Q4 2019 Earnings Call

Turning to slide.

5

2019 was a year of growth through targeted initiatives our achievements in 2019 are Testament to our steadfast focus on being a partner of Choice by providing marketing of quality products and customer service through a market competitive business business model and crisp execution of our for strategic priorities.

First through our deep customer focused strategy, we strive to be the trusted partner and payments by exceeding the expectations of our customers through high quality and collaboration and delivering a differentiated and Innovative products and solutions.

Entering 2019. We stood ready with over ten years experience in dual interface card manufacturing to meet customers needs as they transition to dual interface during 2015. We executed well on this market demand which we believed contributed to our market share gains.

We collaborated with our customers allowing their needs and the markets they serve to inform our business which in turn enhance our ability to deliver value and help their businesses Thrive. We are providing our customers with Choice convenience and control through multiple products launched this year, including our second wave card featuring a core made with recovered ocean-bound plastic cup in 2019, as a result of our dual interface card manufacturing expertise and Innovative product offerings. We successfully built upon our relationship with one of the largest US based card issuing Bank financial institutions by committing to provide them with debit and credit cards along with our second wave card this resulted in our second wave card being the first recovered ocean-bound plastic card to Mom.

second

Through strong execution of our market-leading quality products and customer service strategy. We believe we gained market share across all of our business units while positioning ourselves to capitalize on Market opportunities. For example, we continue to win business with our market-leading car. Once software-as-a-service instant issue and solution ending 2019 with nearly 11,000 printers across approximately 1,600 financial institutions.

Pretty strong team work with multiple distribution Channel Partners including Harland Clarke as well as direct sales relationships. We sold over 2000 printers and printed over six million cards in 2019.

Our third strategy is continuous innovation. We collaborate with our customers to help them enhance their brands and provide them with differentiated products and solutions by being the first time it was second-wave a dual interface payment card featuring a core made with recovered ocean-bound plastique. We provide our customers with a distinct and Innovative way to serve a growing Market of environmentally conscious consumers. Well helping to address their sustainability objectives We Believe second wave has an outstanding value proposition and a strong use case for financial institutions with another customer segments including Transit Hospitality entertainment retail consumer Brands and their respective cardholders.

likewise as our

Customers in the market transition to contact list technology. We're providing them with multiple contact list products launched in 2019, including dual interface metal cards and adaptive are embedded contact with technology for payment objects.

In our car. Wants business, we continue to improve and enhance this market-leading software-as-a-service solution.

Our Innovative product capabilities and personalization including CPI and demand allow our customers to quickly personalize their engines or experience experiences through high quality and uniquely cup his cards carriers and collateral.

For a prepaid business we continue to innovate with market-leading secure card packaging Innovation and robust designs.

To put it simply through continuous innovation. We are winning new business and expanding Relationships by providing our customers with products and solutions designed to build their brands and differentiate their offerings off the market.

Our fourth strategy is Market competitive business model during 2019. We built upon our 2018 successes and implemented additional initiatives to enhance our business model and improve compatibility in 2019. And we significantly expanded margins year-over-year by continuing to focus on a number of initiatives. We realize the benefits of the consolidation of our personalization. Thursday is from 3 to 2 and the divestiture of our UK business and 2018 and our Canadian business in 2018. In addition. We continue to execute efficiency initiatives.

Turning to slide six as we enter twenty-twenty. We believe we are well-positioned to capitalize on Market opportunities including continued growth of dual interface cards in the US which generally have a higher selling price and strong demand for instant issuance and other innovative solutions such as second wave, we believe our 2019 success in growing through Target initiatives has this well positioned to continue to scale our solution diversify our products and expand our customer base to accomplish this we are focused on continued execution of our strategies.

our first

Strategy is deep customer focus. We will continue to keep our customers at the Centre of everything. We do strengthening and deepening our customer Relationships by delivering value to help our customers Thrive off.

Our second strategy is market-leading quality products and customer service. We continually raise the bar on delivering Innovative quality products while pursuing initiatives to ensure exceptional service took it easier to do business with CPI.

Our third strategy is continuous innovation. We will continue to partner with customers to enhance their brands and Achieve topic wallet status by offering products and solutions to support our customers initiative to differentiate.

Our for strategy is a market competitive business model. We will continue to focus on driving efficiency and productivity through process improvements operational automation technology and Equipment advancement.

Turning to slide seven as we enter twenty-twenty. We believe we are well-positioned to meet customer and Market demands through our strong portfolio of differentiated products and solutions. I'd like to take a moment to review how we're thinking about this with respect to our segments and products.

first with are you

Debit and credit segment which includes secure card card at once and personalization.

And our secure card business, we have a long history of manufacturing experience and a large and growing portfolio of innovative and differentiated products. We believe we are well-positioned to continue to wage in the market as the US continues to migrate to dual interface and contactless cards. We aim to further bolster our position in the market with our second wave cards, which offer a solution to support the sustainability initiatives of our customers entering 20/20. We plan to continue to win in the marketplace by collaborating with our customers and providing them with differentiated products and find Solutions.

Ricard at once we plan to build Upon Our market-leading instant issuance solution, which is the end of 2019 had nearly 11,000 printers in the field across approximately 1,600 financial institutions are customer friendly car. Once software-as-a-service solution eases the burden on our customers as we securely Managed IT set up support and maintenance for our web-based solution as a market leader. We believe we can continue to win new business particularly with respect to small and medium-sized financial institutions as we expand our pre-owned market across new relationships and verticals.

And are personalisation business. We have invested in broadening our product and solutions capabilities including CPI on demand. We believe we can win incremental business from our customers while expanding our customer base given our enhanced product and solution capabilities and high level of customer service.

For a prepaid segment. We believe our position is a market leader in our expanding portfolio of innovative solutions, including the use of differentiated card materials and secure and sustainable packaging capabilities enable us to win in the space.

In addition, we plan to build Upon Our Success in bringing more environmentally friendly solutions to our customers with the launch of our second wave product in 2019. We delivered a more Eco that is reliable durable high quality and meets payment brand certification requirements. We're investing behind the success to scale and support demand while also executing against our own new product development roadmap focused on providing more Choice convenience and control to our customers internally. We're executing initiatives that limit our impact on the environment and sustainability is one of our key values.

Only due to the operating leverage in our business model. We believe we can drive incremental profitability and strengthen our balance sheet as the Top Line gross.

Turning to slide AIDS in summary 2019 we executed well on our strategies and operating initiatives which resulted in strong top-line growth and significantly improved bottom line performance while providing more robust products and solutions for our customers as we enter 20/20. We look to build upon that Success Through steadfast commitment to achieving our vision of being a partner of Choice by providing market-leading quality products and customer service with a market competitive business model. We believe we are well-positioned to execute on our strategic plan as we keep our customer at the Centre of everything we do.

I will now turn the call over to John Lough to review our financial and operating results John. Thanks, Scott. Good morning. Everyone. I'll begin my overview of our results from the fourth quarter of year 2019 on slide tent as a reminder 2018 compared results are on a continued operations basis and exclude the UK business that was divested and reported as a 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 month or included in the other segment. We delivered strong sales growth in the fourth quarter full year 2019 net sales were up 6% and 9% year-over-year for the fourth quarter and full-year respectively, excluding the impact of the divested Canadian business net sales increased 9% in the fourth quarter and 12% for the full year.

2019

Some results were driven by sales of higher price dual interface DMV cards, including second wave and strong performance and personalization including card at once fourth-quarter. Gross wage is $22 million dollars up 5% year-over-year and gross margin was 30.3% directionally the same as the year-ago fourth quarter for the full year 2019. We generate a gross profit of 91.3 million dollars up 16% compared to 2018. We also expanded gross margins by over two hundred basis points off from 30.7% in 2018 to 32.8% in 2019.

Gross margin expansion in 2019 was driven by higher net sales and our us debit and credit segment creating greater leverage of our operating model a smaller Geographic footprint took a Consolidated or a personalization facilities from 3 to 2 and divested our non-core business in Canada. And it more favorable product mix in 2019.

during the

Order we reported income from operations of three point nine million dollars compared with the loss from operations of zero point four million dollars in the fourth quarter 2018.

2019 full year operating income was 25.5 million dollars and our operating margin was 9.2% This includes the benefit of the Six Million Dollar Cash litigation settlement game received during the 2019 second-quarter, excluding this 6 million dollar gain, operating margin was 7% up more than five hundred basis points compared to last year off turning to slide 11 our first fourth quarter 2019 net loss of two point 1 million dollars were a $0.19 loss per share was a significant improvement over the net box of 7.2 million dollars or a $0.65 loss per share in the fourth quarter of 2018 fourth-quarter adjusted ebitda. Was eight point eight million dollars down 74% from the fourth quarter of 2018 adjusted ebitda margin increased to 12.1% from 7.4% in the fourth quarter 2018 month.

these improvements were

And primarily by higher net sales, which delivered greater operating leverage in addition the fourth quarter benefited from lower corporate expenses, including the effects of divesting or Canadian business.

For the full-year Lost before income taxes was zero point seven million dollars compared to a 19.1 million dollar loss before income taxes in the prior-year after-tax net loss was 4.3 million dollars were a $0.39 loss per share. Both are meaningful improvements from 2018.

Who your 2019 adjusted ebitda was 37.6 million dollars up 39% compared with 2018 adjusted ebitda margins increased 13.5% in 2019 from 10.6% in 2018. These improvements were driven by higher net sales which delivered greater operating leverage as well as life expenses turning to our segments on slide twelve segment net sales were up 24% year-over-year to sixty one point six million dollars off during the quarter. We've benefited from strong sales of higher priced dual interface cards, including second wave and strong volumes from personalization.

fourth-quarter you

A step in and credit segment income from operations was eleven point four million dollars up 68% year-over-year income from operations benefited from higher net sales and a more favorable mix of products and services.

Who are u s debit and credit segment net sales were up 19% year-over-year to 213.1 million dollars driven by strong performance from Dual interface E & V cards and a personalization including card at once us debit and credit income from operations for the full year was up 61% to thirty six million dollars in operating margins increasing more than four hundred basis points to 16.9% year-over-year Improvement demonstrate the operating leverage in our business model and we're driven by strong performance from Dual interface cards and personalization including card at once looking at our us prepaid debit business as expected net sales for u.s. Prepaid debit segments were down year-over-year Thursday the 4th quarter and full-year as we worked again against tough year-over-year comparisons to the record net sales we posted in 2018.

fourth quarter

11.2 million dollars and sixty four point three million dollars for the full year

fourth quarter 2019 us prepaid debit segment income from operations was one point nine million dollars and operating margins were 16.8% down from five million dollars and twenty 9.3% respectively during the fourth quarter of 2018 due to unfavorable cost absorption resulting from lower sales full year 2019 u s prepaid debit segment operating margin strong and consistent with 2018 at 31.7% as a reminder with the April 1st, 2019 completion of the disposition of the Canadian business page. It's from our other segments no longer include the losses previously generated by this business nor the associated net sales.

Turning to slide 13 our cash balance at the end of the year was eighteen point seven million dollars cash provided by operating activities was three million dollars for the full year 2019 as a reminder. This result includes Investments of over ten million dollars in additional inventories to support growth in the business in addition cash from up activities also includes a six million dollar cash litigation settlement gain recorded in the second quarter cash outflows for Capital expenditures or 4.2 million dollars and adjusted free cash flow was a -7.2 million dollars during the year, we made significant investments in our business including in operational and information technology equipment it security and our people all together these Investments and purchased at least equipment and an inventory totaled over twenty million dollars.

Our capital structure. We ended the year with total debt principal outstanding of 312.5 million dollars as of December 31st, 2019. Our net debt leverage ratio is 18.0 times and improvement from 10.9 times a year in 2018 and 12.2 times at its peak on March 31st, 2018. Our term low temperatures in August of 2022.

Now I'd like to take a moment to discuss the new $30 credit facility. We announced this morning.

Over the last couple of years we have made significant progress in executing our strategic plan and expanding our top-line the Investments. We've been making in the business have played a key part in supporting strategy this new facility provides us with capital to continue to execute our strategic plan and provides us with cash as a revolving credit facility who is set to mature in August of this year. The new facility was led by a lender with whom the company has a long-standing relationship. The facility provides us with approximately twenty-seven million in net cash at closing time. There's interest at a floating rate and matures in May of 2022.

the impact of this

New facility to our net debt leverage ratio is minimal. Our revolving credit facility had no outstanding borrowings as of year-end or on the date of the close of the new facility. The Revolt was terminated on the closing date of the new credit facility.

We are pleased to receive the support of our lending partners and believe this new facility reflects their confidence in our business and our strategic plan.

As a reminder our business results fluctuate from quarter-to-quarter based on several factors, including customer order and patterns which can be lumpy as well as broader economic signal quality in a quarterly seasonality. For example, as we enter the first quarter of 2021 to remind you that our us prepaid debit segment net sales for the first quarter of 2019 Chef fitted from the timing of larger-than-expected customer sales as we support it existing customers through changing regulatory requirements in the industry.

in addition

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

On an ongoing basis, we proactively manage our business to mitigate risk CPI is closely monitoring the news and information available regarding the coronavirus to understand its potential impacts to our supply chain and operations.

Our ability to meet our customer commitments from this developing situation has not experienced an impact. We will continue to monitor the situation and take actions as needed.

Turning to slide 14.

Before I wrap up I want to give a few thoughts about our current outlook for the US markets in 2020.

First looking at our credit segment which includes secure card card at once and personalization.

Insecure card, we expect steady card manufacturing market growth. We also expect the migration to dual interface and contactless products will continue with strong growth and become a larger part of the overall Card Market.

Just recently in February Visa reported. They have 145 million tap-to-pay cards in the us up from $100 million tap-to-pay cards reported in September of 2019. In addition. They stated they expect these numbers to continue to grow to $300 million tap-to-pay cards in the US by the end of 2020.

or

Record at once we expect strong market growth in the number of small and medium-sized financial institution locations offering instant issuance.

For personalization, we expect low but steady Market volume growth in a small and medium-sized financial institution personalization Market driven by card reissuance has and the brake interface Market conversion.

For a prepaid debit segment, we expect the open-loop Prepaid Card Market to be directionally flat in 2020.

In summary the success we've had and driving our top loan growth and margin expansion underscores the operating leverage in our business model and our continued success in winning new business and market share. I look forward to updating you on our progress as we continue to execute on our strategies. I will now turn the call back to Scott for some closing remarks Scott. Thanks John off in wrapping up. I want to thank all of our employees for their commitment and dedication to delivering excellence and serving our customers. Well the results from this focused hard work underscore my confidence in our ability to continue to execute well for our customers and all of our stakeholders in 2020 and Beyond with the success, we've had over the last two years first in getting the company ready for growth and not going through targeted initiatives. I believe we are well-positioned to embark on our next stage of scaling are solutions diversifying our products and expanding our customer base through continued wage.

Fusion on our key strap

Jeez, I look forward to updating you on our progress operator. You may now end the call.

The conference has now concluded thank you for attending today's presentation. You may now disconnect.

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