Good day, ladies and gentlemen and welcome to the CPI Card Group Inc. Quarter One 2016 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder this conference is being recorded. I would now like to introduce your host for today, Mr. William Maina, Investor Relations. Please go ahead.

Thank you, Andrew, and good afternoon, ladies and gentlemen. Welcome to the CPI Card Group First Quarter 2016 Earnings Conference Call. Participating on today's call from CPI Card Group are Steve Montross, President and Chief Executive Officer; and David Brush, 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. Please refer to disclosures at the end of the Company's Earnings Press Release for information about forward-looking statements that they may be made or discussed on this call. Please review the information along with our filings with the SEC and SEDAR for a disclosure of the factors that may impact subjects discussed on this call. 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 on or more non-GAAP financial measures including EBITDA, adjusted EBITDA, adjust EBITDA on margin, adjusted net income from continuing operations, adjusted diluted earnings per share from continuing operations, free cash flow and constant currency. Please see the earnings release on the CPI's web site for all the disclosures required by the SEC including reconciliations to the most comparable GAAP numbers. And now I'd like to turn the call over to Mr. Steve Montross, President and Chief Executive Officer.

Thanks Will. Good afternoon, everyone. And thank you for joining us today for our first quarter 2016 Earnings Conference Call. I’ll start with some operating and financial highlights from the quarter. Our US shipments of EMV chip cards increased approximately 6.6% from the fourth quarter of 2015 and increased 66.1% over the prior year period. Our net sales were $86.4 million up 11.7% over the prior year period. Adjusted EBITDA was $18.8 million, a 13.1% increase over the prior year period. Adjusted net income from continuing operations with $7.1 million or $0.13 per share and free cash flow was $13 million, up $7 million in the prior year period. On a segment basis, while our EMV card sales grew on a sequential basis from the fourth quarter of 2015 and were up strongly year-over-year. Our U.S. debit and credit results were slightly below expectations due to lower than projected EMV card purchases by our large issuer customers, which is something we’ll discuss further during the call. Our value-added services business lines in our U.K. limited segment or essentially in line with our expectations on the first quarter as was our U.S. prepaid debit segment as we recognize that significant product redesigns by major customer in the first quarter of 2015 would not be replicated in 2016. Dave will discuss our segment results in more detail later. I’m going to focus my comments on key trends in the U.S. EMV market and what they mean for our revised 2016 outlook. Through recent discussions with our customers and other important market participants, there are three adverse market trends that have become evident. Two of which concern the timing of EMV card sales in which we’ll have a significant impact on the EMV card production market in 2016 and third impacts market pricing.…

Thank you, Steve, and good afternoon, everyone. I will begin by summarizing the results of our first quarter 2016. I’ll then provide our current guidance for full year '16 before opening the call for questions. First quarter net sales were $86.4 million, up 11.7% from $77.3 million in the first quarter of 2015. Our net sales this quarter continued the benefit from the ongoing conversion in the U.S. financial payment card market from magnetic strip cards to EMV chip cards as well as continued demand from our customers for value added services. First quarter product net revenue grew 22.1% year-over-year to $55 million. Services net revenues decline 2.7% year-over-year to $31.4 million in the first quarter. The decline in our service revenue primarily reflects the year-over-year impact of a significant prepaid debit card refresh program that occurred in Q1 of 2015 offsetting solid growth in other areas of the segment. When you remove the $4.4 million year-over-year impact of the program refresh as well as 1 million of revenue related to the close Peter’s field facility. Services net revenue increased by 17% in Q1 2016. Now turning to the review of our segments. U.S. debit and credit segment net sales were 65.1 million for the first quarter, a 30% increase over the prior year period and segment EBITDA was $18.9 million or a 50.4% increase. The increase in revenue in EBITDA were predominantly driven by 66.1% year-over-year growth in EMV card shipments partially offset by declines in average selling prices. Our EMV card shipments for the first quarter increased 6.6% sequentially from the fourth quarter of 2015 to 41.4 million cards in the quarter. This was modestly below our original forecast driven by the market factors Steve discussed earlier. U.S. prepaid debit segment net sales were $12.3 million in Q1…

Certainly. [Operator Instructions] And our first question or comment comes from the line of Jim Schneider with Goldman Sachs. Your line is now open.

Thank you for taking my question. Guys I was wondering if you could maybe start with the sequence of events that kind of happen since the last Q4 conference call and what are the factors that you started to hear from your issuing partners. And what order they come in? And kind of give us a sense of how these factors came to play out in terms of your awareness of them? And I have a follow-up please.

Okay. Jim this is Steve. So, just going through the timeline, we saw slowing of orders as we got into the late first quarter. We saw a slowdown in orders and started to having more frequent discussions with the issuers about the slowdown in orders. And we had -- as you referenced, in our earnings call back in February, we had discussed this overstocking that took place in 2015. And so we were aware that through discussions with the customers and knew that was going to slow the first part of the year. Then in late March, we started seeing a slowdown in orders and we knew that the overstocking had taken place and part of it was in an assumption that we're seeing the impact because the amount of shipments that we had thus far in the first quarter and orders was fairly strong and as you know by the numbers, we shipped about $41 million in EMV cards in the first quarter which was sequentially up from the fourth quarter. So, the activities level is still pretty good, but as things started to slowdown, we assume that part of it was this overstocking and we started to having more frequent discussions with the issuers. And the issuers frankly were -- have been reluctant all along to really give the details in terms of what their own situation is. Part of it is competitive reasons, also part of it is that takes a while, knows organizations for the information to really funnel down. But as started having more discussions all through April with those issuers, the picture started to emerge that the overstocking in 2015 was far more significant than what we had been led to believe and what we understood by all of the information that we gathered.…

Okay. Then if in terms of pricing situation, can you maybe comment on what your revised guidance implies in terms of the pricing for EMV cards in both the small and larger issuer segments? And maybe talk about what we should be thinking about in terms of the gross margin impact due to that pricing. Is there a small impact or -- which is what you've kind of alluded to, or there could be a bigger impact? And how do we know that there's not a further downside on the pricing side as we head into the back half of the year?

Yeah, Jim, this is Dave. What I would tell you is that it's sort of in the range of $10 million to $12 million of pricing and it's substantially waited in the third and the fourth quarters. As we moved through the first quarter pricing, really right in line with what we expected and as we look at well on much smaller volumes, we look at the -- as a pricing for the second quarter. Again, it's right in line with what we expected as we began the year. I think when you look at the -- then the third and fourth quarter expectations, we're predicting a little bit forward about where we see pricing just giving current market activity, the current market activity is obviously being driven by people searching for volume at much lower levels. But as we predicted forward, it's really all around the large issuer segment. We haven't seen any real pricing pressure at all in that small and mid-size issuer segment. So, I guess, to specifically sort of address the magnitude of the pricing in and around the larger issuer segment when we put together our original guidance, we were sort of in the $0.87 range for that part of the market. I think as we predict forward for the -- what we could see in the latter half of the year, it’s a $0.15 to $0.20 reduction off of that. I think at the same time, we have already had discussions with chip suppliers on the chips that go into those cards and at those levels already have commitments on lower chip pricing that would maintain our margins even at those levels. So, I think what I can tell you as we said here today is our projection to the fourth quarter too conservative; one and two is a permanent decline in pricing or is it a more temporary situation just based on the current volume that's available into the marketplace.

So, then finally, just to be clear, are you saying that you don't anticipate gross margins to be down by the end of the year relative to where they are now?

What I would say Jim is that the second and the third quarters, the gross margins are going to be down off of where we would historically predict them, but that's more driven by volume and absorption at the margin level. We’ve adjusted indirect labor and the things that are variable that we can control, but I think margins in the second and third quarter will be impacted by just the low volumes on the same overhead. As we move into the fourth quarter based on our current projections of volumes and our current discussions on pricing and chip pricing, we would expect to see our gross margins back in that 36% to 37% range.

Okay. Thank you.

Yeah.

And our next question or comment comes from the line of Bob Napoli with William Blair. Your line is now open.

Thank you. I guess what is your buyback you have out there? What is the – how aggressively will you be with the buyback, share buyback?

Hi, Bob, it’s Dave.

Hi, Dave.

I think first of all as the share prices where they are at and below that it’s -- doing the share repurchase will be an accretive transaction for the company. We also believe that in the spirit of shareholder return, its good measure to have it out there. What I would tell you though is as we look at the 20 million and 2.8 million shares, we’re going to be measured in terms of how we spend that. I think we will be measured partly in terms of not just being very aggressive on the front end and secondarily just measured from a liquidity perspective as we move through the year to make sure that we’re in line with our current expectations and that we don’t spend well ahead of it.

Okay. And then just on dual interface I guess we’ve heard some rumblings that’s larger banks are looking at launching dual interface in U.S. I mean nothing definitive on that from what we’ve heard, but I men are you hearing, what are you hearing in the market with regard to dual interface, at this point?

Bob, its Steve. I’d say there is a range of views. There is one major issuer that as I mentioned that we’re in process of delivering on that pilot four right now. And then there is another major issuer that has taken the view that they are going to wait and see. And then there is a lot of activity in between. I can say that almost without exceptions everybody is in dual interface products on the roadmap. And they are going through the process of getting those products qualified, so they are ready. And while there is no one that has announced a major program that being said there are some issuers right now in the U.S. market that are issuing dual interface and so we have that activity, but that number of issuers is limited. No other major issuers have announced a dual interface program. We are coming out with one. But there are some issuers right now, including one major issuer that are issuing to dual interface cards. And so, there is activity Bob and increasing interest, I would say based upon our work around the products and qualifying products, it seems to be much interest in dual interface and starting that whole process of been prepared for dual interface issuance sometime in the near future.

And do you have any dual interface in your guidance, how much do you have in your guidance?

We have a little bit Bob, but I wouldn’t categories as meaningful think about it.

It is very small it’s not – it’s not – as Dave said it’s not meaningful Bob.

And it's in line…

I’d say –put it this way we are not counting on dual interface in 2016 at all. We’re doing all the missionary work so to speak around that and working with the customers, but we are not counting on dual interface to any meaningful extent.

Okay. And what is pricing on dual interface cards today?

Pricing is in the – it’s around $2 a unit.

Okay. And then just – I mean how confident are you that you have not lost market share, this is challenges in a market share challenge?

Yeah. We’re pretty confident we haven’t lost market share because we’ve been tracking very closely the sales that have taken place what issuers are preparing and through those discussions we’ve got a good sense of what the market is in the first quarter for instance and we believe that our market share was close to 40% in the first quarter. Now we are not projecting that through the whole year at all, but we’re looking very, very closely at the procurement by the issuers and tracking that very closely. So we’re comfortable that this isn’t suddenly this revision is a big share loss by us at all.

Okay. Thank you.

Thanks Bob.

And our next question or comment comes from the line of William Johnson with Raymond James. Your line is now open.

Yes. Good afternoon. So if we could just summaries here again, so three challenges inventory, SMB pricing pressure, how would you weight that again, let's say that revenues are essentially coming down by 100 million in this year 2016, so if have to assign a dollar value to each one or percentage to each one could you just hit that one more time for me please?

Yeah Wayne, this is Dave. I would – I think the number I quoted on pricing to Jim was in the 10 to 12 range. And then the issue on the large issuer or the inventory carryover and the delay and the small issuers is about 50-50 equally divided from a dollar perspective. From a unit perspective, obviously the small issuer delay at higher pricing and the little bit larger on the volume on the inventory delay off a bit smaller pricing.

Could you talk at all about what else you are seeing in the prepaid market over and above general and purpose cards?

Yeah. We’re – couple of things we are seeing in the prepaid market one is we’re seeing a lot of growth what we call the enterprise prepaid or I talked about it earlier as the B2B and B2C segments of prepaid. So that’s rewards in incentives it’s also a healthcare for instance and if these are in payroll would be another area. So, we are seeing strong growth in those areas. And it’s more specialized or customized offering that really demanded by the participants, but there is very strong growth there which is why we are investing to make sure that we have the capabilities to really serve those markets and so we are seeing excellent opportunity in those segments of prepaid. In terms of retail prepaid, we see still strength in GPR, gift is as you know seasonal, but we are seeing still good strength in GPR. Also what we’ve seen is a real concern by the program managers around fraud in the retail channel. And so there is a lot more focus on the secure packaging itself and how that can help them to combat that in the retail channel. But there is big concern and a big increase in prepaid or brought with prepaid cards. And so the program managers are concerned about that and taking steps to address that. Also we’ve been having conversations or discussions with the prepaid program managers about chip cards for the reloadable cards and we’re continuing to work with them on that. I think you probably know we’re already doing chip cards for prepaid cards up in Canada. And we are actually doing some dual interface cards prepaid cards up in Canada for one program manager. So we’ve already seen chip cards emerged in the prepaid space up in Canada. And again, we are working with several program mangers around qualifying a chip product for their reloadable products.

Great. Thank you very much.

Sure.

And our next question or comment comes from the line of Paulo Ribeiro with BMO Capital Market. Your line is now open.

Hi, good afternoon. I have a couple of questions. The first is very straight forward; in your EPS guidance for revised EPS guidance for the year, do you include any of the buyback?

No.

…for your EPS?

No. Sorry, Paulo I know you have some terms get in the press release, but we laid out the guidance on schedule up and just noted at the bottom of it that the revised guidance does not reflect the accretion impact of a share repurchase.

Perfect. That’s easy. Second question is in terms of what Steve said in US dividend credit that you expect this impact from lower EMV volumes in products, but not in service, did I get it right? And if I did does it mean that you are personalizing higher share of the existing cards, yeah just trying to you are producing or shipping less cards, but your service are not impacted, so just trying to understand that better?

Yeah. Paulo, this is Steve. Yes, we are seeing the decline or decrease in card manufacturing, the purchases or the demand in card manufacturing and we are seeing the increase in our personalization fulfillment business. And like we were talking about earlier with the issuers oh, I am sorry the processors in earnings calls were talking about the EMV tailwind and they see increasing activity and while we are seeing that same kind of increasing activity with our personalization and fulfillment operation around EMV. And that’s also a helping increase the results for our personalization fulfillment business. We had very strong results in the first quarter year-over-year, but just to give you a sense in the first quarter of 2015 we personalized, of all the cards we personalized in fulfillment first quarter less than 1% was EMV. And in the first quarter of 2016 approximately 52% of the cards that we personalized were EMV. So we have seen a big increase in EMV activity around the issuance if you will, but personalization and fulfillment business so in services.

I see. So just a quick try to follow-up that, so coming to 2017 and I know you are not giving guidance for that. But you said in the stage for one, if the timing issue for especially for the small issuers they are pushing 2017 and then personalization it does keep sustainable that increase degree of personalization percentage of personalization. You set up 2017 be stronger than you initially expected in U.S. dividend credit? Hello?

Yes, we would. But we absolutely -- with that small to mid-sized issuer business pushing out, we would expect that would have a positive impact on 2017 for us.

Okay perfect. I'll get back to the line. Thank you.

Okay. Thank you, Paul.

Our next question or comment comes from the line of Eric Ciura with Baird. Your line is now open.

Hey, guys. Thanks for taking my question. Just on the personalization, you guys called a pricing pressure from the large issuers on the manufacturing side, have you seen any pricing pressure on personalization? And then do you expect to see any in the latter half of the year?

No, in the personalization business, no, we haven’t seen any pricing pressure and we wouldn’t expect to see any. Personalization business that we have is heavily weighted to the small and mid-issuer and as Dave was mentioning, even on the manufacturing side, we haven’t seen pricing pressure in that small and mid-issuer segment. It's been really in the large issuer segment as where we've seen the pricing pressure and where we expect to see it in the second half of the year. But we don't expect to see pricing pressure in the personalization business.

Okay. And then secondly on potentially M&A opportunities, you mentioned that during the call, I guess what types of things are you guys still looking for and how big could they potentially be given -- using free cash for potential buybacks and the dividend?

Yeah. The things that we would looking for looking are -- we would really be looking to complement our services to build -- continue to build out our service offering. And so that would be number one priority as something that will strengthen -- obviously strengthen our offering for our customers if we also get into a new niche for it; that would be very attractive. But the focus has been services. We've got -- we believe we've got excellent manufacturing capacity and therefore really looking at service side of things and how we can continue to really build and strengthen the service side of the business. So, that would be the number one priority for us.

Okay. Thanks guys.

Thank you, Eric.

And at this time, I'm showing no further questions or comments. So, with that said, I would now like to turn the conference back over to President and CEO, Mr. Steve Montross for closing remarks.

Okay. Well, I thank everyone for your participation in the earnings call today. And we know that we're going to have follow-up discussions with a number of you over the next few days and we look forward to those discussions and we also look forward to communicating with you next quarter in our earnings call. Thanks for participating, have a good rest of the day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may now disconnect. Everyone enjoy the rest of your day.