Thank you for standing by, and welcome to CompoSecure's Fourth Quarter and Full Year 2023 Earnings Conference Call. I would now like to hand the call over to CompoSecure's Investor Relations adviser, Sean Mansouri, with Elevate IR. Please go ahead.

Good afternoon, and thank you for joining us to review CompoSecure's fourth quarter and full year 2023 financial results. With me on the call 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, adjusted EPS and free cash flow. 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 fourth quarter and full year results.

Thank you, Sean. Good afternoon, everyone, and thank you for joining us for our Fourth Quarter and Full Year Conference Call. Our fourth quarter results delivered a strong close to 2023, capping off another year of record revenue and adjusted EBITDA, while providing strong free cash flow. I'd like to take a moment to acknowledge the efforts of our team in 2023. While we face challenges in the macroeconomic environment, our deep client relationships, best-in-class products and a thoughtful approach to managing our business allowed us to deliver adjusted EBITDA in line with our original guidance issued back in March 2023. We accomplished a lot last year. We extended long-term contracts with our top two clients and produced more than 31 million metal cards, which is another record for the business. And we introduced several innovations such as the Echo Mirror card that are clear examples of how CompoSecure delivers unique value for our customers. I'll share more on this shortly. Now to summarize our financial results on Slide 3. Net sales in the fourth quarter increased to $100 million due primarily to growth in our domestic business, which exceeded our previous quarterly record set in the third quarter. Looking at our bottom line, Q4 adjusted EBITDA grew more than 20% to $37 million, reflecting our most profitable quarter of the year. As we have often stated, our team is acutely focused on profitability while simultaneously driving investments to capture long-term opportunity and value. I want to call out a few additional highlights. In 2023, we supported more than 150 new and ongoing card programs for our customers, up from more than 125 programs in 2022. This past December, ABI Research ranked CompoSecure as the market leader in its assessment of the metal payment card market. We believe momentum is…

Thanks, Jon, and good afternoon, everyone. I'll provide a more detailed overview of our Q4 and full year 2023 financial performance and then turn it back to Jon before we open the call for questions. Unless stated otherwise, all comparisons and variance commentary are on a year-over-year basis. In Q4, net sales increased 7% to $99.9 million compared to $93.8 million. The increase was driven by continued domestic growth in our metal payment card offerings, partially offset by lower international sales, which is a more variable market due to customer mix and a smaller sales base. Gross margin for the quarter was 53% compared to 54% in the prior year. The decrease was primarily due to lower production efficiencies from new card constructions and customer designs. Net income for the quarter increased 39% to $31 million compared to $22.4 million in the prior year. The increase was driven by prudent operating expense controls as reflected by a reduction in selling and general administrative expenses as well as changes to the fair value of warrants, earn-out consideration and derivative liabilities. Adjusted EBITDA in Q4 increased 22% to $37.2 million compared to $30.6 million in the prior year, and our adjusted EBITDA margin increased approximately 461 basis points to 37% compared to 33% in the fourth quarter of 2022. The increase in adjusted EBITDA was driven by net sales growth and the aforementioned operating expense controls. On Slide 12, you can see our full year performance. Net sales were up 3% to a record $390.6 million driven by continued strong U.S. demand, partially offset by our international business, which was impacted by global economic conditions. Our full year gross margin was 54% compared to 58% in the prior year due to lower production efficiencies from new card constructions and customer designs. Net…

Thanks, Tim. As I mentioned earlier, we expect our 2024 net sales to range between $408 million and $428 million, and adjusted EBITDA to come in between $147 million and $157 million. Turning to Slide 21. I want to conclude by summarizing a few key themes that we covered today. As I've stated in the past, we've always had a thoughtful approach to managing the business while effectively balancing our investments, which has resulted in a long history of delivering profitable growth. Our team delivered a record year in 2023 including meeting our original adjusted EBITDA guidance. The consumer continues to prove resilient and global issuers are actively expanding their metal payment card programs to satisfy that growing demand. We believe Arculus is starting to gain momentum as fintech seek to leverage our innovative technology to expand their capabilities. As mentioned, we expect the net investment for Arculus to continue to improve and turn positive for fiscal 2025. And last, we believe our current market valuation reflects a discount for a category-leading business and the securities repurchase program we announced today equips us with another tool to deliver shareholder value as we execute on our growth and profitability objectives. With that, I'd like to open up the call to Q&A.

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

I just have one here. You mentioned the net investment for Arculus turned positive in 2025. Is there just kind of any metrics we can get on Arculus in that growth? Because just thinking Bitcoin around all-time highs here, a lot of volume activities picked up in the space. Is there kind of almost night and day differences and what we're starting to see in Arculus now versus maybe six months or so ago? And if not, kind of what environment is needed then to really get Arculus to start contributing?

Thanks, John, for the question. We're not disclosing deeper metrics at this point. We are going to continue to show you and others, examples of Arculus executions like the Chainge Finance, Radix, Venus.io and others where we are seeing exactly the types of things we want to see, John, where people are white labeling, co-branding the solution in various alternatives and delivering those to the market through their channels. So we are seeing that kind of momentum in both executions, in our pipeline and the discussions that we're having as well. And yes, we've seen an uptick from the market, and I think the increase in crypto prices, and that's certainly, we believe, a positive. If you look at the net investment in Q4 at roughly 2.4, it's headed in exactly the right direction that we want. And we think that will improve again next year while turning positive in '25.

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

You guys mentioned inventories. They've been actually flat since the Q1 report, but you called out as it being maybe elevated versus maybe year-end 2022. Where do you think inventories are in the channel? And do you think over time, inventory levels around 2022 levels is possible again? Or are you just really comfortable at this level going forward?

Yes. So Hal, we separate those, I think, issues of inventory in channel. We touched on it briefly last time we spoke with a couple of limited examples of people managing inventory on their end. We think those have largely subsided. From our perspective, we were almost inventory limited for a long time in terms of our ability to ensure that we had enough chips, metal and other sort of key items for us. And we feel comfortable at the levels that we're operating to ensure that we can deliver against the growth that we've outlined.

If I can ask one follow-up on new program wins. That was some great new information going from 125 to 150 or so. How many of them are in New products like Echo Mirror and some of the other products. Can you just kind of give us a feel of those new products or part of those programs?

Yes. Those new products, products like our LED card, Echo Mirror and others are definitely part of those wins. And typically, we see those ramps build from sort of initial executions with clients that make a big splash and have early success, followed by others in the market. So we're quite encouraged how, I would say, by the take-up of some of these new products and look forward to seeing that build with products like our Lux Glass card that we expect to see tick up here over time.

Our next question comes from the line of Mark Palmer of Benchmark.

What would you say are the main swing factors between the top end and the lower end of your guidance for net sales and adjusted EBITDA for 2024? And what portion of that is simply due to the macro?

Thanks, Mark. Look, we've laid out a range for sales. We've got, we think, very good visibility as we look out into the year through our top clients and as in any year, there are things that we need to lock down both with our largest clients and the visibility that we've been given with high confidence as well as the other identified opportunities. And so it's just essentially executing against what we can see in front of us. And that's how we laid out that range and feel quite good about it.

And just one follow-up. With regard to the $40 million that repurchase program over the next three years, what will drive the decision making with regard to the allocation across common stock, warrants and converts?

So Mark, our Board has been and will continue to look at capital allocation. Historically, it's been focused on driving organic growth and paying down debt. We've had the conversations throughout about sort of all of the different things we could do with capital to help drive shareholder value. And the board authorized the plan to enable us to do any of those things that we outlined. And we will continue those discussions with the Board around which of those avenues that -- all of those things would be sort of in consultation with the Board as we execute.

Our next question comes from the line of Joe Flynn of Compass Point Research and Trading.

I know we're still relatively early until ultimately the deal closes, but if you guys could comment maybe on the Capital One discovery deal and ultimately your kind of outlook of how that impacts the volume of metal cards longer term, that would be really helpful.

Thanks, Joe. When we think about that deal, Capital One is a client today. We do cards like Venture X, Venture, Spark and others. Discover, we have very little business. We see this as, I'd say, neutral to positive for us as it may open up an additional opportunity, but no additional comments really beyond that.

I wanted to ask one more question on the kind of the capital allocation side. I guess you guys have definitely shown like increased flexibility with focusing on paying debt down and now the buyback. I just wanted to spread the discussions over potentially doing like share distributions to potentially lower some of the impact of the UP-C structure? Or just anything you could provide there would be helpful.

Yes. Just foundationally, as I said in my prepared remarks, we believe our stock is undervalued. We have a market-leading company with strong gross margins north of 50% or EBITDA margins at 37%. And we're trading at near 5x enterprise value to EBITDA. Like we fundamentally believe our stock is undervalued. And so we've looked at that and said the Board has authorized what I call additional flexibility around stock buyback warrants, notes or other levers that we and the Board deem appropriate to drive shareholder value. And so this is, to me, us leaning in saying, we fundamentally believe we're undervalued. And we're going to make sure that we've got the necessary tools to address that in the market. And your comments were right. We've been very successful in paying down debt. Our leverage ratios at 2.4x total debt, 1.4x on our bank leverage. We paid down additional debt this year. Incrementally, if you look at the cash position at the end of the year, we both paid down additional debt and ended the year with substantially increased cash. And that's what we believe we can do in this business. So beyond that, I'm not going to get more specific at this point, but we've got the tools in our tool set, we believe to address challenges we see to drive shareholder value.

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

I was hoping that you could maybe talk a little bit about, I guess, the revenue cadence for next year. We should think about kind of a similar profile to previous years? Or how you guys are thinking about that? And I have a follow-up as well.

Thanks, Reggie. We don't generally see seasonality in our business driven by, I'd say, time of year, right? It's typically just driven by timing of different programs as we move through the year. Beyond that, it's not something we look at and say X quarter is always typically higher or lower than others, and we believe well positioned to kind of hit the total ranges that we've laid out for the year.

Got it. And then looking like historically, like your revenue growth rate has bounced around quite a bit. Obviously, '22 was a record year in terms of growth. And I know you've talked about kind of double-digit growth longer term. Just curious like what's your thinking is currently on the long-term outlook for metal cards in your business in general. And then just included in that, if it's significantly higher than what it is today, is it macro or is it adoption? Like what's the bridge to kind of get back to whatever you deem to be kind of a longer-term growth profile?

Thanks, Reggie. Look, when we look at the growth rate of this company over the last 5 years, 10 years, it's a double-digit grower. And we have done that consistently, literally over that kind of time frame. So yes, you look at our growth since we went public and you've got the 41% growth. You've got obviously lower growth last year. Net-net, we still believe, over time, this business is a double-digit grower. And when you talk about what helps it get there over time, I go back to kind of the core tenets that we're going after to grow the business, which is continued domestic expansion outside of our -- including, but then outside of our top clients. And I think we've continued to demonstrate progress on that front with the number of new clients that we're opening, top 10, top 20 U.S. banks. Second is international. And well, you do see some variability over there. It did come in for the year right about 20%, a little bit under. But we look to see that continue to grow and be an important part of that as well. And on top of that, we've got fintechs, U.S. and international fintechs that help drive that growth. And so for us, it's continuing to build out the sales force, build out our distribution partners and execute on that. So that's the way we think about it.

Thank you. As I show no further questions in queue, that does conclude today's conference call. Thank you for participating. You may now disconnect.