Welcome to CPI Card Group's fourth quarter 2024 earnings call. My name is Julianne, and I will be your operator today. If you are viewing on the webcast, you may advance the slides forward by pressing the arrow button. The call will be open for questions after the company's remarks. If you would like to get in queue for questions, please press star one on your telephone keypad. To withdraw any questions, press star one again. Now I'd like to turn the call over to Mike Salop, CPI's Head of Investor Relations.

Thanks, operator. Welcome to the CPI Card Group fourth quarter 2024 earnings webcast and conference call. Today's date is March 4, 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 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, 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 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, 2024, will be available on CPI's Investor Relations website. On today's call, our growth rates refer to comparisons with prior year period unless otherwise noted. The agenda for today's call is on slide three. John will give a brief overview of business performance and our strategies, Jeff will provide more detail on the financial results and our 2025 outlook, and then we will open the call for questions. We can start on slide four, and I'll turn the call over to John.

Thanks, Mike, and good morning, everyone. Overall, we are pleased with fourth quarter results and what we accomplished in 2024. Looking back on my first year as CEO, there are several important areas I would like to highlight. First, we refined and advanced our strategy. Maintaining our emphasis on customers and quality, while also increasing our focus on innovation and diversification. This includes intensifying efforts to expand into adjacent markets by providing new offerings for our existing customer base, and delivering existing solutions to new customer verticals. We also enhanced the management team, promoting from within to balance our leadership, talent, and skills, and bringing in outside expertise to support our next stage of growth. And we delivered good results. Returning to growth despite the channel inventory challenges in our debit and credit card business. Our prepaid business produced exceptional performance. Growing 26% for the year and exceeding $100 million in net sales. This growth was driven by strong demand for our PACS Gene solutions focused on fraud prevention. An expansion of one of our adjacencies, the healthcare payment solutions vertical. Our debit and credit business increased 4% for the year. With strong growth in the second half, led by sales of eco-focused contactless cards. In addition to our recovered ocean-bound plastic, and other more environmentally friendly debit and credit card offerings, we're also seeing strong market response to our eco-focused offerings in the prepaid space. In total, we have sold more than 350 million eco-focused credit, debit, and prepaid card or packaging solutions since launch. With prepaid contributing more than 200 million of these in certification in 2023. Overall, we continue to win business across our portfolio in 2024. We believe we gained market share during the year. We also generated strong free cash flow exceeding $34 million for…

Thanks, John, and good morning, everyone. I will begin my overview on slide seven. Net sales increased 22% in the fourth quarter led by great performance from prepaid, as well as growth in debit and credit card volumes and personalization services. Adjusted EBITDA increased 10% and net income more than doubled. Free cash flow was very strong as we generated more than $34 million for the year despite higher capital spending. Turning to the detailed fourth quarter results on Slide eight. The overall 22% sales increase reflected a 59% increase in our prepaid segment and a 12% increase in our debit and credit segment. Prepaid growth was driven by continued strong demand for higher-priced fraud-focused packaging solutions as well as incremental growth from non-financial customer verticals including our healthcare payment solutions. Debit and credit card growth was led by contactless, with strong growth from eco-focused cards. Gross profit increased 20% in the quarter while gross margins decreased from 34.4% in the prior year quarter to 34.1% as operating leverage was offset by some negative product mix. SG&A including depreciation and amortization increased $1.8 million from the prior year primarily due to increased compensation expenses including higher employee performance-based incentive compensation expense partially offset by expense related to the previous CEO reaching retention agreement in the prior year. The tax rate in the quarter of 17.9% reflected benefits related to a statute of limitations expiration. Net income increased 148% driven by sales growth, a lower effective tax rate, and the impact of the CEO retention expense in the prior year. Adjusted EBITDA increased 10% to $21.9 million while adjusted EBITDA margins declined from 19.3% to 17.5%. Turning now to our full-year results on slide nine. Net sales increased 8% for the full year, which reflected and 4% from debit and credit.…

Thanks, Jeff. To summarize, we made a lot of strategic progress in 2024. Generated good results, and finished the year strong. Our prepaid business was outstanding. Our debit and credit business grew despite challenges. And we generated strong free cash flow while investing for the future. We also completed significant capital activities. Which should benefit our company and shareholders in future years. We are projecting a good year in 2025 and we'll continue to execute our strategies to gain share and expand our addressable markets and drive long-term growth. We look forward to reporting our progress. Operator? We will now open the call up for questions.

We will now open the call for your questions. Our first question comes from Andrew Scutt from Roth Capital Partners. Go ahead. Your line is open.

Hey, good morning, guys. Thank you for taking my questions. So the first one here, I'm going to try to tie a couple questions into one. But the prepaid results were very strong. You guys kinda touched on the sales drivers there. Could you kinda give some detail around the gross margins were also very chunky. And then also, kinda dig a little bit more into some of those verticals touched on that are performing well in prepaid including I think you said some healthcare payments and as well as your eco-friendly cards. So any details there would be great.

Yeah. Andrew, so let me I'll cover part of your two questions, and then I'll pass off to Jeff. But yeah, our prepaid team did a great job. We've seen a lot of progress in the prepaid space. In terms of higher value packaging due to fraud protection in our innovation of our team up in Minnesota. Working with our customers. And that really benefited us. In 2024 and we're happy about that performance. In terms of our verticals, healthcare definitely has been a vertical that's been a good adjacency for us. We started that couple of years ago. And really saw great progress in 2024. That's part of the reason for the growth in prepaid, especially Q4, I believe, was up nearly 60%. So kudos to the team. In ECO, we've actually been doing that. We became certified under FSC certification in 2023. And since that point in time, along with the rest of our company, prepaid has really taken a position of moving most of what we produce from a paper perspective into eco-focused in some way shape or form. And so they've contributed significantly to our eco-focused production along with what we do in our card manufacturing side. So happy about that as well. But let me let Jeff cover the gross margin side.

Yeah. Hey, Andrew. You're right. The gross margin for the year we did it. We were able to increase gross margins by 60 basis points. So we feel good about, you know, continuing to generate operating leverage. I think before you you kind of probably see that really strong gross margins and prepaid obviously you know, really really strong growth in Q4 and prepaid. Leading to more operating leverage in that segment. In debit and credit, you know, we we we talked about this from time to time. There are some mix issues we had a couple of sales in Q4 that were particularly low lower margin sales that know, a little bit more unusual. But, you know, that happens from time to time. And, you know, we still feel really good about our operating model. As we grow, continue to be able to gain gain operating leverage. You know? And in the future, it's just about know, how much balancing how much we reinvest back in the business. You know, from an EBITDA perspective.

Great. Well, thank you for the call. And second one from me, you guys gave some details around the inventory clearance. Sounds like second half of 2025. We should really see some progress there. You guys did liquidate. It looked like around $20 million in inventory. Can you just stop any any additional color from from what you provided on the prepared remarks would would be great.

Yeah. On our if you look at our inventory balance, they that's what you're talking to on the balance sheet. You did see that we, you know, we have this longer-term agreement commitment of purchasing ships. It goes through beginning of 2026. So it would really have to do with the timing of purchasing. We do feel like throughout 2025, it might the inventory balance might go up a little bit by the by the end of the year, similar to what happened what you saw in 2024. We should be able to bring that balance that inventory balance down. So the it just it's really about the timing of committed purchases.

Great. Well, thanks for the Yeah. No. Thanks for the the answers and the continued progress, and I'll hop back in the queue.

Our next question comes from Peter Heckmann from DA Davidson. Please go ahead. Your line is open.

Hey. Good morning. Could you talk a little bit about a little bit more about what you need to do as a company and then the just the marketing efforts to penetrate that prepaid closed-loop market and can you talk about kind of the size of it? And where you might start? I mean, I would assume you're already working with a lot of those customers. On the OpenLoop side. Okay. But, yeah, the we talked about, you know, entering that closed loop in a more significant way and how big that could be.

Yeah. Pete, good morning. Yeah. The closed-loop side is definitely it is larger than the open loop. And just as a reminder for those following us, you know, we are predominantly in open-loop secure packaging of gift cards. That's been our bread and butter for a number of years. Closed-loop historically has been lower value. You know, it's what you see when you walk into a Starbucks, if you will, to get a Starbucks card through you know, that you can only But given the change in regulatory environment, given the need for fraud protection that's actually bleeding into the closed-loop side as well. That market, which we believe is, you know, four to five times greater in size than the open-loop market is a good opportunity for us. It's a longer-term opportunity. And Pete, to your point, our customers that we are selling, open loop into also have relationships on the closed-loop side. So that benefits us as well. So we are making investments to move into closed-loop expansion. We have been doing some closed-loop on a very small scale. But those investments won't necessarily arrive and give us the capacity and capabilities to expand until late in 2025. So we would expect a small impact on 2025. But the punchline is the closed-loop market's a great market for us, and we are the leader in secure packaging from a gift card perspective in the US. And because of that, we feel like we're well-positioned to capitalize on the close of the market.

Okay. That's good to hear. That's good to hear. And then just an update on the facility in Indiana, the expect that to go online here later this year?

Yeah. Our Indiana facility is on track. We expect to be up and running in the second half of 2025, but Jeff, would you add any color there?

Yeah. No. I think, you know, we're excited about getting this facility online. We've talked about it in the past. We're buying some new equipment. Some automations, know, we're really looking forward to putting some of the production through the new facility and being able to gain some efficiencies. So we're quite excited. Right now, it's pretty much, you know, on schedule. There are no significant hiccups, and we should be operational, you know, like John said, second half of the year.

Okay. Great. So any CapEx related to that? They would probably likely be in the first half, you think?

Yeah. I mean, we yes. We will have You're right. This year, there will be some more CapEx as and John was just talking about the close of opportunity. There will be some CapEx there to buy some more capacity, some equipment that will be more specialized to the close loop opportunity. So we do feel like you know, or just in terms of CapEx, you know, if you look at the last few years, our CapEx has been a little bit lumpy. Anywhere from $6 million a year to $18 million a year. If you go back to last three years, we'll probably be closer to the higher end of that in 2025 in terms of CapEx just because of these two Mainly because of these two areas and some other equipment we're purchasing as well.

Okay. Great. And I think you said in the press release you would expect free cash flow to be Yep. Maybe down just a little bit or close to the level of 2024. Correct?

Yeah. We do have we do have not only the higher CapEx that we just mentioned, but relative to 2024, we do in 2024, we actually only had ten months of cash interest paid, if you will, just based on our refi. So we'll go back to a more normal twelve months of cash interest expense in 2025 on a relative basis. That also is an impact But you know, that kinda offsets the higher the higher profitability in 2025.

Okay. Great. That's helpful.

Thanks, Pete.

Our next question comes from Jacob Steffen from Lake Street. Please go ahead. Your line is open.

Hey, guys. Appreciate you taking the questions. And congrats on the quarter. Maybe just to start off, know, I wanted to delve into kind of the healthcare market a little bit. Obviously, you gave some good color with 60% growth in Q4, but you know, when I think of healthcare, I think donor incentives, copay programs, What are kind of the verticals within prepaid that you're seeing strength within the healthcare?

Yeah. Jacob, just good morning. The 60% growth is actually our broader prepaid business. Just to make that clear. The help has been a strong contributor of ours. Think about when you're receiving an FSA card, an HSA card, in the mail, it's got all the marketing materials around it. You've got to do that in high volume, high variability high accuracy, in that benefits time frame late in the year. And then throughout the year, that's another area of the broader US payment card market where people lose their cards, they switch companies for whatever reason, they need a replacement or something new sent to them. So that's in a vertical that we haven't been in. If you go back look at us historically. So we entered that into that last couple of years and it's a good market for us. It's a growing market with the broader economy and in addition, it's a very much a recurring market. Once you get in and you do it well. So a lot of these types of issuance cycles that occur annually and are, again, high volume, high variability and you have to be highly accurate. That's where we excel and they are quasi prepaid. Cards since why they fit in our prepaid set.

Got it. Understood. That's really helpful. And maybe just know, kind of to dig a little bit deeper, on the kind of margin impact of that healthcare you know, business. Are margins relatively similar to kind of the prepaid credit and debit or slightly higher given the secure packaging nature and kind of customization.

Yeah. I mean, I don't know if we'd comment specifically on the margins for healthcare in general. But it's a good vertical to move into. Margins as well as pricing, it's all based upon value proposition of what you're providing your customers. You know, our goal is to provide innovative differentiated solutions and hold strong margins across the business. But our prepaid business broadly does have strong margins. It has for a number of years, and that's because of the value proposition that we provide to our customers there.

Got it. Understood. Appreciate you taking the questions.

Yep. Jacob.

Our last question will come from Hal Goetsch from B. Riley. Please go ahead. Your line is open.

Hey, guys. A terrific quarter and outlook. Wanted to ask about the prepaid segment in Q4. You might have covered this, but I just wanna make sure I understand it. The revenue was up 26% in the commentary of the existing customers. And you had sales of higher value-added packet that it implies, like, Nope. The higher value-added packaging has higher pricing. And just kinda curious what's the what's the trade-off between, you know, volume and price to get to that 26%?

Yeah. Just to clarify how 26% was for the full year the fourth Yeah. Of the fifty-nine. Yeah. Yes. Yeah. We don't break out. That's necessarily volume versus value. I'd say, you know, the healthcare is volume. Driven. That's incremental units. A lot of the other business was more value-driven, just higher value solutions with our customers.

Okay. And maybe in retail and how you know, is there, like, a complete shift in pricing for, you know, more security, things you've mentioned that you'll lap that at some point where all the installed base and the inventory and the channel is the higher is the more secure, you know, and the better packaging, is it how many is that largely complete or we're still early in that?

Yeah, Hal. It's a good question. And we haven't necessarily commented on you know, the entire retail prepaid market transition. Dual to higher value packaging. There are pockets that we've been moving to higher value packaging to protect against fraud. That said, even in 2024 as we did that, there were also pockets where we were doing replacements of what's out there in the market today. So you saw probably a little bit of, you know, one time if you will, from that, which we haven't necessarily quantified. But my point is, prepaid had a great year of 2024. In 2025, you know, we expect it to be relatively flat. The most part, And that's because of some of that lumpiness that occurred in 2024. But broadly, if you look at the market longer term, transition further. we are well-positioned if that market continues to But it's hard to say how much the penetration of the entire prepaid market will move to higher value packaging to protect against fraud.

Okay. Terrific. Thank you, guys.

Thank you.

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

Thanks, operator. I once again acknowledge and thank all of our CTI 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.