Earnings Call Transcript - CMPR Q4 2022

Operator, Operator

Good day, and welcome to the Cimpress Q4 and Fiscal Year 2022 Earnings Conference Call. I will now introduce Meredith Burns, Vice President of Investor Relations and Sustainability. Please go ahead.

Meredith Burns, VP of Investor Relations and Sustainability

Thank you, Vaishnavi, and thank you, everyone, for joining us today. We decided to host this earnings follow-up webcast in light of increased investor focus on macroeconomic uncertainty as well as the fact that our annual Investor Day will be in September, which is later than it has been in recent years. With us today are Robert Keane, our 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 and annual letter to investors. There's a lot of information in these documents, and we appreciate the time that you have 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 pre-submitted and live questions. You can submit questions live via the Ask-A-Question box at the top right of the screen. Before we start, I'll note that in this session, we're likely to make statements about the future. Our actual results may differ materially from these statements due to risks that are outlined in detail in our SEC filings and the documents we published yesterday on our 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, CFO

Great. Thanks a lot, Meredith, and let me echo our thanks to those who have joined the webcast today. Before we take your questions, I just want to highlight a few salient points from the information released yesterday. In the fiscal year that just ended June 30, Cimpress delivered record revenue and gross profit in the face of significant cost inflation, supply disruption and lingering impacts of the pandemic. Our organic constant currency revenue growth accelerated in the second half of the year and to 19% in the fourth quarter. Our value creation trajectory is clear in our Upload and Print businesses, and National Pen, and BuildASign and Printi, and you'll see strong results across each of those businesses. But it's worth highlighting that our upload of Print businesses as a whole, which now represents 30% of our consolidated revenue, had record revenue and record combined segment EBITDA this past fiscal year despite these macro conditions and also currency headwinds. And the 2 largest businesses in the group had record new customer acquisition during this past quarter as evidence of the continued shift from offline to online, which we believe accelerated in the current environment. So very strong results there. In our largest business, Vista, revenue growth wasn't as strong as many of our other businesses. Our profitability this past fiscal year and also in the fourth quarter was significantly weighed down by high levels of discretionary investment and also cost inflation that increased in the second half of the year and was not offset by price increases, although we believe there's opportunity for that in the near term that we've started to take action on. In Vista, we're progressing on our multiyear transformation journey with stronger foundations. Vista is now nearly complete with the migration to our new tech stack, which is launched in all but one small market. That effort has required almost 3 years of dedication of almost all of Vista's engineering resources and constrained our bandwidth to innovate and improve our customer offering. But as we look forward, it's a crucial enabler in product development, data analytics, personalization and accelerated new product introductions. With our foundational investments in place, the Vista team now has a clear focus on demonstrating that Vista's transformation can yield rapid improvements to customer value and the financial returns on the significant investments that we've made, and we look forward to sharing tangible examples of that at our September Investor Day. To offset some of the cost inflation that's baked into our cost structure as we head into this next fiscal year, but also to further prioritize our focus on areas with near-term financial returns, we've been proactive to reduce costs in parts of Cimpress as well. The savings from actions outlined this quarter and also in last quarter should result in annualized savings of about $25 million. In the annual letter, we also described important liquidity and risk management topics that allow us to keep our focus on operational execution despite increased volatility. We have ample liquidity. We have no material debt maturities until May of 2026. We have a robust currency hedging program and a portion of our debt denominated in euros, amongst other balance sheet hedging. And we have a mix of fixed and floating rate debt, coupled with the use of interest rate swaps to mitigate the impact of interest rates. In our letter, we've once again shared our range of estimated steady-state free cash flow, which shows a decrease from our pre-pandemic high due to Vista's financial results and, in particular, the impact of cost inflation and also product mix changes, which is partly offset by increases in our other businesses. There are plenty of external inputs like the impact of inflation, the impact of currency swings and the like, that are anything but steady-state right now, but nonetheless, this range that we've disclosed implies an intrinsic value per share that's significantly higher than where our share price is trading today. We've also provided forward-looking commentary by component in our annual letter. I'm not going to go through all that here. But in summary, we see Cimpress as being competitively advantaged and able to continue to grow profitably for years to come. In Vista, where we've been investing significantly, we expect annual organic constant currency revenue growth in the year ahead to accelerate from where it was in FY '22, which was 5%. And on the profit side, we expect that the shape of Vista's profitability improvement will start to be visible in FY 2023 and that over the next several years, Vista's segment EBITDA and unlevered free cash flow can return to historical highs. With that, Meredith, let's open up for questions.

Meredith Burns, VP of Investor Relations and Sustainability

Thank you, Sean. We’ll start with our first pre-submitted question from yesterday. We appreciate the questions submitted in advance. Did you observe continued momentum in Europe within the Vista segment in the fourth quarter of 2022, similar to what you saw in the third quarter? Are there any signs of decreased customer spending due to inflation or economic slowdowns in Europe or other regions?

Robert Keane, CEO

So this is Robert speaking. First of all, I want to welcome everyone and thank you for joining. The quick answer is that no, we did not see any softness in Europe. Europe has been performing very well. If I break that down, Vista's constant currency revenue growth in Europe in Q4 was in the teens, which is a good result. It has definitely improved over the first half of the year. If you look at our consumer business, excluding facemasks, which understandably was down globally, invitations and announcements grew in Europe but did not in the U.S. We can discuss that further if needed. The largest segment we have in Europe is the Upload and Print businesses, which experienced very strong growth with a combined organic constant currency growth of 47%. Overall, we see Europe performing very well.

Meredith Burns, VP of Investor Relations and Sustainability

Great. Let's discuss Europe with a question about the Upload and Print businesses. What are the key factors driving the significant growth in these areas, which you noted in your letter stated there were record customer additions in the largest businesses? Was this due to new products, changes in the sales team, or simply macroeconomic factors? More importantly, how sustainable is this growth?

Robert Keane, CEO

Three years ago, we restructured our approach to Upload and Print by removing a middle layer of leadership to empower our teams on the front line and enhance execution. This has proven to be extremely successful and was crucial for us during the pandemic, allowing us to respond swiftly. In short, we continued to invest in these businesses during the pandemic while many others scaled back. The momentum created by the teams we established three years ago is now self-sustaining. We observe that smaller online competitors and traditional offline printers are struggling in the current environment, facing supply chain issues related to paper, rising energy prices, and shipping costs. However, we benefit from Cimpress' global procurement strengths and our ability to shift production across multiple sites in Europe. Overall, we are seizing the opportunity presented by the market's shift from offline to online and from traditional job shop production to mass customization. This blend of online presence and mass customization is driving our growth in Europe.

Meredith Burns, VP of Investor Relations and Sustainability

Great. Thank you, Robert. All right. So we're going to move over to the U.S. right now in particular, in Vista. Describe in more detail, please, what led to just marginal U.S. growth within Vista, for example, the $4 million decline in consumer product sales.

Sean Quinn, CFO

Yes, there are really 2 areas that I would say were disproportional in the U.S. The first one is consumer product sales and the second one is the impact of facemasks. Each of those is about $4 million of year-over-year decline that weighed on growth. On the consumer side, that was really weighted towards invitations and announcements. So that was the biggest impact there, which is really different market by market. We've seen actually growth in that category elsewhere, but a decline in the U.S. market in Q4. I'll just add that in terms of small business product revenue, in the U.S. that was stronger. We saw good growth there year-over-year, certainly in promotional products, but also in signage as well as in marketing materials and business cards, which are very large categories in the U.S.

Meredith Burns, VP of Investor Relations and Sustainability

Great. Thank you. Next question, what led to your decision to exit your businesses in China and Japan?

Robert Keane, CEO

In summary, our focus is on capital allocation. Over the past decade, we have aimed to enter these significant markets, recognizing the substantial opportunities available. While competitors in both markets are performing well, our team in China is developing an innovative business model that we respect and admire. However, we felt it was necessary to prioritize turning around Vista and maintaining momentum in our core businesses in Europe, Australia, and the U.S. We also have two smaller businesses in Brazil and India that are growing rapidly and are either profitable or close to profitability. This led us to make a difficult decision to stop our investments in China and Japan. Regarding capital allocation, we've mentioned before that while we don't frequently change our hurdle rates, there is an implied rate based on our capital investment opportunities, whether that's in our Upload and Print businesses, Vista, National Pen, or especially in areas like share buybacks and debt repurchases, which we have not pursued. I will let Sean elaborate further on that, but given all the capital allocation opportunities, we decided to halt spending and investment in China and Japan.

Meredith Burns, VP of Investor Relations and Sustainability

Robert, and we did just get a question asking about the size of the revenue that we're foregoing in those 2 markets.

Sean Quinn, CFO

It's small. Yes, I would call it relatively immaterial to consolidated revenue in the sort of $10 million range roughly. So it's not significant.

Meredith Burns, VP of Investor Relations and Sustainability

Great. Thank you.

Robert Keane, CEO

But just to be very clear, a negative EBITDA and negative cash flow that will cease.

Sean Quinn, CFO

In both markets.

Meredith Burns, VP of Investor Relations and Sustainability

Great. Thank you. All right. We're going to shift to a couple of questions around our outlook. So first, from a margin perspective, in Vista, the language around margin outlook is noticeably noncommittal for Vista. Can you please clarify when you estimate that margins will return to pre-pandemic levels? How does the margin outlook 2 to 3 years from now compare to the margin profile of pre-pandemic low 20%s?

Sean Quinn, CFO

Yes. Yes, we didn't talk about margin for Vista guidance or for any of our businesses. We did add more commentary than we have in the past. So hopefully, people find that helpful. We said in the letter that we expected in FY '23, that Vista's profitability improvement will start to be visible and then over the next several years that we could reach historical highs. So that's not margin outlook, but we do expect margins to expand, and that's required to expand over that several-year period, and that's required as part of the commentary about getting profitability back to historical highs. I think that that margin improvement will happen across each part of the P&L, in gross margin, in leverage in terms of ad spend as a percentage of revenue and then also in our OpEx leverage. But the shape of our margins will also be somewhat dependent on how design and digital and some of our other offerings impact our margin mix. And so we're really focused on absolute profit and that's why the commentary was focused around that as well.

Meredith Burns, VP of Investor Relations and Sustainability

Great. Thank you. And then do you think that adjusted EBITDA margin expansion for Cimpress in FY '23 is a reasonable expectation due to your focus on leveraging the significant investments made in FY '22 as well as your efforts to combat inflation and reduce costs?

Sean Quinn, CFO

Yes, we didn't provide consolidated margin guidance, but we did offer some indicators. In Vista, our guidance suggests that margin expansion will be delayed because we indicated that annual organic constant currency revenue growth would accelerate, but EBITDA growth will be slower. This is primarily due to the annualization of some of our incremental investments made in FY '22, particularly in the first half of the year that will have a full year impact, as well as the full year impact of cost inflation. Additionally, there is still uncertainty regarding how much of this will be offset by pricing. We believe there are opportunities there, but we need to demonstrate the extent. In our other businesses, we see potential for some margin expansion. It's essential to consider all these factors when evaluating expectations at the Cimpress level. Moreover, other macro factors, such as the degree of any further cost inflation and our ability to manage it with pricing, will also play a role, which we will have to manage throughout the year.

Meredith Burns, VP of Investor Relations and Sustainability

Great. Thank you. So you mentioned pricing, let's stick on that one. Do you have confidence that you can raise prices in the Vista segment without impacting demand? How long do you think it will take to offset inflationary pressures through pricing?

Robert Keane, CEO

I believe there may be some potential impact on demand, but we are confident that the overall effect will be positive. We see opportunities to actually increase demand in terms of absolute volume. In the Upload and Print sector, which is largely a commoditized market, we are selling to graphic professionals who have access to numerous suppliers online. Typically, we rely on competitive differentiation, which includes offering web-based self-service design that reduces costs not just for printing, but for graphic design efforts as well. Despite Upload and Print lacking that competitive edge, we have observed rising volumes even as we increased prices. This may be due to competitors both offline and online facing similar input cost inflation, resulting in overall market price increases. Furthermore, before the onset of inflation, our strategic focus at Vista has been to leverage our strength in do-it-yourself design that sets us apart from many competitors and to enhance that segment. Investments in initiatives like 99 designs and customer service-driven design are central to improving our value proposition. This shift helps elevate our brand from being recognized primarily for discounted business cards to one that offers a broader value proposition. Given that we believe Upload and Print can expand volume while also raising prices, this strategic value transition can assist Vista in increasing prices without sacrificing, and ideally growing, volumes.

Meredith Burns, VP of Investor Relations and Sustainability

Thank you, Robert. All right. Have we seen any early benefits from launching the new Vista technology platform in the United States? Or I'll just add anywhere.

Robert Keane, CEO

Yes, I will discuss the U.S., but I agree that this applies anywhere. Recently, in the last 2 to 3 months, we have been able to implement comprehensive and dynamic pricing tests that measure the elasticity of demand. We strive to understand the net impact on gross profit, accounting for changes in volume, on a product-by-product and country-by-country basis. This approach goes beyond simply raising prices by a certain percentage; it acknowledges that different products have unique elasticity curves and we work with that. Such sophistication did not exist in the previous system. Regarding product introductions, we are still in the early stages as we complete the transition from the old system, but we can see a much faster and easier ability to enhance products due to the API structure of the new architecture compared to our traditional platform. For example, we launched a product called LogoMaker, which was built entirely on this new platform. If you explore it on our U.S. and U.K. sites, you'll see that it seamlessly cross-sells into print products at the end of the experience. Additionally, we have VistaCreate, which is in early development; it allows designs for American-sized posters to flow directly into the checkout process on VistaPrint due to the API structure. Finally, our partnership with Wix has greatly accelerated our ability to integrate features like payments and subscriptions. Overall, the new platform is being launched worldwide, and while we are still learning how to utilize it, it meets our expectations for expanding our capacity and increasing our speed in product development. This development works in tandem with data-driven experimentation to assess the actual impact based on real customer interactions.

Meredith Burns, VP of Investor Relations and Sustainability

Great. Thanks. So a quick follow-up question on the results. So a follow-up, excluding facemasks and Consumer Products, what was the growth in Vista U.S.? Seems the growth was negative given the commentary of Europe up teens and Canada up 20%?

Sean Quinn, CFO

Yes. In our commentary, we noted marginal growth. While it was positive, it was not significant, but there was still growth despite that weight. However, the growth in other markets was much higher. As we mentioned, in our second and third largest markets, it was 20% or higher.

Meredith Burns, VP of Investor Relations and Sustainability

But excluding facemasks and consumer, the growth in the U.S. is the question?

Sean Quinn, CFO

Yes, it was roughly flat. The marginal growth, including those factors, is higher than without them. So it's kind of roughly mid-single digits in Q4.

Meredith Burns, VP of Investor Relations and Sustainability

All right. Great. So we're going to move to a question about guidance on growth investments. So organic growth investments at Vista were $100 million plus in FY '22. How much do you expect to invest in FY '23? I know that we didn't give specific guidance there but...

Sean Quinn, CFO

Yes. So we didn't give specific guidance other than to talk about kind of the trajectory of some of our profitability, which is a little bit different, but of course, it's related. I think there's a couple of things that we've said that I think are helpful here. One is starting in Q3, we did start to slow hiring. And that's certainly continued. And then we also had the recent cost reductions that we did as well. And we said that in FY '23 that we prioritized our investments and our focus around areas that have the ability to deliver near-term returns as well. We do have some of the full-year impact of the FY '22 investments, as I mentioned before, but I think this overall commentary around, kind of, increased hurdle rate for organic investments, especially incremental organic investment, but also the slowing the rate of hiring and then the actions that we took recently, hopefully is going to set the scene for the, kind of, the path or the pace of investment as we look forward.

Meredith Burns, VP of Investor Relations and Sustainability

Okay. Let's take some capital allocation questions. There have been quite a few that have come in. So we'll start out on bonds side. So can the company buy back bonds in the open market? Or are there bank covenants preventing this? And if you can buy back bonds, given the current prices are well below $80, yesterday, why wouldn't this be a good use of cash, especially with the elevated level of cash on the balance sheet at $622 million?

Sean Quinn, CFO

Yes, we can buy back our bonds in the open market. We have established mechanisms to execute this if we choose to allocate capital in that direction, and our debt covenants do not limit our ability to do so. Unlike share repurchases, there are no pre-purchase disclosure obligations for bond purchases, allowing us to act promptly in the open market. We recognize the appeal and the favorable math regarding the returns. Similar to our deliberations on share repurchases, this remains an active consideration for us. We regularly evaluate our liquidity needs, especially given the current macroeconomic uncertainties, and while we have recently leaned towards maintaining liquidity, we are also assessing our net leverage and relative returns. We have ongoing discussions with our Board about this, and we believe that both bond repurchases and share buybacks at these levels present attractive return opportunities.

Meredith Burns, VP of Investor Relations and Sustainability

Okay. Next question. You mentioned that the hurdle rate for incremental organic investment has increased as a result of the share and bond price depreciation. What is that new hurdle rate?

Sean Quinn, CFO

Yes, Robert mentioned earlier that we do not calculate month-by-month or provide a precise number regarding this matter. However, it's crucial that we continue to invest in our businesses, particularly in Vista, due to its effect on our per-share value. We are inclined to keep investing in our operations, but we must evaluate these investment levels, especially any additional investments, against the returns from bond buybacks or share repurchases. Buying back bonds right now offers a clear and measurable return, as we can see the yield. In contrast, assessing the return from repurchasing shares requires more judgment, although I believe the potential return at current price levels is very high. Some of our recent decisions have been influenced by this higher hurdle rate, particularly in terms of exiting long-term investments, such as in Japan and China, where we can't justify these investments anymore given the increased hurdles. We can allocate our capital, time, and focus more effectively elsewhere. We also consider factors like liquidity in our decisions, and all options remain on the table. This is an ongoing discussion with the Board.

Meredith Burns, VP of Investor Relations and Sustainability

Great. So, a question regarding organic growth investment. Over the past 8 years, organic growth investment has averaged about $150 million. That appears to be more of a typical business expense rather than a one-time investment. Why should investors trust that their estimates of intrinsic value, based on steady-state free cash flow estimates, are valid when investment spending is so consistent? What actions can you take in the coming years to enhance confidence in steady-state free cash flow estimates as a reliable basis for intrinsic value?

Sean Quinn, CFO

Great question. I had a chance to think about it since it was pre-submitted, and I'll spend a few minutes addressing it. Robert, feel free to add anything if you like. Over the years, Robert has been open about our failures, and a portion of the spending over the last eight years was not typical business expenses; they were growth investments that didn't succeed. Some of our early-stage investments, which Robert has discussed in the past, are examples of this. It’s important to understand the concept of steady-state free cash flow and to differentiate between the investments that are necessary for it and those that are not, which was a new idea for us eight years ago. The ranges have narrowed quite a bit over time, and I want to clarify our current investment levels to provide perspective. Speaking of nonrecurring expenses, I want to make it clear that while some growth investments, like CapEx or third-party costs, can be nonrecurring, people-based costs are usually recurring unless we decide otherwise. We aim to highlight the costs of investments that are not essential to maintain steady-state free cash flow, as defined in the letter. To give perspective over the past eight years, our revenue has risen from $1.3 billion to $2.9 billion. Our adjusted free cash flow increased from $72 million in fiscal year 2014 to about $244 million just before the pandemic. Our unlevered free cash flow also saw growth, increasing from $78 million to $317 million in fiscal year 2020, just prior to the pandemic. Likewise, our adjusted EBITDA grew significantly, from $181 million in fiscal year 2014 to $362 million in fiscal year 2020, just for the Vista segment. Looking at our results and future possibilities, alongside our investments, the picture has become clearer over the last few years. In our non-Vista businesses, there isn't much growth investment relative to the revenue and profits that are rising. For instance, in Upload and Print, most growth investment comes from growth CapEx, and they are showing actual growth in revenue and segment EBITDA, indicating those are indeed reasonable growth investments. In our all other businesses segment, a significant part of the fiscal year 2022 growth investment comes from our operations in China, which we've decided to exit. This exit won’t impact our steady-state free cash flow, so it's clear that it isn't necessary for that cash flow. In Vista, some areas are equally straightforward. For example, our investments in 99 designs and VistaCreate after the acquisition represent a significant portion of our overall investment. Those initiatives are now merging into the VistaPrint experience, and the EBITDA or cash flow burn from those acquired businesses clearly indicates they are growth investments. Regarding advertising, this area requires more judgment. We need to understand how much of our advertising spend is necessary to maintain steady-state. Our mid- and upper-funnel ad spending in fiscal year 2022 is meant for long-term gains, and we’ve only included a small portion of our performance advertising in our outlined growth investments. The mass customization platform is another area that's been substantial over the past eight years. While it's becoming more integrated into our business operations, it has shifted to maintenance costs even as actual costs have increased. The use of mass customization services has grown significantly, contributing to revenue growth and profit improvement, making our estimates for fiscal year 2022 reasonable. Lastly, our investment in Vista's operational expenses has risen due to hiring skilled talent across various areas, including user experience, product management, data analytics, and technology teams. We see considerable potential for these teams to unlock value, but we are still in the early stages of enhancing our capabilities. Ultimately, we need to demonstrate that Vista can grow revenue and contribution profit at a pace that justifies these growth investments, especially the talent-based ones. We believe we can accelerate top-line growth in Vista and return to historical profitability levels over the coming years. When we reduced our investment in 2019 and 2020 just before the pandemic, we observed significant profitability and cash flow increases. Although the pandemic and inflation have impacted profitability and cash flow, we believe we are well-positioned for the future.

Meredith Burns, VP of Investor Relations and Sustainability

Thank you, Sean. All right. So we're going to shift back to a couple of live questions that we've had in a couple of different areas, one of them on marketing. So with Vista, we noticed that you started leaning more aggressively into marketing this past quarter. Does that mean that you feel confident enough in the product and value proposition that is just a matter of driving awareness now? How will you balance growth in margins in that segment in the next 12 to 18 months?

Robert Keane, CEO

I do definitely believe that your question contains the answer. We are more comfortable with where we position the brand. So pre-pandemic, we pulled back because we felt, one, the ROI on ad spend just wasn't making sense, so we pulled that back. The other thing is the brand was very much stuck in the deep discounted business card brand image, which limited the future upside of the business. Today, we have reversed a multiyear decline in the gross profit per customer. If you look after 12, 24, 36 months of a customer's lifetime, how much gross profit do we generate, we have gotten back on what had been a long-term trend to move that up every year. We have a value proposition which still needs to continue to evolve, but as we've, both simultaneously reduced discounts and reduced list prices to be more transparent to customers. And with that and with the launch of the new platform with VistaCreate, with 99 designs, we feel now is the time to turn to bringing in new customers at larger numbers than we have in the last 12, 24 months based on that new value proposition. And again, it's not a radically new value proposition, but it's definitely an elevated brand value, and we definitely see that. In terms of how we look at margin expansion, Sean, you might want to add or margins related to those advertising. We really look at it as an ROI perspective if we are going to generate X dollars in cash flow over a given period from a new customer, how much can we spend at the margin to acquire those types of customers, and then that will generate value to the shareholders. We don't measure it from a EBITDA margin or a near-term free cash flow margin.

Sean Quinn, CFO

The only thing I'd add to that is, I think with the introduction of more mid and upper funnel spend, which we've seen come in over the last few quarters, and there were some testing in these areas last year as well, unlike our historical performance advertising spend, which is a little bit more consistent as a percentage of revenue, the way that those dollars get spent can go up and down in terms of the intensity quarter-by-quarter. And so from a margin perspective, you may see a little bit of volatility there. We've said that we don't expect to stay at the Q4 levels of advertising as a percentage of revenue for a full year, which is again an indicator thereof, we'll have moments where it's a little bit more intense and moments where it's less intense, which is just because of the changing mix of our spend.

Meredith Burns, VP of Investor Relations and Sustainability

Great. So I'm going to throw a question out there that I think we're probably not going to answer, but I just want to get it out here on the call. So we've been asked if we can provide more context on what counts as visible I believe in referring to Vista's margin or Vista's profits in FY '23?

Sean Quinn, CFO

Got it. Well, I think visible means to appear. What we're trying to communicate is that there shouldn't be an expectation based on our commentary that we are entering a significant year of margin expansion in Vista. We are still adjusting for the increased investment levels from FY '22 and the substantial cost inflation we've experienced, which we've detailed in our documents over the past few quarters. To say visible really means that we are working towards a trajectory of ongoing profitability improvement and margin expansion. The beginning of that should be noticeable as we move through the year. However, as we account for the impacts of these other factors I've mentioned, those effects won't be apparent at the outset. Hopefully, that's clear. I think that's about as specific as we can be.

Meredith Burns, VP of Investor Relations and Sustainability

Thanks. Given the increase in interest rates, especially in the U.S., how do you expect this will impact underlying volumes as new business owners may borrow less to invest?

Robert Keane, CEO

We have not been able to pinpoint specifics on this matter. Historically, in significant recessions or near shutdowns, such as during the pandemic and the 2008 global financial crisis, we have seen the emergence of small businesses. The average amount spent by our customers, around $100 a year from Vista, is unlikely to be significantly affected by fluctuations in interest rates. Our business serves as a more affordable option compared to traditional graphic design and printing services. While it is possible to create an economic model to assess some impact, given how minimal our spending is relative to a small business's budget, we don't think we can attribute any specific impact to this situation.

Sean Quinn, CFO

Yes. The only thing I'd add to that is, yes, I think where we sit in, sort of, the marketing stack for a small business, having a presence and having an identity and telling people what you're doing is required in some way, shape or form for a small business. And as Robert, as you just said, I think what we present is a low-cost option to be able to do that in a credible way and allow small businesses to look professional, which they need to do.

Meredith Burns, VP of Investor Relations and Sustainability

Can you address the significant increase in inventories year-over-year on your balance sheet?

Robert Keane, CEO

Inventories have significantly increased across nearly all of our businesses, though some more than others. There are two main reasons for this. First, we've faced constrained supply in some key inputs, particularly paper, which has led us to build more inventory in those areas to ensure we have stock and can manage any potential disruptions. Second, certain products, especially in the promotional products sector where National Pen is more involved, have longer lead times due to many raw materials being sourced from China. As a result, we’ve taken a cautious approach in acknowledging these longer lead times to ensure stock availability as we prepare for the upcoming holiday season in December. We believe that the cost associated with building this inventory is justified compared to the risk of not having enough supply. We have always managed our working capital wisely and will continue to do so. By building some inventory, we have reduced our risk. It's important to note that this inventory consists of high-demand products, primarily paper, which we will definitely use; it's merely a question of timing. This contributes to our comfort in building this inventory as it primarily involves the cost of capital rather than the risk of obsolescence.

Meredith Burns, VP of Investor Relations and Sustainability

Thank you. For the aggregate organic Vista Investments to meet your hurdle rate won't unlevered free cash flow have to grow considerably above the pre-pandemic level?

Sean Quinn, CFO

Yes, it will. It will. So I think that's a very fair point. But I think that especially given the impact that we felt over the last few years, either from the pandemic, from changes in product mix, from cost inflation, of course, in order to get to the point that's referenced in the question to justify and have strong returns on all of our investments, of course, we have to first get to what we outlined in the document. And so what's outlined in the document is not kind of an end state that is our goal, but is at least the first point on that destination.

Meredith Burns, VP of Investor Relations and Sustainability

We have received numerous inquiries regarding share repurchases and why we are not engaging in them. We have addressed this in responses to other questions concerning capital allocation. A key aspect of this discussion is that the past few months have demonstrated that share price declines can happen quickly and unexpectedly. Therefore, why haven’t we sought authorization for share repurchases to be prepared for the right opportunity when it arises?

Sean Quinn, CFO

Yes. Just so everyone knows, we do not currently have a share repurchase authorization in place. The quick answer is that we can move very quickly on that. We have a five-person Board, with Robert as one of the members and the Chairman. Within a couple of hours, we can obtain that authorization if necessary; this is an active discussion we have with the Board, and we can move very quickly in that regard. To be clear, our disclosure obligation is to announce an authorization before we actually repurchase shares, not to disclose the authorization by the Board itself.

Meredith Burns, VP of Investor Relations and Sustainability

Great. We have another question just came in. Does the company anticipate the need to draw on the revolver in FY '23 or '24?

Sean Quinn, CFO

We don't expect to need it. It exists for a reason in case it’s necessary in the future. However, with $327 million on the balance sheet at the end of the year from cash and marketable securities, we see no need to utilize it. The $250 million revolver is available to us, and while there is a first lien covenant that would apply if we have an outstanding balance on it at the end of a quarter, we are currently below that covenant, so we could access it if needed. Nonetheless, we have no plans to use it.

Meredith Burns, VP of Investor Relations and Sustainability

The big increase in accounts payable in Q4. Does this reverse in FY '23? And how should we think about working capital overall for FY '23?

Sean Quinn, CFO

Yes, there was definitely some positive movement in Q4, which is reflected in our working capital results. While inventory levels increased, which is a negative factor, we also saw significant growth in accounts payable, and that will vary over time. I believe some of that positive impact will stabilize. We don't offer a specific forecast for working capital, but I anticipate that accounts payable will decrease throughout FY '23. Additionally, in terms of inventory, depending on our need to maintain these levels, which are currently much higher than historical averages, that could also decrease. In our annual letter, we adjust our steady-state free cash flow analysis for working capital since it was quite favorable in FY '22, and we don't expect that same level for FY '23.

Meredith Burns, VP of Investor Relations and Sustainability

Great. Thank you. One more question, which is asking for guidance that we're probably not going to give. You mentioned too that you expect to delever over the next year, would you be able to quantify how much higher levered free cash flow can be in FY '23?

Sean Quinn, CFO

No, we're not going to provide that guidance.

Meredith Burns, VP of Investor Relations and Sustainability

Yes. I am going to turn things over to Robert for some closing remarks as we approach the end of our scheduled time.

Robert Keane, CEO

Thank you. To start, let's take a broader look at the market opportunity and our total addressable market. We've identified two main drivers that have been pivotal for a long time: the trend towards mass customization over traditional printing methods and the transition from offline to online e-commerce. We believe these trends are gaining momentum, indicating a robust market with significant growth potential. The key question is about Vista's future and our substantial investments to revitalize it. This echoes the foundation upon which Vista and Cimpress were built. Between 2000 and 2015, VistaPrint thrived due to the online shift and mass customization, supported by a focused product offering. We limited the number of products to ensure a standard and highly efficient production process, simplifying graphic design. Our strategy included marketing high-priced products alongside deep discounts, which generated strong demand. We positioned ourselves not as the lowest quality, but rather at the lower end of the market spectrum. We also excelled at cross-selling various formats in bundled orders, which was a highly profitable model. However, starting around 2005, we began to notice changes as new business models emerged, particularly with services like Upload and Print which catered to professional graphic designers while utilizing mass customization principles. Other areas, such as logo apparel and promotional products, also moved online, further adapting to simpler graphic design. Vista once disrupted the traditional market landscape, but we recognize the need to evolve as our growth trajectory indicates. We aim to transition Vista from a focus on deep discounts and limited product quality to becoming a design and marketing partner for small businesses. We believe we can establish a world-class integrated design platform, leveraging resources like VistaCreate, which features templates from a vast number of freelance designers and incorporating algorithm-driven modifications, while also utilizing traditional design assistance from VistaPrint and services from 99designs for custom graphics. These developments will cater to customers who either lack design skills or prefer not to pay traditional prices. Revamping Vista is crucial, and we view these investments as discretionary. Until we modernize our technology infrastructure, we couldn't fully capitalize on these opportunities, but we are now committed to investing in the business. We’ve emphasized that fiscal year '23 is about focused execution, with flexibility to scale back investments if necessary to maintain higher margins. The underlying business is profitable, and we believe it will gain even more value as we strengthen our service and design capabilities, improve data analytics, product development, and user experience. This strategy holds great promise, and we are eager to delve deeper during our September discussions. The success we've seen in Vista showcases the potential of these market shifts, though we can't predict the future with certainty. We've demonstrated our ability to adjust investments to reveal the cash flow strengths of the business, especially during challenging times like the pandemic. As we move into fiscal year '23, we feel well-positioned with our technology, talent, products, and strategy to deliver substantial value to our customers and, in turn, drive shareholder value. Thank you for your attention, and we look forward to the upcoming Investor Day in September.

Meredith Burns, VP of Investor Relations and Sustainability

Okay. And thank you, Vaishnavi. We can now end the call.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.