Earnings Call Transcript - CMPR Q4 2024

Operator, Operator

Welcome to the Cimpress Q4 FY 2024 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, Dee, 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. We appreciate the time that you've dedicated to understand our results, commentary and outlook. This live Q&A session will last about 45 minutes and we'll answer both presubmitted and live questions. You can submit questions via the questions-and-answers box at the bottom left of your webcast screen. Before we start, I'll note that in this session, we will make statements about the future. Our actual results may differ materially from these statements due to risk factors that are outlined in detail in our SEC filings and the documents we published yesterday on our website. We also have published non-GAAP reconciliations for our financial results on our IR website, and we invite you to read them. And now I will turn things over to Sean.

Sean Quinn, EVP and Chief Financial Officer

Great. Thanks a lot, Meredith, and thanks to everyone who's joined us today. Before we get into questions, I'm just going to highlight a few things from the 2 documents that we published yesterday. That first document was our earnings document that we normally publish. And then the second one is Robert's annual letter to investors. As we noted in the earnings documents, Cimpress had a strong finish to a strong year. In Q4, consolidated revenue grew 6% on both a reported basis and organic constant currency basis. For the full year, revenue grew 7% on a reported basis and a little over 5% on an organic constant currency basis. Adjusted EBITDA grew $5 million year-over-year in Q4 to $119 million, off of a tougher comp last year that had some onetime benefits and we had year-over-year currency headwinds of a little more than $3 million as expected. For the full year, adjusted EBITDA grew $129 million year-over-year to $469 million, which is 38% growth. And that growth is inclusive of year-over-year currency headwinds of $19 million, which is consistent with the expectation for currency impact that we said at the beginning of the year. Our full year adjusted EBITDA margins were up over 300 basis points to 14.2% in fiscal 2024, and that was driven by a combination of revenue growth, gross margin expansion and then also the cost reductions that we announced last March. From a segment perspective, every segment accelerated revenue growth sequentially this quarter with the exception of National Pen, where we made a choice to reduce advertising spend and that impacted the revenue growth rate, but significantly improved profitability. In Vista, we continue to see growth in per customer value, which is a trend that we've been talking about for several years now. And we had our sixth consecutive quarter of growth in the number of customers we're serving as well. Those 2 things combined are having a positive impact, and that's been driven by a lot of incremental improvements in the customer experience, but also new product introduction that's supporting the attraction and retention of higher-value customers across our geographic markets. Over the last 2 years, the value of Vista's new customer cohorts has been strong. And over time, what we're seeing is that's starting to have more impact on the health of repeat customer performance as well. Adjusted free cash flow was $117 million for Q4 and $261 million for the full year, a great result that benefited from our strong profit growth that I just went through but also strong working capital inflows. Q4 did include proceeds from the sale of a building for just over $17 million. That was something that we referenced last quarter. But nonetheless, a very strong cash flow result. It was our highest ever for a fiscal year and also for our fourth quarter. During fiscal 2024, we repurchased 1.7 million shares for $157 million at an average price per share of $91.09. That represents a 7% reduction to the shares outstanding at June 30, 2023, and we're able to do that while substantially reducing leverage and increasing liquidity. Of that total fiscal 2024 repurchase, we repurchased 638,000 shares in Q4 for $56 million at an average price per share of $88.20. We finished the quarter with net leverage at June 30 of just under 3.0x trailing 12-month EBITDA as defined by our credit agreement, and that's down from 3.9x last year. Our multiyear outlook remains both positive and also unchanged. We expect to grow organic constant currency revenue at mid-single-digit rates, possibly a little higher. We expect to grow adjusted EBITDA slightly faster than revenue. And we expect a multiyear conversion rate of adjusted EBITDA to adjusted free cash flow to be approximately 45% to 50% with fluctuations from year-to-year. In our earnings document, we also shared some housekeeping items that hopefully will be helpful for all of you as you seek to estimate our profitability and free cash flow for FY '25. I'm not going to go through all those details here, but I'm happy to take any questions that you may have on that. And our plans for this next fiscal year, fiscal 2025 will be done all within the context of the leverage policy and commentary that we introduced last quarter, which also remains unchanged. This is a strong year. It's a year that just ended. And now all of our focus is on continuing to build on that progress in fiscal 2025 in the years ahead. I'd encourage everyone to read Robert's annual investor letter that was also published last night; it gives an update on our strategic progress. After years of hard work through transformation and technology migrations, increased investment, we feel we're poised to continue the progress that we had in fiscal 2024, leveraging our scale-based advantages that we're seeking to build upon, including in the area of production and supply chain where we'll be investing more in CapEx in the year ahead to take advantage of opportunities there. So with that, Meredith, why don't we get into questions?

Meredith Burns, Vice President of Investor Relations and Sustainability

Thank you, Sean. We have received a couple of pre-submitted questions, and I'll add the live ones as they come in. Our first question is for Sean. Can you provide a breakdown of run rate EBITDA growth for the fourth quarter of fiscal year 2024 compared to the fourth quarter of fiscal year 2023? I see from the release that currency adjustments reduced EBITDA by $3.1 million in fiscal year 2024, while one-time items positively impacted fiscal year 2023 EBITDA by $3 million, and that Vista advertising increased by 130 basis points in fiscal year 2024. Additionally, the last quarter ended on a Friday last year and on a Sunday this year, which may have a negative effect this year. It would be helpful to know how much run rate EBITDA increased in the fourth quarter of fiscal year 2024 after adjusting for these unusual items.

Sean Quinn, EVP and Chief Financial Officer

Great. Well, thanks for the question. It's a good one. And there's a lot to dig into there. We always have some timing differences and shifts in things like the timing of holidays or how many days fall in a quarter, and that can impact comparisons to last year. So to some extent, there's always some of this. But I would say this quarter in Q4, that impact was definitely more notable. And there are a few things that we called out in the release, as you noted in the question, just to go through them. The first is that, and I mentioned it in my opening remarks as well, currency was a negative year-over-year impact of just over $3 million on EBITDA. It was $19 million for the full year and $3 million for the quarter. So that's one. Two is that, as we called out in the release, there were some onetime benefits in Vista last year that didn't repeat this year. And so that's a little over $3 million as well. So between those two, you're at $6 million. And then if you look at kind of the top half of our P&L, our consolidated gross profit grew $28 million year-over-year in the quarter, which was quite strong. Advertising spend was higher by $9 million year-over-year, and that was mostly driven by Vista. And we talked about this sometimes, in our advertising spend, it's normal also to see some fluctuations in intensity quarter-by-quarter. But that was accentuated in Q4 because last year, in Vista, we were doing pretty extensive testing where we were going dark in certain channels and markets to test incrementality. And so that impacts the year-over-year comparison and is one of the reasons why advertising spend in absolute dollars year-over-year is up as much as it is. We also had a creative shoot in Vista that generates assets that we use for well more than a year. But when we do that, we expense all that upfront, that was about $1.4 million. So reported EBITDA grew $5 million. But if you add up all those things, that's another about $16 million of year-over-year impact if you compare it back to Q4 last year. I think last year, I would say, advertising spend was lower than the normal run rate given the testing that we were doing. But in any case, I think it's very fair to say that the run rate EBITDA growth in Q4 was higher than the headline number that we reported.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great, Sean. The next question, I'm going to ask Robert to answer. Robert, can you talk a little bit more about the reseller challenges in Print Group? What gives us confidence that these are broad-based market challenges and not idiosyncratic to our businesses, that is, somebody is eating our lunch?

Robert Keane, Founder, Chairman and Chief Executive Officer

Yes. So to your specific question, we do not see any reseller competitor "eating our lunch." First of all, we do value our reseller customers and we work hard to make them very competitive by serving them. But in the end, it is the end customer, the ultimate consumer of our products, who chooses whatever channel is most convenient for them and most competitive. And this shift that we are speaking about is part of a long-term disintermediation and a shift towards direct-to-customer e-commerce models continue to grow. Now we've described this reseller disintermediation in our Upload and Print space for many years even as we've continued to grow our revenues in Upload and Print very nicely. We've spoken about it again because it is continuing. But if you step back, some of our Upload and Print businesses including our largest ones today have transitioned to a point where they serve mostly end customers, and so they're not exposed to these negative side of this trend. But we do have a couple of businesses that historically and even currently primarily serve resellers. So their growth is more muted as a result. Again, this isn't new. Going back to why we spoke about it again this year, because this year, our revenue growth in Upload and Print, which is driven by our traditional, certainly our traditional products, has been coming from volume alone or primarily. Whereas in the past, there was some mix shift toward newer products and pricing improvements that we drove. This underlying reseller trend shows through our results in that environment. And now as we step way back, we continue to think and believe that there's a long runway for growth in Upload and Print. Again, most of our businesses and our largest businesses in the segment primarily serve end customers, not resellers. Now this shift is happening. I would say more volume going direct to end customers' benefit, same price overall. And finally, I just say repeating, we do have an important business with our resellers and we certainly are continuing to fortify our value proposition for them via things like new product introductions, quantity choices, which are right for their customers, faster delivery speed and other things, again, once again, as we do for all of our customers, whoever they are.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great. Robert, I'm going to stick with you for the next question, which is about our CapEx spend. So what makes now the time to accelerate those capital expenditures?

Robert Keane, Founder, Chairman and Chief Executive Officer

We highlighted that last night because, in summary, for the past two fiscal years and the upcoming fiscal '25, our focus has been on operational execution. This capital expenditure will strengthen our manufacturing and supply chain advantages, which are crucial to our operational capabilities. For more details, you should refer to my annual letter published last night. Currently, we are in a better financial and operational position than we've been for many years, thanks to the work we did six years ago and the significant investments made over those years. This has provided us with a solid foundation for future growth. This foundation spans various aspects of our competitive edge and customer value proposition, which I covered in my letter. From a CapEx perspective, most of these funds will be allocated to production operations, enhancing what we excel in: mass customization of print and print-related products, which we believe will deliver great financial returns. Many of these investments are clear opportunities that will boost production efficiency with rapid payback, given our high volumes. Some are aimed at introducing new products to better serve our customers and attract new ones. Others will enhance quality or quality attributes offered to customers. Many investments will achieve multiple benefits, boosting efficiency, supporting new product introductions, and improving quality attributes. Lastly, we are excited about the current equipment market, which is marked by intense competition and innovation, some of which has been developed in collaboration with our suppliers. We see new equipment in the supply chain that is highly productive and attractive. Furthermore, I want to emphasize that any increase in CapEx or other cash flow expenditures remains within the framework of our leverage policy, which we reiterated in last night's documents.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great, Robert. All right. I'm going to shift gears. We're going to talk about the debt side of things. I'm going to pass the next couple of questions over to Sean. So Sean, any new thinking about refinancing our 2026 bonds?

Sean Quinn, EVP and Chief Financial Officer

Yes. The short answer is that nothing, there's nothing new there from what I said on last quarter's call; we had a similar question. We haven't made any decisions on exactly when or how we'll refinance the bonds. But of course, it's something that we are regularly thinking about. We still have a little under 2 years to maturity. And so we can be patient, but we're kind of getting into that window now where we'll be ready to act. And so we'll be ready when it makes sense to do so. We're in regular contact with our rating agencies so that they understand the financial progress that we've made, and we'll continue to do that. This is something we regularly do. And then as I said last quarter as well, when we got this question, we do like having both secured and unsecured debt in our capital structure. We think that diversification of our capital base is a good thing for a number of reasons; it keeps some secured capacity, gives us some optionality over time as well as our base of profitability growth. So no change in thinking there. But we'll be ready to act when it makes sense to do so. And I think that's probably likely to be in this fiscal year.

Meredith Burns, Vice President of Investor Relations and Sustainability

Okay. So a question here. What are the plans for the small EUR 46 million TLB tranche? Just as an aside for folks who are listening. If you remember, during the quarter, we did reprice our Term Loan B and that actually involved a shift in the balance between U.S. dollar and euro tranches of that. So well, the question is, will it be repaid or will we hold it in until maturity?

Sean Quinn, EVP and Chief Financial Officer

Sure. Yes, and it made sense to do this in our repricing; we were able to get a benefit by shifting around the proportion of euro and U.S. dollar in the Term Loan B. But we still have a plan to hold that until maturity unless we do something else with the term loan overall. Yes, that can always change, but for now, plan is to hold it.

Meredith Burns, Vice President of Investor Relations and Sustainability

Okay. Next question. For I think, Sean, and then Robert, if you want to add anything after, please feel free. We'll start off on Sean on this one. For the 50% of organic investments in Vista that are more subjective. So this person has read our annual letter; folks, if you haven't read it yet, this is something that's out of our annual letter. For the 50% of organic investments in Vista that are more subjective, how do we increase the likelihood that these are, in fact, as attractive as we think? Put differently, a few years ago, prior to the management changes at Vista, we were making investments that at the time we thought were great, but in hindsight, were value destroying. What guardrails do we have in place today to avoid recommitting the sins of the past?

Sean Quinn, EVP and Chief Financial Officer

Great question. Let me give some context, especially for those who may not have read Robert's annual letter yet; I highly recommend it. Each year, we provide an estimate of our growth investments and our steady state free cash flow. Most of our growth investments, about three-quarters, are allocated to Vista. In the letter, we mentioned that half of our investment in Vista is relatively easy to estimate because it's quite clear-cut. For example, capital expenditures for new products, growth capacity, or specific parts of our advertising spend are straightforward to assess. The other half of our Vista growth investments involves more subjectivity, particularly in areas like product development, where teams may focus on both maintenance and growth projects. The subjectivity I mentioned relates to how accurately we can determine whether these investments are necessary for steady state operations. We have estimates, and based on a $30 million range we provided earlier, we believe that sufficiently covers the uncertainties involved. The essence of the question is about past investments and how we ensure, especially with Vista, that we improve the chances of achieving good returns on those investments. Since 2019, when we made significant changes in the Vista business, we've gained much better data and analytics, enhancing our visibility and allowing for more data-driven decision-making. We've discussed these improvements during our Investor Days and other platforms. Additionally, we've modified our organizational structure, reducing coordination costs and clarifying accountability. Teams are now closer to the customer challenges we aim to address, and the results from our investments are clearer too. While organizational adjustments may seem minor, they have a significant impact. This situation is similar to the changes we made in 2019 for Upload and Print, where we decentralized further and improved accountability and clarity of results, which yielded positive outcomes. We're also conducting much more experimentation; the tools, data, and practices are now better understood and integrated throughout the organization. This means the investment needed to gather customer feedback is significantly lower, enabling us to iterate more effectively. Additionally, the years-long technology migration has provided us with greater flexibility and has facilitated many of the improvements I've mentioned. We are now seeing faster incremental enhancements, which is evident in the new customer cohorts and our overall performance. Previously, advancing improvements and gathering feedback was costlier and more engineering-intensive, but we've seen substantial improvements because of these developments. Regarding guardrails, we have several mechanisms in place to regularly review our progress. We've made considerable changes to our planning processes and how they correspond to resource allocation within our product teams, which is important to note. As was evident last year, we are not hesitant to discontinue initiatives if we don't see adequate progress. However, significant changes like last year's cost reductions can be painful, and we aim to minimize those disruptions. After streamlining costs and refocusing our investments, maintaining high standards remains essential. Lastly, we always strive to learn and improve. Robert has been forthcoming about our learning journey in his annual letter recap published last night. While we will continue to make mistakes, I believe that the investments we are making now are more aligned with our long-term goals compared to those we considered promising before 2019 that ultimately did not yield the expected results. I hope this information provides useful context. Robert, do you want to add anything?

Robert Keane, Founder, Chairman and Chief Executive Officer

No, I agree with everything you said, but I wouldn't add anything.

Meredith Burns, Vice President of Investor Relations and Sustainability

Well, we are actually through all of the live questions at this point. And I'm going to hand the call back over to Robert to wrap things up.

Robert Keane, Founder, Chairman and Chief Executive Officer

Okay. Thanks, Meredith. Thank you all, as investors, for joining the call and continuing to entrust your capital with us. As I said in my annual letter, Cimpress is financially strong, and that reflects the significant investment work that we've completed over the past 6 years. It made us stronger operationally and technologically and most importantly, stronger in terms of the value we deliver to our customers. And that strength really does bode well for our future and our ability to continue to drive increased customer value, and in doing so, grow our intrinsic value per share. We'll certainly give more details on our strategic progress and what we're doing as a business in our upcoming Virtual Investor Day, which will be held on September 10 of this year, and we hope you will join us for that as well. Thank you all.

Operator, Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.