Cimpress plc Q3 2023 Earnings Call
Speaker 1: Is.
Speaker 2: Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Sempre's third quarter fiscal year 2023 earnings call. I will introduce Meredith Burns, vice president of investor relations and sustainability.
Speaker 3: With us today are Robert Keane, founder, chairman, and chief executive officer, and Sean Quinn, EDB 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 understand 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. And as always, remember to work hard to Base special debt up to $60 a month without having to pay too blind accounts kg and your credit card fraud
Speaker 3: You can submit questions live via the questions and answers box at the bottom left of your screen. Before we start, I'll note that in this session we will make statements about the future. Our actual results may differ materially from these statements due to risk factors that are outlined in detail in our SEC filings and the documents we published yesterday on our website.
Speaker 3: We have also published non-GAAP reconciliations for our financial results and our outlook on our IR website. We invite you to read them. Now I will turn things over to Sean for some brief remarks before we take questions.
Speaker 4: Thanks a lot, Meredith, and thanks to 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.
Speaker 4: 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 off-back 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.
Speaker 4: in our March 24th 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.
Speaker 4: From a revenue perspective, we're at the high end of our guidance range, which was 16% consolidated organic constant currency revenue growth, in part from year-over-year pricing improvements and also accompanying a weaker period in January and February last year.
Speaker 4: We continue to see strong performance in our upload of print businesses and invest the currency revenue growth accelerated to 16% as well.
Speaker 4: This 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, for marketing materials, for signage, and for packaging.
Speaker 4: New customer count and new customer bookings in 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 pass the anniversary of the migration of our US site onto the new technology platform, which was in February of last year, but growth was equally strong in North America and Europe .
Speaker 4: 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 to strong growth in gross profit as well. As we said during the investor call on March 24th, we're seeing input costs stabilized with opportunities for reduction.
Speaker 4: we look to the coming fiscal year. From a profitability perspective Q3 adjusted EBT more than doubled every year and finished above the guidance range that we provided in March.
Speaker 4: That 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.
Speaker 4: as well as some differences in spend levels during the last quarter's holiday peak. That all combined to drive a much lower outflow for adjusted free cash flow compared to recent years in Q3.
Speaker 4: 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.
Speaker 4: Net leverage was 4.83 times our 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 benefit of a portion of our cost reduction action.
Speaker 4: 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 EBT guidance to 90 million to 94 million. We expect that to come with seasonally strong free cash flow conversion as well.
Speaker 4: Inclusive of this guidance and also the higher reported Q3 results are expectation for fiscal 2023 adjusted EBITDA is now 316 million to 320 million.
Speaker 4: We remain on track to reduce that leverage to below four and a half times trailing 12 month EBT is defined by our credit facility by the end of next year fiscal 2024. Sorry by the end of this fiscal year. So next quarter June quarter.
Speaker 4: Moving to our thoughts on Fiscal 24, we remain confident in our ability to achieve at least $400 million in adjusted EBITDA and Fiscal 24. Our Q3 results and the raised Q4 guidance further support that. The cost reduction actions that we've taken will yield about $100 million in annualized savings as we outlined in detail last month.
Speaker 4: We expect to see about 15 million to 17 million of year-over-year savings in Q4 and then the remainder 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 pre-cash flow.
Speaker 4: of approximately 40%, bringing net leverage to be below three and a half times by the end of next fiscal year.
Speaker 4: As discussed on our March 24th call, given the extent of cost reductions we put in place,
Speaker 4: Achieving at least $400 million in adjusted EBITDA requires relatively modest revenue growth next year and the associated contribution flow through.
Speaker 4: We have not provided revenue guidance for FY24 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.
Speaker 4: 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.
Speaker 4: 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.
Speaker 3: Sounds good, thanks Sean. So as a reminder, you can submit questions during this webcast via the questions and answer box at the bottom left of the screen. We did receive a significant number of pre-submitted questions as well. And so I will ask those questions now. There were some overlaps, so I'll make sure that we touch on the topics that are on everybody's minds. And we'll get you as many as we can over the course of the next 45 minutes or so.
Speaker 3: So the first question, I'm going to do a pre-submitted question and we got this a couple times from different folks, which is basically what changed from the March Investor Update where Q3EBIT.com came in much better than the guidance of 60 to 62 million. Sean, why don't you take that one?
Speaker 4: Yeah, sure. Yeah, I mean, there's really two, two main things. The one that quarter finished strong. So that's, that was the main driver. Also, we had, 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 that, how those actions and when those actions were finalized. I mean, in general, we have, we have very good visibility to the top half of our P&L.
Speaker 4: on a daily, on a weekly basis. The full EV set of customers 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 24th was based on two months of actual was one month of forecast. We ended up better than that forecast.
Speaker 4: 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 EBT guidance for Q4, as you saw in the release last night.
Speaker 3: 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? Why cash and cash equivalents were so much higher than the 135 to 145 million guidance given that investor day toward the end of the quarter? Was there any kind of working capital pulled forward from Q4 of FY23 and a related question working capital with a positive instead of less of an asset?
Speaker 4: 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. Because of that, frankly, we had to take a little bit more of a conservative stance in that guidance. That's not guidance we would typically give. There was a lot of focus on that and we wanted to be clear about.
Speaker 4: at least where we expected to land. We of course came in well ahead of that, which is good news. 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.
Speaker 4: In terms of the kind of poll for question, for Q4,
Speaker 4: We do expect to see seasonal strength in terms of the conversion of our EBITDA to cashflow. 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.
Speaker 3: Great, thank you, Sean. I'm going to hand the next couple questions over to Robert. Robert, first, Bill the sign growth has recently moderated. What is driving that moderation?
Speaker 5: Well, let me before entering the specifics of the question, step back and provide a summary perspective.
Speaker 5: I don't have the exact numbers on hand, but broadly speaking, if you look at the revenues of Buildifying Today relative to.
Speaker 5: their revenues prior to the pandemic. This business has grown roughly in line with what you've seen SimPress do over that multi-year period. But Build Design has taken a different path.
Speaker 5: And to get into that type of, that path specifically, you'll recall that during the pandemic, we performed very well at Build Assign. 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. But...
Speaker 5: It's still a strong segment. We still see it growing over time, but we accelerated some of that revenue.
Speaker 5: On the other hand, signage and enterprise accounts have generally performed well after the pandemic. So...
Speaker 5: 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
Speaker 5: The home decor products that spike during the pandemic have normalized to lower levels and that's
Speaker 5: pushing down our growth rate of build design, signage products, and enterprise accounts are growing strongly. And so it's been a little noisy in the last several quarters and years, but build design remains a great business with a really strong leadership team. And we're very confident in their ability to grow both revenues and profit into the future. Great. Thank you, Robert. And a question on VISTA for you.
Speaker 3: In the mid-year update Florian mentioned that there would be a refocusing of this attention on vista print comm What does this mean for the Vista portfolio? This apparent vista create 99 designs and also the concept of print versus digital Maybe I'll stop that step back again and say
Speaker 5: We retain VISTAs, 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...
Speaker 5: We will move towards that long-term vision, as we've talked about already in the past. The difference that Florian was alluding to is a decision to progressively integrate the VISTA-create experience and the 99-design experience and other future additional experiences directly into the VISTA-print.
Speaker 5: user experience. In other words, on the VistaPrint site itself as opposed to an adjacent site.
And that will bring these expanded design capabilities or digital capabilities.
And the standalone experiences of Vista Create and 99 designs will continue to exist as separate URLs. We're not taking those down. But the development of the system is a very important part of the development of the system. And we're really excited about the development of the system and the development of the system. And we're really excited about the development of the system and the development of the system
is really being focused to bring the integration into Vista, which has always been the long-term objective. Over time, I believe the broadening of Vista Print user experience towards these areas of design and digital will help fulfill that North Star, where we speak of that North Star as Vista being that broader value proposition.
So it's really a change in path of how to get there to leverage the large number of customers we already have, but it's not a change in the destination.
Thanks, Robert. Sean, I think I'll hand this one over to you. This one is on Margin's at VISTA. Is the Margin Recovery at VISTA tracking inline ahead or behind your expectations? Please elaborate.
It really depends on when that expectation was set. If we go back to what we expected at the beginning of the year, I'd say we're all day on track, maybe slightly ahead. We talked a little bit about that in investor day in September , about the shape of margins throughout the year, that we were still going to be laughing some of these things. The first half of the year, that was going to put pressure on margins, and then we would start to see...
expansion in the second half of the year. But it's accelerating now beyond our expectations in large part because of the cost reductions that we've taken action on. But I think relative to the most, our most recent plans over the recent months, we're definitely on track and maybe a little bit ahead.
If you just step through the main sections of the P&L.
Gross margins in Q3 were flat year every year in VISTA. And that becomes a really, really important piece of the margin picture that was in place in the first half of the year or in the second half of last year.
So gross margins being flat year over year with in Q3 that acceleration and growth starts to set up for the ability to really pretty strongly expand margins. And then over the last year, we've also we've also had a bit more intensity and advertising and it wasn't expected that we.
flatten out, but now we're starting to bring that down, given the cost reductions that we put in place as well.
I think the maybe just the last thing to say is you know I think from a Meredith you have a another question you actually want to answer ask the next question and then I'll yeah I was just gonna I was gonna hop on a live question in here for you so new customer count and bookings and Vista have now grown for two consecutive quarters can you speak to what's driving this and how sustainable do you think this track
new customer acquisition and finding economic ways to do that and do that at scale.
So I think this is very positive to see over the last two quarters. And we had been seeing that new customer bookings were growing nicely in quarters before that, but now to have new customer account and bookings both growing strongly and very positive. I think that that is in terms of what's driving that, like I said,
our imitation there with positive results. I do think that that trend is sustainable. We have some benefit in Q3 of some of the software comp, but I do think that trend is sustainable and it's a clear focus of ours as we go into next fiscal year.
Thanks, Sean. We're going to stick with VISTA marketing for a moment and go into guidance territory here. We've got several questions from folks asking us about the level of marketing spend as a percentage of revenue in Q3, 14.5% of revenue, whether that's a new run rate.
What what this is it going to look like going forward could it decrease further is it going to increase again? lots of questions and On this topic as you can imagine Yeah, we made a few comments on this in the release for Vista
Ad spend as a percentage of revenue should not be expected to be a constant every quarter. There will be fluctuations. Those fluctuations will be driven by the intensity of mid and upper funnel campaigns, especially as we continue to experiment with next.
Be the right decision based on the returns on the spend that that we have in the portfolio today. I think on an annual basis'll actually have advertising spend as a percentage of revenue. That's likely to be slightly higher than the 14 and a half percent that we had in Q3, but we'll still have leverage there. I mentioned this in the question: margin margin expansion. We'll still have leverage there relative to the last year or so.
And like I said, you'll see that in Q4 as well.
In Q4 last year, we were starting to do more experimentation from a mid and upper funnel spend perspective. We were spending against some of the new properties that we had acquired. And so, like I said, we'll see some pretty sizable leverage there in Q4. I think the commentary that we had provided back in our September of yesterday was that....
We'd likely be at approximately 17% of revenue on an annual basis with some fluctuations on a quarterly basis over the next few years. And that's significantly lower than we've been in some of our past history in fiscal 18. And before that, we were roughly 22% higher. I think we're actually now, we'll track below that.
opportunity to continue to experiment with mix and continue to push efficiency even in Q3. We saw some great wins there and we'll continue to be focused there as we get into next fiscal year as well.
Great. Thanks, Sean. Quick question. Where is Pringy on its profitability journey? Well, I'll take this one. Getting close from a profitability perspective, growth has been strong there. I think even more importantly than that, the gross margins there have improved.
quite meaningfully over the last two years to now where the P&L structure supports that path to profitability and with growth and profitability beyond that as that business scales.
Brazil is a huge market. Princhy is the clear leader in that market. And we're basically, we're taking what's winning elsewhere around SimPress and understanding the relevance of that to the Brazilian market and then helping the team to roll those things out.
We've made great progress here in the last two years and the pace of expanding product selection is increasing. So there's good momentum in that business.
All right, I'm going to go to a topic area where we've had pre-submitted questions but also a couple of live questions as well. Really looking to understand the growth rate this quarter and what's coming from price, what's coming from volume, what's coming from the weaker comp. Several questions in that area.
Yeah, this is a, I'll do my best to give an overview here, recognizing that we do have a portfolio of businesses, each of them experiencing some different things, product categories, experience, and different things, and also the timing of when we've done price increases has been different by...
you know, kind of business by business. So I won't go through the exact breakdown, but just to paint the picture, and for this quarter of the 16% growth, roughly about a third of that is price, and about two thirds of that is the combination of both volume and product mix shift, you know, in promotional products, for example, your AOVs there.
are higher than our average. And so with the growth there, that helps also. You know, I would say and part of that from a volume perspective, we're helped a little bit in Q3 in Vista just as we as we left the US site launch last year.
and also some of the pandemic related impacts. In upload and print, again, different by business, different by category, but it's ranged roughly about half of the growth from price, about half from volume, and that amount from price will come down in the next couple of quarters as we lap the pricing changes that we put in.
place over the last year. I think one of the other important things, and I think I mentioned this briefly earlier
New customer activity has been strong, investor, we just talked about that, but also in our upload of print businesses in Q3, but also in the quarters prior to that. As those cohorts build, I think that also supports future growth as well. So that's been another important element to how growth has been driven over the recent quarters, including in Q3.
customer activity has been strong, investor, we just talked about that, but also in our upload of print businesses in Q3, but also in the quarters prior to that. And so as those cohorts build, I think that also supports future growth as well. So that's been another important element to how growth has been driven over the recent quarters, including in Q3. Great. Thank you.
All right, I'm going to throw this next question to Robert. Robert, have the layoffs been finalized, or are they still ongoing? And what are we doing to keep team morale high? To your first question, the layoffs have been finalized. We completed them in March and April . And they are fully complete other than.
some processes which are required by employment law in certain countries but substantially complete.
which are required by employment law in certain countries, but substantially complete. On your question
It has been doing, doing communication and all levels of the organization, but being sure to combine two very important messages and two very important sets of facts.
First, we are treating departing employees with respect, with financial fairness, and with heartfelt appreciation for the contributions they've provided to the business in the past, and reiterating these changes are not a reflection on their talent. And that's a very important human...
message which I think has gone over well. Secondly, we've stressed how these changes will make us a better company. Of course, financially stronger, but...
In addition to that, we've positioned ourselves to improve our velocity in terms of improving customer value, and that we've done that by reducing management layers, by clarifying areas of accountability, by narrowing and improving our focus, by empowering our product development teams, and by combining teams that were working on similar activities.
So the combination of that human to human respect and fairness combined with the business logic of this.
I think has helped a lot and no restructuring is easy, but given that the team morale is relatively good. And I think we've certainly come through the most difficult part of that because those two messages have landed quite well.
Thank you, Robert. All right. I'm going to go to a quick housekeeping issue from a balanced sheet perspective on question. Is the increase in accrued expenses mostly tied to restructuring expenses that were incurred but have yet to be paid out? If so, are we correct that those will likely reverse in the next three-ish months as indicated in the next session?
mostly be paid out in Q4. And then the other driver is in terms of the increases, just a crude interest, which was about 10 and a half million of increase because we pay the interest on our high yield notes semi-annually, that next payment will happen in June . Great.
Okay, let's shift gears and go into a bunch of questions on our outlook. All right, so first one, gross profit margin declined, although the rate declined significantly. Is inflation more or less topped out at this point? Do you see a need for further price increases in the future to offset inflationary pressures?
On a consolidated basis, gross margins, they're basically flat year over year, they're down 30 basis points.
gross margins where they're basically flat year over year, they're down 30 basis points.
It's always we can never definitively say that inflation is topped out, but things have certainly stabilized and in some areas Costs are coming down. We've seen improvements in things like inbound freight In energy some of the underlying costs for materials like plastics aluminum Inputs like paper started to improve as well
So that's all headed in the right direction based on everything that we see. It's a big area of focus for us to make sure that our costs are coming down, as underlying commodities are coming down, that maybe that will be a big area of focus.
In terms of when that will impact the P&L, there's a little bit of a lag there just because that's caught up in our inventory. It'll take a couple of months for that to come through. But as we get into FY24, we'll see more material impact from the re-outline and some of that in our March 24 call.
which was a range of 18 to 19 million of cost reductions. That included some compensation savings, but most of that being from these reductions in input costs based on what we knew at that time, based on discussions or actual contracts with suppliers. In terms of price changes, we'll be anniversarying most of those by the end of this year.
In this state, that extends a little bit into next year as well in the first quarter, based on the time of those.
And then from here, I think, we expect all of our businesses to continue to test price elasticity and do that on an ongoing basis and make optimizations up or down based on impact to customer behavior. So we'll, I think, subject to any large shift in inflation that's unforeseen right now, we would be kind of back into normal operating mode as we get into FY24. For more information, visit www.fema.gov
Thanks. So we had a live question come in around how April is looking, Sean, how are constant currency sales looking this month?
to 94 million. And so hopefully that says something about what we're seeing in April , but also the strong finish to March, which is indicative in the fact that we beat our Q3 guidance as well, having given that guidance pretty late into the quarter. And that is the answer. Okay. Now it's surely more so.
So trends remain strong. Great. So the next question that we're going to take is, could you please tell us your expectation for Q4 FY23 free cash flow and or expected gross cash position at the end of the year?
On this one, we're not going to give specific guidance for free cash flow in Q4 or in any cash position. What we said in the release is that we do expect the higher year-over-year adjusted EBT and Q4 to have seasonally strong conversion to adjusted free cash flow. And that's even with our cash restructuring charges that will be paid out. If you look back at the last...
two or three years, for example, and just look at the patterns in Q4, working capital in Q4 has been a material inflow. And so we again expect to see strong cash flow conversion on EBITDA in Q4, but we're not giving specific guidance on that nor are any cash positions. Great. Thank you. Okay. Great.