CPI Card Group Inc. (PMTS) Q4 2018 Earnings Report, Transcript and Summary

Good morning, and welcome to the Fourth Quarter and Full Year 2018 CPI Card Group's Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jennifer Almquist, Investor Relations. Please go ahead.

Thanks, Carl and good morning everyone. Welcome to the CPI Card Group fourth quarter and full year 2018 earnings conference call. On the call today from CPI Card Group is Scott Scheirman, President and Chief Executive Officer; and John Lowe, Chief Financial Officer. Before we begin, I would like to remind everyone that this call may contain forward-looking statements as they are defined under the Private Securities Litigation Reform Act of 1995. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. For a discussion of such risks and uncertainties, please see CPI Card Group’s most recent filings with the SEC and on SEDAR. 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 EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjusted net income and loss, adjusted diluted earnings and loss per share, and free cash flow all reported on a continuing operations basis. Reconciliations of this non-GAAP financial measures to the most directly comparable GAAP measures are included in the press release we issued this morning Please be advised that the financial results discussed on the call today, reflect continuing operations and therefore exclude the results of CPI’s U.K. limited segment which has been accounted for as discontinued operations in accordance with U.S. GAAP. The pending sale of the CPI Canada subsidiary does not qualify as a discontinued operation in accordance with U.S. GAAP. Results for the Canada business as well as sales related cost incurred to date are reflected in the other segment. Copies of today’s press release as well as the presentation that accompany this conference call are accessible on CPI’s investor relations website, investor.cpicardgroup.com. Please note that this call will conclude after our prepared remarks. And now I'd like to turn the call over to Scott Scheirman, President and Chief Executive Officer of CPI.

Thanks Jen, and good morning everyone. Thank you for joining us today. I will begin my prepared remarks on Slide 4. We had a strong finish to the year with fourth quarter net sales up 19% year-over-year and adjusted EBITDA up more than 50%. For the full year, we delivered a 14% year-over-year increase in net sales and delivered a 17% percent increase in consolidated adjusted EBITDA. We posted record annual net sales in our prepaid debit segment. These results reflect solid execution against our plan and evidence our commitment to being the partner of choice by providing market leading quality products in customer service with a market competitive business model. Turning to Slide 5, 2018 was a transformational year for our business in many ways. During the year, our deep customer focus allowed us to strengthen our existing relationships and win new business. Our customer oriented and differentiated solutions as well as our capabilities in EMV and dual interface enabled us to win more business with existing clients and attract new customers in the marketplace. We renewed our contract with PSCU and expanded our Card@Once by broadening our installation base with existing and new customers. During 2018, Card@Once grew net sales more than 30% year-over-year. In prepaid, we were trusted by a large customer to support them as they executed on a key portfolio win, which helped contribute to annual net sales growth in our prepaid segment of 21% year-over-year. In addition, our market leading end-to-end solutions have enabled us to expand our presence in new verticals including Transit, FinTech, healthcare and buy online. As a result of our customer centric approach and crisp execution of our plan, we believe CPI gained or maintained market share across all of our U.S. businesses. Our focus on driving market leading quality and customer service resulted in industry award and new business with both existing and new customers. For example, our Card@Once solution won silver for product of the year at the Best in Biz Awards. This exceptional solution allows our customers to be more responsive to their customers by providing an in branch, immediate card issuance option and an easy software as a solution model that can be deployed quickly. Our prepay team's ability to adapt to the needs of an evolving business translated into a strong net sales growth in 2018. This is due to a culture of market leading quality, robust design and innovation, exceptional customer service, superior operational capabilities and new solutions including buy online. This level of excellence enabled us to deepen our relationships with customers and win in the marketplace. During 2018, we made strategic changes to our operating model, that we believed moved us towards a more market competitive business model. Early in 2018, we realigned our U.S. businesses that helped foster a culture of teamwork, innovation, accountability, and excellence that allowed us to better serve our customers. We optimized our footprint with three key initiatives throughout the year. Early in the year, we consolidated our personalization facilities from three to two, to create higher levels of efficiency and focus. In August, we divested our U.K. business to better serve our customers by concentrating on our core businesses, including secure card, manufacturing, personalization, instant issuance, and prepaid. And with the sale of our Canadian subsidiary set to close in the first half of the year, we believe, we are better positioned to support our customers and improve our profitability going forward. Our commitment to innovation also paid off this year. CPI metals, which took home a bronze medal at the 2018 American Business Awards opened new doors for us, yielding new business with existing customers, and allowing us to expand into new verticals such as Fintech. During 2018, we helped a key prepaid customer enhance their products in-store appeal and presence by collaborating with them on design and manufacturer of innovative, secured packaging. Our CPI in demand solution has helped us diversify our customer segment beyond financial services in the transit, healthcare and by online. Our success in 2018 and getting the business fit for growth, gives us confidence in our ability to capitalize on the opportunities in front of us. Turning to slide six, strategically our vision remains the same, to be the partner of choice by providing market quality products and customer service with a market competitive business model. In 2018, we made a meaningful progress in getting the business fit for growth. In 2019, we are committed to growth through targeted initiatives. To accomplish this, we will leverage our four strategic priorities as follows; First, deep customer focus, second, market leading quality and customer service. Third, market competitive business model and fourth continuous innovation. Starting on Slide 7. I will take a moment to walk you through our strategic priorities. First, deep customer focus. Put simply, we remain committed to keeping our customers at the center of everything we do, by partnering with our customers and allowing their needs to inform our business we enhance our ability to deliver value and help their businesses thrive. We will continue to make thoughtful investments into just distribute our customer’s needs, further strengthening and deepening our customer relationships and diversifying our revenue. To that end, we believe that we are ready to meet the expected uptick in demand for dual interface. Second, we remain focused on producing market leading quality products and solutions and five star customer service. Our objective is to provide high quality products and solutions, and reliable on time delivery through customer collaboration and a commitment to service and excellence. As we did in 2018, in 2019 this means continuously raising the bar on quality. We are pursuing initiatives to support exceptional customer service, enhance our customer's experiences and make it easier to do business with CPI. Operationally, this means continuing to build upon our successes, further instilling discipline and a culture of continuous improvement throughout the organization. Next, our market competitive business model. Having optimized our footprint, we're even more focused on driving greater efficiency and productivity throughout our core business. We do this by driving continuous improvement every day through process improvements, operational automation technology and equipment advancement and managing our procurement spending. By creating a dynamic and efficient operating model, we believe, we are better positioned to improve profitability and leverage our platform for growth and innovation. Lastly, we remain committed to continuous innovation, by making innovation a core competency we expand our opportunities to partner strategically with our current and potential customers and help them build their brands and achieve top of wallet status. Our objective is to offer our customers a portfolio of products and solutions to support their initiatives to differentiate themselves in the market. Turning to slide eight, in wrapping up we remain committed to our vision, to be the partner of choice by providing market leading quality products and customer service with a market competitive business model. We made solid strides in getting fit for growth in 2018. As we enter 2019, we believe we have the right strategies and plans to drive top line performance and profitability as we continue to focus on serving our customers well. In summary we have a plan. We executed well against that plan in 2018, and we believe we will execute well against that plan in 2019. I will now turn the call over to John Lowe to review our financial and operating results in more detail for the fourth quarter and full year. John?

Thanks Scott, and good morning everyone. On slide 10, you will see an overview of our fourth quarter and full year 2018 financial results. As a reminder, the financial results I'm sharing today are on a continuing operations basis as required by U.S. GAAP and exclude the U.K. business that was divested in 2018. Looking at the fourth quarter, total net sales increased 19% compared with the fourth quarter of 2017 inclusive of a 38% increase in product sales and a 5% increase in services revenue. The $11 million year-over-year increase in total revenue was primarily driven by increased revenue and volumes from CPI metals, dual interface, EMV cards, and Card@Once. These strong top line results in the final quarter of 2018 boosted [ph] full year net sales to $255.8 million, up 14% from the prior year. In addition to the factors driving the strong fourth quarter year-over-year increase, the full year also benefited from strong performance in our U.S. prepaid debit segment, which was up 21% year-over-year. Gross profit for the fourth quarter was $21 million, up 20% compared with the fourth quarter 2017. For the full year 2018, gross profit was up 15%. As a result of our year-over-year improvement in gross margins, and the success of our cost efficiency initiatives our SG&A cost declined 300 basis points as a percentage of revenue in 2018 compared to 2017. During the fourth quarter, we reported a loss from operations of $391,000 and a net loss of $7.2 million or $0.65 diluted share. For the full year 2018, we generated $4.6 million in operating income and a net loss of $14.8 million or $1.33 per diluted share. Now, let's review our non-GAAP metrics. Adjusted EBITDA for the fourth quarter of 2018 was $5.1 million, up 53% compared to last year. Adjusted EBITDA margins improved to 7.4% in the fourth quarter of 2018 compared with 5.8% in the fourth quarter of last year. On a full year basis, adjusted EBITDA increased 17% compared with 2017. Our improved adjusted EBITDA performance was driven by our focus on growing our top line and our ongoing cost efficiency initiatives as I discussed previously. Turning to Slide 11 for a look at the U.S. debit and credit segment results. U.S. debit and credit segment net sales of $49.6 million for the fourth quarter reflected a 24% increase from the same quarter a year ago. For the full year, U.S. debit and credit generated $178.6 million in revenue, up 10% from 2017. These results were largely driven by strong top line performance, from our emerging products and solutions, including CPI metals, dual interface EMV, and Card@Once. For dual interface, we saw an uptick in demand in the fourth quarter, and we believe, we are well-positioned to address emerging demand for tap-and-go cards as we enter 2019. For Card@Once our fourth quarter revenue was our best quarter on record, driven by the continued growth in our Card@Once installation base. EMV card volumes excluding CPI metals and dual interface EMV cards during the fourth quarter and full year 2018 increased 17% and 5% respectively while average selling prices declined on a year-over-year basis. Net sales of these products were down year-over-year for both the fourth quarter and full year of 2018. U.S. debit and credit segment EBITDA was $9.4 million in the fourth quarter of 2018. This was up 36% from the prior year fourth quarter when adjusting for the $17.2 million non-cash goodwill impairment charges taken in Q4 of 2017. On a full year basis, the U.S. debit and credit segment EBITDA was up 19% when excluding the prior year non-cash impairments I just described. Full year and fourth quarter 2018 U.S. debit and credit segment margins were both 19%, the solid improvement over 17.8% and 17.3% in the same period in 2017 respectively when excluding the impacts of the same non-cash impairments. Turning to Slide 12. Net sales for our U.S. prepaid debit segment were $17.1 million in the fourth quarter, up 6% when compared with the fourth quarter of 2017. Full year 2018 net sales for the segment were $69.2 million, an increase of 21% reflecting record revenue for our prepaid debit segment. Heading into 2019, it’s important to note this record was achieved in part, due to certain onetime projects that we do not expect will recur in 2019. Additionally, the nature of this business is lumpy due to seasonal customer orders and we expect this lumpiness to continue. Prepaid debit segment EBITDA was $5.4 million in the fourth quarter of 2018 . They own 3% from the prior year fourth quarter. On a full year basis, the prepaid debit segment EBITDA was up 26% year-over-year and yielded a 34% EBITDA margin, up from 33% in 2017. As a reminder, our business results fluctuate from quarter-to-quarter based on several factors such as what I described previously, including customer ordering patterns, broader economic cyclicality, and quarterly seasonality. Specifically, revenue and EBITDA has historically been lowest in the first quarter, and highest in the third quarter. This historically has resulted in the use of cash until late in the year, due in part to the seasonality of our business. Turning to our cash flow overview on Slide 13, we generated $8.9 million in cash from continuing operations in the fourth quarter of 2018 compared with $7.5 million in the prior year period. Fourth quarter free cash flow was $8.3 million. This lifted full year 2018 free cash flow to a positive $1.4 million up from $3.8 million use of cash in 2017. Looking at liquidity on slide 14. Our 2018 ending cash balance was $20.3 million. We ended the year with total debt principal outstanding of $312.5 million and $20 million available for borrowing on our revolving credit facility. Our term loan does not mature until August of 2022. Our net debt leverage ratio was 10.9 times at December 31,2018, an improvement from 2017. As we executed on our core strategies and grew our overall business, we ended the year with total available liquidity of $40.3 million at December 31,2018. As a reminder, we believe, we have adequate cash and liquidity to support our business plan. Turning to our view of the market on slide 15. We expect that U.S. enter the three EMV card manufacturing will grow in 2019, driven by dual interface conversion and contact EMV reissuances. For dual interface or tap-and-go, we expect card issuance to grow as a proportion of the market in the U.S. in 2019, but view the U.S. migration to dual interface as one that will occur gradually over the next few years. Over the small and medium issuer card personalization and fulfillment market, where CPI primarily competes. We believe the EMV reissue cycle will lag the larger market. As such, our expectation is that the market will be relatively flat in 2019. In summary, the successes we had in 2018 are evident in our improved year-over-year results. We believe these successes have better positioned us for continued success in 2019. We look forward to sharing our progress with you in the quarters ahead. I will now turn the call back to Scott for some closing remarks. Scott?

Thanks, John. Before we wrap up, I want to take a moment to thank our employees. Our successes in 2018 are a testament to the team's dedication to our customer centric culture and driving excellence throughout the organization. I'm encouraged by the team's commitment to achieving our vision and it underscores my confidence in our ability to deliver on our goals. Entering 2019, we remain focused on becoming the partner of choice for our customers by providing market leading quality products and customer service with a market competitive business model. We remain committed to our four strategic priorities, deep customer focus, market leading quality products and customer service, market competitive business model, and continuous innovation. Through continued execution on these priorities, we are confident, we can capitalize on the long term opportunities ahead of us. I look forward to updating you on our progress. Operator, you may now end the call.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. End of Q&A: