Sean E. Quinn - Cimpress NV Robert S. Keane - Cimpress NV Meredith Burns - Cimpress NV.

Youssef Squali - SunTrust Robinson Humphrey Victor Anthony - Aegis Capital Corp. Kevin Mark Steinke - Barrington Research Associates, Inc. Naved Khan - SunTrust Robinson Humphrey, Inc..

Ladies and gentlemen, welcome to the Cimpress Fiscal Year 2018 First Quarter Q&A Earnings Conference Call. My name is Christy, and I will be your operator for today. This call is being hosted by Robert Keane, President and CEO; and Sean Quinn, Executive Vice President and CFO.

As noted in the Safe Harbor statement at the beginning of the earnings presentation, comments may include forward-looking statements, including statements regarding revenue and earnings guidance, and actual results may differ materially.

Risks that could impact these statements are described in the documents that are periodically filed with the Securities and Exchange Commission. We turn now to Mr. Sean Quinn for opening remarks..

Great. Thanks a lot, Christy. Hello, everyone, and thanks for joining us this morning. Before we take your questions, I'd like to make just a few brief comments about our results and other news announced yesterday. First of all, we had a solid start to the new fiscal year. Our consolidated constant currency organic revenue growth was 12%.

And our profitability and unlevered free cash flow increased in line with our expectations.

Our newly decentralized operating structure is showing the intended benefits we discussed in January, including tightened coordination between marketing and manufacturing teams, the reduction of complexity and cost, and an enhanced ability to evaluate performance and assess returns.

In the earnings release issued yesterday evening, we announced that Vistaprint has made a difficult but appropriate decision to reorganize its business. You can see from Vistaprint's quarterly results that we are taking this action because we see challenges with revenue.

Vistaprint's customer metrics continue to be strong including our highest repeat rate since 2012. This reorganization is in part a follow-on from last January's decentralization action which enabled each of our businesses to operate holistically and better understand the full set of resources and cost in their business.

Vistaprint took on nearly 3,000 team members as part of that decentralization and has now had time to assess the entirety of the new organization.

The Vistaprint leadership team felt there was an opportunity to improve the way that they are operating and to streamline the organization to best deliver on their strategy and also deliver for their customers. Additionally, we believe these changes will assist Vistaprint in achieving the desired turns on our recent investments.

We expect to implement this restructuring in the second quarter. Our current estimate, as we outlined last night, for the restructuring charge is $15 million to $17 million and our estimate for fiscal year 2018 savings is $20 million to $22 million.

Some of our planned actions will be subject to consultations with employees, works councils and other government authorities.

As mentioned in the materials released last night, we do expect the annualized run rate savings to be less than what would be implied by simply extrapolating this fiscal 2018 range to a full year, because we're likely to reinvest the minority portion of the savings in other areas of Vistaprint in fiscal year 2019.

However, we do expect the fiscal year 2019 savings to be higher than the estimated range we gave for partial year fiscal 2018 savings. We'll provide additional information with our second quarter earnings announcement after the restructuring is implemented. And just a few other updates.

On August 31, we completed the divestiture of our Albumprinter business, in line with our previously disclosed expectations. Other than slightly higher proceeds due to a strengthening euro, the accounting for the sale resulted in a significant non-operational gain that you'll see in our GAAP income statement for the quarter.

Our leverage ratio at the end of September was 3.39 times trailing 12-month EBITDA.

We paid down about $58 million of debt during the first quarter, and we continue on our path to de-lever back to about 3 times trailing 12-month EBITDA by the end of next quarter through a combination of debt repayment and EBITDA expansion, despite repurchasing 41 million of our shares in the first quarter at an average price just below $90.

And with that, we'd like to turn it over to your questions..

Our first question is from the line of Youssef Squali of SunTrust. Your line is open..

Yes. Thank you very much, and good morning. Couple questions. Maybe starting with Robert.

Robert, can you just help us understand what functions are exactly being reorganized this time around? And do you see the need for any additional reworks in any of the other segments, Upload and Print or in National Pen? And then, Sean, can you quantify the contribution from Albumprinter in the quarter? And, lastly, that $4 million inter-segment elimination in the quarter, is that mostly related to the VBU unit, or is that evenly split between the different segments? We're just trying to get to a clean net revenue growth for VBU.

Thank you..

Okay. Good morning, Youssef. As to your first question, the restructuring we're talking about here is concentrated really exclusively in Vistaprint. So we don't have others that we foresee anywhere near this magnitude in any of the other businesses.

We have made minor adjustments here and there, which have equally important and difficult decisions regarding some individuals who've left the company in other parts of our business. We did some restructuring.

We've talked about in National Pen that was planned as part of the – by the team, that's part of our acquisition that's been put into effect recently. We've done some changes we allude to on the Corporate Solutions team in Upload and Print. A lot of the changes happened last six to nine months as we reintegrated teams following our decentralization.

So there is – in any company that's growing and changing, there's ongoing modifications. But in terms of any significant restructuring like we're talking about here or like we did in January, this is it and it's concentrated in Vistaprint..

And Youssef, I'll just pick up on your other two questions. So, first, you had asked about the contribution of Albumprinter in the quarter. As I mentioned in my opening remarks, we closed the transaction on August 31, and so we had two months of results this quarter that are in the All Other Businesses segment.

The revenue for those two months was $12.7 million. And in terms of profitability, there's a little bit of profit from the business in the quarter, but that's more or less offset by transaction cost, so you can think about the profitability impact as relatively inconsequential.

In terms of your second question on inter-company revenue, let me just step back for a moment in case others on the call aren't aware of one of the changes that we made, which is as our businesses interact with one another in terms of fulfillment, those transactions are being reflected as revenue for the fulfilling business, which is different from how we've done that in the past.

It's pretty small, but nonetheless it's a change. About half of that was coming from the Vistaprint business, Youssef. But what you're probably trying to do is determine how much of that impacted the growth rate. And if you were to exclude all that, the growth rate is still 10%; 9.6% to be exact. So the impact is very immaterial..

The Vistaprint growth rate..

For Vistaprint, yeah..

Because there was inter-segment revenue in the period last year as well..

Right..

Got it. Got it. Okay. Thanks a lot, guys. Thank you..

Sure. Thanks, Youssef..

Thank you. Our next question is from Victor Anthony of Aegis Capital. Your line is open..

Thanks, and I apologize for the background noise. Maybe you could then talk about 10% constant currency growth rate at the Vistaprint brand. I wonder if you could parse out the delta between repeat usage and customer growth.

What efforts you have underway to get the two growth rates to converge and getting their repeat usage to converge in new customer growth? Second, I think there was a kind of a slight pullback at 100 basis points you called out in advertising spend, I wonder whether or not that was as a result of inefficient advertising spend or where did you pullback with that brand advertising or television or other areas? And third, I may have missed it, but if you could tell me the magnitude of the head count reduction and what geographies does it impact? Thanks..

Thanks, Victor. I just take those in turn. So in terms of the mix of new and repeat within the Vistaprint business, the repeat continues to be very strong. And as I mentioned in the opening remarks, our repeat rates were as high, the highest that they've been since this fiscal 2012.

In terms of what that means for bookings or revenue growth, the bookings from repeat customers continues to grow double-digits and new customer in the single-digits. And so, I think that there's a number of things that the team is working on there. One is to continue to attract higher value customers and we see a lot of progress in that area.

Of course that fluctuates quarter-to-quarter and this quarter there's not a big growth in the number of new customers. It's relatively flat. But over the last few quarters, we've seen that grow. So continue to see that that kick in is important.

The other thing is continuing to launch new products and continue to invest in design services, the things that – all the things that Trynka outlined at our August Investor Day are all other things that we think are important in terms of attracting higher value customers and ultimately increasing their share of wallet.

So on your second question, ad spend, there is some leverage in ad spend this quarter within Vistaprint about 100 basis points. Vic, I am not sure, I would call out any sort of major trend there. As you know, this fluctuates quarter-to-quarter depending on various campaigns that we're running, opportunities we see.

And I would expect that to continue to fluctuate over time and throughout the year. So nothing specific to call out but we did have some leverage there this quarter. And then lastly on the restructuring, Vic, some of those details that you asked about we'll share a bit more next quarter where that's appropriate.

But given where we are in this change, we're not in a position to disclose that yet. We're still early on. Communications have not yet happened with our team members.

And first and foremost, whenever we do changes like this, we need to make sure that we treat our team members very professionally with empathy and we'll talk to them first and then we can share more in our second quarter..

Okay. Thank you very much..

Thanks, Victor..

Thank you. Our next question is from Kevin Steinke of Barrington Research. Your line is open..

Good morning. So, you talked about pricing and operating levers that you can pull to improve the profitability of the new products and services in Vistaprint that are currently pressuring gross margin.

Can you just refresh us on those various levers and also how quickly you pull them in? Maybe a timeline roughly of how quickly it takes or how long it takes to optimize the various product launches you've done?.

Sure, Kevin. Yeah, it's Sean. So, see, it's definitely a focus for the team and we talked about that are at our Investor Day as well. Just kind of stepping back for the Vistaprint business, we have another strong quarter of top line growth and expansion of profitability.

But a lot of that expansion of profitability is coming from savings in OpEx in large part due to the decentralization that we did back in January of 2017.

And so, as we've invested in the expansion of new products and in design services and, of course, last year reducing our shipping prices, we know that we need to get return on those and ultimately see incremental gross profit in order to see those pay off.

Some of the things that we are focused on there, one, as it relates to some of these new products which we see nice growth in, decisions around what we outsource versus in-source is certainly one category and that's something that the team actively evaluates.

Two is, as with any product, as you continue to get more scale, there is more efficiency there. And so that's another category. And, lastly, I would call out pricing optimization as an important one. And some of these, when you launch, you're learning a lot, you're learning about customer demand.

And that's something that is a key area of focus as Trynka outlined back in our August Investor Day as well. In terms of timing, Kevin, of course, it is a significant focus for the Vistaprint team. But these things do take time. And so, I wouldn't be able to say specifically the amount that we will get in Q2, or this year as we focus on these things.

But it is a significant focus and we'll continue to update you guys as we progress throughout this year and beyond..

Okay.

Would you expect a similar level of gross margin compression from the new product launches as we move throughout fiscal 2018 or do you think that that might moderate a bit?.

So I think it also depends on which quarter. I think Q2 has different dynamics given the spike in volume. So the mix of products is a little bit different. I think, our aim – we don't give forward guidance on what gross profit or gross margin will be for the year. What I would say is that we do expect that it will increase from here.

The trajectory of that increase is something that I want to make sure that we prove out and see it happen before we get more specific..

Robert speaking here, I would just add that we are agnostic between growing revenues faster at a lower gross margin, which drives gross profit dollar growth, or driving a little bit slower revenue growth with a higher gross margin.

What in the end matters to us, again as Trynka spoke to in the August Investor Day, is the gross cash flow after the cost of goods sold, payment processing and advertising what we call our contribution. And so, we are relatively indifferent to that.

And it's hard for us to predict which way a given component of that, like gross margin, will go because the teams are trying to optimize for the whole equation..

We also, of course, with the restructuring that we talked about in the release last night and I mentioned in the opening remarks, there will be cost savings attached to that.

So when you look at, as Robert was alluding to, you look at the ultimate margin, we expect improvement from gross margin over time as we've talked about, but also from continued reduction in OpEx from those savings..

Okay. And then, you mentioned that shipping price reductions within Vistaprint this quarter actually had a slight benefit as the benefits of those changes outweighed the revenue impact, profit impact.

I mean can you just talk about what you're seeing there in terms of the benefits, how quickly that's happening and maybe specifically what you're seeing in the U.S.?.

Sure. I would say, the story is more of the same, Kevin. We continue to see positive data there. We continue to see in our NPS tracking that dissatisfaction from shipping is going down and satisfaction going up which is, we believe, a leading indicator. We continue to see positive trends in both conversion and repeat rate as well.

Now, as we've talked about in the past, it's very difficult to track in a mutually exclusive way. And so, we've picked a few data points that we believe are good indicators of progress and give us continued confidence that we've done the right thing.

And we continue to see the right data there consistent with what we've talked about over the last few quarters. You may recall that in Q1 of last year we were fully rolled out in some of our markets. In the U.S., we were testing heavily and then we rolled out fully when we got to Q3 in the U.S. So in this Q1, we're of course fully rolled out.

That means that impact slightly more but also getting some benefits from this as well. So the year-over-year impact slightly beneficial, it's small numbers, Kevin, but we continue to see positive data in terms of the changes that we've made which gave us confidence that it was the right thing to do..

So just from a foreshadowing perspective what that means is that Q2 we were not heavily testing in the U.S. market and not rolled out in the U.S. market. And so, we would probably expect to see Q2 have a slightly negative impact year-over-year..

That's right..

Okay. Just one last question for me here. You mentioned, within Upload and Print, you still see the opportunity to shift production of certain products to lower costs or higher quality options through the mass customization platform, but the current benefits are small but you expect them to grow throughout the fiscal year.

So can you tell us how quickly that might happen and maybe the size of the opportunity you still see there to shift production within the MCP for Upload and Print?.

Yeah, we continue to believe in that opportunity we have in Europe, hundreds of different suppliers and a half dozen or more production facilities that we own ourselves. So we definitely remain on track.

I happened to have the Investor Day presentation in front of me, the first slide of the MCP discussion we had last August talked about how in FY 2018 we really planned on beginning and to ramp up the platform optimization. We're very much on track with that plan. That slide was something we showed 12 months prior in 2016 as well.

So I wouldn't want to quantify it specifically, but I would say that the ramp up of the use is very much as we would like to see. We do, of course, see the volumes from Vistaprint use of the platform as enormous relative to the Upload and Print because the number of transactions and because Vistaprint has largely shifted over to that.

But we, in the next 12, 18 months, will be continually doing more of this and I think I'll stop there other than to say we're pleased with the progress..

And, Kevin, one of the things that, if you remember back to our August Investor Day, Kees, who leads our Upload and Print portfolio, some of the things he talked about were the importance of the technology investments that they're making across the portfolio.

And to both kind of bring some of those business up to e-commerce standards today, but also improve their connections to the platform. And some of that is an enabler or catalyst to allow us to get some of the benefits that Robert just described.

And so, as you think about the timing of that, of course, as those investments in technology get traction that will enable us to start to increase the volumes there specifically to Upload and Print. And so, throughout the year, I think that that will be more backend weighted in the year.

And Upload and Print, even absent those improvements, continues to perform well. And we gave a lot of information about the returns that we've seen in that portfolio in our year-end materials. But it's a group of businesses that grew 16% constant currency this quarter and incremental revenue growth, which was pretty material, over $28 million.

So we continue to be pleased with that portfolio and we look forward to getting these technology improvements done to enable the type of transaction flow that Robert discussed..

Okay. Thanks for taking the questions..

Thanks, Kevin..

Thanks, Kevin..

Thank you. Our next question is from Youssef Squali of SunTrust. Your line is open..

Hey, guys. This is actually Naved Khan on Youssef's line. I had a quick follow-up on the key expansion within Vistaprint. Obviously, right now, you guys are sort of ramping up and that's negatively affecting the gross margins.

But do you expect when you are fully ramped and when pricing is optimized, do you expect the margins to be similar to what you have had historically? And then, I have a follow-up question..

Sure. Yeah, I'll answer that one and then we can go to your next question, Naved. So I guess, first and foremost, I'll reference back to what we described at our August Investor Day, which is that we do see opportunity to improve gross margin in the Vistaprint business from where it's been in recent quarters, including this one.

And we don't believe that we will be going back to, kind of, the historical trends going back several years ago in the Vistaprint business, given just the mix of products there. Now, I would override all of that by saying, as Robert outlined, first and foremost, we are not focused on gross margin. It is an outcome as opposed to an input.

What we're focused on is increasing ultimately the free cash flow dollars from the revenue growth that we're driving in the Vistaprint business and that needs to come from incremental contribution profit, as Robert described as well. So that is really the focus of the team.

If that comes in the form of lower gross margin, then that may be just fine, so long as the incremental profitability of that revenue has good economics attached to it. So that is really the focus of the team. And then, of course, the remarks I made about gross margin earlier apply..

Naved, I'd add a couple other comments. So Sean just mentioned free cash flow. To give you an example, quite a bit of the work that we do in the apparel work is outsourced. So we have zero capital deployed for that. And so, that could actually be potentially a lower gross margin, but a higher dollar value with no capital deployed.

And it's something that very much goes along with the customer value proposition we're building up. So that's a good example, it's not a material shift of our gross margin, but there are many other examples like that where, to underscore what Sean said, we're not pushing gross margin as a primary target.

Another thing which I'm about to say, I want to be clear is, not new information. Nothing I'm about to say is different than what we said and Meredith even just spoke to a moment ago. But shipping has been coming down very consistently as a percentage of our revenues. Again, I'll go back to the Investor Day slide 44 that Trynka showed.

And at the same time we've been cutting shipping prices. So the percentage of our business that's coming from shipping has come down over the last multiple years. And the gross margin that we get from shipping has come down over the last several years. So the actual cash generated after COGS from shipping as a percentage of our revenues has come down.

So even if we got the new products to identical gross margins that the products of three, four years ago had, there's a shipping headwind as well. So when you go to our global gross margin that you have to take other factors than just the gross margin of the product in, to understand that.

Coming way back up, I would just reiterate, what we said is, we feel like there's a lot of growth opportunity in Vistaprint and it's a very strong business with increasingly satisfied customers that we think, from an economic perspective, we're generating more and more opportunity to have higher and higher per customer cash flows..

Okay. That's very helpful. And so just a quick follow-up and this is shipping-related.

So now that you're starting to see some favorable effects on revenue growth, are you satisfied with the shipping – with the lower shipping levels or do you think there's room to lower it more, how do you feel about the impact so far and looking forward?.

Sure, Naved. Yeah. I mean as we've talked about when we first rolled out these changes is, the team is focused on being at e-commerce norms and not going to zero. Now of course e-commerce norms could change over time.

But there is no current plans to do anything that is materially different from what we've already outlined, and what we're executing on this year..

Okay.

And could you just sort of provide some maybe qualitative color on – in terms of where is the shipping reduction having more of impact so far versus, which area – which markets might be lagging?.

Yeah. Naved, I mean, we don't give too much detail by geography both revenue or investments. But I mean, broadly speaking, all of our major markets are fully rolled out in terms of the shipping price reductions that we've done.

And so, there's – in each market, the way that we've done that is slightly nuanced depending on kind of what those norms are, and what our testing showed in each of those markets. But we are fully rolled out in all of our major markets and we have been now for three quarters.

So other than that, I'm not sure that there's any other information that we would provide there..

Okay.

But just on the – in terms of the trends that you're seeing year-to-date, do you still feel comfortable with the original guidance of the impact that shipping will have on profitability for the full year, or do you think that now it's going to have less of an impact?.

Yeah. So, essentially the incremental profit reduction would be negligible from 2017 to 2018..

I understood. Thank you very much..

Thanks, Naved..

Thank you. And that does conclude our Q&A session for today. I'd like to turn the call back over to Mr. Robert Keane for any further remarks..

Well, thank you, everyone, for joining us today. We're continuing to work hard to move towards our uppermost objectives, be it our strategic objective or our financial objective to maximize intrinsic value per share. We're undertaking many different initiatives and investments.

We believe we've made this easier to execute and to track now that we have decentralized our operations and our businesses have clear strategic accountability and clear financial targets that align closely with our uppermost objectives. Have a great day. Thank you very much..

Ladies and Gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a great day..