Q4 2022 CPI Card Group Inc Earnings Call
Welcome to CPI card group.
Fourth quarter 2022 earnings call My name is Glenn and I'll be your.
Operator today.
If you're willing on the webcast you may advance the slides forward by pressing the envelope.
The call will be opened for questions. After the <unk> remarks.
If you'd like to get into queue for question Connie Press Star followed by one on tackling Keith.
Now I would like to turn the call over to Microsoft.
C P I head of Investor Relations Mike.
Thanks, operator, and good morning, everyone welcome to the CPI card group fourth quarter 2022 earnings webcast and conference call. Today's date is March eight 2023 and on the call today from CPI card group are Scott, Chairman, President and Chief Executive Officer, and Michael 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.
A discussion of such risks and uncertainties. Please see CPI card groups. 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 investors <unk> CPI card group Dot Com. In addition, cpi's Form 10-K.
Timber 31, 2022 will be available on Cpi's Investor Relations website, and now I would like to turn the call over to President and Chief Executive Officer, Scott Sherman.
Thanks, Mike and good morning, everyone. During today's call I will discuss Cpi's performance in 2022.
Thoughts on our initial outlook for 2023 and reiterate our long term strategy.
<unk> will review the financials Baltimore detail and then we'll open up the call for questions.
We will start on slide four.
22 was a great year for CPI, we increased sales, 27% for the full year to a record level of $476 million and we believe we gained significant overall market share.
We grew adjusted EBIT of 28% to $98 million, an increase the adjusted EBITDA margin slightly to 25% despite.
Despite significant inflationary impacts on costs.
We also improved our net leverage ratio in 2022, ending the year at three times and retired $25 million principal on our senior secured notes during the year.
And we enter 2022 on a high note with fourth quarter net sales, increasing 36% and adjusted EBITDA, increasing a 100%.
As we look back on 2022, there are four main drivers that were critical to our success.
First was our differentiated innovative products and services and end to end solutions.
Our market, leading quality and customer service.
Third our strong supply chain execution, while the industry faced challenges.
Fourth we benefited from a strong growth year for the card markets in the U S.
Our differentiated end to end solution, leading quality and customer service and strong supply chain execution, each contributed meaningfully to our market share gains.
One example was our innovative eco focused cards, which posted a 70% increase in sales for the year led.
Led by our cards made with recovered ocean bound plastic core we sold more than $40 million equal focus cards in 2022, bringing our total to more than 90 million sold since the launch in mid 2019.
Another example is our differentiated software as a service instant issuance solution card at once.
We delivered another excellent year for.
Growth was driven by new customer installations broad printer upgrade sales and ongoing services revenue.
At the end of the year card at once installations across the U S totaled more than 14000 customer locations.
Across our portfolio, our market, leading quality and customer service helped us gain more business with existing and new customers.
Including a prepaid where we added new customer types beyond the traditional retail channel.
In addition, we were able to significantly expand secure card production capacity during the year meet customer needs and to fulfill demand in the market.
And we believe our strong execution supply chain, including proactive inventory management during the year, while the industry was challenged also allowed us to gain more business in 2022.
As you May recall, we entered last year with strong customer demand, but faced significant supply chain and labor shortage challenges and the impact of inflation on our cost was escalated.
I would like to thank all of our employees for their dedication and effort to tackle those challenges.
And deliver a record year successfully increasing capacity navigating global supply chains and serving our customers.
Before I discuss our 2023 outlook I would like to also personally thank our mature schenkel for his strong contributions to our success.
Joining CPI.
I'm a tour has informed us he will be leaving the company. This year due to family related personal reasons, but well stay on while we search for his replacement to help transition the new CFO once an egg.
In addition to his role in helping us drive profitability and improve our financial position. Our mature has led us towards successful Sox compliance and further develop our financial organization.
As with our strong financial team.
Inventory will give some remarks and a further financial review in a few minutes, but first let's turn to our 2023 outlook on slide five.
For 2023, we're focused on continuing to execute on our strategies grow the business win share in the marketplace increased cash flow and reduce leverage.
We believe we are well positioned to continue to gain overall market share in 2023, with our portfolio of differentiated solutions and market, leading quality and customer service.
We anticipate continued benefits from the ongoing transition to contactless cards more progress on providing end to end solutions to small and medium sized issuers and further instant issuance penetration.
Our initial financial outlook for 2023 projects mid single digit growth for net sales with higher expected net sales growth in our debit and credit segment, which comprised 82% of net sales last year.
And prepaid debit segment net sales similar to the 2022 levels.
Net sales outlook reflects expectations for slower market growth in 2023 as last year benefited from robust customer demand we.
We anticipate issuers being more cautious regarding U S economic environment tightly managing spending and orders as they assess the consumer trends and their own inventory levels and potentially increasing credit underwriting standards.
Debit cards, which today make up the majority of the market tend to be less affected by economic conditions and historically around 90% of payment card issuance is for reinsurance in replacements. So we still expect the market to grow overall, but not as strong as 2022.
Also faced challenging comparisons with our 2022 performance as the 27% net sales growth last year benefited from significant contributions by large portfolio additions of existing customers.
Particularly eco focus cards.
<unk> card at once printer upgrade sales.
As we did last year, we'll remain nimble and ready to adapt as the market and economic conditions evolve and customer plans changed.
On the profitability side, we expect adjusted EBITDA growth for 2023 in the mid to high single digit range. Despite continued inflationary impact on costs as we managed expenses tightly and achieve more operating leverage in our debit and credit segment.
We're also focused on significantly increasing free cash flow and reducing our net leverage ratio, which <unk> will discuss in a few minutes.
Overall, we expect continued share gains followed growth another strong earnings year in 2023, as we continue the momentum we have established over the past few years.
Now, let's turn to slide six to discuss our long term strategy.
Over the past five years, we have consistently focused on four key strategic priorities.
Deep customer focus.
Market, leading quality products and customer service.
Can you with innovation.
And a market competitive business model.
Successful execution of these strategies has allowed us to gain market share create and expand market leadership in key categories and deliver strong financial results.
Since 2017, we have achieved compounded annual growth rates of 16% of net sales and 33% and adjusted EBITDA.
Over the same period, we have increased gross margins from 30% to 37% and reduced net leverage from over 12 times to three times at the end of 2022.
Some examples of strategy success in 2022 as mentioned earlier include winning new business with our innovative eco focus cards and prepaid solutions, expanding our SaaS based instant issuance distribution, providing personalization and print on demand solutions for fintech and enhancing our market competitive business model.
To improve capacity and reduced customer lead times following supply chain driven spikes throughout the industry.
At the end of 2022, we reorganized our structure to help us better execute our strategies going forward.
Typically we aligned secure card personalization and instant issuance under one leader, which we believe will optimize our ability to focus on providing in the installations for our customers.
We also created a leadership position dedicated to prepaid.
Physician focus on new growth opportunities, including new product and business development and digital solutions.
Some new product and business. Examples include providing prepaid payment cards for non retail channels, such as our health savings accounts and to support businesses that need to provide funds to gig workers and contractors.
We're also exploring opportunities for instant issuance solution beyond financial institution locations.
As with retailers.
To summarize execution of our strategic priorities has contributed greatly to our success over the past five years driving sales growth.
<unk> share gains and product diversification and operating leverage.
We believe there are many opportunities to further expand offerings and capabilities and drive growth in the years to come.
Now I will turn the call over to Amit first ankle to review, our fourth quarter and full year 2022 results in more detail on this work.
Thank you Scott and good morning, everyone.
Ill begin my overview on slide eight.
Fourth quarter, net sales increased 36% to $126 $4 million compared to the prior year quarter.
With strong growth across our debit and credit portfolio and in prepaid.
The debit and credit segment net sales increased 35% with strong contributions from contactless card personalization services card it wants instant issuance solution and various other products.
Prepaid debit segment net sales increased 39% compared with the prior year.
Driven by new customer additions outside the traditional retail channel and growth with existing customers.
Fourth quarter gross profit of $47 $5 million increased 54% from the prior year.
Gross profit margin increased from 33, 2% to 37, 6%.
Driven by operating leverage from sales growth, including benefits from price increases.
Partially offset by the impact of inflation on production costs.
Primarily on materials costs.
SG&A expenses increased by approximately $3 million in the quarter compared to the prior year.
Primarily to support our growth and strategic execution.
This includes approximately $2 million of increased compensation expenses.
Reflects higher head count and higher salaries, partially offset by a reduction in stock compensation expense up $500000.
Our tax rate was 19, 4% in the quarter due to some favorable adjustment items related to unrecognized tax benefits and state tax settlement, which brought our full year rate to 25, 7%.
The fourth quarter rate was down from 62, 3% in the prior year quarter, which included unfavorable adjustments related to state tax and uncertain tax position on items.
We projected tax rate of slightly less than 30% for 2023, excluding any adjustment items that may arise.
Net income in the fourth quarter increased from $700000 in the prior year to $12 $5 million in 2022, and adjusted EBITDA increased 100% to $27 $2 million.
Adjusted EBITDA margin improved from 14, 6% in the prior year to 21, 5% driven by operating leverage from the strong sales including pricing benefits.
Turning now to our year to date financial results on slide.
Net sales for the full year reached a record level of $475 $7 million, a 27% increase compared to the prior year.
By segment debit and credit segment sales increased 32%.
Prepaid debit segment increased 9%.
Do you have any credit sales growth benefited from strong sales of contactless cards, including large orders for eco focus cars.
Approximately 75% of our secure card volume in 2022 was from contactless cards up from just under 70% in 2021.
We estimate contactless penetration for the U S market ended 2022 at about 50% to 60% of cards in circulation and continue to expect the level to grow to more than 80% by 2025.
We also experienced strong growth in 2022 from card. It once it's in issuance solutions, which represented just under 10% of total company sales and get growth from personalization services contact cards and other products.
In prepaid we expected a challenging year in 2022 as the previous year benefited from significant retail inventory restocking and the addition of a large new customer portfolio.
Thanks to a very strong fourth quarter, we were able to grow the prepaid business, 9% in 2022 to another record level, driven by growth with new and existing customers and pricing benefits.
Overall pricing amounted to a low single digit contribution to the company's 27% growth for the year and to the growth of each segment.
We're secure cards, 80% of sales growth was due to volume with the remainder due to mix from the conversion to contactless and pricing.
Full year gross profit of $175 $8 million increased 24% from the prior year, while gross profit margin decreased from 37, 7% to 36, 9% due to inflationary impact on production costs, primarily materials, partially offset by operating leverage including the benefit.
The price increases.
SG&A expenses increased by approximately $15 million for the full year, primarily due to approximately $8 million of increased compensation expenses and approximately $3 $5 million of incremental professional services costs.
The compensation expense increase reflects increased headcount and salaries as well as approximately $2 million of additional stock compensation.
Partially offset by approximately $1 million of lower severance expense.
Full year net income increased 129% to $36 $5 million, primarily due to the sales growth and the impact of debt refinancing costs incurred in the 2021 first quarter.
Adjusted EBITDA increased 28% to $97 $7 million, while the adjusted EBITDA margin increased from 24% in the prior year to 25% in 2022.
The increase in adjusted EBITDA was driven by sales growth and the resulting operating leverage partially offset by increased production and SG&A costs.
Turning now to our segments on slide 10.
I mentioned the segment sales drivers. So I will just discuss segment profitability on this slide.
Income from operations for the debit and credit segment increased 68% in the quarter to $31 $2 million driven by the higher net sales and operating leverage partially offset by higher production costs primarily materials.
For the full year debit and credit segment income from operations increased 38% driven by the same factors as the fourth quarter.
Prepaid debit segment income from operations increased 35% in the fourth quarter to $5 $2 million driven by higher net sales and operating leverage these.
These benefits were partially offset by increased operating expenses, which also drove the prepaid operating margin decline in the quarter.
For the full year prepaid debit segment income from operations decreased 5%, primarily due to the inflationary impact on production costs.
The majority of the impact on materials and increased operating expenses, partially offset by higher sales, including the benefit of price increases.
Turning to the balance sheet liquidity and cash flow on slide 11.
We continue to strengthen our financial position in 2022, ending the year with a net leverage ratio of three times, we generated $31 $3 million of cash flow from operating activities during the year and invested $17 9 million on capital expenditures, which resulted in free cash flow of $13 5 million.
This was an increase from the $10 $2 million of free cash flow generated in the prior year period, Despite significantly increased capital spending in 2022 and prior year benefits of $9 $8 million related to tax cash refunds.
Accounts receivable balances increased $20 million during 2022 due to the strong sales growth in the fourth quarter.
Inventories increased $10 million during the year as we manage our business to support customer demand and a challenging supply chain environment, Although we reduced the inventory, it's $4 million compared to the end of the third quarter.
In the fourth quarter, we generated strong free cash flow of $16 $2 million on the balance sheet. At December 31, we had $11 million of cash and $5 million of borrowings outstanding on our $75 million ABL revolver.
We had $285 million senior secured notes outstanding at year end as we were doing $20 million of notes in the first quarter of 2022 and repurchased an additional $5 million in the open market in the fourth quarter.
Subsequent to year end, we were purchased another $5 million of notes in the open market in the first quarter of 2023.
Our capital structure and allocation priorities remain focused on maintaining ample liquidity investing in the business, including possible strategic acquisitions deleveraging the balance sheet and potentially returning funds to stockholders.
Consistent with these priorities, we continue to target further lowering our net leverage ratio over time.
Similar to last year seasonal working capital needs May increase net leverage in the early part of 2023, but we do expect the ratio to improve over the course of the year and end the year between two five and three times.
To reiterate our outlook for 2023.
We expect sales growth in the mid single digit range gained share in a slower growth market, we expect adjusted.
Adjusted EBITDA growth in the mid to high single digit range as we managed expenses tightly while still investing for the future and drive more operating leverage my debit and credit segment.
We expect to improve cash flow conversion and we project free cash flow to more than double from the $13 $5 million generated in 2022.
As always our first priority is to serve our customers business needs or the supply chain environment changes, we may prioritize additional inventory and walnuts.
Current outlook reflects strong working capital improvement and more than doubling free cash flow.
Within free cash flow, we expect capital spending to be similar to 2022 levels and we expect to improve our net leverage ratio to somewhere between two five times and three times by year end through EBITDA growth and net debt reduction.
We delivered record results in 2022, and further strengthen our financial position and we expect another year of progress and financial improvement in 2023, despite the more challenging environment.
I'm also pleased to be able to give you an update on our socks status.
Just on the results of our most recent evaluation has been determined and internal control over financial reporting is effective as of year end 2022, and the previously disclosed material weaknesses have been remediated.
We have devoted significant time and resources to strengthening our processes and controls and are pleased to have completed the remediation.
Finally, as Scott mentioned I will be leaving CPI this year due to personal family reasons.
I am proud of the accomplishments we have achieved the results we have delivered since I joined the company.
We have a strong financial team in place, which is well prepared to continue contributing to the company's success and I intend to stay on board to ensure there is an orderly transition to the new CFO .
As we look to the future I believe the company is well positioned to execute our strategies to drive continued growth and financial improvement I will now pass the call back to Scott for some closing remarks on slide 12.
Scott.
Thanks commentary.
To summarize 2022 was an outstanding year for CPI, we delivered strong sales and profit growth.
Countering inflation and supply chain challenges, we believe we continue to gain overall market share in a growing market.
We continue to provide innovative solutions and product enhancements delivered high quality and customer service and further diversified our product portfolio.
We made investments in process improvements to increase our capacity and advance our capabilities and.
And we improved our balance sheet and financial position.
Our 2023, we're focused on continuing to execute our strategies grow the business win share in the marketplace increased cash flow and reduce leverage.
Thank you for joining our call today, and we will now open up the call for questions.
Yeah.
Thank you Lynn.
We will now open the call for your questions. If you would like to ask a question. Please press star followed by one on tackling key personnel.
Asking your question. Please ensure your phone is mute locally.
With our first question from Jason Smith from Lake Street Capital Jason.
Jason Your line is now open.
Hey, guys. This is Max on for Jason Congrats on a really strong quarter.
Just let's jump.
Jumping to the guidance here sort of revenue outlook of mid single digits. I was wondering I know you guys don't guide quarterly, but I was wondering if you could help me maybe what the linearity throughout the year is it second half weighted or is this more balanced throughout the year.
Good morning, Matt This is Scott schier of and thanks for joining our call today.
We're we're confident with our guidance for.
For a variety of reasons don't break it into quarterly or color from that standpoint.
I mean, you can do it depends on customer demand and some other factors, but I would say overall Max we were very pleased with 2022.
We believe we're well positioned in 2023 and longer term to continue to gain share and grow.
And confident with the guidance and where we're heading.
Alright. Thank you and then so prepaid debit let's call. It flat for 2023 is this a function of slower customer additions or growth within existing customers or maybe Bob can you kind of help me out with the prepaid debit for 2023.
Yeah, we really like that business.
<unk> and 2022 we had a bit of a stronger than we anticipated revenues were up nine 9%. So in the fourth quarter in particular was strong so.
Just given the tough comp from 2022.
We're going to call 2023 flattish.
You will but again.
We think there's a lot of opportunity in that business to grow long term and also just some different use cases with prepaid whether it's for our health savings accounts.
We're supporting the gig economy. So there's other things that we're looking at you know just beyond the retail channels, where we have traditionally partake them.
Alright. Thank you and then the last one for me and I'll jump back in the queue just given the macro supply chain can you help me out what's giving you guys confidence you guys can secure supply maybe some puts and takes there. Thank you.
Yeah again, we've worked closely with our suppliers at the end of the day, we are reliant on them, but we'd like to strike close partnerships.
With one of our primary chip suppliers, we've reached into a long term reached or enter into a long term supply agreement.
Which gives us more comfort that we are going to have chips as we move forward again, they have to perform Max as you could expect but.
Just just given our strong supply chain team and working closely with our partners and vendors.
We feel like we will have the supplies we.
We need to move forward and serve our customers well.
Alright. Thank you and you were asked on the strong quarter guys.
Thanks, Matt Thanks for joining the call.
Thank you Matt.
As a reminder, ladies and gentlemen, if you would like to ask a question. Please press star one on pack them keep that now.
Let me try to ask your question. Please ensure you have moved to local needs.
With our next question comes from Chris Sakai from steam both capital pressure.
Your line is now open.
Okay, great. Thank you.
Congratulations on a good quarter guys.
Scott just a couple of questions for you.
I guess I'll start with the kind of the investor awareness of the company.
As you know your primary.
Publicly traded competitor.
<unk> recently got picked up coverage by a firm called compass points and other covered by J P. Morgan Compass point.
Need.
And BTG.
How many of these analysts have you guys reached out to see if they would be interested in picking up coverage of your company.
Yeah I'll let.
We've been working very hard on R&R Investor Relations program, and that's a critical priority for us between reaching out to potential.
Potential analysts attending conferences working really hard at that Mike.
<unk> has done a terrific job and Mike I'll, let you give some color commentary if the things you've been working on tubes.
Yes personally I mean, as you're aware we've talked to.
Many firms with many analysts that we've been engaged in and so we're hoping to get additional coverage at some point in the future.
Comparisons with other companies are challenging.
Some analysts are interested in crypto some analysts may have done for the sake of firms may participate in transactions with those companies, but we're talking to several atmos.
I actually think comparisons with this company or rather.
Not as difficult given that they are.
Roughly the same size.
And similar margins shouldn't similar leverage.
Very similar product line and the earnings contribution are almost entirely from a.
Card manufacturing so I think the comparison is rather apps and I would suggest that.
You guys have done a great job getting the leverage.
Where it needs to be providing conservative guidance hitting your numbers, but your stock is very erratic. As you are obviously aware you had that period last months, we're thinking two days your stock. So maybe 26, 27% on absolutely no news.
It does your shareholders a disservice when your stock exists in a vacuum of this nature, whereas I think with these four analysts that we mentioned in addition to Lake Street. You can have more attend you can get more attention you could get more focus on the company and you can allow.
An orderly share price so that if some investor wants to come in or to come out they could do it at a more reasonable price.
Alright.
We don't do that.
Yeah go ahead Mike.
Okay.
Yes.
We are repeating the same thing we don't disagree with you as I said, we're engaged with many analysts there's a lot of things that go into analyst coverage as you know.
But we're attempting to get more coverage and more awareness of the stock and we'll continue working on that.
Okay.
Another question for Scott can.
Can you elaborate further.
What what would it take.
For you to expand into the premium metal scarred.
And just given the margins that Youre your competitor in that space has why this is not an issue.
It's something that at least should be attempted by the company.
Yeah, I would say a couple of things.
First we've been razor focused on.
Four five key market segments.
And if you look over the last five years I think we've been incredibly successful with that with revenue growing at a 16% CAGR from 17% to 22 EBITDA growing at a 33% CAGR during that same period, our leverage as you're pointing to has gone down from over 12 times to three <unk>.
So I think the areas that we really focused on we continue to gain share and we gained significant share over that period of time.
With the metal card segments are heavy cards we.
We do partake in that.
It's not a major revenue source, obviously for us.
But we continue to have some product offerings, we generate some revenue from that.
That is.
A different lineup investments are significant investments that we need to be made and just trying to balance investments with investing in other areas. We have been very successful and also paying down our debt. So it's just a balance that we have to move forward and we think we've got the right strategies to move forward to continue to <unk>.
<unk> gained share.
Okay.
Okay.
And then lastly.
What is the incremental capital expenditures being.
Being used or can you give us a little color as to when you look at $17 million of Capex. What is what is the breakdown above what is kind of needed to operate the business.
Yes, I'm, sorry, I'll, let you go ahead and.
To answer that.
Yeah, we don't really provide a specific breakdown as it relates to those items, but.
Clearly as we think about kind of the expenditures that we have the capital it's typically always a mix.
Making sure that our capital stayed current on equipment stays current but then also investing for future items as well one thing that we've noted previously is that we do.
Did increase our ability to produce by 50% during 2022 and that was definitely a reason for some of the increase in the capital spend but as you might imagine.
In a business like ours. There's also renewal that has to take place as test time goes on as well.
Okay.
Got it.
Thank you for all your contribution and good luck with everything.
I will speak with you gentlemen.
Shortly offline.
Sounds great. Thank you.
Thank you.
Yes.
Thank you.
As a reminder, ladies and gentlemen, if you would like to ask a question. Please press star followed by one on half on keep her now.
Okay.
No.
We have no further questions on.
On the comments.
Yeah.
Yeah.
Yeah.
I will now hand back to the CPI team for closing remarks.
Okay. Thanks, everyone for joining us.
Hope you have a good day and that ends our call.
Yeah.
Yes.
Thank you.
<unk> and gentlemen, this concludes today's call. Thank you for China, you May now disconnect your lines.
[music].