Q3 2019 Earnings Call
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I'd now like to turn the conference over.
Thank you Jennifer <unk> Investor Relations. Please go ahead.
Thank you and good morning, everyone welcome to the CP I card group third quarter and year to date 2019 earnings webcast and conference call on the call today from CP I card group, It's got Chairman, President and Chief Executive Officer, and John Low 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 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 CCBI card groups. Most recent filings with the FCC and on SEDAR.
All forward looking statements made today reflect our current expectations only and we undertake no obligation to update any statement 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 adjusted EBITDA adjusted EBITDA margin adjusted free cash flow net sales growth, excluding Canadian operation income from operations, Excluding litigation settlement gain an operating.
Margin, excluding litigation settlement gain all reported on a continuing operations basis.
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.
Please be advised that the financial results discussed on the call today reflect continuing operation and therefore exclude the result of Cpis UK Limited segment, which was divested in August of 2018 and has been accounted for as discontinued operations in accordance with U.S. gap.
The disposition of Cpis, Canada business was closed on April 1st 2019, and does not qualify as a discontinued operation in accordance with U.S. gap.
Results for the Canadian business through the date of disposition as well as a disposition related costs are reflected in the other segment.
Copies of today's press release as well as the presentation that accompanies this conference call are accessible on Cpis Investor Relations website investors that CP I card group dotcom.
In addition, Cpis Form 10-Q , four the three and nine months ended September 32019 was filed with the FCC earlier today and is also available on Cpis Investor Relations website.
Please note that this call will conclude after our prepared remarks.
And now I'd like to turn the call over to Scott Chairman, President and Chief Executive Officer of Cpis.
Thanks, Jen and good morning, everyone.
Thank you for joining us today I will begin my prepared remarks on slide four.
Our third quarter in year to date results reflects solid execution against our plan our ongoing commitment to our strategic priorities allowed us to deliver net sales growth and significantly increased profitability in margins on a year over year basis.
Net sales for the quarter were up 1% year over year or 3% when excluding Canada.
You asked debit and credit segment net sales were up 7% year over year, driven by increased net sales from personalization.
Dual interface cards and card at once a.
Year to date net sales from the U.S. debit and credit segment were up 17%.
Net sales for our prepaid debit segment were down 3% during the third quarter, while year to date net sales of $53 million were up 2% over the same period last year.
As a reminder, 2018 benefited from portfolio wins that as expected did not reoccur in 2019.
Net loss for the quarter was $700000, bringing our year to date net loss to $2.2 million inclusive of a 6 million dollar cash litigation settlement gain recorded in the second quarter.
Adjusted EBITDA was $12.3 million in third quarter, an increase of 34% compared with the same quarter a year ago.
Our year to date, adjusted EBITDA was $28.8 million, a 31% increase over the same period last year.
We believe this strong performance through the third quarter and first nine months has is on track to achieve the goals we established for ourselves this year.
Turning to slide five.
Our success this year has come from strong execution against our four strategic priorities.
First deep customer focus.
<unk> market, leading quality products and customer service.
Third market competitive business model and fourth continuous innovation.
We believe continued commitment to these priorities is key to delivering on our vision.
Part of this commitment is ensuring that our organization aligns with these priorities recently, we changed our leadership relating to the secured card business, which will now be led by Guy Demaggio.
I joined CPI in 2018 and has played a key role in helping to grow the personalization business.
Jason Board has stepped down from his role as SVP and general manager of secure card.
I want to thank Jason for his contributions and to recognize all of our employees for their support dedication and commitment as we continue to evolve as an organization.
We believe this realignment will further optimize our businesses and support future growth and continuing to serve our customers effectively and efficiently.
Turning to slide six I want to take a moment to update you on our progress against our strategic priorities. So far this year.
Beginning with our first priority deep customer focus.
We continue to listen to the needs of our customer and focus our energy on helping them deliver unique and differentiated solutions that elevate their customers experience.
One Great example is the launch of second wave, our dual interface capable payment card, which incorporates a core made with recovered ocean bound plastic.
We are proud of our leadership in this area, which enables CPI to be first to market with a product designed to reduce first use plastic and divert plastic waste from entering the ocean.
The environmental upside as powerful we estimate that for every 1 million second wave payment cards produced over one ton of plastic waste will be diverted from entering the world's oceans waterways and shorelines.
The end use cases compelling.
As this is a win for all involved.
First this is an important part of Cpis overall initiative to reduce first use plastic and to be more environmentally conscientious and our operations.
Second it uses upcycle plastic ways that would otherwise be ocean bound.
The increasing levels of plastic in our oceans threatens delicate ecosystems and our second wave innovation. It incorporates this material to help address the problem.
Third it provides our customers with a differentiated socially and environmentally relevant product that supports their sustainability commitments and is compelling for their customers.
In a recent Cpis survey of debit and credit card users conducted by an independent research from more than half of respondents indicated they would be willing to switch to another financial institution. If it offered cards made who have recovered ocean bound plastic and had the same features and benefits as their current cards.
Second wave provides financial institutions the opportunity to do just that.
Our second wave product is resonating with our customers concurrent with the launch of second wave we entered into an agreement with one of the largest us based card issuing financial institutions to provide second wave cards. In addition to current debit and credit financial payment cards.
Another example of deep customer focus is our approach to dual interface as our customers transition to dual interface cards, we strive to provide them with differentiated solutions, including dual interface capable metal and secondly payment cards, both of which are certified by two of the major payment brands.
Increasingly we see large financial institutions as well as small to medium issuers asking for dual interface financial payment cards.
We continue to be responsive to the specific needs of these customers and have seen dual interface card volume increased significantly year over year.
Our second strategic priority is providing market, leading quality products and five star customer service as we strengthened our position as a partner of choice.
With our card at once solution, we remain focused on our customers' needs.
The value added and convenience provided the SaaS based instant issuance solution enables us to continue winning new business with prospects, while increasing business with our existing customers.
Many of whom are expanding their instant issues programs across their branch networks.
Year to date, we have sold 1400, new card at once printers, which contributed to our continued growth this year.
Turning to our third strategic priority market competitive business model.
Third quarter operating margins were 11.1% of 450 basis points year over year, bringing year to date operating margins to 10.5%.
Year to date, adjusted EBITDA margins were up more than 200 basis points year over year.
These improvements are a direct result of our continued focus on price and process improvement efficiency and improved capabilities as we provide our customers with unmatched solutions innovation and World Class service.
In addition, we continue to experience the benefits of consolidating our personalization facilities from three to two and divesting our noncore businesses.
Now to our four strategic priority continuous innovation.
We continue to look for ways to enhance and further differentiate solutions for our customers by innovating and improving upon our successes.
With the launch of our second way payment card. We're now the first to market with a product specifically designed to reduce first use plastic by upside going plastics that would otherwise be ocean bound.
These cards in circulation today as financial payment cards, and we believe this innovative product can also provide a compelling in use case for other segments of the card industry, including transit hospitality entertainment retail consumer brands and their respective cardholders.
Turning to slide seven steadfast focus on our four strategic priorities generated strong progress in the third quarter and the first nine months of 2019.
We believe continued commitment to these priorities is key to delivering on our vision of being the partner of choice by providing market, leading quality products and customer service with a market competitive business model.
I'll now turn the call over to John low to review, our third quarter and year to date financial and operating results John .
Thanks, Scott and good morning, everyone.
Ill begin my overview of our results from the third quarter first nine months of 2019 on slide nine.
As a reminder, 2018 comparative results are on a continuing operations basis and exclude the UK business that was divested and reported as discontinued operation during 2018 as required by Us GAAP.
The April 2019 disposition of our Canadian business did not qualify as a discontinued operation under us GAAP and therefore the results from this business are included in the other segment.
Third quarter net sales were up 1% or 3% when excluding Canada on top of a strong comparable quarter in 2018.
Looking year to date net sales were up 10% year over year or 13% when excluding Canada led by 17% year over year increase in the us debit and credit segment, and a 2% year over year increase in the us prepaid debit segment.
Third quarter gross profit was $25.4 million up 9% year over year gross margin was 35.5% for the third quarter, an increase of 270 basis points year over year, marking our fifth consecutive quarter of improved year over year gross margins.
For the year to date, we generated gross profit of $69.3 million up $11.7 million were 20% compared to the same period in 2018.
We also expanded gross margins by 290 point basis points year over year from 30.8% in year to date, 2018% to 33.7% in the year to date 2019.
This gross margin expansion was driven by higher net sales leading to a more favorable cost absorption as smaller geographic footprint, having consolidated our personalization facilities from three to two and divested or non core business in Canada, and a more favorable product mix in the 2019 periods. This guy.
Both was partially offset by higher card mine material costs, driven primarily by product mix.
During the third quarter, we reported income from operations of $8 million up 70% from the third quarter 2018.
Third quarter operating margin increased 450 basis points year over year to 11.1%.
Year to date operating income was $21.6 million and operating margin was 10.5%. This includes the benefit of the 6 million dollar cash litigation settlement gain we discussed last quarter.
Excluding the $6 million gain year to date operating margins were 7.6% up nearly 500 basis points from 2.7% last year.
Turning to slide 10.
We generated a net loss of $700000 or a six cents loss per share and a net loss of $2.2 million or 20 cents loss per share during the third quarter and year to date 2019, respectively.
Both our improvements from the year ago periods.
Third quarter, adjusted EBITDA was $12.3 million up 34% from the $9.1 million, we reported in the third quarter 2018.
Year to date, adjusted EBITDA, which excludes the $6 million second quarter cash litigation settlement gain was $28.8 million up 31% compared with the same period in 2018 and already 6% in greater than our 2018 full year adjusted EBITDA of 27 one.
$1 million.
Turning to our segments on slide 11.
Third quarter Us debit and credit segment net sales were up 7% year over year to $51.5 million during the quarter. We've benefited from year over year increased net sales from personalization and fulfillment services a shift towards higher priced dual interface CMB cards, and a 21% increase in net sales from.
Hard at once.
Third quarter Us debit and credit segment income from operations was $8.9 million up 36% year over year income from operations benefited from reduced costs, resulting from the consolidation of our personalization facilities last year as well as higher net sales and a favorable mix of products and.
Services.
This was partially offset by higher card materials costs, driven primarily from product mix.
Year to date us debit and credit segment net sales were up 17% year over year to $151.5 million and income from operations was up 57% to $24.6 million.
For us prepaid debit segment net sales declined 3% to $20.5 million in the third quarter year to date net sales were up 2% year over year.
As a reminder, 2018 was a record year for the US prepaid debit segment and included significant net sales associate associated with new portfolio wins that did not recur in 2019.
In 2019 net sales for this segment have kept pace with a record year last year due in part to the timing of larger than expected customer sales in the first half as we supported existing customers through changing demands in the industry.
You asked prepaid debit segment income from operations was $7.8 million in the third quarter of 2019 down 7% from prior year on year to date basis profitability improved with income from operations of $18.5 million up 9% from that same period last year.
Year to date US prepaid debit segment operating margins were up 230 basis points compared to the same period in 2018.
Reflecting a more favorable product mix as well as cost benefits, resulting from improvements in operating efficiency.
As a reminder, with the April 1st completion of the disposition of the Canadian business. The results from our other segment no longer include the losses previously generated by this business nor the associated net sales.
Turning to slide 12.
Our cash balance at the end of the third quarter was $14.3 million as of September Thirtyth, we had $20 million available for borrowing on our revolving credit facility, bringing total available liquidity to $34.3 million at the end of the third quarter.
Third quarter cash used in operating activities was $2 million and included continued investments in inventory to support the growth of the business.
Capital expenditures during the third quarter were $600000, bringing adjusted free cash flow for the quarter to a negative $2.7 million.
We ended the quarter with total debt principal outstanding of $312.5 million.
As of September Thirtyth, our net debt leverage ratio was nine times, an improvement from 10.9 times at year end 2018.
As a reminder, our term loan matures in August 2022, and our revolving credit facility matures in August of 2020, we believe we have adequate cash and operating cash flows to support our business plan.
Looking at the markets, we continue to expect that us industry MB card volume will continue to grow driven by dual interface conversions, primarily from larger issuers and to a lesser extent small to medium issuers as we've been experiencing.
Ill now turn the call back to Scott for some closing remarks Scott.
Thanks, John .
Wrapping up we remain committed to our vision of being the partner choice by providing market, leading quality products and customer service with a market competitive business model over the last two years, we have sought to achieve this vision by executing on our four strategic priorities by first getting the company fit for growth and then in 2019.
Driving topline performance in profitability as we continue to focus on serving our customers well.
Our third quarter and year to date results show that we are successfully executing on the path we have laid out.
As we wrap up 2019 and look ahead to next year, we aim to capitalize on the successes, we've had scaling and growing through continued focus on our four strategic priorities and recent innovations.
We believe we are well equipped to embark on the next stage of growth as we continue to build upon our position as the partner of choice I.
I look forward to updating you on our progress.
Operator, you may now in the call.
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