Copyright 2018 CPI Card Group. Fourth Quarter & FY 2017 Earnings Conference Call March 12, 2018

Transcription

1 Fourth Quarter & FY 2017 Earnings Conference Call March 12, 2018

2 Safe Harbor Forward-Looking Statements Statements 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 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 thirdparty 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; 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, 2016 filed with the SEC on March 2, 2017 and in the Company s forthcoming Annual Report on Form 10-K for the year ended December 31, 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.

3 Business Summary Scott Scheirman President and CEO

4 Results Summary Q Total net sales of $65.0 million GAAP net loss of $14.6 million, Adjusted net loss* of $400 thousand Adjusted EBITDA* of $3.4 million Cash flow from operating activities of $9.4 million and Free Cash Flow ** of $8.4 million FY 2017 Total net sales of $254.9 million GAAP net loss of $22.0 million, Adjusted net loss* of $2.2 million Adjusted EBITDA* of $25.5 million Cash flow from operating activities of $2.4 million * See Appendix for definitions of our Non-GAAP financial measures and reconciliations to the most comparable GAAP financial measures. ** See slides 12 and 14 to this presentation for a reconciliation of Cash provided by operating activities to Free cash flow. 4

5 Business Review Overview CPI has developed a strategy & plan that will enable it 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 marketleading quality products and service with a cost competitive business model CPI will focus on four key strategic priorities that will enable us to reach our objectives and get CPI fit for growth 1. Deep customer focus 2. Market-leading quality products and customer service 3. Market competitive business model 4. Continuous innovation 5

6 Business Review U.S. Organizational Re-alignment CPI has re-aligned its U.S. business by product to best address its strategy Organizational re-alignment is focused on enhancing product and service delivery, driving faster decision-making, and improving accountability and speed to market. New business units are: Secure Card Solutions, which includes CPI Metals Personalization Solutions, including CPI On-Demand Prepaid Each business unit is led by a General Manager with full P&L responsibility. 6

7 Business Review Four Key Strategic Priorities to Enable CPI to Reach its Objectives Deep customer focus Ensure the customer is at the center of all that we do Improving productivity and reducing costs While ensuring the highest quality and market-competitiveness Platforms and solutions are being leveraged and enhanced to create choice, convenience and control for our customers Executing on: Process improvements and efficiencies Direct and indirect procurement savings An optimized footprint Consolidating personalization operations from 3 facilities to 2 Market-leading quality products and customer service With a high bar for excellence, accountability and continuous improvement Enhanced continuous improvement initiatives Emphasis on leadership and accountability and training to ensure consistency Ongoing innovation to generate new opportunities and fuel future growth Card@Once CPI Metals CPI On-Demand CPI Digital Solutions Secure packaging and packaging innovation 7

8 The Market U.S. Market Conditions The market for U.S. Debit and Credit card manufacturing remains challenging Expect U.S. industry card manufacturing volume will be about flat in 2018 versus 2017 levels Expect average selling prices will continue to decline during the course of this year, similar to what CPI experienced in 2017 Personalization and fulfillment services will be characterized by more modest levels of demand driven by steady-state new card issuance, expiration, and lost/stolen-related card reissuance activity Encouraged by early 2018 momentum in Prepaid Business, and expect that CPI will participate in the industry s modest growth this year 8

9 Business Highlights Emerging Products & Solution Areas CPI Metals CPI On-Demand Dual Interface EMV Ended Q4 with ~7,400 installations, up from ~6,700 at the end of Q3 and ~5,600 at YE 2016 Continue to see good demand from small and medium-sized banks who are seeking differentiation Began shipping first metal cards in October Encouraged by the level of activity we are seeing in early 2018 Revenue growth continues to progress and encouraged by the momentum Added new business wins in the healthcare and transportation sectors In active conversations with customers regarding their dual interface product roadmaps At this time not factoring dual interface into 2018 plans in a meaningful way 9

10 Summary 2017 was a challenging year Believe there is significant long-term opportunity for CPI Have put a strategy and plan in place that will get CPI fit for growth Look forward to sharing our progress with customers, analysts, and investors 10

11 Financial Summary Lillian Etzkorn Chief Financial Officer

12 Financial Results Fourth Quarter and FY 2017 ($ in millions, except EPS and ASP) Fourth Quarter Year Ended December 31, Change Change Net sales: Products $ 30.3 $ 36.0 $ (5.7) $ $ $ (43.2) Services (10.6) Total net sales $ 65.0 $ 67.4 $ (2.4) $ $ $ (53.8) Gross Profit $ 18.6 $ 20.4 $ (1.8) $ 75.0 $ $ (26.9) gross margin 28.7% 30.3% 29.4% 33.0% (Loss) Income from operations $ (21.8) $ (0.9) $ (20.9) $ (18.1) $ 29.0 $ (47.1) Net (Loss) Income $ (14.6) $ (4.0) $ (10.6) $ (22.0) $ 5.4 $ (27.4) GAAP Diluted EPS $ (1.31) $ (0.36) $ (0.95) $ (1.98) $ 0.48 $ (2.46) Adjusted EBITDA* $ 3.4 $ 8.6 $ (5.3) $ 25.5 $ 57.2 $ (31.7) adj. ebitda margin 5.2% 12.8% 10.0% 18.5% Adjusted Net (Loss) Income* $ (0.4) $ 0.1 $ (0.5) $ (2.2) $ 15.7 $ (17.9) Adjusted diluted EPS* $ (0.03) $ 0.01 $ (0.04) $ (0.20) $ 1.40 $ (1.60) Cash provided by operating activities $ 9.4 $ 20.2 $ (10.8) $ 2.4 $ 60.0 $ (57.5) Capital Expenditures $ (1.0) $ (1.9) $ 0.9 $ (8.8) $ (14.3) $ 5.5 Free Cash Flow $ 8.4 $ 18.3 $ (9.9) $ (6.4) $ 45.7 $ (52.0) U.S. Debit and Credit Segment Metrics EMV Cards Sold (4.3) (34.1) EMV Average Selling Price (ASP) $ 0.90 $ 0.97 $ (0.07) $ 0.86 $ 0.95 $ (0.09) * See Appendix for definitions of our Non-GAAP financial measures and reconciliations to the most comparable GAAP financial measures. 12

13 Financial Results Fourth Quarter 2017 Segment Review ($ in millions) U.S. Debit and Credit Net Sales $37.9 $43.7 Q Q EBITDA* $6.3 ** $8.8 Q Q Margin 16.5% 20.2% U.S. Prepaid Debit $19.0 $12.6 $6.5 $3.2 Q Q Q Q Margin 34.5% 25.5% $7.5 $7.8 U.K. Limited Q Q * See Appendix for definitions of our Non-GAAP financial measures and reconciliations to the most comparable GAAP financial measures. ** Segment EBITDA of $(10.9) million excluding non-cash goodwill impairment charge of $17.2 million in the fourth quarter of 2017 was $6.3million. 13 $0.0 $1.0 Q Q Margin 0.1% 12.8%

14 Financial Results Operating and Free Cash Flow Positive Operating Cash Flow in Q4 and FY 2017 Positive Free Cash Flow in Q ($ in millions) Three Months Ended December 31, Twelve Months Ended December 31, Change Change Net income $ (14.6) $ (4.0) $ (10.6) $ (22.0) $ 5.4 $ (27.4) Impairments Depreciation and amortization Stock-based compensation expense (0.2) (1.6) Amortization of debt issuance costs and debt discount Excess tax benefits from stock-based compensation - (0.1) (0.6) 0.6 Deferred income taxes (8.2) (1.4) (6.8) (9.1) (1.8) (7.3) Working capital / other, net (9.7) (7.5) 31.9 (39.4) Cash provided by operating activities $ 9.4 $ 20.2 $ (10.8) $ 2.4 $ 60.0 $ (57.6) Capital Expenditures (1.0) (1.9) 0.9 (8.8) (14.3) 5.5 Free Cash Flow $ 8.4 $ 18.3 $ (9.9) $ (6.4) $ 45.7 $ (52.0) 14

15 Financial Results Debt and Liquidity Term Loan Has No Financial Leverage Covenants Borrowing Under Revolver limited to $20 million above 7.0x Net Debt / LTM Adj. EBITDA ($ in millions) Year End Cash $23.2 $37.0 Debt $312.5 $312.5 CPI Debt Maturities $(Millions) Term Loan $313 Net Debt $289.3 $275.5 Weighted Average Interest Rate 6.7% 6.3% LTM Adj. EBITDA* $25.5 $57.2 (Undrawn) Revolver $40 Net Debt Leverage Ratio 11.4X 4.8X Liquidity $43.2 $ * See Appendix for definitions of our Non-GAAP financial measures and reconciliations to the most comparable GAAP financial measures. 15

16 Appendix

17 Non-GAAP Measures Non-GAAP Financial Information In addition to financial results reported in accordance with U.S. generally accepted accounting principles (GAAP), we have provided the following non-gaap financial measures in this presentation: Adjusted Net (Loss) Income, Adjusted Diluted (Loss) Earnings per Share, EBITDA, Adjusted EBITDA, and Free Cash Flow. Adjusted Net (Loss) Income and Adjusted Diluted (Loss) Earnings per Share exclude the impact of impairments, amortization of intangible assets, litigation and related charges incurred in connection with certain patent and shareholder litigation, stock-based compensation expense, performance bonuses in connection with the EFT Source acquisition, restructuring and other charges and other non-operational, non-cash or non-recurring items, net of their income tax impact. EBITDA represents earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA, adjusted for impairments, litigation and related charges incurred in connection with certain patent and shareholder litigation, stock-based compensation expense, performance bonuses in connection with the EFT Source acquisition, restructuring and other charges, foreign currency gain or loss, and other items that are unusual in nature, infrequently occurring or not considered part of our core operations, as set forth in the reconciliation. EBITDA, Adjusted EBITDA and Adjusted Net (Loss) Income should not be considered an alternative to net loss, income or loss before income taxes, cash flows from operating activities, or any other measure of financial performance calculated in accordance with GAAP, as those items are used to measure operating performance, liquidity or the ability to service debt obligations. The Company believes EBITDA, Adjusted EBITDA and Adjusted Net (Loss) Income present a transparent view of our recurring operating performance and allow management to readily view operating trends, perform analytical comparisons, and identify strategies to improve operating performance. Management also believes these measures are useful to investors in their analysis of our results of operations and provide improved comparability between fiscal periods. EBITDA, Adjusted EBITDA and Adjusted Net (Loss) Income, as CPI defines them, may not be comparable to EBITDA, Adjusted EBITDA and Adjusted Net (Loss) Income or similarly titled measures used by other entities. We define Free Cash Flow as cash flow from operations less capital expenditures. We use this metric in analyzing our ability to service and repay our debt and to forecast future periods. However, this measure does not represent funds available for investment or other discretionary uses since it does not deduct cash used to service our debt. Further, management and various investors use the ratio of total debt less cash to Adjusted EBITDA, or Net Debt Leverage, as a measure of our financial strength and ability to incur incremental indebtedness when making key investment decisions and evaluating us against peers. Investors are encouraged to review the reconciliation of these historical non-gaap measures to their most directly comparable GAAP financial measures included below. Additional information relating to certain financial measures, including our Non-GAAP financial measures, is available in our most recent earnings release and on our website at 17

18 Non-GAAP Reconciliation Three Months Ended December 31, Twelve Months Ended December 31, (in millions) (in millions) EBITDA and Adjusted EBITDA: Net (loss) income $ (14.6) $ (4.0) $ (22.0) $ 5.4 Interest expense, net Income tax (benefit) expense (12.5) (2.1) (16.4) 3.1 Depreciation and amortization EBITDA $ (17.3) $ 3.3 $ 0.5 $ 45.5 Adjustments to EBITDA Impairments Litigation and related charges Stock-based compensation expense EFT Source acquisition performance bonuses Restructuring and other charges Foreign currency (gain) loss 0.2 (0.6) 0.4 Subtotal of adjustments to EBITDA Adjusted EBITDA $ 3.4 $ 8.6 $ 25.5 $ 57.2 Adjusted net (loss) income and (loss) earnings per share: Net (loss) income $ (14.6) $ (4.0) $ (22.0) $ 5.4 Impairments Amortization of intangible assets Litigation and related charges Stock-based compensation expense EFT Source acquisition performance bonuses Restructuring and other charges Tax effect of above items (7.7) (2.2) (10.7) (5.6) Adjusted net (loss) income $ (0.4) $ 0.1 $ (2.2) $

19 Non-GAAP Reconciliation Three Months Ended December 31, Twelve Months Ended December 31, (Loss) Income from operations, excluding non-cash impairments (Loss) Income from operations $ (21.8) $ (0.9) $ (18.1) $ 29.0 Impairments (Loss) Income from operations, excluding non-cash impairments $ (2.7) $ (0.9) $ 1.0 $ 29.0 Three Months Ended December 31, Twelve Months Ended December 31, U.S. Debit and Credit Segment EBITDA $ (10.9) $ 8.8 $ 11.5 $ 52.1 Non-cash goodwill impairment charge EBITDA, excluding non-cash goodwill impairment charge $ 6.3 $ 8.8 $ 28.6 $ 52.1 Three Months Ended December 31, Twelve Months Ended December 31, (in millions) (in millions) Weighted-average number of shares outstanding: Basic Effect of dilutive equity awards Weighted-average diluted shares outstanding Three Months Ended December 31, Twelve Months Ended December 31, Reconciliation of diluted (loss) earnings per share (GAAP) to adjusted diluted (loss) earnings per share: Diluted (loss) earnings per share (GAAP) $ (1.31) $ (0.36) $ (1.98) $ 0.48 Impact of net (loss) income adjustments Adjusted diluted (loss) earnings per share $ (0.03) $ 0.01 $ (0.20) $