CPI Card Group Inc. (NASDAQ:PMTS) This autumn 2022 Earnings Name Transcript March 8, 2023
Operator: Welcome to the CPI Card Group’s Fourth Quarter 2022 Earnings Name. My title is Glenn, and I will probably be your operator at present. Now, I want to flip the decision over to Mike Salop, CPI’s Head of Investor Relations. Mike?
Mike Salop: Thanks, operator, and good morning, everybody. Welcome to the CPI Card Group fourth quarter 2022 earnings webcast and convention name. Right now’s date is March 08, 2023, and on the decision at present from CPI Card Group are Scott Scheirman, President and Chief Govt Officer; and Amintore Schenkel, Chief Monetary Officer. Earlier than we start, I might wish to remind everybody that this name might include forward-looking statements as they’re outlined below the Non-public Securities Litigation Reform Act of 1995. These statements are topic to sure dangers and uncertainties that would trigger precise outcomes to vary materially from these expressed within the forward-looking statements. For a dialogue of such dangers and uncertainties, please see CPI Card Group’s most up-to-date filings with the SEC.
All forward-looking statements made at present replicate our present expectations solely, and we undertake no obligation to replace any statements to replicate the occasions that happen after this name. Additionally, throughout the course of at present’s name, the corporate will probably be discussing a number of non-GAAP monetary measures, together with, however not restricted to, EBITDA, adjusted EBITDA, adjusted EBITDA margin, web leverage ratio and free money circulation. Reconciliations of those non-GAAP monetary measures to probably the most immediately comparable GAAP measures are included within the press launch and slide presentation we issued this morning. Copies of at present’s press launch nicely because the presentation that accompanies this convention name are accessible on CPI’s Investor Relations web site, traders.cpicardgroup.com.
As well as, CPI’s Type 10-Okay for the 12 months ended December 31, 2022 will probably be obtainable on CPI’s Investor Relations web site. And now, I might like to show the decision over to President and Chief Govt Officer, Scott Schierman.
Scott Scheirman: Thanks, Mike, and good morning, everybody. Throughout at present’s name, I’ll focus on CPI’s efficiency in 2022, present ideas on our preliminary outlook for 2023 and reiterate our long-term technique. Amintore will evaluate the monetary leads to extra element after which we are going to open up the decision for questions. We are going to begin on Slide 4. 2022 was an amazing 12 months for CPI. We elevated gross sales 27% for the total 12 months to a document stage of $476 million and we consider we gained vital general market share. We grew adjusted EBITDA 28% to $98 million and elevated the adjusted EBITDA margin barely to twenty.5%, regardless of vital inflationary impacts on prices. We additionally improved our web leverage ratio in 2022 ending the 12 months at 3x and retired $25 million of principal on our senior secured notes throughout the 12 months.
And we ended 2022 on a excessive notice with fourth quarter web gross sales growing 36% and adjusted EBITDA growing 100%. As we glance again on 2022, there have been 4 most important drivers that have been vital to our success: first was our differentiated modern services and products and end-to-end options; second, our market-leading high quality and customer support; third, our robust provide chain execution whereas the business confronted challenges; and fourth, we benefited from a powerful development 12 months for the cardboard markets within the U.S. Our differentiated end-to-end resolution, main high quality and customer support and robust provide chain execution every contributed meaningfully to our market share beneficial properties. One instance was our modern eco-focused playing cards, which posted a 70% improve in gross sales for the 12 months.
Led by our playing cards made with recovered ocean-bound plastic core, we bought greater than 40 million eco-focused playing cards in 2022, bringing our whole to greater than 90 million bought because the launch in mid-2019. One other instance is our differentiated software-as-a-service on the spot issuance resolution Card@As soon as, which delivered one other wonderful 12 months. Progress was pushed by new buyer installations, robust printer improve gross sales, and ongoing providers income. On the finish of the 12 months, Card@As soon as installations throughout the U.S. totaled greater than 14,000 buyer areas. Throughout our portfolio, our market-leading high quality and customer support helped us achieve extra enterprise with present and new clients, together with in pay as you go, the place we added new buyer sorts past the standard retail channel.
As well as, we have been in a position to considerably broaden Safe Card manufacturing capability throughout the 12 months, meet buyer wants and to meet demand out there. And we consider our robust execution of provide chain, together with proactive stock administration throughout the 12 months whereas the business was challenged additionally allowed us to achieve extra enterprise in 2022. As it’s possible you’ll recall, we entered final 12 months with robust buyer demand, however confronted vital provide chain and labor scarcity challenges and the affect of inflation on our prices was escalating. I might wish to thank all of our workers for his or her dedication and energy to sort out these challenges and ship a document 12 months, efficiently growing capability, navigating international provide chains and serving our clients.
Earlier than I focus on our 2023 outlook, I want to additionally personally thank Amintore Schenkel for his robust contributions to our success since becoming a member of CPI. Amintore has knowledgeable us he will probably be leaving the corporate this 12 months attributable to family-related private causes, however will keep on whereas we seek for his alternative to assist transition the brand new CFO as soon as named. Along with his function in serving to us drive profitability and enhance our monetary place, Amintore has led us in the direction of profitable SOX compliance and additional developed our monetary group, leaving us with a powerful monetary group. Amintore will give some remarks and an extra monetary evaluate in a couple of minutes, however first, let’s flip to our 2023 outlook on Slide 5. For 2023, we’re targeted on persevering with to execute on our methods, develop the enterprise, win share within the market, improve money circulation and scale back leverage.
We consider we’re nicely positioned to proceed to achieve general markets share in 2023 with our portfolio of differentiated options and market-leading high quality and customer support. We anticipate continued profit from the continuing transition to contactless playing cards, extra progress on offering end-to-end options to small- and medium-sized issuers and additional on the spot issuance penetration. Our preliminary monetary outlook for 2023 tasks mid-single digit development for web gross sales with larger anticipated web gross sales development in our Debit and Credit score segments, which comprised 82% of web gross sales final 12 months, and Pay as you go Debit section web gross sales much like the 2022 ranges. The web gross sales outlook displays expectations for slower market development in 2023 as final 12 months benefited from sturdy buyer demand.
We anticipate issuers being extra cautious concerning U.S. financial surroundings, tightly managing spending and orders as they assess the buyer developments and their very own stock ranges and doubtlessly growing credit score underwriting requirements. Debit playing cards, which at present make up the vast majority of the market, are usually much less affected by financial situations and traditionally round 90% of cost card issuance is for reissuance and replacements. So, we nonetheless anticipate the market to develop general, however not as robust as 2022. Additionally, face difficult comparisons with our 2022 efficiency because the 27% web gross sales development final 12 months benefited from vital contributions by massive portfolio additions with present clients, notably eco-focused playing cards and robust Card@As soon as printer improve gross sales.
As we did final 12 months, we are going to stay nimble and able to adapt because the market and financial situations evolve and clients’ plans change. On the profitability facet, we anticipate adjusted EBITDA development for 2023 within the mid- to high-single digit vary regardless of continued inflationary affect on prices, as we handle bills tightly and obtain extra working leverage in our Debit and Credit score section. We’re additionally targeted on considerably growing free money circulation and decreasing our web leverage ratio, which Amintore will focus on in a couple of minutes. General, we anticipate continued share beneficial properties, stable development, one other robust earnings 12 months in 2023 as we proceed the momentum now we have established over the previous few years. Now, let’s flip to Slide 6 to debate our long-term technique.
Over the previous 5 years, now we have constantly targeted on 4 key strategic priorities: deep buyer focus, market-leading high quality merchandise and customer support, steady innovation, and a market aggressive enterprise mannequin. Profitable execution of those methods has allowed us to achieve market share, create and broaden market management in key classes and ship robust monetary outcomes. Since 2017, now we have achieved compounded annual development charges of 16% in web gross sales and 33% in adjusted EBITDA. Over the identical interval, now we have elevated gross margins from 30% to 37% and diminished web leverage from over 12x to 3x on the finish of 2022. Some examples of technique success in 2022, as talked about earlier, embrace: profitable new enterprise with our modern eco-focused playing cards and pay as you go options; increasing our SaaS-based on the spot issuance distribution; offering personalization and print-on-demand options for fintechs; and enhancing our market aggressive enterprise mannequin to enhance capability and scale back buyer lead instances following provide chain-driven spikes all through the business.
On the finish of 2022, we reorganized our construction to assist us higher execute our methods going ahead. Particularly, we aligned Safe Playing cards, personalization and on the spot issuance below one chief, which we consider will optimize our skill to give attention to offering end-to-end options for our clients. We additionally created a management place devoted to pay as you go and a place targeted on new development alternatives, together with new merchandise and enterprise improvement and digital options. Some new product and enterprise examples embrace offering pay as you go cost playing cards for non-retail channels, comparable to our well being financial savings accounts and to help companies that want to offer funds to gig employees and contractors. We’re additionally exploring alternatives for fast issuance options past monetary establishment areas comparable to with retailers.
To summarize, execution of our strategic priorities has contributed vastly to our success over the previous 5 years, driving gross sales development, market share beneficial properties, product diversification and working leverage, and we consider there are numerous alternatives to additional broaden choices and capabilities and drive development within the years to return. Now, I’ll flip the decision over to Amintore Schenkel to evaluate our fourth quarter and full 12 months 2022 leads to extra element. Amintore?
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Amintore Schenkel: Thanks, Scott, and good morning, everybody. I’ll start my overview on Slide 8. Fourth quarter web gross sales elevated 36% to $126.4 million in comparison with the prior-year quarter, with robust development throughout our Debit and Credit score portfolio and in Pay as you go. The Debit and Credit score section web gross sales elevated 35% with robust contributions from contactless playing cards, personalization providers, Card@As soon as on the spot issuance options and varied different merchandise. Pay as you go Debit section web gross sales elevated 39% in contrast with the prior 12 months, pushed by new buyer additions exterior the standard retail channel and development with present clients. Fourth quarter gross revenue of $47.5 million elevated 54% from the prior 12 months, whereas gross revenue margin elevated from 33.2% to 37.6%, pushed by working leverage from gross sales development, together with advantages from worth will increase, partially offset by the impacts of inflation on manufacturing prices, totally on supplies prices.
SG&A bills elevated by roughly $3 million within the quarter in comparison with the prior 12 months, primarily to help our development and strategic execution. This contains roughly $2 million of elevated compensation bills, which displays larger headcount and better salaries, partially offset by a discount in inventory compensation expense of $500,000. Our tax fee was 19.4% within the quarter attributable to some favorable adjustment objects associated to unrecognized tax advantages and state tax settlements, which introduced our full 12 months fee to 25.7%. The fourth quarter fee was down from 62.3% within the prior-year quarter, which included unfavorable changes associated to state tax and unsure tax place objects. We undertaking a tax fee of barely lower than 30% for 2023, excluding any adjustment objects which will come up.
Web revenue within the fourth quarter elevated from $700,000 within the prior 12 months to $12.5 million in 2022, and adjusted EBITDA elevated 100% to $27.2 million. Adjusted EBITDA margin improved from 14.6% within the prior 12 months to 21.5%, pushed by working leverage from the robust gross sales, together with pricing advantages. Turning now to our year-to-date monetary outcomes on Slide 9. Web gross sales for the total 12 months reached a document stage of $475.7 million, a 27% improve in comparison with the prior 12 months. By section, Debit and Credit score section gross sales elevated 32% and Pay as you go Debit section elevated 9%. Debit and Credit score gross sales development benefited from robust gross sales of contactless playing cards, together with massive orders for eco-focused playing cards. Roughly 75% of our Secured Card quantity in 2022 was from contactless playing cards, up from slightly below 70% in 20 21.
We estimate contactless penetration for the U.S. market ended 2022 at about 50% to 60% of playing cards in circulation, and proceed to anticipate the extent to develop to greater than 80% by 2025. We additionally skilled robust development in 2022 from Card@As soon as on the spot issuance options, which represented slightly below 10% of whole firm gross sales and good development from personalization providers, contact playing cards and different merchandise. In pay as you go, we anticipated a difficult 12 months in 2022, because the earlier 12 months benefited from vital retail stock restocking and moreover massive new buyer portfolio. Due to a really robust fourth quarter, we’re in a position to develop the pay as you go enterprise 9% in 2022 to a different document stage, pushed by development with new and present clients and pricing advantages.
General, pricing amounted to a low-single digit contribution to the corporate’s 27% development for the 12 months and to the expansion of every section. For Safe Playing cards, 80% of gross sales development was attributable to quantity with the rest attributable to combine from the conversion to contactless and pricing. Full 12 months gross revenue of $175.8 million elevated 24% from the prior 12 months, whereas gross revenue margin decreased from 37.7% to 36.9% attributable to inflationary affect on manufacturing prices, primarily supplies, partially offset by working leverage, together with the advantages of worth will increase. SG&A bills elevated by roughly $15 million for the total 12 months, primarily attributable to roughly $8 million of elevated compensation bills and roughly $3.5 million of incremental skilled providers comp.
The compensation expense improve displays elevated headcount of salaries in addition to roughly $2 million of extra inventory compensation, partially offset by roughly $1 million of decrease severance expense. Full 12 months web revenue elevated 129% to $36.5 million, primarily because of the gross sales development and the affect of debt refinancing prices incurred within the 2021 first quarter. Adjusted EBITDA elevated 28% to $97.7 million, whereas the adjusted EBITDA margin elevated from 20.4% within the prior 12 months to twenty.5% in 2022. The rise in adjusted EBITDA was pushed by gross sales development, and the ensuing working leverage, partially offset by elevated manufacturing and SG&A prices. Turning now to our segments on Slide 10. I discussed the section gross sales drivers earlier.
So, I’ll simply focus on section profitability on this slide. Earnings from operations for the Debit and Credit score section elevated 68% within the quarter to $31.2 million, pushed by the upper web gross sales and working leverage, partially offset by larger manufacturing prices, primarily supplies. For the total 12 months, Debit and Credit score section revenue from operations elevated 38%, pushed by the identical elements because the fourth quarter. Pay as you go Debit section revenue from operations elevated 35% within the fourth quarter to $5.2 million, pushed by larger web gross sales and working leverage. These advantages have been partially offset by elevated working bills, which additionally drove the pay as you go working margin decline within the quarter. For the total 12 months, Pay as you go Debit section revenue from operations decreased 5%, primarily because of the inflationary affect on manufacturing prices, with the vast majority of the affect on supplies and elevated working bills, partially offset by larger gross sales, together with the advantage of worth will increase.
Turning to the steadiness sheet, liquidity and money circulation on Slide 11. We continued to strengthen our monetary place in 2022, ending the 12 months with a web leverage ratio of 3x. We generated $31.3 million of money circulation from working actions throughout the 12 months and invested $17.9 million on capital expenditures, which resulted in free money circulation of $13.5 million. This was a rise from the $10.2 million of free money circulation generated within the prior-year interval regardless of considerably elevated capital spending in 2022 and prior advantages of $9.8 million associated to tax money refunds. Accounts receivable balances elevated $20 million throughout 2022 because of the robust gross sales development within the fourth quarter. Inventories elevated $10 million throughout the 12 months as we managed our enterprise to help buyer demand and a difficult provide chain surroundings.
Though we diminished inventories $4 million in comparison with the tip of the third quarter. Within the fourth quarter, we generated robust free money circulation of $16.2 million. On the steadiness sheet at December 31, we had $11 million of money and $5 million of borrowings excellent on our $75 million ABL revolver. We had $285 million of senior secured notes excellent at year-end, as we redeemed $20 million of notes within the first quarter of 2022 and repurchased a further $5 million within the open market within the fourth quarter. Subsequent to year-end, we repurchased one other $5 million of notes within the open market within the first quarter of 2023. Our capital construction and allocation priorities stay targeted on sustaining ample liquidity, investing within the enterprise, together with potential strategic acquisitions, deleveraging the steadiness sheet and doubtlessly returning funds to stockholders.
In line with these priorities, we proceed to focus on additional reducing our web leverage ratio over time. Much like final 12 months, seasonal working capital wants might improve web leverage within the early a part of 2023, however we do anticipate the ratio to enhance over the course of the 12 months and finish the 12 months between 2.5x and 3x. To reiterate our outlook for 2023, we anticipate gross sales development within the mid-single digit vary, gaining share in a slower development market. We anticipate adjusted EBITDA development within the mid- to high-single digit vary as we handle bills tightly whereas nonetheless investing for the long run and drive extra working leverage for our Debit and Credit score section. We anticipate to enhance money circulation conversion and we undertaking free money circulation to greater than double from the $13.5 million generated in 2022.
As all the time, our first precedence is to serve our clients, so if enterprise wants or the provision chain surroundings modifications, we might prioritize extra stock investments, however our present outlook displays robust working capital enchancment and greater than doubling free money circulation. Inside free money circulation, we anticipate capital spending to be much like 2022 ranges, and we anticipate to enhance our web leverage ratio to someplace between 2.5x and 3x by year-end by means of EBITDA development and web debt discount. We delivered document leads to 2022 and additional strengthen our monetary place. And we anticipate one other 12 months of progress and monetary enchancment in 2023 regardless of the more difficult surroundings. I am additionally happy to have the ability to offer you an replace on our SOX standing.
Based mostly on the outcomes of our most up-to-date analysis, it has been decided that inner management and monetary reporting is efficient as of year-end 2022 and the beforehand disclosed materials weaknesses have been remediated. Now we have devoted vital time and sources to strengthening our processes and controls, and are happy to have accomplished the remediation. Lastly, as Scott talked about, I will probably be leaving CPI this 12 months attributable to private household causes. I’m happy with the accomplishments now we have achieved and outcomes now we have delivered since I joined the corporate. Now we have a powerful monetary group in place, which is nicely ready to proceed contributing to the corporate’s success, and I intend to remain on board to make sure there’s an orderly transition to the brand new CFO.
As we glance to the long run, I consider the corporate is nicely positioned to execute its methods to drive continued development and monetary enchancment. I’ll now go the decision again to Scott for some closing remarks on Slide 12. Scott?
Scott Scheirman: Thanks, Amintore. To summarize, 2022 was an excellent 12 months for CPI. We delivered robust gross sales and revenue development, whereas countering inflation and provide chain challenges. We consider we continued to achieve general market share in a rising market. We continued to offer modern options and product enhancements, delivered prime quality and customer support and additional diversified our product portfolio. We made investments and course of enhancements to extend our capability, advance our capabilities, and we improved our steadiness sheet and monetary place. For 2023, we’re targeted on persevering with to execute our methods, develop the enterprise, win share within the market, improve money circulation and scale back leverage. Thanks for becoming a member of our name at present, and we are going to now open up the decision for questions.
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