Earnings Call Transcript - CMPR Q3 2023

Operator, Operator

Good day ladies and gentlemen and thank you for standing by. Welcome to the Cimpress Third Quarter Fiscal Year 2023 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, Howard, and thank you, everyone, for joining us. With us today are Robert Keane, Founder, Chairman and Chief Executive Officer; and Sean Quinn, EVP and Chief Financial Officer. I hope you've all had a chance to read our earnings document. We appreciate the time that you've dedicated to understanding our results, our commentary, and our outlook. This live Q&A session will last 45 minutes to an hour, and we'll answer both presubmitted and live questions. You can submit questions live via the questions and answers box at the bottom left of your 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 have also published non-GAAP reconciliations for our financial results and our outlook on our IR website. We invite you to read them. And now, I will turn things over to Sean for some brief remarks before we take questions.

Sean Quinn, EVP and Chief Financial Officer

Thank you, Meredith, and thank you to everyone joining us today and those listening to the recording later. Before we dive into the questions, I want to point out a few key highlights from the financial results and outlook we released yesterday. As we mentioned during our September Investor Day, this fiscal year's performance has been shaped by margin compression in the first half due to cost inflation and a higher operational expense base, followed by expansion in the second half. Excluding the benefits from the cost reductions we outlined in our March 24 investor update, we observed significant year-over-year growth in adjusted EBITDA during the March quarter, driven by accelerated revenue growth, stabilization of gross margins, and better leverage in advertising and operating expenses. From a revenue standpoint, we are at the upper end of our guidance, achieving 16% consolidated organic constant currency revenue growth, partly due to year-over-year pricing improvements and a comparison to a weaker period in January and February last year. Our Upload and Print businesses, along with Envista, also experienced strong performance, with constant currency revenue growth reaching 16%. Vista's growth was fueled by increased sales across small business product categories, especially in promotional products. We also saw double-digit revenue increases for business cards, marketing materials, signage, and packaging. Both new customer count and bookings in Vista grew nicely for the second consecutive quarter, aided by our mid and upper funnel advertising testing in the first half of the year. We have also passed the anniversary of our U.S. site migration to the new technology platform, which occurred in February last year, with growth remaining robust in North America and Europe. Year-over-year gross margins held steady on a consolidated basis, including Envista. This consolidated revenue growth translated into strong gross profit growth as well. As mentioned in our March investor call, input costs are stabilizing, with opportunities for reductions in the upcoming fiscal year. From a profitability perspective, Q3 adjusted EBITDA more than doubled year-over-year and exceeded our March guidance. This also resulted in strong cash flow performance. As anticipated, we experienced favorable working capital relative to typical seasonal patterns in Q3, offsetting the challenges we faced in the first half of the year due to increased safety stock and variations in spending during the previous quarter's holiday peak. This led to a significantly lower adjusted free cash flow outflow in Q3 compared to recent years. We concluded the quarter with approximately $190 million in cash and marketable securities, surpassing our guidance due to a strong operational finish and improved working capital. As for net leverage, it was 4.83 times our trailing 12-month EBITDA, according to our credit facility, and that improved sequentially due to better profitability and the pro forma benefits from some of our cost reduction initiatives. Regarding our outlook, we are updating the guidance provided in our March investor update based on the strong Q3 performance, raising our Q4 adjusted EBITDA guidance to $90 million to $94 million, which should also bring seasonally strong free cash flow conversion. With this guidance and the higher Q3 results, our forecast for fiscal 2023 adjusted EBITDA is now $316 million to $320 million. We aim to reduce net leverage below 4.5 times trailing 12-month EBITDA as defined by our credit facility by the end of this fiscal year, which will be next quarter, in June. Looking ahead to fiscal '24, we are confident in our ability to achieve at least $400 million in adjusted EBITDA. The strong Q3 results and the increased Q4 guidance support this outlook. The cost reduction measures we took will result in roughly $100 million in annual savings, with about $15 million to $17 million of savings expected in Q4, and the rest to be realized in fiscal '24. Importantly, we anticipate that fiscal 2024 adjusted EBITDA will exceed $400 million, along with a strong conversion to adjusted free cash flow of around 40%, reducing net leverage to below 3.5 times by the end of the next fiscal year. As discussed on our March 24 call, to achieve at least $400 million in adjusted EBITDA, we expect only modest revenue growth next year, which will support the contribution flow through. We have yet to provide revenue guidance for FY '24. By the time we enter next year, we will have reached the anniversary of the technology migration in Vista across all major markets and most of our pricing increases over the last year. We are providing this detailed guidance now because we expect our profitability and cash flow to significantly improve in the upcoming quarters due to the progress across our businesses, along with the benefits from recent investments and the significant cost reductions implemented. Although we do not expect to offer this level of detailed guidance quarterly in the future, we will continue outlining our expectations for the upcoming year at the beginning of each year and will provide updates when necessary.

Meredith Burns, Vice President of Investor Relations and Sustainability

Sounds good. Thanks, Sean. So as a reminder, you can submit questions during this webcast via the questions-and-answer box at the bottom left of the screen. We received a significant number of presubmitted questions as well. And so I will ask those questions now. There was some overlap. So I'll make sure that we touch on the topics that are on everybody's mind. And we'll get you as many as we can over the course of the next 45 minutes or so. So the first question, I'm going to do a presubmitted question and we got this a couple of times from different folks, which is basically what changed from the March investor update, where Q3 EBITDA came in much better than the guidance of $60 million to $62 million. Sean, why don't you take that one?

Sean Quinn, EVP and Chief Financial Officer

Yes, sure. I mean, there are really two main things. One, the quarter finished strong. So that was the main driver. Also, we had about $1.7 million of savings from the March cost actions that we took, which was a little bit higher than what's factored into the guidance just based on how those actions were finalized. I mean, in general, we have very good visibility to the top half of our P&L on a daily, weekly basis. The full EBITDA sector sometimes takes until the end of the month to get fully rolled up. And of course, we do have quite a few businesses across the group. Our guidance for Q3 on March 24 was based on two months of actuals, one month of forecast. We ended up better than that forecast. And that stronger performance against forecast in March. And as we closed out the quarter was one of the drivers for us increasing the range of adjusted EBITDA guidance for Q4, as you saw in the release last night.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great, thanks. So we're going to stick on that same topic and flip it to cash flow. Can you please provide a little more color on why cash and cash equivalents were so much higher than the $135 million to $145 million guidance given at Investor Day towards the end of the quarter? Was there any kind of working capital pull forward from Q4 of FY '23? And a related question, working capital was a positive instead of less of an outflow, what happened there? It's a good thing, but just curious about timing issues.

Sean Quinn, EVP and Chief Financial Officer

Yes, we finished the quarter very strong from a cash flow perspective, which was great to see. We had the upside of the EBITDA flowing through, so that was a positive. We did have some timing benefits relative to our forecast for working capital as well. That gets tricky within a given week in terms of precision. Because of that, frankly, we had to take a little bit more of a conservative stance in that guidance. That’s not guidance we would typically give. There was a lot of focus on that, and we wanted to be clear about where we expected to land. We, of course, came in well ahead of that, which is good news. From a timing perspective, in terms of what impacted that, things like when we pay or receive indirect taxes, all kind of normal stuff is what drives that. Nothing out of the ordinary there to call out. For the kind of pull-forward question, for Q4, we do expect to see seasonal strength in terms of the conversion of our EBITDA to cash flow. We'll have the cash restructuring charges that we've previously outlined, and most of that gets paid out in Q4. But I'd say that the Q3 working capital being stronger than expected was more of an offset to some of the unfavorable trends we saw in the first half of the year, including from inventory than it was a pull forward of what we'd expect to see in Q4. And that's all built into the commentary that we provided in terms of strong cash flow conversion in Q4, and that strong cash flow conversion is inclusive of any of the restructuring costs that we need to pay next quarter.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great. Thank you, Sean. I'm going to hand the next couple of questions over to Robert. Robert, first, build design growth has recently moderated. What is driving that moderation?

Robert Keane, Founder, Chairman and Chief Executive Officer

Before addressing the specifics of your question, I want to provide a broader overview. I don't have the precise figures available, but generally speaking, the revenues of BuildASign today are comparable to their revenues prior to the pandemic, showing growth similar to what we've seen at Cimpress over that multi-year period. BuildASign has taken a different approach. During the pandemic, they performed exceptionally well, primarily due to home decor, which we believe was a result of a surge in demand that has since cooled off. This segment remains strong and is expected to grow over time, but we did see a peak in revenue during that period. On the other hand, signage and enterprise accounts have performed well following the pandemic. We are experiencing some impacts from factors such as cost inflation, labor costs, and changes in our marketing strategies. However, the home decor products that saw a spike during the pandemic have returned to more normalized levels, which is affecting our growth rate for BuildASign. Signage products and enterprise accounts, however, continue to grow robustly. While the past several quarters and years have had some fluctuations, BuildASign continues to be a solid business with a capable leadership team, and we have strong confidence in their potential to grow both revenues and profits moving forward.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great. Thank you, Robert. And a question on Vista for you. In the midyear update, Florian mentioned that there would be a refocusing of Vista's attention on vistaprint.com. What does this mean for the Vista portfolio Vistaprint is to create net 9 design and also the concept of print versus digital?

Robert Keane, Founder, Chairman and Chief Executive Officer

Maybe I'll step back again and say, we retain Vista's strategic North Star to become the expert design and marketing partner to small businesses. That certainly needs to include starting with the last portion of your question, digital websites for small businesses, social media postings. It needs to include great design. We will move towards that long-term vision as we've discussed in the past. The difference that Florian was alluding to is a decision to progressively integrate the Vista create experience and the 99design experience and other future experiences directly into the Vistaprint user experience. In other words, on the Vistaprint site itself as opposed to an adjacent site. And that will bring these expanded design capabilities or digital abilities in costs? Customers and the stand-alone experiences of Vista Create and 99designs will continue to exist as separate URLs; we are not taking those down. But the development is really being focused to bring the integration into Vista, which has always been the long-term objective. We believe the broadening of the Vistaprint user experience towards these areas of design and digital will help fulfill that North Star, where we speak of that North Star as Vista being that broader value proposition. So it's really a change in path of how to get there to leverage the large number of customers we already have, but it's not a change in the destination.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thanks, Robert. Sean, I think I'll hand this one over to you. This one is on margins at Vista. Is the margin recovery at Vista tracking in line ahead or behind your expectations? Please elaborate.

Sean Quinn, EVP and Chief Financial Officer

It really depends on kind of when that expectation was set. If you go back to what we expected at the beginning of the year, I'd say broadly on track, maybe slightly ahead. We talked a bit about the shape of margins throughout the year and that we were still going to be lapping some of these things in the first half of the year, which was going to put some pressure on margins and then we would start to see expansion in the second half of the year. But it's accelerating now beyond our expectations in large part because of the cost reductions we've taken action on. But I think relative to our most recent plans over the recent months, we're definitely on track and maybe a little bit ahead. If you just step through the main sections of the P&L, gross margins in Q3 were flat year-over-year in Vista. That becomes a really important piece of the margin picture that wasn't in place in the first half of the year or in the second half of last year. So gross margins being flat year-over-year in Q3, that acceleration in growth starts to set up for the ability to really expand margins. And then over the last year, we also have a bit more intensity in advertising, and it wasn't expected that we'd maintain that same intensity as a percentage of revenue. We’re starting to see margin leverage there as well, and that was notable in Q3. I think that will be particularly evident again in Q4 as well. And then from an OpEx perspective, we expect it to kind of flatten out, but we’re starting to bring that down given the cost reductions we’ve put in place as well.

Meredith Burns, Vice President of Investor Relations and Sustainability

Yes. I was just going to hop a live question in here for you. So new customer count and bookings in Vista have now grown for two consecutive quarters. Can you speak to what's driving this? And how sustainable do you think this trend is?

Sean Quinn, EVP and Chief Financial Officer

Yes, this has been very positive to see as well. There's a lot of our efforts in terms of where we've been investing over recent years, be it in design but also even a lot of the testing we've done from an advertising perspective, which is geared towards reenergizing new customer acquisition and finding economic ways to do that and do that at scale. So I think this is very positive to see over the last two quarters. We had been seeing that new customer bookings were growing nicely in quarters before that, but now to have new customer count and bookings both growing strongly is very positive. In terms of what's driving that, like I said, it has been the focus of part of our investment over the last few years. We’ve been very focused also on protecting the key parts of investment there even as we’ve gone through these cost reduction actions and then the advertising, including changing the mix of our advertising and doing more and more experimentation there with positive results. I do think that this trend is sustainable. We have some benefit in Q3 from some of the softer comp, but I do think that trend is sustainable and it’s a clear focus of ours as we go into next fiscal year.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thanks, Sean. We're going to stick with Vista marketing for a moment and go into guidance territory here. We've got several questions from folks asking us about the level of marketing spend as a percentage of revenue in Q3, 14.5% of revenue, whether that's a new run rate. What this is going to look like going forward? Could it decrease further? Is it going to increase again? Lots of questions on this topic, as you can imagine.

Sean Quinn, EVP and Chief Financial Officer

Yes, we addressed this in the release. For Vista, the percentage of revenue spent on advertising will not remain consistent each quarter. There will be fluctuations, influenced by the intensity of mid and upper funnel campaigns, especially as we keep experimenting with our mix. The question was whether we could reduce spending from our current level in Q3. In Q3, we are actually down from recent levels. We could decrease further, but we don't believe that would be the right choice considering the current returns on our spend. Annually, we expect advertising spending as a percentage of revenue to be slightly higher than the 14.5% reported in Q3, but we will still have leverage. I previously mentioned this in relation to margin expansion. We will maintain leverage compared to last year, and you'll see that reflected in Q4 as well. Last year in Q4, we began experimenting more with mid- and upper funnel spending; we invested in some new properties we had acquired. I anticipate significant leverage there. During our September Investor Day, we indicated we would likely be at around 17% of revenue annually, with some quarterly fluctuations over the next few years. This is considerably lower than some of our historical levels, like fiscal 2018 when we were around 22%. Now, we will track below the 17% annual mark, especially following some cost reduction efforts that deprioritized spending in certain advertising areas. Most likely, we will be in the 15% to 17% range. There's been substantial progress in this area recently, and ample opportunity remains to experiment with our mix and enhance efficiency. Even in Q3, we achieved some notable successes, and we will continue to focus on this as we move into the next fiscal year.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great. Thanks, Sean. Quick question. Where is Princi on its profitability journey?

Sean Quinn, EVP and Chief Financial Officer

I’ll take this one. We are getting close to profitability, and growth has been strong. More importantly, gross margins have significantly improved over the past two years, enabling a path to profitability along with future growth as the business scales. Brazil is a significant market, and Princi is the leading player there. We are leveraging successful strategies from other parts of Cimpress and tailoring them to the Brazilian market, assisting the team in implementing these strategies. We've made great progress over the last few years, and the rate of expanding our product selection is increasing, indicating good momentum in the business.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thanks. All right. I'm going to go to a topic area where we've had pretty submitted questions, but also a couple of live questions as well. Really looking to understand the growth rate this quarter and what's coming from price, what's coming from volume, what's coming from the weaker comp. Several questions in that area.

Sean Quinn, EVP and Chief Financial Officer

Yes. I'll provide an overview, understanding that we have a diverse portfolio of businesses, each facing unique challenges, with product categories experiencing different trends and varying timing for price increases. I won't get into the specifics but to summarize, for Vista in this quarter, the 16% growth is approximately one-third from price increases and two-thirds from a combination of volume and product mix shifts, particularly in promotional products where average order values are higher than usual. The growth has also been aided by volume improvements as we compare against last year’s U.S. site launch and the impacts of the pandemic. In Upload and Print, growth sources differ by business and category but are about evenly split between price and volume. The contribution from price is expected to decrease in the upcoming quarters as we compare against the pricing changes implemented last year. Additionally, it's worth noting that new customer activity has been robust in Vista and our Upload and Print sectors in both this quarter and previous ones. As these customer groups grow, they will likely fuel future growth, which has been a key factor in our recent performance, including Q3.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great. All right, I'm going to throw this next question to Robert. Robert, have the layoffs been finalized? Or are they still ongoing? And what are we doing to keep team morale high.

Robert Keane, Founder, Chairman and Chief Executive Officer

To your first question, the layoffs have been finalized. We completed them in March and April, and they are fully complete, other than some processes, which are required by employment law in certain countries, but substantially complete. On your question, it has been in communication at all levels of the organization. We’re sure to combine two very important messages and two very important sets of facts. First, we are treating departing employees with respect, with financial fairness, and with heartfelt appreciation for the contributions they've provided to the business in the past, reiterating these changes are not a reflection of their talent. That message has gone over well. Secondly, we've stressed how these changes will make us a better company. Of course, financially stronger, but in addition to that, we've positioned ourselves to improve our velocity in terms of improving customer value. We’ve done that by reducing management layers, clarifying areas of accountability, narrowing and improving our focus, empowering our product development teams and combining teams that were working on similar activities. So the combination of that human-to-human respect and fairness combined with the business logic of this, I think, has helped a lot. No restructuring is easy, but given that the morale is relatively good, I think we’ve certainly come through the most difficult part of that because those two messages have landed quite well.

Meredith Burns, Vice President of Investor Relations and Sustainability

All right. I'm going to go to a quick housekeeping issue from a balance sheet perspective on question. Is the increase in accrued expenses mostly tied to restructuring expenses that were incurred but have yet to be paid out? If so, are we correct that those will likely reverse in the next 3-ish months as indicated in the midyear update? Sean, do you want to answer that one?

Sean Quinn, EVP and Chief Financial Officer

Yes. There's a footnote in the queue every quarter that breaks this down. That might be helpful. We’ll follow that later today. But there are really two main drivers of restructuring expenses, the largest being roughly $17 million that remain accrued at the end of the quarter. That will mostly be paid out in Q4. The other driver is in terms of the increases in the accrued interest, which was about $10.5 million of increase because we pay the interest on our high-yield notes semiannually; that next payment will happen in June.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great. Okay. Let's shift gears and go into a bunch of questions on our outlook. All right. So first one, gross profit margin declined, although the rate declined significantly, is inflation more or less topped out at this point? Do you see a need for further price increases in the future to offset inflationary pressures?

Sean Quinn, EVP and Chief Financial Officer

On a consolidated basis, gross margins are essentially flat year-over-year, down 30 basis points. While we cannot definitively conclude that inflation has peaked, conditions have certainly stabilized, and in some areas, costs are declining. We have observed improvements in inbound freight and energy costs, as well as in the prices of materials like plastics, aluminum, and paper. This is a significant focus for us, and we are working to ensure our costs decrease as commodity prices fall. However, there will be a lag due to these prices being tied up in inventory, so it will take a few months to reflect that change. As we move into fiscal year 2024, we anticipate a more noticeable impact. In our March 24 call, we mentioned a range of $18 million to $19 million in cost reductions, which included some savings in compensation, but primarily stemmed from reduced input costs based on our discussions and contracts with suppliers. Regarding price adjustments, most of these will be revisited by the end of this year, extending into next year depending on their timing. Going forward, we expect all our business sectors to consistently assess price sensitivity and make necessary adjustments based on customer behavior. If there are no significant unexpected shifts in inflation, we should return to a normal operating mode as we enter fiscal year 2024.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thanks. So we had a live question come in around how April is looking, Sean, how are constant currency sales looking this month?

Sean Quinn, EVP and Chief Financial Officer

Yes. We're not going to give specific numbers for April, trying to get out of that pattern. But we increased our Q4 guidance, our EBITDA guidance from what was previously about $86 million to $90 million to $94 million. Hopefully, that says something about what we’re seeing in April, but also the strong finish to March, which is indicative that we beat our Q3 guidance, having given that guidance pretty late into the quarter. So trends remain strong.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great. So the next question that we're going to take is, could you please tell us your expectation for Q4 FY '23 free cash flow and/or expected gross cash position at the end of the year?

Sean Quinn, EVP and Chief Financial Officer

Yes. On this one, we're not going to give specific guidance for free cash flow in Q4 or in any cash position. What we said in the release is that we expect the higher year-over-year adjusted EBITDA in Q4 to have seasonally strong conversion to adjusted free cash flow. That’s even with our cash restructuring charges that will be paid out. If you look back at the last two or three years, you’ll see the patterns in working capital in Q4 have been a material inflow. We expect to see strong cash flow conversion on EBITDA in Q4, but we're not giving specific guidance on that nor on any cash position.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great. So shifting to FY '24 from a free cash flow perspective. So this one is going to take a little bit of math. You guided for $195 million in operating income for FY '24. This quarter depreciation was $14 million higher than CapEx. Is it reasonable to assume that there will be no major change in depreciation and CapEx trajectory? And therefore, for FY '24, assuming a 20% tax rate, free cash flow to shareholders will be $195 million times 80% plus $56 million minus $12 million of interest expense equals about $92 million. Not looking for specifics, but I want to confirm if this is generally correct.

Sean Quinn, EVP and Chief Financial Officer

That's quite a bit of math to consider. I believe there are a few inaccuracies. I'll point those out conceptually and share our guidance. You should add back share-based compensation and include gains from currency hedging that fall below operating income, while also accounting for working capital. This cash tax shorthand would suggest we are on the higher end of our expectations for Q4. Referring back to our guidance, we projected at least $400 million of adjusted EBITDA for FY '24, which would convert to about 40% in adjusted free cash flow. That translates to roughly $160 million, which is the figure to keep in mind. To clarify the bridge; our cash taxes have been in the low $30 million range and may rise slightly this year to between $30 million and $35 million, making it a better proxy than the tax rate mentioned. Regarding capital expenditures, we've been slightly below 2% of revenue year-to-date and last year, and we expect something similar next year. The capitalized software costs should be lower than the current pace, and working capital should normalize in FY '24, resulting in a cash inflow.

Meredith Burns, Vice President of Investor Relations and Sustainability

All right. Next question, Sean, I have a question for you. Is it reasonable to expect long-term adjusted EBITDA to revert back to historical levels of mid- to high teens as a percent of revenue?

Sean Quinn, EVP and Chief Financial Officer

Yes. We haven't given specific guidance on that. But I think certainly, mid-teens from a long-term perspective is absolutely in the cards. So I think it’s reasonable to expect, yes, we're not going to give specific guidance on long-term EBITDA margins.

Meredith Burns, Vice President of Investor Relations and Sustainability

Okay. Here's the fun one on inventory. So pandemic, we operated with 17 to 20 days of inventory on hand. We understand and appreciate the reasons that we increased it to 30-plus days earlier this fiscal year, but is the goal to eventually return to the high teens? Or has our philosophy regarding how many days we should have changed permanently?

Sean Quinn, EVP and Chief Financial Officer

That's a good question. We’re definitely moving back in that direction. I anticipate that we'll end up slightly higher than the pre-pandemic levels regarding days of inventory. There are some areas where we've made different decisions about specific inventory levels, and also, the growth we're experiencing in promotional products and Vista, along with related product expansion, necessitates additional inventory.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great. Another last question is the current run rate of stock-based compensation of about $40 million per year, a fair baseline assumption for SBC run rate in the future.

Sean Quinn, EVP and Chief Financial Officer

It is. That's the slide in the bridge from operating income to adjusted EBITDA for FY '24. So yes.

Meredith Burns, Vice President of Investor Relations and Sustainability

All right. So you've stated on recent earnings releases and in recent earnings calls that Cimpress is coming to the end of a multiyear period of heavy investment to support the business's digital transformation and growth initiatives. As growth investing slows, do you expect adjusted EBITDA and steady-state free cash flow to begin to converge? That is, should we expect to be in a steady-state environment sometime soon?

Sean Quinn, EVP and Chief Financial Officer

Meredith, I'll begin here, and Robert, feel free to add any thoughts. Considering the current market size and the transition from traditional offline suppliers to online, as well as other factors, we don't anticipate entering a steady-state environment in the near future. This is based on our definition and Robert's annual letters, which refer to reducing our cost structure to a level that generates free cash flow exceeding the rate of U.S. inflation. If that's what you're asking, then no, we don't foresee that happening soon. Even with the significant cost reductions of around $100 million we discussed last month, we’re still investing in areas that won't yield returns within the year. Therefore, we won't operate in a steady state as we've defined it. However, I do believe we will see an increasing alignment between our actual unlevered free cash flow and our estimates of steady-state free cash flow. Over the past five years or so, we've moved away from significant growth investments in emerging markets like China, Japan, India, and Brazil. We’ve exited those businesses, and in Brazil, we’re close to achieving EBITDA breakeven, which illustrates a link between our actual unlevered free cash flow and our future steady-state free cash flow that wasn't there before. Previously, there were substantial growth investments in that market. In our other businesses outside of Vista, while we are still investing, the amounts are relatively modest, and those businesses continue to grow well. In Vista, the cost reductions we mentioned in March have led to a rationalization and prioritization of our investments. We have focused our investment efforts significantly. All of these changes will contribute to greater alignment through the growth of our businesses, particularly in our Upload and Print sectors, as well as the recent cost reductions that will help lower our maintenance expenses; these will also support our steady-state free cash flow. I believe we are at the beginning of that convergence, but we will not be fully operating in a steady-state environment.

Robert Keane, Founder, Chairman and Chief Executive Officer

Sean, I completely agree with you. I don’t really have anything to add.

Meredith Burns, Vice President of Investor Relations and Sustainability

A couple of live questions here provide us with an opportunity to clarify a few points. First question, can you again discuss the decline in restructuring cash costs expected in Q4 FY '23?

Sean Quinn, EVP and Chief Financial Officer

Yes. I have to go back to the specific amount that we outlined this specifically in our March call. It's roughly $17 million. I think that falls in Q4. I'll confirm that here while we’re on the call. That's just to reiterate, that was assumed as part of the free cash flow commentary we gave that the EBITDA in Q4 would convert to free cash flow in a kind of seasonally strong way.

Meredith Burns, Vice President of Investor Relations and Sustainability

I think I misinterpreted the use of the word falling because the cash costs are definitely not going to go down from where they were. They were only $5 million in Q3, but I think it's just where are they going to shake out as maybe what was implied there.

Sean Quinn, EVP and Chief Financial Officer

We did outline that specifically in March, so there's no change in those ranges in Q4.

Meredith Burns, Vice President of Investor Relations and Sustainability

The next question also requires some math on our part. Essentially, they are trying to understand our Q3 performance compared to analyst expectations for EBITDA, and they want to know why our fiscal year '23 guidance wasn't increased by $45 million from the midyear update, especially since we exceeded that update. However, for Q4, we only increased the range by an additional $4 million from the midyear update.

Sean Quinn, EVP and Chief Financial Officer

Yes. I'm not sure I completely follow the question. But just to walk through the full year FY '23 guidance. You now have three quarters of actuals, and we've added to that the range of 90% to 94% for Q4. So that is the math. I'm not sure.

Robert Keane, Founder, Chairman and Chief Executive Officer

Yes. I think where the issue is here, so we gave guidance for Q3 in March that EBITDA should come in between $60 million and $62 million, and we came in at $69 million. Then we raised in Q4 from the implied I think 85% to 89% to 90% to 94%. That is the math that goes into raising the range from where we were for the year, which was, if I recall correctly, $303 million to $309 million for FY '23 to the $316 million to $320 million that we have today. If you’re looking at a beat relative to expectations set from models externally and you’re looking to add that, that’s maybe not a fair thing to look at because it’s possible those were not updated after the guidance that we gave after the midyear update. From our perspective, we raised the guidance by the amount we beat our own guidance in Q3 and the raise in Q4.

Meredith Burns, Vice President of Investor Relations and Sustainability

Yes, exactly. All right, I'm going to shift gears to a fun tax question. So when can you begin using your deferred tax assets? And what is your best estimate for the tax rate at a group level?

Sean Quinn, EVP and Chief Financial Officer

We do not provide guidance on our tax rate because there is significant volatility in our effective tax rate from quarter to quarter. I understand this makes it challenging for you to forecast from a P&L perspective. However, in terms of cash taxes over the last two years, we've incurred around $30 million. Two years ago, we were slightly below that figure, and last year we were slightly above it. This year, we expect to exceed that $30 million threshold. I recommend modeling on a cash tax basis as it may be simpler. Regarding our deferred tax assets on the balance sheet, we have just over $10 million, which can be utilized over the upcoming years. Additionally, we possess other tax attributes not reflected on the balance sheet due to a full valuation allowance for various reasons. In the last quarter, we established a valuation allowance for certain GAAP accounting reasons related to significant NOLs in Switzerland. Despite that, these tax attributes, including those NOLs, remain available for future use, primarily to offset future profitability in the Vista business. Considering some recent changes we made and expectations of higher profitability in the coming years, we anticipate those tax attributes will still be beneficial as expected profitability materializes.

Meredith Burns, Vice President of Investor Relations and Sustainability

Perfect. All right. We've had multiple, multiple questions about capital allocation choices. So we're going to shift into that now. So this question will be for Robert. Your $400 million EBITDA guidance for FY '24 will bring your leverage ratio to levels where you will have a lot more flexibility in terms of capital allocation. Do you generally have any preference on how you would like to allocate cash in terms of stock buyback, bonds, term loans, or building that cash on the balance sheet? In the big picture, how do you think about these alternatives?

Robert Keane, Founder, Chairman and Chief Executive Officer

All right. I will speak to the big picture, but we really need to think of that in different time zones, so time frames. We’ve been prioritizing liquidity and reducing our net leverage as liquidity builds, and we go through this delevering path, which is very clear based on what we've outlined for next year. Our opportunity set does broaden. But we've been very clear, and I want to be very clear again that for FY '24, delevering remains critical. It is our financial priority. So after we do that, 15 months from now, we can talk about other options, but we can't be clearer than we have been, and that’s our priority. Over the long term, there’s no change to our capital allocation philosophy. We outlined that every year in our annual letters. I’d encourage you to read them. That has not changed, but clearly, deleveraging is the focus for the next 15 months.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thanks. So, we’ll talk about delevering. Can you provide more clarity on the strategy around leverage? Is 3.5x for FY '24 a level that you think is a goal to maintain going forward? So Sean, I'm going to throw that one over to you.

Sean Quinn, EVP and Chief Financial Officer

Yes, we haven’t framed it as a goal going forward. So it’s not a specific target. We said we’ll be below 3.5x by the end of FY '24. Hopefully, that's clear based on all the information we've provided regarding how we get there. I think after that, we certainly have a desire to live at lower levels of leverage, whether that’s 3x or some other number, we will find out over time and it will also be based on capital allocation opportunities and capital structure as it had been in the past. In terms of capital allocation then in between now and then, as Robert just alluded to, delevering is a clear priority. I think there’s tremendous value in that delevering path because it opens up the opportunity set from a capital allocation perspective and also from a capital structure perspective. That is why it remains the clear priority. We will go back to being able to assess all capital allocation opportunities in ways consistent with all the commentary we’ve provided.

Robert Keane, Founder, Chairman and Chief Executive Officer

Sean, I want to add to your comments. I agree with your focus on the year and want to reiterate my previous point. If we hadn’t needed to reposition Vista, if we hadn’t experienced a pandemic, and if, after that, we hadn’t decided to invest significantly in our future, I would have never expected us to have leverage in the 5s as a long-term shareholder. We have never done that in the past and don't see it as a healthy position for us as a public company. While it’s not to say it couldn't happen again, it certainly hasn't been our practice for the past 20 or 18 years since going public. Over the long term, I believe we will return to a capital structure that resembles what we had before the turbulence of the last 3 or 4 years.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thank you, Robert. Okay. So just asking for some more detail on the capital allocation front. A couple of questions in here. Just the better-than-expected performance in Q3, your outlook for Q4, and confidence in FY '24 increase your comfort to buy back bonds at a substantial discount to par sooner?

Sean Quinn, EVP and Chief Financial Officer

Nothing’s changed here. We’ve gotten this question in the last few quarters, and I’ll give you the same answer, which is something that we look at on a regular basis. Yields are attractive, but we've also prioritized building liquidity. As liquidity builds, the opportunity set for that starts to open up. We obviously, we had a strong Q3. We expect a strong Q4. We still have the restructuring payments and the like to pay out in Q4. But nothing's changed in the thought process here; we'll continue to look at it.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thanks, Sean. All right, that is going to do it for our list of questions. I want to thank everybody for submitting them, both live and presubmitted before we sign off. Robert, is there anything that you would like to share?

Robert Keane, Founder, Chairman and Chief Executive Officer

Thanks, Meredith. So in closing, let me speak to both the near-term performance and long-term performance. First of all, we do think that the plans we've laid out for you for FY '24 aligned very well with what should drive near-term value for both debt investors and equity investors. They should, as we've spoken about today, expand our options for capital structure and capital allocation over the longer term. Likewise, in terms of driving something that's so important to us, our per-share intrinsic value over the long term. The recent performance we've had and the plans we've communicated to you support our belief in Cimpress' strong underlying steady-state free cash flow, and we believe we are positioned to grow that over the coming years. We remain the clear market leader. After multiple years of repositioning and turbulence, which I just spoke to, we are excited to enter a period of focused execution with clear customer value improvements coming out on a regular basis and clear improvements to our financial results. So, thank you for joining the call.

Operator, Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.