Earnings Call Transcript - CMPR Q4 2023

Operator, Operator

Welcome to the Cimpress Quarter for Fiscal Year 2023 Earnings Call. I'd like to introduce Meredith Burns, Vice President of Investor Relations and Sustainability.

Meredith Burns, VP of Investor Relations and Sustainability

Thank you, everyone, for joining us. 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 our annual letter to investors published yesterday. We appreciate the time you have dedicated to understanding our results, commentary, and 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 in the documents we published yesterday on our website. We also have published non-GAAP reconciliations for our financial results and 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.

Robert Keane, CEO

If we have lost Sean, I will give me a few more moments. This is Robert speaking. I'd be happy to jump in. Apologies for the technical glitch everyone. So thank you, I'm Robert Keane, CEO. And let me just start by saying, as I said in the letter, we had a strong finish to FY '23. We delivered results that were meaningfully above the profitability and net leverage guidance we provided last quarter. I think this outperformance was largely driven at Vista and our Upload and Print businesses. Our revenues on a consolidated basis grew 9% in organic constant currency or even as our Upload and Print businesses were lapping price increases and nearly 50% organic constant currency growth last year in Q4. So it was a tough comp, and we still grew the 9% constant currency. Consolidated gross profit grew 11%, excluding the impact of currency. And that paints a very different picture compared to last year when we had a sizable gross margin contraction given the impact of cost inflation. Consolidated adjusted EBITDA grew $76 million year-over-year to $114 million, which represents an increase of about 200% or over 200%. We mentioned this in yesterday's release, but to put this in perspective, in the last 2 quarters, our trailing 12-month adjusted EBITDA increased by $112 million to end fiscal year '23 with adjusted EBITDA of $340 million. And importantly, this improvement includes one full fiscal quarter of benefit from the $100 million of annualized cost reductions we've implemented. And with just one quarter, we see a lot of those opportunities ahead of us in cost reduction. Adjusted free cash flow did decline year-over-year despite our higher adjusted EBITDA and this was due to restructuring payments this year connected to the cost reductions as well as working capital timing differences. Q4 last year was very favorable in terms of working capital. I'm not going to go through all of the segments. But given the significance of the profitability expansion in Vista, let me share some of the highlights there. This is revenue grew 12% on an organic constant currency basis, with a nice balance across regions and across our core product categories. This quarter's growth was supported by better pricing and strong growth in new customers and new customer bookings. Vista's segment EBITDA grew $66 million year-over-year, which was by far the biggest contributor to our consolidated Cimpress adjusted EBITDA growth and the profitability expansion in Vista was very well balanced with about 1/3 coming from gross profit, 1/3 coming from advertising efficiency and 1/3 from lower operating costs. We ended the quarter with cash and marketable securities of $173 million, and that's after having spent $45 million to repurchase $52 million of notional value in our high-yield bonds during the quarter. As we've talked about in recent calls from a balance sheet perspective, we have been prioritizing liquidity, and we were able to continue to do that while allocating significant capital to these higher returns, which also helped support targeted reductions in net leverage. We ended the fiscal year at a net leverage of 3.9x EBITDA as defined by our credit agreement. This was ahead of our guidance or better than our guidance of being below 4.5x, which we provided last quarter. And just 2 quarters ago, our net leverage was we think our ability to delever this quickly demonstrates the underlying profit and cash flow characteristics of our business model. Moving to our outlook. Given our strong Q4 performance, we are raising our FY '24 adjusted EBITDA guidance to be at least $420 million, and we continue to expect to convert free cash flow at about 40% of EBITDA. We also introduced organic constant currency revenue guidance of at least 6%, which reflects the lapping of the price increases we had last year. The cost reduction actions that we communicated in March drove $24 million of improvement in FY '23, that's slightly ahead of what we had previously outlined, and we expect they'll drive another $76 million of incremental year-over-year fiscal year benefit in FY '24. We now expect to bring net leverage to below 3.25x by the end of fiscal '24, which is also ahead of the guidance we provided last quarter, given our raised EBITDA and the resulting cash flow guidance for FY '24. And finally, I'd point out that I'd encourage you to read the annual letter, which we sent, which I send every year, when we step back from the quarter and the financials to assess our strategic performance, our capital allocation and to estimate our steady-state free cash flow. Consistent with the direction you see in our reported financial results, you'll also see that our estimates of steady-state free cash flow have also increased, and I'd encourage you to read that letter for more details. Now a lot has changed from a year ago, and we see that very positively reflected in our Q4 results. But importantly, just in the tone and tenor of the teams and the operational focus of the teams, which we think bodes well for the coming year.

Meredith Burns, VP of Investor Relations and Sustainability

Thank you so much, Robert. I will now check if we were able to get Sean back on the line.

Sean Quinn, CFO

Yes, I'll take that, Meredith. Let me just make sure you can hear me, right? Okay. And my apologies to everyone; my audio cut out at a very inopportune time. So yes, in terms of the outperformance for Q4, most of the overperformance was in Vista, and the quarter there finished strong relative to what we were expecting. In terms of where that overperformance was, really, it was slightly better throughout the entire P&L. Revenue growth was a little bit higher. Gross margins were slightly higher, ad spend a little lower. And then we also had some additional operating cost savings from the recent cost actions. Part of that is just some delay in backfilling roles and so on. So that was a little bit more favorable than we had expected as well. I should also mention that Upload and Print was part of the overperformance, as well. That one in the Print Group segment was really concentrated on gross margins in terms of overperformance. Then the segment was on higher revenue.

Meredith Burns, VP of Investor Relations and Sustainability

Excellent. Thank you so much, Sean. I'm going to stick with you for the next question. And this is about gross margins in Vista. So gross margins in Vista were still down slightly year-over-year as we showed the growth for revenue was slightly higher than the growth for gross margin. Why haven't they increased if pricing improved throughout the year?

Sean Quinn, CFO

Yes. Very fair question. Just to put this in perspective, on a consolidated basis, we had gross margin expansion. But as we report gross margins in Vista, we did not, although they were up sequentially from Q3. In the last year quarter, so Q4 of FY '22, we had a benefit of a little under $8 million in gross profit from the gain on the sale of land that was attached to a manufacturing asset. That's why it was in gross profit. If you were to exclude that benefit last year, Vista's gross margins actually did increase over last year. That gain is also excluded from EBITDA as well. Excluding that, business gross margin, sort of in real terms, did expand about 170 basis points versus Q4 last year. We had pricing benefits throughout the year, as we've been talking about, and you see that reflected in the Q4 results. We also had costs that continued to increase, especially in the first half of the year versus last year. It's only been recently in the last months that we've seen that cost pressure subside and then the start of cost favorability, but that really didn't have any material impact on Q4. There's more opportunity there as we get into FY '24, but definitely a favorable result to see year-over-year gross margin expansion. We'll still, as we go forward, have some headwind from the areas of the Vista business that are growing the fastest from a category perspective, specifically in our promotional products category. There are many other good things coming from that, but that is a little bit of a headwind that we had in Q4, and we'll continue to have as we get into next year as well.

Meredith Burns, VP of Investor Relations and Sustainability

Great. Thank you so much, Sean. Robert, I'm going to ask you a couple of questions that we got on the annual letter. So the first question. On Page 6 of the shareholder letter, you mentioned growth investments for FY '24 are likely to be similar to the roughly $109 million that we spent in FY '23. Is it safe to assume that the investments by business will be roughly the same?

Robert Keane, CEO

Yes. That's correct.

Meredith Burns, VP of Investor Relations and Sustainability

All right. And then next follow-on question in this category. Within Vista, the investment areas have shifted over time with LTV-based advertising and product development and marketing making up most of the investment activity recently. Are the investments you're underwriting today higher or lower than the ROI you thought you were getting a few years ago?

Robert Keane, CEO

I think they can be higher for different reasons. Let me break the components you mentioned up into the 2 different components. First of all, the lifetime value-based advertising is simply us recognizing that a portion of the advertising spend takes longer to pay back than a year, but it is really instrumental in moving our brand perception and allows us to spend less in lower funnel channels. Those two types of advertising go together. This also helps us in areas like discounting where we've significantly reduced our discounting over the past 4 years. This impacts our ability to serve higher-value customers. If you look at the last year, much of our growth came from higher average order values and the top deciles in our business. The second thing you mentioned was the grouping of product development and marketing. Just for clarity, most of that is product development and data. There's a bit of marketing team senior overhead there. This category represents the heart of our efforts to improve our customer experience and drive product experience-driven growth. That would include examples of easier user experience, more personalization, and incorporating a broader set of design capabilities. Done well, these efforts drive profitability downstream through our physical products. The incremental margins at Vista are quite high, so a better product experience through this investment can drive improvements in average order value, retention rates, and conversion rates that can be really meaningful from a return perspective. We are also well past our migration process; the teams working on it are now organized into clear product domains. Each domain has multiple product teams, with a much higher percentage of time spent understanding customer needs and building new solutions. To step back to your question, yes, I think they can yield higher returns than we thought a few years ago.

Meredith Burns, VP of Investor Relations and Sustainability

Thanks, Robert. I'm going to stick with you for a couple of quick hits. Can you remind us what's in the other geographical segment for Vista, so from a regional breakdown? Is this where Japan was included, hence the decrease?

Robert Keane, CEO

Yes, correct. We pulled out of Japan, which drove that decrease. Sean or Meredith, correct me, India is also in there, but that's growing. National Pen, by the way, also exited Japan, so you would see a similar decrease there as well.

Meredith Burns, VP of Investor Relations and Sustainability

Great. And on a related note, how material is Vista Corporate Solutions to Vista overall?

Robert Keane, CEO

It's about $50 million of annual revenues, but growth has been very strong over the last few years, and we expect it to continue to grow.

Meredith Burns, VP of Investor Relations and Sustainability

I'm going to address the questions we've received regarding pricing, both in the past and for the future. We'll consolidate these inquiries into one discussion to ensure we cover everything. Can you explain the trends in pricing and volume for each business? Regarding pricing, do you anticipate that the increases will be sustainable, or are they likely to be temporary? Additionally, please clarify your guidance of at least 6% organic constant currency revenue growth for FY '24. What assumptions have you made about volume, pricing, and macroeconomic impacts?

Sean Quinn, CFO

Yes, I'll take this one. The answer is quite nuanced because there are different circumstances in each of our businesses regarding when they took pricing increases when we're lapping that, and so on. I'll stick with Vista and upload and print as they represent the vast majority of our revenue. In Vista in Q4, about half of our growth was from pricing. We also had strong volume growth in two of our highest average order value categories. As we look forward into next year, there's still an opportunity with pricing in Vista. In Q1, we will still see some of that favorability because we won't have fully lapped all the pricing changes made over the last year. Beyond that, we believe there is still opportunity on the pricing side, which I categorize as optimization. We do expect to continue to have relatively higher growth in those higher AOV categories, which, from a revenue growth mix perspective, is helpful. In Upload and Print in Q4, you see this in the results; we lapped the more sizable pricing changes we implemented last year. There was still some year-over-year pricing favorability, but we've now lapped those biggest changes. Looking ahead to FY '24 for Upload and Print, we expect that most of their growth will come from volume. If I summarize from a consolidated basis for next fiscal year, we've given guidance of at least 6% growth from a revenue perspective. I'd estimate that about 1/3 of that growth is from price changes and about 2/3 from volume. Keep in mind, that 6% guidance we provided is lower than the growth we experienced in this last fiscal year, given that we're lapping price increases.

Meredith Burns, VP of Investor Relations and Sustainability

Fantastic. Thank you, Sean. We're squarely in outlook territory now, and I have a couple of questions about the EBITDA targets for FY '24. What are the levers that brought our expectations from at least $400 million that we provided last quarter to now at least $420 million? Adjusted EBITDA this year was $340 million. You mentioned that you expect $420 million next year. Cost savings alone would get us to $415 million. If we adjust for the $20 million of expected currency movements, that would bring us to 3.95%. Getting to $420 million seems very doable, assuming it would require 6% growth with no margin expansion, which seems unlikely. Are we thinking about this the right way? Are there certain unknowns that might make getting to $420 million not as straightforward?

Sean Quinn, CFO

Yes. I'll answer both of those together. When I do, I'm going to be actually quite specific because we've provided all or most of these components in our guidance. Just in terms of the first part of the question on the levers that allowed us to raise guidance for FY '24. If you recall back in January, that was the first time with our Q2 earnings release where we gave guidance for fiscal '24. At that time, we said we would achieve at least $400 million of EBITDA. In our call in late March, we provided a lot of detail on how we would arrive at that $400 million. Back then, our Q3 actuals were $7 million higher than the high end of our guidance. We raised our Q4 guidance when we released earnings last quarter, with actuals then for Q4 reported being $20 million above the high end of our updated guidance range. So those are the levers that bridge us to at least $420 million. If you take our exit rate of EBITDA, which is $340 million, and you do the math with the other guidance, let me just walk you through that. Starting point, $340 million as we exit FY '23. We still have $76 million of our cost savings from what we communicated back in March that are yet to be reflected in our actuals, which will benefit this next fiscal year. Our revenue guidance of at least 6% growth gives us roughly 30% flow-through on that in terms of our contribution margin; that's another $55 million benefit in FY '24 from that growth. At that point, you're at just over $470 million. We expect approximately $20 million of currency headwinds next year, adjusting that leads us to $450 million. The last piece is accounting for normal inflationary increases in our operating costs. This leads us to at least $420 million in the next fiscal year. So to answer the question, I think you're thinking about it the right way. Hopefully, that walkthrough makes it clear for everyone what the components of the guidance are.

Meredith Burns, VP of Investor Relations and Sustainability

Wonderful. Thanks, Sean. We're going to stick with the guidance here with another pre-submitted question for the at least $420 million in EBITDA and 40% free cash flow conversion. Would you expect it to be front half or back half weighted?

Sean Quinn, CFO

Yes, we didn't give quarterly guidance, although this is a clever way of trying to ask for it. We have normal seasonality to our profitability, and you can look back over many years and see some of those patterns. Q2, the December quarter, is typically our strongest for profitability. Q4, the June quarter, is usually the second highest in profitability terms, and that's a pattern we do expect to continue in this next fiscal year. Fiscal '23 was the first time ever that our adjusted EBITDA in Q4 was higher than Q2. That won't be the norm. Expect a more typical pattern with Q2 being the highest and Q4 second highest. Given December quarter seasonality, I'd say we expect adjusted EBITDA to be slightly more front half-weighted. Furthermore, the cost savings we have will continue to come in throughout the year, impacting that year-over-year growth comparison.

Meredith Burns, VP of Investor Relations and Sustainability

Thanks, Sean. All right. Sean, can you speak to the long-term margin potential in the business? Could it get back to the mid or high teens? And if so, how do we get there?

Sean Quinn, CFO

Yes. We haven't given guidance that far out. If you use our provided guidance for this next fiscal year, that would yield about a 13% EBITDA margin, heading in the right direction relative to 11% in FY '23. What we've laid out for FY '24 is not the final destination, but rather just the next point on the line, and we expect trends in our results to continue favorably. Therefore, I see continued margin expansion opportunities in the years that follow. I think it's certainly reasonable that we could get back to mid-high teens margins. We prefer to focus on the dollars of contribution rather than the margins because fluctuations in organic investment levels can mislead targets.

Meredith Burns, VP of Investor Relations and Sustainability

Thanks, Sean. We've got a live question that came in here on advertising for Vista. The question is how sustainable is the reduction in lower funnel advertising spend for Vista?

Sean Quinn, CFO

I would encourage people to actually look at advertising spend altogether because we're shifting the mix of the channels that we're using. The mix between lower funnel and mid- and upper funnel should continue to evolve, which I think would be a very healthy development. I wouldn’t look at lower funnel in isolation; instead, view it in total. That said, if you do look at it in total, year-over-year, as a percentage of revenue, our advertising is down quite a bit. There's about 700 basis points of margin leverage year-over-year. I think last quarter, I mentioned that I expect 15% to 17% of revenue on an annual basis is a fair range to assume. In Q4, we happened to be at the low end of that, at 15% of revenue. I believe that is sustainable, and we'll see fluctuations on a quarterly basis, but on an annual basis, that's a fair range.

Meredith Burns, VP of Investor Relations and Sustainability

Thanks, Sean. Quick hit. Are you done with cash restructuring payments after Q4?

Sean Quinn, CFO

There's $8 million left, largely to go out in Q1. Some of that is from the cost reductions we outlined back in March, focused on Vista and our central teams. There are also payments related to National Pen migrating its European manufacturing from Ireland to the Czech Republic, which is nearing completion now. So $8 million is what remains for FY '24.

Meredith Burns, VP of Investor Relations and Sustainability

Thanks, Sean. So a meta question here. What are the 1 or 2 biggest risks to meeting your guidance? Just a general recession?

Sean Quinn, CFO

Certainly, a general recession would be one. I think we've fared well in the past during recessions. Hence, macro uncertainty would be on that list. I'll note that we feel confident in our profitability and cash flow guidance based on the plans we have. That said, the two biggest risks outside general macro concerns would be on the revenue side. It’s crucial that we deliver the volume growth we expect, given we are lapping the pricing increases. The second risk would be whether we see any reversal of pricing benefits if costs become more favorable over the next year. We have plenty of levers when it comes to profitability and cash flow, and we’ve been controlling our operating expenses as needed. So, in essence, it comes down to delivering the revenue. Our guidance for at least 6% growth already reflects that we're lapping price increases.

Meredith Burns, VP of Investor Relations and Sustainability

Great. Thanks, Sean. While we're discussing macro factors, Robert, this one's for you. Thus far, in Q1, have you seen any softening in the business environment across the various countries that Cimpress operates? Have there been any discounts or rollbacks to pricing by you or your competitors?

Robert Keane, CEO

The short answer is no to both questions. From a regional perspective, Q4 saw balanced performance. There's nothing signaling a change going forward, and we haven't noticed broad weakness or the necessity to discount or rollback pricing. We continually monitor competitive pricing and see nothing alarming. We actually think there's still some price optimization available. If pricing levels retract due to lower input costs in the future, as in the past, we would not relinquish market share since we believe we can outlast our competitors.

Meredith Burns, VP of Investor Relations and Sustainability

Thanks, Robert. Now let's explore capital allocation and capital structure. Sean, why did you buy back bonds versus loans in Q4? Loans' interest expense is likely higher due to the base rate.

Sean Quinn, CFO

We believe this was a great use of capital. The weighted average interest rate on our outstanding term loan B debt was about 7.7% at the end of June. While current rates are higher for the term loans compared to the 7% coupon on our bonds, the bonds were trading at a deeper discount than our loans. The yield was much higher for those repurchases. During the buying window, our bonds traded between 84% and 89%, and our average purchase price was about 87%. The U.S. dollar tranche of our term loan B traded in the 95% to 96% range. The yield to maturity on our bond repurchases last quarter was 12%. If we refinance our bonds before maturity, the yield could be even higher. These bonds also mature two years before our term loan B.

Meredith Burns, VP of Investor Relations and Sustainability

A couple of related questions. What do you view to be an adequate liquidity position? Do you see further bond repurchases as a capital allocation priority? Are you expecting to buy back bonds further? What steps have been taken toward refinancing?

Sean Quinn, CFO

Currently, we have an adequate liquidity position. Our cash and investments exceed what we view as a minimum cash level. We expect to continue reducing our net debt in FY '24. As for bond repurchases, we regularly assess those opportunities. For the past year, we prioritized liquidity. It depends on yield and other opportunities, but deleveraging remains a priority for us. Refinancing isn't urgent now, as our bonds have a 2026 maturity while our Term Loan B matures in 2028. The focus will remain on delivering our FY '24 guidance, which implies continued deleveraging.

Meredith Burns, VP of Investor Relations and Sustainability

Robert, what leverage level do you want to achieve before resuming stock buyback and/or M&A?

Robert Keane, CEO

We need to reach a leverage level below 3.25 by the end of the year, after which we will evaluate other allocation opportunities. Our aim is to operate at or below pre-pandemic levels of leverage.

Meredith Burns, VP of Investor Relations and Sustainability

In the annual letter, you mentioned that Cimpress plans to bring mass customization model to new products and categories. What specific products and categories are you referencing?

Robert Keane, CEO

These efforts align with our past 30 years, where we've expanded our physical printed products and other forms of personalization. This can include promotional products, packaging, labels, and other items you can see on our sites. It's about expanding both the depth of our product offerings within each category and the breadth of options available. We aren't moving into very high-volume printing but are aiming for mid-volume expansion. This should align with what anyone familiar with our last 30 years of operation would expect.

Meredith Burns, VP of Investor Relations and Sustainability

Thank you, Robert. I'm looking forward to more innovation from all our businesses in the coming years. Those are all the questions we had for the call. Robert, why don't you sign us off with a few parting remarks?

Robert Keane, CEO

Thank you, Meredith, Sean, and of course, thank you all for listening. We finished another fiscal year delivering financial results in line with guidance. Delivering those results is important to me, to others on the Board, and our senior leaders. We all have aligned economic incentives that relate to the long-term shareholders. As I discussed in the annual letter, we look forward to FY '24, with a focus on improving our customer value proposition further and gaining operational and execution momentum with a clear strategy in a large market. I encourage you to read that letter for insights on our capital allocation and intrinsic value per share. Thank you for your questions and interest in Cimpress, and we look forward to speaking to you soon.

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.