Welcome to CPI Card Group Second Quarter 2025 Earnings Call. My name is Bailey, 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 Second Quarter 2025 Earnings Webcast and Conference Call. Today's date is August 8, 2025. 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, net sales growth, excluding the impact of an accounting change, 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 second quarter will be available on 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 can be found on Slide 3. John will give a brief overview of business performance and our strategy execution. Jeff will provide more details on the financial results and our 2025 outlook, and then we will open the call for questions. We can start on Slide 4, and I'll turn the call over to John.

Thanks, Mike, and good morning, everyone. Well, we had a good first half of sales growth as our strategies and investments are reaping benefits. Our customers are excited about our solutions. Our business continues to grow and win share and our Arroweye acquisition is performing better than our expectations. Let me give you a few highlights from our first half sales performance. Note that what I will cover excludes the impact of a one- time noncash accounting change affecting revenue recognition timing, which Jeff will cover in a few minutes. Let's start with our Secure Card business, where we are a top payment card producer in the U.S. This business delivered volume and sales growth greater than 15% in the first half, and we have won new business, including metal card orders and realized strong performance from the key customer contracts signed early last year. Card@Once, our market-leading Software-as-a-Service instant issuance digital solution, grew more than 20% in the first half and expanded to more than 17,000 locations with 2 consecutive record sales quarters and ongoing momentum in a business that generates strong recurring revenue. Our market-leading open loop prepaid business has continued to grow with sales up 17% this year, excluding the impact of the accounting change, driven by greater value [ tamper evident ] packaging solutions and our diversification into health care payment offerings. Our digital solutions, while still immaterial to overall sales, are growing and generated great customer interest, including customers outside of our typical debit and credit space. And the Arroweye acquisition, which was completed in early May, is off to a good start with nearly $10 million of revenue contribution in less than 2 months, exceeding our expectations for sales and also beating our expectations for profitability. Before we further review the quarter and outlook,…

Thanks, John, and good morning, everyone. Let's start on Slide 9 with the second quarter highlights. Our second quarter net sales reflect organic growth from our Debit and Credit business, the addition of Arroweye and as noted in our press release, the one-time non-cash impact from an accounting change regarding revenue recognition timing for work-in-process orders. Reported net sales increased 9% in the quarter to $129.8 million or 15% excluding the impact of the accounting change, with organic growth led by increased sales of contactless debit and credit cards and strong growth from Card@Once instant issuance. Arroweye also delivered strong performance, contributing approximately $10 million of revenue in less than 2 months since the May 6 acquisition. Gross margins in the quarter were pressured by various factors, which I will discuss shortly, and net income was also impacted by various nonrecurring items. Adjusted EBITDA increased as the Arroweye contribution and sales growth helped offset gross margin pressure. The sales impacts of the accounting change on the second quarter and year-to-date can be seen on Slide 10. The accounting change essentially moves us away from recognizing revenue from certain work-in-process orders at the end of the quarter as was done historically to primarily recognizing revenue only at time of shipment. We made this change after a review of our current business practices with customers and to align with Arroweye. Practically, this means the second quarter does not reflect any revenue for work-in-process orders at the end of the quarter or prior quarters would have included such revenue. This resulted in a one-time negative transition impact of approximately $8 million on sales in the second quarter. Excluding the net impact of work-in-process orders in current and prior periods, net sales increased 15% in the second quarter. The accounting change only affects the…

Thanks, Jeff. Turning to Slide 17 to summarize before we open the call for Q&A. Our core businesses are on track to deliver solid growth for the year, and we are pleased with the Arroweye contribution thus far as well as its long-term potential. We are also excited about the potential long-term benefits of our other investments, including further expansion into new markets such as health care, closed-loop Prepaid and digital solutions and the increased capability and capacity from our new production facility. And we remain focused on executing and delivering results for the remainder of 2025. Operator, we will now open the call up for any questions.

[Operator Instructions] Your first question comes from the line of Andrew Scutt with ROTH Capital.

It was great to see the revenue guide raise this morning. So my first one for me is on the Arroweye acquisition. You guys touched on the fact that some of their customers are now putting in larger orders with the backing of your balance sheet. It looks like current revenue from Arroweye is trending a little bit above your original expectations. Can you kind of talk about what you're seeing from these larger orders and maybe if the backing of your balance sheet will allow you to win larger customer awards as well, new customers, I mean.

Yes. Andrew, good question. So we're happy with the Arroweye performance. We have spent the last 3 months getting even deeper with the business. We've got a great team in Las Vegas. And just in terms of how they performed, they did beat our expectation, nearly $10 million of revenue in less than 2 months that we owned them through June 30, profitability better than our expectations. So performing well. But I would say the performance, not as much driven by immediate revenue synergies, things that you're describing. I think there's opportunity for that as we have been out and about talking to their customers, understanding their customers' needs, how our solutions can work for their customers, their customers' needs might be leveraged by some of our digital solutions, things of that nature. But there's not exactly, I would say, large orders coming through because of the fact that we have a greater balance sheet immediately and things of that nature. But there's opportunities for that prospectively. But overall, we're excited about the opportunity set, the synergies that we see in front of us, especially as we get into 2026, we think will be positive and the performance to date has been better than our expectations.

Great. Well, that's exciting to hear more synergies are ahead. Second one for me before I hop back in the queue. Jeff kind of broke this down, but you guys did a good job previously with your chips procurement. Kind of transitioning to Arroweye, we understand they use some of the same EMV chips that you guys may use. So are you guys able to tap into your existing inventory and maybe potentially free up some cash flows in the future?

Yes. Andrew, yes, I think when we think about chips, we definitely think that's part of the synergy business case with Arroweye. We obviously have -- buy a lot more chips than they have. So we have a stronger purchasing power. So going forward, that is the intention that we can start leveraging some of the chips that we can procure at cheaper rates in their EMV and DI cards.

Your next question comes from the line of Jacob Stephan with Lake Street Capital Markets.

I just wanted to ask a second question on Arroweye here. Obviously, you said $10 million of revenue in less than 2 months on a non- GAAP basis, excluding that accounting charge, how much of the upside was really driven from Arroweye? And maybe you could kind of talk a little bit more on how has it outperformed your expectations as a percentage or maybe as an absolute dollar amount?

Jacob, I mean the Arroweye contribution, it's still a very small part of the business, right? I mean I think if you exclude the accounting change, we're in the mid-130s in revenue. You're talking about $10 million. Without Arroweye, we would have grown year-over-year. Their profitability definitely was a help. They're performing well especially in light of -- we had $1 million in tariffs hit in Q2 that were hard to avoid. So -- but again, the Arroweye contribution was fairly small in relation to everything else for the quarter.

Okay. Got it. Maybe just second one, Card@Once, it sounds like you guys had a nice government program win here, if I understood that correctly. I guess what's the opportunity here? It sounds like that's a relatively newer market for you, but I'd love to get your thoughts on how you're looking at some of those potentially larger programs with better sell-through.

Yes. I mean we've been doing government work. And just to be clear, we do that indirectly. We typically try not to contract directly given the efforts you have to encounter with working directly with the government. But we do a lot of indirect work. We've been doing that in the debit and credit card space for a number of years. So this is an opportunity to take the solutions that we've already had in the debit and credit side and additionally provide them the ability to instantly issue on site in locations at -- specifically, this is for social safety net programs, so think of SNAP, unemployment, varying needs of individuals where they need money quickly and they need it on site at their government location within their local jurisdictions. So we've started this in one state. There's a number of other locations that we believe we can penetrate into in the near term, which we're in discussions with. And this is just another area that we believe is a vertical that's a strong recurring market, similar to our other markets that we can continue to break into. But keep in mind, this is just the first, I would say, nonfinancial institution Card@Once vertical we're breaking into. There's a number of others that we're in discussions with as well, which we think will provide opportunities for us in the longer term. So we're excited about the Card@Once performance. It's a great business for us, had 2 record quarters, Q1, Q2 of this year, and the team there is doing a great job. So we're excited about the opportunity set.

Yes. It's great to see that traction there. I just have one follow-up. You talked a little bit more about metal cards on this call. I guess, what's your kind of thoughts? It sounds like you're providing a complementary product to some of your customers that have maybe plastic card offerings? Or is this kind of a growing part of your business at this point?

Yes. I mean we've been doing metal for a number of years. What we produce, we have a couple of different types of contactless metal cards. Our metal cards in competition with the broader metal market are more on a relative value basis. And when we're trying to penetrate the small to mediums or those who don't want to spend as much on the very costly metal card that you might see from some of our competitors, we're positioned very well to kind of meet the needs of that market. And as metal is a good market, it's still a very small market in relation to our broader markets. But it's an area where we can continue to sell that. You're correct as a complementary product to our customers or if they want to provide something to their higher clientele, we're priced appropriately and can provide them good value for what they're providing to their customers. And it will be a continued niche for us, but we'll continue to drive it from a go-to-market perspective.

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

On the subject, I know it's an evolving story and tariffs have been on again, off again. It's very, very difficult for American businesses to plan purchasing inventory when policy is so unpredictable. But I guess, what ways could you see to mitigate potential tariffs on chips in terms of sourcing? And given current inventory on hand, I guess, how much -- how many months of production would your current inventory cover?

Yes, Pete, good question. So we do have ample chips on hand. Keep in mind, though, there really haven't been any details on the chip tariffs. There's no timing. We don't know what exceptions will be there. The way I would describe, we're an American company for the most part, right? We operate in 5 states. We have nearly 2,000 employees across those 5 states. We're investing in the U.S., building a large plant in Indiana, investing in every single one of our locations across the U.S. So there's things we're trying to do to mitigate tariffs in general. But I think just like anything else that's occurred over the years, we've been able to manage through it and continue to grow the business and win share and drive profitability to the bottom line. So it's something we'll work through as we know more, but it's still hot off the presses, if you will.

Yes. Yes. Okay. Do you think -- I guess, depending upon how this issue was resolved in the press release to discuss any finalized plans?

Pete, that's a good question. I doubt it. As I said, we do have ample chips on hand. We've been holding a decent number of chips ever since COVID hit just to ensure no matter what happens in the market, we're always prepared to meet the needs of our customers. So I think the benefit for us is no matter what happens, we do have time to work through it. So there's no immediate risk, if you will. But again, just like all the other tariffs we would imagine, it makes sense.

And I'd just add, Pete, this is going to be -- I mean, if it does come to fruition, it's an industry phenomenon also, right? It will affect the whole industry. So we'll just have to see if and when it does, we're across the supply chain, it's captured. And from a competitive standpoint, we're all in the same boat here.

And your next question comes from the line of Hal Goetsch with B. Riley Securities.

I just want to go over some of the detail, make sure I got it. So it was about a $1 million tariff impact. And did you say it was a $2 million to $3 million impact from dual production facilities, running 2 facilities in Indiana. Is that right? So that's about $4 million. Is that the right number?

Yes, you got it almost right. $1 million this quarter for the tariffs. [indiscernible] We're trying to partner with our customers to bring that down on the EBITDA impact. But from a cost impact, about $5 million on tariffs for the year. And then for Indiana, that was about $3 million incremental this year for getting the facility up and running. So that's kind of spread mostly Q3, Q4. And yes, go ahead.

$8 million in total. It was $5 million for the year in tariffs, $3 million for Indiana production.

Yes.

Okay. Cool. And the last time we had a supply chain disruption, it was like getting the supplies of chips and it caused a lot of activity and 2022 was a good year because of that, right? And is there any dynamic going on now where there's a pull forward of activity or is it on ordering? Or is it more now just like everyone is just kind of waiting to see what happens. It's a very different maybe dynamic than it was in 2022 in terms of customer order patterns and activity.

Yes, Hal, we have not seen any pull forward from any of the tariff impacts thus far. The chip news came out Wednesday night. So that's very -- but again, we have -- and we shared this with our customers. We have ample chips on hand. There's no need to immediately react as a customer, and we'll continue to work through it.

And just for like kind of -- what was kind of the chip value before tariffs, any tariff changes to like in dollar value per card, like kind of just roughly. So we kind of know like the magnitude of...

Yes. I mean we can't give you exact amounts. But when you think of the cost of the card, I mean, it is the biggest cost component when you talk about material costs significantly. So we can't give you any -- for competitive reasons, we don't want to give you any more detail there. But I mean, it is a big component of the cost structure.

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

Thanks, operator. Well, I want to again acknowledge and thank all of our CPI employees for their contributions and dedication to the company and to our customers. Thank you all for joining, and we hope you have a great day.

Thank you so much. This concludes today's conference call. You may now disconnect.