CPI Card Group Inc.

Welcome to CPI Card Group's first quarter 2022 earnings call. My name is Charlotte, and I will be your operator today. The call will be open for questions after the company's remarks. If you would like to get in the queue for questions, please press star one on your telephone keypad. Now, I would like to turn the call over to Mike Salop, CPI's head of investor relations.

Thanks, operator, and good morning, everyone. Welcome to the CPI Card Group first quarter 2022 earnings webcast and conference call. Today's date is May 5th, 2022, and on the call today from CPI Card Group are Scott Shireman, President and Chief Executive Officer, and Amitur Shankar, Chief Financial Officer. Before we begin, I'd like to remind everyone that this call may contain forward-looking statements, as they are defined under the Private Security Litigation Reforms Act of 1995. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. For discussion of such risks and uncertainties, please see CPI Card Group's most recent followings with the SEC. All forward-looking statements made today reflect our current expectations only, and we undertake no obligation to update any statements to reflect the events that occur after this call. Also, during the course of today's call, the company will be discussing one or more non-GAAP financial measures, including but not limited to EBITDA, adjusted EBITDA, adjusted EBITDA margins, net leverage ratio, and free cash flows. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in the press release and slide presentation we issued this morning. Copies of today's press release, as well as the presentation that accompanies this conference call, are accessible on CPI's investor relations website, investor.cpicardgroup.com. In addition, CPI's form 10-Q for the quarter ended March 31st, 2022, will be available on CPI's investor relations website. And now I'd like to turn the call over to President and Chief Executive Officer Scott Shireman. Thanks, Mike, and good morning, everyone. During today's call, I will provide an overview of CPI's performance in the first quarter, update our 2022 expectations, and review our long-term strategy. I'm informed we'll review the quarterly financial results in more detail, and then we will open the call for questions. We are pleased with our start to the year as we increase sales 25% to $111 million and which is record quarterly sales level since we became public in 2015 and significantly improved our margins from the fourth quarter levels. First quarter growth was driven by our debit and credit segments, with particular strength from contactless cards, including the related personalization services and our software-as-a-service-based card-at-once instant issuance solutions. Our contactless card growth was driven by sales of eco-focused cards, as we sold over 10 million of these cards in a quarter. Our selection of innovative eco-focused card solutions presents us opportunities to gain market share as industry adoption continues to grow and provide us the incremental revenue benefits of selling higher average price contact with cards. Card at Once also once again grew faster than the company overall. This fast-paced instant-issuance solution not only provides us initial product sales upon installation, but also offers an ongoing annuity model of service and consumable revenue. Our prepaid segment sales were flat compared to the prior years, which is good performance given the exceptionally strong first quarter in 2021, which benefited from a significant new portfolio addition. As a result of the strong sales growth overall, we were able to deliver increased adjustment of EBITDA in the quarter compared to the prior years, despite cost pressures and comparisons with a very strong margin in the first quarter of 2021. Thanks to the strong first quarter sales performance, additional inventory purchases, and improvements in our production capacity, we have increased our sales outlook for the full year to low double-digit growth, which is up from our previous outlook of mid-single-digit increase. The overall macro environment remains challenging with ongoing labor shortages, sidechain issues and uncertainty of the potential impacts from the Russia-Ukraine war, China lockdowns, and interest rate increases, among other factors. However, customer demand remains strong, our production capacity has improved, and we believe we're a wealth of mission to serve our customers. We're also increasing the top of the range for our adjusted EBIT expectations, moving from mid-single-digit in our original outlook to mid- to high-single-digit growth. The increased range is a result of the improved sales outlook, and we now expect our full-year adjusted EBITDA margin to be slightly below 20%, reflecting expectations for continued and accelerating inflationary impacts on costs. We did have some offsets from price increases in the first quarter, and we expect more price increases to go into effect as we move through the year. So overall for 2022, we expect sales performance above our original expectations, with continued strong customer demand, partially held back by anticipated supply and capacity constraints, and a higher top end of the range in adjusted EBITDA growth, with benefits of higher sales partially offset by cost pressure that we expect to continue to rise. Turning to slide five. Amanpour will go into more detail on the financial role shortly, but first let me spend a few minutes reiterating our long-term opportunities and strategies. As I mentioned last quarter, the strategies we have implemented are working. We believe we have gained significant overall market share over the last four years in growing markets, and the first quarter results demonstrate further advances. Our four strategic priorities of deep customer focus, market-leading quality products and customer service, continuous innovation, and a market-competitive business model have driven our strong performance in several U.S. payment market segments. We are a U.S. market leader for eco-focused cards, personalization, and instant issuance solutions for small and medium-sized financial institutions and prepaid debit card solutions, and we are a key player in facilitating the ongoing conversion to contactless cards. Our quality products and services in Indian Solutions has helped us establish robust and long-standing customer relationships with financial institution issuers of all sizes, bank platforms and resellers, prepaid program managers, and more recently, fintechs. We believe that the markets where we participate remain healthy and growing, as evidenced in part by the latest figures reported by Visa and MasterCard, which showed U.S. credit, debit, and prepaid cards in circulation have grown at a compounded annual growth rate of 8% over the three-year period ending December 31, 2021. We have significantly increased profitability and improved our financial position over the past four years. And despite the cost pressures in the current environment, we expect to drive further profit growth in 2022. I remain confident in our strategy, our positioning, our markets, and our people. And I believe we have great opportunities to continue to deliver share gains and strong performance in the coming years. Now I will turn the call over to Amentor to review our first quarter results in more detail. Amentor? Thank you, Scott, and good morning, everyone. I will begin my overview on slide seven. First quarter net sales increased 25% to $111.4 million compared to the prior year quarter, driven by a 32% increase in our debit and credit segments. Debit and credit segment growth was primarily due to increased sales of higher-priced contactless cars, including related personalization and strong growth in our eco-focused cars, and strong increases in card-at-once instant issuance solutions. Prepaid debit segment sales were flat compared with the prior year, as the 2021 first quarter benefited from significant onboarding of new customer portfolios. As we have noted in the outlook we provided in March, we expected prepaid debit sales to be between the 2020 and 2021 levels due to the record year the segment delivered in 2021. Based on our current outlook, we now expect prepaid sales to be only slightly below 2021 levels. First quarter gross profit of $39.3 million increased 10 percent from the prior year, while gross profit margin decreased from 40.1 percent to 35.3 percent due to the inflationary impact on materials and labor costs. Gross margin increased 200 basis points from the fourth quarter 2021 levels due to operating leverage from higher sales. SG&A expenses increased by $3.7 million in the quarter compared to the prior year, primarily due to $2 million of increased compensation expenses and $800,000 of increased consulting and accounting costs related to Sarbanes-Oxley. SG&A was $16 million in the first quarter of last year before increasing to approximately $20 million per quarter the rest of the year as we began incurring SOX compliance costs and increased compensation expenses. Net income in the quarter increased 149% to $6 million, primarily due to the impact of debt refinancing costs incurred in the 2021 first quarter, as well as increased sales growth and the resulting operating leverage, partially offset by the increased materials, labor, and SD&A costs. Adjusted EBITDA increased 2% to $22.5 million, while adjusted EBITDA margins declined from 24.8% in the prior year to 20.2% in the 2022 first quarter. Last year's first quarter adjusted EBITDA margins were particularly high, primarily due to lower SD&A expenses, so the comparisons will not be as challenging in the remaining quarters. While our adjusted EBITDA margin was 24.8% in the 2021 first quarter, it averaged 19% in the remaining three quarters as the higher SG&A expenses and increased labor costs impacted results. Our first quarter adjusted EBITDA margin of 20.2% this year increased substantially from the 14.6% margin recorded in the fourth quarter as we expected. Turning now to our segments on slide eight. I mentioned the segment sales drivers earlier, so I will just discuss segment profitability on this slide. Income from operations for the debit and credit segment increased 20% in the quarter to $24.1 million, driven by the higher net sales and operating leverage, partially offset by increased materials and labor costs. Prepaid debit segment income from operations decreased 15% in the quarter to $6 million due to higher labor and materials costs on flat sales growth. Turning to the balance sheet, liquidity and cash flow on slide 9. Our cash balance as of March 31st was $12.1 million, and we had $30 million of borrowing outstanding on our $75 million AVR revolver, with proceeds utilized to fund our notes redemption and temporary working capital needs. We had $290 million of senior secured notes outstanding, and our net leverage ratio as of March 31st was just over four times. Cash flow from operating activities was a usage of $16 million, and we utilized $3.2 million in capital expenditures. This resulted in free cash flow being a usage of $19.1 million, which compared to a $2.4 million usage in the first quarter of 2021. Increased working capital usage in the first quarter was expected, primarily driven by increased inventory purchases of $13 million to continue to support future growth and a $10 million increase in accounts receivable due to the 25% sales growth in the quarter. We anticipate improvement in free cash flow for the remainder of the year, but we will also continue to be opportunistic with inventory purchases. Based on customer demand levels and availability of supply materials, as our first priority is to ensure we can meet our customers' needs. Our capital structure and allocation priorities remain focused on maintaining ample liquidity, investing in the business, including possible strategic acquisitions, deleveraging the balance sheet, and potentially returning funds to stockholders through share repurchases. Consistent with these priorities, we continue to target further lowering our net leverage ratio over time. To reiterate what Scott mentioned earlier, we have updated our full year 2022 expectation to reflect low double-digit sales growth, mid to high single-digit adjusted EBITDA growth, and an adjusted EBITDA margin of slightly below 20%. I will now pass the call back to Scott for his closing remarks. Scott? Thanks, Commentor. Overall, I am pleased with the business performance to start the year. Customer demand remains strong, and we were able to execute in a challenging environment to deliver a 25% sales increase in the first quarter. As always, I'd like to thank all of our employees for working hard to deliver these results. We have updated our 2022 outlook to reflect higher sales expectations and a higher top end of the range for adjusted EBITDA despite labor, supply chain, and inflationary pressures and uncertainties. We're also pleased to have completed the redemption of $20 million of our senior secured notes in the first quarter and I expect improved cash flow for the remainder of the year. We're excited about our long-term opportunities and we look forward to updating you on our progress as we move forward. Thank you for joining our call today and we will now open the call for any questions.

We will now open the call for your questions. If you would like to ask a question, please press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Jason Smith from Lake Street. Your line is now open.