Cimpress plc (CMPR) Earnings Call Transcript & Summary

All right. Good afternoon, everybody. It's Stephen Weiss, the high-yield cable, media and entertainment analyst at BofA Securities. And I'm very pleased to welcome Cimpress back to our Leveraged Finance Conference. With us, I have from the company today for a fireside chat is Sean Quinn, CFO. [Operator Instructions] So with that, Sean, thank you, again, for joining us this year.

Yes. Thanks, Stephen, and thanks to the Bank of America team. We've had a productive today. Appreciate you including us.

Great. Good to hear. So let's just dive right in. I'm not sure everyone that's into the webcast has a full appreciation for your business. So for those less familiar with your company, you tend to get lumped into the printing sector. Maybe explain why this is perhaps an unfair characterization. Obviously, you have a much more robust enterprise value for a reason. So maybe let's start off by just stepping back and explaining what your mass customization model is, what the market backdrop looks like and what's your overall strategy.

Yes, happy to do so. Thanks, Stephen. And actually, before we get started, since we're not using slides, I'll do the normal disclaimer. Just want to say that today, we'll talk about the future. We could be wrong about that, and I would point everyone to our most recent SEC filings for an outline of our risk factors where you can find more detail. So with that, yes, thanks for the question, Stephen. And so let me start with the basics. As for our model, Cimpress invests in and builds customer-focused, entrepreneurial, mass customization businesses for the long term, so that's kind of the start of our strategy statement. We manage those businesses that we have in a decentralized, autonomous manner. And then the way that we get competitive advantage across that portfolio is by investing in a select few things that benefit all of our businesses, such as scale benefit through procurement. Or things like our mass customization platform that allows our businesses to both benefit from the central development of small pieces of technology that they can leverage in relevant ways for their business, but also allows our businesses to connect -- to be able to access new product introduction and low-cost production throughout the Cimpress group. So that's where it starts. All of our businesses are in the online print space, kind of broadly defined, but our target customers have different needs than those that are served by traditional printing companies, which you mentioned in your question. One of the key differences that our customers require custom things in small and much smaller order quantities. And therefore, our business model is very different than a traditional printing company in order to address that need and to do that with favorable unit economics. So we use this principal, we refer to as mass customization, to deliver the quality and the economics of mass production in the quantities and relevance of bespoke production. And in almost all cases, that's done through an e-commerce interface, so again, different than kind of a traditional printing company. To do that, we have to be strong at acquiring large quantities of customers. We have to use technology across our site experience in design services and pre-press operations and production, in customer service to allow us to economically handle really high volumes of low quantity orders that are each custom. And we also have to offer a broad range of products for our customers to be able to work with. So we're really a technology company more so than we are a printing company, but we primarily deliver physical custom products as an output of that and so much more. Print is oftentimes the output, as I said, but we're really kind of as much of a print company as someone like Carvana is a used car company or Wayfair is a furniture store. It is the output of what we do, but it kind of doesn't necessarily define us. The amount that we've invested in technology and in advertising over the years is huge relative to others in the print market, and our profit and our cash flow margins are differentiated as well. So you mentioned our differential relative enterprise value, those are some of the things that drive that, although I'd still argue that our current enterprise value is not reflective of our per share cash flow generation, we could talk more about that. Maybe just touch on the market quickly, and then I'll turn it back to you. In terms of our market, we operate in a really large and fragmented market. We estimate that in North America and Europe, that market opportunity is about $100 billion in total for small and medium quantities of small format printed material and signage, promotional products, apparel and gifts, custom packaging and a few others. The vast majority of that market opportunity is still served through traditional off-line suppliers, many of whom are kind of mom-and-pop shops that you would pass by if you're kind of driving through your town that you live in. And so relative to those traditional print shops, we provide through our businesses, a far wider variety of products at a meaningfully lower price with the quality speed and service that is as good or better. So yes, that's the quick summary.

Okay. That's helpful. And then maybe we can just go right into the impact of COVID. Obviously, you mentioned the small businesses that you cater to, some of those were especially hard hit. Can you walk us through how your business was initially impacted, how it's recovered to date in your view and then the broader outlook for the rest of '21, reminding everyone that you're on a June fiscal year-end? And I think you put out some EBITDA goals for that period.

Yes. Yes, happy to. Yes, so the pandemic first hit our businesses in China and Italy in January and into late February of 2020, and that gave us a lot of insight and even a few weeks of time to really prepare internally for the broader impact that was likely to be had throughout the rest of Europe and in North America. And we were seeing pockets of business drop off quickly down to 70% or even 80% down year-over-year in some pockets. And we knew we had to move really quickly to prepare both financially, but also for the safety of our team and for business continuity as well, and so that's what we did. At the height of the pandemic in -- at the end of March, the last week of March and the first week in April, our consolidated bookings were down about 65% year-over-year. That only lasted for a few weeks in that period of kind of the most heightened uncertainty with new government restrictions and the like. And then we saw kind of a recovery from there. Initially, we were really focused on the defensive measures that we had to take to, again, make sure our teams were safe, make sure that we could fulfill customer orders, but also to reduce variable and any discretionary costs to preserve liquidity. So we did that. We also -- we raised capital to derisk our banking group in order to get maximum flexibility, with suspension of our maintenance covenants at a time when we just had limited visibility to how long the impact was going to last. Fortunately, as restrictions started to lift, our demand steadily improved off of those lows, and we were also able to pivot quickly to highlighting the relevance of some of the existing products in this environment as well as introducing new products like custom masks, which had a nice contribution to our overall results. From July through September, just to give you a sense, our monthly consolidated revenue was down in a range of about 5% to down 15%, and we had demonstrated our ability to manage variable costs in line with those changes in demand, with year-over-year gross margins that were roughly flat year-over-year. And last quarter, we actually reported record EBITDA and free cash flow in Q1 and expanded our liquidity, which I think demonstrates both the recovery in demand, but also the cost discipline. Across our businesses, there's definitely been a variation in performance depending on the different target markets and product focus. For example, our Upload and Print businesses in Europe and also our National Pen business have more exposure to some larger scale events that are still canceled. So the type of revenue from those products that would -- for which the demand would be driven from those types of events is still impacted. Yes, not surprisingly, products like marketing materials, flyers, for sure, signage are in that category. For Vistaprint, Vistaprint's definitely performed better than those other businesses on a relative basis, given lower exposure to those types of events, but also been able to introduce some new products, which I mentioned masks before, and that's been a nice contributor for Vistaprint. Our BuildASign business has actually accelerated this growth since its product vocus is on things like home decor, canvas prints, which have been in favor and actually had an acceleration of demand. So it's been a mix, but our businesses have really shown the ability to be able to pivot to other products. Where there's been increased demand, in the outset it was signage products for health and safety rules or it was stickers and labels for increased takeout from restaurants, face masks as well, which -- I think all of which show the strength of both our supply chain, but also our production capabilities and being able to leverage our mass customization platform to do that. So it's really a range, but I think has really showed the importance of a broad product offering. You had asked about our customer base as well. And the other thing that's worth mentioning is that, for Vistaprint, in particular, we serve very small customers, which is pretty unique. And there was a really interesting Wall Street Journal article about 2 weeks ago that showed data on the surge in self-employment in the United States. And it included Census Bureau data that showed in the first 9 months of 2020, there was a 32% increase in applications by businesses that weren't expected to have employees compared to 1 year ago, and a [ 77% ] increase sequentially in the September quarter, which was the largest ever on record. And so we think there's some trends like that that will actually benefit Vistaprint, in particular, but also add to the shift from kind of off-line to online providers that we've been talking about for a number of years.

So do you think that the -- in terms of competition, do you think the pandemic has accelerated the prospect of an industry shakeout?

Yes. I mean I think it's definitely had an impact. Shakeout is a big -- we're tough to know exactly the extent, but I think there's a couple of different ingredients to it. I think one, I think traditional suppliers have had a very tough time for some obvious reasons in this environment. They're constrained to a physical location. They've had a drop in demand. They don't have as broad of a product portfolio from which they can pivot. And so that's been really tough. And so I think that's going to have an impact in the traditional -- kind of traditional part of the market, also just less access to capital. I think for some others in the competitive environment that also have a more narrow product range, I think some of those have been -- have struggled. So there's a mix there, but I think what we'll see is both an acceleration of kind of the shift from off-line to online, but also some folks that don't survive in the overall market. Which combined with that kind of that spike in self-employment I mentioned before, I think sets up some interesting trends for the next couple of years.

And then just on the cost side, I know you referenced your recent margin performance. Can you just remind us kind of fixed versus variable composition? What's been taken out to date? How much might not yet be fully recognized in your numbers? And just broadly, how do we think about the EBITDA line growing relative to the top line from here, given these initiatives and any mix shifts in the portfolio?

Yes, sure. Yes. So just to give you a sense, I mean, excluding depreciation and amortization and then any other kind of noncash costs, our variable or semi-variable cash costs were about 60% of our total cash costs prior to the pandemic, so it's a pretty significant part of our cost structure. We've got a significant amount of discretionary costs in addition to that, which includes advertising, there's a decent amount of advertising that's highly discretionary. So we pulled back on that during the height of the pandemic. And as I mentioned before, gross margins were able to maintain roughly flat, and we pulled back on advertising as well. But that gives you a sense of the kind of fixed versus variable. We've taken out $30 million of annualized cost -- fixed cost on a permanent basis, and then we've got another about $20 million this year that we expect to see year-over-year savings, but that will be temporary. So that will kind of get folded back in throughout the year. And so we'll have about a $20 million total impact year-over-year from that, but that's temporary. And then it's probably worth noting, too, that those cost reductions have not come by way of significant restructurings. That means there's a lot left to fund in terms of restructuring costs. There's a few million accrued for restructuring costs at the end of the September quarter. In terms of the margin outlook, we have delivered meaningful improvements here in the last couple of years, helped by actions that some of which I've talked about before, but also investments in data and advertising efficiency, which has been very material in Vistaprint in particular, and some other efficiencies in the business as well as less EBITDA burn in some of our early-stage growth investments, which is pretty material as well. Prior to the pandemic, we were reporting record EBITDA and cash flow results in the trailing 12 months through February. So just before the pandemic, our EBITDA increased to $477 million with a 17% consolidated margin, and that was prior to the permanent cost reductions that we made in response to the pandemic. So there's still efficiency opportunities. Yes, I'll point to a couple of examples of that. I think we can continue to get more leverage out of our mask customization platform, including finding lowest cost of production. We saw some clear examples of that over the last 9 months. There's also an opportunity to shed the maintenance costs associated with our legacy tech stack in Vistaprint once we get to the other side of the technology replatforming that we're doing there. We'll have some temporary savings. I just mentioned the $20 million that will come back in. So kind of relative to this year, going forward, that will be kind of a onetime headwind as that comes back in. I also expect that advertising spend as a percentage of revenue will increase a bit from the lows that we've seen recently. We've -- I think, if you look at it over a 2-year period, in the September quarter, there was something like 400 basis points of margin improvement from the advertising line. And I think a lot of that will be locked in, but I think we'll likely increase a little bit off of the lows of the last couple of quarters. And then we don't provide any specific kind of overall margin guidance, but one of the things that is a big driver for margin is the extent of organic investment that we're making, organic growth investment. And we are increasing the amount of organic investment, especially in Vistaprint over recent quarters, even despite what we've been going through with the pandemic. We haven't provided guidance on that specifically this year. We look to get back to that kind of in a more normalized environment for next fiscal year. But we are starting to increase some of that, which it will take a couple of quarters before that becomes -- is kind of accretive to margins as we get payback on those investments.

So maybe we'll pivot to the balance sheet, if you could. Just wanted to get a sense of your leverage tolerance from here. I think pre-pandemic, you had made some representations that you wanted it to be, I think, inside of 3.5x, and you had been aggressively buying in stock in front of that. I know right now you're, I think, prohibited from doing so given your amendment. But just in general, what is your risk tolerance at this juncture? Do you have a specific near-term and like longer-term guideposts that will guide your strategy? And how has COVID maybe impacted this?

Yes. Yes. I mean nothing has changed in our broad capital allocation approach that Robert outlines every year in our annual letter to investors. We haven't -- we also haven't made any specific changes to our views on longer-term leverage. But just to kind of reiterate what you referenced in terms of back to February 2020, what we had said. We had said that we would allow leverage to go up to a maximum of 3.5x for organic investments or share repurchase as an upper bound for total leverage or up to 4x for M&A, again, as an upper bound with an eye towards delevering after any intense period of capital allocation. So we said that back in February when we were doing a follow-on to our high yield notes, and that all remains the case. Now again, those are upper bounds, not targets. And in reality, we've operated well below those in almost all quarters. Even with the impact of the pandemic in this last reported quarter in September, our total leverage was 3.4x, and that was with a lot of share repurchases the year before, as you referenced. During the period that our maintenance covenants are suspended, we are not able to repurchase shares, so we won't be doing any of that while our maintenance covenants are suspended. And we have a limit to the extent of acquisitions that we can do, which is a $50 million cap, and we actually consumed almost all that with the 99designs acquisition we announced at the beginning of October. So in fiscal 2021, which as you said before, that -- our fiscal year runs through June, so through June 2021, we expect to pay down debt with excess cash and at the same time maintain that organic investment I referenced earlier. And as we look beyond that, I would say, with the experience of the last 9 months, we certainly will continue to evaluate the intensity of investment relative to the value of dry powder and financial flexibility. Both of those things are things that we very much value, and that was extremely evident to us over the last 9 months. And of course, the opportunity cost of that last $100 million, $150 million or so of capital allocation was high given the fact that we had to raise capital to make sure that we could continue to invest in the things that we thought were valuable in the business. So I think that's a summary. Again, in the September quarter, 3.4x leverage. We had almost $550 million of liquidity as of September as well. And with the restrictions, debt paydown will be the focus here for the next couple of quarters.

Okay. Got it. And then I did want to ask a little bit about the Apollo investment that was put in place at the height of the pandemic. Is there anything you can say in terms of their influence at this juncture? Does it go beyond just being a second lien investor with some warrants? Are there potential ties with some of their other investments that they have? And then maybe if you can review the schedule on when you can take Apollo out and how soon or likely that might occur.