Welcome to CPI Card Group's second quarter 2023 earnings call. My name is Chris, and I'll 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. If you'd like to get in the queue for questions, please press Star then one on your telephone keypad. Now, I'd like to turn the call over to Mike Salop, CPI's Head of Investor Relations. Thanks, operator, and good morning, everyone. Welcome to the CPI Card Group second quarter 2023 earnings webcast and conference call. Today's date is August 8, 2023, and on the call today from CPI Card Group are Scott Scheirman, President and Chief Executive Officer, Jeff Hochstadt, Chief Financial Officer, and John Lowe, Executive Vice President, End-to-End Payment Solutions. Before we begin, I'd like to remind everyone that this call may contain forward-looking statements as they are defined in 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. 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 that we issued this morning. Copies of today's press release, as well as a presentation that accompanies this conference call, are accessible on CPI's investor relations website, investor.cpicardgroup.com. In addition, CPI's Form 10-Q for the quarter ended June 30th, 2023, will be available on CPI's investor relations website. On today's call, all growth rates refer to comparisons with the prior year period, unless otherwise noted. Now I'd like to turn the call over to President and Chief Executive Officer, Scott Scheirman. Thanks, Mike. Good morning, everyone. During today's call, I will give a brief overview and highlight our ongoing strategy. John will discuss CPI's second quarter performance and our updated outlook for the full year. Jeff will review the financial results in more detail before we open the call for questions. We will start on slide 4. As you know, in early June, I announced my plans to retire in early 2024. This was a difficult decision for me as I have enjoyed leading CPI since becoming CEO in late 2017. I need to give priority to my family. Given the company has a strong foundation with an excellent leadership team that has been executing our strategy successfully, I feel comfortable that the time is right for me to retire. Our board is currently undergoing a search for the next CEO, evaluating both internal and external candidates, and expects to name a new CEO in late 2023 or early 2024. I want to assure you that the company remains committed to the key strategic priorities that have guided our success, specifically, deep customer focus, market-leading quality products and customer service, continuous innovation, and a market competitive business model. Although we have adjusted our outlook for the year to reflect some near-term challenges in the industry, I remain confident in the long-term secular growth for the market and in CPI's competitive position. As you can see on slide 5, payment cards issued to consumers continue to grow. The latest figures from Visa and Mastercard show cards in circulation in the US increased at a 10% CAGR for the 3 years ending March 31st and were up 9% compared to the prior year period. Trends toward adoption of higher priced contactless and eco-focused cards also support long-term market growth expectations. As we have discussed in the past, the card business is reoccurring in nature, and our research shows that on average, about 90% of US payment card annual issuance is driven by replacement of existing cards. In short, banks and financial institutions need and want to issue cards. As the market grows over time, we are well positioned to continue to win share based on our differentiated products and End-to-End Payment Solutions portfolio, our strong customer service, and our team's track record of gaining share through execution of our focused strategies. We are currently being affected by softness in customer demand, which has caused us to adjust our sales outlook range for the year. We believe the softness is temporary in nature, as eventually cards will still need to be purchased and issued. Overall, given the market conditions, I am pleased with the results we posted in the second quarter and for the first half of the year, including solid profitability growth. I would now like to turn the call over to John Lowe to further discuss the current environment, our second quarter results, and our outlook for 2023. For those of you who don't know John, he leads all of our debit and credit segments, which represents approximately 80% of the company's net sales, and previously served as the company's CFO. He has done a great job of bringing our End-to-End Payment Solutions businesses together and driving our business forward. John? Thanks, Scott, good morning, everyone. Happy to be on the call today. Let me first go through some of the results for the quarter on slide six before reviewing our full year outlook. For the quarter, we delivered a 1% increase in net sales, driven by 14% growth in our prepaid business, which is led by Peggy O'Leary and her team. Our debit and credit business declined 1%, which reflects both challenging comparisons with the prior year quarter and cautious spending by some of our customers. As you may recall, our debit and credit segment net sales increased 29% in the second quarter of 2022. This was driven by a large card order related to an eco-focused portfolio addition with one of our largest customers. As a result, we sold nearly 15 million more eco-focused cards in last year's second quarter than the current quarter. As a reminder, as of the end of the current quarter, we have sold nearly 100 million eco-focused cards to our customers since late 2019. Aside from eco-focused cards, we delivered increases in debit and credit in this year's quarter, primarily from our other contactless cards, contact cards, and services businesses. Comparisons aside, customer demand is softer than we expected coming into the year, which we believe is driven by a couple of factors. As we mentioned last quarter, we started to see some impact on orders following the banking stress that began in the spring. Although the turmoil that affected small and regional banks has dissipated and the current environment appears to have stabilized, we continue to see cautionary spending among many of our smaller and medium-sized banking customers on cards and the related personalization. We are also hearing from our customers that they were utilizing more existing inventory, as supply chain challenges that previously prompted them to carry more inventory have improved. We believe the ongoing economic slowdown concerns have also likely put more emphasis on customers optimizing inventory levels. As we talk to our customers, our belief is the softness in the market and inventory work downs will likely continue in the near term, but we believe the market will improve later in the year. As Scott noted, card issuance to consumers remains healthy, so we do expect sales to issuers to start to regain momentum once inventory levels are worked down. Turning back to second quarter results, despite the slight sales growth, we were able to increase adjusted EBITDA by effectively managing operating expenses. We grew net income by 6% and Adjusted EBITDA by 18% in the quarter, with Adjusted EBITDA margins increasing 290 basis points to 20.3%. For the first half of the year, we delivered solid 5% net sales growth, a 43% increase in net income, and 15% growth in Adjusted EBITDA. Jeff will give you more details on our results in a few minutes. First, let's turn to slide 7 to discuss our updated outlook for 2023. Today, we are adjusting the sales outlook provided in May, while affirming our outlooks for Adjusted EBITDA growth, free cash flow generation, and Net Leverage. We've updated our full-year sales outlook to a range of flat to low single-digit growth, down from our original outlook of mid-single digit growth due to the factors mentioned previously. This change is attributable to the debit and credit segment, as we continue to expect the prepaid segment to be similar to or slightly better than 2022 levels. Currently, we expect sales to decline in the third quarter and return to growth in the fourth quarter as the market starts to improve and the impact of our sales initiatives takes hold. As we mentioned last quarter, due to the softness we are seeing in the market, we are executing various initiatives to drive sales in 2023, and these will primarily benefit the fourth quarter. On the profit side, we are affirming our outlook for mid to high single-digit adjusted EBITDA growth. Given the lower sales expectation, we have increased our focus on managing discretionary expenses such as outside services costs and managing the timing of implementation of certain projects where possible. As noted, Adjusted EBITDA increased 15% in the first half of the year. We are off to a good start. Although there is still uncertainty in the economic environment and exactly when the market will improve, we have confidence in our teams and their focus on delivering our outlook and believe we have solid plans in place to do so. Longer term, the same positive secular trends remain intact: cards in circulation growth, contactless card market penetration, and eco-focused US card growth trends, where we believe we are a leader. I will now turn the call over to Jeff to review our second quarter and year-to-date results and outlook in more detail. Jeff? Thanks, John. Good morning, everyone. I will begin my overview on slide 9. Net sales increased 1% in the quarter as strong growth from our prepaid business offset the expected softness in debit and credit. Prepaid sales increased 14%, driven by higher sales to existing customers, while debit and credit segment sales decreased 1%, as the previously implemented price increases helped offset some of the reduced demand. Looking at our products and services and debit and credit, declines in eco-focused card sales were largely offset by increases in sales of other contactless cards, contact cards, personalization services, including our print-on-demand business, Card@Once, instant issuance, processing fees, and sales of non-EMV cards. First quarter gross profit increased 1%, largely in line with sales growth. The gross profit margin decreased slightly from 35.8% to 35.5%. We reduced SG&A expenses by $2 million in the quarter, primarily due to lower expenses in prepaid and lower professional service expenses. Compensation expenses increased slightly in the quarter as the impact of increased headcount and salaries and the executive retention package noted in our early June 8-K were offset by reduced short-term employee incentive compensation expense. Most of the cash and equity expense impacts from the executive retention package will be amortized within SG&A through the end of February of next year and recorded as adjustment items to EBITDA. We had a relatively high tax rate of 38.9% in the quarter, which compared to 22.1% in the prior year and brought our year-to-date rate up to 28.6%. The increased rate in the quarter primarily reflects limitations on deductibility of executive compensation related to the CEO retention package. The year-to-date rate is still below last year's level due to higher interest expense deductibility and a favorable adjustment in the first quarter to reflect a change in state tax law. We project a normalized rate, excluding any adjustment items, of between 25% and 30%. Now expect the overall 2023 rate to be near the top of that range. Net income in the second quarter increased 6% to $6.5 million. Adjusted EBITDA increased 18% to $23.3 million. Adjusted EBITDA margin improved from 17.4% in the prior year to 20.3%, driven by reduced SG&A expenses, while net income growth also benefited from lower interest expense, partially offset by a higher tax rate. Turning now to our year-to-date results on slide 10. For the first half of the year, net sales increased 5%, with the debit and credit segment growing 5% and prepaid debit increasing 6%. Debit and credit sales growth was driven by contactless cards, card personalization services, Card@Once, instant issuance solution services, and non-EMV cards. Pricing contributed just under 4 percentage points of the overall growth in the first half, primarily related to actions taken in 2022, so this impact will lessen over the remainder of the year. First half gross profit increased 5% from the prior year, with gross profit margin increasing slightly to 35.6%. SG&A expenses decreased by approximately $1 million in the first half, as reduced professional service expenses, including for third-party SOX costs and lower expenses in prepaid, were partially offset by increased compensation expenses, primarily reflecting increased headcount. Net income in the first half increased 43% to $17.4 million, and Adjusted EBITDA increased 15% to $48.4 million. Adjusted EBITDA margin improved from 18.8% in the prior year to 20.5%, driven primarily by reduced operating expenses, while net income growth also benefited from lower interest expense and a lower tax rate. Turning now to our segments on slide 11. I mentioned the segment sales drivers earlier, I will just discuss segment profitability on this slide. Income from operations for the debit and credit segment decreased 1% in the quarter to $25.1 million, in line with the sales decline. For the first half, debit and credit income from operations increased 11%, driven by sales growth, operating leverage, including the benefits of pricing increases and lower SG&A expenses. Prepaid debit segment income from operations increased 43% in the second quarter to $7.6 million. First half income from operations was flat due to first quarter costs related to the labor conversion at our prepaid production facility. As was mentioned last quarter, we expected prepaid margins to improve from the first quarter as we gained efficiencies from the labor conversion and benefited from more favorable mix and operating leverage. Compared to prior year, prepaid income from operations also benefited from lower SG&A expenses in the second quarter. Turning to the balance sheet, liquidity, and cash flow on slide 12. On a year-to-date basis, we generated $10.3 million of cash flow from operating activities and invested $6.6 million on capital expenditures, which resulted in free cash flow of $3.7 million. This compared to the free cash flow usage of $16.3 million in the prior year period, with the improvement driven by increased net income and reduced working capital usage compared to last year's first half. On the balance sheet at June 30, we had $11 million of cash and $18 million of borrowings outstanding on our $75 million ABL revolver. We had $270 million of senior secured notes outstanding at quarter end, as we repurchased $7 million of notes in the open market in the quarter, bringing our total to $15 million year to date. Our Net Leverage Ratio of 2.8x at the end of the quarter, compared to 3x at year-end and 4x in the prior year second quarter. Our capital structure and allocation priorities remain focused on maintaining ample liquidity, investing in the business, including possible strategic acquisitions, deleveraging the balance sheet, and returning funds to stockholders. As mentioned earlier, we have updated our sales outlook for 2023 from mid-single-digit growth to a range of flat to low single-digit growth, and affirmed our outlooks for mid to high single-digit Adjusted EBITDA growth, more than doubling free cash flow from last year's $13.5 million, and net leverage improvement to between 2.5 and 3 times at year-end. With sales lower than anticipated, we are focused on managing costs through initiatives and delaying certain project spending to drive Adjusted EBITDA growth. I will now pass the call back to Scott for some closing remarks on slide 13. Scott? Thanks, Jeff, and thank you to all of our employees for their efforts in delivering our first half results in a challenging environment.... I also wanted to note that we are pleased to have had our stock added to the Russell 3000 in June, which should further help us in our efforts to increase liquidity for our shares. To summarize today's call, we faced expected demand challenges in the quarter but delivered good profitability growth and have generated solid results overall for the first half. We expect the short-term customer demand challenges to persist in the near term and have adjusted our sales outlook to reflect that, but are focused on profitability and free cash flows and have affirmed our adjusted EBITDA and free cash flow outlooks for the year. We expect the market to improve over time, we continue to remain confident in the long-term secular trends for payment cards and in our ability to continue to gain share. Thank you for joining our call today, we will now open the call for any questions. Operator? Thank you. We'll now open the call for your questions. If you'd like to ask a question, please press star, then one on your telephone keypad. The first question is from Jason Schmidt with Lake Street Capital Markets. Your line is open. Hey, guys. Thanks for taking my questions. Just want to start with sort of your Q4 outlook, sort of that confidence in a return to growth in Q4. I mean, is this based on recent customer order patterns or visibility into inventory levels, or what gives you that confidence that you can return to growth here later this year? Yeah, Jason, good morning. This is Scott. Let me give you a couple thoughts, then I'll let John add some color, too, as he works even more closely with the customers than I do every day. I would say, you know, based on, you know, recent conversations with customers about their project plans, you know, we believe conditions will start to improve later in the year, Jason. Obviously, the timing of the market improving, you know, could change depending upon a variety of factors, you know, economic conditions, our customers' business objectives, and so forth. I think what's really important to note here is the long-term secular trends continue to be intact. Contactless cards will continue to transition in the US. Eco-focused cards are popular, will be very popular. We're the market leader there for sure. You know, 90% on average, annually, 90% of our revenue is reoccurring, so we, we have a, a model that has secular trends, reoccurring revenue in nature. Clearly, we're going through some cautious spending with our customers. And again, these are on, you know, based on recent conversations, and we have, in the last few months, you know, seen some customers push large projects into 2024. You know, I've had know one customer that, that canceled an order because they're tightening their credit a bit, but again, these are temporary conditions. John, I'll let you give some more color on what gives us some confidence in Q4, although not without risk, obviously, for sure. Yeah. Hey, morning, Jason. Good to talk to you again. I mean, I, I think Scott covered it well, but the, the one thing I would say is we're, we're talking to our customers all the time. You know, if you think about what's changed since May, right, there's really been 2 drivers. Scott mentioned this, but we've seen the large banks just, just be a little bit more, some of them at least, focused on inventory. You know, some have moved projects out to next year. Some are tightening credit standards, which has impacted their ordering. And then in the small to medium space, you've seen, you know, the trends that I would say that were occurring in Q2, they've, they've continued to a certain extent in Q3. We do expect those to come back in Q4. The reason being, to, to answer your question directly, is really, you know, we're talking to our customers all the time. There, there's a significant amount of what I would say, quoting activity, projects we're working on. There's always risk in the outlook, but we feel good about the, the end of the year and, and things picking up in relation to where we are now. Okay. No, that's really helpful color. Appreciate it, guys. Then just looking at the prepaid segment, it seemed to be quite strong in Q2. Just curious if this would impact sort of your normal seasonal patterns that you typically see in the second half of the year? You know, Jason, it, it may have a bit of an impact. You know, in each of our businesses, timing can vary among quarters, for for sure. We're pleased with the prepaid business. Peggy O'Leary and the team are doing a great job of growing that business. Again, we see that business probably being slightly better than where it ended up in 2022. There, there is a bit of seasonality in Q3 for sure, as our customers prepare for the holiday season, the gifting season. There could be a bit of timing that moves among the quarters. Overall, I'd probably focus you on prepaid having a solid year for sure and should be a tad bit better in 2023 than it was in 2022. Hey, hey, Jason, the other thing I'd say is, you know, the prepaid business, and again, Peggy O'Leary running that business, she's doing a great job. They've been able to diversify their product set to a certain extent. We've moved into HSA cards, some other areas, doing things more than just our typical prepaid open loop gift cards. That's reduced some of the seasonality, in the business overall. So what you'll see from kind of the second quarter to third quarter to the fourth quarter, I, I think you see a little bit less lumpiness than what you, you would look at, if you looked back to our financials historically. Okay, that makes sense. Then just last one from me, and I'll jump back into queue. How should we think about gross margin here in the second half of the year? Yeah. Hi, Jason, this is Jeff. I think for the gross margin for the rest of the year, obviously, when sales dip a little bit, we typically get a little bit of operating leverage with higher sales. That will put a little pressure on the gross margin. Also, our pricing is lapsing from last year that we implemented. It's been about a year or so. Gross margin will be a little bit of pressure, but on the same token, we are managing our expenses pretty effectively. We don't really give guidance per se on gross margin. On, on, on the adjusted EBITDA, you know, we, we still affirmed our, our guidance for the year. There's a lot that we can again, tighten our expenses in the, in the second half and watch those closely. You know, we feel good about the the adjusted adjusted EBITDA guidance in light of slower slower revenue growth. Okay. That's really helpful. Thanks a lot, guys. Thanks. Thanks, Jason. Thanks. Again, that's star one if you'd like to ask a question. The next question is from Bill Charters with Sabal Capital. Your line is open. Hi, guys. I just wanted to get some clarity on, on the guidance. Regarding third quarter guidance, you mean third quarter is down year-over-year, and that's off of, like, $124 million and $28 million last year? Then you expect Q4 to grow somewhat, and that's how you get to the almost $100 million EBITDA for the year. Am I thinking about that correctly? Yeah, that's correct. Okay. And then in 2015 and 2016 with EMV, you know, it created a cyclicality with lower maturities from 5 years down to 3 years and lower margins. What cyclicality, if any, do you expect from the contactless conversion? Yeah, I, I. Hey, Bill, good to talk to you again. you know, contactless is very different from what we saw in 15 and 16, right? I mean, I, I think if you go back, the mandate from Visa and Mastercard, there was a very clear set date. That was October of 15. you fast-forward to the contactless transition, you know, really started to pick up, you know, slightly in late 18. if you look at the broader market, we've seen the penetration as of the end of 2022 at roughly 50%-60%. we expect that to be in the, you know, 80%, mid-80s, if you will, in the next few years. The, the transition has been slower. There's no mandate, so, I, I wouldn't say this particular change in guidance or what's happening in the current year has anything to do with the contactless transition in its totality. I, I would say that's a much more slow transition, which is, you know, good for our customers, it's good for us, and we do expect that to continue in the coming years. The cyclicality from that, I, I would say, isn't really comparable to what we saw from the inventory building and the boom in the industry that we saw back in the 2015 and 2016 time period from the Visa and Mastercard mandate. Okay, great. Yeah, you expect everything to be fully, kind of, I guess, satur- or fully implemented by 2025? Is that, is that kind of what you were thinking? Well, I mean, you're never going to get to 100% penetration. Right. We do believe kind of 25, 26 time period, you're in the 80%-85% range. You know, keep in mind, our, our business, you know, 1/3 of our revenue on the debit and credit side comes from our largest issuers. 2/3 of our revenue comes from the small to medium issuers, and those small to medium issuers are, are the ones that are much slower to transition. We, we expect, even if you get to 80%, 85%, there's a fairly long tail. The other thing I would say is, you know, the secular trends, just broadly, you know, still remain. The cards in circulation, Scott mentioned this, you know, they're up at a, a roughly 10% CAGR over the last 3 years. Overall, card issuance is, is roughly 90% recurring. You know, if you're looking at the, the eco-focused market, where we believe we're a leader, you know, we sold nearly $90 million or $100 million of those through Q2, and we expect that market to grow at a 50% CAGR over the next few years. I understand the question about the cyclicality and contactless, but we feel, feel good about where we are in the market. Yep. Okay, great. The last question I have is on CapEx. What is maintenance CapEx? I noticed, like, last year was higher than historic. The first quarter was higher, but then this quarter is lower. What do you feel about CapEx and maintenance? Can you just give me some more color on that? Yeah, John, again, you know, if you go back several years ago, where we were very tight on cash, I would say we were probably in a, you know, $8 million-$10 million range. I think in the current environment, we're probably more in that $15 million-$20 million range. We, we do have, you know, projects that are ongoing. We're always trying to improve our operations from an efficiency perspective, a capability perspective for our customers. In doing that, we, we expect to continue to spend kind of in that $15 million-$20 million range over the course of the future. I'd, I'd break that down just to your question. There's CapEx for true maintenance for the organization, there's CapEx for projects and improvement, and the maintenance side is probably more in the $5 million-$8 million range, if I had to put a number around it. Got it. Yep, the rest is, is growth or efficiencies? That's right. Okay, great. Well, I have no other questions. Great quarter, and, and great call. Thanks. Yep. Thank you. Thanks, Bill. We have no further questions at this time, and this will conclude today's CPI Card Group second quarter earnings call. Thank you for joining. Have a good day.