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John Lowe

Thanks, Mike and good morning everyone. Overall, we're pleased with the 4th quarter results and what we accomplished in 2024. Looking back on my 1st year as CEO, there are several important areas I would like to highlight. First, we refined and advanced our strategy, maintaining our emphasis on customers and quality, while also increasing our focus on innovation and diversification.
This includes intensifying efforts to expand into adjacent markets by providing new offerings for our existing customer base and delivering existing solutions to new customer verticals. We also enhance the management team, promoting from within to balance our leadership, talent and skills, and bringing in outside expertise to support our next stage of growth, and we delivered good results, returning to growth despite the channel inventory challenges in our debit and credit card business.
Our pre-paid business produced exceptional performance, growing 26% for the year and exceeding $100 million in net sales.
This growth was driven by strong demand for our packaging solutions focused on fraud prevention and expansion of one of our adjacencies, the Healthcare Payment Solutions vertical.
Our debit and credit business increased 4% for the year, with strong growth in the second half, led by sales of eco-focused contactless cards.
In addition to our recovered ocean-bound plastic and other more environmentally friendly debit and credit card offerings, we're also seeing strong marker response to our eco-focused offerings in the prepaid space.
In total, we have sold more than 350 million EcoFocus credit, debit, and prepaid card or packaging solutions since launch, with Prepaid contributing more than 200 million of these in certification in 2023.
Overall, we continue to win business across our portfolio in 2024 and believe we gain market share during the year.
We also generated strong free cash flow, exceeding $34 million for the full year while increasing our capital spending investments. And we completed several key capital structure actions during the year that we believe enhance our market positioning.
We purchased $9 million of stock at an average price of just over $18 which we view as a strong investment for our shareholders.
We refinanced our debt, including issuing $285 million of new senior notes that extended our debt maturity to 2029.
And we completed a 1.4 million share secondary offering of common stock on behalf of our majority shareholder, which reduced its holdings from 56% to 43% of shares outstanding, increased our public float, and brought in new shareholders.
Turning to our 2025 outlook, we currently project mid to high single digit net sales growth for the year, led by our debit and credit business, which reflects our goal to continue to gain market share.
We believe the channel inventory situation is much improved, but it's still above historical levels, and we expect the market to continue to normalize during the year.
We expect adjusted IBEDA growth of mid to high single digits in 2025 as well, which reflects increased investments for the future, including for our innovation and diversification strategies.
We also expect to generate strong free cash flow.
And reduce that leverage by year end.
Jeff will provide you more detail on the results and Outlook in a few minutes. But first, let me highlight our strategy on slide 5.
Our vision is to be the most trusted partner for innovative payments technology solutions. We aim to support that vision by providing market leading high quality payment solutions and best in class customer service.
In managing our business, we focus on four main strategic pillars customer focus, quality and efficiency, innovation and diversification, and people and culture. Our focus on the customer's evidenced by our net promoter scores. Where we have consistently ranked high relative to fears and continue to get better.
The innovation and diversification pillar includes our efforts to expand our addressable markets by offering new solutions to existing customers and existing solutions to new customer verticals. We have already made significant progress in advancing these expansion strategies, including increasing our addressable market through offerings of healthcare payment solutions, which contributed to our strong pre-paid growth in 2024.
The new areas we have entered have increased our total addressable market from $1.5 billion related to our traditional core businesses to approximately $2 billion and there is more opportunity to come.
For example, we are in the early stages of investment to support the penetration of the closed loop pre-paid market in the US where many customers are shifting to higher value secure packaging solutions due to regulation or proactive moves to combat fraud.
And we continue to advance our digital solutions, such as push provisioning for mobile wallets with more integrations and implementations underway with additional mobile banking app providers and platforms as we continue to make our services more available to the broader market.
While new solutions generally take time to gain adoption and turn into meaningful revenue, these opportunities leverage existing strengths and we believe they will allow us to further expand our total addressable market in the future.
We also remain confident in the long-term growth of our traditional markets as payment card issuance continues to grow in the US.
We are stepping up investments in 2025 to take advantage of these opportunities through both CapEx and OX.
This includes investment in our Indiana factory for developing digital solutions and closed loop pre-paid capabilities.
Among other.
Initiatives, as we balance generating strong profitability in the near term with accelerating our long-term growth.
Overall, we expect 2025 to be a good year and we also plan to make strong progress on our various market expansion initiatives. I would now like to turn the call over to Jeff to review our financial results and Outlook in more detail. Jeff.

Jeff Hochstadt

Thanks, John, and good morning everyone.
I will begin my overview on slide 7.
Net sales increased 22% in the fourth quarter, led by great performance from pre-paid, as well as growth in debit and credit card volumes and personalization services. Adjusted E dot increased 10% and net income more than doubled.
Free cash flow was.
Very strong.
As we generated more than $34 million for the year, despite higher capital spending.
Turning to the detailed fourth quarter results on slide 8, the overall 22% sales increase reflected a 59% increase in our prepaid segment and a 12% increase in our debit and credit segment.
Prepaid growth was driven by continued strong demand for higher priced, fraud focused packaging solutions, as well as incremental growth from non-financial customer verticals, including our healthcare payment solutions.
Debit and credit card growth was led by contactless with strong growth from eco-focus cards. Gross profit increased 20% in the quarter, while gross margins decreased from 34.4% in the prior year quarter to 34.1% as operating leverage was offset by some negative product mix.
SGNA, including depreciation and amortization, increased $1.8 million from the prior year, primarily due to increased compensation expenses, including higher employee performance-based incentive compensation expense partially offset by expense related to the previous CEO retention agreement in the prior year.
The tax rate in the quarter of 17.9% reflected benefits related to a statute of limitations expiration.
Net income increased 148%, driven by sales growth, a lower effective tax rate, and the impact of the CEO retention expense in the prior year.
Adjusted EPEAT increased 10% to $21.9 million while adjusted EPITA margins declined from 19.3% to 17.5%. Turning now to our fo year results on slide 9.
Net sales increased 8% for the full year, which reflected 26% growth from the pre-paid segment and 4% from debit and credit.
Prepaid delivered an exceptional year, well above our original expectations. The debit and credit segment increase was driven by growth in contactless cards, card at once, instant issuance, and personalization services. Card growth was led by strong performance from EcoFocus contactless cards, and contactless overall represented approximately 90% of our chip card volume in 2024, up from just over 80% in the prior year.
Full year gross profit increased 10% as gross margin increased from 35.0% to 35.6%, driven by operating leverage from sales growth.
SGNA increased $14.5 million from the prior year, driven by increased employee performance-based incentive compensation as we return to growth following a challenging year in 2023, investments in people and increased medical costs.
Interest expense increased $7.2 million for the year, primarily due to the $5.8 million dollar call premium paid to redeem our senior notes due in 2026 in the third quarter.
Other expense reflects a $3 million loss on debt extinguishment, which was also recorded in the third quarter.
The full year tax rate of 22% declined versus the prior year rate of 30.4% due to increased stock compensation deductibility and the benefits realized related to a statute expiration in 2024, as well as limitations on executive compensation deductibility in the prior year.
We would expect the rate to be in the mid to high 20% range moving forward.
Net income for the full year decreased 19% to $19.5 million with the reduction primarily due to the $8.8 million of pre-tax debt refinancing costs incurred in 2024 and increased SGNA partially offset by sales growth, gross margin expansion, and a lower effective tax rate. Adjusted EBITDA incurs 3% to $91.9 million and adjusted EBITDA margin declined from 20.1% to 19.1%, primarily due to increased employee performance-based incentive compensation expense.
Turning now to our segments on slide 10, I discussed the segment sales drivers earlier, so I will highlight segment profitability on this slide.
Income from operations for the debit and credit segment decreased 7% in the fourth quarter, primarily due to negative product mix, and 2% for the year, primarily driven by the impact of increased compensation-related expenses.
Prepaid debit segment income from operations increased 106% in the quarter and 49% for the year, driven by sales growth and margin expansion from operating leverage.
Turning to the balance sheet, liquidity and cash flow on slide 11.
We generated $43.3 million of cash from operating activities in 2024 and invested $9.3 million in capital expenditures, which resulted in free cash flow of $34.1 million. This compared to operating cash flow of $34 million and free cash flow of $27.6 million in 2023. The increased generation in 2024 was primarily driven by higher net income, excluding the debt refinance costs. And improved working capital, including lower senior no interest payments due to the refinancing timing, partially offset by a $3 million increase in capital spending. On the balance sheet at year end, we had $33.5 million of cash, no borrowings on our ABL revolver, and $285 million of senior notes outstanding.
Our net leverage ratio was 3.0 times down from the 2023 year-end level 3.1 times, despite cash outflows during the year for share repurchase and the debt refinancing.
Our capital structure and allocation priorities remain focused on investing in the business, including possible strategic acquisitions, deleveraging the balance sheet, and returning funds to stockholders.
In 2024, we bought back approximately $9 million of our common stock, and our authorization expired at year end.
Before we move on to our 2025 outlet, we have provided the latest US cards and circulation trends from Visa and Mastercard on slide 12. For the three years ending September 30th, cards in circulation in the US increased at a 9% kicker. In addition, the February Nielsen report indicated the total number of general purpose credit cards in the US increased 7% in 2024.
This was driven by both growth and the number of cardholders and a 3.5% increase in the number of cards per cardholder, which stood at more than 5 credit cards per holder in 2024.
Nielsen also reported a 9% increase in the total number of credit and debit cards for the year, including general purpose prepaid cards.
The latest earnings reports from large bank issuers have indicated healthy account growth and card business outlooks as well.
The data continues to show positive issuance trends as well as cards remaining the predominant form of payment for in-person transactions in the US, further supporting the card growth dynamic.
Turning now to our 2025 outlook on slide 13.
We expect a good year in 2025. Although channel inventories of credit and debit cards are still being worked down, positions are better than last year, and we expect the market to continue to normalize. Our outlook projects mid to high single digit net sales growth for 2025, led by our debit and credit segment. We are not planning significant growth from our pre-paid segment coming off the record levels reached in 2024, but we do expect to make some inroads into the closed loop market late in the year as our capabilities become operational.
We expect adjusted e growth to also be mid to high single digits as we ramp up investments in digital, or Indiana factory, and other areas to drive long-term growth.
From a quarterly perspective, we expect net sales and adjusted EEA growth to be strongest in the second half of the year. For the 1st quarter, we expect sales to increase, but currently anticipate adjusted EPA to be slightly down due to timing of spending and mix.
We expect our full year 2025 free cash flow to be slightly below the 2024 level due to increased cash interest expense driven by the timing of our refinancing last year and higher rates and increased capital spending.
The increased cap backs in 2024 and 2025 for our Indiana production facility and other sales related machinery will also impact depreciation and amortization expense in our P&L, and we expect DNA and cost of sales to increase by approximately $3 million in 2025, although this does not impact EITA.
Finally, we expect to reduce our net leverage ratio to below 3.0 times by year end, driven by growth in adjusted EA and strong cash flow generation.
I will now pass the call back to John for some closing marks on slide 14, John.

John Lowe

Thanks Jeff. To summarize, we made a lot of strategic progress in 2024, generated good results, and finished the year strong. Our pre-paid business was outstanding. Our debit and credit business grew despite challenges, and we generated strong free cash flow while investing for the future.
We also completed significant capital activities which should benefit our company and shareholders in future years. We're projecting a good year in 2025 and we'll continue to execute our strategies to gain share and expand our addressable markets and drive long-term growth. We look forward to reporting our progress, operator, we will now open the call up for questions.

Question and Answer Session

Operator

(Operator Instructions) Andrew Scutt, Roth Capital Partners.

Andrew Scutt

Hey, good morning guys.
Thank you for taking my questions. So the first one here I'm going to TRY and tie a couple questions into one, but, the prepaid results were very strong. You guys kind of touched on the sales drivers there. Could you, kind of give some detail around, the gross margins which were, also very chunky and then also, kind of dig a little bit more into some of those verticals you touched on. That are performing well in prepaid including I think you said some healthcare payments and as well as your eco-friendly cards so any any details that would be great.

John Lowe

Yeah, Andrew, good morning.
So let me, I'll cover part of your, two questions and then I'll pass off to Jeff, but, yeah, our prepaid team did a great job. We've seen a lot of progress in the prepaid space in terms of higher value, packaging, due to fraud protection and the innovation of our team up in Minnesota, working with our customers and that really benefited us in 2024 and. We're happy about that performance. In terms of our verticals, healthcare definitely has been a vertical that's been a good adjacency for us. We started that a couple of years ago and really saw great progress in 2024. That's part of the reason for the growth in pre-paid, especially Q4 I believe was up nearly 60%. So kudos to the team. And eco we've actually been doing that. We, became certified under FSC certification in 2023, and since that point in time, along with the rest of our company, Prepaid has really taken a position of moving most of what we produce from a paper perspective into eco-focused in some way, shape, or form, and so they've contributed significantly to our eco-focused production. Along with what we do in our car manufacturing side, so happy about that as well. Let me let Jeff, cover the gross margin side.

Jeff Hochstadt

Yeah, hey, Andrew, you're right in the gross margin for the year, we did, we were able to increase gross gross margins by 60 basis points, so we feel good about, continuing to generate operating leverage, but I think before you kind of probably see that really strong gross margins and and pre-paid obviously. Really strong growth in Q4 and pre-paid, leading to more operating leverage in that segment and debit and credit, we talked about this from time to time. There are some mixed issues. We had a couple of sales in Q4 that were particularly, lower margin sales that a little bit more unusual, but that happens from time to time, and we still feel really good about our operating model as we grow, continue to be able to gain gain operating leverage, in the future it's just about, how much balancing how much we reinvest back in the business, from an event perspective.

Andrew Scutt

Great. Well, thank you for the call and second one from me, you guys gave some some details around the inventory clearance sounds like a second half of 25, we should really see some progress there. You guys did liquidate look like around $20 million in inventory. Can you just, any additional caller from from what you provided on the prepared remarks would be great.

Jeff Hochstadt

Yeah, I know, if you look at our inventory balance, I think that's what you're talking to on the balance sheet, you did see that, we have this longer term agreement, commitment of purchasing chips, it goes through the beginning of 2026. So it really has to do with the timing of purchasing. We do feel like throughout 2025, the inventory balance might go up a little bit but the, but by the end of the year, similar to what happened, what you saw in 2024, we should be able to bring that balance, that inventory balance down. So it's just, it's really about the timing of committed purchases.

Andrew Scutt

Great, well thanks for the, yeah, no thanks for the for the answers and the continued progress and I'll opp back in the queue.

John Lowe

Thanks, Andrew.

Operator

Peter Heckmann, D.A. Davidson.

Peter Heckmann

Hey, good morning. Could you talk a little bit about, a little bit more about what you need to do, as a company and and then just the marketing efforts to.
To to penetrate that prepaid closed loop market and and he talked about kind of the size of it and where you might start. I mean, I would assume you're already working with a lot of those customers on the open loop side, but yeah, the thoughts about, entering that that closed loop in a more significant way and and how big that could be.

John Lowe

Yeah, Pete, good morning. Yeah, the closed loop side is definitely it is larger than the open loop and just as a reminder for. Those following us, we are, predominantly in open loop, secure packaging of gift cards. That's been our bread and butter for a number of years. Closed loop historically has been lower value. It's what you see when you walk into a Starbucks, if you will, to get a Starbucks card for, that you can only use Starbucks. But, given the change in regulatory environment, given the need for fraud protection that's actually bleeding. Into the closed loop side as well, that market, which we believe is, 4 to 5 times greater in size than the open loop market, is a good opportunity for us. It's a longer term opportunity and and to your point, our customers that we are selling open loop into also have relationships on the closed loop side so that benefits us as well. So we are making investments to move into closed loop expansion. We have been doing some closed loop on a very small scale, but those investments won't necessarily arrive and give us the capacity and capabilities to expand until late in 25, so we would expect a small impact on 2025. But the punch line is the closed loop market is a great market for us and we are the leader in secure packaging from an gift card perspective in the US and because of that, we feel like we're well positioned to capitalize on the close of the market.
Okay, that's good to hear. That's good to hear and then just an update on the facility in Indiana, do you expect that to go online here later this.
Year?
Yeah, the, our.
Indiana facility is on track. We expect to be up and running in the second half of 25, but Jeff, would you add any any colors? Yeah.

Jeff Hochstadt

No, I think, we're excited about getting this facility online. We've talked about it in the past. We're buying some new equipment, some automation, we're really looking forward to putting some of the production through the new facility and being able to gain some efficiency, so. We're quite excited, right now it's pretty much, on schedule. There are no, significant hiccups, and we should be operational, like John said, second half of the year.

Peter Heckmann

Okay, great. So any cap actually related to that they would likely be in the first half, you think?

Jeff Hochstadt

Yeah, I mean, yes, we will have, you're right this year that there will be some more CapEx associated with Indiana and John was just talking about the closed loop opportunity, there will be some CapEx there to buy some more capacity, some equipment that will be more specialized to the closed loop opportunity. So, we do feel like, just in terms of CapEx, if you look at the last few years, our CapEx has been a little bit lumpy, anywhere from 6 million a year to 18 million a year. If you go back to the last 3 years, we'll probably be closer to to the higher end of that, in 2025 in terms of CapEx just because of these two, mainly because of these two areas and and some other other equipment we're purchasing as well.

Peter Heckmann

Okay, great, and I think you said in the press release you would expect free cash flow to be, maybe down just a little bit or or or close to the level of 2024, correct?

Jeff Hochstadt

Yeah, we do have, we do have not only the higher caps that we just mentioned, but relative to 2024 we do in 2024 we we actually only had 10 months of cash interest paid, if you will, just based on our refi. So we'll go back to more normal 12 months of cash interest expense in 2025 on a relative basis, that that also is an impact.
But.
That kind of offsets the higher profitability in 2020.
2025.

Peter Heckmann

Okay, great, that's.
Helpful.
Like.

Operator

(Operator Instructions) Jacob Stephan, Lake Street.

Jacob Stephan

Hey guys, I appreciate you taking the questions, and congrats on the quarter. Maybe just to start off, I want to delve into kind of the healthcare market a little bit. Obviously you gave some good color 60% growth in in Q4, but when I think of healthcare, I think donor incentives, co-pay programs. What are kind of the verticals within prepaid that you're you're seeing strength within the Healthcare.

John Lowe

Yeah, Jacob, just, good morning. The 60% growth is actually our broader pre-paid business, just to make that clear, but the health has has been a strong contributor of ours. Think about, when you're receiving an FSA card, an HSA card in the mail, it's got all the marketing materials around it. You've got to do that in, high volume, high variability, high accuracy. In that benefits time frame late in the year and then throughout the year, that's another area of the broader US payment card market where people lose their cars, they switch companies for whatever reason, they need a replacement or something new sent to them. So, that's in a vertical that we haven't been in if you go back and look at us historically. So we entered into that in the last couple of years and it's a good market for us. It's a growing market with the broader economy and in addition, it's a very much a recurring market once you get in and you you do it well. So, a lot of these types of issuing cycles that occur annually. And again, high volume, high variability, and you have to be highly accurate. That's where we excel and they are quasi prepaid cards since why they fit in our prepaid.

Jacob Stephan

Got it.Understood that's really helpful. And maybe just, kind of to dig a little bit deeper, on the kind of margin impact of that healthcare, business. Are margins relatively similar to kind of the pre-paid, credit and debit or they're slightly higher given the secure packaging nature and kind of customization.

John Lowe

Yeah, I mean, I. I don't know if we we'd comment specifically on the margins for health care in general, but it's a good vertical to move into, margins as well as pricing, it's all based on value proo proposition of of what you're providing your customers, our goal is to provide innovative differentiated solutions and hold, strong margins across the business, but our pre-paid business broadly, does have a strong margins. It has for a number of years and that's because the value proposition that we provide to our customers. There.

Jacob Stephan

Okay, got it, understood. I appreciate you taking the questions. Yeah, thanks, Jacob.

Operator

Hal Goetsch, B. Riley.

Hal Goetsch

Hey guys, a quarter and Outlook. I wanted to ask about the prepaid segment in Q4. You might have covered this, but I just want to make sure I understand it. The revenue was up 26% and the commentary is the existing customers and you had sales of higher value added packet it implies like, no, the higher value added packaging has higher pricing and just kind of curious what's the what's the trade-off between, volume and price to get to that 26%.

Mike Salop

Yeah, just to clarify how 26% was for the full year, the fourth quarter was 59.
Yeah, we don't break out necessarily volume versus value. I'd say, the healthcare is volume driven, that's that's incremin units. A lot of the other business was was more value driven, just higher value solutions with our customers.

Hal Goetsch

Okay, and maybe in retail and, is there like a completely shift in in pricing.
For more security things you've mentioned that you'll you'll la that at some point where all the installed base and the inventory and the channels is the higher the more secure, and the better packaging that's how many is that largely complete or we're still early in that?

John Lowe

Yeah, how it's a good question, and we haven't necessarily commented on. The entire, retail pre-paid market transition to higher value packaging. There there are pockets that we've been moving to higher value packaging to protect against fraud.
That said, even in 2024 as we did that, there were also pockets where we were doing replacements of what's out there in the market today, so you saw. Probably a little bit of, one time, if you will from that which we haven't necessarily quantified, but my point is, pre-paid had a great year in 24, in 25, we expect it to be relatively flat for the most part, and that's because of some of that luminess that occurred in 2024. But broadly, if you look at the market longer term. We are well positioned if that market continues to transition further, but it's hard to say how much the penetration of the entire pre-paid market will move to higher value packaging to protect against fraud.

Hal Goetsch

Okay.Terrific. Thank you guys.

Operator

As there are no further questions in the queue, I would like to turn the call back over to John Lowe for closing remarks.

John Lowe

Thanks, operator.
I want to again acknowledge and thank all of our CTI 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.
Thank you all for joining our call this morning, and we hope you have a great day.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.