GPGI, Inc. Q4 FY2024 Earnings Call

Hello. Welcome to CompoSecure, Inc. Fourth Quarter and Full Year 2024 Earnings Conference Call. The operator provided 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 are Dave Cote, Executive Chairman of CompoSecure; Jonathan 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 investor relations 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 for 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 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 Jonathan.

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 card 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 card 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 U.K.; and JetBlue co-branded card in the U.S. In addition, other examples included HSBC and Capital on Tap, among others. On Slide 5, you can see CompoSecure's largest customers continue to report purchase volume growth 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 showcase 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 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, Jonathan, and 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 Jonathan 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, earn-out 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 $24.7 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 were $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 1.25x 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 1.39x at December 31, 2023. Turning to our cash flow statement on Slide 15, you can 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 Jonathan 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.

The conference is now open for questions. Our first question comes from the line of Moshe Orenbuch with TD Cowen.

Great. Can you hear me?

We can.

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

Thanks, Moshe. Look, we're not giving quarter-by-quarter guidance. 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 expand and flesh out a little bit the elements and the steps of the CompoSecure Operating System: what do you expect to be realized during 2025, and what kind of things are on the roadmap that will be realized after 2025?

So for us, the operating system looks at really the entirety of the company. Think about from the time we get an order in until we get cash in the door. So it's not just manufacturing or lean manufacturing concepts that we're diving deep into within that function. 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 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. That's where he's pushing us, and that's where we are driving as a team to deliver those efficiencies. We expect to see these benefits building as we move through the year and into next year, where we should really start to see the benefit on the organic growth side and the efficiency side.

Our next question comes from the line of Hal Goetsch with B. Riley Securities.

First question is on Arculus. Thanks for the commentary and the detail there. What was the exit rate revenue for Arculus on an annualized run rate? And what can we expect this business to contribute versus 2024?

Hal, we're not going to break down the guidance 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 roll into a good run rate to ensure that we're on track to deliver that net positive result in 2025 and really start to see 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 the momentum we're seeing on the cold storage side.

Okay. And on the metal card business, can you give us a feel for the funnel and pipeline for domestic and international? Both basically grow at different rates and are difficult to predict quarter to quarter. How should we think about contributions from each?

Yes. If you remember last year, we had a lower first quarter internationally. Think of it over the year where we expect international to be about 20% of revenue as we move through the year. Because of the size and the nature of those orders, we do see more variability in timing. We said it would come out about 20%, and for the full year we came out about 18%, which was right in line with what we expected. As we look into 2025, we're fairly balanced on both domestic and international growth. International growth was stronger year over year for us last year.

Our next question comes from the line of Jinli Chan with Bank of America.

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

Sure. Jinli, the impact on the business is meaningful across all three dimensions we talk about: organic growth, the operating system work, and M&A. Resolute has active input and participation with our team, and Dave has been engaged across all three. Dave has been on customer calls with us, meeting with the operating team, and there is a robust pipeline of opportunities. Resolute had a robust pipeline when they were considering CompoSecure, and that work remains in terms of opportunities up and down the spectrum that can deliver accretive M&A. The number-one criterion is delivering value for our investors. Dave, I don't know if you want to add anything.

Our next question comes from the line of Jacob Stephan with Lake Street Capital Markets.

Maybe if you could break down the guidance a little: the mid-single-digit revenue growth. How do you think about stabilized card programs versus newer ramping programs and overall new card launches?

Jacob, every year for us is a mix: existing programs with existing clients, new programs with existing clients, and new, new customers. Last year we saw strong growth from new clients and new programs with existing clients, and we expect all three to be important contributors to growth in 2025. We're planting seeds and building out the sales team further to accelerate organic growth and drive the long-term results we have historically delivered.

On Arculus, it's tracking well ahead of expectations on the net investment level. Is current customer demand more on the Authenticate side or on Cold Storage? Which is customers paying for currently?

I'd say it's both, but if you had to skew it, currently more towards authentication. We've seen strength in both businesses.

Our next question comes from the line of Brian Vieten with Needham.

It's John Todaro from Needham on. First, can you give a refresher on spinning off Resolute versus keeping a team internally to vet and explore M&A opportunities? Second, a follow-up on the authentication comment.

John, the mission doesn't change in terms of driving accretive M&A. We believe this structure delivers more value to shareholders over time because of how asset managers are valued in the market—steady, predictable revenue streams. The mission and outcomes don't change, but we believe the structure delivers better returns for investors. Net-net after the spin, if you looked at CompoSecure stock and the value of Resolute, net-net we were up slightly after the spin. We firmly believe it delivers more long-term value for our investors.

Understood. On the authentication piece, can you walk through the sales process? Is it longer-term contracts? When do those conversations begin and when do deals sign? Could you provide more color on that piece?

Sure. The sales cycle for authentication is similar to metal payment cards in that you're working through use cases, how the product can reduce fraud, and increase security for medium- to high-risk transactions. It provides a hardware token in the customer's hands without carrying a separate dongle. Typically, both card buyers and fraud teams are engaged. With larger banks, it's been a longer sales cycle, which is why it has taken longer to ramp; fintechs tend to move faster. We're pleased with the momentum.

Our next question comes from the line of Reggie Smith with JPMorgan.

Following up on the Resolute question: is the thinking that Resolute will only manage CompoSecure, or is the plan to eventually bring in third-party capital and/or manage other companies? I have a few follow-ups.

Reginald, the primary intention is to drive the value of the CompoSecure share price. Dave and the Resolute team have roughly $600 million to $700 million of equity capital in CMPO stock, and the goal is to drive that up. Things that we acquire would be acquired by CompoSecure; that is the model. It does not exclude Resolute from ever having another agreement with someone else, but the intention here is to drive the value of CMPO stock. Incentives and stock compensation are aligned to that outcome.

On the CompoSecure Operating System, can you help us understand how expenses break down within it? Is the opportunity primarily around material costs, people, or process? You mentioned investments — is there any plan for CapEx to improve the process? How should we think about the opportunity?

From a CapEx standpoint, it's generally not very expensive. This is more a method of operating and getting everybody in the factory involved in understanding what they're doing, how they can make it better, and ensuring that anything that won't pass muster doesn't get passed along. It's a big process and people focus, and the cultural mindset makes a big difference. This isn't a flip-the-switch change; there's an acculturation process to get everyone onboard and understanding how significant their job is in the scheme of things. You don't see the benefit immediately in big numbers; it takes a few months to really get it rolling. We're a much smaller operation than the scale I dealt with previously, so it should happen a little faster. The benefits are huge: as you start improving yields, costs go down, you free up capacity and floor space; it's impressive what you can do. Think of it as the Toyota production system modified for CompoSecure. I feel very good. Our manufacturing and engineering leaders working with Jonathan are driving the cultural change. This is more about process, people and culture than capital expenditure.

It does. It reminds me of reading The Goal in business school and hearing those terms like floor space. Last question on tariffs: do you get your metal cards in the country? Is there anything to think about regarding tariffs and how that may impact your raw material cost?

Thanks for the question. We are keeping a keen eye on tariffs. We have materials that come from Europe and some from Asia, and very little from China, but it is something we're watching closely. It could have an impact. Compared to an industrial or industrial tech company, we're less at risk to those fluctuations, but it's an important item to monitor.

We have a follow-up question from the line of Moshe Orenbuch with TD Cowen. We also have another follow-up question from the line of Reggie Smith.

I was curious if you can frame an up-to limit as far as the size of a deal you may be interested in. Obviously it's not a commitment, but trying to understand the scale of things you may be exploring, if possible.

I'm happy to take it, and Dave can follow up. We will look at things small, medium and large. I know that's not a precise answer, but it's not limited to small or small-to-medium. We'll look at a broad spectrum of opportunities. There are criteria Dave looks at for every acquisition, including ours: it has to hit those criteria and be at a value and price that can deliver exceptional returns for our investors. That's the critical criteria.

If I could add to Jonathan's point, this will come down to where we can add value with the operating tools we bring. You're not going to see us do something where it doesn't make sense how we can add value. To reinforce, Tom, me and the rest of the acquisition team have our equity in CompoSecure, not in Resolute. We are heavily incentivized to make sure CompoSecure performs well and that the stock performs well for our shareholders. That's our focus.

We have a follow-up from the line of Moshe Orenbuch with TD Cowen.

Sorry about earlier; I couldn't figure out on this new phone how to unmute. Dave, thanks for that last comment — that's helpful. Question: could you clarify what the pro forma guidance means with respect to the Resolute payments? Does it mean as if it were in effect for the entire year or in effect from some other date? Could you clarify what that means?

Moshe, the guidance is presented with the Resolute management fee on a pro forma basis for last year and for this year. If you want to look at the guide with and without the Resolute management fee, you can see the difference. The company expects mid-single-digit growth in the business itself.

Right. And I think just as a follow-up to that, you said that Arculus was positive in adjusted EBITDA in the fourth quarter by $3.5 million, correct? If that remained neutral or positive, shouldn't that alone be a significant driver of adjusted EBITDA growth into 2025?

We are also making investments, Moshe. I discussed investments in engineering talent and sales talent and other investments — including some capital where necessary — to get to where we want to be around operations and efficiency. We are taking those investments into account in our guidance.

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