Earnings call transcript Q2 2023

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Operator

Welcome to the CPI Card Group's Second Quarter 2023 Earnings Call. My name is Chris, and I will be your operator today.

If you're viewing on the webcast, you may advance the slides forward by pressing the arrow buttons. The call will be open for questions after the company's remarks. [Operator Instructions]

turn Investor over Relations. to CPI's Mike like of Head I’d the to call Salop, Now,

Mike Salop

Payment webcast Vice Today's Thanks, Jeff Executive to And Group Group and earnings are the Officer; and on Hochstadt, CPI conference President, operator, good from Lowe, Solutions. President John Card Chief second morning, the call Scott quarter Financial CPI X, Scheirman, is Officer; August date everyone. End-to-End today Welcome and Executive XXXX. call. Card XXXX Chief and

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

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

slide of margin, course and cash the limited are financial measures financial flow. directly GAAP we EBITDA, in will of most not comparable this presentation the and adjusted including, call, issued or ratio measures more included during Also, morning. non-GAAP be discussing press measures, EBITDA, adjusted non-GAAP these to, net but company leverage EBITDA one today's Reconciliations free release to the the

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

today's all comparisons will be the quarter Relations growth for rates prior June available website. period, with CPI's otherwise year the XXXX Investor to Form unless noted. XX, addition, XX-Q In refer on CPI's call, On ended

Chief Scott Executive And now, and the to I'd over Schierman. Officer, to turn President call like

Scott Scheirman

Mike, and everyone. good morning, Thanks,

full year, highlight updated ongoing call open second and results the During more financial we call, the I review for will and outlook quarter will our performance and Jeff strategy, give overview questions. CPI's the brief John for will in our before today's a discuss detail then

start on will We Slide X.

June, becoming know, XXXX. As decision since as early leading family. but This priorities enjoyed I in CPI difficult my to XXXX, plans I've late in give for to you in CEO announced me I was early need retire a to my

the company Given our strong executing an feel that strategy comfortable retire. been with has that to successfully, I a is time leadership excellent foundation the for has me right team

in to search and the Our new a Board CEO both or is early XXXX. evaluating name undergoing CEO, currently late next and candidates for a XXXX expects internal external

assure to quality I customer committed remains business want continuous guided innovation you and success, deep our customer market-leading strategic that the market that have to products model. service, specifically company and a key the competitive priorities focus,

to the the for and the reflect outlook position. year have I long-term confident we the in adjusted industry, market near-term in competitive our in challenges Although remain for some secular growth CPI's

XX% Visa CAGR, in a March see up the and the Slide period. to continue cards the can consumers ending and grow. payment to years compared issued for MasterCard year The cards you As XXst show increased US in latest from figures circulation X, on X% prior and to three at were

research is cards. as payment contactless expectations. of XX% card issuance discussed long-term reoccurring growth about and business average, by is of of that the cards existing driven we also past, market eco-focus card nature, shows higher-priced the US in adoption towards replacement support And in our on Trends have annual and

need issue and want institutions short, to and cards. banks financial In

our record strong execution solutions service share strategies. grows our As products customer of the well-positioned are over of and differentiated track team's focused we through market on end-to-end portfolio, to continue to win time, our based share our and gaining

Overall, our purchased adjust in customer given softness us will nature we to conditions, for be solid currently for of cards year, believe the the eventually growth. by the the are being in and is am the range We as softness I to which in caused temporary need sales affected outlook quarter the demand, first but still year, results pleased market half second including and issued. we profitability with posted the has

and call now John would for environment, to over second I like Lowe further quarter XXXX. current turn our discuss the to to the outlook results our

of our and you of and business served net sales all John, our solutions of payment and of bringing company's represents don't our approximately great those done For segment, He CFO. debit leads the John? previously together businesses driving know job as end-to-end XX% he which the credit has a who company's forward.

John Lowe

and good Happy be the on Scott, morning, to everyone. today. Thanks, call

for go before Let the results X full first on reviewing the year through some outlook. slide of quarter our me

For Peggy driven prepaid the a and increase X% in we which our led XX% by O’Leary net by team. in is delivered quarter, sales, business, growth her

year quarter customers. and our of Our which by with spending comparisons dominant declined challenging credit business cautious prior reflects X%, the some both

recall, net of As and Credit largest sales by quarter an large customers. order one This driven in card second to related portfolio XX% our of you eco-focused the may increased with a segment our was Debit XXXX. addition

result, year's a nearly cards we sold last XX million quarter. As focused second quarter ECO the than more current in

have of million of since customers we XXX as cards the current As our nearly eco-focus a end sold the to XXXX. late reminder, quarter,

year's delivered cards, we debit credit increases primarily quarter, and focus businesses. other cards and cards, contact this in Eco our for from services Aside contactless in

than by year, is driven into which demand believe factors. Comparisons we aside, expected customer is coming couple the of a we softer

As stress in mentioned impact we spring. following quarter, we started banking begin to some see the last on orders that the

have turmoil related and continue and dissipated spending of many current the regional the among to and has stabilized, medium-sized that our to appears environment we Although on customers smaller cautionary personalization. banks cards see small banking and affected a

concerns emphasis optimizing that that levels. also inventory as We slowdown inventory customers to challenges prompted have economic believe are also put chain from We the ongoing they more were have them more carry customers inventory utilizing our supply hearing previously likely existing more improved. on

customers, believe improve will market is in continue the later belief near-term, to likely in softness the the we inventory market our our As downs the year. work and but will in the talk we

As card remains healthy. Scott issuance consumers noted, to

So, are we momentum levels worked start to do issuers sales down. to regain to once expect inventory

Turning able increase second Despite basis EBITDA adjusted slight XX% XXX the results. to expenses. were adjusted XX.X%. by adjusted in net to with quarter we to margins X% managing effectively operating EBITDA EBITDA by and back growth, the sales points grew increasing income We by quarter,

results of half will we EBITDA. income give the increase a minutes. few solid X% Jeff growth, net in a our For details more net delivered the adjusted first XX% you growth in XX% sales year, and in on

to EBITDA let's sales to are net our our seven and outlook free discuss flow generation, outlook updated May, XXXX. for adjusted Today, first, slide in turn we leverage. outlook cash growth, affirming But provided while for adjusting the

mid-single-digit single-digit We to our of have full sales to to the the down levels. previously. as original Debit segment, due expect continue updated or and be our attributable factors to year outlook to prepaid to we than XXXX Credit low the growth slightly of better is This mentioned range from to outlook flat growth similar a change segment

initiatives to hold. to the quarter improve fourth expect decline in sales takes we and starts as of growth to our sales market the and quarter third returned the impact the in Currently,

fourth last various these in initiatives will softness the XXXX due in to to executing mentioned As and we are the seeing drive benefit primarily quarter. the we we sales are quarter, market,

we profit outlook are the high On for our adjusted single-digit side, EBITDA to affirming mid- growth.

where certain sales have timing projects managing and lower of our the such on of the expenses focus expectation, Given outside implementation discretionary as possible. we increased managing services costs

As noted, adjusted EBITDA first increased the half XX% year. the of in

So, we are off start. to a good

in the solid we their plans we uncertainty the and outlook so. in environment have in there will market economic and still focus when exactly place our to have Although is our and delivering confidence teams believe on do improve,

growth the positive secular trends term, and contactless a Longer believe eco-focused market intact, are circulation we US trends leader. remain where cards we card penetration same in growth. card

I detail. will turn second call results now year-to-date Jeff? more our review over quarter to Jeff to outlook the and in and

Jeff Hochstadt

to I growth begin Prepaid X% the from and I quarter in on my softness the offset decreased segment and John Prepaid some our by increases helped demand. offset existing increased while driven increased and Credit. as price the reduced slide business higher will sales everyone. sales as good implemented Credit Thanks in strong Net the Debit customers, nine. sales previously sales X% morning of expected XX%, Debit overview

Card@Once, Debit other services Looking instant Credit, personalization Demand Print in fees, our including cards. card were and sales products on largely cards, contactless offset and business, of and processing our of and non-EMV issuance, declines cards, sales at eco-focused increases in services, contact sales by

prepaid in and in to the expenses First profit due professional XX.X%. growth. expenses. from expenses largely service by lower in to gross with quarter, decreased $X reduced SG&A We profit primarily line X%, The million XX.X% slightly gross quarter margin sales lower increased

and X-K, were impact Compensation headcount the Executive by June and salaries quarter the noted expenses package of as increased Retention in early incentive slightly in employee the our increased compensation short-term expense. reduced offset

of package and expense of EBITDA. the to of February next impacts as within from be adjustment the the and Retention Most year end will Executive items equity cash SG&A through amortized recorded

XX.X% and up We of year-to-date a rate compared primarily in compensation limitations the of package. our deductibility prior had executive brought tax CEO to relatively the to high in in to related quarter The rate year XX.X%. retention the the reflects XX.X% rate increased quarter, on which

the interest first the rate, expense now that to the due deductibility be below to expect quarter items reflect would still in normalized is tax the XX% XX% between rate rate in excluding adjustment near and and to a state year-to-date The any XXXX laws. level adjustment range. a project last We top overall of of change favorable and higher year's

increased the XX% prior income SG&A million. improved million increased Adjusted by reduced XX.X% $X.X to $XX.X driven Net XX.X% from the adjusted margin in and EBITDA to in X% expenses. year quarter to EBITDA second

from While partially lower expense, growth income a also net rate. offset benefited higher interest tax by

XX. year-to-date slide our Turning to results on now

X%. and For year, and with card services, the increased Credit X% solution Debit the first was cards. driven with segment half contact Prepaid net instant growth issuance X% increasing growing personalization Credit Debit Card@Once, services card, by of Debit sales non-EMV sales and and the

the under the actions X-percentage in growth related in over will taken overall Pricing remainder contributed the the lessen so first primarily XXXX, just to impact half, year. points this of of

year, increasing slightly to XX.X%. First from X% profit prior margin gross the gross half with increased profit

SOX professional costs increased compensation for SG&A expenses, party approximately in by reflecting and in lower expenses, partially expenses prepaid headcount. half service reduced including million by third increased offset decreased expenses primarily as were the $X first

increased from also to lower margin lower tax operating first year XX.X%, primarily interest rate. XX% Net income driven XX% in in XX.X% expenses, and by reduced to EBITDA net adjusted income growth million EBITDA while a prior half benefited and $XX.X $XX.X the to Adjusted from million. increased expense the improved

segment profitability our sales slide this from drivers the Turning $XX.X in decline. now so Credit the and decreased will million, slide. on in discuss Income to on Debit segments the line segments segment to I mentioned just for with earlier, quarter I operations X% sales the XX.

increased For and lower benefits half, income and XX% of by Credit sales SG&A the expenses. the Debit leverage, from including first growth, operations increases and operating pricing driven

$X.X the Prepaid in XX% income from second increased quarter Debit segment operations to million.

First to half was facility. to operating at the income production related labor due prepaid costs first quarter from our flat conversion

last from quarter, mentioned efficiencies first the quarter. prepaid we benefited the and operating and favorable more operations was quarter, As expected margins labor prepaid gained as income also to Compared SG&A from in improve leverage. from prior benefited second conversion year, expenses from the we mix lower from to

million free income year-to-date capital liquidity of driven basis, resulted the $X.X million. cash flow by cash in improvement Slide Turning activities a million usage year expenditures, $XX.X cash the This On free net balance compared flow which usage and $X.X of the flow from last million cash prior compares year's period, reduced invested sheet, to $XX.X on flow half. first to and capital working with increased the we of operating to in generated on and XX.

the at of $XX $XX On to sheet, and secured of total had repurchased XX, $XX million outstanding had the as market June the ABL open $XXX we borrowings at $XX outstanding $X end, quarter million bringing our notes in balance senior on notes quarter, in million million of cash of we million million our year-to-date. We revolver.

four Our times end of leverage of at compared second the net the to X.X three prior quarter ratio year times year-end and times in quarter. the at

and business, in capital to strategic allocation including liquidity, Our ample priorities structure on focused sheet possible maintaining balance stockholders. the deleveraging the and investing funds acquisitions, returning remain

growth growth times three project doubling As our to flow EBITDA are and mentioned between X.X adjusted high adjusted more our single-digit have million from range improvement and flat $XX.X than to on year's net for than earlier, certain cash managing mid-single-digit for of outlook last affirmed outlook through updated to we and growth. year-end. mid- sales delaying we costs With XXXX to to spending EBITDA at anticipated, initiatives free low a growth and lower from drive leverage sales focused single-digit

call I remarks will Scott now on pass Slide XX. for back Scott? closing the some to

Scott Scheirman

Thanks, our environment. should challenging first of in the our you XXXX in are had to half our to us I also all Jeff, wanted employees have to and Russell delivering June, our in that efforts thank efforts our increase to note their a to added liquidity which in for pleased stock for results shares. further help we

we results demand profitability but overall the for quarter the expected growth faced half. in To generated summarize solid delivered challenges today's have good first call, and

cash that, free but flow persist flows and have the We focused year. expect in adjusted and customer free affirmed sales profitability reflect adjusted outlook our our and on demand the to near-term and to EBITDA are for cash outlooks have the short-term challenges

the confident time, over and and our we secular remain long-term for to share. in to payment ability in to market expect gain cards to the trends continue improve We continue

Thank you open call we the now will our and for questions. call any today, for Operator? joining

Operator

the open Lake with is questions. for The Capital Street Markets. Jaeson now [Operator We'll first your call Schmidt you. question Instructions] from Thank

Your is open. line

Jaeson Schmidt

guys. Hey, my Thanks questions. taking for

mean, or with start you return recent of to this a visibility you year? return here QX, to outlook, or later what levels, growth in confidence your want that is into Just and customer sorry can gives I that QX – patterns, growth to order on based that inventory this sort confidence

Scott Scheirman

This morning. is good Scott. Jaeson, Yeah,

the he customers give a you the thoughts, add their about factors, couple recent year, our conversations conditions even of depending of too later the forth. Jaeson. improving me closely could and on change project let with upon timing would objectives day. variety start based But with economic plans, But do as we improve John say some obviously, believe the in so customers' will I'll of works customers I color business a more to and Let conditions, than every market I

the sure. continue eco-focus really what's our cards popular, very here is think will to then long-term to I secular average, annually, in the the on popular important continue market transition will US, contactless cards revenue we’re be note leader XX% for to of reoccurring. And be are intact, trends XX%, there is

been based nature. into few through that in And model has reoccurring some spending we are the secular seen conditions. had in last an months temporary are with -- we cancels going again, their cautious have clearly, on these tightening So that I've we're one and trends, XXXX, have customers customers. projects so credit a again, recent But customer revenue push no But some conversations, these our they're order, bit. large on a

John, QX, us without But more let color you gives risk, for I'll on in sure. give what obviously, confidence although some some not

Jeff Hochstadt

we're mean, thing say I to time. is talking morning, all talk the good would again. I but covered it well, Hey, one Yeah. Jaeson. Good customers you the think I to to Scott our

continued there's been little to just to we've mentioned on next the to some at credit projects but extent which in -- drivers. about two a would the were some banks I space, large occurring bit be tightening impacted say seen the least and changed QX. in year, this, them are you May, a has their out that some you've QX. trends standards, moved inventory, Scott They've more medium think have If since focused really that in seen ordering, what's certain of small

answer is to what those There's There's of we're the good the talking the reason customers projects do we back And I on. -- but feel really working in your come picking significant time. being expect say, the year directly all would amount now. activity, our QX. end question we of and always things a We to to where in are outlook, the to risk up about relation coding we're in

Jaeson Schmidt

segment, at quite it that's just I the color. looking be strong appreciate prepaid in No, Okay. really it, then guys. And QX. seemed to helpful

would normal half if your year? see typically this seasonal of that curious impact in the patterns the Just second you

Scott Scheirman

of each businesses, have the the see can again, an probably O'Leary timing is should prepaid XXXX? a it and slightly for But tad being XXXX and bit may in our But that a where team seasonality the there you of year bit ended great moves and for pleased than Peggy XXXX. that is sure, be in among a I'd job our in vary better holiday in But of that growing was on prepaid probably bit quarters a for timing quarters. in as season. for with be sure, focus QX it having doing business. we season, sure And business. the among of impact of prepare that better we're bit are business Jaeson, up gifting a customers could a solid overall, there the

Jeff Hochstadt

thing I'd say business cards, typical to business. a just open-loop extent. They've things the job. in HSA certain of doing than again, prepaid and product We diversify been our set business, great some [indiscernible] the Jason, a some moved reduced the overall. doing able their other running is to cards seasonality She's areas, gift that's prepaid that and the more other into

would from kind think I So bit little to you fourth what you see financials of than look historically. back you'll quarter the our a second to look lumpiness less quarter, to at third what the you if quarter see

Jaeson Schmidt

last sense. second here queue. How margin for the I'll makes we and the year? Okay. me, into gross then about back That And should one in just think jump of half

Jeff Hochstadt

Jeff. this Jaeson, Hi, is Yes.

of operating the the a I year, dip leverage for typically bit, little sales with when rest bit margin a of for sales. the higher obviously, gross little think get we

implemented. that so. or our pricing lapsing is year a been about so the last a we also pressure put margin -- on little year from that the It's will So gross

the will those margin still pressure. gross gross managing bit on But a closely. we be same really the And year. There's guidance token, se give per the EBITDA, we pretty our the a expenses that are So, watch lot effectively. on we guidance and of But our second expenses little in again, adjusted on for tighten we margin. can, affirmed our half don't

adjusted lower good light guidance revenue in So growth. feel of about we the EBITDA

Jaeson Schmidt

really guys. lot a That's Okay. helpful. Thanks

Jeff Hochstadt

Jaeson. Thanks, Thanks.

Operator

Sabal The Instructions] from Charters question is [Operator with Bill next Capital.

line Your open. is

Bill Charters

Hi, to on some get guidance. guys. clarity wanted I just the

and of up And Regarding guidance, is quarter down you third year. million quarter third mean million that's $XXX like last year-over-year. $XX

then the how almost and to I EBITDA QX Am million to $XXX so the that that's you you about grow And get thinking somewhat, expect for year. correctly?

Scott Scheirman

Yes, that's correct.

Bill Charters

Okay. And EMV traded years XXXX maturities cyclicality, contactless lower expect with and if then the in with XXXX three and What five lower cyclicality years margins. you down any, do from conversion? from to

Scott Scheirman

let's is mean right? was from in very a I -- October in XXXX, to to Bill, slightly saw XXXX and you up forward started you and talk was clear That really the date. think XXXX. there set we again. you pick if contactless back, late Contactless very what from the transition I go Yes. mandate MasterCard, fast Visa different to

you the broader roughly as at penetration end of the seen we've XX% If to at XXXX look market, XX%.

We expect will, few in years. if that next the mid-XXs, to XX%, be you the in

has slower. So been mandate. transition the no There's

do transition customers, current the continue say, its us. good anything say in wouldn't which it's would good is coming guidance particular our that a And year or that's in to change what's contactless years. we in this happening to slow expect in transition, I I more much for So the totality. for with do the has

we we and boom the to and cyclicality industry I from from that the the what time say, isn't in Visa period So the mandate. inventory the XXXX Mastercard building saw really XXXX the and that, in back would from comparable saw

Bill Charters

guess, to of by Okay. that be XXXX. implemented Great. you're kind And Is everything you kind I fully what of, fully thinking? or expect

John Lowe

to you're never Well, to I get XXX% mean, penetration going

Bill Charters

Right

John Lowe

the one-third XX% comes small issuers, believe of Credit transition. on issuers the so to small revenue from XXXX and kind we medium of largest time business, do and range. the two-thirds to to keep those side XXXX, the our comes that XX% are But period much slower to ones Debit medium mind, are our issuers during our from our revenue in of

XX% So even say Scott up the that's is, The in this, broadly three thing XX%, just we still at -- they're a get remain. XX% And if cards expect, a trends, long you last tail. circulation, CAGR over years. I would roughly other the fairly the secular mentioned

if expect a million Overall, we're at leader, looking believe you're card where million XX% market -- CAGR those we we nearly that grow at market years. the issuance over to is eco-focus XX few the we next roughly QX through recurring. sold a XX% of or And XXX and

feel So in the and the about about where we market. we are understand good the but cyclicality question contactless, I

Bill Charters

Yes.

maintenance Okay. question last Great. was CapEx? CapEx. And is on then What than noticed last like historic. I year have the is I higher

lower. just then that? feel What The first but color it us more you you do Can and quarter was higher, some quarter this about give maintenance? was on CapEx

John Lowe

John, Yes, again.

where you we back If go range. million, very tight on were $X several we're probably $XX ago, million years say would the in cash. I

customers. do current the $XX to efficiency trying capability the the kind course in for range perspective improve that million to that of more range. million in always of million future. are that, spend continue perspective, projects In $XX have to we expect $XX million we're doing think a $XX an operations our from We to our over we're I environment, ongoing, probably in that to

$X for the range, your And maintenance organization. put is if for And it. to just million number There's side CapEx to and I'd break maintenance I the $X there's question, through the million down for projects around to more had improvement. that CapEx in a probably

Bill Charters

or Got it. growth And the efficiencies. rest is

John Lowe

right. That's

Bill Charters

Okay. Thanks. no I great have Great. Great other and questions. call. Well, quarter

John Lowe

Bill Thanks,

Operator

joining. for this We questions a further quarter conclude at have call. second Group's and Card Thank time, earnings day. this Have good today's no will you CPI

CPI Card (PMTS) 8 Aug 232023 Q2 Earnings call transcript