Cimpress plc (CMPR) Earnings Call Transcript & Summary

Thank you for joining us. My name is Marlane Pereiro, I'm the High Yield Cable and Media Analyst at Bank of America. We're very happy to have with us from Cimpress today, Sean Quinn, Executive Vice President and Chief Financial Officer; as well as Meredith Burns, Investor Relations. Thank you both for joining us. Following the presentation, we'll go into Q&A. Thank you.

That's great. Well, thanks for the introduction. Thanks for those in the room that have taken time to join us and also for those on the webcast as well and thanks to the Bank of America team for hosting us. I'll join Meredith afterwards for Q&A. We'll both take questions. But I thought I'd start off with just a few slides, mostly geared at background on the company for those that are less familiar with us. So let me start in. Before I go into the content, just the normal safe harbor statement today, we'll talk a little bit about the future. That will include the guidance that we've provided for fiscal year '24. Of course, things can change. So I'd encourage all of you to read our risk factors and our SEC filings, and that's all available for you. In addition to our non-GAAP measures, which you can find anything in this presentation is reconciled along with our historical results on our IR site. So with that, maybe just to start, at Cimpress, we have a long track record of profitable growth, and that's a result of a few things, industry tailwinds, our market leadership and also our competitive advantages. On the chart that you see here, this is our annual revenue in a stacked bar. The blue here represents our largest business, a little bit over 50% of our revenue today, which is Vista. As you may know, it is Vista Print, which has grown primarily organically during our history. And then the gray bars here are all the revenue that comes from businesses that we've acquired along within the subsequent growth of those businesses, which has been significant. Those businesses have grown over 70% since we've acquired them. Our organic and our acquired growth has led to overall 23% CAGR since 2004, which was the first year that we had published results when we went public. And then Vista's CAGR over that same period is 19%, again, the vast majority of that being organic growth. Our consolidated revenue for last fiscal year as a whole was a little bit over $3 billion. So as I said, this has been highly profitable growth. We have generated a lot of cash flow as well over the years. Over the last 10 fiscal years, we've generated over $1.8 billion of unlevered free cash flow. It's a very cash generative. And it's important to know also that we take a long-term approach to our capital allocation. We have roughly 40% of our equity values represented on our Board of Directors with a long-term mindset so there's a great deal of alignment between our decision-making and our long-term investor interest, including our debt investors as well. Maybe just a few words on our offerings. You can see some examples here, but our businesses serve millions of customers every year with custom marketing materials, signage, logo, apparel, promotional products, custom packaging labels and many other products, again, that you see here. We, across our businesses, offer over 23,000 unique products, over 300 million product variants. So it's a product portfolio that has a lot of breadth and depth -- that's unparalleled breadth and depth relative to others in the market between all the products we offer, all the different product attributes, options, but all with the convenience of online ordering and that is enabled by our focus on mass customization. We're selling to customers who have a need for relatively small order quantities and who have historically been underserved by traditional suppliers that couldn't offer them low quantities at a reasonable price. And we've driven growth by bringing that mass customization paradigm offering low small order quantities at an affordable price to new and more complex products over time, and there's a very consistent pattern of us doing that over the last decades. We operate in a really big market. I won't go through this in a lot of detail. We've shown this slide consistently in our investor presentation. It's over $100 billion total addressable market. It's very large, and this is in North America, Europe and Australia. And that's just the part of the print market that we could reasonably address through small and medium print runs. There's a lot of disruption that's happening here from a mass customization perspective, highly fragmented market, thousands of traditional print businesses in here. And that part of the market, those small traditional suppliers still serves over 60% of the market today in the aggregate. In terms of market share, there's still a lot of runway for us in terms of capturing market share in that transition from offline or traditional suppliers to online, but also even in the online market opportunities to continue to take share there. The overall market is, as I said, still primarily served by these small traditional suppliers and again, this is a chart that we've used in investor presentations. The short story here is that these small traditional suppliers that we all experience in our local communities are slowly declining. And you can imagine, even over the last 4 years with COVID and supply chain disruption, cost inflation, that's been a very difficult environment for them to operate in. And so the chart on the top left here shows that slow, but steady decline in these small local print establishments and the data on the bottom left just shows how small those are, the vast majority of them being 1 to 9 employees, but I think it's something like 90% of them, over 90% employed fewer than 50. So very small operations. With our over $3 billion in revenues, you can imagine some of the scale advantages that come to play relative to these small traditional suppliers. We've led the print mass customization revolution since our founding. And here is a slide that we regularly share in our investor presentations, which really speaks to what mass customization really is, which is how do you offer unique products in small quantities, but do that at unit economics that are more like mass production. And there's a lot of things that we have to do, which are -- some of them represented on the right-hand side of the slide, in order to orchestrate them to allow us to break that cost curve that you see on the left and that's really fundamental to each of our businesses in terms of our economic engine. We have a unique set of capabilities that allow us to do that. There's a lot on this slide. I won't go through, but I would encourage you to go to our Investor Day, if you have less familiarity. And again, it is the total orchestration of these capabilities that really makes us unique and creates the competitive advantage and the scale advantage that we have today. From a -- just from a segment perspective and geographic mix, we're organized in 5 segments, and you can see them represented here on the slide, along with the brands that are in each of those segments. For those in the room here, the one that you'll likely recognize as Vistaprint on the top left, Vista is just over 50% of our revenue today. And then the next biggest chunk is the combination of the next 2, which we call our Upload and Print businesses. These all happen to be in Europe. Those are brands that you probably don't recognize but serve customers in a similar way to Vista, but it's a slightly larger customer, repeat dynamics are a little different, but in the end, still met with mass customization at the core of that business. On the right, you see our geographic breakdown with about 50% of revenue in North America, a little under that same percentage in Europe and then the rest primarily concentrated in Australia and Brazil. We have a commitment to higher profitability and lower net leverage. We've been talking about this over the last year. And for anyone following this has been evident both in our guidance but also in our actual results. On the left side of this chart, you can see our adjusted EBITDA over a multiyear period and the far right side of that -- sorry, on the right side of the chart, you see our net leverage ratio as well. The gray bars here represent our historical information. The blue bar is our expectation for FY '24. For us, that's the year that ends June of '24. If you look at the gray bars, again, on the left, you see very profitable over time. In 2022 and 2023, we were in an investment cycle with higher growth investments, also some impact of cost inflation. We've been seeing recently both return on past investments but also an easing of inflation as well as we've put pretty sizable cost reductions in place back in March that we disclosed. That's about $100 million of annualized cost reductions. We delivered $340 million of adjusted EBITDA in FY '23; and FY '24, we expect that to grow quite a bit to at least $425 million, which will eclipse our prior high, which was in fiscal 2020. We're well underway to achieve that guidance as is evident from our recent results. We expect that higher profitability and also the cash flow that will come from that to bring our net leverage levels to below 3.25x net by the end of FY '24. That's something that we remain very much committed to. And again, we remain very much on track to deliver that. Let me just dive deeper for just a moment into how we achieve that expansion. You can see that through our first quarter, the trailing 12-month EBITDA, which is on the left-hand side of the slide, is $383 million. There's another $50 million of cost savings yet to come into the reported run rate. It's just a matter of time passing for that to happen. The actions that produce those results have already taken place. We've given guidance that we expect through the remainder of this fiscal year that there's an EBITDA headwind of about $17 million, $16.5 million left from a currency perspective. And then the last bridge item there is $8 million that needs to come from the kind of the contribution of growth for the remainder of the year. We had 6% constant currency revenue growth guidance for the year. And so we believe that $8 million is very much achievable with that growth and the flow-through from that growth, and that gets us to the guidance that we provided of at least $425 million. So that's a brief overview, hopefully helpful. With that, let's turn it over to questions, and I'll sit down here with Meredith and we'll tag team that. So thank you very much.

Thank you, Sean. So to start out with -- you talked about your leverage getting down to 3.2x -- 3.25x, excuse me, and you discussed some of the puts and takes. One of the drivers, obviously, you've talked about is cost savings. So given what you've already taken out, if may be, is there room to take out additional costs? And can you also talk about where most of the costs have been and also the cost to implement those cost savings?

Sure. Yes. The cost to implement those cost savings are now fully behind us. So we had, I think Meredith the total number -- somewhere around $40 million of total restructuring costs. Most of that was actually in the last fiscal year. There's about $8 million of that this fiscal year, but all of that was in our Q1, so our September quarter. So the cost to implement those cost savings from a cash flow perspective is behind us. And as I said in the remarks earlier, the actions required to deliver on the cost savings that we've given guidance for, those have also happened. The people cost and the related actions there, they happened back when we had disclosed these cost reductions back in March. And any of the non-compensation costs that were reduced, those decisions have been taken. And again, it's just a matter of time passing, and there's 2 quarters left for that to come into the run rate. In terms of -- you referenced other opportunities for cost reduction, I'd probably point you to 2 things. One is that just in terms of our input costs, we've provided an update associated with our September quarter results, that input costs were trending in a favorable direction, and that was actually a little bit more favorable than what we had planned for this fiscal year and that's incorporated into the guidance that we provided. We updated and revised upward that guidance in this -- and attached to our September results. Yes, I would say that, that's been a stable environment since the time we made those remarks. So if anything, I think there could be further opportunity there in terms of the direction of input cost, but for now stable and that certainly had a favorable impact, as I said, more favorable than what we had planned to coming into the year. Elsewhere in the structure, there's always further opportunities, if we desire. We do have significant growth investment that is still in this EBITDA guidance, which is important to recognize. We think that that's appropriate. We have no plans to change that because we're comfortable with where those investments are directed and seeing good results. So no plans there, but there is a lot of discretionary investment that's still in these numbers that is a choice that we'll continually evaluate. Otherwise, there's a lot of variability in our cost structure as well, and we saw this even navigating through the pandemic that with the extent of variability in our cost structure, we're able to flex that pretty quickly, including in advertising such that we're able to maintain profitability and be generating cash flow even in the most severe economic downturn like we experienced in the pandemic.

Great. And the 3.25x leverage, is that the ideal leverage for the business or once you get there, would you like to drive even lower?

Yes, that is not a longer-term target or even an ideal level, but it is the level that we're committed to getting to by the end of the fiscal year. And again, we feel very comfortable with the trajectory that we're on to achieve that given the profitability expansion but also the cash flow generation. Beyond that, one of the things that we said in our annual letter that we published back in July is that after we get through this fiscal year, having achieved the net leverage guidance of being below 3.25x net, with the cash flow that we generate, we'll have an opportunity to continue to bring leverage down further. And as we get into next fiscal year, so the year that ends June '25 that we'll be in a position to start to opportunistically allocate capital while still maintaining lower levels of leverage. And if you kind of cut through the words that we used there that would imply operating at the sort of roughly 3x or below net leverage while still being able to allocate capital. That's not a target per se. But I think that there's a clear commitment to operating at lower levels of leverage than we've been at in recent years. Like I said, we're well on the way to get there. But once we're there, staying there, not as a target, but then figuring out capital allocation within that, taking advantage of opportunities when they exist, but also being comfortable either increasing liquidity or bringing down debt as well, if that makes sense. We've done that recently. We've bought in roughly $75 million of our bonds over recent quarters. So that's an example of both operating within that net leverage, but also starting to opportunistically allocate capital.

Great. And that was actually following on to my next question is you have bought back the notes at a discount, about $21 million in the last quarter. Are you just focused on the notes or could you possibly consider the term loan as well?

The notes have been -- so the short answer is no, we're not just focused on the notes, but the notes have been, I think, a pretty obvious choice, at least in the recent quarters, given the discount at which they were trading. So the yield to worst there or the yield to even an expected refinancing was quite high, and we're able to take advantage of that. We are very happy to do so. That yield was quite a bit higher than where our Term Loan B was trading just given the discount on the high-yield notes. That discount has largely evaporated. Where the notes are trading today, they're almost at parity to where our unhedged portion of our Term Loan B is at. And so I think as we go forward and depending on changes in the market, we'll have to evaluate if we are to buy in any of our debt. Should that be the Term Loan B, should that be the high yield? I think it's a less obvious choice today. than it was in recent quarters where the yield on the high yield was just so much higher and also a near-end maturity that was the obvious choice, but we'll evaluate that looking at both the yield but also the maturity and also the alternatives, which is -- you have -- you get 5% on the money market, if it's a 9% yield, does it make sense to take advantage of that 4% spread or leave that capital in the structure. And again, we'll evaluate that quarter-to-quarter.

Great. And from a free cash flow perspective, if I'm not mistaken, you guided to about $170 million for the fiscal year. So can you just provide us some of the puts and takes? And remind us, for example, what your CapEx is, what you consider maintenance CapEx, cash tax position and maybe some working capital swings that we should consider?

Sure, I'll take this one. So if you bridge from the $400 -- at least $425 million of EBITDA guidance to the at least $170 million of free cash flow guidance, so the puts and takes there are: we said CapEx less than 2% of revenue, which is sort of a continued trend, that's, say, roughly $58 million, $60 million. Cap software in a similar level as well, that's going to be probably in line with or maybe slightly lower than where we were in FY '23. We're expecting our cash taxes to be higher by about $10 million year-over-year. So that's like $41 million. And then we've got the $8 million of the tail of the restructuring charges that we talk through the P&L last year, but from a cash flow perspective are coming this year. That's mostly done. At this point, there's like a couple of million left in Q2. And then the remainder there, so that gets you a little bit lower than the $170 million. The remainder is going to be an inflow from working capital that we expect. And just for folks to know, as we grow, we have a negative working capital cycle. So as we grow, that's a source of cash for us. And so we expect to see that inflow because we expect to be growing this year. So...

Great. And I do have 1 follow-up, it's a little more broad. But what do you see as the biggest challenges and opportunities for the business as we move into '24?

Sure. So for us, I'll talk about calendar '24, [ for as ] we operate on the June fiscal year, so -- but probably one in the same in terms of the answer. Yes, I think from an opportunity perspective, it's -- it would be hard to articulate, especially in the time we have today, the extent of change and transformation that our business has encountered over the last 4 years, in particular, in our Vistaprint business, but also more broadly Probably the biggest area of change that has taken a lot of resources and focus has been the technology transformation that we've had, again, most notably in our Vistaprint business or Vista business, but also elsewhere to modernize the technology stack. In Vistaprint, that was a complete redo of the tech stack. And just to put that in perspective, for almost 3.5 years in that business, we weren't able to launch new products or not many of them. We really weren't able to, in any dramatic way, improve the customer experience. And of course, that's not where you want to be. That technology transformation is now over a year in the rearview mirror. And so every day, every week, every month, there are new improvements, new products being launched, all the things that we should be focused on that we want to be focused on. And you can see the impact of that starting to be evident in our financial results. So to your question in terms of opportunity, frankly, it's just stacking a lot of little improvements in ways that we haven't been able to in the last 4 years, not just Vistaprint, but across all of our businesses in Cimpress. So that's probably the biggest opportunity. I think in terms of challenges, the -- I think from a balance sheet perspective, as was evident from some of the slides that I shared, we're in a very different place than we were a year ago. Net leverage is on a very good trajectory. Liquidity is in good shape. So the balance sheet is in a good spot. I think from a cost structure standpoint, input costs have really normalized in ways that we anticipated, but that's been good to see. That feels quite stable. Supply chain feels quite stable. So I think from a challenges perspective, the biggest thing is really just continuing to have our businesses positioned to move quickly to continue to make those improvements, launch new products and do all the things that have gotten them the success they've had. As you guys, you get bigger and our founder and CEO, always talks about this, making sure that as we get bigger, that we can still move fast to be entrepreneurial. And so that's frankly the biggest challenge, which is controllable by us. We get a lot of questions about macroeconomic environment and recession, and that's not something we can control, but our business has actually responded quite well in past macroeconomic contractions. You never know when the next one is or what the characteristics are going to be. But on that front, we've actually responded quite well in the past. So that's not the thing that I put on the top of my list.

That was actually a follow-on question.

Thought that might come up, yes.

Exactly. How do you feel the business is positioned better now to deal with any economic uncertainty versus where the business was in the last 2 down cycles that you saw?

Yes. Well, I think in the last 2 down cycles, and you can look at this in our results, as I said, the business performed quite well. That doesn't mean that we're immune to impacts. Our customers are small and medium-sized businesses. And if they're credit constrained, there can be impacts there. But there's actually things that go in the other direction for our business that are evident -- have been evident in past macroeconomic declines. One of those, especially in our Vistaprint business is that usually, macroeconomic declines are connected with increases in unemployment. And oftentimes, that increase in unemployment, prompts new small business formation whether that be formal more small businesses or informal small businesses, someone that's going to cut on for someone to generate some cash. Well those new small businesses or informal small businesses need just a basic set of marketing products to be able to have an identity to exist and they turn to our businesses to do that. So that's one kind of countercyclical trend. The other thing is that in the slides I covered some of the market dynamics, big market, very fragmented, still served by a lot of traditional suppliers, what we've seen in past macroeconomic declines is that there's more price sensitivity for obvious reasons. And because the pricing is lower in the online part of the market, those have been moments of catalyst for the shifts from off-line to online, which has benefited our business and other online providers. The last thing is that we saw this very much in the COVID period is that, as I mentioned to before, those periods are really difficult for small and traditional suppliers. And so we've also seen it as an opportunity to take market share, increase market share in this period. So those are reasons that sort of offset some of the pressure that might exist and that's been evident in our past results. The last thing I would say is that COVID was probably, hopefully, the largest test of what happens when all of a sudden demand drops quickly. And I think we showed during that period that we were able to very quickly flex our cost structure, which is very oriented towards variable cost and we're able to protect liquidity. And so those muscles are there, if needed in the future. Hopefully, not in such a severe way, but those muscles are there, and that playbook is there, and we would execute that as we did back then.

Great. And can you just remind us what is the minimum cash balance or liquidity that you like to maintain? And then second and follow-on question is, are there any assets that you view as noncore that you could potentially monetize if you chose to or if needed be?

On the first question, minimum cash, we haven't provided a specific number externally. I think a reasonable place to start is, I assume, it's about $100 million required kind of across the operations, just for comfortable funding of everything. And then on top of that, you would want some cushion. So even the cash position that we have today is very comfortable within that context. And then from there, the question is just what are sources of liquidity. We have an undrawn revolver, so that's an -- a source of liquidity. So we don't need to just keep cash on the balance sheet. So the levels that we last reported are very comfortable within that context and -- but probably about the area that we would want to always have on the balance sheet. On your other question in terms of noncore assets, I would say from a -- just from a capital allocation perspective, we are -- we would be rational and we wouldn't be against selling a business. And we've had a couple of examples of that in the past where we have sold assets. As we sit here today, there's nothing I would put on that list of noncore assets. And so the short answer would be no, not today, the portfolio is in good shape. There are choices that we've made in recent years, not only for selling assets, but also to exit certain markets in some emerging markets like some in China, we've pulled out of; in Japan, we've actually pulled out of. And that's been really to make sure that we're focusing on where the return on invested capital is highest and making sure that our focus and our capital is directed there.

Great. That's all I have. I don't know if any in the audience?

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Yes. It's a question we get often. And so the question just for the webcast is about our guidance of 6% revenue growth for this year, and that seeming healthy relative to some other businesses, especially in this economic climate. You asked, is that just organic? Or does that involve acquisitions? So that is constant currency and organic. So that's all organic. Within that, there is some price benefit. We've mostly lapped to the price increases that have occurred throughout our portfolio, but as we entered this fiscal year, there was some of that benefit still to come. So we haven't provided specific numbers on a consolidated basis. But you can assume about 1/3 of that is from pricing and then the rest from volume. And quarter-by-quarter this year, it won't be exactly the same and there's reasons for that in terms of what we're lapping and so on. But we still feel very comfortable with that revenue guidance. There was a source of a lot of questions after our Q1 results because we reaffirmed that revenue guidance despite the fact that our constant currency revenue growth on an organic basis was 4% in Q1. But we still feel comfortable with that. And we still see the volume growth that supports that. And like I said, it will differ a little bit quarter by quarter, but we still feel comfortable with that. Frankly, there's a lot of -- as I alluded to earlier, there's just a lot of improvements that we've made in the business. So some of it is just sort of what demand is out there. But from a micro perspective, there's a lot of things that were changing small increments of improvement that are happening on a very regular basis now that in a business like ours where we serve over 50 million customers a year with relatively small transactions, improving that experience, reducing friction, launching new products, which is a feature in that growth as well, all can help to contribute to that. So it's not just kind of pure demand. There's micro things that are under our control that are connected to the things we've talked about so far this morning.

Great. Well, Sean, Meredith, thank you so much for joining us today. We really appreciate it.

Great. Thanks for having us. Appreciate it.