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spk07: Good day and thank you for standing by. Welcome to the CompostSecure Second Order Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Anthony Piniella, head of corporate communications for CompoSecure. Please go ahead, Anthony.
spk00: Good evening, and thank you for joining us to review CompoSecure's second quarter 2022 financial results. With me on the call tonight is John Wilk, CompoSecure's chief executive officer, and Tim Fitzsimmons, chief financial officer. They will begin with prepared remarks, and then we will open the call for Q&A. During the call, we will make statements related to our business that may be considered forward-looking, including statements concerning our plans to execute on our growth strategy and our ability to maintain existing customers and acquire new customers, as well as other statements regarding our plans and prospects. Forward-looking statements may often be identified with words such as we expect, we anticipate, or upcoming, these statements reflect our views only as of today and should not be considered our views as of any subsequent date. We undertake no obligation to update or revise these forward-looking statements. Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties that could cause the actual results to differ materially from our expectations. For a discussion of material risks and other important factors that could affect our actual results, please refer to the information in our annual report on Form 10-K and other reports filed with the SEC, which are available on the investor relations site of our website at compostsecure.com and on the SEC's website at sec.gov. Please note that the discussion on today's call includes certain non-GAAP financial measures as defined by the SEC, including adjusted EBITDA and non-GAAP EPS. The company believes these non-GAAP financial measures provide useful information to management and investors regarding certain financial and business trends impacting the company's financial condition and results of operations. These non-GAAP financial measures should not be considered as an alternative to net income or any other performance measures derived in accordance with U.S. GAAP and may differ from similarly titled non-GAAP measures used by other companies. A reconciliation of GAAP to non-GAAP measures is available in our press release and earnings presentation available on the Investors Relations section of our website. Thank you, and with that said, let me turn the call over to John to discuss second quarter earnings.
spk03: Thanks, Anthony. Good evening, everyone, and thank you for joining us tonight. as we discuss our second quarter 2022 earnings release. We appreciate your interest and thank you for participating. In the first quarter, we established early momentum and we achieved new record sales and profitability. I'm pleased to announce that we had another outstanding quarter, and I'd like to start by thanking our nearly 800 employees for their contributions that have helped us accelerate our growth. For the second quarter, we achieved net sales of 97 million, which is 55% higher year over year and up 15% sequentially, driven by strong sales execution and growth across new and existing accounts. In addition, our performance continues to be bolstered by consistent card issuer trends including a robust demand for travel and entertainment spending, growth in solicitations, growth in new customer card acquisitions, and demand for premium metal card products. Our adjusted EBITDA was $40 million for the second quarter, up 45% year over year, demonstrating the impressive margin profile of our premium metal card business and our constant focus on operational excellence and process improvement. Before I share some customer win details, I'd like to take a moment to address the current digital asset market challenges, including the news around exchanges freezing or limiting withdrawals. This climate actually drives an increased need for consumers to control the private keys to their digital assets. This is what our Arculus cold storage wallet offering was made for, and we believe we will benefit from this market turbulence in the long term. We are encouraged by recent partnerships to address the growing need for security, authentication, and cold storage. For example, Invesco, a Latin American-based fintech, has selected Compose Secure to launch a metal card that is designed to combine premium payment card technology and digital authentication. Separately, Invesco plans to white label the Arculus cold storage wallet, giving their users the option to securely custody the keys for their digital assets. At the same time, we believe this dynamic market has created uncertainty in timing for our anticipated Arculus ramp up as some of our partners and targets have been impacted. We continue to be thoughtful about how we're running the business and remain focused on margins while simultaneously managing our investments to capture long-term value for shareholders. We are confident that our Arculus platform is well positioned to meet the current and anticipated needs of the market. I am excited to announce that we are raising our full year guidance for 2022. Our first half results have positioned us extremely well, and with confidence in our sales pipeline and backlog, we now expect net sales to be in the range of 355 to 380 million, up from our previous guidance of $336 to $376, and we expect adjusted EBITDA to be in the range of $110 to $120 million, up from $100 to $110. Turning to slide three, we are using a similar framework from last quarter to highlight momentum and wins in both the metal payment card business and Arculus portfolio. On the left side, we continue to demonstrate momentum with both new and existing clients. From traditional banks to FinTech partners, I'm not going to go through all the examples in the quarter, but we'll highlight a few. We were honored to be part of the new Boeing 747 American Express Delta Reserve Card Limited Edition, with metal taken from a retired Delta 747 aircraft. This program is being supported by a strong marketing campaign from Delta and American Express, and the early customer feedback has been extremely positive. Another new relationship was with Truist to deliver a Truist Visa card for the US market. This is the credit card issuer resulting from the merger of SunTrust and BB&T. We expanded our Chase relationship with a new co-brand partner in Hyatt. with a card focused on business. And we established a new relationship with Credit Suisse for a metal card for the Swiss market through our distribution partner, Talus. And the last example was we expanded our relationship with Verizon for a Verizon business MasterCard through a new distributor relationship with First National Bank of Omaha. On the FinTech side, X1 is a card issued by a community bank and another new relationship that offers up to five times spending limits, more than traditional cards, and they're currently accepting waitlist orders. And finally, we established a new relationship with Oxygen, a bank focused on supporting entrepreneurs and creators to deliver a metal debit card supporting their elements product line, water, fire, and air. Moving on to our Arculus platform, we highlight some of the progress we are seeing in partnerships, marketing, and events. I mentioned Invesco earlier. They plan to offer a premium payment card plus Arculus digital authentication and separately white label our Arculus cold storage wallet, providing their users the option for self-custody, the trend that I described earlier. Change is a DeFi app with half a million users that empowers people to become their own digital bank. They are looking to offer Arculus cold storage for their mobile wallet. Hedge allows users to automatically convert their pay into crypto. And we will partner with Hedge on co-marketing of each other's products and services, as well as developing an integration plan for the Arculus cold storage product. As we mentioned last quarter, we are working with MassPay, a leading payments platform that enables customers to deliver mass payouts globally in fiat or cryptocurrency. And they have selected Artulis for an integrated payment card with cold storage and digital authentication. And the last note on that side is we received approval from Visa and MasterCard for issuing payment cards with authentication capabilities built in. This is a big step in enabling our Arculus roadmap. We are very excited to bring this capability to market. Finally, I wanted to highlight some of our marketing activity. I'm proud that our Arculus platform was ranked the most innovative cold storage wallet in a recent report by ABI Research. We were also included as one of the top three leaders for cold storage of digital assets. That's quite an accomplishment in our view for a product that's been out less than a year. In June, we had a standout presence at Consensus, a leading digital asset conference with over 15,000 attendees, influencers, and media who were exposed to both our B2B and our B2C offerings. We'll have a strong presence at Money 2020 in October in Las Vegas, and we are scheduled to participate in a marketing event with SuperRare. a leading NFT marketplace to discuss the need for cold storage wallets for NFT digital assets. Turning to some industry trends on page four, I mentioned some of the card issuer trends. I'd like to provide some detail on what we're seeing in the marketplace. On the left-hand side of slide four, we're showing our largest customers purchase volume growth based on publicly available data. which remains well above pandemic levels. In the recent earnings announcements, we've heard several of our top customers refer to how they're seeing spending in such areas as travel and entertainment, as well as premium goods and services, where pent-up demand continues to drive consumer spend. Moving to the right side of the chart, you can see how banks are spending aggressively to drive new customer card acquisitions. with solicitations in the first half of 22 above 2019 pre-pandemic levels for the same period. This was highlighted in a Wall Street Journal article from two days ago with the headline, Big Banks Spend to Boost Credit Card Signups Defying Recession Fears. On slide five, you can see that American Express continues to publicly report strong card acquisition numbers. We showed you this chart last quarter, which has been updated, and you can see a positive trend. As a matter of fact, during the recent earnings call, American Express highlighted that acquisitions of U.S. consumer platinum, gold, and delta were at record levels, and that their customer retention and credit quality both remain at exceptionally strong levels. On page six, you can see that industry observers believe in the growth of metal payment cards as well. ABI Research published a report that estimated total worldwide metal payment card shipments of 2021 of around 29 million. As you know, we announced that we produced more than 22 million cards in 2021, confirming our strong leadership position in the marketplace. ABI expects the premium metal card market will double to more than 63 million cards shipped by 2026, which we believe highlights several growth factors, including increased demand by premium clients and expansion toward other vertical payment segments. I know there may be some new listeners on the call today, and I want to take the opportunity to dive deeper into Arculus and share the diversity and strength of the platform. Each time we talk about Arculus, I have highlighted that it is a security and authentication platform with opportunities across a variety of verticals. One of them is crypto, but we have always said there are numerous opportunities and we want to continue to frame that for you. Let me orient you to what's on slide seven. On the left side, we're talking about our B2B solutions that we would white label for their customers to deliver security, authentication, identity verification, and or cold storage across a variety of verticals, including financial institutions, fintech partners, gaming and gambling, telecom, sports and entertainment, and healthcare. And we believe these opportunities are as big or bigger than the opportunities that we have within the crypto market. When we talk about secure authentication, this helps a consumer better protect the login process, whether it's for banking and investment accounts, gaming or gambling, et cetera. This is our direct response to the password problem we are all aware of. And Arculus allows for the use of three-factor authentication to support enhanced security. On the right side, we have our direct-to-consumer Arculus cold storage product that you are familiar with, and I'm going to cover more on the next few pages. Which leads me to our overall portfolio on page eight. We've got our core offerings across the top, metal payment cards, cold storage, and authentication. I mentioned a moment ago that we've received approval for the ability to add payment cards with digital authentication, and later this year we'll have payment cards with cold storage, cold storage cards with authentication, and then finally early next year we intend to bring together payments plus cold storage plus digital authentication, and we are excited for each of these advances. I spoke about the current challenges in the digital asset market as exchanges were freezing or limiting withdrawals. This has been driving the increased need for consumers to control the private keys to their digital assets. You can see on slide 9 the timeline and actual headlines over the last few months as this has become a widespread issue for exchanges and digital asset platforms. Not only has this elevated the awareness for consumers to protect their assets, but these platforms may move to offer cold storage as part of their offerings to help protect their consumers' digital assets, which we are well positioned to support. On slide 10, we're proud to continue to meet our targets for adding features and functionality to Arculus. And everything you see on the top of the slide is fully available today. This includes ability to view NFTs and Arculus, as well as Wallet Connect integration and expanded currency support that we launched at the end of June. For the second half, we've got a number of meaningful updates coming, including our ability to significantly expand the number of digital currencies that we support, introducing white-labeled payment cards, with integrated cold storage functionality, which I mentioned, continuing to enhance our SDK for B2B integrations, offering a joint wallet option for direct-to-consumer, expanding our direct-to-consumer distribution channels, and finally, simplifying succession planning for crypto through our joint wallet solution. On page 11, I want to summarize some points that I've made already, but I think are critical. Number one, we believe that the current challenges in the market are driving an increased need for consumers to take control of their private keys to their digital assets. Second, we're encouraged by recent partnerships where we can address the growing need for security authentication and cold storage, even while the market is facing a bit of turmoil. We do not see crypto going away. This market cycle has created uncertainty in timing for our anticipated Arculus ramp-ups and some partners and targets have been impacted. And we continue to be thoughtful about how we're running the business. And as you can see by our margin discussion later, we remain focused on margin while simultaneously managing our critical investments to capture long-term value for our shareholders. We are confident that our Arculus platform is well positioned to meet the current and anticipated needs of the market. I'm going to turn it over to Tim to give some financial highlights.
spk04: Thanks, John, and good evening, everyone. I'll provide a more detailed overview of our second quarter 2022 financial performance and then turn it back to John before we open the call for questions. Second quarter 2022 net sales grew 55% to $97 million, up from $63 million in the same quarter of the prior year. As John mentioned, we continue to perform extremely well through strong sales execution of our sales strategy and our deep client relationships, both domestically and internationally. Moving on to gross margin. margins were 61% in the second quarter of 2022 versus 56% in the second quarter of 2021. We continue to watch supply chain costs and have been successful offsetting raw material cost increases through production efficiencies and increased scale. We reported net income for the second quarter of 2022 of $61 million. This includes a $35 million favorable impact for fair value adjustments associated with the mark-to-market of the warrants and the earn-out. If you adjust out the $35 million of our operating net income would be $26 million, which is up 18% compared to our operating net income of $22 million in the second quarter of 2021. Adjusted EBITDA was a record $40 million in the second quarter of 2022. up 45% to $27 million in the second quarter of 2021. Similar to last quarter, the Oculus revenue and investment resulted in a net impact of approximately minus $7 million in the second quarter. Turning to the first half results. Looking at our strong performance for the first half of the year, net sales grew 43% to $181 million in the first half of 2022, up from $127 million in the first half of 2021. Gross margins were 59% in the first half of 2022 versus 55% in the first half of 2021, a change of more than 440 basis points, driven by production efficiencies and product mix. Net income for the first half of 2022 was $88 million. This includes a favorable impact of $37 million for the fair value adjustments associated with the mark-to-market of the warrants and earn-outs. If you adjust out the $37 million out of our operating net income, it would have been $51 million or up 13% compared to an operating net income of $45 million in the first half of 2021. So far, for the first half of 2022, we have produced adjusted EBITDA of $73 million, which was an increase of 29% from the first half of 2021 and of course excludes the $37 million increase of fair value adjustments from the earn out and warrant revaluation, but include the net impact of minus 10 million related to the Oculus investments. For the first half of 2022, we also had operating cash flows of $51 million versus 27 million for the first half of 2021, and free cash flow from operations of 47.5 million when you back out the $3.5 million of capital spending. You can see this cash flow statement in the appendix of the presentation. Looking at the split between domestic and international, you can see that we continue to have strong domestic sales, increasing 50% compared to the second quarter of 2021 to $70 million, again, due to the strength of our sales execution and favorable industry trends. International net sales for the second quarter of 2022 was $27 million, 71% higher than the prior year due to the expansion of our international sales team, continued distributed growth, and demand for premium payment cards in the international markets. As we mentioned last quarter, our Edgar Dunn survey highlighted the growing demand for metal payment cards in the international market. We are well positioned to take advantage of this growing opportunity. I want to touch briefly on the debt. Please note that the balance sheet is in the appendix. As of June 30th, we have secured debt of $258.1 million, which is made up of $231.1 million of a term loan plus $25 million of a drawn revolver, an unsecured convertible debt of $130 million. In the quarter, we made the 2021 excess cash flow payment of 13.8 million, thereby reducing our term loan. We had cash of 13.4 million on the balance sheet, and this resulted in a net debt leverage for the secured debt of 21.9, and a total of 21.19, I apologize, and total net debt leverage of 3.29, based on $118 million in trailing 12-month EBITDA. This calculation is in accordance with our bank agreement. The secured debt facility along with our operating cash flow, will provide working capital for us to fund our growth plans. Let's turn to slide 16. I want to talk about our earnings per share. As you may have read in our earnings release, we've adopted an alternative method under GAAP for calculating basic and diluted EPS. This method allows us to allocate changes in fair value adjustments of the mark-to-market instrument among the public company and the operating subsidiaries better reflect the actual economic impact of the conversion of such instruments on our net income per share basis. The reason we are doing this is that GAP is evolving as it relates to EPS on a company with an up-sea structure. We believe this method better reflects the economic impact for our shareholders. Having said that, let me run through our EPS calculations. Basic gap earnings per share for the first half of 2022 is $0.80 per share, and diluted is $0.75 per share. You can read through the footnotes on the slide that take you through the complexities of the allocation of the net income due to the FC structure and the shares that are included in the basic and diluted calculations. Note that the fair value adjustments in the quarter and the year-to-date have been allocated among the operating companies to come to pre-allocation net income. On slide 17 and in our MD&A, we're also providing a non-GAAP EPS that takes out the impact of the non-cash fair value adjustments and the effect of the up-see structure. We believe that this provides a clearer picture of the economics of the company's operating results. With that background, our basic non-GAAP earnings per share for the first half of 2022 was $0.60 per share and diluted is 52 cents per share. In the appendix, you'll find a reconciliation between the GAAP and non-GAAP net income used in these calculations. Note that we've added back the impact of the fair value adjustments and the stock-based compensation to be consistent with our adjusted EBITDA calculations. Now, let me hand it back over to John to address our updated guidance and for a final summary before we take questions.
spk06: Thanks, Tim.
spk03: As I mentioned, our first half results have positioned us well. We have confidence in the strength of our sales backlog and pipeline and have updated our guidance. We now expect net sales to be in the range of $355 to $380 million, up from our previous guidance. And we now expect adjusted EBITDA to be in the range of $110 to $120 million, also up from our previous guidance of 100 to 110. Turning to slide 19, I also want to reshare our strategic priorities as I do every quarter. Regardless of short-term market dynamics, we continue to be guided by our strategic priorities, and I'm very pleased with the progress we are making against goals as we pursue long-term value creation for our shareholders. We had another outstanding record quarter, and we have set a strong pace going into the second half of the year. We continue to see increased demand for our metal payment card offerings from both new and existing customers, driven by strong sales execution, deep relationships, and market momentum. We are focused on our growth while maintaining or improving margins to capture long-term value. We remain encouraged by both the business and consumer response to Arculus, even with the current crypto market turbulence and partially because of it. And we believe we have created a powerful platform that is well positioned to meet the growing need for digital security authentication and cold storage solutions. With that, I want to thank you all for taking the time to join us today. We very much appreciate your attention, and I'll open it up to questions.
spk05: Thank you.
spk07: At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1 1 on your phone and wait for your name to be announced.
spk05: Please stand by for just a sec.
spk07: Our first question comes from Steve Moss from B Reilly Securities. Go ahead, Steve.
spk01: Good afternoon. Maybe just starting here with the revenue guide here, you know, it kind of seems to apply about a flat-ish revenue guide at the high end relative to the second quarter level. Maybe just talk about the drivers and the puts and takes as we look forward.
spk03: Sure. Thanks for the question, Steve. So when you think about the guidance we've given first half revenue at roughly 180 and, you know, second half at, you know, total guidance at 355 to 380, you know, it says that in the second half, we think we will sort of beat or exceed the first half essentially is the way we're looking at it. And, you know, we set guidance, Steve, in a way that, you know, we always hope to be able to meet and exceed.
spk01: Okay. That's helpful. And then in terms of just the adjusted EBITDA guidance, you know, it seems like – I'm assuming it's fair to assume that, you know, the second half will be impacted by an increase in the archival spend relative to the first half. Is that a fair assumption?
spk03: A bit. But at the same time, Steve, we've taken a very measured approach to spending. As I mentioned on our last call, you know, the – Spending for us was more back half weighted. So yes, there is more spending in the back half. At the same time, we are able to control the levers and dials of our business quite well as we try to balance, you know, driving, you know, strong results in growth and in margin to build long-term value.
spk01: Okay. And maybe just in terms of, you know, driving efficiency, is this gross margin sustainable here, or should we use maybe just a little bit of a lower number here going forward?
spk03: Steve, we've given, I think, kind of gross margin and EBITDA margin guidance, certainly on the core business, that we would suggest that you go back and look at for the long-term ranges.
spk01: Okay. And one more question just back on revenue for me. Just kind of curious if you could break out what was the contribution from Arculus this quarter and just kind of, you know, with the uncertainty you're seeing in the market for crypto, just kind of, you know, how you're thinking about the revenue contribution relative to the prior color.
spk03: Yeah, Steve, as we said on the last call, we're not breaking out the Arculus revenue and units separately. you know, at a later date as it becomes a greater part of our business, you know, it would break out into its own reporting segment, but not at this point. We've tried to give you guidance in terms of progress we're making on partnerships. We have seen an uptick in demand from, you know, in Q2 versus Q1, we think as a result of some of the trends that we described. And, you know, Overall, we still remain very confident about the Arculus platform. At the same time, we certainly saw some partners impacted that slowed down some progress that we would have liked to have made.
spk06: All right, great. Thank you very much for all the color in this quarter. Thanks, Steve.
spk05: One second.
spk07: Our next question comes from John Tredaro from Needham and Company. Go ahead, John.
spk02: Thank you. Thanks for taking my question, guys. I guess just looking at that revenue guide a little bit further, I mean, the growth in that, it's fair to assume that all that growth is coming from the metal card side, right, or is it I know we're not going to break out the Arculus, but is some of that growth contributing from Arculus, or should we really be thinking of it as the core metal card side?
spk03: Yeah, John, similar to the response I gave Steve, we're not breaking out the Arculus business. I think I'd point you back to my comments on where we are both pleased about the progress in the partnerships, some uptick that we've seen in demand, Q2 over Q1 and, you know, confidence in sort of executing against the, you know, the opportunity that's there for Arculus. At the same time, you know, we've seen some impact from some of those relationships that, you know, have slowed down as a result of some of the turmoil. So I'm not going to break it out more deeply than that.
spk02: Okay. Understood. And then, yeah, Kind of just the strategy on that, with some of the slowdown in crypto and some of the institutional partnership slowdown, is there a strategy shift to focus more on the direct-to-consumer, which, as you guys noted, with the issues with decentralized operators, there's a growth in kind of that average everyday retail user trying to take custody of their assets and move to a hardware wallet. Are you guys shifting the strategy a little bit to focus on that direct-to-consumer segment, or still is the focus I guess just can you break out the focus between going after the institutional partnerships versus that direct-to-consumer strategy?
spk03: Yeah, it's a great question, John. I think we believe that over the long term, the B2B opportunities will still be the bigger channel for us. Your point is fair, and I made that point that we have seen some increase in demand on the B2C side as we think consumers are recognizing the need to control their private keys. But I would say, you know, our strategy hasn't changed. It will still leverage both the B2B and B2C channels. We think heavier B2B over the long term for us.
spk02: Okay, thanks for that. And then just a last question on the recessionary environment. if there are concerns that the recessionary environment gets a little bit worse here, where would the focus be in seeing some of that weakness? Is it in the FinTech relationship, some of the larger legacy core customers, international expansion? Just any high-level color on that would be helpful.
spk03: So, John, the best example that we can look at for that is when – The pandemic hit, it did have, well, it may not have been defined as a recession. It did have a significant impact on the credit card market. So marketing spending was down, acquisitions were down. And you can see that trend if you look at some of the data that we've shared. And those trends impact us. So, you know, through, we believe, you know, the pandemic, which was a pretty tough set of circumstances for us. We still managed to grow in single digits during that time. So if the recessionary concerns were to pick up more deeply, could it slow down some of the growth? Potentially a bit, but net-net, we were still able to grow through extremely challenging times before because we have a number of drivers in the business New acquisition is one, but we also have natural reissue. We also have lost stolen cards and it is kind of the three of those drivers that come together. And we were able to continue to increase new account, new net new logos during that time as well. So that's kind of how we think about, you know, possible downturn impacts.
spk02: Okay, great. Thanks. That's helpful. Those are all the questions for me. Congrats on the quarter, guys. Appreciate it. Appreciate it. Thanks for the question, John.
spk07: Okay, we will give it just a couple more seconds for questions. If you do have a question, you'll need to dial star 11 on your phone to be put in the queue.
spk05: Okay, thank you everyone for your participation in today's conference.
spk07: This does conclude our program and you may now disconnect.
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