second quarter 2018 earnings conference call · regarding forward -looking information” and...

Copyright 2018 CPI Card Group

Second Quarter 2018 Earnings Conference CallAugust 9, 2018


Safe HarborForward-Looking StatementsStatements in this presentation that are not statements of historical fact are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward looking statements may be identified by terms such as statements about our plans, objectives, expectations, assumptions or future events. Words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “continue,” “project,” “plan,” “foresee,” and other similar expressions are intended to identify forward-looking statements, which are generally not historical in nature. These statements involve risks and uncertainties that could cause actual results to differ materially from those described in such statements. These risks and uncertainties include, but are not limited to: system security risks, data protection breaches and cyber-attacks; interruptions in our operations, including our IT systems; defects in our software; failure to identify and attract new customers or to retain our existing customers; problems in production quality and process; failure to meet our customers’ demands in a timely manner; a loss of market share or a decline in profitability resulting from competition; developing technologies that make our existing technology solutions and products less relevant or a failure to introduce new products and services in a timely manner; disruptions relating to the development and execution of our strategy, or a failure to realize the anticipated benefits of such strategy; our inability to sell, exit, reconfigure or consolidate businesses or facilities that no longer meet with our strategy; our inability to develop, introduce and commercialize new products; our substantial indebtedness, including inability to make debt service payments or refinance such indebtedness; the restrictive terms of our credit facility and covenants of future agreements governing indebtedness; our limited ability to raise capital in the future; our inability to adequately protect our trade secrets and intellectual property rights from misappropriation or infringement; our dependence on the timely supply of materials, products and specialized equipment from third-party suppliers; a competitive disadvantage resulting from chip operating systems developed by our competitors; price erosion in the financial payment card industry; failure to accurately predict demand for our products and services; quarterly variation in our operating results; the effect of legal and regulatory proceedings; infringement of our intellectual property rights, or claims that our technology is infringing on third-party intellectual property; our inability to realize the full value of our long-lived assets; the impact of U.S. tax reform legislation; our failure to operate our business in accordance with data privacy laws, the PCI Security Standards Council (“PCI”) security standards or other industry standards, such as Payment Card Brand certification standards; costs relating to product defects; a decline in U.S. and global market and economic conditions; potential imposition of tariffs and/or trade restrictions on goods imported into the United States; economic conditions and regulatory changes leading up to and following the United Kingdom’s exit from the European Union; our dependence on licensing arrangements; inability to renew leases for our facilities or renew leases at existing terms; dependence on our senior leadership team; inability to recruit, retain and develop qualified personnel; the continued viability of the Payment Card Brands; non-compliance with, and changes in, laws in the United States and in foreign jurisdictions in which we operate and sell our products; failure to maintain our listing on the NASDAQ; and other risks and other risk factors or uncertainties identified from time to time in our filings with the Securities and Exchange Commission. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Reference is made to a more complete discussion of forward-looking statements and applicable risks contained under the captions “Cautionary Statement Regarding Forward-Looking Information” and “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 13, 2018. CPI Card Group Inc. undertakes no obligation to update or revise any of its forward-looking statements, whether as a result of new information, future events or otherwise.


Business SummaryScott Scheirman

President and CEO

Copyright 2018 CPI Card Group 4

Results Summary

* Financial results included in this presentation for all periods reflect continuing operations. The sale of CPI UK, which had historically been reported as the U.K. Limited segment, has been presented as a discontinued operation and comparative financial information has been restated.

** See Appendix for definitions of our Non-GAAP financial measures and reconciliations to the most comparable GAAP financial measures.

Second Quarter 2018 Highlights from Continuing Operations*

• Second quarter results in-line with expectations

• Total net sales of $61.5 million, up 12% year-over-year, reflecting growth in both the US Debit and Credit and Prepaid Debit Segments

• Delivered sequential and year/year growth in EMV® card sales volumes in Q2

• GAAP Net Loss of $0.8 million; Adjusted Net Income of ~$1 million**

• Adjusted EBITDA of ~$9 million**

• $37.8 million of liquidity: $17.8 million of cash and $20 million available under revolving credit facility


Strategy

5

Continued Execution in Q2 2018

• CPI executing a strategy and plan that will enable us to better serve the needs of our customers, further capitalize on our addressable market, and deliver shareholder value

• Goal is to be the partner of choice by providing market-leading quality products and service with a market competitive business model

• CPI is focused on four key strategic priorities that will enable us to reach our objectives:

1. Deep customer focus

2. Market-leading quality products and customer service

3. Market competitive business model

4. Continuous innovation


#2 Market-leading quality products and customer service

#1 Deep customer focus

6

Ensure the customer is at the center of all that we do

• Focused on delighting our customers every day• Debit Card Portfolio win with Hancock Whitney Bank

Strategy

With a high bar for excellence, accountability and continuous improvement

• Collaboration with Commercial Business Systems for integrated instant issuance solution• Ended Q2 with ~8,400 Card@Once® installations, up 31% year-over-year• Recent Card@Once® wins with Midland Bank and First US Bank

Four Strategic Priorities to Enable CPI to Reach our Objectives

Copyright 2018 CPI Card Group 7

Strategy

#3 Market competitive business modelWhile ensuring the highest quality and market-competitiveness

• Continue to focus on process improvements and efficiencies, direct and indirect procurement savings, footprint optimization

• In final stages of personalization site consolidation from three facilities to two

• Benefits to cost structure mostly beginning in 2019

# 4 Continuous innovation to generate new opportunities & fuel future growth • CPI Metals™ – Continue to see good customer interest

• Encouraged by Q2 metal card activity and Acorns win

• Dual Interface – In active conversations with customers regarding their dual interface product roadmaps

• Manufactured modest levels of dual interface EMV® cards in the second quarter• Continue to expect that dual interface will not contribute to 2018 revenue in a meaningful way

Four Key Strategic Priorities to Enable CPI to Reach our Objectives


The Market

8

U.S. Market Conditions

• Expect U.S. industry card manufacturing volume will be about flat in 2018 versus 2017 levels

• EMV® card average selling prices expected to decline similar to 2017

• Expect personalization and fulfillment services to be characterized by more modest levels of demand driven by steady-state new card issuance, expiration, and lost/stolen-related card reissuance activity

• Expect that CPI will participate in the Prepaid industry’s modest growth this year

EMV® is a registered trademark or trademark of EMVCo LLC in the United States and other countries.


Summary

9

• Pleased with second quarter results

• Winning new business with existing customers and new customers

• Continued progress on strategic priorities

• Tracking in line with our business plan through the first half of 2018


Financial SummaryJohn D. Lowe

Chief Financial Officer


Financial Results

11

Second Quarter 2018*

* Financial results included in this presentation for all periods reflect continuing operations. The sale of CPI UK, which had historically been reported in the U.K. Limited segment, has been accounted for as a discontinued operation and comparative financial information has been restated.

** See Appendix for definitions of our Non-GAAP financial measures and reconciliations to the most comparable GAAP financial measures.

($ in millions, except EPS)2017 2018 Change ($) Change (%)

Net sales:Products 26.6$ 31.5$ 4.9$ 18.2%Services 28.2 30.0 1.8 6.3%

Total net sales 54.8$ 61.5$ 6.6$ 12.1%

Gross Profit 16.7$ 19.9$ 3.2$ 19.3%gross margin 30.4% 32.3%

Income (loss) from operations 0.7$ 2.7$ 1.9$ 268.1%

Net loss from continuing operations (3.3)$ (0.8)$ 2.5$ ---

GAAP diluted loss per share (EPS) from continuing operations (0.30)$ (0.07)$ 0.23$ ---

Adjusted EBITDA - continuing operations** 7.2$ 8.9$ 1.7$ 24.1%adj. ebitda margin 13.1% 14.5%

*Adjusted net income (loss) from continuing operations** (1.1)$ 1.1$ 2.3$ ---

Adjusted diluted earnings (loss) per share (EPS) - continuing operations** (0.11)$ 0.10$ 0.21$ ---

Cash provided by (used in) operating activities (1.0)$ 0.2$ 1.2$ ---Capital expenditures (2.1)$ (1.4)$ 0.7$ ---Free cash flow (3.1)$ (1.2)$ 1.9$ ---

U.S. Debit and Credit Segment MetricsEMV® Cards Sold 18.8 19.1 0.3

Three Months Ended June 30,


Financial Results

12

Second Quarter 2018 Segment Review

U.S. Debit and Credit**

U.S. Prepaid Debit**

Net Sales EBITDA*

($ in millions)

* See Appendix for definitions of our Non-GAAP financial measures and reconciliations to the most comparable GAAP financial measures.

** Beginning with Q1 2018, CPI began reporting our CPI On-Demand business within the U.S. Debit and Credit segment, vs. the Prepaid Debit segment previously. The realignment of CPI on Demand is consistent with other related personalization operations, and corresponds with CPI’s decision-making process regarding the allocation of resources. CPI restated our 2017 segment information to be consistent with the realignment. This restatement was not material.

$42.4

$7.9

$43.8

$9.9

$12.3$3.6

$15.4

$4.7

Q22017 Q22018

Margin 18.7% 22.7%

Q22017 Q22018

Margin 29.7% 30.4%

Q22017 Q22018

Q22017 Q22018


Financial Results

13

Operating and Free Cash Flow


($ in millions)2017 2018 Change

Net loss from continuing operations (2.2)$ (16.7)$ (14.5)$

Loss (income) from the discontinued operation (1.1) 16.0 17.1 Depreciation and amortization 4.3 5.0 0.7 Stock-based compensation expense 0.3 0.4 0.1 Amortization of debt issuance costs and debt discount 0.5 0.5 (0.0) Deferred income taxes (0.2) (3.2) (3.0) Working capital / other, net (2.6) (1.8) 0.8

Cash provided by (used in) operating activities - continuing operations (1.0)$ 0.2$ 1.2$

Capital expenditures (2.1) (1.4) 0.7

Free cash flow * (3.1)$ (1.2)$ 1.9$



Financial Results

14

Debt and Liquidity

• Term Loan Has No Financial Covenants• Borrowing Under Revolver limited to $20 million above 7.0x Net Debt / LTM Adj. EBITDA • Term Loan matures August 2022 and Undrawn Revolver matures August 2020


($ in millions) Second Quarter2018

Cash $17.8

Debt $312.5

Net Debt $294.7

Weighted Average Effective Interest Rate 7.2%

LTM Adj. EBITDA - continuing operations $24.7

Net Debt Leverage Ratio 12.1X

Liquidity $37.8


Appendix


Non-GAAP Measures

16

Non-GAAPFinancial InformationInaddition tofinancialresultsreported inaccordancewith U.S.generallyacceptedaccounting principles (GAAP),wehaveprovidedthefollowing non-GAAPfinancialmeasuresinthispresentation allonacontinuing operations basis:AdjustedNet(Loss)Income,Adjusted Diluted (Loss)EarningsperShare,EBITDA,AdjustedEBITDA,andFreeCashFlow.Adjusted Net(Loss)IncomeandAdjusted Diluted(Loss)EarningsperShareexclude theimpact ofamortization ofintangible assets;litigationandrelatedchargesincurred inconnection withcertain patentandshareholder litigation; stock-basedcompensation expense;restructuring andother chargesandothernon-operational, non-cashornon-recurring items,netoftheirincome taximpact.Beginningin2018,a21%taxrateisusedtocalculateadjustednetincome(loss)andadjusted diluted earnings(loss)pershare.EBITDArepresents earningsbeforeinterest, taxes, depreciation andamortization allonacontinuing operations basis.AdjustedEBITDAisdefined asEBITDA,adjustedforlitigation andrelatedchargesincurred inconnection withcertain patentandshareholder litigation;stock-basedcompensation expense;restructuring andother charges;foreigncurrency gainorloss;andother itemsthatareunusualinnature, infrequently occurring ornotconsidered partofourcoreoperations, assetforth inthereconciliation. EBITDA,AdjustedEBITDAandAdjustedNet (Loss)Incomeshouldnotbeconsidered analternativetonetlossorlossbeforeincometaxes, cashflowsfromoperatingactivities, oranyothermeasureoffinancialperformance calculated inaccordance withGAAP,asthoseitemsareusedtomeasureoperatingperformance, liquidity ortheabilitytoservicedebtobligations.TheCompanybelievesEBITDA,AdjustedEBITDAandAdjustedNet(Loss)Incomepresent atransparent viewofour recurring operatingperformance andallowmanagementtoreadilyviewoperatingtrends, perform analyticalcomparisons, andidentifystrategiestoimproveoperatingperformance. Managementalsobelievesthesemeasuresareusefultoinvestorsintheiranalysisofour resultsofoperations andprovideimproved comparabilitybetweenfiscalperiods.EBITDA,Adjusted EBITDAandAdjusted Net(Loss)Income,asCPIdefinesthem, maynotbecomparabletoEBITDA,Adjusted EBITDAandAdjustedNet (Loss)Incomeorsimilarlytitled measuresusedbyother entities.WedefineFreeCashFlowascashflowfromoperations lesscapitalexpenditures.Weusethismetricinanalyzingourabilitytoserviceandrepayour debtandtoforecastfuture periods.However,thismeasuredoesnotrepresent fundsavailableforinvestmentorother discretionary usessinceitdoesnotdeductcashusedtoserviceourdebt. Further, managementandvariousinvestorsusetheratiooftotaldebtpluscapitalleaseobligations lesscashtolasttwelvemonths(LTM)AdjustedEBITDA,or“NetDebtLeverage Ratio”, asameasureofourfinancialstrength andabilitytoincur incremental indebtedness whenmakingkeyinvestmentdecisionsandevaluatingusagainstpeers.Availableliquidity isconsidered endingcashplusundrawn availablerevolver.Weightedaverageeffectiveinterest rateiscomputedasinterest expense dividedbydebtof$312.5million multiplied byfour.

Investorsareencouragedtoreviewthereconciliation ofthesehistorical non-GAAPmeasurestotheir mostdirectly comparableGAAPfinancialmeasuresincluded herein.Additional information relatingtocertainfinancial measures,including ourNon-GAAPfinancialmeasures,isavailableinour mostrecentearningsreleaseandonourwebsiteathttp://www.cpicardgroup.com/investor-relations.


Non-GAAP

17

Reconciliation

EBITDA and Adjusted EBITDA - continuing operations:Net loss from continuing operations $ (3.3) $ (0.8) Interest expense, net 5.2 5.6 Income tax (benefit) (1.0) (2.6) Depreciation and amortization 4.3 5.0 EBITDA $ 5.2 $ 7.2

Adjustments to EBITDA:Litigation and related charges 1.8 0.1 Stock-based compensation expense 0.3 0.4 Restructuring and other charges — 0.8 Foreign currency loss (gain) (0.2) 0.5 Subtotal of adjustments to EBITDA 2.0 1.8 Adjusted EBITDA - continuing operations $ 7.2 $ 8.9

Adjusted net income (loss) and earnings (loss) per share:Net loss from continuing operations $ (3.3) $ (0.8) Amortization of intangible assets 1.2 1.2 Litigation and related charges 1.8 0.1 Stock-based compensation expense 0.3 0.4 Restructuring and other charges — 0.8 Tax effect of above items (1.2) (0.5) Adjusted net income (loss) - continuing operations $ (1.1) $ 1.1

(in millions)

Three Months Ended June 30,2017 2018


Non-GAAP

18

Reconciliation

Weighted-average number of shares outstanding:Basic 11.1 11.1 Effect of dilutive equity awards — 0.1 Weighted-average diluted shares outstanding 11.1 11.2

Reconciliation of diluted (loss) per share (GAAP) to adjusted diluted earnings (loss) per share:Diluted (loss) per share - continuing operations (GAAP) $ (0.30) $ (0.07)Impact of net income adjustments - continuing operations 0.19 0.17Adjusted diluted earnings (loss) per share - continuing operations $ (0.11) $ 0.10

Reconciliation of cash provided by (used in) operating activities - continuing operations (GAAP) to free cash flow:Cash provided by (used in) operating activities - continuing operations $ (1.0) $ 0.2Acquisitions of plant, equipment and leasehold improvements (2.1) (1.4)Free cash flow - continuing operations $ (3.1) $ (1.2)

Three Months Ended June 30,2017 2018

(in millions)

2017 2018

2018

(in millions)

Three Months Ended June 30,2017



Non-GAAP

19

Reconciliation

(1) Represents legal costs incurred in connection with certain patent and shareholder litigation.(2) Represents primarily employee and lease termination costs incurred in connection with the decision to consolidate three personalization operations in the United States into two facilities.

As of June 30, 2018

LTM EBITDA and Adjusted EBITDA - continuing operations:Net loss from continuing operations $ (22.2)Interest expense, net 21.6Income tax benefit (17.9)Depreciation and amortization 18.2EBITDA (0.3)

Adjustments to EBITDA:Stock-based compensation expense 1.9Litigation and related charges (1) 3.0Impairment 19.1Restructuring (2) 1.1Foreign currency loss (gain) (0.1)Subtotal of adjustments to EBITDA 25.0LTM Adjusted EBITDA - continuing operations $ 24.7

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