Robert Keane - President & CEO Sean Quinn - EVP & CFO Meredith Burns - VP, IR.

Naved Khan - SunTrust Victor Anthony - Aegis Capital Kevin Steinke - Barrington Research.

Ladies and gentlemen, welcome to the Cimpress Fiscal Year 2018 Second Quarter Q&A Earnings Conference Call. My name is Aiava, 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 those statements are described in the documents that are periodically filed with the Securities and Exchange Commission. We turn now to Robert Keane for opening remarks..

Hello, everyone, and thank you for joining us this morning. Before we take your questions, we'd like to make a few brief comments.

First, across Cimpress, we see evidence that the decentralization of the past year is helping us stay small as we get big, and the leaders of each of our businesses now have direct control over their cross-functional teams.

In turn, this means that each leader has clear accountability for customer value improvement, for the attraction and motivation of talented team members, for the operation of their businesses on a socially - in a socially responsible manner and for the delivery of attractive returns on investment.

Secondly, our organizational changes have simplified and improved our internal visibility to the financial performance both of our businesses and of the cost and the investments which we continue to manage centrally.

So as such, starting with last night's release, we have aligned our external investor communication to reflect our internal changes by introducing our new quarterly earnings format.

We believe this new approach eliminates repetition that existed with our past practice of issuing multiple documents and it better reflects the internal conversations we have as we assess our own performance.

In conjunction with this change this will be our last public audio call related to our quarterly earnings announcements, since for each quarter going forward we will be disclosing everything we have to say via the news - of the new earnings document, a spreadsheet of key data and via our SEC filings.

Many of you have commented in the past that we provide a really substantial amount of quarterly disclosure and in fact given the busy schedule of investors and analysts that follow us we recognize that in any case it was not always possible for people to digest all of this information before our public call 730 a.m. Eastern Time the next morning.

Subject of course to Reg FD Disclosure constraints, Meredith and Jenna on our Investor Relations team will be available to speak to you by phone individually should you have questions. Nothing changes there other than that going forward we can do so on a timeline that works best for individual investors and analysts.

Now Sean is going to make a few comments about our second quarter..

Thanks a lot Robert. Just a few comments from me here. Our revenue and cash flow results showed good year-over-year growth in line with our expectations. Vistaprint implemented the organizational restructuring as announcement in last quarter's earnings materials. The restructuring charge was lower than we originally estimated.

However, we believe the anticipated savings will materialize as expected. We spent about $50 million repurchasing our own shares during the second quarter and we spent an additional $40 million on repurchases subsequent to the end of the quarter. Fiscal year-to-date, we’ve spend about $95 million on share repurchases at an average share price of $106.

Despite those repurchases in the second quarter we reduced our leverage ratio from 3.39 times trailing 12 month EBITDA at the end of September to 2.58 times at the end of December - of the December quarter, through a combination of EBITDA expansion and $120 million of debt repayment.

This is right in line with our expectations and what we have communicated over the last year. And with that, we'd like to take your questions..

[Operator Instructions] Our first question is from Youssef Squali with SunTrust. Your line is now open..

Yes, hi. Thank you very much. It's Naved Khan for Youssef. I just had a few questions on the different segments. So on the Vistaprint unit, the growth slowed down a little bit in the December quarter, was it the quarter before.

Just wondering if there were any specifics here to call out and if you're still confident of seeing double-digit growth there? And then I had some other follow up questions on National Pen, but I’ll leave that to later..

Great. Thanks, Naved. And good morning. Yeah, I’ll take the first question, so on Vistaprint really nothing to report there in terms of the difference between Q1 and Q2.

I think as you know and we very consistently communicate, we do have certain objectives in terms of longer term trends for growth, but quarter-to-quarter we see that fluctuate and we would expect that would continue to do so. But maybe just a few comments on Vistaprint for the quarter.

Of course, to say it's a seasonally very important quarter for them. And I think what we saw was not only strong growth, but also very strong expansion of profitability. You may recall now that last quarter this year there were some production inefficiencies that we had called out.

And so when you look at the results you see an incremental margin that's actually – that’s quite high because we don't have those inefficiencies again and the team really performed well.

I mentioned the restructuring for Vistaprint everything there is you know right in line with what we talked about last quarter, but to execute on those changes during what is a very busy period just shows the - just the focus that the team had. And so it was a good solid quarter for Vistaprint..

Okay.

And then just on the restructuring itself, do you think you are at a point now where restructuring is actually helping versus people sort of adjusting to the new roles and maybe having some sort of a dampening effect in the interim? Is that totally behind you?.

I would say that if you answer that question about today - that is in - the end of January, that's largely true. The earnings we're reporting today were released last night. Of course, we're talking about the December quarter and that restructuring happening right in the middle of that quarter.

So I think its true going forward, but it was not true for the quarter we're talking about..

Okay, that's - I think I understand. On National Pen, I think your prepared remarks have some commentary around how it's sort of good growth on its own, but also there was some timing-related reduction to the backlog.

Can you sort of shed some light on that? What was the - how big was the backlog and if the high single digit growth rate for - that you expect for the full year, if that's sort of a sustainable pace that we should expect?.

Sure, Naved. So for National Pen, yes, the growth that you’re referencing for this quarter, of course, we didn't own them for this quarter last year. But if you look at that kind of on a pro forma basis that excluding currency the growth was 28% which is quite an acceleration from what we've seen over the last few quarters.

And we've been talking about this really since the time of the acquisition, which is that, especially in North America the team at National Pen decided to make some changes which we fully supported and with the benefit of a few quarters behind them we start to see the progress of those changes. So we're pleased with the performance this quarter.

And we did change our commentary a bit in terms of our revenue expectations for the year. As it relates to National Pen we had said at the beginning of the year we expect single digit growth. We clarify that to say high single digit growth. Last quarter in Q1 the growth on a pro forma basis with negative 7%.

So when you take all of that into account you know, we do expect high single digit growth for the year. I do not want though there to be an expectation that the 28% that we saw this quarter is in any way the new norm. There were certain reasons why that was the case operationally.

In this quarter last year they had started to pull back a bit on some of the marketing investments, as some of the changes were just beginning. And the backlog change that you referenced now that I'm not going to quantify that specifically, but think about that is very much the minority of this reform and it's not a very material number..

Okay, that helps.

And just in terms of your own expectations of getting into high single digits versus low to mid before, what is - what are the sort of the key things driving that? Is that simply more synergies emerging in terms of cross-sell and better marketing spending?.

Yeah, now that the - we're very happy with the progress of our integration activities and whether that be things like procurement savings or things like starting to offer a National Pen products to our other businesses through the platform.

But in terms of the clarification we made on our growth for this year, it's really the team continuing to execute against the things that they've already been doing over the last three quarters, prior to Q2 and those things really just starting to have an impact. And so nothing really more than that.

The team is executing, it’s right in line with our expectations. And so we’ll continue to focus and we think high single digit growth is where it will be for the year..

Okay, thanks. I'll put myself back in the queue..

Thanks, Naved..

[Operator Instructions] Our next question is from Victor Anthony with Aegis Capital. Your line is now open..

Good morning. And thanks, guys.

Just a follow up with the National Pen, so I am hearing your comments and I think you’re just essentially that its really just execution, that you’re that close to 30% year-on-year growth, if that the case why won't we see that happen in the next two quarters?.

Yeah, couple of things. Hey, Victor. Robert, here. Couple of things.

One is as Sean mentioned there were some unusual comparison quarter, so prior to our acquisition there were some divestitures that had happened, and secondly there was a business - secondly there was a pull back on advertising as they were coming into the last month - before selling a business where frankly a lot of our discussions were on EBITDA and they were not exclusively marketing.

I think what we have done and we've spoken about publicly is under Cimpress the management team has done a great job stopping advertising campaigns that we did not think had attractive ROI and that resulted in a lot of slowdown. They have now re-worked a lot of those campaigns, improve them and we think there are attractive campaigns.

But an attractive campaign in a high season like December may not be an attractive campaign in other seasons, given the seasonality of response rates.

So when we put all that together and look at it we feel comfortable with our updated view that this will be high single digits and it definitely will not be anywhere close to the 28% that we happen to have, which is more of a – it’s a unique event based on the combination of factors over a period prior to our ownership.

It's not a fundamental shift to that type of growth rate for the business..

Okay. Got it, got it. And secondly, on I guess, the – you listed several drivers of the gross margin expansion in the quarter. Just curious what – which one had the biggest impact.

And also the $10 million production inefficiencies that you -- that component of the gross margin expansion, how should we think about that going forward, was it just kind of a one-time or is there a more inefficiency that you could reduce going forward?.

I'll take that second part and then Sean can you take the first part and the relative impact. Last year we had started moving things from Vistaprint - procurement of Vistaprint onto the MCP, the Mass Customization Platform. And technically it worked very well.

We - I would say through what we learned the hard way was organizationally we had a lot of missteps because of the functional organization we had, where issues such as labor shortages and a tight labor market in Ontario led to a number of different events where we didn't properly align our own production capabilities with external - with our expectations of demand.

And we had to turn to external fulfilment last year, this is in the 2017 fiscal second quarter. And if you go back to our earnings discussion in the January 2017 period you will see quite a bit of discussion, it was about $10 million of excess costs. This year the Vistaprint team did an incredibly great job and a lot of it evolved.

People who are on the Vistaprint team they were doing this great job came from the central teams last year, but we definitely saw the benefit of them operating in a single business organization where communication was much tighter and we didn't have any of these problems that we had last year.

So when we talk about the non-reoccurrence of that $10 million, it's not like there is a deep well of other things which we can replicate, it was just that we avoided a mistake which we wish had not happened last year and we do credit our new organization as one of the reasons why we were able to avoid that..

And to add to that Victor, because you're - you started out asking about kind of gross margin overall.

If you look at it on a consolidated level gross margin expand – did expand a little bit and there's a few puts and takes there, the one that's probably the most materials where Robert was just talking about the production efficiency last year that we did not have this year and last year we had - we had said last year that was about $10 million.

But there are a few other changes in the mix as well. So of course, we have National Pen which is above the average and we did not own National Pen last year. On the flipside last year we had Albumprinter which we divested in our first quarter of this year. And so the net-net of that is a little bit of expansion.

And then of course, the trend that we've seen over recent years is that as Upload and Print becomes a bigger part of the mix - the gross margin, as you know they are lower, so that drag it down. So those are some of the puts and takes underneath the surface and at a consolidated level gross margin expanded a little bit.

In addition to in Vistaprint specifically, in addition to the production and efficiencies that didn't reoccur. Gross margin or gross profit more specifically has really been a focus of the team and this is something we've talked about in recent quarters. As in the Vistaprint business we've launched a lot of new products.

We are also at the same time optimizing that, looking at pricing, looking at what we use third parties for versus in-source. That work continues. And so you don't see that in the trend so much because of the production and efficiency not being there.

Its kind of the overwhelming trend for Vistaprint, but the team continues executing nicely on those things as well..

Got it.

Just lastly and quickly, Robert, you said in kind of an article for Printing Impressions on the importance of coopetition, is the word that you used in the industry, just kind of curious what led you to write that article and what you're seeing in the industry that force you to do that?.

Sure.

I would say that article is – which was relatively recently published is very consistent with themes that I have spoken about originally two years ago at a German industry conference and we believe that coopetition, in other words the combination of cooperating and competing with other people in the industry has in many different industries proving to create more value for customers and therefore in the long run more value for shareholders of the various companies.

Obvious examples like that are the technology industry where as an example one of many Apple and Google compete fiercely in the falling market. Yet Apple still pays billions of dollars to Google to have the right – or Google pays Apple to have the Google as the search engine on an Apple iPhone.

There are dozens of examples where competitors in certain areas find advantages to cooperate. And in our specific industry as Cimpress is expanded well beyond simple products that are traditionally small rectangles into a wide variety of different products and larger orders we're shipping also becomes a bigger component.

We increasingly are turning to partners in the industry where we subcontract out to buy product from, even now at the same time we sometimes compete against those companies or in our brands. And we think that that is healthy.

And we believe that the overall transition of our markets, be those market as printing or signage or packaging or many other market are only in the early stages of the transition to a mass customization paradigm into online.

And the more we can cooperate in a way which preserves competition for the benefit of customer, but also increases value to the customer. It's good for the industry.

So as the biggest player in the industry, we've been - and I personally have been active in speaking about that approach as something we believe is good for all of us - everyone who's competing in this industry..

Thank you very much..

Thanks, Victor..

And our next question is from Kevin Steinke with Barrington Research. Your line is now open..

Good morning.

I apologize I got on the call a little late here, but did you mention the amount of savings that the Vistaprint restructuring contributed in the quarter?.

Hey, Kevin. It's Sean. Good morning. We haven't. So I'll go through that. So again there's two ways to look at that Kevin. One is if you look at it from kind of a segment profit perspective, which excludes the - excludes the restructuring charges that we would have taken and then to look at it just on a cash flow basis. I'll start with the latter.

On a cash flow basis there was really - that the impact is actually quite neutral this quarter because the payments that we made during the quarter offset the savings. From a profitability perspective, if you exclude the restructuring charges that we took its roughly $7 million in the Vistaprint business in the quarter..

It's probably worth clarifying that that Vistaprint it's getting savings from two different restructuring activity right now. So Vistaprint had about $11 million of year-over-year savings from the combined recent action, that was just Vistaprint, as well as the decentralization action that took place in Q3 of 2017.

That was $11 million total from just this recent action, it was about $5 million of savings year-over-year..

Okay, yeah. Yeah, exactly right. That was the number I was getting at the $5 million, it was just from the Vistaprint restructuring specifically..

Correct..

Okay. All right. Perfect.

So then you have you know, $20 million to $22 million minus $5 million left for the year?.

Correct?.

Yes. There is no change to our expectation of the - the impact of the full year. That's right, Kevin..

Okay. So with the nice results in Vistaprint, and I guess generally across the business can you talk a little bit about just the holiday season results this quarter.

You know, the sale of home and family products or any other factors you highlight that helped drive those results related to the holidays?.

Sure..

Yeah, I think – so we don't provide the specific breakdown between home and family and business, but maybe just a few higher level comments.

For Vistaprint and of course for National Pen too, this is a very seasonally important quarter and we talked a little bit earlier on the call Kevin about the performance for National Pen for the quarter, I'm not sure of the cost, I'm happy to answer any questions you have.

For Vistaprint, yeah, I would say that the results were right in line with our expectations which is great given the changes that they went through in the quarter.

In terms of holiday performance, also very much on track and we saw a good growth both from the more consumer focused products, but also from the business products in the quarter and the product categories that we are - that we're really focused on. So yeah, so kind of right in line with our expectations Kevin.

Of course, we continue to focus on new product introduction and Vistaprint and optimizing all that we've gone over the recent quarters and year. So - and the underlying customer metrics in the quarter can continue to be strong as well. Repeat was the highest I think since 2007 and dollars per buyer was up nicely.

So right in line with our expectations and strong holiday..

Okay, great. With regard to Upload and Print, you mentioned again you're seeing the desired impact there from the decentralization.

I don't know if it be possible to give an example or two of what exactly is working there – yeah, go ahead sorry?.

We’ll be happy too. I think at the highest level what we've been successful in doing is recreating the sense of an entrepreneurial holistic company at each one of our different businesses.

And by what that – by that I mean, the men and women who lead each of those individual companies have cross-functional teams reporting to them, which include technology, marketing, customer service, production operations, finance, legal and they have to think holistically about how to improve customer value proposition, employee value proposition, returns on invested capital.

So at the highest level, what that's done is removed a lot of the vertical chimney that existed where often the same people were working with - in a functional organization where, let's say a manufacturing operation had to go up the vertical chain to the head of manufacturing technology had to go up - up the vertical chain, marketing and customer service were decentralized, but they then were aggregated into a manager who reported to me who then would have to work with the other business units.

And that just created slowness and again in all due respect for the people who work for us because often they are still with us in other roles it created a bureaucratic environment that was - those same talents can be focused on customer value proposition when they're in a cross-functional environment.

So we see faster new product introduction, faster reactivity to trends pulling back on campaigns, in marketing that are not successful when you look at the whole picture and accelerating those which are successful. And so really across the board it's been quite a success.

And in the Upward and Print business, which really consists of six or eight different individual businesses and we've gone back to having six or eight managing directors of each of those businesses that are able to make those calls..

Okay. That's helpful. Just following up a little bit more here on National Pen. You obviously talked about the increased marketing activities, changes to the marketing campaigns et cetera.

I was just wondering how far along you are in improving or building out National Pens e-commerce capabilities? I believe that was one of your objectives, you know, post-acquisition news to just improve their e-commerce capabilities?.

That remains a long-term objective and certainly not something we can change overnight, but we are making investments in that area which are totally invisible publicly because we're working on core technology infrastructure that needs to be built behind the scenes.

We have some excellent team members in the e-commerce part of National Pen that are doing a great job. And it's a business which is growing very nicely. We don't break out what percentage of it is - of National Pens e-commerce, but it's a material amount of business and it's growing at a very, very good clip.

We think it could go much faster once we've brought up to scale the e-commerce technology, which is something we will be doing over the coming multiple years and we are already working in the background to do so..

Okay.

And then just lastly, if maybe you could just give me some color, some of the thinking behind the share repurchase activity that you've done thus far in Q3 and maybe how you know, you're thinking about that as we move through the rest of the fiscal year?.

Sure, Kevin. Yeah, we - so as I had mentioned earlier we did about 50 million of share repurchases in Q2 and roughly 40 million in January this quarter. So there's a few pieces to that.

Of course, you know, we always look at share repurchases and other capital allocation opportunities on an ongoing basis and share repurchases in particular is something that we don't you know, we don't forecast or outline in terms of our investment tables that we talk about for example at Investor Day, because there's a lot of things that factor into that.

One of the things that has been a constraint is we've communicated over the last few quarters that we were going to remain committed to get our leverage back down to approximately 3 times or below that. And we've done that and so that of course factors into the equation as well.

And so going forward the approach is remains consistent that we'll continue to look at share buybacks and any other capital allocation opportunity and weigh the relative returns and make decisions accordingly. But we don't have - we don't have a specific forecast for how much that we would like to do for the remainder of the year..

Okay. Sounds good. Thanks for taking the questions..

Thank you, Kevin..

Excellent. So this is Meredith Burns from Cimpress.

I actually have a question that was emailed to me that I'd like to ask you Can you clarify something about your disclosed un-levered free cash flow and I think what they mean by that is the charts in our earnings document that show free cash flow and also and also cash interest expense So on pages 10 and 11 and you should charge free cash flow, plus cash interest related to borrowing on a trailing 12 month basis, and then certain cash payment impacting cash flow from operations on a trailing 12 months basis.

So in a second of those charts in Q2 FY ‘17 in Q2 FY ‘18 you show 0 million and 26 million of cash restructuring respectively. Does that imply that absent restructuring charges, un-levered free cash flow on a trailing 12 month basis would have been 26 million higher this quarter and no higher in the prior year quarter.

Or put another way could an analyst reasonably conclude that absent onetime restructuring charges instead of growing roughly a 11% from 134 million to 149 million unlevered free cash flow on a trailing 12 basis grew 31% from 134 million to 175 million year-over-year..

So there's a lot there. I think I'll start with saying, I agree with the math. But let me back way up. What we in our new earnings format deconstruct some of the things that we look at internally in a way that hopefully helps those who look at this externally. From an internal perspective this is something that changed this year.

But quarterly and annually the metric that we view is most important and we hone our businesses to is unlevered free cash flow which is our free cash flow, plus any cash interest related to our borrowing.

Now from an external perspective of course, the starting point should always be our GAAP financials and then it's up to you to decide what you want to add back or not. But let me just tell you about how we think about it.

If you look at page 11 in our earnings materials what you see here is we start at our cash flow from operations, which is a GAAP metric and write-off our cash flow statement. We then show a chart which has our capital expenditures and our capitalized software development cost and the net of those two is what our free cash flow is.

We then provide a chart which shows our cash interest payments and our cash restructuring charges or restructuring payments that are embedded in our cash flow from operations. But if one chose to do so could exclude them if they wanted to think about the real kind of underlying performance and that's what we do internally.

And so going back to the math that the person was asking about, yes, it is true, if you look at our trailing 12 month free cash flow without excluding those things on a trailing 12 month basis last year it was 134 million, this year it was 149 million.

Included in the 149 million for this year, again, on the trailing 12 month basis is 26 million of restructuring payments. And so yes, that's the right math and we try to lay that out in a way that people can choose what they want to add back or not, but that's certainly how we look at it from an internal perspective..

Yes. We have a final question from Youssef Squali. Your line is now open..

Yeah. Thank you very much. It’s again, its Naved Khan for Youssef. I'm just trying to look at your outlook for National Pen for the full year and just trying to reconcile how the business has performed today. So if I'm doing my math correctly, the next 2 quarters would be flat to maybe even negative.

Is that the right way to do it, or am I doing something wrong?.

So I guess a couple of things now. One of course, the volume by quarter plays into that math and because we don't provide revenue guidance you don't have the volume of each of the quarter for Q3 and Q4 and that's not a commentary that that you know we get into as you know for any of our businesses.

So what I would go back to is for the full year we expect our revenue for National Pen to grow in the high single digits on a constant currency basis. That takes account of the fact that growth was negative on a pro forma basis in Q1, negative 7%. And we also you know, keep in mind that there are a lot of changes that the team has made.

We're encouraged by what we see and we want to continue to see that execution and we'll keep you guys updated if any of that - if anything changes.

But for now we feel very comfortable clarifying the commentary to be not single digit growth for the year, but at single digits and we’ll provide future updates based on the progress we do or do not continue to see there..

Okay, helpful clarification. And just on the -- on your leverage ratio and use of capital going forward, I just wanted to also tie into the conversation the opportunity for Upload and Print in the U.S.

Where are you in terms of sort of looking at it in terms of organic growth versus potential acquisitions and how that kind of becomes part of the picture overall?.

Sure. We've looked for many years at the Upward and Print market globally, including in North America, both organically and we’ve looked at acquisition opportunities. We've not found an opportunity that was right for us yet, where we were able to align with sellers.

But for the near term we have and we are happy to have launched initially two different organic expansions. One was with Pixartprinting and one was with Printi. So Pixartprinting from our Italian firm and Printi from Brazil. We have been learning a lot there and recently we combined those two initiatives.

So today if you go to printi.com you see a site which serves both the pixartprinting.com startup customers which has been folded – and our team has been folded into Printi US and we don't expect the material financial impact from these launches in terms of revenues or expense increase in the near term.

The teams remain small and focused and very nimble and fast moving. The team is growing fast, but it's a very small revenue base. So for now that's all we're doing and I think we'll learn a lot about whether or not we want to do more in North America..

Okay. Thanks. And then one last question from me.

Can you just sort of quantify the costs for the overall business that are domestic versus international if I look across all the 3 segments?.

Well, across, you mean, I assume you mean U.S. versus other markets. We give some growth rate information on an annual basis in our annual letter to shareholders and we have a breakout of U.S. revenues in our SEC documents.

Sean, do you want to talk to some of those number?.

Yeah, I think beyond that there's not much more - there's not much more that we provide.

Naved, is there something specific that you're trying to get at?.

Just trying to get a better handle on the domestic, what goes into the domestic or the U.S. cost of goods sold, how big is that overall across the three segments combined….

We don’t break that out..

Yeah, we do break that out and for us, I thought maybe you were going to - to go tax reform. For us now that of course, when we hear domestic we're a Dutch company, so we don't think U.S. there. So that's why I was asking, but we don't provide any of the breakout of our cost of goods sold by region..

Okay. Thanks, guys. That’s it from me..

Thanks, Naved..

And I'm showing no further questions. I will now like to turn the call back to Robert Keane for any further remarks..

Thank you everyone for joining us today and for your continued interest and your support to Cimpress.

We are going to continue to endeavour to be good stewards of the capital that our long-term shareholders and our debt holders have entrusted to us and we'll continue to pursue our uppermost objectives of being the leader in mass customization and of maximizing our intrinsic value per share. Have a great day. And thanks, again..

Ladies and gentlemen, thank you for participating in today's conference. You may now disconnect. Everyone to have a good day..