Q1 2024 CPI Card Group Inc Earnings Call

Operator: Welcome to the CPI Card Group's 1st Quarter 2024 Earnings Call. My name is Kathleen, and I will be your operator today. If you are viewing this on the webcast, you may advance the slides forward by pressing the arrow button.

Welcome to the C. P. I card groups first quarter 2024 earnings call. My name is Kathleen and I will be your operator today if.

Operator: If you are viewing on the webcast you may advance the slides, we're worried by brushing the Io buttons.

Operator: The call will be opened for your questions. After the company's remarks, if you would like to get in the queue for questions. Please press star one and now I would like to turn the call over to Mike Salop C. P is head of Investor Relations. Please go ahead.

Operator: The call will be open for questions after the company's remarks. If you would like to get in the queue for questions, please press star 1. Now, I would like to turn the call over to Mike Salop, CPI's Head of Investor Relations. Please go ahead.

Operator: Okay.

Michael A. Salop: Thanks, Operator, and good morning, everyone. Welcome to the CPI Card Group First Quarter 2024 Earnings Webcast and Conference Call. Today's date is May 7th, 2024, and on the call today from CPI Card Group are John Lowe, President and Chief Executive Officer, and Jeff Hochstadt, Chief Financial Officer. Before we begin, I'd like to remind everyone that this call may contain forward-looking statements, as they are defined under the Private Securities Litigation Reform Act of 1995.

Michael A. Salop: Thanks, operator, and good morning, everyone welcome to the CPI card group first quarter 2024 earnings webcast and conference call.

Michael A. Salop: Today's date is may seven 2024 and on the call today from CPI card group are John Lowe, President and Chief Executive Officer, and Jeff <unk> Chief Financial Officer.

Michael A. Salop: These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statement. For a discussion of such risks and uncertainties, please see CPI Card Group's most recent filings with the SEC. All forward-looking statements made today reflect our current expectations only, and we undertake no obligation to update any 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 EBITDA, adjusted EBITDA, adjusted EBITDA margin, net leverage ratio, and free cash flow.

Michael A. Salop: 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.

Michael A. Salop: For a discussion of such risks and uncertainties. Please see CPI card group's most recent filings with the SEC. All forward looking statements made today reflect our current expectations only and we undertake no obligation to update any statements to reflect the events that occur after this call.

Michael A. Salop: Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in the press release and slide presentation we issued this morning. Copies of today's press release, as well as the presentation that accompanies this conference call, are accessible on CPI's Investor Relations website, investor.cpicardgroup.com. In addition, CPI's Form 10-Q for the quarter ended March 31st, 2024, will be available on CPI's Investor Relations website. On today's call, all growth rates refer to comparisons with the prior year period, unless otherwise noted. And now I'd like to turn the call over to President and Chief Executive Officer, John Lowe.

Michael A. Salop: 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. The most directly comparable GAAP measures are included in the press release and slide presentation. We issued this morning.

Michael A. Salop: Copies of today's press release as well as the presentation that accompanies this conference call are accessible on Cpi's Investor Relations website, investor about CPI card group Dot com.

John D. Lowe: Addition, cpi's Form 10-Q for the quarter ended March 31, 2024 will be available on Cpi's Investor Relations website.

Michael A. Salop: On today's call all growth rates refer to comparisons with the prior year period, unless otherwise noted and now I would like to turn the call over to President and Chief Executive Officer, John Lowe.

John D. Lowe: Thanks, Mike, and good morning, everyone. On today's call, I will give a brief overview of the quarter and our ongoing strategies. Jeff will go into more detail on the results and our 2024 financial outlook, and then we will open the call up for questions. Let's start with slide four.

John D. Lowe: Thanks, Mike and good morning, everyone.

John D. Lowe: On today's call I will give a brief overview of the quarter and our ongoing strategy, Jeff will go into more detail on our results and our 2024 financial outlook and then we will open the call up for questions.

Jeff: I'll start on slide four.

John D. Lowe: Overall, we're pleased with the first quarter performance, which puts us solidly on track to achieve our four-year net sales and adjusted EBITDA financial outlook. As we discussed when we reported our fourth-quarter results, we anticipated the first half of this year would be challenging as customers continue to work down their card inventory levels. While card sales declined as expected, this impact was partially offset by strong growth in our prepaid business, as well as from our instant issuance and card personalization services businesses within Debit and Credit.

John D. Lowe: Overall, we're pleased with our first quarter performance, which puts us solidly on track to achieve our full year net sales and adjusted EBITDA financial outlook as we discussed when we reported our fourth quarter results. We anticipated. The first half of this year will be challenging as customers continue to work down their card inventory levels.

John D. Lowe: <unk> sales declined as expected this impact was partially offset by strong growth from our prepaid business as well as from our instant issuance and card personalization services businesses within debit and credit.

John D. Lowe: This resulted in a total net sales decline of 7% in the quarter and sequential growth compared to the fourth quarter in net sales, net income, and adjusted EBIT. Compared to the prior year first quarter, we delivered gross margin improvement and relatively stable adjusted EBITDA margins, and also generated solid cash flow. Additionally, we made significant progress advancing our strategies in executing our share repurchase program. Jeff will go into more detail on our financial results in a few minutes, but first, I would like to briefly review our strategies on slide five.

John D. Lowe: This resulted in a total net sales decline of 7% in the quarter and sequential growth compared to the fourth quarter and net sales net income and adjusted EBITDA.

John D. Lowe: To the prior year first quarter, we delivered gross margin improvement and relatively stable adjusted EBITDA margins. It also generated solid cash flow.

John D. Lowe: Additionally, we made significant progress advancing our strategies and executing our share repurchase program.

Speaker Change: Jeff will go into more detail on our financial results in a few minutes, but first I would like to briefly review our strategies on slide five.

John D. Lowe: Our strategies reflect the opportunities to grow and gain share in our traditional businesses while also enhancing growth by expanding into adjacent markets, including digital solutions, over the long term. Our traditional portfolio includes secure cards, card personalization services, instant issuance solutions, print-on-demand, and prepaid solutions. Our goal is to continue to gain share in these markets by being the leader in customer service, quality, and innovation. One recent example is a contract we signed in the first quarter to expand the relationship with one of our larger customers, which will result in increased share and incremental sales over the life of the contract, which runs through 2029.

John D. Lowe: Our strategies reflect the opportunities to grow and gain share in our traditional businesses, while also enhancing growth by expanding into adjacent markets, including digital solutions over the long term.

John D. Lowe: Our traditional portfolio includes secured cards card personalization services.

John D. Lowe: In issuer solutions trends on demand and prepaid solutions. Our goal is to continue to gain share in these markets by being the leader in customer service quality and innovation.

John D. Lowe: One recent example is a contract we signed in the first quarter to expand the relationship with one of our larger customers, which will result in increased share and incremental sales over the life of the contract which runs through 2029.

John D. Lowe: It will take some time to transition the incremental business, but this agreement should aid our growth in 2025 and over the next several years. As we discussed last quarter, we believe we can supplement core growth over the next few years by expanding into additional markets that are adjacent to our core businesses today. There are two paths for this expansion.

John D. Lowe: It takes some time to transition the incremental business, but this agreement should aid our growth in 2025 and over the next several years.

John D. Lowe: As we discussed last quarter, we believe we can supplement core growth over the next few years by expanding into additional markets that are adjacent to our core businesses today.

John D. Lowe: There are two paths for this expansion.

John D. Lowe: OnePath is leveraging its existing customer base of thousands of financial institutions, most of which are small to medium issuers who rely on third parties for many of their payment services, to provide additional solutions and service offerings to help their customers with their payment needs. An example is digital push provisioning, where we can offer our customers the ability to let their customers seamlessly push their card credentials onto a digital wallet through their mobile banking app, which serves as a complementary offering to physical card personalization.

John D. Lowe: One path is leveraging our existing customer base of thousands of financial institutions, most of which are small to medium issuers, who rely on third parties for many of their payment services to provide additional solutions and service offerings to help their customers with their payment needs. An example, as digital push provisioning, where we can offer our customers.

John D. Lowe: The ability to let their customers seamlessly push their card credentials onto a digital wallet through their mobile banking app.

John D. Lowe: Which serves as a complementary offering to physical card personalization.

John D. Lowe: In the first quarter, we advanced this initiative, including signing a referral agreement with MEA Financial Enterprises, one of the national leaders in providing software solutions to US financial institutions. Through this agreement, we will have the ability to offer push provisioning services to MEA's mobile app users, which include approximately 300 financial institutions. This is one step in opening up the service to both existing and new customers.

John D. Lowe: In the first quarter, we advanced this initiative, including signing a referral agreement with NDA financial enterprises, one of the national leaders in providing software solutions to U S financial institutions.

John D. Lowe: Through this agreement we will have the ability to offer push provisioning services to EMEA as mobile App users, which include approximately 300 financial institutions.

John D. Lowe: This is one step in opening up the surplus to both existing and new customers. The second adjacent expansion path, both taking existing products and solutions to new customer types, such as health savings account payment cards and instant issuance for customers beyond the financial institution space.

John D. Lowe: The second adjacent expansion path involves taking existing products and solutions to new customer types, such as health savings account payment cards and instant issuance for customers beyond the financial institution space. Many of these areas will take some time to develop and drive customer adoption, but we believe there are substantial opportunities to supplement our core growth over the next few years. In the near term, we remain confident in the overall health of the U.S. card market.

John D. Lowe: Many of these areas will take some time to develop and drive customer adoption, but we believe there are substantial opportunities to supplement our core growth over the next few years and.

John D. Lowe: In the near term we remain confident in the overall health of the U S card market as you can see on slide six U S cards in circulation continue to grow the latest figures from visa and Mastercard show cards in circulation in the U S increased at a 9% CAGR for the three years ended December 31.

John D. Lowe: As you can see on slide 6, U.S. cards in circulation continue to grow. The latest figures from Visa and MasterCard show cards in circulation in the U.S. increased at a 9% CAGR for the three years ending December 31st and were up 7% compared to the prior year quarter. Our issuance trends continue to give us confidence that issuers will eventually need to replenish their inventories, which is consistent with the indications we're hearing from our customers.

John D. Lowe: And we're up 7% compared to the prior year quarter.

John D. Lowe: Card issuance trends continue to give us confidence that issuers will eventually need to replenish their inventories, which is consistent with the indications we are hearing from our customers.

John D. Lowe: The most recent quarterly earnings reports from the large banks have also demonstrated positive momentum for card brokers, and we expect the U.S. debit and credit market will continue to grow over the long term, aided by ongoing preferences for cards and the recurring nature of the industry, as well as trends toward higher-value eco-friendly and other contactless cards. Another recent data point on the ongoing adoption of contactless cards came from Visa, who stated in its latest earnings report that tap-to-pay penetration at the point of sale in the U.S. is nearing 50%.

John D. Lowe: The most recent quarterly earnings reports from the large banks have also demonstrated positive momentum for card programs and we expect the U S debit and credit market will continue to grow over the long term aided by ongoing preferences for cards and the recurring nature of the industry as well as trends towards higher value eco friendly and other contactless cards.

John D. Lowe: Another recent data point on the ongoing adoption of contactless cards came from visa to stated in its latest earnings report the tap to pay penetration at point of sale in the U S is nearly 50%.

John D. Lowe: We will continue to keep you apprised of market trends and our strategic progress, but I would now like to turn the call over to Jeff to discuss our first quarter financial results and 2024 outlook in more detail.

John D. Lowe: We will continue to keep you apprised of market trends and our strategic progress, but I would now like to turn the call over to Jeff to discuss our first quarter financial results and 2024 outlook in more detail Jeff.

Jeffrey A. Hochstadt: Thanks, John, and good morning, everyone. I will begin my overview on slide 8. The first quarter environment was generally what we expected for card volumes as customers continued to work down their inventory levels. Overall results improved compared to recent trends, as card declines were partially offset by strong growth in prepaid card-at-once instant issuance and other card personalization services. We also increased gross margins and generated solid cash flow in the quarter. However, overall, first quarter net sales declined 7%, net income decreased 50%, and adjusted EBITDA declined 8% compared to the prior year period.

Jeff: Thanks, John and good morning, everyone I will begin my overview on slide eight.

Jeff: The first quarter environment was generally what we expected for card volumes as customers continue to work down their inventory levels overall results improved compared to recent trends card declines were partially offset by strong growth in prepaid card that one.

Jeffrey A. Hochstadt: Issuance and our other card personalization services.

Jeffrey A. Hochstadt: <unk> increased gross margins and generated solid cash flow in the quarter overall first quarter net sales declined 7% net income decreased 50% and adjusted EBITDA declined 8% compared to the prior year period.

Jeffrey A. Hochstadt: The net income decrease was impacted by the final accrual for the previously announced Executive Retention Award and other costs related to the CEO transition, as well as a lower tax rate in the prior year period. However, our net leverage ratio was consistent with year-end at 3.1 times.

Jeffrey A. Hochstadt: The net income decrease was impacted by the final accrual for the previously announced executive retention award and other costs related to the CEO transition.

Jeffrey A. Hochstadt: As well as lower tax rate in the prior year period, our net leverage ratio was consistent with year end at three one times.

Jeffrey A. Hochstadt: sequentially, we posted increases in net sales, net income, and adjusted EBITDA compared to the fourth quarter, thanks primarily to growth in prepaid and the other services businesses. Turning to the detailed first quarter results on slide 9, the overall 7% sales decline was comprised of a 14% decrease in our debit and credit segment and a 26% increase in prepaid. Within debit and credit, both contactless and contact card sales decreased as expected compared to the prior year's first quarter.

Jeffrey A. Hochstadt: Sequentially, we posted increases in net sales net income and adjusted EBITDA compared to the fourth quarter, Thanks, primarily to growth in prepaid and the other services businesses.

Jeffrey A. Hochstadt: Those declines were partially offset by strong growth from card at once instant issuance solutions and other card personalization services. Increases in both processing fees and solution sales aided CARDatOnce as we continued to grow our installation base, while our other card personalization services sales benefited from strong demand for our print-on-demand services and incremental fintech business, including services related to tax refund cards. The increase in prepaid reflects both strong demand from existing customers, including for our leading Tamper Evident packaging solutions, as retailers continue to combat fraud and some timing between quarters.

Jeffrey A. Hochstadt: Turning to the detailed first quarter results on slide nine the overall, 7% sales decline was comprised of a 14% decrease in our debit and credit segment and a 26% increase in prepaid.

Jeffrey A. Hochstadt: Within debit and credit both contactless and contact card sales decreased as expected compared to the prior year first quarter. Those declines were partially offset by strong growth from card at once.

Jeffrey A. Hochstadt: Solutions and other card personalization services.

Jeffrey A. Hochstadt: Increases in both processing fees and solution sales aided card it wins as we continue to grow our installation base.

Jeffrey A. Hochstadt: Our other card personalization services sales benefited from strong demand for our print on demand services and incremental fintech business, including services related to tax refund cards. The increase in prepaid reflects both strong demand from existing customers, including for our leading tamper evident packaging solution.

Jeffrey A. Hochstadt: Retailers continue to combat fraud, and some timing between quarters.

Jeffrey A. Hochstadt: Gross profit in the quarter declined 4% from the prior year due to the sales decline. However, our gross profit margin improved from 35.7% to 37.1% due to lower production costs, primarily related to labor efficiencies and costs incurred in the prior year quarter when we transitioned our prepaid production facility workforce from temporary to permanent. SG&A expenses, including depreciation and amortization, increased $5 million from the prior year period, primarily due to increased compensation costs, partially offset by lower professional services fees.

Jeffrey A. Hochstadt: Gross profit in the quarter declined 4% from prior year due to the sales decline our gross profit margin improved from 35, 7% to 37, 1% due to lower production costs, primarily related to labor efficiencies and costs incurred in the prior year quarter, when we transitioned our prepaid production facility.

Jeffrey A. Hochstadt: For us from temporary to permanent.

Jeffrey A. Hochstadt: SG&A expenses, including depreciation and amortization increased $5 million from the prior year period, primarily due to increased compensation costs, partially offset by lower professional services fees.

Jeffrey A. Hochstadt: The compensation expense includes the final $2 million accrual related to the previous CEO's retention award, as well as some other CEO transition-related items that should come down over the course of the year, primarily relating to executive severance and stock compensation amortization from special grants issued in 2023. Compared to the prior year quarter, compensation expense also reflects increased salary costs and medical expenses. While the majority of the SG&A increase in the quarter was driven by compensation items that should decrease over time, we expect some of that benefit to be partially offset by strategic growth investments in the coming quarter. Our tax rate in the quarter increased to 28.7% from 20.7% in the first quarter of last year as the prior year period benefited from a favorable adjustment item.

Jeffrey A. Hochstadt: The compensation expense includes the final 2 million accrual related to the previous Ceos retention award as well as some other CEO transition related items that should come down over the course of the year, primarily relating to executive severance and stock compensation amortization from special grants issued in 2023.

Jeffrey A. Hochstadt: Compared to the prior year quarter compensation expense also reflects increased salary costs and medical expenses.

Jeffrey A. Hochstadt: While the majority of the SG&A increase in the quarter was driven by compensation items that should decrease over time, we expect some of that benefit to be partially offset by strategic growth investments in the coming quarters.

Jeffrey A. Hochstadt: Our tax rate in the quarter increased to 28, 7% from 28, 7% in the first quarter of last year as the prior year period benefited from a favorable adjustment items.

Jeffrey A. Hochstadt: Net income in the first quarter decreased 50% to $5.5 million, and adjusted EBITDA decreased 8% to $23 million. The adjusted EBITDA margin of 20.5% was down slightly from 20.7% in the prior year as the impact of lower sales and higher operating expenses was largely offset by improved gross margin. As mentioned, the net income decline also reflects the impact of the Executive Retention Award accrual and other CEO transition-related costs, which are not included in adjusted EBITDA, and a higher tax rate.

Jeffrey A. Hochstadt: Net income in the first quarter decreased 50% to $5 5 million and.

Jeffrey A. Hochstadt: Adjusted EBITDA decreased 8% to $23 million.

Jeffrey A. Hochstadt: Adjusted EBITDA margin of 25% was down slightly from 27% in the prior year as the impact of lower sales and higher operating expenses is largely offset by improved gross margins.

Jeffrey A. Hochstadt: As mentioned the net income decline also reflects the impacts of the executive retention award accrual and other CEO transition related costs, which are not included in adjusted EBITDA and a higher tax rate.

Jeffrey A. Hochstadt: Turning now to our segments on slide 10. I discussed the segment sales drivers earlier, so I will highlight segment profitability on this slide. Income from operations for the debit and credit segment decreased 24% to $22.8 million in the first quarter, driven by the sales decline and increased compensation expenses.

Jeffrey A. Hochstadt: Turning now to our segments on slide 10.

Jeffrey A. Hochstadt: I discussed this segment sales drivers earlier, so I will highlight segment profitability on this slide.

Jeffrey A. Hochstadt: Income from operations for the debit and credit segment decreased 24% to $22 8 million in the first quarter driven by the sales decline and increased compensation expenses.

Jeffrey A. Hochstadt: Prepaid debit segment income from operations increased 138% to $8.7 million, driven by sales growth at lower production costs, including labor efficiencies, as the prior year first quarter reflected additional expenses related to the staffing transition in our prepaid production facility. Turning through the balance sheet, liquidity, and cash flow on slide 11. For the first quarter, we generated $8.9 million of cash flow from operating activities and invested $1.5 million in net capital expenditures, which resulted in free cash flow of $7.4 million.

Jeffrey A. Hochstadt: Prepaid debit segment income from operations increased 138% to $8 $7 million driven by sales growth at lower production costs, including labor efficiencies as the prior year first quarter reflected additional expenses related to the staffing transition in our prepaid production facility.

Jeffrey A. Hochstadt: Turning to the balance sheet liquidity and cash flow on slide 11.

Jeffrey A. Hochstadt: This compared to operating cash flow of $8 million and free cash flow of $3.9 million in the prior year's first quarter. The higher generation of this year's period was driven by further improvement in working capital and lower net capital spending, as we expect CapEx to ramp during the course of the year. On the balance sheet, we had $17.1 million of cash, no borrowings outstanding on our $75 million ABL revolver, and $268 million of senior secured notes outstanding at quarter end. The net leverage ratio of 3.1 times was consistent with the year-end level.

Jeffrey A. Hochstadt: For the first quarter, we generated $8 $9 million of cash flow from operating activities and invested $1 $5 million and net capital expenditures, which resulted in free cash flow of $7 4 million.

Jeffrey A. Hochstadt: This compared to operating cash flow of $8 million and free cash flow of $3 $9 million in the prior year first quarter.

Jeffrey A. Hochstadt: The higher generation of this year's period. It was driven by further improvement in working capital and lower net capital spending as we expect capex to ramp during the course of the year on.

Jeffrey A. Hochstadt: On the balance sheet, we had $17 1 million of cash no borrowings outstanding on our $75 million ABL revolver and $268 million of senior secured notes outstanding at quarter end and our net leverage ratio of three one times with consistent with the year end level.

Jeffrey A. Hochstadt: 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 returning funds to stockholders. We have made good progress on our share repurchase program, buying back or committing to purchase approximately $6 million against our $20 million authorization through the end of the first quarter. We spent $1.25 million to repurchase 68,000 shares of common stock on the open market in the first quarter.

Jeffrey A. Hochstadt: 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 returning funds to stockholders.

Jeffrey A. Hochstadt: We have made good progress on our share repurchase program buying back or committing to purchase approximately $6 million against our $20 million authorization through the end of the first quarter.

Jeffrey A. Hochstadt: We spent $1 million to $5 million repurchased 68000 shares of common stock in the open market in the first quarter and early in the second quarter. We completed the purchase of an additional 244000 shares for $4 4 million.

Jeffrey A. Hochstadt: And early in the second quarter, we completed the purchase of an additional 244,000 shares for $4.4 million from our majority shareholder, pursuant to the stock purchase agreement announced in December. Under that agreement, we committed to repurchase shares from our majority shareholder at a ratio of 3 to 1 to the number of shares we repurchased in the open market from December to March at a price of 98% of the average open market repurchase price over that period.

Jeffrey A. Hochstadt: From our majority shareholder pursuant to the stock purchase agreement announced in December.

Jeffrey A. Hochstadt: That agreement, we committed to repurchase shares from our majority shareholder at a ratio of three to one to the number of shares we repurchased in the open market from December to March at a price of 98% of the average open market repurchase price over that period.

Jeffrey A. Hochstadt: We have a similar agreement for the second quarter that was signed in March. Turning to our 2024 financial outlook on slide 12. Today we are affirming the full-year net sales and adjusted EBITDA financial outlook provided in March. Specifically, we continue to project slight increases for the year for both net sales and adjusted EBITDA. We maintain our view that the market will gradually return to growth over the course of the year, and we expect sales declines in the first half of the year to be offset by growth in the second half, which will also reflect anticipated share gains.

Jeffrey A. Hochstadt: We have a similar agreement for the second quarter that was signed in March.

Jeffrey A. Hochstadt: Turning to our 2024 financial outlook on slide 12.

Jeffrey A. Hochstadt: Today, we are affirming the full year net sales and adjusted EBITDA financial outlook provided in March specifically, we continue to project slight increases for the year for both net sales and adjusted EBITDA.

Jeffrey A. Hochstadt: We maintain our view that the market will gradually return to growth over the course of the year and we expect sales declines in the first half of the year to be offset by growth in the second half, which will also reflects anticipated share gains.

Jeffrey A. Hochstadt: As John mentioned, we recently won a greater share with one of our large customers that will provide us incremental business and share over the next several years. However, this contract requires certain upfront incentives that will negatively impact our cash flow in 2024. Consequently, we have adjusted our full-year free cash flow outlet to be approximately half the 2023 level of $27.6 million, which reflects the increased capital spending we discussed in March, as well as the incentives related to this contract. We continue to expect our year-end net leverage ratio to be between 3.0 and 3.5 times. I will now pass the call back to John for some closing remarks on slide 13. Okay, John?

Jeffrey A. Hochstadt: As John mentioned, we recently, one greater share with one of our large customers that will provide us incremental business in share over the next several years. This contract requires certain upfront incentives that will negatively impact our cash flow in 2024.

Jeffrey A. Hochstadt: Sequentially, we have adjusted our full year free cash flow outlook to be approximately half the 2023 level of $27 6 million.

Jeffrey A. Hochstadt: Which reflects the increased capital spending we discussed in March as well as the incentives related to this contract.

Jeffrey A. Hochstadt: We continue to expect our year end net leverage ratio to be between $3 <unk> and three five times.

Jeffrey A. Hochstadt: I will now pass the call back to John for some closing remarks on slide 13, John Thanks.

John: Thanks, Jeff.

John D. Lowe: To summarize, we're pleased with the first quarter performance. Our prepaid, card at once, and other card personalization businesses helped offset expected debit and credit card declines in the quarter, and overall results improved sequentially compared to the fourth quarter. While challenges remain in the market, we're on track for the full year and have affirmed our net sales and adjusted EBITA. Card issuance remains healthy, as cards in circulation in the U.S. continue to grow, which gives us confidence the industry will return to more normalized dynamics once inventories are worked down.

John: Summarize we are pleased with first quarter performance, our prepaid card at once and other card personalization businesses helped offset expected debit and credit card declines in the quarter and overall results improved sequentially compared to the fourth quarter.

John D. Lowe: While challenges remain in the market. We are on track for the full year and have affirmed our net sales and adjusted EBITDA outlook.

John D. Lowe: Card issuance remains healthy as cards in circulation in the U S continued to grow which gives us confidence the industry will return to more normalized dynamics once inventories are worked down.

John D. Lowe: Long-term market trends are still strong, and we will continue to focus on gaining share in our traditional businesses by leading in customer service, quality, and innovation while increasing our addressable market through expansion into adjacencies over time. Operator, we will now open the call up for questions.

John D. Lowe: Long term market trends are still strong and we will continue to focus on gaining share in our traditional businesses by leading in customer service quality and innovation, while increasing our addressable market through expansion into adjacencies over time.

Speaker Change: Operator, we will now open the call up for questions.

Operator: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask a question and are listening via the loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, please press star 1 to join the queue. Your first question comes from the line of Jaeson Schmidt of Lake Street. Please go ahead. Any of you guys...

Speaker Change: Thank you we will now begin the question and answer session. If you have dialed in and we'd like to ask a question. Please press star one on your telephone keypad your hand and joined the queue.

Jaeson Allen Min Schmidt: I would like to withdraw your question. Thank you press Star one again.

Jaeson Allen Min Schmidt: Called upon to ask your question and listen thank via loud speakers.

Jaeson Allen Min Schmidt: Device. Please pickup your handset and ensure that your phone is not on mute when asking your question.

Operator: Again, Please press star one to join the queue.

Jaeson Allen Min Schmidt: Your first question comes from the line of Jason Schmidt of Lake Street. Please go ahead.

Jaeson Allen Min Schmidt: Hey, guys, thanks for taking my questions. I just want to start with that multi-year contract. How should we think about the size and scope of this? Is there a minimum volume level each year, or is that over the life of the contract? And I guess, relatedly, are there opportunities to pursue long-term contracts with other customers? Hey, Jaeson. Good morning.

Jaeson Allen Min Schmidt: Hey, guys. Thanks for taking my questions just wanted to start with that multiyear contract. How should we think about the size and scope of this is there a minimum volume levels each year or is that over the life of the contract and I guess relatedly are there opportunities to pursue long term contracts with other customers.

Jaeson Allen Min Schmidt: <unk>.

John D. Lowe: It's John here. Yeah, no. We're excited about it. It's a good deal. With one of our larger customers, it's a little bit more than a five-year deal. It actually goes through 2029.

Jaeson: Hey, Jason Good morning, John here.

Jaeson: Yeah, No. We're excited about it it's a good deal.

Jaeson: With one of our larger customers.

John: Little bit more than a five year deal actually goes through 2029.

John D. Lowe: And just for context, we do have contracts with a number of our customers, large and small, across the business. This one does provide committed values for the next five plus years. And it's a big win for us.

John D. Lowe: And just for context, we do have contracts with.

Jaeson: A number of our customers large small across the business. This one does provide committed values over the next five plus years and it's a big win for us.

John D. Lowe: We had to provide incentives on the front end to win this deal, but at the same time, we're getting fairly large committed volumes on the back end. So it's a share gain. And ultimately, we'll benefit from our definite credit side of the business over the next five plus years. Okay, that's great to hear.

John D. Lowe: We had to provide incentives on the front end to win this deal but at the same time, we're getting.

John D. Lowe: Early large committed volumes on the back end, so it's a share gain and ultimately will benefit our debit and credit side of the business over the next five plus years.

John D. Lowe: And it sounds like the prepaid segment was a little stronger than expected. Was this driven by a single customer, or was it a more broad base? Yeah, you know, the prepaid business has been performing pretty well over the last number of years. You know, it's less seasonal than it used to be, and there are a few things happening there.

John D. Lowe: Okay.

Speaker Change: Great to hear and it sounds like the prepaid segment with a little stronger than expected was this driven by a single customer or with a more broad based.

John D. Lowe: Yes, the prepaid business has been performing pretty well over the last number of years.

John D. Lowe: It's less seasonal than it used to be and there's a few things happening there one.

John D. Lowe: One, you know, we do see fraud as a greater challenge in the prepaid market. Our team does a good job of building out packages that protect against fraud. We can charge slightly higher prices for those types of packages, so that benefits us. We have been expanding in one of our adjacencies that we do out of our prepaid business, which is in the health savings account space.

John D. Lowe: We do see fraud is a greater challenge in the prepaid market our team does a good job.

John D. Lowe: Building out packages that protect against Rob we can charge.

John D. Lowe: Slightly higher prices for those types of packages so that benefits us.

John D. Lowe: Have been expanding in one of our Adjacencies that we do out of our prepaid business, which has been the health savings account space.

John D. Lowe: So that's been benefiting us. But the prepay business was strong. We did have a strong performance with one of our larger customers. But keep in mind, it's a lumpy business as well. So there's a little bit of timing there, but a good quarter for our prepay business. No, that's helpful. And just last one from me, and I'll jump back into Q.

John D. Lowe: So that's been benefiting us.

John D. Lowe: The prepaid business was strong we did have strong performance with one of our larger customers, but keep in mind, it's a lumpy business as well, so theres a little bit of timing, there, but but a good quarter for our prepaid business.

Speaker Change: No. That's helpful and just last one from me and I'll jump back into queue. When do you think the excess inventory situation will be fully resolved.

John D. Lowe: When do you think the excess inventory situation will be fully resolved? Yeah, you know, Jaeson, it's hard to put a specific point in time on when inventories will be completely worked out and normalized. But we did see, you know, our expectations met in terms of card performance in Q1. Card volumes were actually slightly up in Q1 from Q4. But keep in mind, there are other businesses that are, let's say, less susceptible to a certain extent.

Speaker Change: Yes, Jason it's hard to put a specific point in time on when inventories will be completely worked down a normalized.

John D. Lowe: But we did see.

John D. Lowe: Our expectations met in terms of card performance in.

John D. Lowe: In Q1 card volumes were actually slightly up in Q1 from Q4.

John D. Lowe: But keep in mind, our other businesses that are let's say less susceptible to a certain extent.

John D. Lowe: In our personalization services, that's our personalization issuance side, as well as our card-at-once instant issuance side. Both of those perform better than expected. We also had some tax season benefits on that side. So, you know, the card inventories, if you think about the broader market, cards in circulation are still really healthy. Nine percent growth over the last three years from a Kager perspective for Visa and MasterCard stats. And so we still feel that cards are, as they become worked down, and ultimately, we'll see the market normalize. But it's hard to put a specific date on when that will occur.

John D. Lowe: And our personalization services Thats our personalization.

John D. Lowe: Issuance side as well as our card at once.

John D. Lowe: Issuance side, both of those performed better than expected. We also had some tax season benefits on that side.

John D. Lowe: So the card inventories if you think about the broader market cards in circulation are still really healthy nine.

John D. Lowe: 9% growth over the last three years from a CAGR perspective for visa and Mastercard stats and so we still feel that cards or as they become work down ultimately we will see the market normalize, but it's hard to put a specific date on when that will occur.

Jaeson Allen Min Schmidt: Okay, understood. I appreciate all the color. Thanks a lot, guys.

Speaker Change: Okay understood I appreciate all the color. Thanks, a lot guys.

Speaker Change: Yes. Thank you.

Andrew Scott: Your next question comes from the line of Andrew Scott from Roth Capital. Please go ahead.

John D. Lowe: Your next question comes from the line of Andrew Scott.

Roth capital: From Roth capital. Please go ahead.

Andrew Scott: Hey, good morning, congrats on the strong results. And thanks for taking my questions. The first one from me here is on gross margin. You guys said there was some healthy expansion in the quarter, and I was wondering if that was kind of primarily due to mix, or if there were other efficiencies kind of mixed in there that that kind of helped drive the margin.

Speaker Change: Hey, good morning, Congrats on the strong results and thanks for taking my questions.

Andrew Scott: First one from me here is on gross margin you guys said some healthy expansion in the quarter and I was wondering if that was primarily due to mix or if there are other efficiencies kind of mixed in there that that kind of help drive.

Andrew Scott: The margin growth.

Jeffrey A. Hochstadt: Yeah, hi Andrew. This is Jeff.

Andrew Scott: Yes, Hi, Andrew this is Jeff.

Jeffrey A. Hochstadt: Yeah, I mean we did have a good quarter from a margin perspective, but you know most of it was really due to our production costs and really primarily related to labor efficiencies. If you recall Q1 last year, we transitioned our Minnesota facility from a temporary workforce to a more permanent workforce, and so we had some costs associated with that move. Obviously, we don't have those costs in this quarter, so year over year, we were able to improve margin from that standpoint.

Speaker Change: Yes, I mean, we did have a good quarter from a margin perspective.

Andrew Scott: But.

Jeff: Most of it was really due to our production costs and really primarily related to labor efficiencies.

Jeffrey A. Hochstadt: You'll recall Q1 last year, we transitioned in our Merrill Lynch.

Jeffrey A. Hochstadt: Minnesota facility from temporary workforce through a more permanent workforce and so we had some costs associated with that move obviously, we don't have those costs in this.

Jeffrey A. Hochstadt: This quarter, so year over year, we were able to improve margins.

Jeffrey A. Hochstadt: Also, just labor efficiencies across the board, we've been focusing on that, and you see some of that realization in Q1. Now, when you look at prepaid, you know that a lot of times when we grow sales, we get some operating leverage, operating leverage benefit, and so if you look at our prepaid business, we had strong growth there, and that generated some operating leverage. When you look year over year at debit and credit, we had sales decline, and so you had a lower margin year over year in debit and credit, but ultimately, those are the puts and takes, but across the board, it was really these labor efficiencies that drove the margin.

Jeffrey A. Hochstadt: From that standpoint, also just labor efficiencies across the board we've been focusing on that.

Jeffrey A. Hochstadt: You see some of that realization in Q1.

Jeffrey A. Hochstadt: No.

Jeffrey A. Hochstadt: You look at prepaid.

Jeffrey A. Hochstadt: A lot of times when we when we grow sales, we get some operating leverage operating leverage benefit and so if you look at our prepaid business, we had strong growth there and that generated some operating leverage when you look year over year at debit and credit.

Jeffrey A. Hochstadt: We had sales decline and so you have a lower lower margin year over year, and debits and credits, but ultimately those are the puts and takes.

Jeffrey A. Hochstadt: Across the board. It was it was really these labor efficiencies that drove the margin.

John D. Lowe: Great, thank you for the color. And my second question here is, so a lot of the ancillary services that you guys provide, you know, card at once and push provisioning, it seems like those areas have been strong. Just kind of want to talk about the MEA financial partnership you signed. How long does it take for a partnership for that to ramp up to kind of see some meaningful revenues, and are there other opportunities in the market spaces to sign a similar agreement?

Speaker Change: Great. Thank you for the color and my second one tier in size. So a lot of your ancillary services that you guys provide card at once and push provisioning seems like those areas have been strong just kind of wanted to talk about the EMEA financial.

John D. Lowe: The partnership we signed one kind of how long does it take for a partnership for that to ramp to kind of see.

John D. Lowe: Some some meaningful revenues and are there other opportunities in the market space.

John D. Lowe: Similar agreements.

John D. Lowe: Yeah, I mean, another good agreement we're excited about. MEA is a good provider of software solutions to financial institutions in the U.S., and what we're specifically working with them on is them being a mobile app provider for our push provisioning services. They have about 300 financial institutions that they service. That kind of creates our addressable market there. But just for context, you know, what we do on the push provisioning side is a little bit similar from a market, or addressable market perspective, if you will, to what we've done in our car-to-once instant issuance side over the years.

Speaker Change: Yes, I mean, so were.

John D. Lowe: Another good agreement we're excited about.

John D. Lowe: EMEA is a good provider of software solutions to financial institutions in the U S and what were specifically working with them on.

John D. Lowe: As then being a mobile app provider for our push provisioning services.

John D. Lowe: We have about 300 financial institutions that they service that kind of creates our addressable market there, but just for context.

John D. Lowe: What we do on the push provisioning side is a little bit similar from a market.

John D. Lowe: Restful market perspective, if you will to what we've done in our card it wants instant issuance side over the year. So as a reminder, our card at once business. We're in about 15000 branches across the U S.

John D. Lowe: So, as a reminder, our car-to-once business, we're in about 15,000 branches across the U.S. We have about 2,200 financial institutions that we've penetrated thus far. And that's taken us, you know, 9, 10 years to do that. So, you know, this is a slow growth kind of penetration, if you will, but it's a strong value proposition for our customers, and it's a good margin business for us as well. So, it's fairly early days, but we're excited about the deal with MEA and excited about what we're going to do on our broader digital solutions side.

John D. Lowe: We have about 2200 financial institutions that we penetrated thus far in <unk>.

John D. Lowe: That's taken US 19 years to do that so.

John D. Lowe: This is a.

John D. Lowe: Slow growth kind of penetration if you will but it's a strong value proposition for our customers.

John D. Lowe: It's a good margin business for us as well so it's fairly early days, but we're excited about the deal with NBA and excited about where we're going to do on our broader digital solution side.

Andrew Scott: And last for me, I know we're kind of in the early days of the Indiana facility expansion, but it seems like you guys might have a little more visibility on CapEx here in the year. Are there just any updates for you guys?

Speaker Change: Thanks I appreciate the detail now last from me I know, we're kind of early days in the Indiana facility expansion, but it seems like you guys might have a little more visibility on capex here in the year is there just any any updates you guys cannot can give us on the new facility.

Jeffrey A. Hochstadt: Yeah, we mentioned this in the last call. We expect about $5 million worth of CapEx related to Indiana this year. So that's still the case. Well, in the back half of the year, we'll probably have some OpEx also that hits the SG&A line. But that's what we expected so far, nothing different than what we...

Speaker Change: Yes, Yes, we mentioned in.

Andrew Scott: In the last call, we expect about $5 million worth of Capex related to Indiana.

Jeffrey A. Hochstadt: This year.

Jeffrey A. Hochstadt: So that's.

Jeffrey A. Hochstadt: That's still that's still the case in that back half of the year, we'll probably have some opex also.

Jeffrey A. Hochstadt: At the SG&A line, but thats.

Jeffrey A. Hochstadt: What we expected so far nothing different than what we expected at the beginning of the year.

Andrew Scott: Perfect. Well, thanks. Congratulations again on the strong results, and I'll hop back into Q.

Speaker Change: Perfect well thanks.

Speaker Change: Congrats again on the strong results and I'll hop back into queue.

Speaker Change: Thanks, Andrew.

Operator: Again, if you have any questions, please press star 1 on your telephone keypad. As there are no further questions in the queue, I would now like to turn the call back over to John Lowe for closing remarks.

Jeffrey A. Hochstadt: Again, if you have any questions. Please press star one on your telephone keypad.

John D. Lowe: As there are no further questions in the queue I would now like to turn the call back over to John Locke for closing remarks.

John D. Lowe: Thanks, Operator. Before we sign off, I want to acknowledge and thank all of our CPI employees for everything they do for our company and our customers every single day. We have outstanding teams who are dedicated and passionate about our business and results.

John D. Lowe: Thanks, operator.

John D. Lowe: Before we sign off I want to acknowledge and thank all of our CPI employees for everything they do for our company and our customers every single day, we have outstanding teams, who are dedicated and passionate about our business and results. Thank you all for joining our call. This morning, and we hope you have a great day.

Operator: Thank you all for joining our call this morning, and we hope you have a great day. Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Operator: Ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.

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