Welcome to the CPI Card Group's Fourth Quarter 2022 Earnings Call. My name is Glenn, 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. Mike?

Thanks, operator, and good morning, everyone. Welcome to the CPI Card Group fourth quarter 2022 earnings webcast and conference call. Today's date is March 08, 2023, 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 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, 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 well as the presentation that accompanies this conference call are accessible on CPI's Investor Relations website, investors.cpicardgroup.com. In addition, CPI's Form 10-K for the year ended December 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 Schierman.

Thanks, Mike, and good morning, everyone. During today's call, I will discuss CPI's performance in 2022, provide thoughts on our initial outlook for 2023 and reiterate our long-term strategy. Amintore will review the financial results in more detail and then we will open up the call for questions. We will start on Slide 4. 2022 was a great year for CPI. We increased sales 27% for the full year to a record level of $476 million and we believe we gained significant overall market share. We grew adjusted EBITDA 28% to $98 million and increased the adjusted EBITDA margin slightly to 20.5%, despite significant inflationary impacts on costs. We also improved our net leverage ratio in 2022 ending the year at 3x and retired $25 million of principal on our senior secured notes during the year. And we ended 2022 on a high note with fourth quarter net sales increasing 36% and adjusted EBITDA increasing 100%. As we look back on 2022, there were four main drivers that were critical to our success: first was our differentiated innovative products and services and end-to-end solutions; second, our market-leading quality and customer service; third, our strong supply chain execution while the industry faced challenges; and fourth, we benefited from a strong growth year for the card markets in the U.S. Our differentiated end-to-end solution, leading quality and customer service and strong supply chain execution each contributed meaningfully to our market share gains. One example was our innovative eco-focused cards, which posted a 70% increase in sales for the year. Led by our cards made with recovered ocean-bound plastic core, we sold more than 40 million eco-focused cards in 2022, bringing our total to more than 90 million sold since the launch in mid-2019. Another example is our differentiated software-as-a-service instant issuance solution…

Thank you, Scott, and good morning, everyone. I will begin my overview on Slide 8. Fourth quarter net sales increased 36% to $126.4 million compared to the prior-year quarter, with strong growth across our Debit and Credit portfolio and in Prepaid. The Debit and Credit segment net sales increased 35% with strong contributions from contactless cards, personalization services, Card@Once instant issuance solutions and various other products. Prepaid Debit segment net sales increased 39% compared with the prior year, driven by new customer additions outside the traditional retail channel and growth with existing customers. Fourth quarter gross profit of $47.5 million increased 54% from the prior year, while gross profit margin increased from 33.2% to 37.6%, driven by operating leverage from sales growth, including benefits from price increases, partially offset by the impacts of inflation on production costs, primarily on materials costs. SG&A expenses increased by approximately $3 million in the quarter compared to the prior year, primarily to support our growth and strategic execution. This includes approximately $2 million of increased compensation expenses, which reflects higher headcount and higher salaries, partially offset by a reduction in stock compensation expense of $500,000. Our tax rate was 19.4% in the quarter due to some favorable adjustment items related to unrecognized tax benefits and state tax settlements, which brought our full year rate to 25.7%. The fourth quarter rate was down from 62.3% in the prior-year quarter, which included unfavorable adjustments related to state tax and uncertain tax position items. We project a tax rate of slightly less than 30% for 2023, excluding any adjustment items that may arise. Net income in the fourth quarter increased from $700,000 in the prior year to $12.5 million in 2022, and adjusted EBITDA increased 100% to $27.2 million. Adjusted EBITDA margin improved from 14.6% in the…

Thanks, Amintore. To summarize, 2022 was an outstanding year for CPI. We delivered strong sales and profit growth, while countering inflation and supply chain challenges. We believe we continued to gain overall market share in a growing market. We continued to provide innovative solutions and product enhancements, delivered high quality and customer service and further diversified our product portfolio. We made investments and process improvements to increase our capacity, advance our capabilities, and we improved our balance sheet and financial position. For 2023, we're focused on continuing to execute our strategies, grow the business, win share in the marketplace, increase cash flow and reduce leverage. Thank you for joining our call today, and we will now open up the call for questions.

Thank you. We will now open the call for your questions. [Operator Instructions] Our first question comes from Jaeson Schmidt from Lake Street Capital. Jaeson, your line is now open.

Hey, guys. This is Max on for Jaeson. Congrats on the really strong quarter. Just -- let's jump into the guidance here. So, revenue outlook of mid-single digit. I was wondering -- I know you guys don't guide quarterly, but I was wondering if you could help me maybe with the linearity throughout the year. Is this second half weighted or is this more balanced throughout the year?

Good morning, Max. This is Scott Scheirman. Thanks for joining our call today. We're confident with our guidance for a variety of reasons. Don't break it into quarterly or color from that standpoint. Timing, you can -- depends on customer demand and some other factors. But I would say overall, Max, we were very pleased with 2022. We believe we're well positioned in 2023 and longer term to continue to gain share and grow, and confident with the guidance and where we're heading.

All right. Thank you. And then, so Prepaid Debit, let's call it, flat for 2023. Is this a function of slower customer additions or growth within existing customers, or maybe both? Can you kind of help me out with the Prepaid Debit for 2023?

Yes. We really like that business. In 2022, we had a bit of a stronger year than we anticipated. Revenues were up 9%. So, in the fourth quarter, in particular, was strong. So, just given the tough comp from 2022, we're going to call 2023 flattish, if you will. But again, we think there's a lot of opportunity in that business to grow long term, and also just some different use cases with prepaid, whether it's for health savings accounts or supporting the gig economy. So, there's other things that we're looking at just beyond the retail channels where we traditionally partake in.

All right. Thank you. And then, the last one from me and I'll jump back in the queue. Just given the macro and supply chain, can you help me out, what's given you guys confidence you guys can secure supply? Maybe some puts and takes there? Thank you.

Yes. Again, we work closely with our suppliers. At the end of the day, we are reliant on them, but we'd like to strike close partnerships. With one of our primary chip suppliers, we've reached into a long-term -- reached or entered into a long-term supply agreement, which gives us more comfort that we are going to have chips as we move forward. Again, they have to perform, Max, as you could expect. But just given our strong supply chain team and working closely with our partners and vendors, we feel like we'll have the supplies we need to move forward and serve our customers well.

All right. Thank you. And congrats on the strong quarter, guys.

Thanks, Max. Thanks for joining the call.

Thank you.

Thank you, Max. [Operator Instructions] With our next question comes from Parsa Kiai from Steamboat Capital. Parsa, your line is now open.

Okay, great. Thank you. Congratulations on a good quarter, guys. Scott, just a couple of questions for you. I guess, I'll start with kind of the investor awareness on the company. As you know, your primary publicly-traded competitor recently got picked up coverage by a firm called Compass Point. So, now they're covered by J.P. Morgan, Compass Point, Needham, and BTIG. I'm curious how many of these analysts have you guys reached out to see if they would be interested in picking up coverage of your company?

Yes. I'll let -- we've been working very hard on our Investor Relations program and it's a critical priority for us. So, between reaching out to potential analysts, attending conferences, we're working really hard at that. Mike Salop has done a terrific job. And Mike, I'll let you give some color commentary of the things you've been working on too.

Yeah. Parsa, I mean, as you're aware, we've talked to many firms, with many analysts that we've been engaged in, so hoping to get additional coverage at some point in the future. Obviously, comparisons with other companies are challenging. Some analysts are interested in crypto. Some analysts may have done participate -- their firms may have participated in transactions with those companies, but we're talking to several analysts.

All right. I actually think comparisons with this company are rather not as difficult given that they are roughly the same size and similar margins -- excuse me, similar leverage, very similar product line, and the earnings contribution are almost entirely from card manufacturing. So, I think the comparison is rather apt. And I would suggest that you guys have done a great job getting the leverage where it needs to be providing conservative guidance, hitting your numbers, but your stock is very erratic. As you are obviously aware, you had that period last month where, I think, in two days, your stock fell maybe 26%, 27% on absolutely no news. I think it does your shareholders a disservice when your stock exists in a vacuum of this nature, whereas I think with these four analysts that we mentioned, in addition to Lake Street, you can have more -- you can get more attention, you can get more focus on the company, and you can allow an orderly share price, so that if some investor wants to come in or to come out, they could do it at a more reasonable price.

All right, Parsa, [Multiple Speakers]. Yeah, go ahead, Scott.

Go ahead, Mike.

Yes, Parsa, I think, we're repeating the same thing. We don't disagree with you. As I said, we're engaged with many analysts. There's a lot of things to go into analyst coverage as you know, but we're attempting to get more coverage and more awareness of stock and we'll continue working on that.

Okay. Another question for Scott. Can you elaborate further what would it take for you to expand into the premium metals card? And just given the margins that your competitor in that space has, why this is not kind of something that at least should be attempted by the company?

Yes. I would say a couple of things. First, we've been razor focused on four or five key market segments. And if you look over the last five years, I think, we've been incredibly successful with that with revenue growing at a 16% CAGR from '17 to '22. EBITDA growing at 33% CAGR during that same period. Our leverage, as you pointed to, has gone down from over 12x to 3x. So, I think the areas that we've really focused on, we continue to gain share and we've gained significant share over that period of time. With the metal card segment or heavy cards, we do partake in that. It's not a major revenue source obviously for us, but we continue to have some product offerings. We generate some revenue from that. That is a different line of investment or significant investments that would need to be made, and just trying to balance investments with investing in other areas where we've been very successful, and also paying down our debt. So, it's just a balance that we have to move forward. And we think we've got the right strategies to move forward to continue to properly gain share.

Okay. And then, lastly, what is the incremental capital expenditures being used for? Can you give us a little color as to when you look at $17 million of CapEx, what is the breakdown above what is kind of needed to operate the business?

Yes, Amintore, I'll let you go ahead and answer that.

Yes. We don't really provide a specific breakdown as it relates to those items. But clearly as we think about kind of the expenditures that we have for capital, it's typically always a mix of making sure that our capital stays current, our equipment stays current, but then also investing for future items as well. One thing that we've noted previously is that we did increase our ability to produce by 50% during 2022, and that was definitely a reason for some of the increase in the capital spend. But as you might imagine, in a business like ours, there's also a renewal that has to take place as test time goes on as well.

Okay. Got it. Amintore, thank you for all your contribution, and good luck with everything. And I'll speak with you gentlemen shortly offline.

Sounds good. Thank you.

Parsa, thanks.

Thank you.

See you.

Thank you. [Operator Instructions] We have no further questions on the conference. I will now hand back to the CPI team for closing remarks.

Okay. Thanks everyone for joining us. Hope you have a good day, and that ends our call.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.