Welcome to CPI Card Group’s First Quarter 2025 Earnings Call. My name is Karen, and I will be your operator today. If you are viewing on the webcast, you may advance the slides forward by pressing the arrow buttons. The call will be open for questions after the company's remarks. [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 first quarter 2025 earnings webcast and conference call. Today’s date is May 7, 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, 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 accessible on CPI's investor relations website, investor.cpicardgroup.com. In addition, CPI's Form 10-Q for the quarter ended March 31, 2025, 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 business performance and our strategies, Jeff will provide more detail on the financial results and our 2025 outlook, and then we'll 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. As you've likely seen from this morning's press releases, in addition to reporting our first quarter results today, we are excited to announce the acquisition of Arroweye Solutions, a leading provider of digitally-driven on-demand payment card solutions for the US market. This acquisition fits in nicely with our strategies to gain share and diversify our business and I'll talk more about this in a few minutes. First, I'll comment on our first quarter results and 2025 outlook. We are pleased with the first quarter sales performance led by our debit and credit card portfolio and continued strength from prepaid solutions. Both of our segments increased 10% in the quarter with debit and credit growth led by strong sales of contactless cards including eco-focused cards and prepaid, driven by our higher value packaging solutions and growth in healthcare payment solutions. As we mentioned last quarter, we expect adjusted EBITDA to decline in the first quarter due to anticipated mix issues and timing of spending. We did experience these mix impacts and some added production costs, which resulted in an 8% decline in adjusted EBITDA compared to last year's first quarter. Although there is uncertainty in the market regarding the US economic outlook and there is the potential for additional tariff issues, current demand from our customers remains healthy and we are affirming our 2025 organic outlook for mid-to-high single digit growth for net sales and adjusted EBITDA. For the remainder of 2025, we are focused on driving sales growth while balancing investing for the long term with managing spending to improve margins as the year progresses. Even in this environment, we continue to invest in key strategic projects including our new Indiana facility, opportunities within the closed loop prepaid market, digital solutions and now the…

Thanks John and good morning everyone. I will begin my overview on Slide 8 with first quarter highlights. Net sales increased 10% in the first quarter led by strong performance from debit and credit cards and continued growth in prepaid. The first quarter gross margin was impacted by negative sales mix and increased production costs, which resulted in adjusted EBITDA declining 8% in the quarter. We expect similar margin pressures in the second quarter before seeing improvement in the second half of the year, despite tariff impact, due to operating leverage and better mix especially in the fourth quarter. Free cash flow was slightly positive in the first quarter, as cash flow generated from operations was primarily utilized for capital spending, including our new Indiana production facility. Turning to the detailed first quarter results on Slide 9, the overall 10% sales increase reflected a 10% increase in both our debit and credit and prepaid segments. Debit and credit growth was led by contactless cards with strong growth from eco-focused cards, partially offset by a decline in personalization services. Prepaid growth was driven by continued strong demand for higher priced fraud prevention packaging solutions in our healthcare payment solutions. The gross profit margin decreased from 37.1% in the prior year quarter to 33.2%, as operating leverage from sales growth was offset by negative sales mix and increased production costs. Increased production costs reflect some operational inefficiencies, which we expect to diminish over the course of the year as well as incremental costs as we operate two production facilities in Indiana during our transition to the new site, SG&A, including depreciation and amortization, decreased almost $1 million from the prior year as the 2024 first quarter includes the final cost related to the prior CEO retention agreement and other executive severance. Net…

Thanks Jeff. To summarize, we delivered good sales growth in the first quarter and are affirming our full year net sales and adjusted EBITDA outlooks, despite some cost pressures from sales mix and tariffs. Customer demand remains healthy. Although there is uncertainty in the market, we are managing spending in response. We are excited about the Arroweye acquisition and adding their zero inventory on demand solutions to the CPI portfolio, boosting our strategies to diversify the business and drive long-term growth. Operator we will now open the call up for questions.

We will now open the call for your questions. [Operator Instructions] The first question comes from Pete Heckmann from DA Davidson. Your line is open.

Thank you. Good morning everyone. Congratulations on the Arroweye deal. I want to know if you could give us a little bit more color on exactly where they play. Are they a customer of another card production firm or are they doing all of their own card production? And how would you characterize their customers? I think you said low customer overlap, but would it be the same type of customers, both large issuers, small issuers, through third parties and -- or would it be different?

Yeah, Pete, good morning.

Good morning.

So just to start, Arroweye is an entity that we had seen in the market over a number of years. If you think about who we compete against in the market broadly, there's larger players, there's smaller players. They service what I would say is a smaller, more nimble card program, so think of fintechs who might want to test out different types of card programs and do it on the fly. Those are the types of unique solutions that we at CPI don't necessarily have, the larger players don't necessarily have. So in many cases there are customers that we have where there's small overlap where they might want to do a really small nimble program and they'll go to Arroweye to do that. So in cases where we're scaling with the customer, that customer may be coming with us. But in the cases where that customer wants to do something really nimble that we might not be able to do, they'd go into Arroweye. And then there's a large portion of the market that wants those small nimble programs. Think of fintechs that act as program managers, if you will, that service a number of different types of programs and think of their programs as almost like marketing tools for a number of different unique institutions. And so that's where Arroweye comes into play and they have technology that we don't have and ultimately we believe they can penetrate the market in ways that we cannot. And to a certain extent we can offer their solutions to our customers in ways that we cannot. So it's a good complementary solution and we believe it'll generate a strong return for not only CPI but our shareholders as well.

Okay, that's great to hear. And then in terms of the EBITDA margins at Arroweye, I didn't hear, did you give maybe a time horizon for your expectation of margins moving towards the CPI average?

I think the way we described it is they have kind of low-double-digit adjusted EBITDA margins right now. Obviously, in 2025 there's a bit of integration that we need to do, so margins may be impacted this year from that. That said, we do believe we can bring their margins closer to CPI margins. We didn't give a time frame but Jeff, you want to comment on the accretion and --

Yeah, no, it's going to take a little bit of time. I mean one of the things we're excited about is they're a smaller, smaller company. We bring our purchasing power, power is much greater. So we're going to be able to bring a lot of cost of good synergies over time, it's going to take some time but we do feel like over the longer period we're going to be able to get the margin near where we are with CPI.

Okay, great, that's helpful. I’ll get back in the queue.

Thanks, Pete.

The next question comes from Jacob Stephan from Lake Street Capital Markets. Your line is open.

Good morning. Congrats on the acquisition as well. Maybe just to start off housekeeping item you could help us understand kind of the balance sheet moves here with the acquisition. What would you draw on the revolver versus cash on the balance sheet?

Yeah, we ended the quarter with about a little over 30 million of cash. We drew about 35 million from our revolver. So after this acquisition, we'll still have some cash on hand for sure, but that's really how we financed it.

Okay, perfect. And then maybe you could just help me understand kind of the broader portfolio application here. It sounds like this is more on the prepaid debit side. Do you see an opportunity with kind of retailers here with Arroweye and talking about those smaller run programs?

Yeah, I mean, I think that's a good point. I mean whether in the prepaid debit space, whether retailer wanting to try out different types of branding for your customers, whether you're a fintech working with a number of programs that you want to test out with maybe a younger generation, there's a number of applications that Arroweye fits into. So again, I'd say their solution is -- the way I describe it is just unique to what we have and much more nimble. They refer to it as hyper personalization so they can move on the fly and it definitely opens up an area of the market that we don't necessarily service today.

Okay, got it. That's helpful. I'll hop back in the queue.

Thanks, Jacob.

[Operator Instructions] The next question comes from Craig Irwin from ROTH Capital Partners. Your line is open.

Good morning. A number of your shareholders have pinged us this morning asking about pricing. Is there anything you can share with us about the pricing environment right now and is there anything competitive going on or do you maybe have mix issues also impacting gross margins? I know there's been some success with large issuers in the last couple quarters, didn't notice the hiring in Colorado. Can you maybe just unpack this for us as far as the pricing environment and what we should think about going forward?

Good morning, Craig. Well, let me comment on that and then ask Jeff too as well. The market in general is, I mean, it's always a competitive market, but I would say pricing is always based upon the value proposition of what you're selling into that market. The overall think of the inventory rebalancing that had been going on that we're probably in the tail of, so I'd say we're back more in the normal course somewhat. And just from a volume perspective, we've grown multiple quarters in a row, so we're seeing positive events in the market that I would say create a more rational pricing environment. But, Jeff, you want to speak to the quarter and how it sits?

Yeah, I can give you a little bit more color on the gross margin. Craig, you're right. You mentioned sales mix that from time to time we see different products going through, and some of them have higher margins, some of them have a little bit lower margins. This was a quarter with a little bit lower margin for the sales mix. Also, we had a little bit higher production costs in the quarter than we normally see. So we're working on efficiency programs there that will get those production costs down over the rest of the year. Also, we have a little bit of incremental cost just as we're getting our new facility in Indiana up and running but that also happened a little bit in Q1. We'll see that a little bit more in the next couple quarters as the new facility comes online. So when we look at the rest of the year in terms of our gross margin, we do think, the Q2, I think, the gross margin is going to be pretty similar but in the second half of the year, we do see a little bit better sales mix coming. Like we said, I think the production costs will be driving some efficiency there, so I think that will improve. That will be offset a little bit by continued Indiana costs with the new facility and also we mentioned the tariff impact of a couple million dollars. So ultimately, on the gross margin line, we see it improving from where it was in Q2, but probably lower than what we saw last year in 2024. And that's one of the reasons why we did some cost actions on the SG&A line to kind of offset that a little bit. We talked about reducing headcount, so we did that recently that will bring our cost structure down. We're tightening the belt a little bit on our discretionary spend. We're still trying to invest in the areas that we want to invest in, but trying to limit hiring in certain places and discretionary spend where we can. So, kind of trying to offset some of the margin -- gross margin decline that we see this year, year-over-year, with some SG&A improvements.

Excellent. That actually dovetails nicely to my second question, which is startup costs for Indiana. So it did appear like you were hiring quite significantly for the facility or at least advertising for positions this last quarter. And I wanted to ask if you have actually been bringing people online and training them for a rapid start as you look to serve new customers. Can you maybe just clarify this for us and anything quantitative that you can give us as far as employee costs or other frictional costs for the startup of this facility and how these are likely to taper? And can you also just confirm that just a couple weeks away, we were talking about June and that's really less than a month from now, so the benefits should start to kick in fairly soon? Thank you.

Hey, Craig. So you're right, and Jeff mentioned it a little bit. As we transition from one location to another, there is overlap in cost, there's overlap in hiring, if you will. We are hiring more people to service, in a sense, the transition. And you see that in Q1, you'll continue to see that throughout the year. Jeff can probably speak to more of the quantitative side of it, but it's definitely something that we knew would impact us this year. That's part of the reason when we gave our original guidance, which we affirmed today. You know, revenue growth and adjusted EBITDA growth are roughly the same. Some of the investments that we're making, this being one of them kind of eat into our spending but, ultimately, when you go to 2026 and beyond, we believe these will be accretive and strong returning investments that we're making.

Yeah, yeah, Craig. And we didn't give exact numbers for the transition for Indiana, but as John said, we'll be running both facilities for a period of time just so we don't lose a step with our customers so that will go through the end of the year once the new facility goes online. We'll still be running both facilities for a period of time, probably through the end of the year, but nothing specific on those costs. But like I said, we're taking some cost actions in other parts of the business and we still feel good with our outlook of mid-to-high single digits for both revenue and adjusted EBITDA.

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 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. Also, I'd like to welcome the Arroweye team to the CPI family. We're excited to have you all on board. Thank you all for joining and we hope you have a great day.

Ladies and gentlemen, that concludes today's call. Thank you all for joining and you may now disconnect.