Welcome to CPI Card Group’s Third Quarter 2024 Earnings Call. My name is Rob, 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. Welcome to the CPI Card Group’s third quarter 2024 earnings webcast and conference call. Today’s date is November 5, 2024, and on the call today from CPI Card Group are John Lowe, President and Chief Executive Officer; and Jeff Hochstadt, 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 September 30, 2024, will be available in CPI’s Investor Relations website. On today’s call, all growth rates refer to comparisons with the prior year period, unless otherwise noted. The agenda for today’s call is on Slide 3. John will give a brief overview of the third quarter and our strategies, and Jeff will provide more detail on the results and our financial outlook, and then we’ll open the call for questions. And now we can move to Slide 4, and I’ll turn the call over to John.

Thanks, Mike, and good morning, everyone. We are excited to share our strong third quarter results and increased outlook this morning. We delivered the second largest sales quarter in the company’s history and generated nearly 20% growth in both net sales and adjusted EBITDA. We also continue to make advances with our adjacent market strategies and are seeing growing interest in our expanding set of digital solutions. As we highlighted at the beginning of the year, we expected the first half to be challenging as channel inventories continue to be worked down and expected to see good growth in the second half, and the third quarter reflects that. Net sales increased 18% in the quarter, with product sales, which primarily represent debit and credit cards, growing 25%, led by strong sales of eco-focused contactless cards. While channel inventory levels are still elevated, they are improving, and we believe we are winning business in the market. In addition to our card performance, we continue to grow our Card@Once instant issuance solutions and our personalization businesses, and our prepaid business remains strong, delivering 13% growth in the quarter. We also made great progress improving our profitability with gross margins increasing 170 basis points compared to prior year and adjusted EBITDA increasing 18%, and we completed some significant financing and capital strategy items, issuing new Senior Notes extending maturities out to 2029, and supporting a secondary offering by our majority stockholder group, which should aid trading liquidity for our stock over time. Based on our results and current expectations for the fourth quarter, we have updated our full year outlook for 2024, increasing our net sales range due to strength across our portfolio and also increasing our adjusted EBITDA and cash flow expectations. Jeff will provide you more detail on our results and…

Thanks, John, and good morning, everyone. I will begin my overview on Slide 8. As John mentioned, we delivered very strong sales growth in the quarter with increases across our portfolio. The sales growth drove gross margin expansion, and we also delivered a strong increase in adjusted EBITDA despite increased performance-based employee incentive compensation expenses. Net income declined in the quarter due to the impact of debt refinancing costs as we completed the retirement of our previous Senior Notes and the issuance of new notes due in 2029. Free cash flow generation was healthy, and our net leverage ratio of 3.2x at quarter end improved slightly compared to the second quarter despite the cash outflows associated with debt refinancing costs. Turning to the detailed third quarter results on Slide 9. The overall 18% sales increase reflected a 19% increase in our Debit and Credit segment and a 13% increase in our Prepaid segment. Debit and Credit segment growth was led by unit volume increases from our card business, driven by eco-focused contactless cards and continued growth from Card@Once instant issuance solutions and other card personalization services. Prepaid segment growth continues to reflect demand for higher-priced fraud-focused packaging solutions as we discussed last quarter. Gross profit increased 24% in the quarter as gross margins increased from 34.1% in the prior year quarter to 35.8%, driven by operating leverage. SG&A, including depreciation and amortization, increased $3.7 million from the prior year, primarily due to increased performance-based employee incentive compensation expense as accruals in the third quarter of last year were minimal. Interest expense increased $6.7 million in the quarter, primarily due to payment of a 2.156% call premium or $5.8 million to redeem the $268 million outstanding of our Senior Notes due 2026. We also recorded a $3 million loss on debt…

Thanks, Jeff. To summarize, we are very pleased with the third quarter performance. Our Debit and Credit card business provided strong growth, while we continue to also drive growth in prepaid, instant issuance, and our other card personalization services. Based on the strength of our portfolio, we updated our full year expectations, increasing our net sales, adjusted EBITDA, and free cash flow outlooks. We continue to advance our strategies to gain share by leading in customer service, quality, and innovation and increasing our addressable market through expansion into adjacencies, including digital solutions over time. We are pleased with our positioning and progress and look forward to continuing to drive performance for our shareholders. Operator, we will now open the call up for any questions.

[Operator Instructions] Your first question comes from the line of Jaeson Schmidt from Lake Street Capital Markets. Your line is open.

Thanks for taking my questions and congrats on the nice results. Just want to start with sort of the revenue momentum. I know the excess inventory was creating some headwinds earlier this year. But is it fair to say that that is completely behind you now?

Jaeson, good morning. So I would say not necessarily behind us. I mean, things are improving, not over, but the market is strong. Cards in circulation are still growing at a 9% CAGR over the last 3 years. And if you go back in time to the beginning of this year, we did expect growth in the second half after kind of a down – a little bit of downside in the first half. And the third quarter reflects that. We had a strong third quarter with performance across the card side, including eco-focused, Prepaid had a good quarter. And our Software-as-a-Service digital solution, Card@Once had a great quarter, and our personalization business has had a great quarter. So overall, market momentum is still there, but channel inventories are still working themselves down, but we do believe we’re winning business in the market.

Got it. That’s helpful. And then just as a follow-up, your commentary about news on the integration of the chip and antenna design. Maybe it’s a bit too early, but can you help us think about how we – how that will impact either ASPs or gross margins longer term?

Yes. I mean look, we are excited about the, what we call the all-in-one chip that creates a chip where the antenna is essentially put within the chip itself versus adding card layers within the card. So, it helps our customers expand their design options, reduces carbon footprint. But we are in early stages, right. It will take years to really ramp up. So, we don’t necessarily know the pace, so I wouldn’t want to speak to the financial impact quite yet. But we are excited to be an early adopter. And hopefully, we will see adoption faster than slower.

Alright. Thanks a lot guys.

Thanks Jaeson.

Your next question comes from the line of Andrew Scutt from ROTH Capital Partners. Your line is open.

Hey. Good morning guys. Thank you for taking my questions. First one for me, you guys have kind of spoken to strength in some of the ancillary businesses like Card@Once and push provisioning. Can you kind of – as far as push provisioning goes. You have been a couple of months into the MEA partnership, can you kind of talk about momentum that you are seeing there?

Yes. I mean momentum is strong. I would say it’s still a very minor impact to our financials at this point in time. But just, Andrew, to your question, MEA, as a reminder, they probably have 300 FIs that they work with. We are now able to work with their FIs, providing them push provisioning. There is a pipeline that we are kind of working with. And push has been successful so far, but it’s kind of slowly ramping, right, banks are always slow to adopt and ramp things up. But there is definitely strong interest, which is great. And if you think about our Card@Once solution, right, our Software-as-a-Service solution, we have been in that business for more than 10 years. That’s a business where we are in more than 16,000 branches across the United States. And that’s been a strong growth business for us. It’s a high-margin business, similar to what our broader digital solutions are as well. So, we will share more on push prospectively from a metric perspective. But what I can say is there is a strong momentum, but it’s still early days.

Awesome. No, great to hear. And second one from me, you kind of spoke on the revenue momentum in debit and credit. We also saw a nice bump up in prepaid in the quarter. Can you just kind of speak to what you saw in that business over the last few months?

Yes. I mean prepaid is having a great year. I have got to thank the team up in Minnesota because they are just doing a great job. 13% year-over-year growth is a really strong quarter for the prepaid side. And it’s really driven by two sides. I would say one side is the kind of increase in fraud protection demand by our customers. We are constantly innovating with our partners in terms of putting more fraud protections into the package. That creates a higher value package, which is great for us, but also protects our customers’ customers, if you will. And then the other side is there is a number of prepaid areas we are moving into from an adjacency perspective into the healthcare side, and that’s benefiting our prepaid business. So, strong quarter for the prepaid team, and we are hoping for a strong growth for the remainder of the year.

Great. Well, congrats on the continued momentum and I will hop back in the queue.

Alright. Thanks Andrew.

Your next question comes from the line of Peter Heckmann from D.A. Davidson. Your line is open.

Hey. Good morning everyone. Thanks for taking the question. Following on that last question, your – the raise in your full year guidance does imply another strong quarter for the fourth quarter. And just trying to think about in terms of thinking about seasonality in debit and credit versus prepaid debit, I guess could you give a little bit of thoughts in terms of the relative strength of those two? It certainly looks like prepaid is on track to have a really great year and debit and credit a good year. But I guess that’s dependent upon my forecast. So, in terms of how you are thinking about the fourth quarter, would you expect it to – in terms of the relative growth rates of the two segments, would you expect it to be about the same, or would you expect there to be a significant variance?

Yes. Actually, I mean a good question. We really, over the years, we haven’t been as fluctuating as seasonally as we had in the past. So, we feel like both businesses will have a good continuation in Q4. I don’t think there is really a significant seasonality in either of these businesses at this point.

Okay. And then just in terms of your new production facility in Indiana, can you talk a little bit about how that process is coming and when you would expect to go live? And then if you could, I don’t think you have done this in the past, but if it’s possible, if you could maybe quantify a little bit about that additional volume commitment you received from that customer and when we might see that start to hit in results?

Hey Pete, good to talk to you. I will let Jeff talk about kind of Indiana and capacity. And on the customer contract side, the one we locked into in Q1, just as a reminder, that’s a 6-year deal, commitments that really ramp in ‘25 and the outer years. This year was kind of the start to it. So, we continue to strengthen our relationship with that customer, and it’s a good way for us to win share, and we are excited about it. But I don’t really want to go and comment on the performance quite yet, given it’s a 6-year deal. That said, Indiana, we are excited about it. I think as I understand it, we have got walls up and a roof on. So, we are slowly getting it up and running. I think it’s mid-next year before it’s starting to be operational. But Jeff, do you want to comment?

Yes, Pete, it will be – like John said, we broke ground and walls are up. We should be in by the end of 2025. We did say previously that the cost of – the whole cost of the facility will be about $20 million. We think that will be a cash flow impact for the first 2 years of about $13 million, $12 million to $13 million. So, that has increased our CapEx this year. We are increasing our footprint in Indiana. We are doubling our footprint in Indiana. And that overall is about a 10% increase in our overall footprint company-wide. So, it does – it will increase capacity over time. And another note is we are buying new equipment. We are investing in automation. So, not only do we have more capacity, but our throughput should be more efficient with new equipment and automation. So, we are really excited to get that up and running next year.

Your next question comes from the line of Hal Goetsch from B. Riley Securities. Your line is open.

Hey. Thank you. On the sales growth, you were lapping, you had 25% growth in product sales, lapping a minus 22%. So, really just kind of getting back to where you were maybe at 2022 levels. Could you give us a little color on how much of that is normalization of existing customers and how much of that is potentially new programs, kind of what’s the composition of the growth kind of year-over-year?

Yes. I will give you a high level, Hal, and good to talk to you, and then pass it off to Jeff. But if you go back to 2022, I mean that was a record year. That was predominantly driven by payment card sales, right. I mean that was when the market had extremely high demand and drove our secure card business to have significant growth. And ultimately, we had a nearly 30% year-over-year growth in that year. If you look at this year, while year-over-year in Q3, card sales were strong, right, and our volumes have been increasing progressively through the year. We are still not necessarily at the levels that we were in ‘22 and still have enough of ways to go, if you will, from an inventory rebalancing perspective. So, I think the other areas of our business, think of our instant issuance business, it’s grown since ‘22. Our personalization businesses are performing strong. And if you think about our prepaid business, that’s performing really well in 2024 about that as well. But Jeff, do you want to?

Yes. I think you are right in the sense that it’s coming back. But also we have seen some really strong sequential growth from Q1 to Q2, Q2 to Q3. So, as John mentioned at the outset of the call, our second highest quarter ever. So, we are – like John mentioned earlier, the rebalancing is still going through the system, but we feel like the other parts of our portfolio are also performing at high levels. So, we feel some good momentum.

Okay. So, what to say, would you say it’s mostly existing customers or some new – a mix of both?

Hal, it’s a great question. No, we are winning new customers in the market across the portfolio.

Okay. Great. Thank you.

As there are no further questions in queue, I would now like to turn the call back over to John Lowe for closing remarks.

Okay. Well, thanks operator. Thanks everybody for joining the call. I want to again acknowledge and thank all of our CPI employees for everything they do for our company and our customers as they execute on our vision, values, and strategies every day and continue to drive our business forward. Thank you all for joining our call this morning, and we hope you have a great day.

This concludes today’s conference call. Thank you for your participation. You may now disconnect.