Earnings Call Transcript - GPGI Q2 2025

Operator, Operator

Good day, everyone, and welcome to the CompoSecure Second Quarter 2025 Earnings Call. Please note this event is being recorded. Now it's my pleasure to turn the call over to the General Counsel, Steve Feder.

Steven Feder, General Counsel

Good afternoon, and thank you for joining us to review CompoSecure's Second Quarter 2025 Financial Results. With me on the call from CompoSecure are David Cote, Executive Chairman; 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, customer demand, our ability to maintain existing and acquire new customers, implementation of the CompoSecure Operating System and our guidance for the balance of 2025 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 these risks and other important factors that could affect our results, please refer to the information in our 10-K, 10-Qs 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 effective as of February 28, 2025, the date of the spin-off of Resolute Holdings Management Inc. and as a result of the management agreement between Resolute Holdings Management Inc. and the company's wholly owned subsidiary, CompoSecure Holdings, the results of operations of CompoSecure Holdings and the operating companies, which are its subsidiaries are not consolidated in the financial statements of CompoSecure Inc. included in our quarterly report on Form 10-Q and the accompanying earnings presentation and instead are accounted for by CompoSecure under the equity method of accounting. In the earnings release we issued earlier today and in the discussion on today's call, we also present non-GAAP results to help investors reconcile and better understand our operating performance. 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 IR section of our website. Thank you. And with that said, let me turn the call over to Executive Chairman, Dave Cote.

David Cote, Executive Chairman

Of our investment in CompoSecure, I want to step back and assess the opportunity compared to what we saw at the time of our investment. That said, Tom and I were confident that CompoSecure had a great position in a good industry. This has proven to be true. We are far and away the leader in metal cards globally, but importantly, metal cards in total represent less than 1% penetration of the payment card market. This is the case even though the financial and brand benefits our metal cards offer to an issuer are huge and proven with the most recognizable card programs in the world. We believe the upside for us and our customers is significant, and we believe the opportunity for metal to take a larger share of the total market is very real. I can confirm we are seeing early results from our focus on Compo's sales efforts and are confident in the continued investments we're making to capitalize on the very large opportunity we see. We're also very encouraged with the early results from the implementation of the Compo Operating System, or COS. We believe at the time of our investment that opportunities existed for step changes in performance, and we're beginning to see those come to fruition. We're making capital investments across the enterprise that we believe will drive meaningful results over time. All of this is intended to enable CompoSecure to build and sustain a culture of excellence that delivers for our customers, employees and investors in a very real way over time. The high-performance culture is the glue that allows COS to become ingrained throughout the enterprise and beginning to happen. This will take time, we've proven before, this approach to building a business will work. As I've said, I have even greater confidence today about what is possible for CompoSecure than when we first invested. And with that, I'll turn the call over to Jon.

Jonathan Wilk, Chief Executive Officer

Thank you, Dave. Good afternoon, everyone, and thank you for joining us for our second quarter conference call. As mentioned last quarter, our results are being reported using equity method accounting following the completed spin-off of Resolute Holdings Management earlier this year. Due to the change in accounting on this call, we will refer to non-GAAP measures for net sales, gross profit and related operating measures. With that context, let's dive into the quarter. We delivered strong top line growth in Q2 with non-GAAP net sales increasing 10% year-over-year to $119.6 million. This was driven by robust domestic demand from traditional banks and leading fintechs. Pro forma adjusted EBITDA increased 26% to $46.3 million for the quarter, driven by organic revenue growth and the early operational efficiencies from the ongoing implementation of the CompoSecure Operating System. We also saw several high-profile customer program launches during the quarter, which I will expand on shortly. For fiscal year 2025, we are raising our guidance and now expect non-GAAP net sales to be approximately $455 million. We also now expect pro forma adjusted EBITDA to be approximately $158 million. Both are up from prior guidance of mid-single-digit growth. This updated guidance reflects continued commercial and operational momentum in the second half of the year and ongoing foundational investments as well as the payment of Resolute Holdings management fee. You saw Slide 5 last quarter, but as a quick reminder, because our reporting can be a bit complex, when you're trying to understand the CompoSecure business, think of it as our traditional operating results minus the management fee paid to Resolute. And when it comes to Resolute, it is essentially the management fee from CompoSecure less whatever operating expenses they incur. Turning to Slide 6. We continue to see strong activity around premium upgrade cycles and card program refreshes. These are great examples of how issuers are enhancing the value proposition of established premium products and speaks to the ROI of metal cards. We're also seeing growth from new market entrants and fintechs who are leaning into the differentiated offerings with metal card programs. Metal cards are increasingly serving a broad range of customers with product tiers designed to meet the needs of the high net worth, mass affluent and also includes mass market segments. On the operational side, we are making tangible progress through the CompoSecure Operating System. We've rolled out our operating system across all functional areas, establishing more structure and discipline in how we operate. We're building a high-performance culture that promotes collective ownership and drives accountability across the organization. And to support long-term growth and sustained execution, we've prioritized investments in talent and manufacturing capabilities, efforts that will enable us to scale efficiently and deliver strong margins. Taken together, we are clearly beginning to see the benefits of the CompoSecure Operating System in our financial performance, as you can see from our improved margins this quarter. Now turning to Slide 7. We continue to build on our market leadership with strong program activity during the quarter, highlighted by the launch and expansion of several metal card programs. They include the Chase Sapphire Reserve and the Chase Sapphire Reserve Business Card, the Coinbase One Card, Geminicrypto.com and the MGM Reward card, demonstrating the breadth of customers that value our differentiated offerings. As we step back and look at the broader picture, Slide 8 underscores just how much opportunity we see ahead. While metal cards remain a small fraction of total payment cards, consumer demand continues to rise, and we've proven our ability to grow within that white space. With a market estimate of over 4 billion payment cards shipped every year and more issuers looking to differentiate through premium experiences, we believe there's a long runway for us to continue capturing share and delivering strong returns. Our combination of design leadership, operational execution and trusted customer relationships puts us in a great position to continue to scale. On Slide 9, we continue to see strong signals from top issuers that reinforce the durability of premium metal card demand. These trends across three of the largest global issuers show just how much is being invested to attract and retain high-value customers. Turning to Slide 10. We're seeing growing momentum from Arculus as a secure multifunction platform for digital authentication and asset protection. We delivered another net positive quarter for Arculus, supported by continued operational progress and commercial momentum. The Arculus team was especially proud to partner with Coinbase and American Express on the launch of the new Coinbase One Card, the first crypto card on the American Express network, which underscores our role in enabling innovation in digital finance. As a reminder, and for those who may be new, our Arculus offering spans three core applications: Arculus Authenticate, our Passkey-based authenticator, secure payment with Arculus Authenticate and Arculus Cold Storage, the digital asset hardware wallet. These tools enable a range of use cases from passwordless login and account validation to step-up authentication and digital asset security. I'll now hand it over to Tim to review our financials before returning for closing remarks.

Timothy Fitzsimmons, Chief Financial Officer

Thank you, Jon, and good afternoon, everyone. Before running through our financial results, hopefully, many of you caught the news last month that I will be retiring later this year after more than 13 incredible years with the company. It's been a remarkable run, and I'm grateful to have had the opportunity to work with such a talented team. I'm excited to see how the next chapter of CompoSecure unfolds and know the team will continue to raise the bar while I participate in the company's growth as an adviser and shareholder. I want to go through the required accounting change as a reminder from last quarter. As of February 28, following the spin of Resolute Holdings and the execution of the management agreement, Resolute Holdings is required to consolidate the financial results of CompoSecure's operating businesses in accordance with U.S. GAAP. As a result of this change, the results of CompoSecure Holdings and its subsidiaries, which are our operating companies, are no longer consolidated in our GAAP financials. Instead, our share of earnings from CompoSecure Holdings is presented as a single line item in our income statement and the carrying value in the assets of CompoSecure Holdings is now reflected on our balance sheet. The non-GAAP financial information we are providing is comparable to our historical financial statements, with the only change being the management fee paid to Resolute Holdings. For Resolute Holdings, the non-GAAP financials show management fee revenue from CompoSecure less salaries and ongoing operating expenses. Now turning to the quarter. I'll walk through our Q2 2025 financial performance. Unless stated otherwise, all comparisons and variance commentary are on a year-over-year basis. In Q2, non-GAAP net sales increased 10% to $119.6 million compared to $108.6 million in the prior year period, driven by strong domestic demand and growth across both traditional financial institutions and fintech partners. Non-GAAP gross margin for the quarter was 57.5% of net sales compared to 51.6% for the same quarter of the prior year. The gross margin expansion reflects improved manufacturing efficiencies driven by the CompoSecure Operating System, along with favorable product mix. Pro forma adjusted EBITDA for the quarter increased 26% to $46.3 million, up from $36.7 million in the year-ago period. The increase was due to organic revenue growth and early operational efficiencies from ongoing implementation of the CompoSecure Operating System. Pro forma adjusted EBITDA includes the payment of a management fee in the amount of $3.4 million for Q2 2025 as incurred by CompoSecure Holdings in the quarter, and a $3.3 million fee for Q2 2024 on a pro forma basis for comparability as if the management fee had been in effect in this quarter as well. You can find the statement of operations in the appendix of the company earnings slides for a full reconciliation. We continue to generate strong cash flow, bringing in approximately $52 million in operating cash flow year-to-date on a non-GAAP basis. This reflects both the efficiency of our model and our continued focus on disciplined execution. At June 30, 2025, on a non-GAAP basis, CompoSecure had $96.5 million of cash and cash equivalents and $192.5 million of total debt, resulting in net debt of $96 million and a net debt leverage ratio of 0.66x. This compares to June 30, 2024, non-GAAP cash and cash equivalents of $35.4 million and total debt of $330.9 million that resulted in net debt of $295.5 million and a net debt leverage ratio of 2.15x. Both periods reflect pro forma management fees to Resolute Holdings. For further details and reconciliations, please refer to the appendix. On Slide 14, you can see that the domestic net sales of CompoSecure Holdings grew 22% to $104.3 million, an increase of $19.1 million compared to the prior year period, while international net sales of CompoSecure Holdings declined 35% to $15.3 million, down $8.1 million versus the prior year period. As we've often said in the past, our international business tends to see greater fluctuations given its smaller scale relative to our domestic business. Turning to Slide 15. Adjusted net income was $28.4 million compared to $24.2 million in the year-ago period. Adjusted diluted EPS was $0.25 per share compared to $0.23 in the prior year period. With that, I'll hand it back to Jon.

Jonathan Wilk, Chief Executive Officer

Thanks, Tim. As mentioned, we are raising our full year guidance. We now expect non-GAAP net sales to be approximately $455 million and pro forma adjusted EBITDA to be approximately $158 million, up from our previous guidance of mid-single-digit growth. Guidance for pro forma adjusted EBITDA includes the payment of the Resolute Holdings management fee in both periods for comparison. This updated guidance reflects continued commercial and operational momentum in the second half of the year and ongoing foundational investments. I'll close with reiterating what Dave highlighted in his opening remarks. Over the course of the past year, we've been planting seeds of investment that are starting to pay off, which is helping us drive growth while simultaneously improving operating efficiency. We believe the addressable market opportunity is huge given the continued interest and growing demand for premium payment products, authentication and digital asset solutions. Our conviction about what's possible for CompoSecure is stronger than ever, and we believe we will continue to drive both short- and long-term value for our shareholders. With that, I'd like to open up the call for Q&A.

Operator, Operator

One moment for our first question from Moshe Orenbuch with TD Cowen.

Moshe Orenbuch, Analyst

Great. Jon, since you have so many new and refreshed products available and MX coming in the second half of the year, I noticed you didn't mention Citi Strata, which I believe is another recent launch of yours. Can you discuss when those players typically order those cards and when we can expect to see them reflected in your results?

Jonathan Wilk, Chief Executive Officer

Yes. And I did see a report with your detective work on the Citi Strata card. And yes, that is a card that we make. So look, it depends on the issuer typically, I'd say, one to two quarters ahead, depending on the size of the program for some of the larger programs that we would expect.

Moshe Orenbuch, Analyst

Got it. And Dave, I was struck by your comment about greater confidence in the investment now. And I think there's a lot of wonderful things that have been going on. I mean there's practically a war in the high-end card segment. So and you've had better sales likely to see that continue. Arculus continues to improve. Could you talk about what the factors kind of that drove you to that statement? Which are the things that are the most important that you feel have improved since you made the investment?

Jonathan Wilk, Chief Executive Officer

So Moshe, Dave had to drop off after his remarks, I apologize. We've had that conversation. And I think in his remarks, he tried to highlight sort of the two sides of the story. It's one on the organic growth side. And when we talk about the impact of the changes that are happening, number one, just we've talked about the ability to leverage Dave, the Resolute team, our Board to help drive some of that organic growth, making introductions in a pretty material way in terms of trying to help accelerate that. In addition to what we've talked about more, which is the operating system work and the efficiency work. And so his prepared remarks were intended to convey both the market opportunity, which I think he sees even more clearly today, just how big and important it is, combined with the progress being made on the organic growth and the operations side.

Operator, Operator

It comes from Brian Vieten with Needham.

Brian Vieten, Analyst

Congrats on a great quarter. You called out the commercial momentum. Any particular reason the back half wouldn't look more like Q2 here, maybe an offset to the some of the recent crypto launches, which seem well positioned? Or was it more of just a pull forward here?

Jonathan Wilk, Chief Executive Officer

We don't see it as a pull forward. We see continued momentum sort of as we move through the year. Yes, we've given you specific point guidance for how we see the year unfolding. There's always some natural timing for how we see things play out through the year, but it was certainly not a pull forward into Q2 in terms of our results.

Brian Vieten, Analyst

Okay. Great. And then just on the margin profile of some of those newer launches, are those cards coming in with a similar margin profile, anything to call out there?

Jonathan Wilk, Chief Executive Officer

On the margin question, as both Dave and I, and Tim all noted actually, we are beginning to see, we believe, the effects of the operating system work. And it's happening throughout every function in the company, including manufacturing. But it is, we think, a pretty meaningful contributor to the improvements that we saw in gross margin during the quarter. So I'd say we're really pleased with the operating system work and the impacts that it's driving.

Operator, Operator

Our next question is from Reginald Smith with JPMorgan.

Reginald Smith, Analyst

Congrats on the quarter. I guess I have a few questions. First, I want to hear, obviously, the gross margins were up sharply, and I understand that the operating system is working, but I was hoping maybe you could talk about maybe some of the most impactful operational changes you guys have made. And I'm going to ask you this, I don't know that I'm going to answer, but how much more efficiency is available like over the next 12, 18 months? And then I have some follow-ups.

Jonathan Wilk, Chief Executive Officer

Reggie. So I'm not going to get specific on the specific operational improvements, which function of operations. It is throughout manufacturing. And in addition to the manufacturing I've talked about, it's literally from the time we take an order to the time cash comes in the door. The intensity, the focus, the discipline that we are providing around all aspects of that are all contributing to the improvements that you're seeing in the gross margin lines. And so as we move through the back half of the year. Some of that's impacted by product mix in a particular quarter. And you will see perhaps some variation and fluctuation in that, but we believe we can maintain this strong margin profile and continue to drive additional improvements, which was the core to your question. Those improvements let us continue to reinvest in the business, right, in manufacturing, in sales and other things that we need to ensure we continue to grow the business and continue to drive additional operating efficiencies. So we've said from the beginning, Reggie, we will reinvest some of that back in seed planting for the future. And we believe there's actually still a good bit of opportunity ahead of us on the operations side.

Reginald Smith, Analyst

That sounds good. Looking forward to seeing that unfold. I was hoping to ask Dave, and maybe you can speak to this, but I would love to hear about the M&A pipeline and maybe talk about how many deals are in like serious diligence and what you expect there? And then finally, and you may or may not be able to answer this, but looking at your Resolute Holdings, I know that they earn a management fee, but I'm not sure if there's anything else in there, kicker or incentives that may explain its value. Am I missing something there on Resolute in terms of what they can earn from your success?

Jonathan Wilk, Chief Executive Officer

So on the first part of the question, I would say the M&A pipeline is robust. There are a lot of opportunities out there that we are looking at and evaluating. I am not going to comment, Reggie, on how many or which ones are deep into diligence, et cetera. I'm going to come back to there are a set of core criteria that we look at for any deal that we're going to do that align well to the framework that Dave used to drive nearly 100 acquisitions during his time at Honeywell. Those same criteria are the core criteria we're going to use here. And we're going to be very selective. We're trying to find the next CompoSecure, a market leader, great company that is undervalued and do an accretive deal for our shareholders. And to the second part of the question, I'm not going to comment deeply, as you said when you asked the question on the valuation there. The business, as I tried to explain, is pretty straightforward in terms of the management fee paid from Compo less the expenses there. The point that we've made over time, Reggie, is that the goal is that the management fee will grow as we grow EBITDA, as we acquire new companies, the goal would be to see material growth in our EBITDA, therefore the management fee while keeping costs relatively flattish there driving huge operational leverage in that business. And we think that makes it quite an attractive investment opportunity. I'm not going to comment specifically on the valuation.

Operator, Operator

Our next question is from Jacob Stephan with Lake Street Capital Markets.

Jacob Stephan, Analyst

Great quarter, everyone. I wanted to highlight a few things. We’ve observed several relaunch initiatives, like the ones with the Chase Sapphire Reserve and Amex’s recent effort last year. Can you provide insight into the pipeline for relaunching existing metal card offerings? Additionally, it would be helpful to understand the outlook for new card programs.

Jonathan Wilk, Chief Executive Officer

Looking ahead, we are very pleased with the developments in the premium card market, where banks continue to compete for customers in this segment. We have observed that cards are transitioning from high net worth individuals to mass affluent customers and eventually into the mass market. This is highlighted by the approximately 4 billion payment cards issued annually, of which we estimate less than 1% is currently utilized, presenting a significant opportunity. To answer your question, we appreciate the competition for this customer segment as it benefits our business by integrating premium cards into a compelling value proposition for customers. We believe this market is attractive, and it is this competition that is fueling our current growth and will continue to support our growth in the coming years. Both Dave and I have expressed our outlook and confidence in this business and the substantial opportunity we see ahead.

Jacob Stephan, Analyst

Got it. Very helpful. And maybe if I could just kind of ask more of a crypto-focused question. Obviously, there's been significant kind of legislation proposed and you've kind of got the rise of stablecoins. But is there any other driving factors between several other of the major exchanges kind of rolling out their card offerings or upgrading existing?

Jonathan Wilk, Chief Executive Officer

Jacob, we think that's very exciting opportunities. So to see folks like Coinbase, Robinhood, Gemini, Crypto.com making the kind of strides that they are at the intersection in our view of crypto and payments, we think this is a very exciting time. Overlay the recent changes with stablecoins and the work that our team has done to basically build the capabilities to help spending of stablecoins from cold storage at point of sale over traditional rails or direct wallet to wallet. We're very excited about how we're positioned for the opportunities ahead there.

Operator, Operator

And we have a follow-up from Moshe Orenbuch with TD Cowen.

Moshe Orenbuch, Analyst

Okay. You mentioned that Arculus contribution was positive. Can you provide more details on the growth path? Are you investing more and is the revenue increasing? Could you elaborate on that in the context of your disclosure?

Jonathan Wilk, Chief Executive Officer

Yes. I'd say generally, it's being driven by revenue growing by far the #1 driver of what's driving that positive contribution in the business. I'd say our spending or investment is fairly flat to slightly increasing on the things like the sales side, go-to-market, Moshe. But overall, it's revenue growth that is driving the day there.

Operator, Operator

Thank you so much. And ladies and gentlemen, this concludes our Q&A session and conference for today. Thank you all for participating, and you may now disconnect.