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Cimpress plc (NASDAQ:CMPR) Q2 2023 Earnings Call Transcript

Cimpress plc (NASDAQ:CMPR) Q2 2023 Earnings Call Transcript January 26, 2023

Operator: Welcome to the Cimpress Second Quarter Fiscal Year 2023 Earnings Call. I would now introduce Meredith Burns, Vice President of Investor Relations and Sustainability. Please go ahead.

Meredith Burns: Thank you, Catherine, and thank you, everyone, for joining us today. After a positive investor feedback from our Q4 FY 2022 public earnings call, we have decided to reinstate quarterly public earnings calls, and we'll continue them as long as they continue to be useful to investor understanding of our financial and operating performance. 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. We really do appreciate the time that you've dedicated to understanding our results, commentary and outlook. This live Q&A session will last 45 minutes to an hour, and questions €“ you can submit questions via the question-and-answer box on the bottom left 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 risk factors that are outlined in detail in our SEC filings and the documents that we published yesterday on our website. We invite you to read them. And now I will turn things over to Sean and Robert for some brief remarks before we take questions.

Sean Quinn: Great. Thanks a lot, Meredith, and thanks everyone for joining us today. I'm just going to start by highlighting a few key points from the results that we published yesterday, along with our outlook. As we outlined back in our September Investor Day, the fiscal year results for this year, we're going to be characterized by margin compression in the first half of the year as we annualized the impact of cost inflation that accelerated in the second half of last year also as we annualized the impact of last year's investments in Vista and we experienced some unfavorable shifts in our product mix from a margin perspective. And we said that as we exit this fiscal year, we expect to be on a path to expanding our EBITDA, both through margin expansion and through revenue growth.

All of this remains the case and our second quarter results reflect this. Our total revenue grew in constant currencies across all segments, including growth in revenue from new customers in the Vista businesses last quarter. However, constant currency revenue growth slowed from the first quarter. Revenue from consumer products was down slightly and has more weight this quarter, particularly in the months of November and December. That being said, in January month to date, as mix shifts back, our organic constant currency revenue growth has accelerated back above the 9% consolidated growth rate that we reported for the six months ended December. And over the remainder of the fiscal year, we're going to be comping last year's Vista site migrations to our new tech platform in large markets like the U.S., like in France and Germany that we expect to support higher year-over-year growth as well.

From a cost perspective across Cimpress, we see signs that our year-over-year pressure of many input costs is stabilizing and in some cases costs are starting to decrease. That said, gross profit did weigh on our year-over-year results and it's still impacted by both increased input costs net of the pricing increases that we've taken as we're still lapping cost increases that accelerated in the second half of last year. But also product mix shifts, particularly in the Vista business, also had an unfavorable impact. If you look at it in total, consolidated gross profit declined year-over-year by $36 million. About $22 million of that decline was from unfavorable currency fluctuations on our gross profit that are offset throughout the rest of the P&L, including from our hedging gains.

Of that remaining $14 million of operational decline in gross profit, that was really from our Vista business. All of our other businesses had constant currency growth in gross profit. So for Vista, in addition to increased input costs year-over-year, as I mentioned before, gross margins were impacted by product mix as we had constant currency decreases in consumer and in digital product bookings, which represented a combined $7 million decline. Those are categories that have high variable gross margins. While we had very strong constant currency bookings growth of over $16 million in our promotional products, apparel and gifts category and that has very strong customer economics, but it has lower variable gross margins. Sticking with Vista, our full funnel advertising test that we outlined back in September generated differential performance.

Business, Computer work, Finance
Business, Computer work, Finance

Photo by Jose Vazquez on Unsplash

New customer count and new customer bookings both grew this quarter overall for Vista and that was helped by markets where we had been testing mid and upper funnel advertising spend and new customer growth was one of the specific outcomes we were looking to deliver. As previously disclosed, it was always our plan that the spend behind that testing will be front-loaded in the first half of the year, that remains the case, and we'll now use the learnings from this testing to continue to evolve and test our channel mix going forward. In the quarter, we actually decreased our performance advertising spend year-over-year in Vista, and that includes during the consumer-driven holiday peak. Following actions that we took to reduce operating costs as we enter the fiscal year, we took some further actions this quarter to contain our operating cost.

Operating expenses, excluding restructuring charges, were up only modestly year-over-year in constant currencies despite the significant investments we made in Vista throughout last year that we're still lapping and despite continued growth in our businesses. On the net income and EPS side, we had sizable losses there due mainly to non-cash drivers, including the establishment of $116 million valuation allowance that drove tax expense in our P&L, but doesn't have an impact on our cash taxes. That was a reversal of a tax benefit that we reported back in fiscal 2020 for net operating losses that aren't available to use until 2025 to 2030. We still expect to use a large portion of those NOLs, but we aren't able to support maintaining that deferred tax asset based on the U.S. GAAP rules.

Additionally, given the weakening of the U.S. dollar against our largest currency since last quarter, we had unrealized losses from currency hedges that flow through our P&L and affect net income. Moving on to cash flow, last quarter, we told you we increased our safety stock of certain raw materials to mitigate supply chain disruption, especially related to risk related to energy disruption in Europe. We started to work this inventory down in Q2, and actually we had cash inflows from inventory as a result when we would typically see cash outflows in our December quarter. We expect to continue to work that inventory down in the back half of FY2023 as well. That said, from a working capital perspective, we didn't see as large of an overall benefit as we have in recent years due to the lower, sequential increases in our cost base given some of the actions that we've taken.

And therefore, we also should not experience a significant of an outflow as we go into the third quarter. During Q2, we did pay $95.6 million to acquire noncontrolling interest in our businesses, $91 million of that was for the settlement of a put option for over 90% of the noncontrolling interest in the businesses in our PrintBrothers segment, which has been our fastest-growing segment. Last quarter, we told you that we were preparing for that likelihood so that actually happened and those payments reduced our liquidity, which was down sequentially, although still sufficient at $213 million. Net leverage increased this quarter, we did expect an increase given the lower year-over-year EBITDA. The settlement of the put options and the noncontrolling interest payments overall, of course, had an impact on our net leverage.

That alone drove about half of the increase in that leverage from last quarter. At the end of December, our net leverage was 5.52 times, and our first lien net leverage was 3.34 times. Finally, let me just say a few words about the guidance that we provided in last night's release. As I said earlier in our past commentary we described an expectation for margin compression in the first half of the year, for all the reasons I outlined and profitability expansion as we were exiting the fiscal year, with growth in the years ahead. We are committed to expanding profitability, we're committed to delevering the balance sheet. I previously mentioned that revenue growth in January has accelerated, but we will not rely on revenue growth alone to drive those profit improvements.

We've taken multiple steps over the last year to contain or reduce cost, but over the remainder of the fiscal year, we plan to take further steps to significantly reduce our cost base in support of expanding profitability as we exit the fiscal year. As I noted or we noted in our release last night, in light of anticipated cost reduction measures, we expect that we'll be able to return to our prior fiscal year high adjusted EBITDA of $400 million in fiscal 2024. That's next year. This higher adjusted EBITDA, combined with the expected free cash flow generation, would bring net leverage levels to approximately 3.5 times or below. We have a midyear strategy update plan for investors on March 21, and there, we'll share more details on the steps that we're going to take to drive that profitability expansion, including cost reductions and the associated net leverage improvement.

Now I will hand things over to Robert to say a few words about the Vista CEO transition that was referenced in the document last night.

Robert Keane: Thanks, Sean. Good morning to everyone who is calling in today. Given the guidance, as Sean just outlined, I also wanted to importance to Cimpress overall. When I returned to Vista four years ago, there was straight but also areas that needed really significant attention in order to transform the business for the coming decades. In January 2019, I expected that would take a couple of years to establish strong foundations for Vista's future, and then pass the baton to Vista's next CEO. The pandemic slowed down our progress for a time, and we have been focused on multiple major multiyear investments. These included replatforming the Vista technology €“ positioning that had been highly dependent on deep discounts, better serving higher-value customers, and adding the groundwork, upon which we can revitalize Vista's traditional strength in design and service.

Thanks to the €“ and thanks to the great talent that Vista already had, to new talent that we attracted over the last four years and to the contribution from people . I told you at the Investor Day in September that Vista was ready to run, and that certainly remains true today. Notwithstanding the fact that macro conditions are causing us to look at significant cost reductions for the coming months. Vista will be able to improve how it serves customers, thanks to the strong foundations we've built across technology, data and analytics, market, product ranges and the beginnings of a full spectrum of design capabilities and certainly the talent pool at Vista capabilities. That's why at this juncture, it's the right time for me to now pass the baton to Vista's new Chief Executive Officer; Florian Baumgartner.

Under Florian's leadership and his strong executive team, I expect this soon will progress steadily towards its North Star to be the design and marketing partner for small businesses while delivering the financial results necessary to support what Sean has just outlined, and the continued growth beyond that. In my role as CEO, I look forward to spending my time supporting all of our business abilities to drive both higher level €“ and higher financial returns for our investors as we focus on delivering the guidance outlined in yesterday's release, and on growing the per share value of Cimpress. With that, let's open up to questions.

A - Meredith Burns: Great. Thanks, Robert. So as a reminder you can submit questions during this webcast via the questions and answers box at the bottom left of the screen. Some of you have already found that. Thank you very much. We received a significant number of pre-submitted questions as well. Also thank you so much. We really do appreciate that. There are in some overlapping areas, which is good. So there's going to be a couple of cases where I will ask a representative question that we have got from multiple people, and then our answers will do our best to cover everybody's questions. We'll get to as many as we can, and we'll make sure that we get to a variety of topics that are on people's minds. So let's take our first question, which was a pre-submitted one, which is this: In the last earnings document published in October, you wrote, €œas we publish this, our customer demand picture remains strong across Cimpress.€ However, organic constant currency growth has slowed materially from the mid to high teens to the mid-single digits.

What happened in November and December that changed things for the worst? Sean, do you want to take that one?

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