Q4 2022 Cimpress PLC Earnings Call
Good day, and Bell Creek is a centrist Q4 and fiscal year 2022 earnings conference call I will now introduce Meredith Byrnes, Vice President of Investor Relations and sustainability. Please go ahead.
Thank you bye snobby and thank you everyone for joining US today, we decided to host this earnings follow up what webcast in light of the increased investor focus on macroeconomic uncertainty as well as the fact that our annual Investor day will be in September which was 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 Israel information in these documents and we appreciate the time that you have dedicated to understanding our results our commentary on our outlook. This live Q&A session in the last 45 minutes to an hour and we will answer both pre submitted and live question 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 do you 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.
Great. Thanks, a lot Meredith and let me add.
So our thanks to those who have joined the webcast today before.
Before we take your questions I just want to highlight a few salient points when the information released yesterday.
In this fiscal year that just ended June 30th suppressed 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.
19% in the fourth quarter.
Our value creation trajectory is clear and our upload and print businesses and national Penn and build a sign in <unk>.
And you'll see strong results across each of those businesses, but it's worth highlighting that our upload and 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 two 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. It's a very strong results there.
In our largest business Vista revenue growth wasn't as strong as many of our other businesses. The 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 is 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. This is now nearly complete with the migration to our new Tech stack, which is launched in all but one small market.
That effort is required at almost three year dedication of almost all of this is 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 and data analytics and analytics and personalization and an accelerated new product introduction.
With our foundational investments in place the Vista team now has a clear focus on demonstrating that Vista transformation can now 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 thats baked into our cost structure as we head into this next fiscal year, but also to further prioritize our focus on areas with near in financial returns, we've been proactive to reduce cost in parts, it's impressed as well with.
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 is denominated in euro 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 share at a range of estimated steady state free cash flow, which shows a decrease from our pre pandemic high due to vistas financial results and in particular, the impact of cost inflation and also product mix changes, which is partially 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 Im not going to go.
Through all of that here, but in summary, we see <unk> as being competitively advantaged and able to continue to grow profitably for years to come and 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 'twenty, two which was 5% and on the profit side, we expect.
That the shape of business profitability improvement will start to be visible in FY 2023 and that over the next several years. This the segment EBITDA and Unlevered free cash flow can return to historical highs with that Meredith, let's open it up for questions. Thanks, John and as a reminder, you can submit questions. During the webcast via the ask a question box at the top.
Right of the screen so what we're going to take our first question, which was pre submitted yesterday. Thank you by the way for pre submitted questions. We got several so did you see a continued momentum in Europe within the segment in Q4 'twenty. Two as you did in Q3 22, any indications of softness in customer spending due to inflation <unk>.
Economic slow down in Europe or elsewhere.
So this is Robert speaking and first of all I want to join Meredith and Shawn and welcome everyone and thank you for joining.
The quick answer is that no we did not see softness in Europe .
<unk> has been doing very well if I break that down a vista the constant currency revenue growth in Europe in Q4 was in the teens. So that's a good result there.
Definitely improved over the first half of the year.
If you look at our consumer business.
Excluding our face masks, which will for understandable reasons down globally.
Indications and announcements are grew in Europe .
They did not in the U S. We can talk about that if need be.
The biggest business we have in Europe is in the upload.
Upload and print businesses and they had very strong growth, 47% combined organic constant currency growth. So we see Europe is doing very well.
Hey, and well stick with Europe with a live question that got submitted about the upload and print businesses for a second are drivers of the strong growth behind the upload and print businesses. You mentioned in the letter that you had a record customer and and it is true that in the two businesses largest isn't there was this driven by new product changes.
And the sales team or simply macro and more importantly, how sustainable is this growth.
What I would say that the team two or three years ago. If you go back we did some significant restructuring of how we went through upload and print you may recall that we.
We took out a middle layer of leadership.
Leadership and.
To really push the team to the frontline and focus on execution that has been extremely successful it was.
Paramount to our ability to get through the pandemic and rather quickly I think the long short answer it well it could be a longer answer is we.
We continue to invest in those.
Those businesses through the pandemic when a lot of other companies hold back.
The momentum of the teams that we set up in the structure of the teams we set up two or three years ago has really.
It started to become a self.
Feeding momentum.
We definitely see.
Smaller online players and especially offline traditional printers being very stressed in the org in the current environment. Our that includes supply chain stresses in terms of paper supply in gas and other energy prices shipping costs. So.
We are advantaged because of the centralized global procurement capabilities the ability to shift our production around.
A large number of production sites in Europe , and so I think all those things came together to.
Take advantage of what our secular tailwind of this entire market shifting from an on line I'm sorry for an offline model to an online model, but importantly from traditional means of production, which our job shop batch based production towards mass customization and that.
Combination of online and mass customization is what's been driving our European business great. Thank you Robert Alright, So we're going to move over to the U S. Right now in particular in desktop.
Scribed in more detail what led you get margin on U S growth within desktop.
For example, they have $4 million decline in consumer product sale.
There are really two areas that I would say.
Disproportional in the U S. The first one is consumer product sales in the second one is the impact of face masks.
Each of those was 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.
Just add that.
In terms of small business product revenue.
In the U S that was a that was stronger we.
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.
Great. Thank you.
Next question, what led to your decision to exit your businesses in China and Japan.
I think in summary, its focus and capital allocation now if you go click into each one of those.
We have.
Attempted for well over a decade and both of those markets to go into what are obviously enormous markets.
And if you look at the opportunity there.
Uh-huh hypothetically.
Hypothetically if theoretically there's a very large opportunity and we see competitors in both markets doing very well, we also see our China team.
Developing a business model that is very innovative teams, we we really respect and.
Like the teams there, but we really feel and felt that we needed to focus on.
Turning around Vista.
And.
<unk> momentum in our core other businesses in Europe , Australia, and the U S. We do have two smaller businesses in Brazil, and India. Those are both growing very fast and either at profitability or about to get to profitability.
We ended up making those tough decisions in terms of capital allocation, we've mentioned in the letter or Sean.
Has spoken about different times a week.
Although we don't change what we consider our WAC or our hurdle rates.
To month quarter to quarter, even year to year there is a.
Implied hurdle rate of what we need to do given the opportunities for capital investment, whether it's organically in the upload and print businesses, our Vista, our national pen or importantly, places like share buybacks and debt repurchases, which we have not done and we can talk more about that I'll defer to you Sean on that.
In light of all of those capital allocation opportunities. We just felt that we should stop.
Stop the spend and stop the investment in China and Japan.
Robert and we did just get a question asking about the size of the revenue that we're foregoing in those two markets.
Yes.
It's small.
It's I would call it relatively immaterial to consolidated revenue.
In the sort of $10 million $10 million range roughly.
So it's not great.
Great. Thank you, but just to be very clear.
The negative EBITDA and negative cash flow.
It will cease.
In both markets great. Thank you all right, we're going to we're going to shift to a couple of questions around our outlook.
So first off from a margin perspective, and invest that 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 are two to three years from now compare to the margin profile pre pandemic low twenties.
Yes, we didn't talk about margin for Vista guidance or for for any of our businesses we did add.
More commentary than we have in the past and so hopefully people find that helpful. We suddenly in the letter that we expected in FY 'twenty three that business' profitability improvement.
We will start to be visible and then over the next several years that we could reach historical highs.
So that's not that's not margin outlook, but we do expect margins to expand and that's required expand over that several year period and thats 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 and gross margin and 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 it design and digital and some of our other offerings impact on <unk>.
Mix and so we're really focused on absolute profit and that's why the commentary was focused around around that as well.
Great. Thank you.
Then.
Do you think I E.
<unk> EBITDA margin expansion for Cinryze in FY 'twenty three is a reasonable expectation due to your focus on leveraging the significant investments made in FY 'twenty two as long as your efforts to combat inflation that reduce costs yeah, yeah, we didn't.
Again, we didn't provide a consolidated margin guidance, but we did give some indicators here so in in this.
Uh huh.
If you look at our guidance it does imply that margin expansion will be delayed there because we said that.
Organic constant currency revenue growth would accelerate but EBITDA growth would be slower and the reason for that is that we still have the annual nation of some of our incremental investments that we did in FY 'twenty two.
In particular those in the first half of the year that was the full year impact of but also the full year impact of cost inflation and then that'll be.
Theres still a question of how much of that would be offset by pricing and as we said we think there's opportunity there we need to we need to prove how much.
In our other businesses. We said we believe that there was an opportunity for some margin expansion and so you have to kind of put that altogether in terms of what you believe at the simplest level.
Of course, when it comes to margin there are other macro factors that will come into play like the extent of.
Any further cost inflation from where we are and our ability to offset that with price. So we'll have to of course manage that throughout the year.
Great. Thank you.
So you mentioned pricing, let's take on that one do you have confidence that you can raise prices didn't notice the segment without impacting demand how long do you think it will take to offset inflationary pressures through pricing.
I will say that there will be some impact demand potentially but we definitely believe that the net impact will be positive and there is there are pads, where we think we can actually grow demand in terms of absolute volume, but let me just answer that are kicked down a few levels to that and upload and print traditionally that's been a more.
It is a more of a commoditized market.
We're selling to graphic professionals, who can go on the internet and find supply anywhere they want and traditionally distance.
Competitive differentiation one of them has been doing.
Studio base.
Based self service design.
It's a customer that cost not a not a printing per se, but other graphic design effort.
So in upload and print which doesn't have that.
Pattern of buffer or that.
Design value to the.
The customer we have seen increasing volumes, while we've increased prices I think that is because like us competitors, both offline traditional and online competitors are all facing very severe cost input.
The inflation in input costs and the market pricing is going up.
More broadly I would say that.
Even before this inflationary environment.
The Vista strategy, we've laid out is to take that traditional strength in do it yourself designed the Vista has had the differentiated us for so many other competitors out there and really double down on that by if you look at Vista create 99 designs the investments, we're making in our customer service based <unk>.
Fine.
Those are really at the core of the elevation of the value proposition or the increase of the value proposition, we're giving to our customers in Vista that leads to an elevation of the brand and as we move away from a.
Brand known for deep discounting of business cards to the broader value proposition on.
On top of the fact that we see upload and print having the ability to grow volume, while increasing pricing, we think that value shift and doubling down in demand.
Can and will.
Help Vista.
Both raise prices, while preserving or we.
We would prefer growing volumes.
Thank you Robert.
Alright.
Have we seen any early benefits from launching the new Vista technology platform in the United States or I'll just add anywhere.
Well I'll talk about U S Bank and I agree with you. It's anywhere certainly applies to both I would say definitely first of all very recently in the last two to three months, we've seen that we've been able to rollout robust and dynamic pricing tests, which.
Rather than just rolling out our prices are sophisticated in the ability to.
Measure the elasticity of demand and we try to understand and we are able to understand product by product and country by country.
The net impact to the gross profit net of volume changes. So it's not just let's raise prices by X percent what's actually.
Recognize that different products have different elasticity curves and.
And work on that that type of sophistication simply did not exist in the model it.
In terms of product introductions.
We are seeing we are still early in the game because we're getting the final country off.
<unk>.
But we definitely see faster easier.
<unk> ability to improve products being enabled.
The API structure of the new model.
The new architecture compared to our monolithic traditional.
Platform I'll give you two or three very specific examples.
We have introduced.
A product called logo maker, you can see in the U S. UK and other sites. If you go into our search button to logo maker that was built entirely on the new platform.
<unk>.
If you go through that experience Youll see at the end of that experience, it's directly integrated to cross sell into print products and that type of handoff.
<unk>.
Greatly eased in the new Tech platform.
I'd say the other.
Another example is district create it's very early days, but we have if you go to Mr create for American sized posters.
Have a beta running where.
The.
Design, you do invest to create.
Move straight into the checkout flow on Vistaprint.
And we do that handoff from one to the other because of this API structure and finally, our wix partnership the speed at which we can integrate things like payments and subscription.
It is greatly increased so overall I'd say the platform is just coming live across the world and we are still learning to use it but I think it.
Is meeting our expectations of expanding the.
The bandwidth and increasing the velocity of us in terms of doing.
Constant product development that is.
Going hand in hand, with data driven experimentation to see the actual impact based on real customers.
Okay. Thanks.
So a quick follow up question on the results.
So a follow up excluding face masks and consumer product what was the growth invest in U S.
The growth was negative given the commentary of Europe , our teams in Canada, 20%, yes.
And in our commentary even in our documents, we said marginal growth. So it was positive it was just not not.
But it was there was still growth.
Despite despite that way, but the growth in other markets was much higher and like we said in our second and third largest markets.
20% or higher, but excluding based masks and consumer direct in the U S.
Got it yes it was.
Roughly roughly flat.
I'm, sorry that I got that.
The marginal growth, including those is higher than that without them right and so it would be kind of roughly mid single digits in Q4.
Alright.
Great. So we're going to move to.
<unk> a question about guidance on growth investments.
So organic growth investments at Vista, where $100 million Boston FY 'twenty Q, how much do you expect to invest in FY 'twenty three.
We didn't give specific guidance there, but yes so.
We didn't give specific guidance.
Other than to talk about kind of the trajectory of some of our profitability was 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.
Slow hiring and.
That's certainly continued and then we also had the recent cost reductions that we did as well.
And we've said that in FY 'twenty, three that we prioritize and prioritize 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 'twenty two investments as I mentioned before but I think this overall commentary around kind of increased hurdle rate for organic investment, especially incremental organic investments, but also the slowing the rate of hiring and then the actions that we took recently.
Hopefully you kind of set the scene for.
For the kind of the path of or the pace of investment as we look forward.
Okay, let's take some capital allocation question there've been quite a few that have come in so it will start out on a bond side. So can the company buy back bonds in the open market or are their bank covenants, preventing us and if you can buyback bonds given the current prices are well south 80 yesterday.
Why wouldn't it be a good use of cash, especially with the elevated level of cash on the balance sheet at spot X 22.
Yes, so we can buyback our bonds in the open market.
And just from a tactical perspective, we have the mechanisms established two to execute that if we decide to allocate capital there.
And we're not limited in terms of.
In terms of our debt covenants in terms of our ability to do that.
Just so everyone knows unlike if we were to do share repurchases there arent any pre purchase disclosure obligations. So we could go in and purchase those in the open market.
And we and we certainly understand the attractiveness there and also the math in terms of in terms of the returns.
Yes.
As is the case also with our share repurchases. This is it's an active consideration.
That were very regularly thinking about and.
And as ultimately a triangulation between our liquidity needs and especially in light of some increased macro uncertainty we bias there towards liquidity recently, but also thinking about our net leverage and then assessing relative returns.
We have these discussions with the board on a very regular basis, and we'll continue to do that and but we agree with from a returns perspective, both repurchasing our bonds or share repurchases at these levels. We believe are attractive returns okay.
Great.
Okay. Next question, you mentioned that the hurdle rate or incremental organic investment has increased as a result of the surety bond price depreciation what is that mean hurdle rate, yes, Robert mentioned, who this is not something that we.
We calculate month by month or kind of precise number changes. So there is no precise number to provide there in response to the question.
But yes, I think one we think it's critical that we continue to invest in our businesses and especially in Vista given the impact of.
The profitability there on our per share value and so we certainly have biased to continue to invest behind our businesses, but yes, as we consider whatever those investment levels are and especially any incremental investments we have to weigh that against returns on either bond our share repurchases as well and as I said.
And in response to the earlier question buying back our bonds right now is a very clear and Cashable return, we can see what the yield is and buying our shares.
A little bit more judgment, but they're as I said in my opening remarks, I think there is a very high return there as well as recent price levels. So.
Some of our.
I think some of our recent actions I think have been informed by this notion of a higher hurdle rate exiting long term investments for the reasons that Robert talked about before like.
Our businesses in Japan and in China.
I think are clear examples where we just can't we can't justify those long term investments right now relative to increased hurdle rates when we can allocate capital in our time and focus elsewhere.
Of course always factors like liquidity that we're always considering and so therefore options that will remain on the table and like I said before that's an active discussion that we have with the board on a regular basis.
Great Alright.
A question on organic growth investments organic growth investments has averaged about $150 million for the past eight years.
Seems more like a normal business expense and nonrecurring investment why should investors have confidence anchoring our estimate of intrinsic value on steady state free cash flow estimate when investment spend is so persistent what can you do over the coming years to improve confidence in steady state free cash flow estimate as a realistic answer anchor for intrinsic value.
Great. This is a great question. It was pre submitted so I did have a chance to think through this so I'm going to spend a few minutes here Robert Please chime in if there's anything you want to add as well.
I think Robert's letters over the years he has been quite quite candid about where we've had failures and so there's definitely a portion of the spend that's referenced over the last eight years that arent normal business expense. They were intended growth investments that failed.
And things like some of our early stage investments Robert's talked about that extensively in past letters.
<unk> of that but.
Yes, I think overall, though.
Whole notion of steady state free cash flow and understanding and kind of breaking apart the investments that aren't required for steady state free cash flow was a completely new concept for us eight years ago and so the ranges over time have narrowed quite a bit.
And I'm going to spend just a few minutes going through to try to answer your question, but really focused on our current investment levels to put in perspective.
But before I do that the question refers to nonrecurring expenses that I just want to be really clear about what we try and outlined in the letter which is not intended to be nonrecurring expenses.
Some growth investments like Capex or some third party costs could be nonrecurring in nature, but things that are people based costs are definitely recurring and unless we make a choice to to not have them recur and so that distinction there is I think important.
Were trying to outline.
The cost of the investments that are not needed to maintain a steady state free cash flow and thats, what we define in the letter.
Just to also put things in perspective, because we are talking about an eight year arc here.
And there is a question about are any of these or are these investments we outlined in fact growth investments.
We've and I recognize we've also had significant M&A that wasn't part of the question too, but our revenue over the last eight years has gone from $1 3 billion to $2 9 billion. Our adjusted free cash flow has gone from $72 million in FY 2014, eight years ago to I'll say $244 million.
Just prior to the pandemic, our unlevered free cash flow is up over that period more than that from 78 million to $317 million in FY 'twenty just prior to the pandemic and our adjusted EBITDA has grown quite a bit too and if you go back to kind of the start of that eight year period, which the company was still mostly Vista.
Our adjusted EBITDA for FY, 2014 was $181 million and just before the pandemic in FY 'twenty just for Vista. Our EBITDA was 362 million. So there is clearly been growth as well, but when you look at our our actual results and then also the statements that we make about what we think we can do next year in the next couple of years and then <unk>.
Look at our investments.
I think that the picture has gotten much clear, especially over the last few years and so I'm just going to kind of quick through that.
In our businesses outside of Vista, there's really on a relative basis, theres really not that much growth investment and revenue and profits are growing so take upload and prep for example, most of the <unk>.
Growth investment there is growth Capex and you can see their actual growth in revenue and segment EBITDA and I think one can pretty quickly conclude that that's that that's a reasonable amount and that those are in fact growth investments.
Take.
All other businesses segment.
A big part of the FY 'twenty two growth investments that's in there.
There is from our business in China, which Robert talked about earlier, we've made the decision to exit that exit will decrease our steady state free cash flow and so clearly that's not something needed to maintain our steady steady state free cash flow. So again I think you can conclude that is a reasonable estimate.
And then invested there is also some areas that I think are are equally clear if you take our 99 designs and Vista create investments that we've done post acquisition.
That's a significant piece of our overall investment.
There are two I think there's just not much judgment. There those are just now starting to be integrated into the vistaprint experience and so those investments are the that we outlined to the actual EBITDA or cash flow burn.
In those businesses that we've acquired and.
And those those are clearly growth investments.
Our advertising this is where you start to get into some more judgment. So from an advertising perspective, theres certainly judgment in understanding how much of that is needed to maintain our steady state.
But with the mid and upper funnel AD spend that we've that we've had in FY 'twenty, two and the nature of that.
The fact that that isn't intended to payback in year.
And the fact that we've only included just a small amount of our performance advertising and our growth investments that we outlined in the letter I think from my perspective that line is pretty clear as well.
And at least two areas one is our mass customization platform that's been a big one over the last eight years.
And I think Thats, certainly harder for an outsider to to judge.
But we've actually been moving more of that into maintenance, because it's becoming more integral in how we run our businesses and so youll see that that's actually shifted down in our FY 'twenty two numbers, even though our actual costs have gone up.
And we've had a significant increase in the usage of MCP services and also.
Things that enable.
In our business fulfillment, we referenced that in the letter.
Which is growing massively over the last three years, but also AIDS revenue growth and profit improvement and so we think that's a reasonable estimate that we've included for FY 'twenty two.
And then the other one that I think the hardest for you all to judge is the investment in Vista Opex that talent base, where we've added significant cost over the past few years either in terms of hiring new talent, which we have a very high level of confidence in and areas like user experience designer and product management, our data and analytics and brand and <unk>.
Even in our technology teams, which now as we can look beyond re platforming. Many of those teams can shift to building new capabilities and so we think that there is significant opportunity for these teams to unlock but we're really just getting started improving that and so the key questions really then or can vista.
Revenue and more importantly, our contribution profit at a level that justifies that growth investment and in particular that talent based investment and we've said in our forward looking commentary that we think in Vista, we can accelerate topline growth in that over the next several years, we can get back to historical levels of profitability and so that's what we must prove to all of you and when we did pull back.
Investment in 2019, and 2020, just before the pandemic, we did expose large increases in profitability and cash flow, which again is suggestive that these are in <unk>.
<unk> not needed to maintain steady state.
The pandemic and cost inflation has definitely had an impact on underlying profitability and cash flow in Vista, and that's reflected in our estimates as well and the re platforming effort.
As Robert outlined before is consumed a tremendous amount of organizational focus and resources, but now we're excited about where we can go from here and we're confident in that.
Okay. Thank you Sean.
Alright, so we're going to 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.
Mr. 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 and margin in that segment in the next 12 to 18 months.
I definitely believe that your question.
Contains the answer we are more comfortable with where we position the brand.
Pre pandemic, we pulled back because we felt one.
The.
The ROI on AD spend just wasn't making sense, we pulled that back. The other thing is the brand was very much.
Chuck in the deep discounted business card brand image, which limited the future upside of the business today, we have reversed a multi year decline in the gross profit per customer. If you look after 12 24 36 months of a customer's lifetime, how much gross profit that 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.
Simultaneously reduce discounts and reduced list prices to be more transparent to customers and with that.
The launch of a new platform with this.
To create with 99 designs, we feel now is the time to.
Turn to bringing in.
New customers.
Larger numbers than we have in the last 12 months 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.
We definitely see that in terms of how we look at margin expansion, Sean you might want to add.
Margins related to those advertising, we really look at it as an ROI perspective, if we are going to generate X dollars in cash.
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 of error or a near term free cash flow margin. The only thing I'd add to that is I think with the introduction of more mid and upper funnel spend which.
You'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 can kind of 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.
Advertising as a percentage of revenue for a full year, which is again, an indicator thereof will have moments, where a little bit more intense in moments, where it's less intense.
Which is just because of the changing mix of our spend.
Great.
So I'm going to throw a question out there that I think we're probably not going to answer 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 I believe in referring to.
<unk>.
Margin of our business.
Profit in FY 'twenty three.
Got it.
Visible means.
To appear I think.
Yes.
What we're trying to get across there is that.
There should not be an expectation based on the.
The commentary that we provided that we're entering into a large year of margin expansion and Vista.
As we still annualize the.
Increased investment levels that we had in FY 'twenty two and also the significant cost inflation that we've had and we've outlined that in our documents last few quarters.
And so to say visible really is that we are.
We are working towards the trajectory of both continued profitability improvement expansion.
<unk> expansion and the start of that should be visible as we progress throughout the year, but as we as we annualize the impacts of these other things that outlines.
That won't be visible to start so hopefully that's clear.
And.
Yes, I think I think.
I'll stop there.
It's about as specific as we can with great. Thank you.
Given the interest the increase in interest rates, especially in the U S. How do you expect this will impact underlying volume as new business centers will borrow.
Les turning back.
We have not we don't think thats, a very difficult thing for us to say, specifically I would say that in past.
Deep recessions or near to shutdowns, including the pandemic 2008 global financial crisis.
Small businesses.
Tend to come into the formation.
The amount of money, we're talking about here, our average customer buying something like a $100 year, Mr. Amit <unk>.
It's not something I think it is sensitive to a.
A rate swing.
Alright.
As a business or a.
Lower cost alternative to traditional graphic design and traditional printing.
So.
I'm sure.
Yeah.
You could run an economic model defined some impact on that but our spend is so small even within the budget of a small business. We don't we don't see that as something that we can.
Ascribe a specific impact too.
Yeah, the only thing I'd add to that is.
I think where we sit in sort of the the marketing staff for a small business.
Having a presence in having an identity and telling people what youre doing is is required in some way shape or form for a small business and as Robert as you just said.
I think what we presented.
The 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.
Okay.
Can you address the significant increase in inventory year over year on your balance sheet.
I'll take that.
No.
Inventories have increased quite a bit.
Almost across all of our businesses and some businesses more than others, but there is really it's really two things. One is there have been there has been constrained supply in some of our key inputs, including paper.
And so we have we have built up more inventory in those areas to make sure that we have stock.
And can we.
Can can withstand any any further disruption that may exist there.
So thats.
That's one and then I think the other one is just there's some some products, especially the promotional products area, which national Penn is more exposed to that.
We've had longer lead times, because many of those.
Raw materials are sourced from China, and so we've been more prudent there in acknowledging those longer lead times again to make sure that we have stock, especially as we look forward to the holiday season that they had in the December quarter and so.
I think the.
The cost of doing that relative to the cost of not having the supply. We think is the right trade off to make.
I think very prudently managed our working capital will continue to do that but here. We've been we've taken some of that risk off the table by building some some inventory okay.
Let me just also mentioned that this is inventory that is sort of high running products as paper.
Not a question of.
If we will use it it's just a matter of when and so thats another input to that decision, where it's easier to feel comfortable building some of that inventory and it's really just the cost of capital.
Type.
Cost as opposed to the risk of obsolescence.
Thank you.
<unk>.
For the aggregate organic.
To meet your hurdle rate loans Unlevered free cash flow has to grow considerably above the pre pandemic level.
Yes, 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 to the point that as referenced in the question.
To justify and have strong returns on all of our investment of course, we have to first get to what we outlined in the documents. So whats outlined in the document is not a kind of an end state that is our goal but as a.
At least the first point on that destination.
We've had a lot of questions.
Hi.
Share repurchases why are we doing share repurchases.
We've talked about that and the answers to other questions about our capital allocation one nuance around.
Around this topic the past few months have shown that share price depreciation can be starting and violent widening out requested authorization for share repurchases that you already should the right opportunity arise.
Yes, just so everyone knows we do not currently have a share repurchase authorization.
That is that is out there.
The quick answer is yes, we have.
We can move very quickly on that we have.
A five person board of which Robert is one of them and the chairman and within a couple of hours, we can get that authorization. If needed. This is an active conversation we have with the board and so.
We can move move very quickly there.
And just to be precise about it our disclosure obligation there is actually.
To disclose an authorization prior to actually repurchasing not to disclose when there is an authorization by the board just to be precise about it.
Yes.
<unk>.
We have another question just came in does the company anticipate the need to draw on the revolver in FY 'twenty three or 'twenty four.
So we don't anticipate.
It is.
There for a purpose.
It was ever needed in the future.
But now with $327 million on the balance sheet as we cross the end of the year between cash and marketable securities. We we don't see a need to do that.
And but it is available to us that the $250 million revolver. There are there is a first lien covenant that would kick in if we had a balance outstanding on that revolver.
As we crossed a quarter and we are just just.
Just so people know we are below that first lien covenant right now and so we could do that.
But now we don't have any plans to use it.
Okay.
The big increase in accounts payable in Q4 does this reversed in FY 'twenty jewelry, and how should we think about working capital overall for FY 'twenty three.
There was definitely some favorability in Q4, you can see that in our results from working capital.
Had a combination of things to the prior question around inventory inventories built so thats unfavorable.
But there was large increases in accounts payable.
And that will fluctuate overtime some of that favorability will settle and we don't provide any specific forecast around working capital.
But yes that accounts payable I would expect to unwind some in over the course of FY 'twenty three and then.
And then also from an inventory perspective, depending on.
The need for us to continue to maintain inventories at the current levels, which are well above historical levels.
That can unwind as well if you look at.
Our steady state free cash flow analysis in our annual letter.
We do actually make an adjustment there for working capital because that was that was quite favorable.
In FY 'twenty, two and we would not expect that that same level to repeat in FY 'twenty three.
Okay.
One more question.
Which is asking for guidance that we're probably not going to get.
You mentioned that you expect to Delever over the next year would you be able to quantify how much higher levered free cash flow can be.
Okay.
We're not going to provide that guidance.
Alright.
And you work for 10 minutes away from nine o'clock with diabetes that where our target time, I'm going to turn things over to Robert <unk>.
Some parting words.
<unk>.
Okay great.
Well first of all let me step way back and.
Look at this.
Market opportunity the Tam we have.
And how we look at this and so there have been two key drivers that we've been aware of it we exploited for a very long time, that's been mass customization rather than traditional print economics.
And the shift from offline to E Commerce online.
And.
At the highest level.
We very much believe that those.
Trends are accelerating and we think it's a great market with a lot of runway in front of it.
You can see in the results here.
The real question, obviously comes down to what's the future of Vista.
And why are we investing so much to turn Vista around.
I'll go back to what built Mr which what.
It was what <unk> originally and from a period of approximately 2000 to approximately 2015.
We at Vistaprint at the time had an incredible combination of that shift online and to mass customization, but very specifically there are other attributes of that model.
We.
Really tightly constrained the number of products, we offer to customers. So we'd have one Penn two different types of business cards to different size of postcards, but very limited amounts. So that we could do production operations that were.
Very very standardized in ultra high volume and so the.
Graphic design elements could be very simplified because they werent very complex.
We also found that using advertising of our high prices with deeply discounted and often in the early days free products.
Drove incredible response often.
All right.
I would say, creating demand from that type of offer and as a product, we and we intentionally positioned ourselves not as bad quality, but at the lower end of the quality of the.
The effect from the market and finally, we became very very adept at cross selling in the experienced one designed format one format to another through design and operation to be able to put all of those into a single box save a lot of shipping and sell $30 $50 orders with multiple products.
That was frankly is.
Incredible business model, where we make a lot of money.
But if you look what happened.
We started seeing this in the 2000.
Five a little bit about certainly by 2010 other business models came in around that we've certainly seen an upload and print which did not.
Go for people, who didn't understand graphic design like Vista, but went to professional graphic designers, who wanted to buy online.
And still leverage the mass customization economics.
Areas of logo apparel and logos on promotional products, we have at so impressed with national Penn, but also we see this with.
Vista's promotional products and there is competitors in the industry because the graphic design is relatively simple you just put a logo on something that was a product which also quickly became online.
So.
<unk> was this very vistaprint was is very profitable.
Disruptive business that came into.
A massive market 20 years ago, and built an incredible kind of counter offer to all the traditional assumptions of that market.
But we do believe and we still believe that you can see that in our growth.
Five six years ago, we had run that course, and we fundamentally believe that going back to that shift.
Online and shift to mass customization is driving into the very core of this enormous tam so into packaging into signage into.
Apparel products, which were never before moving online and that's why we see the growth that we do in the other parts of <unk>.
Simply put our Vista, we need to elevate and we are very successfully moving vista out of that deep discount lower quality products of very limited selection to the design and marketing.
Marketing partner for small businesses.
And one click down from that is we believe that we can build a simply best in the world.
Integrated smooth flowing series of design capabilities, ranging from things you see like in Vista create we have.
Tens of thousands of.
Freelance designers, creating templates.
Strong algorithmically driven modifications to those templates.
What we were doing in Vistaprint traditionally through the design assistance, we give with live customer care in browsers through 99 designs, where you can get cut.
Custom bespoke graphic design from freelancers, who once again, our tens of thousands of freelancers typically in low cost locations around the world.
That gives the customers who don't have either the graphic design skills of upload and print customers or don't want to pay for that and traditional prices the opportunity to also drive into the heart of that market.
No.
We recognize that.
Turning around Vista is really critical these are discretionary investments.
Until we got off our old monolithic technology stack, we couldn't capitalize on those but we're pouring those investments into the business. We've said many times fiscal 'twenty three is a year of focused execution.
If we do not progress as we expect we have the ability to reduce investments and generate significantly higher margins underneath this business is a very profitable business, but it will be worth a lot more if and when we can drive into that core market like we are in our upload and print businesses by adding the whole design and service capabilities, but.
<unk> increasing.
Our capabilities and deep data analytics.
Product development.
User experience by and we fundamentally believe that the huge opportunity. We believe in that strategy. We said many times a Y and we look forward to talking about that in more detail in September but again.
The success of this elsewhere.
Elsewhere demonstrates the opportunity of these shifts.
We can't say for sure what the future looks like but we have in the past shown our ability to pull down investments most recently in the pandemic.
When need be to expose the underlying cash flow capabilities of the business.
Yeah.
We're moving forward as FY 'twenty three because we are feel that we have never been better positioned including at Vista in terms of technology people products and our strategy to give much greater value to the customer in a way that's not done anywhere else and that will we believe translate to value to shareholders.
So thank you again for listening. Thank you for your time reading the documents, we put out last night and we look forward to the September .
Investor day, which will be having so it's not that far off in the future.
Alright, and thank you mentioned today, we can now end the call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Goodbye.
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