Cimpress : Q3 FY23 Earnings Transcript

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EDITED TRANSCRIPT

CMPR.OQ - Q3 2023 Cimpress PLC Earnings Call

EVENT DATE/TIME: APRIL 27, 2023 / 12:00PM GMT

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APRIL 27, 2023 / 12:00PM, CMPR.OQ - Q3 2023 Cimpress PLC Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Meredith Burns Cimpress plc - VP of IR

Robert S. Keane Cimpress plc - Founder, Chairman & CEO

Sean Edward Quinn Cimpress plc - Executive VP & CFO

P R E S E N T A T I O N

Operator

Good day, ladies and gentlemen. Welcome to the Cimpress Third Quarter Fiscal Year 2023 Earnings Call. I will introduce Meredith Burns, Vice President of Investor Relations and Sustainability.

Meredith Burns - Cimpress plc - VP of IR

Thank you, Howard. And thank you everyone for joining us. With us today are Robert Keane, Founder, Chairman and Chief Executive Officer; and Sean Quinn, EVP and Chief Financial Officer.

I hope you've all had a chance to read our earnings document. We appreciate the time that you've dedicated to understanding our results, our commentary and our outlook. This live Q&A session will last 45 minutes to an hour, and will answer both pre-submitted and live questions. You can submit questions via the question-and-answer box at the bottom left of your screen.

Before we start, I'll note that in this session, we will make statements about the future. Our actual results may differ materially from these statements due to risk factors that are outlined in detail in our SEC filings and the documents that we published yesterday on our website. We have also published non GAAP reconciliations for our financial results and our outlook on our IR website. We invite you to read them.

And now I will turn things over to Sean for some brief remarks before we take question.

Sean Edward Quinn - Cimpress plc - Executive VP & CFO

Thanks a lot, Meredith. And thanks everyone who's joined us today and who's listening later on the recording. Before we get into the questions, I'll highlight just a few key points from the financial results and outlook that we published yesterday.

As we outlined in our September Investor Day, this fiscal year's results were going to be characterized by margin compression in the first half of the year, as we lap the impact of cost inflation and a higher OpEx space, and then expansion in the second half of the year.

Before factoring in the material benefits from the cost reduction outlines that we outlined for you in our March 24 investor update we saw significant year-over-year expansion of adjusted EBITDA in the March quarter, from a combination of accelerated revenue growth, gross margin stabilization and leverage in advertising spend and operating expenses.

From a revenue perspective, we were at the high end of our guidance range, which -- with 16% consolidated organic constant currency revenue growth, in part from year-over-year pricing improvements, but also comping a weaker period in January and February last year.

We continue to see strong performance in our Upload and Print businesses and in Vista constant currency revenue growth accelerated to 16% as well.

Vista's performance was driven by growth across small business product categories with promotional products once again in the lead. But we also had double digit revenue growth for business cards from marketing materials, for signage and for packaging.

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APRIL 27, 2023 / 12:00PM, CMPR.OQ - Q3 2023 Cimpress PLC Earnings Call

New customer count and new customer bookings and Vista both grew nicely. That was the second quarter in a row that both of those metrics grew. Helped by the mid and upper funnel advertising testing that we did in the first half of the year.

We did also passed the anniversary of the migration of our U.S. site onto the new technology platform, which was in February of last year. But growth was equally strong in North America and Europe.

Gross margins were stable year-over-year on a consolidated basis, but that also included in Vista and so our consolidated revenue growth that I just went through translated the strong growth in gross profit as well.

As we said during the investor call on March 24, we're seeing input cost stabilized with opportunities for a reduction as we look to the coming fiscal year.

From a profitability perspective, Q3 adjusted EBITDA more than doubled year-over-year and finished above the guidance range that we provided in March. That's translated to strong cash flow performance as well.

As expected we saw working capital favorability relative to typical seasonal patterns in Q3, offsetting the unfavorability we saw in the first half of the year between taking on extra safety stock as insurance against possible supply chain challenges, as well as some differences in spend levels during the last quarters holiday peak. That all combined to drive a much lower outflow for adjusted free cash flow compared to recent years in Q3.

We ended the quarter with cash and marketable securities of about $190 million, which was well ahead of the guidance that we provided as a result of both strong operating finish to the quarter, but also more favorable working capital.

Net leverage was 4.83x on trailing 12 month EBITDA, that's as defined by our credit facility. And that was lower sequentially due to improved profitability, and also the pro forma of benefit of a portion of our cost reduction action.

Moving to our outlook, as an update to the guidance that we provided in our March investor update. On the back of the strong Q3 performance, we're raising our Q4 adjusted EBITDA guidance to $90 million to $94 million. We expect that to come with seasonally strong free cash flow conversion as well.

Inclusive of this guidance, and also the higher reported Q3 results, our expectation for fiscal 2023 adjusted EBITDA is now $316 million to $320 million.

We remain on track to reduce that leverage to below 4.5x trailing 12 month EBITDA as defined by our credit facility by the end of next year fiscal year 2024 -- sorry, by the end of this fiscal year, so next quarter -- June quarter.

Moving to our thoughts on fiscal '24. We remain confident in our ability to achieve at least $400 million in adjusted EBITDA in fiscal '24. Our Q3 results and the raised Q4 guidance further support them.

The cost reduction actions that we've taken will yield about $100 million in annualized savings as we outlined in detail last month. We expect to see about $15 million to $17 million of year-over-year savings in Q4, and then the remainder of that will take place in fiscal '24.

Importantly, we continue to expect that fiscal 2024 adjusted EBITDA of at least $400 million next year will be coupled with strong conversion to adjusted free cash flow of approximately 40% bringing net leverage to be below 3.5x by the end of next fiscal year.

As discussed on our March 24 call, given the extent of cost reductions we've put in place, achieving at least $400 million in adjusted EBITDA requires relatively modest revenue growth next year and the associated contribution flow through.

We have not provided revenue guidance for FY '24 yet. As a reminder, by the time we enter next year, we will have passed the anniversary of both the technology migration and Vista in all of our large markets, as well as most of our pricing increases that we've done over the last year.

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APRIL 27, 2023 / 12:00PM, CMPR.OQ - Q3 2023 Cimpress PLC Earnings Call

We provided this detailed guidance in our March call and continuing here because we are in a moment in time where we expect our profitability and our cash flow to be meaningfully higher in the quarters ahead. And that's starting to happen as a result of the progress that we've made across our businesses, including from recent investments, but also from our continued growth and the material cost reductions that we've recently implemented.

We don't expect to provide this level of detailed guidance on a quarterly basis in the future. But we'll continue to outline our expectations for the coming year, at the start of each year. And when warranted, with any changing circumstances we'll of course, update that.

Meredith, why don't we turn it over to Q&A?

Q U E S T I O N S A N D A N S W E R S

Meredith Burns - Cimpress plc - VP of IR

Thanks Sean. (Operator Instructions) So the first question, I'm going to do a pre-submitted question and we got this a couple of times from different folks, which is, basically what changed from the March investor update, where Q3 EBITDA came in much better than the guidance of $60 million to $62 million. Sean, why don't you take that one?

Sean Edward Quinn - Cimpress plc - Executive VP & CFO

Yes, sure. There's really 2 main things. One, that quarter finished strong, so that was the main driver. Also, we had about $1.7 million of savings from the March cost actions that we took, which was a little bit higher than what's factored into the guidance just based on how those actions and when those actions were finalized.

I mean, in general, we have very good visibility to the top half of our P&L on a daily, on a weekly basis. The full EBITDA picture sometimes takes until the end of the month to get fully rolled up. And of course, we do have quite a few businesses across the group.

But our guidance for Q3 on March 24 was based on 2 months of actuals, 1 month of forecast. We ended up better than that forecast. And that stronger performance against forecast in March and as we closed out the quarter was one of the drivers to us increasing the range of adjusted EBITDA guidance for Q4, as you saw in the release last night.

Meredith Burns - Cimpress plc - VP of IR

Great, thanks. So we're going to stick on that same topic and flip it to cash flow. Can you please provide a little more color on why cash and cash equivalents were so much higher than the $135 million to $145 million guidance given at Investor Day towards the end of the quarter? Was there any kind of working capital pull forward from Q4 of FY '23?

And a related question, working capital was a positive instead of less of an outflow, what happened there? It's a good thing, but just curious about timing issues.

Sean Edward Quinn - Cimpress plc - Executive VP & CFO

Yes. We finished the quarter very strong from a cash flow perspective, which was great to see. Of course, we had the upside of the EBITDA flowing through. So that was a positive. We did have some timing benefits relative to our forecast for working capital as well. That gets tricky within a given week in terms of precision. And because of that, frankly, we had to take a little bit more of a conservative stance in that guidance. And that's not guidance we would typically give. There was a lot of focus on that, and we wanted to be clear about at least where we expect it to land. And we, of course, came in well ahead of that, which is good news.

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APRIL 27, 2023 / 12:00PM, CMPR.OQ - Q3 2023 Cimpress PLC Earnings Call

From a timing perspective, in terms of what impacted that, things like when we pay or receive indirect taxes, all kind of normal stuff is what drives that. Nothing out of the ordinary there to call out. In terms of the kind of pull-forward question, for Q4, we do expect to see seasonal strength in terms of the conversion of our EBITDA to cash flow. We'll have the cash restructuring charges that we've previously outlined. Most of that gets paid out in Q4.

But I'd say that the Q3 working capital being stronger than expected was more of an offset to some of the unfavorable trends we saw in the first half of the year, including from inventory than it was a pull forward of what we'd expect to see in Q4. And that's all built into the commentary that we provided in terms of strong cash flow conversion in Q4. And that strong cash flow conversion is inclusive of any of the restructuring costs that we need to pay next quarter.

Meredith Burns - Cimpress plc - VP of IR

Great. Thank you, Sean. I'm going to hand the next couple of questions over to Robert.

Robert, first, BuildASign growth has recently moderated. What is driving that moderation?

Robert S. Keane - Cimpress plc - Founder, Chairman & CEO

Before answering the specifics of the question, step back and provide a summary perspective. I don't have the exact numbers on hand. But broadly speaking, if you look at the revenues of BuildASign today relative to their revenues prior to the pandemic, this business has grown roughly in line with what you've seen Cimpress do over that multiyear period. But BuildASign has taken a different path.

And to get into that type of that path, specifically, you'll recall that during the pandemic, we performed very well at BuildASign. A lot of that was driven by home decor, and much of that was, we believe, a pull forward of demand and that segment has cooled off. It's still a strong segment. We still see it growing over time, but we accelerated some of that revenue.

On the other hand, signage and enterprise accounts have generally performed well after the pandemic. So we see some impact from other things like all of our businesses in cost inflation or labor costs or some shifts in marketing approach. But generally, the home decor products that spiked during the pandemic have normalized to lower levels, and that's pushing down our growth rate of BuildASign signage products and enterprise accounts are growing strongly.

And so it's been a little noisy in the last several quarters and years, but BuildASign remains a great business with a really strong leadership team, and we're very confident in their ability to grow both revenues and profits into the future.

Meredith Burns - Cimpress plc - VP of IR

Thank you, Robert. And a question on Vista for you.

In the midyear update, Florian mentioned that there would be a refocusing of Vista's attention on vistaprint.com. What does this mean for the Vista portfolio, Vistaprint, VistaCreate, 99designs and also the concept of print versus digital?

Robert S. Keane - Cimpress plc - Founder, Chairman & CEO

Maybe I'll step back again and say, we retained Vista's strategic North Star to become the expert design and marketing partner to small business. And that certainly needs to include starting with the last portion of your question, digital, websites for small businesses, social media postings. It needs to include great design. And we will move towards that long-term vision as we've talked about already in the past.

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