Cimpress plc (CMPR) Earnings Call Transcript & Summary

[Audio Gap] and Dave Mossberg from Three Part. We do have Cimpress. We met them in March through trying to figure out who introduced us to the name of it, a really smart investor to introduce us to this name, and they were able to do our virtual conference, this is the first one they've done live. And I really do think there's a lot more room to go on the stock and from a company as Sean Quinn, I'll turn over to Sean.

Great. Thanks a lot, Dave. And thanks to everyone who's joined us here in person for the last session of the day on a very hot day in Chicago. So I'm Sean Quinn. I'm the CFO of Cimpress. I'm joined here by Meredith Burns as well, who leads Investor Relations and sustainability for us. I've been at the company for 14 years, along with Meredith actually, and so I'm happy to give you an overview of Cimpress today. Cimpress is the leader in mass customization for print. And we serve over 15 million customers a year, with custom marketing materials, with signage, logo apparel, promotional products, custom packaging labels and many other products as well. As you'll hear about today, the market that we're in is large. We've been leading its transition from what is a very fragmented market, with a lot of traditional and small suppliers, to one that is primarily e-commerce-driven experience that we think offers significant value to our customers. Before I get into the details of the presentation, as always, we have a safe harbor statement here today. Later in the presentation, I'll talk about our plans for FY '24 and the guidance that we provided for FY '24. Today, I'm not going to give any intra-quarter updates, but in the course of that conversation for FY '24, we will be talking about our forecast, which we may be wrong in those forecasts. So I would definitely turn you to the risk factors that we provide in our 10-K, which we recently filed just a few weeks ago. You can read them there. We also have some non-GAAP metrics throughout this presentation, and you can find reconciliations there and the information that we have on our Investor Relations site. So with that, let's get into it and to start out, we've had a long track record of profitable growth, and that's the result of a few things, a combination of industry tailwinds of our market leadership and also our competitive advantages. On the slide that you see here, the blue is representative of the revenue from our Vista business, which has grown primarily organically during our history and the gray bars here show our revenue from all of our other businesses outside of Vista, which today are about 70% larger than they were when we acquired them, all of those businesses coming through acquisition. You can see here that we had a bit of a dip in revenue during the pandemic. We weathered that well, and we weathered that well because of the product diversity that we have, but also the role of the products that we provide for customers in the work that our customers do in their small businesses. Our organic and acquired growth here has led to a 23% CAGR from the beginning of our history. Actually, the year before we went public, which is 2014, as you can see on the slide, and within that, the CAGR and business growth has been about 19% over that same time period. Our consolidated revenue for the fiscal year that we just ended in June was just over $3 billion. The growth here, importantly, has been highly profitable growth. And you could see on the slide here, over the last 10 fiscal years, we've generated over $1.8 billion of unlevered free cash flow. We have a long history of value creation in service of our customers, but also importantly, in service of our long-term investors, our team members and the communities that we serve. And we take a long-term approach to capital allocation. We have about 40% of our shares represented on our Board, and there's really great alignment between the decisions that we make from a long-term investor perspective, but also how we think about that from a customer perspective. And ultimately, while we've grown nicely, we've been profitable. We've generated a lot of cash. We do that ultimately in service of our uppermost objective, which is maximizing our intrinsic value per share. And you'll see that we communicate that, hopefully very consistently and clearly, in all of our investor communications. Just going to the next slide in terms of how the business works. We are the leader in an ongoing multi-decade business model revolution in our very large and fragmented market. And the chart here on the left shows this concept of mass customization, where we seek to break the traditional trade-off between the cost and the volume of production. Traditionally, if you have low unit cost, you traditionally only get that by mass producing something. Conversely, if you want low quantities, you'll have high unit costs. And so our business model seeks to break that trade-off. And with mass customization, we aggregate high volumes of small customer orders, and we amortize the cost of marketing and customer service and technology and production across those orders so that we can deliver low unit cost -- lower unit cost than traditional suppliers could. But the value to our customers goes beyond just cost. There's improved convenience, product breadth, quality, speed of production and delivery. And inherent in this approach is also low obsolescence because we are, in general, making orders produced on demand only as needed. And so we have very low obsolescence in this business. Mass customization has been at the core of our economic engine for more than 2 decades, and we continually apply this approach to new product categories as well, helped by continuous innovation in technology and production equipment and processes. And that's a pattern that we seek to continue for many years to come. The way that mass customization works when applied to print is through the 3 capabilities that we referenced on the right side of the slide here. The first 2, e-commerce and software-driven order aggregation and production systems, are required no matter who the customer is that we're serving. And then the last one, democratize design, is required to serve customers who don't have graphic design skills or the resources to acquire them. And so for us, that's most relevant for our Vistaprint business, which is our largest business today. And those customers there and our Vistaprint business have historically been very small businesses in the do-it-yourself part of our market, where we serve them through an online design studio and templates and more recently, through real-time design assistance, but also access to online marketplaces for graphic designers and other creative roles. We have many differentiated capabilities, each with scale-based advantage and you see them listed on the slide here. Those include things like software engineering, product development, data and analytics, manufacturing and supply chain, design and service, globally competitive and scale talent locations, procurement, e-commerce marketing and then the ability to drive synergies through M&A through a lot of these capabilities as well. While each of these individual capabilities is important, it's really -- it's the orchestration of the combination of these capabilities that together, really drives the competitive advantage that we have today, which is significant. And they derive from our flywheel of being able to leverage scale-based advantages to drive efficiency that leads to increased customer value, but also allows us to, over time, continue to increase market share. And therefore, the cash flow that we generate and then be able to reinvest that in different ways back into the business. When you compare the scale that we have to a typical competitor, whether that be a small local print shop or even smaller online mass customization players, we can serve more customers. We can serve customers with higher quality with faster speed and with lower cost than we believe, that the scale advantages there are key to the long track record of growth that we've had and expect to continue to have. This next slide here talks a little bit about our market. The overall opportunity that we have, we believe, is quite significant. There remains a quite stable market, which we've estimated to be over $100 billion for marketing material, also for business identity, for signage, promotional products, logo apparel, and other lower volume applications for things like packaging or labels or books. There's tens of thousands of off-line competitors, who have a more traditional business model, that still serves the majority, about over 60% of the total addressable market that's outlined on the slide. Their share is declining, while ours is increasing in addition to other mass customization players that largely are operating online. And together, we and they have been steadily penetrating these markets. We've been at this for more than 2 decades now, and we've seen patterns where more mature products like business cards with higher penetration over time, slow their growth. And then innovation brings this mass customization paradigm to entirely new and more complex categories more recently like promotional products or packaging that are noted on the slide here. The most mature part of the market is in small format marketing materials. I mentioned business cards. You could put flyers, brochure. So generally, squares and rectangles or paper in there. And then newer applications, like I mentioned, promotional products, apparel, packaging labels are faster growing today. And we are, today, growing in Cimpress across all of these categories, but to differing degrees. In terms of the products that we offer, we have a vast array of products that we offer across some of the categories I just mentioned. And the common thread there is that we're selling to customers, who have a need for relatively small order quantities and who are well served by our mass customization model. Our business offers -- or combination of businesses offers well over 20,000 unique products in the categories that you see here with over 300 million in product variance, so really significant. In addition to physical marketing materials, merchandise and packaging, you also see on the slide here, our Vista business has recognized the importance of design, and being an expert design and marketing partner for our small businesses that we serve. So we have a broad offering that is expanding in that area, design services. We also offer brand identity capabilities, but also digital offerings like websites, that we do in our Vista business through a partnership with Wix, and ideas and advice for small businesses as well. In our Vista business, in addition to small businesses, we also serve consumers and we serve them with similar product formats as our small business customers, but for different use cases. So things like invitations and announcements, holiday cards and photo products and photo gifts. Just in terms of kind of a quick overview, and there's a lot to digest on this slide, but a quick overview of our businesses that we have across Cimpress today, there's commonalities across all of our businesses, and I just went through the mass customization model and our product offerings. Those are quite similar across our businesses. But there are some key differences when it comes to the types of customers that we serve, how we serve them and then how that impacts the P&L structure of each of these businesses. So I'll go through these. And just to orient you on the slide here, across the top are our main business groupings. So you have Vista, what we call our Upload and Print businesses, which is the combination of 2 reportable segments, Print Group and Print Brothers and the National Pen and BuildASign. Down the left here, you see some of just the kind of key economic characteristics that will help you just get a better picture of who these businesses serve, how they serve them and what that means from a P&L perspective as well. So I'll start with Vista. Vista is itself, a global business, that represents a little over half of our consolidated revenue. Upload and Print is as I said, a group of 2 reportable segments, but a little over 7 businesses combined. That's about 30% of our revenue. National Pen represents about 12% of our revenue and operates itself pretty globally, but mostly in North America and Europe. And then BuildASign is one of 2 businesses that make up our all other businesses, reportable segment, and that business operates in North America. That represents about 6% of our total revenue. And like I said, that's the largest component of that all other businesses reportable segment. For all of our businesses, e-commerce is the primary channel. So that is common. The one exception to that is that National Pen has historically had a significant amount of its revenue generated from direct mail and telesales. That is slowly shifting. E-commerce is the fastest part of that business' growth, and we expect that to continue in the future. Maybe going into a little bit detail through the vertical columns here. Starting with Vista. Business goal is to be the design and marketing partner to small businesses often very small businesses. That manifests in a really significant number of relatively low average order values. This business has strong gross margins, relatively higher advertising as a percentage of revenue, it's about 15% to 17%, and that percentage of revenue has decreased quite a bit over the last 5 or so years. To serve customers well in our Vista business, there's a significant focus on technology and design capabilities and services and doing that at scale. Doing that at scale is quite complex and hard. It's one of our significant competitive advantages and really feeds the flywheel there in that business and has enabled us to both do very well over time from a revenue perspective, but importantly, to do that very profitably. By contrast, if you go to the next one over, Upload and Print, our Upload and Print businesses serve a slightly larger and more graphically sophisticated customer. So the design need there is relatively less compared to our Vista customers, and there's a very wide product variety and depth that these businesses offer. That manifests itself in higher average order values, also higher frequency of orders, a lower customer count but much higher customer retention, given the use cases of these customers and therefore, lower advertising as a percentage of revenue. The gross margins in these businesses, it ranges from kind of high 20s percentage to about 40%. So that's lower than Vista. But due to the product breadth and also the relatively high use of third-party fulfillers, as you work your way down the P&L, and with the lower advertising and lower CapEx in many of these businesses, the cash flow margins are quite strong. National Pen targets custom promotional products. Writing instruments has historically been the largest category there. More recently, there's strong growth in bags and drinkware, which have been growing nicely in Vista as well, but strong growth there in National Pen. The average order values in this business are amongst the highest of any of our businesses. The order frequency and gross margins looks quite similar to Vista, but advertising as a percentage of revenue is slightly higher here, just given the extent of direct mailing that's happening here in terms of custom samples, but also the conversion of that from a telesales perspective converting prospects. And then lastly, BuildASign. BuildASign is focused in North America, based in Austin, Texas. Partly on signage products, but also on consumer-oriented home decor. Average order values there are just under $100 gross margins in the high 40s percent, and ad spend as a percentage of revenue is a little bit below 20% there. I mentioned earlier that we have a strong track record of growth, but importantly, profitable growth. So let me shift now to some recent financial results, but also our expectations for the year that we are now in. On the left side of this chart here, you see our historical adjusted EBITDA back to fiscal 2016. And then on the right side is over the same period, our historical net leverage. The gray bars there on both of those, represent historical information through our most recently reported fiscal year, which ended in June. And the blue bars there represent the expectations we've set as part of our guidance for FY '24, so the year that ends June 2024. If you look at the gray bars here, starting on the left, you'll see we've been very profitable over time as I shared before. In the last 3 years, that profitability was negatively impacted by a couple of things. One, the pandemic. Two, higher discretionary investment levels and then three, the impact of inflation. And because of the timing of the investments that we have made, but also overcoming inflation, as we came into last fiscal year, we had talked about the first half of the year having EBITDA contraction, and then that would start to grow again in the back half of the year, as we would benefit from the investments that we have made, but also the impact of cost inflation would start to wane. Between the progress that we've made in our businesses, the growth that we've driven, but also to reduce that impact of inflation and importantly, the cost reductions that we disclosed in March, which was to remove about $100 million of annualized expense, we finished fiscal '23 with $340 million of adjusted EBITDA, which was a demonstration of quite significant profitability expansion, even if you compare that just back to December. December, we ended with trailing 12 months EBITDA of $228 million, so $228 million to $340 million in reported terms just in the 6-month period. We expect that to grow, again from there quite substantially in fiscal '24, to at least $420 million. That's the guidance we provided. That will mean that we will have eclipsed our previous high in terms of EBITDA delivery on an annual basis, which was in FY '20 previously. We also plan for that EBITDA to convert to free cash flow at about 40%. And so that would imply nearly $170 million of free cash flow, so that would be inclusive of interest of free cash flow for FY '24. So strong profitability, strong cash generation. And turning to the right-hand side here, we expect that higher profitability and that strong cash flow generation will mean that we will have brought our net leverage levels to below 3.25x net by the end of fiscal '24. We're doing that while we're maintaining quite material growth investments, which we expect will continue to allow us to improve the value that we deliver to our customers and ultimately enhance the steady-state for cash flow potential of the business. Lastly, I'm just going to show kind of the bridge to get to the $420 million from where we exited FY '23. On the slide here, the left bar there, $340 million is our reported EBITDA -- adjusted EBITDA for FY '23. The next element of this bridge to the at least $420 million of guidance that we provided, is the remaining cost savings that we expect to get from the actions that we communicated at the end of March of this year. That $76 million of benefit in FY '24 in terms of year-over-year, those actions have already been taken. And so it is a matter of time for this to impact our reported results, as opposed to figuring out what's going to drive these cost savings. So that will come in throughout the year, predominantly from Q1 to Q3. We have some currency headwinds from an EBITDA perspective, this upcoming year. We averaged into our currency hedging over a 12- to 24-month period. So as we enter the year, we know for the most part, what our contracted rates are. So we feel that, that's a good estimate. That will be a headwind of $20 million, which means that we need to generate $24 million -- at least $24 million of flow-through from growth, in order to get to at least $420 million of EBITDA for the year. Now we also gave guidance that we would have at least 6% organic constant currency growth from a revenue perspective in FY '24. So if you do the math on that and assume 6% of revenue, we have an average contribution margin on a consolidated basis, which is a little bit in excess of 30%. There are some increases in OpEx, as you would expect, on an annual basis. Things like normal compensation increases and so on. But we feel like, based on the growth guidance that we provided and the expected flow-through that, that $24 million is definitely achievable and based on even results throughout this quarter. So far, we feel very confident in achieving this guidance for the full year. So with that, I'll open it up for any questions. Hopefully, it's clear that through the changes that we've made, and also the investments we've made over recent years, we're well positioned to continue to be a leader in the transition of a very large market. We remain very focused on ultimately our uppermost objective, which is maximizing our intrinsic value per share. That's where we will remain focused, and we're excited about what's ahead for the remainder of this fiscal year. So with that, let me open it up to questions.

[indiscernible]

Yes. So the question was about Board members only 40% of the stock. That's correct. Our largest and third largest shareholders are represented on the Board, are also our founder, is the Chairman and CEO of Cimpress and he and his family remain significant shareholders. And so altogether, they -- and those that sort of vote closely with them represent 40% of our shares. That's correct.

[indiscernible]

Correct. So the question was around advertising spend or advertising as a percentage of revenue and what's in there? Yes, that is the actual spend on advertising. So media dollars or Google paid search, Facebook display and so on, broadcast spend, any brand spend. So that's not people cost, that is the actual advertising spend. For us, the most material spend happens, as you could see on that slide in our Vista business. Just given both the size of that business in our portfolio, but also the extent of advertising there. And there's a lot of efficiency and effectiveness improvements that we've driven through that over the last -- in particular, over the last 5 years. So those levels have come down from where they were. And we feel good about where we're at now. We've given guidance of 15% to 17% on an annualized basis. This is where we expect to be. We're doing a lot of experimentation within that to continue to optimize there. So there's still opportunities for continued improvement, but we feel good about those levels. But to your question, yes, that is the actual advertising spend, people cost.

[indiscernible] better environment, especially in the Vista business, especially as it relates to some of the [indiscernible].

Sure. The question was about the competitive environment, in particular in the Vista business. Maybe just to -- I'll start out a little bit broader and then I'll narrow in on Vista. There's no one single competitor that I can point to that has the sort of the breadth of offering that we do, either from a product perspective, or the way we serve customers are also kind of deep geography. The competitive environment looks a little bit different in North America than it does in Europe, just in terms of how the market structure has developed. But it is a very competitive market overall, including from those traditional suppliers, I mentioned that still represent the majority of the market today. In North America, there are some larger online providers that tend to be a little bit more focused in some section of the market that we operate in. For example, in promotional products, FormPrint would be a good example of a competitor. There are some Upload and Print players, Uprinting. Godprint, there's Move. So there's kind of a long tail of those online providers that are -- some of which are a couple of hundred million in revenue. There's also the part of the market that is served by the likes of Staples or UPS or FedEx Office and so on, which itself provides a certain customer experience. In Europe, the market structure has developed in a little bit different way. There tends to be more sort of national leaders, versus like a few pan-European competitors. Again, a very competitive environment. We are leading in many of the markets that we're in, but there's strong competition, including from online providers. In Vista, there's other aspects of what Vista does that are relevant in terms of the Venn diagram of all the competitors that we keep an eye on. In addition to the physical product offerings that we have, we have other kind of small business marketing offerings, including a relatively small, but still an important digital business, which we now, as I mentioned earlier, serve through a partnership with Wix. And so you have kind of all the kind of digital providers. Some of which are entering the small business marketing arena through a different starting point, but getting into this broader market. And then also from a design perspective, there's a number of different competitors that are focused on design and then using that as a venue to enter into some of these markets, be it Canva or even some of the photo image gallery businesses. And so you have kind of that part of the market as well.

[indiscernible]

Yes. The question was on longer-term leverage targets and kind of capital allocation priorities once we reach those targets. We have not set out a specific target. We have, as I mentioned in the slides, given guidance for FY '24, which is to get to at least 3.25x net leverage. That's not -- that's not where we expect to end. We expect to continue to delever beyond that. We haven't been specific about exactly what that number would be, and we don't have a target per se, in terms of like this is the most optimal. But we certainly want to live at lower levels of net leverage. And like I said, I think 3.25x is -- will be a very healthy end point for FY '24. But we can certainly, given the cash generation of the business, can go lower than that, depending on capital intensity in the years beyond. One of the things that -- and Robert, our CEO has an annual letter that he publishes every year, which was at the end of July, is an interesting read for any potential investors that are getting up to speed on the company. And in there, we do talk about that leverage target for the end of the year, in terms of guidance. But also the fact that beyond that, we think that we'll be in a position to opportunistically allocate capital at high returns and do so at levels of leverage that are sort of at or below where we were pre-pandemic. If you look at kind of where that range was, it was in the, let's call it, 2 7 and 3.2 and it could change quarter-by-quarter, depending on capital allocation. But I think that's an indication that the expectation is we'll be able to allocate capital to -- in a value-creating way, but do so with sustained lower levels of leverage. That's something that we're putting a finer point on, even in internal discussions and with the Board, and we'll do that over the coming year. And as we do that, we'll provide more specifics or more clarity on that. But certainly, the direction of leverage is one that we expect to continue. In terms of capital allocation priorities, in the near term, that remains very much focused on delevering. And we think that's important, both to give ourselves flexibility to put ourselves in a position to have more option value in terms of capital allocation. But we also think, just from an equity value perspective, that's going to be a good thing as well. Once we get to beyond FY '24, I expect that over the next decade, there will be a mix of organic investment, of share repurchase, of M&A and then debt repay down when it makes sense to do that. And if you look at our last decade, there's been a very healthy mix of those -- all those aspects of capital allocation as well. In the near term, I think in terms of any material M&A, I don't expect that to feature, because we are very focused on delevering. And so that's, I'd say, over the next 18 months or so, for sure. And then beyond that, we'll see. There will be opportunities, but we'll be very selective about those opportunities if we were to pursue them at all. Organic investment. We still have significant organic investment in the business today. There will be opportunities for other organic investment in the future, but the levels that we're at right now are still quite significant, and I wouldn't expect that to change in a very material way -- in an upward material way in the near term, again, in that next 18 months or so. And then share repurchases and debt repurchases, we'll continue to look at opportunistically. But for now, the focus is on -- the priority is on delevering, and that will be the case through FY '24.

[indiscernible]

So the question was what do we spend on production equipment. And the answer there is our CapEx, if you think about it as a percentage of revenue, has been below 2% of revenue. It's been closer to probably 1.5% of revenue for the last number of years, about 5 years or so. That could fluctuate a little bit year by year, but that's a pretty good proxy. Now that's total CapEx, so that can include building improvements and other things. But most of that is CapEx in terms of production equipment. There's probably about 1% of revenue or so is maintenance CapEx, which is continual refresh or updates or investments towards efficiency, and then the rest of that would be for growth capacity, which the intensity of growth CapEx has been lower because we, over time, have bought a bunch of companies that itself had production capacity that has been sort of added into the system, and all of our businesses are connected through a common platform, which allows us to tap into that kind of latent capacity that might exist in other businesses as well.

[indiscernible]

The question is on kind of our go-to-market strategy and the extent to which that relies upon the sales force or how does that work? The short answer is, for the most part, no, we don't have a sales force as such. I'll come back to that in a moment. But from the primary go-to-market is through e-commerce and largely leveraging digital advertising. And so in our Vista business, for example, while we have scaled customer service operations, including those that can help with design, that is not a sales function. That is a group of really talented team members that is a very scaled operation, helping customers every day through the experience, through design, making sure that they're able to find what they need, but it's not a sales function as such. And so we're acquiring customers through a lot of spend on digital performance channels, but also broadcast and other brand advertising as well. That's the case for in almost all cases across all of Cimpress. I mentioned National Pen. They do have a telesales function. There's some outbound and inbound telesales there. That's small in the grand scheme of things. And then in some of our businesses, we do have focused sales teams that are there to support a different customer needs. So for example, in our Vista business, while the vast majority of that is customers coming themselves online and working their way through that process or, in some cases, getting help from our customer service teams, there is a small group called Vista Corporate Solutions. And even today, actually for Three Part, when we were speaking to them. If you look around this conference, and we're at the end of the day, but you won't be walking around too much. But even as you exit, you'll see tabletop signs. You'll see flyers. You'll see small brochures with the agenda. You'll see retractable banners. You'll see lanyards. You'll see the giveaway at the registration table was a charger with the logo on it for the IDEAS Conference, and I could go on. But these are all needs for something like this. And so we do have some sales support for a more bespoke order that we can help customers if they need it. But that's certainly the minority.

[indiscernible]

Sure. Absolutely. So the question was about the shareholder structure, in particular those on the Board and then also about management incentives. So on the first one, Robert Keane, who is the founder of the business, Founder of Vistaprint, and is today the Chairman and CEO of Cimpress. He owns approximately 9% of the business still today. The -- as I mentioned before, our largest shareholder and third largest shareholder have representative of those firms that are not there as a representative of the firm, but are there as individuals on our Board. And that combined with affiliated parties, is the other roughly 30%. All those shareholders, including many of our other large shareholders have a very long-term focus, and we benefited greatly from their involvement. In terms of management incentives, as you might expect, there's a mix of cash and equity. That is biased predominantly towards equity vehicles for the management team. I could speak specifically to Robert, our CEO, and also myself as CFO. The way that the equity vehicles work is for both of us, they're 100% -- for example, for the awards for this year, 100% performance-based. I won't get into all the details because we haven't disclosed those yet, but 100% performance-based, based on certain financial targets and then with service vesting that goes over 4 years. And so we are very much incentivized to deliver on the numbers that have been outlined today, based on the design of those vehicles. And of course, the instrument is our shares. And everything we do, as I said, is ultimately to increase the per share value of the company, and we're very much incentivized to do so. Now Robert is also a significant shareholder. I've been in this role for 32 quarters as well. So I've had similar things over the years. And so yes, we're very much aligned to shareholders in that regard. I think we're coming to the end. The applause has started before the end. Thank you all for your time in the room but also, those who have joined on the webcast, and please reach out with any further questions. Thank you.