Welcome to CPI Card Group's First Quarter 2021 Earnings Call. My name is Charlotte, and I will be your operator today. [Operator Instructions]. Now I would like to turn the call over to Mike Salop, CPI's Head of Investor Relations.

Thanks, operator, and good morning, everyone. Welcome to the CPI Card Group's First Quarter 2022 Earnings Webcast and Conference Call. Today's date is May 5, 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-Q for the quarter ended March 31, 2022, will 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 CPI's performance in the first quarter, update our 2022 expectations and review our long-term strategy. Amintore will review the quarterly financial results in more detail, and then we will open the call for questions. We are pleased with our start to the year as we increased sales 25% to $111 million, which is record quarterly sales level since we became public in 2015 and significantly improved our margins from the fourth quarter levels. First quarter growth was driven by our debit and credit segment with particular strength from contactless cards, including the related personalization services and our Software-as-a-Service-based Card@Once instance issuance solutions. Our contactless card growth was driven by sales of eco-focused cards as we sold over 10 million of these cards in the quarter. Our selection of innovative eco-focused card solutions presents us opportunities to gain market share as industry adoption continues to grow and provided the incremental revenue benefit of selling higher average priced contactless cards. Card@Once also once again grew faster than the company overall. This SaaS-based instant issuance solution not only provides us initial product sales upon installation, but also offers us ongoing annuity model of service and consumable revenue. Our prepaid segment sales were flat compared to the prior year, which is a good performance given the exceptionally strong first quarter in 2021, which benefited from a significant new portfolio addition. As a result of the strong sales growth overall, we were able to deliver increased adjusted EBITDA in the quarter compared to the prior year despite cost pressures and comparisons with a very strong margin in the first quarter of 2021. Thanks to the strong first quarter sales performance, additional inventory purchases and improvements in our production capacity, we…

Thank you, Scott, and good morning, everyone. I will begin my overview on Slide 7. First quarter net sales increased 25% to $111.4 million compared to the prior year quarter, driven by a 32% increase in our debit and credit segment. Debit and credit segment growth was primarily due to increased sales of higher-priced contactless cards, including related personalization and strong growth in our eco-focused cards and strong increases in Card@Once instant issuance solution. Prepaid debit segment sales were flat compared with the prior year as the 2021 first quarter benefited from significant onboarding of new customer portfolios. As we have noted in the outlook we provided in March, we expected prepaid debit sales to be between the 2020 and 2021 levels due to the record year the segment delivered in 2021. Based on our current outlook, we now expect prepaid sales to be only slightly below 2021 levels. First quarter gross profit of $39.3 million increased 10% from the prior year while gross profit margin decreased from 40.1% to 35.3% due to the inflationary impact on materials and labor costs. Gross margin increased 200 basis points from the fourth quarter 2021 levels due to operating leverage from higher sales. SG&A expenses increased by $3.7 million in the quarter compared to the prior year primarily due to $2 million of increased compensation expenses and $800,000 of increased consulting and accounting costs related to [Sarbanes-Oxley]. SG&A was $16 million in the first quarter of last year before increasing to approximately $20 million per quarter the rest of the year as we began incurring soft compliance costs and increased compensation expenses. Net income in the quarter increased 149% to $6 million, primarily due to the impact of debt refinancing costs incurred in the 2021 first quarter as well as increased sales growth…

Thanks, Amintore. Overall, I am pleased with the business performance to start the year. Customer demand remained strong, and we were able to execute in a challenging environment to deliver a 25% sales increase in the first quarter. As always, I'd like to thank all of our employees for working hard to deliver these results. We have updated our 2022 outlook to reflect higher sales expectations and a higher top end of the range for adjusted EBITDA despite labor, supply chain and inflationary pressures and uncertainties. We are also pleased to have completed the redemption of $20 million of our senior secured notes in the first quarter and expect improved cash flow for the remainder of the year. We're excited about our long-term opportunities, and we look forward to updating you on our progress as we move forward. Thank you for joining our call today. And we will now open the call for any questions.

[Operator Instructions] Our first question comes from Jaeson Schmidt from Lake Street.

Congrats on some really impressive results. Just wanted to start with kind of Q1. Sorry if I missed it, but was there any demand that you were unable to fulfill because of the supply chain backdrop? And then I guess relatedly, just given how strong Q1 was, are you at all concerned about any sort of pull forward in demand?

Jaeson, this is Scott. I appreciate you [indiscernible]. Customer demand is very strong, it's very robust. So clearly in Q1, we have great results, but still have [indiscernible] some material. So yes, we could have sold more in Q1 [than what we did] [Indiscernible] customer, and is very strong and very robust. The second part of your question on pull forward. I would say there may be some. However, we broadly work very closely with our customers in planning [indiscernible], if there is any need as we have appropriate capacity and [indiscernible]. So as we have worked with our customers, I know there are customers who have got more projects that we can provide today some, its obviously [indiscernible] pull forward in the market today.

Okay. That's really helpful. And then looking at the prepaid segment, sort of the upward vision here, is that being more driven by just overall improving market conditions or share gains or I guess, a combination of both?

I think it's a couple of things. I'd first say just the customer demand has been a bit stronger than what we had anticipated, call it, 60 or 90 days ago. But I think more importantly, it really just speaks to our product set. Our team in Minneapolis does a great job up in Minnesota. The quality is very high. Our Prepaid solutions are very innovative with our packaging. It helps prevent fraud, but it also helps drive [shells] appeal. So I think just being a market leader here, customers continue to turn to us and we continue to -- over time, we've got new programs and continue to win share of wallet with our customers. So very pleased with that business.

Okay. Perfect. And then just the last one for me, and I'll jump back in the queue. Really nice rebound in gross margin, I know the situation is fluid with supply chain and lots of dynamics going on. But is it fair to think about sort of that 35.3% being the low watermark for the year?

Jaeson, what I'd probably guide you towards is the top line outlook we've provided and the EBITDA guidance -- adjusted EBITDA guidance that we’ve provided. We've mentioned that there still is a bit of uncertainty out there. We're in a very dynamic environment with inflation, low unemployment levels, supply chain challenges and so forth. But I would say with the outlook we've provided, we are quite confident in the top line growth and our outlook and the adjusted EBITDA guidance that we've provided today.

[Operator Instructions]. Our next question comes from the line of Kartik Mehta from Northcoast Research.

Scott, I was hoping to get your perspective upon what you think could happen in the business or have you seen any pressure from the business if banks start making underwriting standards more stricter because of what's happening in economy? And have you seen any signs of that?

Kartik, I have not seen any signs of that. In fact if you look at the banks who have reported in the first quarter of 2022, their underwriting has been robust. They're issuing more cards. In fact, Visa and MasterCard over the last 3 years have said on an average annual basis, cards outstanding are up 8% per year, it's pretty robust. So we have not seen any pullback on that. I think one thing that's really important in our business, about 600 million cards are issued every year. 90% of that is really driven by reoccurring issues. So it could be a lot -- stolen credit cards. It could be fraud, it could be just a normal reoccurrence cycle. So the good news in our business, at least 90% of that 600 million cards that are issued every year are reoccurring in nature. So any potential impact in the future, hard to predict for sure, but don't see that having a real meaningful impact given that 90% of it's reoccurring with what we see with card issuance.

And just as a follow up, Scott, I know that the banks in the last couple of years have been very across with trying to get new card holders out there because of -- they kind of slowed down during the pandemic. I'm wondering -- I don't know if you look at this on a quarterly basis, but if you do, any change in that 90, 10 percentage from last quarter to this quarter, in terms of renewals or the explorations versus new cards?

It's hard to look at it on a quarterly basis. It is more something we view on an annual basis, but your point is spot on as far as issuing banks are competing cards for share of wallet. And that's where I think, for example, our eco-focused cards are a very innovative product. We know from customer research that over 50% of consumers would switch to an eco-focused card if it had the same benefit. So I think one of the reasons why we're winning in the marketplace, we sold 10 million eco-focused cards. So I think we've got products and solutions that will help our customers continue to gain share of wallet.

[Operator Instructions]. There are no further questions at this time. I will now turn the call back to Mark Salop for the closing remarks.

Okay. Thank you, Charlotte. Thanks, everyone, for joining our first quarter call today. I hope you have a good day. Thank you.

That concludes today's CPI Card Group First Quarter Earnings Call. Thank you.