PMTS - Earnings call transcript Q2 2019

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Operator

Good morning, and welcome to the CPI Card Group Second Quarter and First-Half 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Scott Scheirman, Chief Executive Officer. Please go ahead.

Jennifer Almquist

morning, good and operator, everyone. Thanks, CPI Welcome First-Half Second and Group Earnings to Webcast the XXXX and Quarter Card Conference Call.

On Group is Executive from CPI President today Lowe, Chief Officer. John officer; the and and Financial Scott call Scheirman, Chief Card

to begin, results defined certain this are call everyone we differ These to actual Private the could and Securities forward-looking Before uncertainties forward-looking the Act remind as statements of subject contain XXXX. statements that from materially those risks that like I’d in to they under may Litigation Reform cause are expressed statements.

we such this For made no a statements and call. any update discussion after see and reflect obligation of the SEDAR. recent on risks today most reflect Card events to filings SEC undertake with that to CPI occur and statement Group’s our forward-looking please the current All uncertainties, only, expectations

to, excluding non-GAAP EBITDA and income or non-GAAP margin, course excluding the gain, issued measures settlement, operating press the including, directly but Also continuing discussing be on during litigation from in call, limited one included adjusted will the the cash financial settlement morning. flow, measures adjusted company slide free release this EBITDA, most of are GAAP in EBITDA, more financial operations, today’s comparable measures to of Reconciliations and all operations basis. we a the litigation these not reported margin, adjusted presentation

not business costs the Canada a XXXX, and the the related qualify Canada GAAP. date operation other has GAAP. in for disposition the accordance Limited the of Results are discussed business discontinued X, was in today been through and as the which reflected operations results April well disposition segment. closed Please on CPI the U.S. financial with in of therefore, accordance as on call results with as segment, be that accounted August of as of U.S. operations for UK discontinued advised the The divested XXXX, exclude disposition does and reflect CPI’s continuing in

presentation that today’s Relations Copies of press are call conference website, release on Investor this accessible accompanies investor.cpicardgroup.com. as the well as CPI’s

XX-Q and Investor six months was today this available quarter In ended is on addition, earlier filed the after June website. XXXX also call the with Please SEC note our CPI’s CPI’s Form remarks. XX, conclude Relations will prepared that and for

And now, President Officer call Scheirman, of to and I’d to like turn the Chief Executive Scott CPI. over

Scott Scheirman

Jen, morning, Slide begin you everyone. Thanks, and good on will joining Thank prepared us X. I remarks for today. my

reflect execution our results quarter second solid against Our -centric customer strategy.

a of resulting X% in net in the sales sales, prior XXXX the quarter, increase year-over-year we net delivered first-half increase During XX% over year.

segments. our continued through our to Prepaid sales favorable XX% of included quarter, sales outperforming recall, X%, In Turning Net sales and volume Debit net from a segment from in XXXX U.S. products services. was we the net new significant and our the second our which, mix launch. Debit strong increases quarter increase delivered Credit and portfolio second results, the with more up segment you as associated

of inclusive of line we a net a related $X.XX net to of of a share, to cash million, litigation. settlement quarter, second disclosed the income loss brings $X a or million. During per generated bottom year-to-date This million $X.X the $X.X gain previously

track top increase experienced to total year. momentum been have line believe the cash excludes million gain second us to of on the EBITDA, set year-to-date for we bringing the quarter, We the far line in Adjusted our million, million XXXX XX%. bottom $XX.X ourselves achieve goals and which $X was out $X.X year-over-year puts for this thus a we

Turning X. to Slide

priorities. strategic execute to continue We four on our

market products quality and customer and First, competitive customer model; third, market-leading innovation. service; business fourth, deep focus; second, continuous

have these take I X, priorities on delivered our the against you during update this initiatives progress moments we year. to will on of first-half some few a Slide and On highlight

with first priority, focus. Beginning our customer deep

deliver needs differentiated to energy the listen and of customers’ focus them helping on continue our to solutions customer and experience. that unique our We elevate their

For of customers. EMV double-digit in the in by market, card resulted needs meet manufacturing volumes our dual continue percentage dual EMV increase the cards. the This quarter, to interface emerging during interface second propelled in we

During meet opportunities we the and our first-half year, needs we over priorities by strategic the invested customers see of businesses Card@Once capacity the in the long-term. operating our prepaid also for the our increasing and of to

star market-leading service. we choice. providing priority, effectively five By Our on establish partner quality products second further CPI strategic this of executing customer priority a is and as

Association, World Card Elite of the were Partners, recognized Tungsten Encased Pinnacle Manufacturers or for ICMA, by manufacturing card. Financial we the the example, For Holdings’ International Corserv

services The with life and card received. we that that are distinctive, a their showcases partnering vision to and highly with sleek, customer, luxurious able their card we their of sophisticated best were have and of to customers. product to the differentiated provides this accolades the supporters By bring this our the brand customer proud

market on strategic remain our increased Turning priority, driving efficiency. business third and competitive productivity We to focused model.

our and focusing XX secure the months, customers core prepaid. to positioned ourselves last Over card personalization, we’ve manufacturing, including on businesses, serve better by instant issuance

provide Canadian divested facilities innovation consolidated and and customers service. our with personalization We and operations our businesses from us allocate enabling two. Streamlining to and resources world-class unmatched UK three our to to solutions,

last initiatives margins of compared up and operational our efficiencies, our a are As operating strategic our focus top result year. to meaningfully line on

adaptives. fourth differentiate integral payment and contactless devices growing wearables Our launch continuous products. priority strategic the of we and distinctive to innovation, globally, Considering winning our themselves helping the recently with non-wearable embedded popularity customers is technology our is announced business of which

to create This addressing evolving technology factors, and customers form brands unique payment customer preferences. reflecting end-users and their enables various devices for our

options to compact Fit Flip and technology Fit Pay’s power their collaboration advancing purchases payments Fit Pay for with make contactless One for its adaptives device. contactless to is of recent customers. using is Pay. locations consumers allows example to at that payment our retail and new millions transactions Flip, accept commitment payment contactless address

believe quality wrapping up, X. focus choice. to on committed execution first-half providing competitive our Turning a a we our quarter and and We reflect service customer priorities. business as with market-leading upon second our key CPI’s goals, to market build as to we continue towards Slide solid partner In model, as remain products we results of position

will I quarter to review the our Lowe call and John to first-half now results. second over financial and turn operating John?

John Lowe

I Thanks, quarter my overview XXXX Scott, morning, on the and first-half good Slide of will second everyone. of results begin our X. from and

exclude results XXXX The U.S. which the operation under the discontinued reminder, a continuing operation as basis GAAP. discontinued divested comparative U.S. from business X, required during our As reported of UK operations as by in April Canadian And this therefore, closed GAAP. and and as qualify disposition segments. business, a did are was that Other XXXX on are results included XXXX business not a a the

X% $X.X segment. Debit sales offset and business net our our Canada our These quarterly gains of recent compared quarter and to decrease the Credit due that migrated million partially of segment the second U.S. the quarter in year-over-year to U.S. disposition, a U.S. were sales net increased sales growth Canadian Second sales operations. with from by XX% in secure card from Debit XXXX, Prepaid driven X% by net net increase

over XX%. of sales first-half $XXX.X the same up XXXX, million, in period the net For were XXXX.

consecutive year. second year-over-year up our of basis million, quarter profit for $XX.X points gross margins. quarter the over XXX was year-over-year XX.X%, last XX% quarter of fourth to gross margins quarter the Gross Second improved increased second

consolidation net profit of higher gross to generated led mix driven was we XXXX. products. favorable growth in of cost more growth year-to-date, from year-to-date was personalization last of our manufacturing basis, operations. points XX% This and partially sales, margin by we million, the a On Looking card offset materials reduction costs, gross of expanded absorption by to expenses XXX higher by due $XX.X a first-half up This certain basis gross year’s a from margins year-over-year. primarily which resulting

an income the $XX.X quarter, a cash which details margin we settlement income XX.X%. operations from of in gain in from is During Included filed of yielding from are we the the today. second operations million of the operating XX-Q $X of litigation, earlier reported stemming million,

the a products up services, in operating last quarter was to operating favorable from $X X.X% sales of were in turn more improvement million Excluding quarter and leverage. This gain, due the which net higher of greater second drove and X.X%, mix second margins year.

were excluding margins from gain, X.X% last litigation or operating year. up the First-half XX.X%, X.X%,

XX. Slide of periods. loss net net generated income million, second a a quarter $X.X XXXX, improvements million, and the share, to diluted of year-ago loss We from Turning per per $X.X of and $X.XX respectively, or during our or the $X.XX both first-half share diluted

to litigation Canadian addition currency foreign non-cash resulting include accounting to business. cash quarter from required GAAP of a $X.X the the results the XXXX $X disposition settlement, the million In million loss, our related second

million $X.X a of mix products was was million manufacturing employee to incentive of cash $X second Adjusted higher with compensation expectations. million, EBITDA, from the which costs litigation relative due certain reported improved excludes down XXXX. increased $X.X X% the from gain, performance the and resulting settlement to performance our commensurate materials quarter in the This largely business card of the we

cash the the of $XX.X litigation XX% was gain, XXXX. settlement excluding first-half EBITDA, up adjusted with Year-to-date, million, compared

Turning Slide on to XX. our segments

U.S. quarter up Second $XX.X were sales and Debit XX% Credit year-over-year to segment million. net

year-over-year manufacturing from payment higher-priced financial products shift and as well in services. increases benefited card volume and services, we a as quarter, and the personalization During towards fulfillment

demand interface percentage volumes, cards, the propelled interfacing double-digit a EMV During in by primarily increase by as card manufacturing manufacturing from larger was expected. issuers dual dual driven EMV volumes by quarter, increased The year-over-year.

were in to For of the underscoring timing, both up sales were approximately healthy Net be printers and long-term confidence the lumpy. personalization believe Though tend value remained this our XXXX, sold result softness of the be largely XXX second sales and a year-over-year. to first-half product in the quarter, potential printer solution offering. printer we Card@Once percentage sales quarter for double-digit Software-as-a-Service and of consumables Card@Once, down for as differentiated by quarter this of sales at the

by make This reduced we and year-over-year. Credit that services U.S. from discussed million, year. $X quarter Income previously, products benefited costs up from facilities of our I as from investments Second deliver higher operations to to last consolidation offset Debit our and manufacturing operations higher materials quality from card XX% personalization was sales the and cost resulting customers. partially to was continue income

XX% first-half, from For XX% the sales and was year-over-year to were $XXX Debit income Credit net up to million. $XX.X million U.S. operations and up segment

the increase were second Prepaid sales U.S. a of X%. For net in million year-over-year our of segment, quarter $XX XXXX, Debit

This on of increase of strong XXXX, in first the increase year-over-year associated the for sales launch. net significant with included X% new segment in portfolio six which performance XXXX months and moreover, the top is a

While be second tend lumpy, quarter for year-to-date results segment are to our encouraging. net the sales and

in prior from XXXX, XX% up was year. segment Debit the second the quarter million Prepaid income $X.X operations from

was from in XX% the million, $XX.X income operations first-half, up from period XXXX. the For same

quarter the sales, in Debit Year-over-year, basis absorption more operating first-half, and up approximately segment XXX points and reflecting Prepaid product were mix. improved the favorable more higher for than margins cost XXX basis points a

a segment X results the business, associated Canadian reminder, our the reflect net the April disposition loss As now of with completion from sales. of of Other the the

XX. Slide to Turning

Our cash balance of $XX.X million. as was XX, XXXX June

borrowing XX, for bringing $XX.X quarter. credit the available As available had we the at of on million XXXX, a million of second revolving to June $XX liquidity facility, end total

quarter of the our end the principal total XX.X times was improvement an ended with We debt outstanding leverage quarter, the XXXX. year-end At million. at net X.X ratio times, debt second from $XXX.X

million quarter, of inclusive litigation received During settlement. cash in activities, cash $X.X generated operating the the second from we from

flow resulted we in cash This we million. of addition, equipment $X.X the $X.X adjusted spent for as leverage capital on expenditures, million continue In cash financing. in free to quarter

on customer our economic ordering factors, cyclicality a results patterns, and As based from several business broader seasonality. quarter-to-quarter fluctuate quarterly reminder, including

of a the in year, and EBITDA in net lower years, the the due been in sales latter and use of recent to second-half higher the the business. the of first-half our of year, in until part cash resulting seasonality In adjusted have part

believe the cash in As to to have plan. adequate said we and liquidity business continue we support have past, our we

As a quick update market. the on

with card contact from what continue and we expect EMV smaller that industry primarily have by is U.S. primarily This been larger issuers dual We experiencing. financial reissuances, institutions. EMV conversions, grow will driven manufacturing consistent from to interface in XXXX,

dual go. tap For interface, or and

is card a as will the interface grow the few the in We to that years. the in over U.S. one view issuance of next expect dual gradually market migration U.S. XXXX, occur to but continue proportion to

for remarks. the some to I over Scott? Scott call turn will now closing back

Scott Scheirman

John. Thanks,

the strategies and first-half We we that well-positioned deliver as look our the in believe of we the we are of business on our to progress. XXXX, forward year. end pleased our goals I performance to second-half you now the are call. updating and Operator, on you with may XXXX enter

Operator

presentation. today’s The now you for conference attending Thank concluded. has

You disconnect. may now

CPI Card (PMTS) 7 Aug 192019 Q2 Earnings call transcript