Yahoo Finance CompoSecure, Inc. (NASDAQ:CMPO) Q1 2024 Earnings Call Transcript
CompoSecure, Inc. (NASDAQ:CMPO) Q1 2024 Earnings Call Transcript May 6, 2024
CompoSecure, Inc. misses on earnings expectations. Reported EPS is $0.04182 EPS, expectations were $0.24. CMPO isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to CompoSecure’s First Quarter 2024 Earnings Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Steve Feder, General Counsel and Corporate Secretary. Please go ahead.
Steve Feder: Good afternoon and thank you for joining us to review CompoSecure’s first quarter 2024 financial results. With me on the call is Jon 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 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 section of our website at compassecure.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, including adjusted EBITDA, adjusted net income and adjusted 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 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 Investor Relations section of our website. Thank you. And with that said, let me turn the call over to Jon to discuss our first quarter results.
Jon Wilk: Thank you, Steve. Good afternoon, and thank you for joining us for our first quarter conference call. Our momentum from the end of last year has carried into the first quarter as we generated our third consecutive quarterly net sales record driven by sustained growth in our domestic business, which was up 26% compared to the year ago period. During the quarter, our customers launched several new high-profile card programs that garnered significant attention in the marketplace. This includes the introduction of the Robinhood Gold Card and a new limited edition Delta Reserve card in white made from an airplane. I’ll discuss these new programs in greater detail later in the call, but I’m proud to see the effort and execution from our team to introduce innovative new technology and card constructs that continue to drive demand from metal payment cards.
Now to summarize our financial results on Slide 3. Net sales in the first quarter increased 9% to a record $104 million, driven primarily by continued growth in our domestic business, offset by lower international net sales. Looking at our bottom line, Q1 adjusted EBITDA grew 6% to $37.8 million, reflecting our team’s continued focus on profitability while simultaneously driving investments to capture long-term opportunity and value. Our card issuers continue to express a positive outlook for the consumer and have expressed intentions to maintain or increase their payment card marketing spend compared to prior year. For Arculus, we continue to see positive momentum and remain on track for our total net investment to be lower than 2023, with the expectation of turning positive for fiscal year 2025 as mentioned in our last quarter’s call.
I would also like to take a moment to comment on the announcement we made today regarding our capital allocation framework. We have continued to generate meaningful free cash flow and closed out the quarter with a cash balance of $55 million, which has more than doubled from 1 year ago. Given our cash position, our Board has declared a special cash dividend of $0.30 per share for our Class A shareholders, along with a corresponding distribution to Class B unitholders. This reflects our confidence in the sustainability of our cash flow generation as well as our commitment to rewarding shareholders. We are pleased to incorporate another means to enhance CompoSecure shareholder value into our capital allocation framework, which includes investment in organic growth, debt paydowns, securities repurchases and consideration of future special and recurring dividends.
Finally, as mentioned in our press release earlier today, we are reiterating our full year guidance, which calls for net sales to range between $408 million and $428 million and adjusted EBITDA ranging between $147 million and $157 million. These targets reflect our expectation for continued strength in our business as we execute on our growth and profitability objectives. Moving on to Slide 4. We want to share several new metal card programs that we have launched since our last call. Robinhood launched a very exciting card program last month with the Robinhood Gold Card, which is a gold-colored metal veneer card weighing 17 grams. As part of the program, we also created a limited edition card made from 10 carat gold weighting 36 grams. Amex and Delta announced a new limited edition Delta Reserve card made from recycled airplane.
You may remember Amex launched a limited edition version in black to great success in 2022. The new version, which was launched last week, is white and already generating buzz in the market. You can see several additional customer launches on this slide, including Lloyds Bank in the UK, Rogers Bank in Canada and Bradesco in Brazil. Turning to Slide 5. I mentioned card issuer trends earlier, and I’d like to provide further insight. The information is based on quarterly reported public information. Our largest customers are continuing to drive strong purchase volume in 2024. Additionally, we’ve seen continued strong card acquisition trends as well as sustained business development and marketing investment. Looking at the overall payment card market, we’ve highlighted several customer and partner quotes on Slide 6.
Across the board, issuer sentiment remains constructive on the state of the consumer and the long-term opportunity in the payment space. Our issuers report intentions to sustain or increase program spend compared to 2023 with several citing the intention to lean into solutions to capture high-quality customer accounts. I always like to take the opportunity to outline our Arculus platform on every call to provide clarity around our product capabilities. As mentioned earlier, we continue to see positive momentum and remain on track to achieve our net investment target. From a capabilities perspective, we recently added multicard support for Arculus Cold Storage, which allows our customers to split their assets across multiple Arculus cards operating on the same device and expanded support for different blockchains, including XDC, Provenance and Stellar, in addition to adding support for Ondo tokens and Polygon NFTs. I’ll now hand it over to Tim to review our financials before returning for closing remarks.
Tim Fitzsimmons: Thanks, Jon, and good afternoon, everyone. I’ll provide a more detailed overview of our Q1 2024 financial performance and then turn it back to Jon before we open the call for questions. Unless stated otherwise, all comparisons and variance commentary are on a year-over-year basis. In Q1, net sales increased 9% to a record level of $104 million compared to $95.3 million. The increase was primarily driven by continued domestic growth in our metal payment card business. Gross margin for the quarter was 53% compared to 56% in the prior year. The decrease in gross margin was primarily due to inflationary pressure on wages as well as product mix. Net income for the quarter increased 59% to $17.1 million compared to $10.7 million in the prior year.
The increase was driven by higher net sales and a $4.3 million net differential in non-cash items from the revaluation of warrants, earn-out consideration and derivative liability driven by change in our stock price. Adjusted EBITDA in Q1 increased 6% to $37.8 million compared to $35.5 million in the prior year, and our adjusted EBITDA margin was 36% compared to 37% in the first quarter of 2023. The adjusted EBITDA was driven by greater net sales, partially offset by $1.8 million of net investment in Arculus. Looking closer at the split between our domestic and international business, you can see that our first quarter domestic net sales remained strong at $93 million, up 26% year-over-year and surpassing our record domestic quarter in Q4 of 2023.
Jon highlighted earlier that our domestic business was offset by lower international net sales. International net sales for the first quarter of 2024 were $11 million, which was down from $22 million in the comparable period last year. As we have stated previously, our international business to be more variable due to the customer mix and a smaller sales base. we continue to expect our international business to account for roughly 20% of our annual total net sales mix. For perspective, international net sales were 18% of our total net sales mix in 2023 and were 22% of our mix in 2022. Moving on to the balance sheet. At March 31, 2024, we had cash and cash equivalents of $55.1 million and total debt of $335.6 million, which includes $205.6 million of term loan and $130 million of exchangeable notes.
This resulted in total net debt of $280.5 million. Looking at our leverage ratios. We provide both our overall debt leverage ratio and our bank agreement secured debt leverage ratio as our bank agreement is calculated with slight differences. At March 31, 2024, our overall leverage ratio was 2.28x based on total debt of $335.6 million and trailing 12-month adjusted EBITDA of $147.3 million. This compares to 2.35x at December 31, 2023, with the improvement driven by paying down debt and increased TTM adjusted EBITDA. At March 31, 2024, we had a bank agreement secured debt leverage ratio of 1.34x based on a total secured debt of $205.6 million and trailing 12-month bank adjusted EBITDA of $153 million. This compares to 1.39x at December 31, 2023.
As Jon mentioned earlier, we have accumulated a robust cash position, supported by sustainable strong cash flow generation. Given this, our Board has decided to allocate a portion of our capital towards a special cash dividend of $0.30 to our Class A shareholders and an equivalent distribution to our Class B unitholders. Both the dividend and the distribution will be payable on June 11 to Class A shareholders and Class B unitholders of record as of May 20 and will be funded by our cash and our balance sheet. The total amount of cash to be disbursed is expected to be approximately $24.2 million. Turning to our cash flow statement on Slide 12. Net cash provided by operating activities increased 36% to $33.8 million compared to $24.9 million in the prior year quarter.
I want to turn now to earnings per share. As a reminder, our method under GAAP for calculating basic and diluted EPS allows us to allocate changes in adjustments of mark-to-market instruments among the public company and the operating subsidiaries to better reflect the actual economic impact of the conversion of such instruments on our net income and on a per share basis. GAAP EPS for the 3 months ended March 31, 2024, was $0.20 per basic and $0.17 per diluted share. This compares to $0.13 per basic and $0.11 per diluted share in the year ago period. The increase was driven by greater net sales as well as changes to the fair value of the warrants, earn-out consideration and derivative liabilities, primarily due to the change in our stock price.
On Slide 13, 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 Up-C structure and the shares that are included in the basic and diluted calculations. On Slide 14, we’re also providing non-GAAP adjusted net income and adjusted EPS, which excludes the impact of noncash fair value adjustments to the warrants, the earn-out revaluation and stock compensation. We believe that this provides a clearer picture of the economics of the company’s operating results. With that background, our non-GAAP EPS for the first quarter 2024 was $0.29 per basic share and $0.25 per diluted share. This compares to $0.27 per basic share and $0.23 per diluted share in the year ago period.
In the appendix, you will find a reconciliation between the GAAP and non-GAAP net income used in these calculations. I’ll now turn it back to Jon to discuss our guidance and give closing remarks.
Jon Wilk: Thanks, Tim. As I mentioned earlier, we are reiterating our 2024 guidance and continue to expect net sales to range between $408 million and $428 million and adjusted EBITDA to come in between $147 million and $157 million. In closing, on Slide 16, I’d like to highlight a few points we covered on our call this evening. 2024 is off to a strong start as we achieved another quarter of record net sales driven by the sustained momentum in our domestic operations. We’re excited to see the launch of several high-profile customer programs that have received significant attention in the marketplace. Global issuers are reporting intentions to sustain or grow their marketing program spend in 2024 and continue to see a resilient consumer, despite inflationary headwinds.
For Arculus, we see positive momentum and remain on track for our total net investment to be lower than 2023, with the expectation of turning positive for fiscal 2025. We continue to generate strong and sustainable free cash flow, which has enabled us to accumulate a robust cash position on our balance sheet. As a result, today, we announced that our Board has declared a special cash dividend to reward our shareholders and to equip us with another tool to deliver shareholder value as we continue to execute on our growth and profitability objectives in the year ahead. With that, I’d like to open up the call to Q&A.
Operator: [Operator Instructions] Our first question comes from the line of John Todaro with Needham.
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