CPI Card Group Inc. Q3 FY2024 earnings call

• Delivered the second largest sales quarter in company history with nearly 20% growth in net sales and adjusted EBITDA. - Innovation with a new advanced contactless chip that integrates the antenna within the chip itself, allowing for design flexibility and reduced carbon footprint, with pilots to be initiated. - Partnered with Rippleshot to offer fraud prevention tools leveraging predictive analytics. - Completed debt refinancing, issuing Senior Notes due 2029 and supporting a secondary offering to aid stock liquidity. - Card@Once instant issuance solutions and personalization businesses growing, prepaid business strong with 13% quarter-over-quarter growth.

In the third quarter, the overall 18% sales increase reflected a 19% increase in the Debit and Credit segment and a 13% increase in the Prepaid segment. The Debit and Credit segment growth was led by unit volume increases from the card business, driven by eco-focused contactless cards and continued growth from Card@Once instant issuance solutions and other card personalization services. The Prepaid segment growth continues to reflect demand for higher-priced fraud-focused packaging solutions. Year-to-date, net sales increased 4% with the Debit and Credit segment increasing 2% and Prepaid increasing 16%.

• Increased net sales range to mid to high single-digit growth from mid-single digit previously. - Adjusted EBITDA outlook to low single-digit growth from slight growth previously. - Full year free cash flow outlook slightly below 2023 level, reflecting working capital improvements, lower capital spending, and lower tax rate. - Year-end net leverage ratio expected to be similar to 2023 level.

• Channel inventories still elevated but improving, which could impact short-term performance. - Long adoption cycles for new chip technology may delay financial benefits. - Uncertainties related to debt refinancing cash outflows affecting net leverage.

Q: Is excess inventory completely behind CPI?

A: Jaeson Schmidt asked if excess inventory was completely behind CPI. Jeff Hochstadt responded that things are improving but not completely behind, noting cards in circulation are still growing and the market is strong.

Q: Impact of new chip technology on ASPs or gross margins?

A: John Lowe said it's early stages, too early to determine financial impact, but CPI is an early adopter of the new technology.

Q: Momentum in push provisioning via MEA partnership?

A: Andrew Scutt asked about push provisioning momentum. John Lowe said momentum is strong but still a minor impact financially, with strong interest but early days.

Q: Fourth quarter guidance and segment strength?

A: Peter Heckmann asked about fourth quarter guidance and segment strength. Jeff Hochstadt responded both businesses are expected to have good continuation in Q4 with no significant seasonality.

Q: Indiana production facility and customer contract?

A: Peter Heckmann asked about Indiana production facility and customer contract. John Lowe mentioned Indiana facility is being built with walls up and roof on, mid-2025 operational; customer contract is a 6-year deal ramping in 2025 and beyond.

Q: Composition of sales growth (existing vs new customers)?

A: Hal Goetsch asked about composition of sales growth. John Lowe responded CPI is winning new customers across the portfolio with sequential growth seen.