Thank you for standing by, and welcome to CompoSecure's Second Quarter 2023 Earnings Call. [Operator Instructions] I would now like to hand the call over to Sean Mansouri, Investor Relations. Please go ahead.

Good afternoon, and thank you for joining us to review CompoSecure's second quarter 2023 financial results. With me on the call is Jon Wilk, CompoSecure's CEO; and Tim Fitzsimmons, CFO. 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, let me turn the call over to Jon to discuss our second quarter results.

Thank you, Sean. Good afternoon, everyone, and thank you for joining us for our second quarter conference call. As you hopefully read from our 8-K filed this afternoon, I am excited to announce a 5-year contract extension with one of our largest customers through December 2028 as their exclusive provider of metal cards. This comes on the heels of the extension with American Express we announced last quarter. Which means we have now secured long-term renewals with our 2 largest customers. Throughout our 20-year history, our company has been driven by delivering unmatched value and business impact for our clients, as well as innovation, all while establishing long-term partnerships across the market, and I'm proud that we continue to demonstrate that unique value proposition. Now to summarize the quarter on Page 3. Our second quarter results once again reflected the performance and consistency of our business as net sales for the quarter increased 1% to $98.5 million, driven by strong domestic growth of 11% which was offset by lower international sales, which Tim will cover in a bit more detail. On a year-to-date basis, net sales are up 7% to $194 million. Looking at card issuer trends, our customers continue to report strong growth and have a positive outlook while maintaining their investment in customer acquisition and rewards despite the macroeconomic uncertainty. During the quarter, we continue to position our payment card and Arculus product offerings for growth, including expanding our sales team, continuing trade show and partnership opportunities and executing our B2B marketing strategy. And finally, we are reaffirming our guidance for 2023 which calls for net sales to range between $400 million to $425 million, with adjusted EBITDA ranging between $145 million and $155 million. I'd like to take a minute and cover some of the other highlights…

Thanks, Jon, and good evening, everyone. I'll provide a more detailed overview of our Q2 2023 financial performance, and then turn it back to Jon before we open up the call for questions. Unless stated otherwise, all comparisons and various commentaries are on a year-over-year basis. As Jon mentioned, net sales increased 1% to $98.5 million compared to $97.2 million. The increase was primarily driven by continued domestic growth in the company's metal card payment business, which was up 11%, partially offset by lower international sales, which is a more variable market due to customer mix and a smaller sales base. International sales remained in line with the company's targeted revenue mix of approximately 20%. Gross margin for the quarter was 55% compared to 61% in the prior year. The decrease was primarily due to higher material and labor costs resulting from inflationary pressures and less favorable product mix compared to 2023. It's important to note that gross margin continues to be in line with our previously stated mid-50% margin target. Net income from the quarter was $32.7 million compared to $60.7 million in the prior year. $25.4 million of the difference was driven by non-cash items. Q2 of 2023 had $9.2 million added to net income for non-cash items, while Q2 of 2022 had $34.6 million. These non-cash adjustments are a result of changes in the valuations of the warrants, the earn-out consideration and derivative liabilities, which is primarily driven by the company's stock price improvement year-over-year. Adjusted EBITDA in Q2 was $36.9 million compared to $39.7 million in the prior year, with an adjusted EBITDA margin of 37% compared to 41% in the second quarter of '22. The decrease in adjusted EBITDA margin was driven by product mix and the impact of the inflationary pressures, that I've already…

Thanks, Tim. Now turning to Slide 16. As I mentioned earlier, we remain on track for 2023, and we are reaffirming our previously issued guidance. We anticipate net sales to range from between $400 million to $425 million with gross margin in the [ mid-50s ] range and expected adjusted EBITDA to finish between $145 million and $155 million. To close on Slide 17, I want to highlight a few things that we've covered today. One, we've reaffirmed our guidance and have now re-signed long-term contracts with our 2 largest customers. Our customers continue to maintain a positive outlook for the premium payment [Technical Difficulty] opportunity around Arculus Authentication and Cold Storage. We are bolstering our position to take advantage of growth opportunities by adding salespeople and focusing on our B2B marketing efforts. We remain thoughtful about our investments to better capture long-term value for our shareholders, and that continues to pay off simultaneously, supporting margin and driving growth opportunities. With that, I'd like to open [Technical Difficulty].

[Operator Instructions] Our first question comes from the line of Reggie Smith of JPMorgan.

My first, you cited, I guess, macro uncertainty in the press release. So I was curious if you felt or saw any macro weakness, and how that manifests in the business?

We're seeing at this point data that still remains, I'd say, positive. There's just [ the ] [ watch ] item out there for us and for our issuer partners that we continue to monitor closely. But so far, those signs have been solid.

And if I could follow up with one more. Obviously, you reiterated your guidance, which is great. And not to nitpick here, but just curious, I guess, when you think about what's implied for the back half and kind of the range of outcomes for the back half by maintaining guidance in the same range, I guess, it somewhat implies that there is a wider band of potential outcome for the last 2 quarters. I'm not sure if that was -- if that's even accurate, or the message you're trying to convey, but curious how you think about that. So essentially, you've got a $25 million range over the last 2 quarters of the year, where before you had a similar range over 3 quarters of performance, if you follow my question?

Yes. I think you may be reading too much into it from that perspective. We typically have not updated guidance quarter-to-quarter. We feel good about the ranges that we've given. What it does imply, Reggie, is that the back half would be stronger from a revenue standpoint to come into that range. And if you look at where we are year-to-date on EBITDA, we're right about halfway to the bottom end of that range as well. So, I mean, those are the implications I wouldn't read more into it than that, other than we feel very comfortable with the ranges we've given.

And if I can get one more in quickly. So obviously, '22 was an amazing year for you guys that -- it's a very difficult comp. If you were to kind of control for that, how are you thinking about kind of the growth of the business kind of long-term?

So we haven't given updated long-term guidance, Reggie. We'll issue updated guidance as we move through the back half of this year. And what we said in the past is we do believe this business on average can grow in the mid-teens. But more specifically, the implications around gross margins, being able to continue to operate [ mid-50s ], EBITDA in the core business north of [ 40% ] with investment perhaps [ mid-30s ]. So that's how we think about it.

Our next question comes from the line of John Todaro of Needham & Company.

Congrats on the contract renewal. First one here -- I have 2. But if we could just go back to the sales outlook for a moment and without trying to dig too deep into it. As you mentioned, it does imply kind of an uptick. Are there any second half drivers that we should be thinking about and aware of?

The drivers for us are fairly consistent, John. I try to hit them almost -- on each call, which is continued growth from our top clients, domestic expansion outside of those top clients, international growth and fintechs really across domestic and international. And we're seeing the opportunities coming in and across all 4 of those areas and feel good about that.

And then just a second question. Inflationary pressures were recorded as some of the gross margin decline. I would imagine from here -- maybe a little additionary inflationary pressures, but would love to hear if there's any color there, and if we should kind of expect that new number for gross margin moving forward, at least for the rest of '23?

So we -- I've said, I'll continue to say, and Tim reiterated a number of times, we think gross margin should be in the [ mid-50s ]. Sometimes it could be a few points higher, sometimes it could be a few points lower. We think that [ mid-50s ] is the right range for people to be thinking about. And this quarter, we're right on that number. So the time Tim spent was around explaining the difference between second quarter of last year and those were the examples he gave. But net-net, we've been saying for a long time we think that [ mid-50s ] is the right target and we came in exactly on that, and we feel good about that continuing.

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

My question is, there's been a little bit of scare in the banking sector in the back half of Q1 and Q2. And I'm wondering if -- was there any impact of any inventory drawdown in the channel? Where do you think inventories are in the right shape, both at your company and with your bank partners?

So, we've certainly been watching and monitoring the activity among things like regional banks. We have not seen an impact on our business from that. We've seen, I'd say, continued strong levels of conversation across that next level of bank in the U.S. and feel good about that. Citizens is a great example of a new launch, which we're very proud of. With reference to inventory levels, we don't have perfect visibility into what clients could be carrying around that. I'd say, generally speaking, we've carried more inventory post COVID. We've wanted higher inventory levels of key raw material items going in. Generally, issuers, I think, are keeping appropriate amounts of safety stock of cards on hand, and I really haven't seen a change there.

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

So on your contract expansion, you've got your top 2 clients now extended. Is it safe to assume that the contract extension that you just announced is on similar terms when it comes to escalators and other KPIs? And does that give you any better visibility? Obviously, you kind of touched on this earlier, but any better visibility into early 2024 in terms of the business? And I have a follow-up after that.

I'm not going to comment on terms and conditions of the renewal, except to say that we have planned for all of the contract renewals we had coming up as part of our normal business cycle. We remain comfortable with our overall guidance in the context of all of our renewals. And we'll give updated guidance as we move toward the end of the year here. But just having our top clients under contract and winning those opportunities, we think, is a very important statement around our business, yes.

And a follow-up. Any updates on your exchange partner for Arculus, or when we could hear more about that?

So we're continuing to advance partnerships, some previously announced, some I announced today. And I continue to feel terrific about the product we built, the platform, the Arculus road map. We maintain, and continue to maintain a positive outlook there. Things always seem to take a little bit longer than you anticipate as you're trying to get some of these programs up and running. And we continue to work through with the exchange partner, that we highlighted earlier this year, around piloting the Arculus authentication technology. So we look forward to more updates as we move through the year as well.

[Operator Instructions] Our next question comes from the line of Mark Palmer of Berenberg Capital Markets.

The company is throwing off a very healthy amount of cash flow on a pretty consistent basis. What are your priorities right now with regard to the use of that cash? And [ you ] see that your overall leverage ratio is at 2.5x. What do you think as being an optimal level of leverage that you want to maintain as you continue to operate the business?

Yes, we continue to throw off a significant amount of cash. As we've highlighted before, our 2 stated priorities are organic growth and continuing to pay down debt. And as Tim highlighted and you highlighted in your question, we've continued to lower those leverage ratios. So feel good about that. When you look, Tim's reference points were for June of last year, same time. If you go back further to when we went public, it's even further deleveraging from that point. And we got there through a combination of paying down debt and growing EBITDA and we would look to continue to do both of those things. So beyond that, it's Board level conversations around capital allocation that we will continue to have and monitor on an ongoing basis.

As there appear to be no further questions in queue, this does conclude today's conference call. Thank you for participating. You may now disconnect.