Ladies and gentlemen, thank you for standing by, and welcome to CompoSecure's Third Quarter 2023 Earnings Call. I would now like to hand the call over to compete of our external Investor Relations Adviser, Sean Mansouri with Elevate IR. Please go ahead.

Good afternoon and thank you for joining us. With me on the call is Jon Wilk, CompoSecure's Chief Executive Officer; and Tim Fitzsimons, 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 delivered 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 third quarter results.

Thank you, Sean. Good afternoon, everyone, and thank you for joining us for our third quarter conference call. During the quarter, our domestic business once again achieved record results, exceeding our all-time net sales from the third quarter of last year, demonstrating the resiliency and demand for our premium metal payment cards. However, global economic uncertainty weighed on results across our smaller international business, which we will review later in the call. Despite this, we are on track to achieve the most successful year in our company's history in terms of net sales, adjusted EBITDA and operating cash flow. Now to summarize the quarter on Slide 3. Net sales in the quarter were $97 million compared to $103 million in the year prior. As I mentioned a moment ago, the decrease was primarily attributable to lower international sales, which offset the record results we delivered domestically. Year-to-date, our net sales were up 2% to $291 million compared to the prior year. Adjusted EBITDA increased 9% to $35 million compared to $33 million in our prior year, in part due to our operating expense control. Looking at card issuer trends. Customer feedback and broader industry sentiment indicate that the demand for premium metal cards remains strong, and they continue to communicate a positive outlook despite the economic uncertainty. That said, select customers are more tightly managing their inventory levels, which has impacted order volumes in both Q3 and Q4. Given these factors, we are adjusting our full year sales guidance for 2023 to a range of $386 million to $392 million and expect adjusted EBITDA to range between $141 million and $146 million, which captures the low end of our original guidance for adjusted EBITDA issued earlier this year. Regarding Arculus, we projected the net investment to improve from last year,…

Thanks, Jon, and good afternoon, everyone. I'll provide a more detailed overview of our Q3 2023 financial performance and then turn it back to Jon before we open the call for questions. Unless stated otherwise, all comparisons in variance commentary on a year-over-year basis. Net sales were $96.9 million compared to $103.3 million. Domestic sales increased modestly compared to the record year ago period, which was offset by lower international sales, which is a more variable market due to global economic uncertainty, customer mix and a smaller sales base. Gross margin for the quarter was 51% compared to 60% in the prior year. The decrease was primarily due to lower production efficiencies from new card constructions as well as an impact from inflationary pressures on wages and materials. Net income for the quarter increased 74% to $38 million compared to $21.9 million in the prior year. The increase was driven by prudent operating expense controls as reflected by a reduction of selling, general and administrative expenses as well as changes to the fair value of the warrants, earnout consideration and derivative liabilities. Adjusted EBITDA in Q3 increased 9% to $35.5 million compared to $32.7 million in the prior year, and our adjusted EBITDA margin increased approximately 500 basis points to 37% compared to 32% in the third quarter of 2022. The increase in adjusted EBITDA was driven by the aforementioned operating expense controls. On Slide 10, you can see our year-to-date performance. Net sales were up 2% to $290.7 million, driven by our strong sales execution and the resilience of our domestic market, partially offset by lower international sales. Our year-to-date gross margin was 54% compared to 60% in the prior year due to the lower production efficiency and inflationary pressure from labor and materials. Net income for the first…

Thanks, Tim. Now turning to Slide 17. As I previously stated, we are revising our 2023 net sales guidance and now expect it to range between $386 million and $392 million, and we expect adjusted EBITDA to range between $141 million to $146 million, which still captures the low end of our previously issued adjusted EBITDA guidance. In closing, I want to reiterate a few key takeaways from our call today. We're on track to achieve the most successful year in our company's history in terms of net sales, adjusted EBITDA and operating cash flow, even following a record year that saw 41% revenue growth and 33% adjusted EBITDA growth. During the third quarter, our domestic business once again achieved record results, demonstrating the resiliency and demand for our metal payment cards. And although select customers have begun to manage tighter inventory levels and macro uncertainty has weighed on the international results. Customer sentiment regarding consumer demand remains positive. We continue to expand our marketing and sales capabilities of both our payment card and Arculus offerings while investing to deliver unique innovations to the market. We remain focused on optimizing our balance sheet as reflected by another reduction in debt this quarter, and I remind you of our long-term contract renewals that we put in place with our two largest customers that we discussed in the last quarter. With all of that, we believe we are well positioned to execute on our growth and profitability objectives as we move forward. With that, I'd like to open up the call to Q&A.

Thank you. (Operator Instructions). And our first question coming from John Todaro with Needham.

Great. Congrats on a record year. Jon, obviously, you've been in the business for quite some time. Just wondering on the macro uncertainty and weakness. If you could get a bit more color on kind of how far ahead card issuers typically manage their inventory. Any kind of site line or thoughts on 2024 trends? And then I have one more question on the authentication side.

Sure. So typically, customers can keep anywhere from, let's say, three to six months of inventory, John, and at certain times, they'll tweak that up slightly at certain times, they'll tweak it down slightly. And that has the potential to impact any given quarter. We think that is, call it, transitional type impact as that happens over time, they'll adjust levels up or down. On the international front, we've talked about two things. One, just generally, that part of our business is made up by a number of customers, smaller customers, but more of them. And generally, that has more variability. With some of the economic uncertainty on a global basis right now, we just see a modest slowdown in that business. But it will still, we think, perform well for the year, coming in right around 20% of total revenue for the year, which is our long-term guide, and that's where we ultimately think it comes in, but it will be slightly down from last year.

Got it. And then just one more on digital authentication. So, in the past, I think it was last earnings call, you specifically called out some of the non-crypto opportunities on that side as being quite a large opportunity set. So just curious kind of how that shaped up quarter-over-quarter. Any kind of update on how you're framing the Cold Storage versus the digital authentication non-crypto.

Continue to remain very excited about the opportunities in the authentication space, having meaningful conversations across large institutions and fintech's domestically and internationally right now. The movement or implementation of these, as I've mentioned in prior quarters, takes longer. It requires sort of technology change within institutions and it's taking some time. But I'd say those conversations continue to go very well. And in our view, we're starting to see that in the overall sort of net investment numbers for Arculus, which are heading in the direction that we want.

One moment for our next question. And our next question coming from the line of Reggie Smith with JPMorgan.

This is Charlie on for Reggie. Curious if we can dig in a little bit more on international slowdown. Was there any specific geographies that pulled back? And are there any large money center banks out there that could be an opportunity moving forward? Or is that not so much an option out there?

Yes. So, Charlie, thanks for the question. I'd say we saw some of those impacts really across Europe and a little bit in Asia. To answer the second part of the question, yes, we think we opened up new business with a couple of money center banks in Europe last quarter and expect those kinds of opportunities to bear fruit in our international business over time. So, it is just a more variable base for us given it's more spread out, more customers dealing with different economic conditions within different countries and regions.

Got it. That's helpful. And if I could sneak in one more. Do you see any risk to that sentiment spreading to the U.S.? And looking back, were there any cracks or maybe subtle signs that could have predicted the slowdown? I mean you mentioned the variability, but any color there would be helpful.

Yes, Charlie, we're not seeing it domestically as evidenced by kind of what we announced today, which was third quarter of last year was our strongest domestic quarter ever. We beat that this year with, in our view, a really strong domestic quarter. We, as I mentioned, renewed contracts with our two largest customers. That was one of the big outstanding questions for us as we moved into this year. And as I mentioned earlier, we couldn't be more pleased with that. As we look at whether or not we could have predicted it, I think you're seeing across a variety of industries. Not -- we're still seeing consumer spending. We're still seeing resiliency there. You're just seeing a little bit of cautiousness in this point about inventory management. I think you're seeing across a variety of industries, not necessarily specific to card manufacturing, which is not a major pullback, but just improving cost controls in an uncertain world. So no, we don't see that impact domestically and hindsight is 2020. But we think we're seeing this impact not just specific to card manufacturing.

And our next question coming from the line of Hal Goetsch with B. Riley.

Jon, can you just give us your thoughts on maybe what you think inventories in the channel are now after some of this cautiousness? Or is it -- I mean the quarter for you guys was good domestically. The channel inventories were high. It's probably why it was not meeting your expectations as inventory draw down, but what do you think inventories are right now?

Thanks, Hal. We don't have visibility into inventory levels across all of our customers. It's data that they generally hold tight across a few. We do have some visibility. But it's -- I think ranges in sort of the areas that I talked about could be three to six, three to seven months, of inventory that they can dial up or down, depending on how they're feeling going into end of year.

Our next question. And our next question coming from the line of Chase White with Compass Point Research and Trading LLC.

So, on the updated guidance, what factors would drive you to the top end of the range in revenues and EBITDA versus the bottom end?

For us, it's largely locked from orders and production. There are sort of a few things that we need to close out that would take you to the higher end of the range. And then just from a production standpoint, being able to run without challenges. And one of the things that we talked about here briefly, and I just want to mention is -- as we innovate, so as we deliver new products to the market that we're excited about, we will see some up and down in our margin as times when we launch new products, we'll see small bumps down in that. Other times, you'll see small bumps up. But we will continue to deliver innovative new products that is the lifeblood of this company. It helps drive our future growth. And so, making sure that is -- those products are ramping up. They're running through efficiently in the factory. So, closing out a few orders here and then making sure that we run efficiently between now and the end of the year would deliver us closer to the high end of the ranges.

Got it. That's helpful. And can you just remind us what needs to happen before you're able to return capital to shareholders, whether it be buybacks or dividends or both?

Chase, I appreciate the question. On capital allocation, we've said specifically our two priorities are organic growth and paying down debt. And beyond that, we have conversations with the Board, as you could imagine, regarding capital allocation and what we might do and when and as the Board were to make decisions that would alter those priorities, we'll certainly let you in the market know. But at this point, those are still our priorities.

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