CPI Card Group Inc. (NASDAQ:PMTS) Q4 2023 Earnings Call Transcript

CPI Card Group Inc. (NASDAQ:PMTS) Q4 2023 Earnings Call Transcript March 7, 2024

CPI Card Group Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to CPI Card Group’s Fourth Quarter 2023 Earnings Call. My name is Audra, and I will be your operator today. [Operator Instructions] Now I would like to turn the call over to Mike Salop, CPI’s Head of Investor Relations. Please go ahead.

Mike Salop: Thanks, operator, and good morning, everyone. Welcome to the CPI Card Group fourth quarter 2023 earnings webcast and conference call. Today’s date is March 7, 2024. And on the call today from CPI Card Group are John Lowe, President and Chief Executive Officer; and Jeff Hochstadt, Chief Financial Officer. Before we begin, I’d like to remind everyone that this call may contain forward-looking statements as they are defined in the Private Securities Litigation Reform 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 a discussion of such risks and uncertainties, please see CPI Card Group’s most recent filings 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 margin, net leverage ratio and free cash flow. 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-K for the year ended December 31, 2023, will be available on CPI’s Investor Relations website. On today’s call, our growth rates refer to comparisons with the prior year period, unless otherwise noted. And now I’d like to turn the call over to President and Chief Executive Officer, John Lowe.

John Lowe: Thanks, Mike, and good morning, everyone. For today’s call, I will give an overview and discuss our strategic priorities. Jeff will go into more detail on our 2023 results and 2024 financial outlook, and then we will open the call for questions. Let’s start on Slide 4. As most of you are aware, I was named President and CEO of CPI Card Group in January, taking over from Scott Scheirman, who announced his plans to retire mid last year. I would like to take a moment to thank Scott. Under his leadership, our team delivered a remarkable turnaround over the last six years and established a strong foundation that we can build from as we begin the next phase of the company’s growth. CPI has a strong culture and values that have helped to establish us as a trusted leader in the U.S. payment space, and we have a great leadership team in place today.

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Q&A Session

This team combines both experienced CPI leaders that have helped drive our success over the last several years as well as some relatively newer hires to bring in additional outside expertise. Among the experienced leaders we have promoted Peggy O’Leary to Senior Vice President, Prepaid Solutions and Chief Development and Digital Officer. Peggy has been leading our prepaid business since 2022, and has been instrumental in driving our growth strategy in various areas of the business since joining CPI in 2015. Peggy will be supported in business development by Rob Dixon who is our Vice President of Business Development and Digital Solutions. Rob has been leading our product, growth and innovation strategy for instant issuance, personalization and digital solutions.

And he and his team have been integral in expanding our product and solution sets, including our digital connections and solutions. Last year, we also brought on two executive leaders from outside the company and newly created senior roles that report directly to me to further enhance our sales and operations activities. Tony Thompson joined us from RR Donnelley and is now our Senior Vice President of Debit and Credit Operations. Tony leads the teams responsible for ensuring the best quality for our customers for secure card, personalization, instant issuance and print on demand. J.D. Porter, who came to us from Pfizer, is now our Chief Commercial Officer. J.D. is responsible for all customer-facing activities for our debit and credit segment and is tasked with driving market share gains and providing the best customer service for our thousands of customers.

CPI’s newly structured leadership team aligns with our strategy of building from our current foundation while expanding long-term opportunities and diversifying the business, which I will talk more about in a few minutes. First, though, I would like to address our financial results and initial outlook for 2024. Certainly, 2023 was a challenging year. As we’ve discussed the last few quarters, in general, our customers were very cautious with our spending last year. Economic uncertainties, banking industry turmoil and inventory rationalization after our customers purchased large quantities amidst supply chain concerns in 2022, all contributed to the cautionary spending in 2023. If you recall, 2022 sales were at a record level for CPI and reflected a 27% increase from prior year and a 32% increase in the debit and credit business.

We anticipate the customer inventory rebalancing will continue into 2024, but believe the market will gradually improve over the course of the year. For the full year, we expect to return to positive sales growth in 2024 with our initial outlook projecting slight increases for both net sales and adjusted EBITDA. We expect sales to be down for the first half of the year. with growth anticipated in the second half. Our sales outlook is based on discussions with customers, opportunities we are seeing in the marketplace, industry projections and analysis and anticipated benefits from sales initiatives that we initiated in 2023. We are also encouraged by the outlooks of many of the large banks who generally are predicting a soft landing for the U.S. economy.

We expect 2024 adjusted EBITDA to slightly increase. Growth will be impacted by investments to support our long-term strategy of growing and diversifying the business and comparisons with lower short-term employee incentive compensation in 2023. Longer term, we believe we can drive further operating leverage from sales growth and operating efficiencies. Looking back to 2023. Although our sales results were disappointing, we did take important strides that will help lay the groundwork for the future. We won additional business with both new and existing customers. We expanded our health savings account business and opportunity. We developed and introduced new metal card offerings. We introduced eco-focused solutions in the prepaid space. We expanded our Card@Once instant issuance installations to more than 15,000 locations, and we accelerated plans to diversify the business by launching digital push provisioning capabilities and exploring an expansion of our instant issuance solution beyond financial institutions.

In addition, despite the sales and net income decline in 2023, we were able to more than double our free cash flow to nearly $28 million, thanks to improvements in working capital and tight management of capital spending. We also initiated our share repurchase program in the fourth quarter and made good progress executing against the $20 million authorization in the first couple of months of 2024. We’ll go into more detail on 2023 results and our 2024 outlook in a few minutes. But first, let’s turn to our strategy review on Slide 5. My goal is to carry forward and enhance the strategies that have made us successful with our current portfolio. While also expanding our addressable market over the long term by adding adjacent product and service offerings, including more digital solutions for our extensive customer base of thousands of financial institutions.

My leadership team and I want to continue with the key strategic priorities that have successfully driven growth and market share gains in our portfolio of secure cards, card personalization services, instant issuance solutions, print on demand and prepaid solutions. Specifically, we will continue to differentiate ourselves in the market by prioritizing a deep customer focus, market-leading quality payment solutions and customer service, continuous innovation in a market competitive business model. These priorities have helped us become a leader in areas such as eco-focused payment cards, our Software-as-a-Service-based instant issuance solutions and tamper-evident prepaid packaging solutions. Our focus on customer service, quality and innovation gives us a strong value proposition in the market, and we have consequently established strong, long-lasting customer relationships.