Business Breakdowns
· Matt Reustle
[00:00:00] S0: It was an announcement made that was a little bit of a head scratcher to me, and I can't say that I necessarily loved it at the time. But I also look at Dave Cote. He's brought Tom Knott, who was the Goldman banker who worked with him on Vertiv and then came over with CompoSecure. We will see over time how it plays out. It's just a very interesting structure. You framed it perfectly well there in terms of it will act as a case study in terms of value unlock within businesses on the M&A side. Would you expect that acquisitions would be very overlapping and naturally tuck in? It could be bigger in size but fit the overall strategy. Could you see them diversifying away? Do you have any read on that in terms of—I would expect M&A given Cote's track record. I think he's made 150, 200 plus deals in his career, so he's familiar with it in the same way that Brad is. What would you expect in terms of sticking with the core business lines versus extending out where?
· Parsa Kiai
[00:00:00] S1: We have no knowledge of any transaction, but we would anticipate it is in the payments hardware, technology, software, security, and authentication verticals so that it will look like an adjacency to where CompoSecure is today. One of the biggest reasons we get comfortable with the long-term physical card disintermediation risk is that there's so many opportunities to grow this business from its pole position in physical card manufacturing to these different adjacencies. Whether they're recurring software revenue lines, whether it's adjacencies on the hardware side, it'll initially be in the payments space. Longer term, I could see diversification being implemented, and I think that would very much be positive because you would reduce some customer concentration, you would reduce some long-term industry disintermediation risks. It would morph into a much higher multiple business. One of the things that you will always expect is it will be done at an appropriate valuation and it will be in the interest of shareholders. And when you get people like Dave Cote, we get questions like, well, how do you know he's going to do a good deal? Again, you say okay, well last year he bought a controlling interest in CompoSecure at $7.50 a share, and today you get a share of CompoSecure at $20 and Resolute Holdings at $80. So he did a great deal last year. He's going to continue to do good deals, and he's showed you the playbook of how he's going to do it. It'll be interesting to see how all of this plays out, but initially payments, longer term probably diversification, but with shareholder value as the primary north star.
· Matt Reustle, Parsa Kiai
[00:00:00] S0: It's going to be fascinating to watch. And I think with that Resolute, I'll call it a dislocation in terms of how it's trading, which made me scratch my head a few times. You wonder what is being worked on and what's happening. I guess if we're to tie everything together, you mentioned the stock has had a nice run over the past year, year plus. What still stands out as the main catalyst for this business? [00:00:00] S1: There's several. If you look at the reaction to American Express's earnings last week and stock did great and they raised their guidance, the premium metal card is still the best customer acquisition tool for the high-end credit card holder. All of these companies are going to continue to invest resources, and it's going to be driven by American Express, Chase, and a lot of other issuers, neobanks, and the market recognition of that durable growth and CompoSecure's pole position as the key supplier. I think that is one key catalyst. I also think getting Arculus to the point where it starts being a material contributor, starts having a positive cash flow contribution instead of a small negative, and the cross-selling opportunities in security and authentication is a big catalyst and could change the narrative on the company. And then of course the M&A debut. I think everyone's trying to see what they're up to, but it'll be an interesting one. [00:00:00] S0: On the other side of the spectrum in terms of the risks, and in theory, what would keep you up at night, for lack of a better cliche? What's most prominent?
· Matt Reustle, Parsa Kiai
[00:00:00] S0: On the other side of the spectrum in terms of the risks, and in theory, what would keep you up at night, for lack of a better cliche? What's most prominent? [00:00:00] S1: Near term, you look at the response to the Chase and American Express refreshes. Near term, I feel pretty good about where the business is going, but long term and medium term you gotta keep an eye on competition. There are really sophisticated and well-capitalized competitors in Idemia and Thales and others, and you're not going to have a monopoly forever, and you have to innovate, you have to continue to grow with your customers. So competition is really always at the forefront of, I guess, any business. And then the mobile wallet issue, it's kind of the elephant in the room. And the next few years it's not an issue, but that is something you definitely have to keep an eye on in the long term. We have full faith in the team at Resolute, but there's a structure in which they get paid on the EBITDA of CompoSecure. You do have to think about the long-term alignment of those, but given Mr. Cote's controlling interest and holdings in both, that's not a near-term concern. But those are the things I would think about long term that we have to keep an eye on.
· Parsa Kiai, Matt Reustle
[00:00:00] S1: Near term, you look at the response to the Chase and American Express refreshes. Near term, I feel pretty good about where the business is going, but long term and medium term you gotta keep an eye on competition. There are really sophisticated and well-capitalized competitors in Idemia and Thales and others, and you're not going to have a monopoly forever, and you have to innovate, you have to continue to grow with your customers. So competition is really always at the forefront of, I guess, any business. And then the mobile wallet issue, it's kind of the elephant in the room. And the next few years it's not an issue, but that is something you definitely have to keep an eye on in the long term. We have full faith in the team at Resolute, but there's a structure in which they get paid on the EBITDA of CompoSecure. You do have to think about the long-term alignment of those, but given Mr. Cote's controlling interest and holdings in both, that's not a near-term concern. But those are the things I would think about long term that we have to keep an eye on. [00:00:00] S0: Those all make sense. This has been absolutely fascinating. I am biased because of my particular interest in this name, but I appreciate you getting into some of the history and details in terms of their positioning in the market and what it looks like from your perspective, having the history. As we close out, we always try to cover lessons that you can pull away at maybe a broader level and apply elsewhere. What would stand out to you from Compo?
· Matt Reustle, Parsa Kiai
[00:00:00] S0: Those all make sense. This has been absolutely fascinating. I am biased because of my particular interest in this name, but I appreciate you getting into some of the history and details in terms of their positioning in the market and what it looks like from your perspective, having the history. As we close out, we always try to cover lessons that you can pull away at maybe a broader level and apply elsewhere. What would stand out to you from Compo? [00:00:00] S1: The whole history and our involvement in the company has been a fascinating learning experience. But the biggest takeaways and what we've learned from it is finding overlooked and not well understood businesses that are actually mission critical to large, entrenched, and growing customers with a cost that is minuscule compared to the ROI that the customer has on their core product. Like selling a $12 premium metal card to Chase and American Express, that is an incredibly powerful tool. And you've had a bunch of businesses on the podcast in the past, whether it's a company like Transdigm that will sell a proprietary $200 widget that goes on a $100 million Boeing, or industrial gas businesses like Air Products that provide a small key input into a multibillion dollar refinery or chemical plant. Finding these businesses in which you are mission critical, you are exceptionally high value, low cost and entrenched—they're fascinating businesses. And then on the CompoSecure 2.0 with David Cote, and it turns into what can he do here? Watching that capital allocation unfold is going to be very interesting.