Welcome to the CPI Card Group’s Fourth Quarter 2021 Earnings Call. My name is Bailey, and I will be coordinator for today. The call will be open for questions after the Company’s remarks. [Operator Instructions] I would now like to turn the call over to Mike Salop, CPI’s Head of Investor Relations. Please go ahead.

Thanks, operator, and good morning, everyone. Welcome to the CPI Card Group fourth quarter 2021 earnings webcast and conference call. Today's date is March 8, 2022, and on the call today from CPI Card Group are Scott Scheirman, President and Chief Executive Officer; and Amintore Schenkel, Chief Financial Officer. Before we begin, I'd like to remind everyone that this call may contain forward-looking statements as they are defined under the Private Securities Litigation Reform Act of 1995. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. 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. 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-K for the year ended December 31, 2021, will also be available on CPI’s Investor Relations website. And now, I’d like to turn the call over to President and Chief Executive Officer, Scott Scheirman.

Thanks Mike and good morning everyone. During today's call, I will provide an overview of CPIs performance in 2021, give some thoughts on our strategy, future, and 2022 expectations. Amintore will review the quarterly and annual financial results in more detail. Then we will open up the call for questions. Overall, as we will look back at 2021, we deliver very strong performance for the year. Net sales increased 20% raising our compounded annual growth rate in sales to 14% over the last four years. The profitability has improved that even a greater rate than the top-line, moving from a net loss of $22 million in 2017 to 2021 net income of $16 million, and adjusted EBITDA exceeding $76 million, which translates to a compounded annual growth rate of 35% over the past four years. We believe our high quality and innovative products and solutions have propelled us to significant outpaced market growth over the past four years. In addition, we believe our team's ability to navigate the supply chain and labor environment has given us a competitive advantage. Some of the highlights from 2021 include strong sales from new customer additions as our comprehensive end-to-end solutions helped us gain the business from FinTechs customers as well as traditional financial services providers. We also continue to help facilitate the U.S. market's gradual transition to higher priced contactless cards. We believe approximately 40% of the estimated $2 billion financial payment cards outstanding in the U.S. at the end of 2021 were contactless with small-and mid-sized financial institutions well below that level. For CPI, almost 70% of the secure cards we sold in 2021 were the higher average selling price contactless cards, which was up more than 10 percentage points from the year and contributed to our operating margin growth. Secure cards…

Thank you, Scott, and good morning, everyone. I will begin my overview of 2021 with the fourth quarter results on Slide 7. Fourth quarter net sales of $93.2 million represented an increase of 11% compared to the prior year quarter, driven by an 11% increase in our debit and credit segment and a 6% increase in the prepaid debit segment. The debit and credit segment increases primarily due to the ongoing transition to higher price contactless cards, including strong growth in our eco-focused cards, strong increases in Card@Once instant issuance solutions and new customer growth. Prepaid debit segment growth in the quarter was driven by higher volumes with existing customers. As we noted in our third quarter earnings release, we expect the fourth quarter sales growth and profit margins would not be as strong as the first nine months. And we expected increased labor, materials and certain other costs to be more impactful than earlier in the year. We did see those factors materialized and impact our fourth quarter results. Our fourth quarter 2021 gross profit of $30.9 million was essentially flat with prior year, while gross profit margin decreased 360 basis points to 33.2%. The decrease in margin was primarily driven by higher labor costs and to a lesser extent increased freight and material costs with declined partially offset by offering leverage from sales growth. SG&A expenses increased by $3.4 million in a quarter compared to the prior year, primarily due to $1.3 million in increased consulting and accounting cost related to Sarbanes-Oxley and increased healthcare and other employee related expenses. We are continuing to work on remediation efforts regarding identified internal control deficiencies, so we do expect incremental stock costs to continue into 2022. Our plan is to complete remediation by the end of the year. Employee healthcare…

Thanks, Amintore. As mentioned overall 2021 was another strong year for CPI with growth across our portfolio. I would like to thank all of our employees for working hard to deliver these results. Since implementing our vision to being the partner of choice and payment solutions by providing market leading quality products and customer service for a market competitive business model, we have now posted four consecutive years of strong sales and profitability growth and believe we have gained significant overall market share over that time. We are well positioned in attractive growing markets with strong capabilities and customer relationships. Although, the industry continues to face near-term labor and supply chain related challenges, we have various initiatives that we expect to benefit from in 2022. We are also pleased to be able to pay down $20 million of our senior notes in the first quarter of this year, and we will continue to pursue capital strategies that provide value to our stockholders. We are excited about our long-term growth opportunities and we look forward to updating you on our progress as we move forward. Thank you for joining our call today and we'll now open the call for any questions.

Thank you. [Operator Instructions] Our first question today comes from Jaeson Schmidt of Lake Street. Jaeson, please go ahead. Your line is now open.

Hey guys. Thanks for taking my questions. Scott, you mentioned factoring in capacity and material constraints into your outlook, which makes complete sense, but just curious if you could quantify the impact or the amount of demand do you think you're unable to be satisfied just given these current dynamics?

Yes, again, I won't give you specifics, Jaeson, and I appreciate you joining the call today. But if I just walk you back through our guidance to kind of give you some color on that, again for the Company we guided mid-single digit revenue growth, mid-single digit adjusted EBITDA growth, but it's the tale of two business units. And in our debit and credit segment for sure, demand is generally higher than our outlook, but to your point, we do have some constraints with supply chain and labor and working hard with our partners and our suppliers to alleviate that. But customer demand is very strong, and debit and credit segment it's robust, but we'll continue to work through that. The other business unit is, is prepaid. Prepaid has been a great business for us. We have strong customer relationships. It's a business in really good shape, but it had a record 2021 where sales were up 25% due to two primary factors. One is COVID inventory replenishment that happened in '21, and then with one of our partners, we want a large portfolio. And so, there was some initial stocking there. The good news that'll be reoccurring business as we move forward, but prepaid has a tough comparison in '22 versus '21. So, we see the sales of prepaid for '22 to be somewhere between what we did in 2020 and 2021. But again, I'd come back to customer demand is really strong. We properly gain market share over the last four years. That's our objective on a go forward basis. And we believe our high quality, our differentiated products such as eco-focused cards, our SaaS-based issuance solution, prepaid quality innovative packaging, all those things we believe will help us to continue to win share.

And then, just looking at gross margin, understand the dynamics that impacted Q4, but given sort of the supply chain and labor costs, which likely will persist at least here in the near-term. How should we think about gross margin trending here in 2022? And relatedly, are you able to pass along some of these inflationary costs?

Yes, to your second question, we are passing along the inflationary costs. And so what, I'd probably take it back to just broadly, our guidance where we guided the mid single-digit adjusted EBITDA growth, but also, we believe our 2022 margins will be similar to our 2021 margins that were 20.4%. And so, there were some things of expected in the fourth quarter with labor and inflation and so forth. But to your question on customer pricing, many of our pricing initiatives are going into effect in the first half of 2022, also we believe, the sales we generate the operating leverage will be helpful to the gross margins and also to the adjusted EBITDA. And then we're also like, we always have, is continuing to try and drive efficiencies off of operational and improvements. And so, we're quite comfortable that who you believe our 2022 adjusted EBITDA margins will be similar to 2021 full-year of 20.4%. And knowing Jaeson, that gross margins kind of a number in between sales and adjusted EBITDA right, but it's kind of all the things work together to drive strong margins as we move forward.

And just the last one from me and I'll jump back into queue. I mean, you mentioned taking share over the past few years, I assume you expect that to continue going forward. But just curious, if you've seen any change in the competitive landscape and I guess specifically sort of with the rumor surrounding IDEMIA?

Yes, I won't speak to any specific competitor, but clearly that there are some competitors out there that are struggling in the marketplace. And it's evident that over the last four years, we've gained share, we significantly outpaced the market growth. [Indiscernible] broadly, I feel there's two reasons we're gaining share, a variety of reasons for share, but [Audio Gap] strategic decisions we made to purchase inventory we spent. Our inventory increased over $33 million in 2021, as Amintore mentioned on the call. So I believe we've got very strong quality with the quality of our products, on-time delivery. We've been able to -- I believe navigate the supply chain better than some of our competitors. But the second thing that I think is critically important too is, we have really got some innovative and differentiated products that are in high demand in the market to give you a couple examples, one is our eco-focused cards. Again, financial institutions have ESG goals. All of us with consumers once, the businesses -- we do tidbit business with to be more environmentally conscious. So our eco-focused cards are clearly differentiated. We sold 50 million of both since we launched them in 2019. And more importantly in 2022, we believe sales of eco-focused cards will be up over 50%. Another key, just as an example of a differentiated product is, our SaaS based Card@Once instant issuance. It is clearly the market leader for SMEs. There was no one that is even a close second in my opinion. And with that business, it’s great business in that, it's plug and play, it's easy for the bank or the credit union to use. We get initial revenue from the sales of the machine, but it's got a great reoccurring revenue model with a click charge. Every time a card is printed, we earn a fee, there's fees for some consumables, center driven thing of that nature, so highly differentiated, but I'd also hop to our prepaid business, record sales year in 2021 with 25% growth. But again, high quality there, we've got innovative packaging that is helped to prevent fraud, drive [Indiscernible] a consumer pull that package off [Indiscernible] versus somebody else's package. So again, we do see competitors struggling. I believe our quality, our proactive strategy with inventory supply chain management, and then just our highly differentiate products are allowing us to win over of the last four years. And I'm really confident that our objective is to continue to gain market share as we move forward.

[Operator Instructions] The next question today comes from Joseph Thomas from Voya Investment. Joseph, please go ahead.

Hi. Good morning. Quick question on how you see margins progressing through the year. I mean you've noted, that pricing, higher pricing is coming into effect during the first half. Does that imply margins will be stronger than the second half versus first half? And I have a follow up?

Yes, I would -- the color I would give you is we provided full your guidance. So, any given quarter there could be some variability both in sales and margins, and it could relate to the timing of on-boarding customers. Our prepaid business has seasonality in the third quarter that's generally the highest demand going into the holiday season. Some of it can be when the pricing initiatives kick in or investments we make. So, I don't want to give you specific color quarter by quarter, but I think the important thing is that on a full year basis for 2022, we expect our adjusted EBITDA margins to be similar to 2021 adjusted EBITDA margins of 20.4%.

Perfect. Okay. And, uh, from a leverage standpoint what is your target leverage change?

If I just walk you back through our priorities for our capital; first is to have ample liquidity; second is to and this has to in the business including if there's acquisitions that would make sense for us. The third item to your question, Joseph is reducing our leverage. Our leverage at the end of the year was about 3.8 churns. Today, we announced we're paying down the senior secured notes by $20 million. So, I would describe that we would like our leverage to be less, compared to where it was at yearend, but I think the other important thing to keep in mind is that, we have a much improved financial condition compared to about a year ago, stronger balance sheet. So that really gives us, I'd say more strategic flexibility, whether that's to make more investments in the business or acquisitions, paying down the debts or returning funds to shareholders. If we were to do that that would likely be through stock buyback. So again, I'd like the leverage to be less, but I don't have a target that we want to share publicly, just so that as we move forward, we got some flexibility with investing in the business, acquisitions and including reducing the leverage and returning funds to shareholders.

Okay. And, thank that. That was helpful. And final question from me, obviously working capital was a headwind last year. If you had to stock inventory, how do you see working capital move this year?

Yes. I'll let Amintore, our Chief Financial Officer walk you through our thinking there.

Yes. Joseph, I think, one of the things that's a little difficult to predict this year is, when you think about kind of the inflation and supply chain issues that exist out there, those were obviously two key drivers that caused us to increase our inventory investment and ultimately inventory kind of caused our working capital to be a use of about $17 million. And that was a primary driver, but we're going to continue to kind of monitor supply chain situations out there. We anticipate that increases would not be as high as what we had in 2021, but that clearly will be something that we’ll continue to monitor out there. The key for us is making sure that we're managing the business well and continue to grow our sales and our profits overall. But I do think 2021 was kind of a year that was a bit unique in terms of us having to build up our inventory reserves in order to make sure that we had appropriate inventory in order to make sure we can deliver on what we’re planning to deliver here in 2022.

The next question today comes from Bill Charters from Sabal Capital. Bill, please go ahead.

If I look at guidance that kind of implies a little over $2 of earnings, maybe $2.40, if you normalize that what that comes out to is roughly a 20% free cash flow yield at this point. And I believe in your indentures, you have ability to buy 20 million of stock. I didn't know if the 20 million of buying bond reduced that amount, but I guess that's my first question. And then the follow-up to that question obviously is, with the 20% free cash flow, I would strongly encourage you to buy stock because there's a very few return out that you can get better to feed 20%.

Go ahead, Mike.

Yes, I was going to say the bond redemption does not affect the basket available for the share purchase.

And I appreciate your input on how we should utilize our capital. So, I appreciate that for sure, Bill. Thank you.

There are no further questions registered. So I'd like to hand the call back over to Mike Salop-for closing remarks.

Thank you. I'd like to thank everybody for joining our call today. Feel free to contact the Company or myself, if you have any follow-up questions. I hope everyone has a good day. Thanks.

That concludes today's CPI Card Group fourth quarter earnings call. Thank you. You may now disconnect your line.