Good day, and thank you for standing by. Welcome to the CompoSecure Second Quarter Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Anthony Piniella, Head of Corporate Communications for CompoSecure. Please go ahead, Anthony.

Good evening, and thank you for joining us to review CompoSecure's Second Quarter 2022 Financial Results. With me on the call tonight 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 customers and acquire new customers as well as other statements regarding our plans and prospects. Forward-looking statements may often be identified with words such as we expect, we anticipate or upcoming. These statements reflect our views only as of today and should not be considered our views as of any subsequent date. We undertake no obligation to update or revise these forward-looking statements. Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties that could cause the actual results to differ materially from our expectations. For a discussion of material risks and other important factors that could affect our actual results, please refer to the information in our annual report on Form 10-K and other reports filed with the SEC, which are available on the Investor Relations site of our website at composecure.com and on the SEC's website at sec.gov. Please note that the discussion on today's call includes certain non-GAAP financial measures as defined by the SEC, including adjusted EBITDA and non-GAAP EPS. The company believes these non-GAAP financial measures provide useful information to management and investors regarding certain financial and business trends impacting the company's financial condition and results of operations. These non-GAAP financial measures should not be considered as an alternative to net income or any other performance measures derived in accordance with U.S. GAAP and made 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 second quarter earnings.

Thanks, Anthony. Good evening, everyone, and thank you for joining us tonight as we discuss our second quarter 2022 earnings release. We appreciate your interest, and thank you for participating. In the first quarter, we established early momentum, and we achieved new record sales and profitability. I'm pleased to announce that we had another outstanding quarter, and I'd like to start by thanking our nearly 800 employees for their contributions that have helped us accelerate our growth. For the second quarter, we achieved net sales of $97 million, which is 55% higher year-over-year and up 15% sequentially, driven by strong sales execution and growth across new and existing accounts. In addition, our performance continues to be bolstered by consistent card issuer trends, including a robust demand for travel and entertainment spending, growth in solicitations, growth in new customer -- new customer card acquisitions and demand for premium metal card products. Our adjusted EBITDA was $40 million for the second quarter, up 45% year-over-year, demonstrating the impressive margin profile of our premium metal card business and our constant focus on operational excellence and process improvement. Before I share some customer win details, I'd like to take a moment to address the current digital asset market challenges, including the news around exchanges, freezing or limiting withdrawals. This climate actually drives an increased need for consumers to control the private keys to their digital assets. This is what our Arculus cold storage wallet offering was made for, and we believe we will benefit from this market turbulence in the long term. We are encouraged by recent partnerships to address the growing need for security, authentication and cold storage. For example, InBestGo, a Latin American-based fintech, has selected CompoSecure to launch a metal card that is designed to combine premium payment card technology and…

Thanks, Jon, and good evening, everyone. I'll provide a more detailed overview of our second quarter 2022 financial performance and then turn it back to Jon before we open the call for questions. Second quarter 2022 net sales grew 55% to $97 million, up from $63 million in the same quarter of the prior year. As Jon mentioned, we continue to perform extremely well through strong sales execution of our sales strategy and our deep client relationships, both domestically and internationally. Moving on to gross margin. Gross margins were 61% in the second quarter of 2022 versus 56% in the second quarter of 2021. We continue to watch supply chain costs and have been successful offsetting raw material cost increases through production efficiencies and increased scale. We reported net income for the second quarter of 2022 of $61 million. This includes a $35 million favorable impact of fair value adjustments associated with the mark to market of the warrants and the earnout. If you adjust out the $35 million of our operating net income would be $26 million, which is up 18% compared to our operating net income of $22 million in the second quarter of 2021. Adjusted EBITDA was a record $40 million in the second quarter of 2022, up 45% from $27 million in the second quarter of 2021. Similar to last quarter, the Arculus revenue and investment resulted in a net impact of approximately minus $7 million in the second quarter. Turning to the first half results. Looking at our strong performance for the first half of the year. Net sales grew 43% to $181 million in the first half of 2022, up from $127 million in the first half of 2021. Gross margins were 59% in the first half of 2022 versus 55% in the first…

Thanks, Tim. As I mentioned, our first half results have positioned us well. We have confidence in the strength of our sales backlog and pipeline and have updated our guidance. We now expect net sales to be in the range of $355 million to $380 million, up from our previous guidance, and we now expect adjusted EBITDA to be in the range of $110 million to $120 million, also up from our previous guidance of $100 million to $110 million. Turning to Slide 19. I also want to reshare our strategic priorities as I do every quarter. Regardless of short-term market dynamics, we continue to be guided by our strategic priorities, and I'm very pleased with the progress we are making against goals as we pursue long-term value creation for our shareholders. We had another outstanding record quarter, and we have set a strong pace going into the second half of the year. We continue to see increased demand for our metal payment card offerings from both new and existing customers driven by strong sales execution, deep relationships and market momentum. We are focused on our growth while maintaining or improving margins to capture long-term value. We remain encouraged by both the business and consumer response to Arculus even with the current crypto market turbulence and partially because of it. And we believe we have created a powerful platform that is well positioned to meet the growing need for digital security, authentication and cold storage solutions. With that, I want to thank you all for taking the time to join us today. We very much appreciate your attention, and I'll open it up to questions.

[Operator Instructions] Our first question comes from Steve Moss from B. Riley Securities.

Maybe just starting here with the revenue guide here. It kind of seems to apply about a flattish revenue guide at the high end relative to the second quarter level. Maybe just talk about the drivers and the puts and takes as we look forward.

Sure. Thanks for the question, Steve. So when you think about the guidance we've given first half revenue at roughly $180 million and second half at total guidance of $355 million to $380 million, it says that, in the second half, we think we will sort of beat or exceed the first half essentially is the way we're looking at it. And we set guidance, Steve, in a way that we always hope to be able to meet and exceed.

Okay. That's helpful. And then in terms of just the adjusted EBITDA guidance, it seems like -- I'm assuming it's fair to assume that the second half will be impacted by an increase in the Arculus spend relative to the first half. Is that a fair assumption?

A bit. But at the same time, Steve, we've taken a very measured approach to spending. As I mentioned on our last call, the spending for us was -- were back-half weighted. So yes, there is more spending in the back half. At the same time, we are able to control the levers and dials of our business quite well as we try to balance driving strong results in growth and in margin to build long-term value.

Okay. And maybe just in terms of driving efficiency, is this gross margin sustainable here? Or should we use maybe just a little bit of a lower number here going forward?

Steve, we've given, I think, kind of gross margin and EBITDA margin guidance, certainly on the core business, that we would suggest that you go back and look at for the long-term ranges.

Okay. And one more question just back on revenue for me. Just kind of curious if you could break out what was the contribution from Arculus this quarter and just kind of with the uncertainty you're seeing in the market for crypto, just kind of how you're thinking about the revenue contribution relative to prior [ quarter ].

Yes, Steve, as we said on the last call, we're not breaking out the Arculus revenue and units separately. At a later date, as it becomes a greater part of our business, it would break out into its own reporting segment but not at this point. We've tried to give you guidance in terms of progress we're making on partnerships. We have seen an uptick in demand from -- in Q2 versus Q1, we think, as a result of some of the trends that we described. And overall, we still remain very confident about the Arculus platform. At the same time, we certainly saw some partners impacted that slowed down some progress that we would have liked to have made.

Our next question comes from John Todaro from Needham & Company.

I guess just looking at that revenue guide a little bit further. I mean the growth in that, it's fair to assume that all that growth is coming from the metal card side, right? Or is -- should we -- is there -- I know we're not going to break out the Arculus. But is some of that growth contributing from Arculus? Or should we really be thinking of it as the core metal card side?

Yes, John, similar to the response I gave Steve, we're not breaking out the Arculus business. I think I'd point you back to my comments on where we are both pleased about the progress and the partnerships, some uptick that we've seen in demand Q2 over Q1 and confidence in sort of executing against the opportunity that's there for Arculus. At the same time, we've seen some impact from some of those relationships that have slowed down as a result of some of the turmoil. So I'm not going to break it out more deeply than that.

Okay. Understood. And then kind of just the strategy on that, with some of the slowdown in crypto and some of the institutional partnership slowdown, is there a strategy shift to focus more on the direct to consumer, which, as you guys noted, with the issues with these centralized operators, there's a growth in kind of that average everyday retail user trying to take custody of their assets and move to a hardware wallet? Are you guys shifting the strategy a little bit to focus on that direct-to-consumer segment or still is the focus -- I guess, just can you break out the focus between going after the institutional partnerships versus that direct-to-consumer strategy?

Yes, it's a great question, John. I think we believe that over the long term, the B2B opportunities will still be the bigger channel for us. Your point is fair. And I made that point that we have seen some increase in demand on the B2C side as we think consumers are recognizing the need to control their private keys. But I would say our strategy hasn't changed. It will still leverage both the B2B and B2C channels. We think heavier B2B over the long term for us.

Okay. And then just a last question on the recessionary environment. If we -- if there are concerns that recessionary environment gets a little bit worse here, where would the focus be in seeing some of that weakness? Is it in the fintech relationships, some of the larger legacy core customers, international expansion? Just any high-level color on that would be helpful.

So John, the best example that we can look at for that is when the pandemic hit, it did have -- well, it may not have been defined as a recession. It did have a significant impact on the credit card market. So marketing spending was down. Acquisitions were down. And you can see that trend if you look at some of the data that we've shared, and those trends impact us. So through, we believe, the pandemic, which was a pretty tough set of circumstances for us, we still managed to grow in single digits during that time. So if the recessionary concerns were to pick up more deeply, could it slow down some of the growth? Potentially, a bit. But net-net, we were still able to grow through extremely challenging times before because we have a number of drivers in the business. New acquisition is one, but we also have natural reissue. We also have lost, stolen cards. And it is kind of the 3 of those drivers that come together, and we were able to continue to increase new account -- new -- net new logos during that time as well. So that's kind of how we think about possible downturn impacts.

Okay. Great. That's helpful. Those are all the questions for me. Congrats on the quarter, guys. Appreciate it.

Appreciate it. Thanks for the question, John.

[Operator Instructions] Okay. Thank you, everyone, for your participation in today's conference. This does conclude our program, and you may now disconnect.