Good day, and thank you for standing by. Welcome to the CompoSecure Q1 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to Sean Mansouri, CompoSecure's External Director of Investor Relations. Please go ahead.

Good evening, and thank you for joining us to review CompoSecure's First quarter 2023 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 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 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, 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.

Thank you, Sean. Good evening, everyone, and thank you for joining us for our first quarter conference call. 2023 is off to a solid start following a record 2022. Demand for our premium metal cards remained strong, and we continue to execute on our sales goals and objectives for both new and existing programs. Sentiment from our largest clients also remains positive as consumer and business spending has proven to be resilient despite the challenged macro environment. More to come on this later in the call. Now on to our key highlights from the first quarter on Slide 3. We achieved net sales of $95.3 million, which was up 13% versus last year, driven by strong sales execution and demand from traditional card issuers and fintechs for our premium payment cards. I'll expand on this in a few slides. We also reported net income of $10.7 million compared to $26.9 million in Q1 of '22. Net income in the first quarter was primarily impacted by noncash expenses, including $13.4 million related to the fair value of our warrants, earn-out consideration and derivative liabilities and $4 million of stock-based compensation. As a reminder, the fair value adjustments fluctuate quarter-to-quarter relative to our share price performance. When our stock price increases, our net income is inversely impacted by fair value adjustments. Year-to-date, our stock price was up more than 50% as of market close on May 1, 2023. Adjusted EBITDA came in at $35.5 million, up 6% year-over-year, and we generated $25 million of operating cash flow in the quarter. In March, we were thrilled to announce the extension of our American Express contract to continue manufacturing their premium metal payment cards through July 2026. Looking at card issuer trends. Our largest customers continue to report strong card acquisition growth and have…

Thanks, Jon, and good evening, everyone. I'll provide a more detailed overview of our Q1 2023 financial performance and then turn it back to John before we open up the call for questions. Unless stated otherwise, all of the comparisons in various commentary is on a year-over-year basis. Net sales increased 13% to $95.3 million compared to $84.2 million. As John mentioned, the increase was driven by strong sales execution and demand from traditional financial institutions as well as Fintechs for our premium payment parts. Gross margin for the quarter was 56% compared to 58% in prior year. While this was due to higher material costs, it is in line with our previously mentioned and long-term gross margin expectations of being in the mid-50% range. Net income was $10.7 million compared to $26.9 million Net income in the first quarter of 2023 was impacted by noncash expenses, including $13.4 million related to the fair value of company's warrants, earnout consideration and derivative liabilities, which was driven by the improvement in our stock price. It also was impacted by $4 million of stock-based compensation. Adjusted EBITDA in Q1 was $35.5 million, up 6% compared to $33.3 million last year. And adjusted EBITDA margin in Q1 was 37% compared to 40% in the first quarter of 2022. The decrease in adjusted EBITDA margin was driven by lower gross margins and our continued investment in the Arculus business and building out infrastructure. Adjusted EBITDA includes the net expense investment in Arculus of $4.5 million. However, it excludes both the noncash revaluation adjustments, which were driven by our strong stock price and stock compensation expense. Looking at the split between domestic and international, you could see we continue to have strong domestic sales, increasing 18% compared to the first quarter of 2022 to $74…

Thanks, Tim. Now turning to Slide 18. As I mentioned earlier, we expect another year of solid growth in 2023, and we are reiterating our previously issued guidance with net sales in the range of $400 million to $425 million and adjusted EBITDA between $145 million and $155 million. As a reminder, these targets reflect the expectation of continued sales execution in our metal card business as well as a net investment in Arculus at or below our net investment in 2022. In addition, this guidance takes into consideration some of the continuing uncertainty of the macroeconomic environment, and we continue to monitor these dynamics and our customers closely, and we believe we are well equipped to drive shareholder value. On Slide 19, I want to end where I began. 2023 is off to a solid start following a record 2022. Demand for our premium metal cards remain strong, and we continue to execute on our sales goals and objectives for both new and existing programs. Sentiment from our largest clients also remains positive as consumer and business spending has proven to be resilient despite more challenging macro conditions. With Arculus, we are well positioned to deliver enhanced security and cold storage solutions for businesses and millions of people around the world. The opportunity ahead is immense, and we will continue to innovate our product suite with a prudent approach to capital allocation and driving efficiencies in our business to maximize the bottom line. Thank you all for your time today, and I look forward to your questions.

[Operator Instructions] Our first question comes from the line of John Todaro from Needham & Company.

I just have one here, and that relates to Apple. So, Apple has been pushing more into consumer finance. Just wanted to get some commentary from you guys. Is there an increase in concern whether it's Apple Pay or some of the other products that challenge cards offerings? Or is there actually an opportunity here to add Apple and some other similar companies as customers.

Thanks, John, for the question. I think as we think about the things that Apple is doing on the savings side, split that up between -- on the card side, what's been publicly disclosed is Goldman is losing a lot of money on that business at this point, struggling to sort of find their way. I think they have had some success on the savings side. We have not seen trends on the Apple Pay side that caused us any greater concern. It's something we monitor. But as I've said on these calls prior, we think cards are going to be around a long time, and that view hasn't changed.

Our next question comes from the line of Regi Smith from JPMorgan.

Congrats on the quarter. So, 2 quick questions for me. First, I know you guys are stepping into some pretty difficult growth compares next quarter. And I was hoping you could shed some light on, I guess, kind of quarterly revenue cadence and maybe what the growth rate could look like in the next few quarters -- and then secondarily to that, you kind of alluded to recognizing that the potential strain in the financial markets in banks. But I was curious how you are thinking about metal card growth longer term. you still see it as a [indiscernible] and whether your view has moderated or changed in light of where we are in the cycle?

Thanks for the question, Regi. I'm going to take those in reverse order and just talk about kind of the macro overall and then address the revenue cadence. So, as we look at the macro overall, we tried in the presentation to give some perspective on what we're seeing in the market based on publicly available data to help provide some sentiment, which is -- our view is that our clients and others still see strong purchase volume growth. They're still investing in card acquisition, and they're still looking at the kind of back half of the year, fourth quarter, trying to understand what will unfold. But generally, as we looked at earnings releases, they all seemed generally positive on the growth that is important to us as a company. As we think about the revenue cadence, we haven't broken it down by quarter for you guys, Regi. We've stuck to the $400 million to $425 million, and you can begin to do some math based on kind of where we are coming out of this quarter at what the rest of the year could look like.

Got it. And so, I guess, kind of assume similar seasonality to previous years is the takeaway there? In terms of quarterly.

Yes, we don't see -- I think it's less seasonal for us, Regi, more just related to timing of orders and deliveries and shipments and other things versus necessarily expecting a specific quarter to be up or down based on time of year.

Understood. If I could sneak 2 more in. And just to clarify, if I'm remembering correctly, most of your bank partners are kind of top 10 banks. I know the top 2, the 2 largest partners are pretty massive. But I guess I just wanted to frame, I guess, the potential regional bank exposure, like I would imagine it's a pretty small piece of your business. Is that fair?

Yes. I want to actually address it even more directly, if I could, Regi. We have no direct exposure to kind of the banks that have been taken over in that we have no deposit relationship. We have no lending relationship are not in our lending facility, and we have no outstanding receivables or card sales to any of those specific banks. In addition to that, your point is a fair one, which is, for better or worse, our revenue is concentrated with larger players, Chase, American Express, Capital One and others. We've talked on prior calls about us opening up Wells Fargo as a new client as well. So yes, the smaller regional banks make up a very small percentage. At the same time, we'd like to grow with them over time. But what's happening with those regional banks today is not impacting our business.

I understood. If I could get one more in, and I promise this will be my last question. You highlighted a payment plus authentication pilot that you do with the [indiscernible] partner. I was just hoping you could kind of talk about what -- what are the steps in that pilot? Like how did that play out? When could it actually become a real account or revenue contributor. If you follow up a question, so like…

I do

Time line of how that plays out.

Sure. And Regi, thank you for the questions. We appreciate it. So, I just want to make sure I'm highlighting what it is, again, which is if you think about the crypto space, we play a lot in self-custody or cold storage. The authentication capabilities actually let an exchange lock down their hot wallet. So, a customer, instead of using a username and password to log in, would use our card in a combination of biometric or pin to log in and secure the hot wallet. And that's the pilot that we're ramping up. And for them, it is kind of ramping up the customer pilot, being able to observe that data and then roll it out further from there. I would suggest to you that, that will ramp up in the back half of the year. And we would anticipate, if that goes well, that the impact of that one would more be a 24% impact.

Our next question comes from the line of Chase White from Compass Point Research & Trading.

So, a couple of questions. First of all, so what drove American Express's thinking and extending the contract so early in the process? And in your experience, when would you generally expect to have something to report on the -- in the JPMorgan contract? Obviously, you don't know exactly when, but just trying to get a sense of when we could hear about that.

Yes. So, I'm going to reiterate, we are very pleased to extend the American Express contract through the middle of 26. There are a variety of reasons why some of our issuer partners look to extend contracts. I'm not going to comment specifically on this one. I apologize, but I'm not going to get more detail, but we're very pleased to half, 3.5 years, 3.25 years remaining on that agreement. And we think it's a testament to the partnership that we have and really have had for over 20 years with American Express. With respect to the Chase agreement, I commented last time that for us, we look at that as renewing in the normal course of business, and I expect to have an update as we give you results perhaps next quarter.

Got it. That's helpful. And then how should we think about sort of the international -- the impact of the international expansion on the Arculus business kind of in the near to intermedia term? And when should we start to think about starting to see the impact of the authentication use cases outside of crypto cold storage in Arculus?

So, we think we're making progress on both sides in terms of some of the partnerships that we had announced in earlier quarters, starting to get launched and ramp up, both on the cold storage and the authentication side. So, we hope to start to see progress on both towards the second half of the year. And we're pleased with the pipeline there in terms of the opportunities that we're discussing and we'll continue to update you guys on progress as we make it. Consistent with my comments, the level of investment and what we're doing there, we said would be at or below the levels of last year. And our view is it's trending that way as we reported first quarter numbers.

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

I wanted to ask you about Arculus and your investment. I think you mentioned it's just over $4 million in the quarter and some new partnerships were announced. But wanted to gauge your traction in asking what -- if business takes off, if you get more product market for you to get more traction? Will there be a lessening of those losses in investment spend or will not then have to ramp if traction improves? Just trying to figure out what is the direction of the drag if there's success? And then you have to see also to hit a kill switch and reduce it even further.

Yes. So, Hal, thank you for the question, and welcome to the call. I'd say we anticipate the direction going down in terms of the number that we give you so that I'm clear is the net impact of revenue and investment. So, it's sort of the net of the 2. We haven't broken out revenue. We haven't broken out expense. We're giving you the net of the 2. And so, the net of the 2 last year being about $21 million, we said the net of those 2 this year will be less, and we would hope to see that trending toward a lower number and positive over time.

Okay. If I could ask one follow-up. You mentioned like limited regional bank exposure, but also wanted to do more business with them. And where are you in discussions with larger regional banks? And where are their heads at using metal cards to differentiate versus large national money center banks and credit card issuers like Capital One, which spent a tremendous amount of money on marketing.

Yes. So, when I've talked about domestic growth opportunities outside of Chase and Amex, I've talked about folks like Capital One, I've talked about folks like Bank of America, who is a client. But on the smaller side, we think there's still tremendous opportunity. Wells Fargo, who we've opened up as a new client. And then, yes, to your point, there are a whole set of regional banks that while today, are a huge part of our business, we think, have potential over time. And when I say over time, my point there isn't that we think what's going on there will impact this year's performance. As we look out a number of years now, we'd like to see more of those banks as clients. Today, we do business with folks like U.S. Bank, and there are a handful of others that we would put in that list, and we'd like to see that grow over time and add that on to the international growth story, our growth story with Fintechs, and we think those come together to complement the overall growth that we've been able to deliver in the market. Appreciate it.

Thank you for your questions. I would now like to turn it back to Jon Wilk for closing remarks.

Thanks, operator. We appreciate the time this evening and hope everyone has a good night. Thank you.