Earnings Call Transcript - CMPR Q1 2025

Operator, Operator

Welcome to the Cimpress Q1 FY 2025 Earnings Call. I will introduce Meredith Burns, Vice President of Investor Relations and Sustainability.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thank you, Mirchell, and thank you, everyone, for joining us and happy Halloween to those who celebrate. With us today are Robert Keane, Founder, Chairman and Chief Executive Officer; and Sean Quinn, EVP and Chief Financial Officer. We appreciate the time you've dedicated to understand our results, commentary, and outlook. This live Q&A session will last about 45 minutes and we'll answer both pre-submitted and live questions. You can submit questions via the questions-and-answers box at the bottom left of your webcast screen. Before we start, I'll note that, in this session, we will make statements about the future. Our actual results may differ materially from these statements due to risk factors that are outlined in detail in our SEC filings and the documents we published yesterday on our website. We also have published non-GAAP reconciliations for our financial results on our IR website as well. We invite you to read them. And now I will turn things over to Robert.

Robert Keane, Founder, Chairman and Chief Executive Officer

Great. Thanks a lot, Meredith, and thank you for joining us. Sean, in a moment, is going to speak about our first quarter financial results. But first, let me share some personal insights on how across Cimpress, our talented and engaged team members are driving significant customer value and efficiency through focused execution. This call is particularly important because I personally just spent the month of October visiting over 20 different Cimpress locations across North America and Europe. The observations I want to share with you today come straight from the front lines. First of all, we are continually improving our customer experience. For example, in the past week, I sat side-by-side with team members from product development, with frontline designers, and with service team members, who all showed me improvements they're driving in areas like file revision, design creation, and file upload processes. As an even more specific example, during one sit down session, I met with one of our designers in Tunisia who was crafting beautiful product labels for a high-value customer in our Upload & Print group, who is extending her line of aromatherapy products. These are capabilities we simply didn't have a few years ago. Second, we are enhancing efficiency, improving quality, and increasing speed of delivery across the value chain. During my month of travel, I visited about a dozen of our production facilities, and regardless of facility size or product focus, team members consistently demonstrated a combination of continuous improvement and capital investment, together leading to cost reductions and quality enhancements. Third, we are growing lifetime customer value and revenues through more complex products and support via customer experience improvements. For instance, I met our team in Europe responsible for flexible packaging and our U.S. team leading our drive into corrugated packaging. Both areas are currently small but potential large product categories where we're growing at well over 25% a year. The average lifetime value of these customers is significantly higher than our typical average customer. Almost all of these packaging customers are small to medium-sized businesses that form the core of Cimpress' total addressable market. Fourth, I observed firsthand how Vista has continued building momentum, thanks to the foundations we've been investing in for more than five years, which include a modern flexible technology and data infrastructure, strengthening Vista's product development capabilities, and repositioning Vista Print away from its previous discount-driven brand image. The results are a significantly improved customer experience that attracts and retains high-value customers. During my travels, team members from the Vista teams driving growth in packaging, logo apparel, and large formats walked me through operations on the production floor, where I could personally witness the gorgeous quality products made for countless real-life customers in these vital growth categories. Last but not least, across all my visits, I witnessed how our select few shared strategic capabilities are deeply integrated into our working methods, helping us drive customer value and competitive advantage. For example, I was at an equipment supplier with a capital equipment specialist from our global procurement team and leaders from two different reporting segments. We were at a half-day deep dive at the engineering facility of an innovative equipment supplier, where we collaborated on developing new innovative applications for a product category we are working on. In all my visits to our facilities, I saw how our businesses are leveraging MCP's functionality for artwork, e-commerce, fulfillment operations, and for cross-fulfillment across Cimpress. Three months ago, Cimpress completed our record-best fiscal year in revenue and profitability. Moving forward, the focus on execution that I have described today, which I personally observed over the last month, encourages us to be confident that in fiscal '25, we'll set new records for both revenue and profits. More importantly, the frontline talent and initiatives I've had the pleasure to witness reassure me that, for many years to come, we can relentlessly enhance the value we deliver to our customers while strengthening our print mass customization capabilities. In doing so, we expect to continue to earn market share gains in this vast, fragmented landscape, where traditional competitors still account for most of the market. With that, Sean, let me turn it over to you to discuss our first-quarter financial results.

Sean Quinn, EVP and Chief Financial Officer

Yes. Thanks a lot, Robert, and thanks for that summary. To start and as we noted in the earnings document that we released after the market yesterday, Cimpress delivered solid results for the quarter. Consolidated revenue grew 6% on both a reported basis and an organic constant-currency basis. Adjusted EBITDA declined slightly year-over-year in Q1 to $88 million inclusive of currency headwinds of just under $1 million. The obvious question that we expect from investors, in the context of our multi-year commentary, is why the revenue growth we just mentioned did not translate into increased profitability, specifically adjusted EBITDA in Q1 compared to last year. There is no change to our multi-year guidance commentary, and we remain confident in our ability to deliver against the growth in revenue, adjusted EBITDA, and free cash flow that we've outlined. Let me walk you through the Q1 results with that question in mind. First, looking at the consolidated results, our gross margins and advertising as a percentage of revenue were flat year-over-year. The growth in contribution profit dollars that we observed in Q1 was consumed by operating expenses increases. In Q1, we typically experience our lowest volume revenue quarter, and so OpEx increases, such as annual merit increases for our central teams, are less absorbed by revenue than in other quarters. From a segment perspective, segment EBITDA increased in Upload & Print, in National Pen, and also in our all other businesses segment, with higher gross margins and in some cases lower advertising as a percentage of revenue. In Vista, organic constant currency revenue growth was strong at 8%. From a category perspective, what we observed in Q1 was consistent with what we shared at our September Investor Day regarding strengths and headwinds. Vista had a strong quarter in Europe across the board, and in North America, revenue growth was solid, but we did see a slight decline in revenue from Business Cards, which has more impact on product mix and gross margin. We planned in Q1 for heavier advertising spend, both for Q1 and for the full first half of the year. This quarter reflects that, and there is no material shift in our advertising approach, but it does impact year-over-year results for Q1. If you look at Vista, the reported organic constant-currency revenue growth of 8% translated into 6% gross profit growth, but advertising spend grew about 12% year-over-year, which is the primary impact on the flow-through in Q1. Additionally, we had a $1.8 million benefit in last year's Vista results that did not repeat this year. Referring back to our consolidated results, free cash flow was lower year-over-year, mainly due to higher outflows from changes in working capital. You'll recall that last year, the working capital impacts from supply chain disruptions were still normalizing, which led to favorable inventory trends. The other significant driver of the year-over-year decrease in free cash flow was cash interest payments that increased by $10.6 million compared to the same period last year, largely due to the refinancing of our senior notes, which brought forward the timing of our typical semiannual interest payments on prior senior notes due in 2026 that have now been redeemed. From a balance sheet perspective, we successfully completed a high-yield notes offering for new eight-year notes to replace our previous 2026 notes and concurrently extended the maturity and modified the interest rate of our existing revolving credit facility. These actions, in combination with a significant reduction in net leverage since December 2022, have greatly strengthened our balance sheet and debt maturity profile. Importantly, we've made these balance sheet improvements while maintaining strong liquidity, and also allocating capital to significant organic investments, as we detailed in our annual letter published in July. Over the last three quarters, we've allocated $168 million to repurchase approximately 8% of our shares at what we consider very attractive multiples of earnings, cash flow, and steady-state free cash flow. Additionally, we allocated another $9 million for repurchases in October, and we plan to continue to do so if prices remain attractive. However, all repurchases will remain subject to the leverage commentary we previously outlined, which states we aim to end this fiscal year with net leverage at or below approximately 2.75 times our trailing 12-month EBITDA, as outlined in our credit agreement, if we're repurchasing shares. We are currently in our second quarter of the fiscal year, which also includes the holiday peak season. We received a pre-submitted question about our expectations for the upcoming season, and we feel very good about our preparations and plans as that ramps up. Trends in Vista's consumer product category have been positive, with growth recorded in each of the last five quarters. Furthermore, Q1, which we've just reported, performed strongly, benefiting from our consumer team's focus on new product introductions and overall experience improvements over the last few years. However, compared to last year, we do have five fewer selling days between American Thanksgiving and Christmas, and we also need to consider the U.S. Election. We plan accordingly for these, but they could dampen overall demand and year-over-year growth. With that, I'll turn it back to you, Meredith, for Q&A.

Meredith Burns, Vice President of Investor Relations and Sustainability

Wonderful. Thank you, Sean. As a reminder, you can submit questions during this webcast via the questions and answers box at the bottom left of the screen. Now we received a number of pre-submitted questions, and we also look forward to taking your live questions as well. So, let's jump in with our first pre-submitted question. Robert, this question is for you. What makes you confident enough to make such high levels of growth investments and share repurchases?

Robert Keane, Founder, Chairman and Chief Executive Officer

Thanks for the question. Let me address those two subjects in turn, starting with growth investments, then I'll address share repurchases. We're confident in maintaining a similar level of growth investment as we had in fiscal '23 and fiscal '24 because of the strong performance we've demonstrated in terms of customer value improvements, competitive advantage enhancements, and financial results. Our robust opportunity for the years ahead wouldn't exist without those consistent investments in technology, talent, new product introductions, design enablement, next-generation manufacturing excellence, and advertising that together underpin our customer value improvements and competitive advantage enhancements. For fiscal '24, we reported that those growth investments, from a cash flow perspective, stood at about $146 million at the midpoint estimate. As you mentioned in your question, we expect to continue with a growth investment level similar to that in fiscal '25. Regarding my statement about strong financial results, let me clarify. In my letter to shareholders from July, I discussed our long-term growth in terms of revenue and profitability. In the last fiscal year, we generated about $10 in adjusted free cash flow per diluted share. Even after adjusting for asset sales and some unusually favorable working capital, the cash flow per share was around $8, and all of these cash flow figures are after the roughly $146 million in growth investments. So that free cash flow per share leads to the second subject of your question, namely share repurchases. Share repurchases make even more sense when our share price trades close to current levels relative to that free cash flow per share after growth investments. For various reasons we discuss regularly, such as in our Investor Day presentations, we believe that these $146 million in growth investments are valuable to shareholders, and we will see that in the coming years. However, even if someone disagrees and considers that some of this growth investment is necessary only to keep our business steady, the cash flow per share we're realizing is very strong compared to our share price. That summarizes why we invested an additional $168 million in share repurchases in the last 12 months through September. The final reason we're confident in deploying so much capital is because we're adhering to a clearly communicated leverage policy and have a demonstrated track record enabling us to delever when we want or need to. Recently, the growth investments and the share repurchases I just described totaled over $300 million in the last 12 months. Despite this, we've managed to reduce our leverage from 3.5 times to 3.1 times EBITDA during that same period.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thank you, Robert. I'm going to ask another question we received last night that is along similar lines. Here it goes. We suspect that you agree that the returns associated with repurchasing our shares today are materially more attractive than they were a few weeks ago. Will this influence what sorts of investment activities we prioritize, given the 2.75 times leverage constraint that has been communicated? For instance, are there higher uncertainty CapEx investments that we may postpone to take advantage of the irrational price being offered by Mr. Market?

Robert Keane, Founder, Chairman and Chief Executive Officer

The short answer is yes. I believe Cimpress is a prime example of Benjamin Graham's description of Mr. Market when he's particularly moody and irrational. The cash flow math I shared earlier illustrates that value-to-price disparity. We plan to capitalize on that opportunity and, if prices remain favorable, I would not be surprised if we invest over $100 million in share repurchases this fiscal year, while still aiming to close the fiscal year at around 2.75 times leverage or lower. Regarding the tradeoffs you mentioned, these are regularly discussed in our operations. When opportunities arise, we consider CapEx, OpEx, advertising, and payment terms. However, I want to caution you that much of our successes come from operational consistency and what we call a focus on focus. This requires planning across a broad organization, and shifting investment levels and operating plans frequently based on fluctuations in share price can incur high costs. We remain very committed to our planned investments in CapEx, software development, talent recruitment, and advertising, and we intend to proceed with those. Our planning gives us significant confidence those projects are unlikely to carry high risks. While we recognize there are trade-offs to be made, we anticipate we’ll make adjustments, but this is not something we can simply switch on and off. I'm not sure if your question also pertained to the goal of ending fiscal '25 with net leverage at 2.75 times, but let me address that as well. Similar to operational management, it is beneficial to maintain consistency in our financial strategy, and we should be cautious and protect our goals, barring extreme circumstances. We aim to maintain our leverage expectation for this year as communicated, even though one could argue that given Cimpress' proven ability to delever, this would not be the right moment to reduce leverage given the current state of Mr. Market. Nonetheless, we see the value in consistent messaging about our operational strategy.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thanks very much, Robert. All right. We're going to shift gears and this next question will be for Sean. Sean, please help me understand the $18 million quarter-over-quarter swing in other income/expense? What are the main components of that line, and how do they flow through to adjusted free cash flow?

Sean Quinn, EVP and Chief Financial Officer

Sure. Yes, let’s delve into the details. There's a section on currency impacts in our earnings document, which provides more insights. However, other income and expense can often experience notable movements on a quarter-over-quarter basis. The year-over-year change in our other income and expense was just under $18 million. This line is primarily driven by realized and unrealized currency gains and losses. With that in mind, let me clarify the activity there for the first quarter. We have an active currency hedging program where we average into a combination of forwards and options each quarter based on our currency exposures, all designed to reduce volatility in our adjusted EBITDA. In the past, we maintained EBITDA-based maintenance covenants that influenced this strategy. Presently, we do not have any EBITDA-based maintenance covenants; however, we keep the program in place in anticipation of a drawn balance on our revolver in the future. Our hedging program has effectively minimized currency volatility. The realized gains or losses from those hedges are included in our adjusted EBITDA. Unrealized gains and losses do not impact adjusted EBITDA and flow through this other income line, contributing significantly to this line's fluctuations. In Q1, our realized currency hedges went from a gain last year of $2 million to losses this year of $2 million, amounting to a total change of $4 million concerning that $18 million in that line. This realized component positively influences our adjusted EBITDA and cash flow. Additionally, it's essential to note that while we had losses in Q1 from our currency hedges, they were offset by positive effects elsewhere, either in our revenues or costs contributing to just under a $1 million negative impact to our EBITDA overall compared to last year. That's the most important takeaway for Q1, and it will flow through to our adjusted free cash flow. The remaining $14 million year-over-year change primarily stems from fluctuations in unrealized currency gains and losses, which do not affect our free cash flow this quarter. These changes will continue to be subject to mark-to-market adjustments and could be realized over the next 12 to 24 months. If losses occur, there will generally be a corresponding positive impact on revenue during that period. In summary, while there can be volatility, we expect the overall impact of currency on our adjusted EBITDA to remain neutral for the full fiscal year based on our contracted rates.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great. Thank you, Sean. All right. Sean, I'm going to stick with you. We received a trio of questions from investors regarding working capital. I'm going to ask you all these questions at once, and you can combine the answers. We were surprised by how much cash our payables consumed last quarter. What drove this large use of cash? Second, there’s been noise in our working capital over the past few years. Could you remind us which quarters are expected to generate cash and which quarters are expected to use cash—like inventory continuing to be a source in Q2, etc.? The last question is that, at Investor Day, you predicted working capital would be a source of cash for the full year, although less than FY '24. Have the Q1 results altered that perspective? If yes, what has changed?

Sean Quinn, EVP and Chief Financial Officer

Okay. Let me try to cover all of those points at once. Understanding working capital can be challenging due to quarter-to-quarter volatility. First, I'll say there are no structural changes occurring within our working capital. That said, analyzing a single quarter can be complex as timing differences and sometimes discrete events can cause fluctuations in working capital, potentially in either direction. However, absent specific events like the supply chain disruption impacting inventory over the previous years, we anticipate working capital inflows in Q2, which is usually our largest quarter, and also in Q4. These inflows align with our revenue seasonality during periods of peak volume. For example, in December, we experience our highest revenue due to the holiday peak, culminating in cash collection from customers. Meanwhile, we also pay for materials, shipping, advertising, sales taxes, VAT, etc. This creates a mismatch in working capital. Conversely, we typically observe outflows in Q1 and Q3, with Q1 being the smaller outflow. Our guidance, as mentioned during the previous fiscal year, is still for working capital to be a source of cash for FY '25, albeit less than it was in FY '24, primarily because FY '24 was an exceptionally strong year driven by specific factors. Remaining on Q1 specifics, I want to clarify that timing is critical. For example, Q4 performance was strong, and this might lead to an inflow in that quarter, showing as an outflow the following quarter. In Q1, despite having some inventory build-up for holiday preparations partially due to shipping challenges through the Red Sea, the year-over-year comparison is less favorable. Last year, we were unwinding safety stocks we had built up, contributing to an unfavorable swing. Regarding your query about payables and working capital, several one-off instances tied to specific suppliers impacted this. For instance, last year, we negotiated favorable terms with a technology contract that provided significant benefit that did not repeat this year. Conversely, this year, we had another technology contract that has transitioned from unusually favorable terms stemming from a zero-interest rate environment to more standard commercial terms, creating another unique impact on our cash flow. Just those two instances demonstrate a year-over-year effect exceeding $5 million. As always with working capital, it’s worth noting there’s no structural change. Quarter-to-quarter variations in factors are to be expected. Additionally, when examining cash flow, I typically analyze accounts payable alongside accrued expenses to understand those trends. The cash interest payments I mentioned earlier also increased by $10.6 million in Q1 compared to last year due to early interest payments on bonds we redeemed. So, if you are viewing it from a cash flow standpoint, those payment timings will influence those lines. Overall, while cash flow can be variable, our long-term guidance remains intact.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great. Thank you, Sean. All right. Moving on to Robert with a question about CapEx. Robert, in Q4 FY '24, you indicated plans to increase CapEx in 2025, but the cash outflow for PP&E was lower this quarter. Have your plans changed, or will those investments occur later in the year?

Robert Keane, Founder, Chairman and Chief Executive Officer

I think the investments will still happen later in the year, with a caveat regarding the discussion we recently had about monitoring capital allocation opportunities and share buybacks. However, consistency in operational execution is vital. Our planned investments will proceed. It’s typical for CapEx to fluctuate quarter-to-quarter; we often test capital equipment to ensure it meets our operating requirements and key performance indicators before making full payments, delaying the cash outflow. Based on initial installation tests and our payment arrangements, it’s common for most CapEx from a cash flow perspective to show up in quarters following equipment receipt.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thank you, Robert. I'm going to stick with you for the next question regarding our BuildASign business. We'll have two questions. We presumed that sales for BuildASign would have significantly increased this quarter due to the election cycle. However, sales in North America for all other businesses, which we might incorrectly assume includes BuildASign, increased only marginally relative to last year. Is the election cycle not an effective sales driver for this business? Furthermore, why was there a spike in intersegment revenue for the all other business segment in Q1 FY '25 versus Q1 FY '24?

Robert Keane, Founder, Chairman and Chief Executive Officer

Concerning the first question, our external revenue trends in Q1 for BuildASign reflected consistency with recent past performance. We experienced growth in signage, which was partially offset by a decline in direct sales of home decor products. While the election cycle did positively impact signage revenue, I would categorize this as a helpful increase, but not a major driving force. Regarding the second question, the growth in intersegment revenue is a result of our successful collaboration for cross-Cimpress fulfillment between Vista and BuildASign. To clarify, Cimpress fulfillment refers to instances when one Cimpress business produces for another Cimpress business. We are still in the early stages of a multi-year effort to enhance cross-Cimpress fulfillment to expedite new product introductions and reduce production costs by aggregating volumes into specialized production lines. Specifically, BuildASign possesses excellent production capabilities in signage and home decor. Throughout fiscal '25, we are transitioning most of Vista's North American production volume for those two categories from Vista to BuildASign. This not only generates immediate cost savings but also frees up production capacity in Vista's North American facilities for new product lines we are introducing, primarily focused on growth categories. It is crucial to note that intersegment sales are not included in the regional split of revenue reported in our financial metrics spreadsheet. For example, in this case, BuildASign accounts for most of our all other business segment revenue, but the intersegment revenue results from fulfilling products shipped to Vista customers in North America.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thank you, Robert. I'm going to stick with you for this next question, which came in live. At the Investor Day, you mentioned a modest multi-year revenue decline in the combined business cards and consumer products categories. You noted that consumer products have been growing for the last five quarters and previously mentioned that business cards have been experiencing low single-digit growth due to customers finding different use cases for business cards. Do you believe the modest decline in these combined product categories can be reversed, or should we view this as a modest ongoing revenue headwind?

Robert Keane, Founder, Chairman and Chief Executive Officer

Most of this query pertains to Vista, so I will focus on that. I will say that we do believe we can stop the modest decline and are strategizing for relatively flat revenues across these two traditional product categories. At our September Investor Day, Florian displayed a slide illustrating that, unlike the strong growth we observe in categories like signage, marketing materials, promotional products, apparel, and packaging—which make up the majority of our growth—the flat growth concerning business cards and consumer products represents a much smaller percentage of revenues that has substantially declined. These new growth categories are now generating the majority of our gross profits and are essential to high-value customers driving our growth. Their attractive lifetime value makes our contribution profit, even after advertising, favorable compared to the more established categories of business cards and consumer products. That mix shift means that the gross margin percentage is lower, but Vista excels at maintaining the profitability of these mature product categories through enhanced customer experiences, expanded product range, premium substrates, sophisticated finishing options, price optimization, and reduced discounts to improve advertising efficiency.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thank you. Sean, did you want to add anything to that?

Sean Quinn, EVP and Chief Financial Officer

Yes. If I could. One aspect that might confuse some is that, at Investor Day, we compared business cards and consumer products together due to reasons Robert just discussed. These are larger legacy categories that differ from the more complex products we are prioritizing now with higher growth potential. Additionally, when analyzing revenues, we compared those trends back to 2018, a period marked by a pandemic that impacted many sectors as well as transformation within the Vista business, including reduced advertising budgets. There is a lot of noise in the historical data from FY 2018 to around FY 2024 unrelated to current trends. It’s also important to note that the consumer segment has been growing over the last five quarters, indicating potential for ongoing growth rooted in our focus on product introductions and enhancements to the customer experience.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thanks, Sean. We have run out of questions. So, I'm going to turn it back to Robert to wrap up.

Robert Keane, Founder, Chairman and Chief Executive Officer

Okay. Well, thank you, Meredith. In summary, we continue to execute in line with the plans we've laid out for you during our September 10th Investor Day. Hopefully, some of the examples and details we've shared today are useful. I regularly converse with team members across Cimpress and remain inspired by their talents. I’m motivated by their ability to seize opportunities and address challenges, and I want to thank them for their support and execution of our strategy. There are more than 15,000 Cimpress team members working successfully to drive improvements in customer experience, efficiency gains, new product introductions, and high-quality marketing, among other initiatives. These elements are key to sustaining our 30-year trends of revenue and profitability growth, as well as market share expansion. So, I'll conclude by expressing my gratitude to them and to you, our investors, for joining the call and for continuing to trust us with your capital.