CompoSecure Inc (CMPO) 2024 Q4 法說會逐字稿

Hello. Welcome to CompoSecure Inc., fourth-quarter and full-year 2024 earnings conference call. (Operator Instructions)

I would now like to turn the conference over to Steven Feder, General Counsel and Corporate Secretary for CompoSecure. You may begin.

Good afternoon and thank you for joining us. With me on the call is Dave Cote, Executive Chairman of CompoSecure; Jon Wilk, 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 relating 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 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 actual results to differ materially from our expectations. For a discussion of risks and uncertainties that could cause actual results to differ materially from our expectations, please refer to the information in our annual report on Form 10-K and other reports filed with the SEC available on the IR section of our website and on the SEC's website at sec.gov.

Please note that today's discussion will include certain non-GAAP financial measures, including adjusted EBITDA, adjusted net income, adjusted EPS, net debt, and free cash flow. 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 US GAAP and may be different 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 IR section of our website.

Thank you. And with that said, let me turn the call over to Executive Chairman, Dave Cote.

Good afternoon, everyone. Over the past several months, I've spent considerable time with the team, and I've developed an even deeper appreciation for the strength of this business, its leadership in metal credit cards, strong culture of innovation, and most importantly, the significant long-term potential of the business.

We've taken foundational steps in the last six months to position the company for long-term success. We've initiated investments to build a high-performance culture and strengthen our operating capabilities. We've begun implementing the CompoSecure Operating System, or COS, to enhance efficiency and execution across all areas of the business.

And importantly, we're reinvigorating our organic growth potential. Given we have less than 1% penetration of the current card market, and the financial and brand benefits to a card issuer are huge, the upside for us is significant. We believe these investments will drive meaningful results over time, enhancing our ability to foster a culture of excellence that delivers for our customers, employees, and investors.

So with that, I'll turn it over to Jon.

Thanks, Dave, and thank you all for joining us for our fourth-quarter and full-year conference call. 2024 was a foundational year for CompoSecure. We delivered 8% growth in net sales with robust free cash flow generation while continuing to drive product innovation and expand our business internationally. We also materially improved our balance sheet last year with a 60% reduction in net debt down to $120 million.

Our fourth-quarter net sales were essentially flat, and our fourth-quarter adjusted EBITDA was down 10%, reflecting the investments we are making in our business to ignite organic growth and drive improved operating efficiencies throughout the organization.

We're also excited to announce our first quarter of positive net contribution for Arculus in Q4. Looking ahead, we continue to focus on accelerating payment of our organic growth, driving efficiency through the CompoSecure operating system, gaining additional traction with Arculus, and delivering accretive M&A.

We took a big step in establishing our foundation for M&A by completing the spin-off of Resolute Holdings on February 28, positioning our business for accelerated growth and diversification of revenue. For the upcoming year, we expect mid-single-digit growth for both net sales and adjusted EBITDA, with sales momentum building through the year. Our adjusted EBITDA expectations also include the payment of the new Resolute Holdings management fee for 2025 and 2024 on a pro forma basis.

On slide 4, you'll see that we had several high-profile metal payment cards launches around the globe for both traditional banks and fintechs. These launches included the Citi American Airlines card, which represents our first domestic metal card program with Citi; Barclays, the Private Bank card in the UK; and JetBlue co-branded card in the US. In addition, other examples included HSBC and Capital on top among others.

On slide 5, you can see CompoSecure's largest customers continue to report purchase volume growth year after year, year over year, even in the face of economic uncertainty around tariffs. On slide 6, we also see continued strength in the payment card industry supported by healthy consumer spending and demand for premium products and the commentary from these players.

As an example, Capital One continues to see strong new account growth in its domestic card business with increased investment in premium benefits and differentiated experiences. Meanwhile, Visa and Mastercard highlight value-added services, fraud prevention solutions, and the resilience of consumer spending even amid economic fluctuations.

For those of you new to our story, on slide 7, we showcased why metal cards continue to gain traction. Beyond aesthetics, metal cards deliver real business value, enhancing issuer branding, driving higher customer acquisition and increasing top-of-wallet positioning. Despite the introduction of digital wallets over the past decade, payment cards remain the preferred choice for consumers.

On slide 8, we highlight the Arculus security and authentication solutions. Arculus Authenticate provides seamless multifactor authentication for secure logins and fraud prevention while Arculus Cold Storage enables users to safeguard their digital asset keys with advanced encryption.

As I mentioned earlier, we're pleased to report that Q4 marked our first quarter of positive net contribution from Arculus, and we remain well positioned to achieve our net positive target for Arculus for the full year of 2025. On a full-year basis for 2024, Arculus generated $10.5 million of revenue and a net investment of $3.5 million of adjusted EBITDA when adding back depreciation and stock-based compensation.

With that, I'll hand it over to Tim for a deeper discussion on our financials.

Thank you, Jon. Good afternoon, everyone. I'll provide a more detailed overview of our Q4 and full-year 2024 financial performance and then turn it back to Jon before we open the call for questions. Unless stated otherwise, all comparison and variance commentary are on a year-over-year basis.

In Q4, net sales increased by 1% to $100.9 million. Domestic sales were flat year over year. International net sales were up 7% to $15.4 million. Gross profit for the quarter was $52.5 million or 52.1% of net sales compared to $52.9 million or 52.9% for the same quarter of the prior year. Net loss was $48.4 million in Q4 compared to net income of $31 million last year.

The decrease was driven by an improvement to the company's stock price during the quarter, which led to a change in the fair value of the warrant liabilities and our consideration liability and derivative liability. Net loss per share was $0.53 per basic and $0.53 per diluted share compared to $0.17 per basic and diluted share for the same quarter of the prior year.

Adjusted EBITDA in Q4 decreased by 10% to $33.6 million with the decline being driven by strategic investments in the business that we expect will reinvigorate organic growth and improve operating efficiencies. Adjusted net income was up 8% in Q4 to $24.8 million, with the improvements driven by interest rate savings from the conversion into equity of $130 million of exchangeable notes. Adjusted EPS was $0.27 per basic and $0.20 per diluted share compared to $0.29 per basic and $0.24 per diluted share in the prior year.

Quickly reviewing our full-year results, net sales grew 8% to $420.6 million. Domestic sales increased 7%, reflecting continued demand for premium metal cards. International sales grew 11%, highlighting our successful expansion in key global markets.

Gross profits for the full year was $219.2 million with a gross margin of 52.1% compared to 53.5% in 2023. This decline was primarily due to production of new product constructions and inflationary pressures on wages and materials.

Adjusted EBITDA increased 4% to $151.4 million. Adjusted net income increased 11% to $98.2 million. Net loss was $83.2 million compared to net income of $112.5 million in 2023. The decrease was due to changes to the fair value of the warrant liabilities, earn-out consideration liability, and the derivative liability, partially offset by a decrease in operating expenses. Adjusted EPS was $1.17 per basic and $0.95 per diluted share compared to $1.12 per basic and $0.92 per diluted share in 2023.

Moving on to the balance sheet. As of December 31, 2024, we had $77.5 million of cash and cash equivalents and total debt of $197.5 million. This compares to $41.2 million of cash and cash equivalents and $340.3 million of debt at December 31, 2023.

Our bank agreement senior secured debt leverage ratio was 1.25 times at December 31, 2024, based on total secured debt of $197.5 million and trailing 12-month bank-adjusted EBITDA of $157.8 million. This compares to a leverage ratio of 1.39 times at December 31, 2023.

Turning to our cash flow statement on slide 15, you could see that net cash provided by operating activities for 2024 was $129.6 million up 24% compared to last year, with free cash flow up 62% to $84.9 million. I will now hand it back over to Jon for closing remarks before we take questions.

Thanks, Tim. As I mentioned earlier, for 2025, we expect mid-single-digit growth in both net sales and adjusted EBITDA, our sales momentum is expected to build throughout the year, supported by our deep customer relationships and innovative product offerings.

We are also planting seeds to accelerate growth while leveraging the CompoSecure operating system to drive operational excellence. We remain mindful of global economic tensions, including tariffs, and further pressure on the consumer and are committed to being thoughtful about running and investing in our business to ensure we deliver both short- and long-term value for our shareholders.

On slide 17, I'll close by sharing a reminder of our key objectives for 2025: accelerating payment card organic growth, driving efficiency through the CompoSecure operating system, continuing to deliver Arculus traction, and delivering accretive M&A.

With that, I'd like to open up the call for Q&A.

(Operator Instructions) Moshe Orenbuch, TD Cowen.

Great. Can you guys hear me?

We can.

Great. So I guess you did say that the -- your revenue growth will accelerate during the course of the year. Can you talk a little bit about what might end -- at what rate might it end in 2025? And what are the factors that are kind of causing that acceleration? Like are those things -- those contracts you already have in hand, like how does that work?

Thanks, Moshe. Look, we're not giving quarter-by-quarter guidance, Moshe. We're just trying to give you some insight into what we see in a combination of the backlog and pipeline that we use to manage the business with pretty good visibility.

Got you. Okay. And maybe if you could kind of just expand and flesh out a little bit the things and the steps that the CompoSecure operating system, what will -- what do you expect to be realized during '25? What kind of things are going on that will be realized after 2025?

So for us, the operating system looks at really the entirety of the company. Think about the -- from the time we get in order in till we get cash in the door. So it's not just manufacturing or lean manufacturing sort of concepts that we're deep -- diving deep within that function. So we're literally looking at every function across the place: HR, finance, sales, how we process orders, and then, Moshe, again, a deep dive into the manufacturing and a lot of the lean manufacturing concepts to drive out those efficiencies.

It's a combination of a somewhat relentless and maniacal focus that we bring to that discipline. And we always think we've been good at this. Dave and what he brings to the table is just next level around how to think about this. So that's where he's pushing us, and that's where we are driving as a team to deliver those efficiencies, and we expect to see those. We're making the investments now. We expect to see those building as well as we move through the year and into next year, where we should really start to see the benefit of the organic growth side and the efficiency side.

(Operator Instructions) Hal Goetsch, B. Riley Securities.

Thank you. First question is on Arculus. Thanks for the commentary on the detail there. Kind of what was kind of the exit rate revenue for Arculus on an annualized run rate? And what can we expect this business maybe to contribute versus 2024? Thanks.

Hal, we're not going to break down the guidance sort of within payment card versus Arculus. But the run rate exit was quite strong. So the fourth quarter was very strong in terms of how we finished, and it does sort of roll us into a good run rate to ensure that we're going to deliver that net positive result in 2025 and really start to see, we think, what this business can deliver. We feel really good about where we ended and where we're entering this year around Arculus, both on the authentication side and momentum we're seeing on the Cold Storage side.

Okay. And on the metal card business, can you just give us maybe a feel for what the funnel pipeline is for domestic and then international? Because both -- they basically grow at different rates. They're very difficult to predict quarter to quarter. One contributes one quarter more than the other. Give us your thoughts on that --

Yes. So if you remember last year how we talked we had a kind of lower first quarter internationally, and I talked very specifically about think of it over kind of the year where we expect international to be about 20% of revenue as we move through the year. It just -- because of the size, because of the nature of those orders, we do see more variability and when some of those come through.

But we said it would come out about 20%. I think for the full year, we came out about 18%, which was right in line with what we expected. And I'd say as we look into 2025, we're pretty balanced about what we see in both the domestic and the international growth side. In the end, international growth was stronger year over year for us last year.

Okay, thank you. I'll get back in the queue. Thanks, Jon.

(Operator Instructions) Cassie Chan, Bank of America.

I guess, first, just wanted to ask about Resolute. Obviously, that's all squared away now. But just wanted to walk through and just make sure we understand what the Resolute impact on your P&L is for 2025. And I guess more broadly, what part they're going to be playing in terms of overall strategy for your business. You guys have talked about accretive M&A lot. Can you just give us a little bit more detail in terms of the type or size of the companies that you're looking at as well? Thank you.

Sure. So, Cassie, I'd say the impact on the business is incredibly meaningful. And it's to me, across all three dimensions that we talk about. It's organic growth. It is the operating system work, and it is the M&A work. So very active input and participation with the Resolute team and with Dave specifically across all three of those. So Dave has literally been on customer calls with us, meeting with me, meeting with the team on the operating system work. And there is a very robust pipeline of opportunities.

Resolute had a robust pipeline of opportunities when they were looking at CompoSecure. That work remains in terms of things we'll look at up and down the spectrum of opportunities that will deliver accretive M&A, like that is the sort of number one criteria. It will deliver value for our investors. And Dave, I don't know if you want to jump in there.

(Operator Instructions) Jacob Stephan, Lake Street Capital Markets.

I appreciate you taking the questions. Maybe if you could just kind of piece the guidance out for us a little bit, the mid-single-digit growth revenue growth. How do you kind of think about it when you look at stabilized kind of card programs versus kind of some of your newer ramping programs and overall kind of new card launches?

Jacob, every year for us is a mix of each of those variables, right? It's the existing programs, existing clients, new programs, existing clients, and what we call new, new. Last year, really strong growth with kind of new clients and new programs from existing clients and would expect all three to be important contributors to the growth in 2025.

So importantly, we're planting the seeds. We're building out the sales team further to help ensure that we can accelerate that organic growth and drive the kind of long-term results we have historically and want to make sure we're driving for investors as we move forward here.

Okay. Helpful. And then maybe just on Arculus, obviously tracking well ahead of expectations on kind of the net investment level but maybe -- I know you said there's kind of broad-based strength in the programs. But at the end of the day, is it more on the Authenticate side or more on the kind of Cold Storage side that customers are paying for currently?

Yeah, I'd say it's both. If it would lead one way or the other, probably more towards Authentication, but we've seen strength in both.

Okay, got it. I'll hop back in the queue.

Thanks.

Brian Vieten, Needham.

It's John Todaro from Needham on. Hey guys. I had two here. First -- and I know we've been through this before, but it is very topical for investors. So can you just kind of give us the refresher on spinning off Resolute versus kind of keeping a team internally to vet and explore M&A opportunities? And then I have a follow-up on the Authentication comments.

So, John, the mission doesn't change, right, in terms of driving accretive M&A. We strongly believe that this structure delivers more value to shareholders over time as you look at how asset managers are valued in the market. That sort of steady, predictable stream of revenue that they receive is ultimately how we believe the markets will look at Resolute over time, as that revenue builds for them.

So the missions and outcomes don't change the structure, we believe, delivers better returns for investors. And net-net sort of after the spin, if you looked at kind of the Compo stock price and the kind of value of Resolute net-net, we were up slightly after the spin. Obviously, stock's moving up and down, but we firmly believe it delivers more value for our investors over the long term.

Okay. Understood. Thanks for that, Jon. And then just on the authentication piece, it's interesting that that's growing quite a bit here, actually. But just -- so how are -- just walk us through a little bit of that sales process. Is it longer-term contracts? When do those conversations begin and ultimately -- and with the deal being signed? Just would love a little bit more color on that piece.

Sure. So that sales cycle follows something -- somewhat akin to metal payment cards in terms of how we're working through with clients, the different use cases, how that product can reduce fraud, increase security for them, particularly from medium to high-risk transactions. It puts a hardware token in their hands, not having to carry a separate dongle. And so some medium length sales cycle where you've got sort of the card buyers plus the fraud teams typically engaged with larger banks. It's been a longer sales cycle, which is why it's taken us a little longer, I think, to ramp that. Fintechs tend to move a little quicker in terms of pace. So we're pleased with the momentum here, John.

Great, I'll hop back in the queue. Thank you.

Thanks.

(Operator Instructions) Reggie Smith, JPM.

Thank you. Good evening, guys. This is a follow-up on the Resolute Holdings question from earlier. Just curious, is there something that Resolute will only manage composite door? Or is the plan to eventually bring in third-party capital and/or maybe even manage other companies? And I have a few follow-ups. Thank you.

Reggie, the primary intention is to drive the value of the CompoSecure share price. So Dave and the Resolute team have roughly $600 million, $700 million of equity capital in CMPO stock. And the goal is to drive that up period, full stop, that's the intention.

Things that we acquire would be acquired by CMPO, sort of that's the model. It doesn't exclude Resolute from ever having another agreement with someone else, but trust me when I say the intention here is to drive the value of CMPO stock. That's how the incentives are aligned, stock compensation is aligned that way, and that's what we're driving towards.

Okay. Perfect. And then, I guess, Dave, just thinking about the Compo operating system. And I guess we've never really got a great view into like how the expenses break down within cost. Is there a way to think about, I guess, material costs? Like is that the significant thing? Is it people? Is it process?

And I heard you guys talk about investments. Is there any plan to maybe do CapEx investments to improve the process? Like how should we think about the opportunity there? Thank you.

Sure. From a CapEx standpoint, it's generally not that expensive. This is more a method of operating and getting everybody in the factory involved in understanding what they're doing, how can they make it better and ensuring that anything that's not going to pass muster doesn't get passed along, quite honestly. And it's a big process and people focus. And that's where the cultural headset makes a big difference.

So this is not the sort of thing where you tell people, hey, Friday, you keep doing what you're doing, Monday, you come in prepared to do COS. There's an acculturation process, if you will, that you have to go through to get everybody on board and understanding how significant their job is in the scheme of things.

So you don't see the benefit of it immediately in terms of big numbers. It takes a few months to really get it rolling. We're a much smaller operation across than what we had to deal with in Honeywell. So it should happen a little faster. But the benefits are huge. And as you start improving yields, in particular, that gets you to just a tremendous place.

Costs go down, street capacity, free floor space, it's really pretty impressive what you can do. And think of it this way. It's really the Toyota production system that we're modifying for Compo. And man, I feel very good. The guys are off to a great start. Our manufacturing leaders and engineering leaders working with Jon are really driving the headset and the cultural change. But this is more of a process, people, and cultural headset more than anything else. Does that answer your question?

It does. And funny, it reminds me of reading the goal in business school hearing those terms, floor space and things like that. So that's great. That's good to hear.

I guess last question for me. I guess in terms of tariffs, I'm not sure if you guys get your metal cards in the country. Is there anything to think about there as it relates to tariffs and how that may impact your raw material cost?

Yeah. Thanks for the question, Reggie. Certainly, it is something we are keeping a keen eye on. We definitely have materials that come from Europe, some from Asia, very little from China, but it is something we're watching closely. Yes, it could have an impact, I would say, as you think about industrial companies. We're much less at risk to those fluctuations than what you would typically see in an industrial or industrial tech company. That said, it's a very important watch item for us.

Moshe Orenbuch, TD Cowen.

Moshe, did you have a follow up?

Reggie Smith.

Reggie, good to hear from you again.

Back again. Listen, I was curious -- it may be hard to answer, but is there a way to frame kind of an up to limit as far as like the size of a deal you may be interested in? Obviously, it's not a commitment, but just trying to understand the scale of the things you may be exploring if possible. Thank you.

So I'm happy to take it, and then Dave wants to follow up, he can. But Reggie, I think we said before, but I'm pretty sure we will look at things small, medium, and large. And I know that's not answering your question, but it's not limited to sort of small or small to medium. We will look at a pretty broad spectrum of things. There are a set of criteria that Dave looks at for every acquisition, ours included. It's got to hit those, and it's got to be a value and a price that we think can deliver exceptional return for our investors. That's the critical criteria for us right now.

Yeah. And if I could just add to Jon's point, this is all going to come down to where can we add value with the operating tools that we bring. So you're not going to see us do something that you look at and go, I don't understand how they can add value here. It will make sense.

But just to reinforce something Jon said earlier, Tom, me, the rest of the acquisition team, our equity is in Compo, not in Resolute. So we are heavily incentivized to make sure that Compo performs really well and that the stock performs well for our shareowners. So that's where our focus is.

Moshe Orenbuch, TD Cowen.

Great. Sorry about that before. I couldn't figure out on this new phone how to unmute. And Dave, thanks for that last comment. Actually, it is very helpful. Question is just kind of a technical one. Could you just -- I got a couple of people kind of e-mailing in and asking what exactly does that pro forma guidance mean with respect to the Resolute payments? Is it -- does it mean as if it were in effect for the entire year or in effect from some other date? Like just could you just say what that means?

So, Moshe, the guide is that the business, right, if you want to look at it with the Resolute management fee last year and -- last year on a pro forma basis and this year, if you want to look at it without the business is expected to grow mid-single digits.

Right. And I think just as a follow-up to that, you had said that the adjusted EBITDA was positive in the fourth quarter related to Arculus by $3.5 million, right?

Yes.

So if that had been zero or negative for the rest of the year, I guess, shouldn't that alone, if that continues, be a big driver of adjusted EBITDA growth into 2025?

We are also making investments, Moshe. I talked about this in terms of the investments we're making in engineering talent, sales talent, somebody asked about CapEx to essentially get to where we want to get to around the operations and the efficiency. And it's sort of taking those things into account.

Thank you. Ladies and gentlemen, I'm showing no further questions in the queue. And that concludes today's conference call. Thank you for your participation. You may now disconnect.