CMPR - Cimpress

[stahleyp]

"On March 31, 2020, Cimpress plc's board of directors approved changes to the compensation of Cimpress' named executive officers other than Robert Keane to reduce the named executive officers' base salaries by 50% effective April 5, 2020 and to grant to each executive, on a quarterly basis, a restricted share unit (RSU) award having the same value as the executive's salary reduction for that quarter. Each RSU award will vest in full on a designated date during the quarter following the quarter in which the award is granted, so long as the executive is still an employee of Cimpress plc or one of its subsidiaries on the vesting date. On the vesting date, each RSU is automatically converted into ordinary shares of Cimpress plc on a one-to-one basis.

 

 

Robert Keane, Cimpress' Chief Executive Officer, already receives all of his compensation in the form of performance share units, other than $684 per week paid in cash which is the minimum weekly salary for exempt employees under the U.S. Fair Labor Standards Act, and therefore there is no change to his compensation.

 

 

Cimpress expects that the changes in compensation structure described in this report will be temporary."

 

 

 

 

 

 

[kab60]

I went long yesterday. They mentioned at their Investor Day that they actually do okay during recessions due to their price advantage and that more people start working for themselves when they've been laid off. Didn't really appreciate that angle before. Leverage is too high in this environment, but luckily they have the most import quarter behind them. Lots of PE funds are looking at doing minorities, so worst case is probably lots of dilution. Which is probably somewhat priced in already, and they'll fight for their lives to not have to go there.

[kab60]

Also, check out Vistaprint.com - they might actually do a decent amount of social distancing posters etc.

[chompsterama]

TLDR.  I think the equity is pretty risky as a raise is very likely and the business will turn out uglier than everyone thought.  I like the debt at 74-75 cents on the dollar as the insiders have a very strong incentive to protect some of their sunk cost and life's work. 

 

Some of you will probably disagree here but for years, CMPR has been a financial engineering story tied to very mediocre businesses requiring large amounts of ad spend to essentially hold onto existing revenue and massive amounts of spend to grow revenue.  Finally, the rollups combined with share repurchases combined with leverage seems to have caught up to them - their latest purchase of $542 million in shares at $126.57 (150% above today's price) was just the latest in a long line of levered recaps.  Keane is obviously more successful than most of us, and he's a hell of a storyteller, but he has been so suckered into what Spruce House and Prescott preach as investors and has all but ignored core operating of the business.  He says all the right things and then does most of those things poorly, then quickly changes his mind, then changes it again.  It's painful to watch how incapable he has been at sitting on his ass and focusing on his core business.  I think when all this shakes out we'll see how real free cash flow to the owners of this business has been something like $150m when they preached SSFCF of $400m (while their huge intermittent buybacks occasionally pushed the price up to justify that fanciful level. 

 

There's just been a lot of wishful business going on, but seemingly without intent to defraud.  Almost just an innocent chaos combined with an echo chamber board room. 

 

At this point, their bank covenants are: Total debt to TTM ebitda no more than 4.75x, Senior secured debt to TTM ebitda no more than 3.25x, and Interest coverage ratio at least 3x ebitda.  I don't see how at least one of those is not breached in the coming 18 months.  If they are not, then bravo!  Because there is so much insider ownership on the management team and at the board level (somewhere between 40 and 60%), I think they'll have to issue a large slug of equity in some fashion in order to stay safe.  So, I don't like the equity.  But the unsecured debt at $0.75...interesting.

 

7% June '26 debt is trading at 13.2% YTM.  In Jan or Feb of this year, they did a $200m add-on to the $400m in unsecured debt outstanding.  Per the press release, that was to pay down secured debt.  So pro-forma we should have something like $430m of senior secured debt and $600m face value of unsecured debt plus bit something just shy of $100m in short-term debt.  Because unsecured is trading at 75%, the market value of today's total debt is probably $800-900m (depending on the outstanding balance on the short term debt today). 

 

Because of the huge insider ownership, I doubt Keane and the board are likely to take a zero on their life's work and equity.  I think either via a public raise/rights offering/something similar they do a capital raise whereby they protect some of their equity and the bondholders get a nice cushion build and this tinkering ensures debt is money good.  A worse case is you're backing into this business at an implied valuation of $800-900 million that probably does $150m of normalized FCF. 

 

 

 

 

[KCLarkin]

At this point, their bank covenants are: Total debt to TTM ebitda no more than 4.75x, Senior secured debt to TTM ebitda no more than 3.25x, and Interest coverage ratio at least 3x ebitda.  I don't see how at least one of those is not breached in the coming 18 months.

 

Is there any reason why those covenants won't be amended?

 

You didn't mention the negative working capital. If that unwinds, it will add further pressure on liquidity.

[chompsterama]

At this point, their bank covenants are: Total debt to TTM ebitda no more than 4.75x, Senior secured debt to TTM ebitda no more than 3.25x, and Interest coverage ratio at least 3x ebitda.  I don't see how at least one of those is not breached in the coming 18 months.

 

Is there any reason why those covenants won't be amended?

 

You didn't mention the negative working capital. If that unwinds, it will add further pressure on liquidity.

 

I think relying on the kindness of banks in the midst of an economic fallout is not a good strategy.  Sure, their covenants might/will be amended but I would assume it's based off some additional collateral and/or management watering down the equity to provide some more cushion.  And negative capital unwind...not sure which side you're batting for with that comment, but that's a net negative for the equity holders at this point.  Negative working capital is great as long as you keep growing.

[KCLarkin]

I think relying on the kindness of banks in the midst of an economic fallout is not a good strategy.  Sure, their covenants might/will be amended but I would assume it's based off some additional collateral and/or management watering down the equity to provide some more cushion. 

 

I'm just asking if there is any reason to think Cimpress is any more or less likely to amend covenants than other companies. It is not in banks interest to put all of their clients into default at the same time. The debt yielding 13% seems like a red flag.

 

And negative capital unwind...not sure which side you're batting for with that comment, but that's a net negative for the equity holders at this point.  Negative working capital is great as long as you keep growing.

 

No position, so I'm not on either side. Just watching a few bombed out companies, trying to find survivors. The issue is they have negative working capital which will add an additional liquidity constraint if it unwinds.

 

[kab60]

Banks are in good shape and are very much interested in amending covenants at this point in time, Cimpress' issue is their bonds. Generally dealing with a bunch of different bondsholders - perhaps distressed credit investors - is less flexible than dealing with a couple of banks. Banks don't want to own the equity, some bondholders might. There's definately a risk of dilution here, their balance sheet is weak, and while costs are flexible, a huge drop in demand compared with negative WC is tough. All this balance sheet efficiancy sure can bite one in the ass. Agree on Keane dropping the ball again and again, but still liked the risk/reward low 40. Him taking over Vistaprint, and their results since then, suggests increased focus on execution. But one should rightfully be sceptic. I also think it's possibly bad news, and definately bad governance, that the Company has not given any updates to outside investors.

[mjohn707]

TLDR.  I think the equity is pretty risky as a raise is very likely and the business will turn out uglier than everyone thought.  I like the debt at 74-75 cents on the dollar as the insiders have a very strong incentive to protect some of their sunk cost and life's work. 

 

Some of you will probably disagree here but for years, CMPR has been a financial engineering story tied to very mediocre businesses requiring large amounts of ad spend to essentially hold onto existing revenue and massive amounts of spend to grow revenue.  Finally, the rollups combined with share repurchases combined with leverage seems to have caught up to them - their latest purchase of $542 million in shares at $126.57 (150% above today's price) was just the latest in a long line of levered recaps.  Keane is obviously more successful than most of us, and he's a hell of a storyteller, but he has been so suckered into what Spruce House and Prescott preach as investors and has all but ignored core operating of the business.  He says all the right things and then does most of those things poorly, then quickly changes his mind, then changes it again.  It's painful to watch how incapable he has been at sitting on his ass and focusing on his core business.  I think when all this shakes out we'll see how real free cash flow to the owners of this business has been something like $150m when they preached SSFCF of $400m (while their huge intermittent buybacks occasionally pushed the price up to justify that fanciful level. 

 

There's just been a lot of wishful business going on, but seemingly without intent to defraud.  Almost just an innocent chaos combined with an echo chamber board room. 

 

At this point, their bank covenants are: Total debt to TTM ebitda no more than 4.75x, Senior secured debt to TTM ebitda no more than 3.25x, and Interest coverage ratio at least 3x ebitda.  I don't see how at least one of those is not breached in the coming 18 months.  If they are not, then bravo!  Because there is so much insider ownership on the management team and at the board level (somewhere between 40 and 60%), I think they'll have to issue a large slug of equity in some fashion in order to stay safe.  So, I don't like the equity.  But the unsecured debt at $0.75...interesting.

 

7% June '26 debt is trading at 13.2% YTM.  In Jan or Feb of this year, they did a $200m add-on to the $400m in unsecured debt outstanding.  Per the press release, that was to pay down secured debt.  So pro-forma we should have something like $430m of senior secured debt and $600m face value of unsecured debt plus bit something just shy of $100m in short-term debt.  Because unsecured is trading at 75%, the market value of today's total debt is probably $800-900m (depending on the outstanding balance on the short term debt today). 

 

Because of the huge insider ownership, I doubt Keane and the board are likely to take a zero on their life's work and equity.  I think either via a public raise/rights offering/something similar they do a capital raise whereby they protect some of their equity and the bondholders get a nice cushion build and this tinkering ensures debt is money good.  A worse case is you're backing into this business at an implied valuation of $800-900 million that probably does $150m of normalized FCF. 

 

 

 

 

 

Whatever the merits, this second paragraph here was a lot of fun

[KCLarkin]

Banks are in good shape and are very much interested in amending covenants at this point in time, Cimpress' issue is their bonds. Generally dealing with a bunch of different bondsholders - perhaps distressed credit investors - is less flexible than dealing with a couple of banks. Banks don't want to own the equity, some bondholders might.

 

I took a quick look and I don't see any covenants in the Notes that are likely to trigger default. If they can get a waiver on the bank debt, they might be able to avoid an equity raise.

 

[widenthemoat]

TLDR.  I think the equity is pretty risky as a raise is very likely and the business will turn out uglier than everyone thought.  I like the debt at 74-75 cents on the dollar as the insiders have a very strong incentive to protect some of their sunk cost and life's work. 

 

Some of you will probably disagree here but for years, CMPR has been a financial engineering story tied to very mediocre businesses requiring large amounts of ad spend to essentially hold onto existing revenue and massive amounts of spend to grow revenue.  Finally, the rollups combined with share repurchases combined with leverage seems to have caught up to them - their latest purchase of $542 million in shares at $126.57 (150% above today's price) was just the latest in a long line of levered recaps.  Keane is obviously more successful than most of us, and he's a hell of a storyteller, but he has been so suckered into what Spruce House and Prescott preach as investors and has all but ignored core operating of the business.  He says all the right things and then does most of those things poorly, then quickly changes his mind, then changes it again.  It's painful to watch how incapable he has been at sitting on his ass and focusing on his core business.  I think when all this shakes out we'll see how real free cash flow to the owners of this business has been something like $150m when they preached SSFCF of $400m (while their huge intermittent buybacks occasionally pushed the price up to justify that fanciful level. 

 

There's just been a lot of wishful business going on, but seemingly without intent to defraud.  Almost just an innocent chaos combined with an echo chamber board room. 

 

At this point, their bank covenants are: Total debt to TTM ebitda no more than 4.75x, Senior secured debt to TTM ebitda no more than 3.25x, and Interest coverage ratio at least 3x ebitda.  I don't see how at least one of those is not breached in the coming 18 months.  If they are not, then bravo!  Because there is so much insider ownership on the management team and at the board level (somewhere between 40 and 60%), I think they'll have to issue a large slug of equity in some fashion in order to stay safe.  So, I don't like the equity.  But the unsecured debt at $0.75...interesting.

 

7% June '26 debt is trading at 13.2% YTM.  In Jan or Feb of this year, they did a $200m add-on to the $400m in unsecured debt outstanding.  Per the press release, that was to pay down secured debt.  So pro-forma we should have something like $430m of senior secured debt and $600m face value of unsecured debt plus bit something just shy of $100m in short-term debt.  Because unsecured is trading at 75%, the market value of today's total debt is probably $800-900m (depending on the outstanding balance on the short term debt today). 

 

Because of the huge insider ownership, I doubt Keane and the board are likely to take a zero on their life's work and equity.  I think either via a public raise/rights offering/something similar they do a capital raise whereby they protect some of their equity and the bondholders get a nice cushion build and this tinkering ensures debt is money good.  A worse case is you're backing into this business at an implied valuation of $800-900 million that probably does $150m of normalized FCF. 

 

 

 

 

 

I agree with much of what you are saying, especially regarding the risk of covenant default. In my view, it's really going to come down to how much quickly they can turn off marketing expenses as revenue drops. If these costs are truly variable, based on my numbers, we should be fine (I can run through them another time if people would like to see them). We may be pleasantly surprised by this, and I'm starting to think this will be the case, but I still can't say that I have any meaningful conviction. With that said, there is very real risk of an equity raise here, but if their steady state is even $250m of free cash flow you should be fine at these prices.

 

Regarding your comment on this being a mediocre business, I would have to respectfully disagree. Even at your stated $150m of steady-state earnings, this business only required ~$279m of net tangible assets to operate in 2018/2019. That's a RNTA of ~55%. We may be overpaying for the business at these prices if your $150m of steady-state earnings is correct, but that's still a damn good business.

[WneverLOSE]

widenthemoat, why should we care about Net tangible assets if the company survival is at stake ? it doesn't require a genius to achieve high returns like this, on the contrary, just make sure to have enough debt to make Net assets a small enough number...

[widenthemoat]

widenthemoat, why should we care about Net tangible assets if the company survival is at stake ? it doesn't require a genius to achieve high returns like this, on the contrary, just make sure to have enough debt to make Net assets a small enough number...

 

Sorry, miscommunication by me. The RNTA is inclusive of debt. It's only "net" of spontaneous liabilities (i.e. accrued expenses). In other words, if the business was entirely financed with equity and no debt, 55% would be your return on tangible equity. I agree they overdid it on debt, but I don't think significant leverage should influence whether you think the business is a good one or not. It should, however, influence your view of the equity risk.

[KCLarkin]

Regarding your comment on this being a mediocre business, I would have to respectfully disagree. Even at your stated $150m of steady-state earnings, this business only required ~$279m of net tangible assets to operate in 2018/2019. That's a RNTA of ~55%. We may be overpaying for the business at these prices if your $150m of steady-state earnings is correct, but that's still a damn good business.

 

Yes, this is a very good point. Chomp is somewhat correct: the churn and low LTV makes this a very challenging business. But the negative working capital and mass customization make Vistaprint a very, very good business. It is these core economics which allowed Vistaprint to become a "financial engineering story" and "roll-up" in the first place. It also allowed management to ignore the core business and get tempted by too much debt.

 

Another important point: the economics for mom-and-pop print shops were already challenging. These lockdowns will accelerate the offline to online transition.

[kab60]

Banks are in good shape and are very much interested in amending covenants at this point in time, Cimpress' issue is their bonds. Generally dealing with a bunch of different bondsholders - perhaps distressed credit investors - is less flexible than dealing with a couple of banks. Banks don't want to own the equity, some bondholders might.

 

I took a quick look and I don't see any covenants in the Notes that are likely to trigger default. If they can get a waiver on the bank debt, they might be able to avoid an equity raise.

You're right, sorry. I was under the impression that the net leverage ratio was part of note covenants. Makes me more bullish they can manage this without raising (too) much equity.

[Jurgis]

I checked @Fido and they don't show any Cimpress bonds available. Just FYI.

[chompsterama]

I think relying on the kindness of banks in the midst of an economic fallout is not a good strategy.  Sure, their covenants might/will be amended but I would assume it's based off some additional collateral and/or management watering down the equity to provide some more cushion. 

 

I'm just asking if there is any reason to think Cimpress is any more or less likely to amend covenants than other companies. It is not in banks interest to put all of their clients into default at the same time. The debt yielding 13% seems like a red flag.

 

And negative capital unwind...not sure which side you're batting for with that comment, but that's a net negative for the equity holders at this point.  Negative working capital is great as long as you keep growing.

 

No position, so I'm not on either side. Just watching a few bombed out companies, trying to find survivors. The issue is they have negative working capital which will add an additional liquidity constraint if it unwinds.

 

I don't have a strong view either way as to whether they are more or less likely than others to get an amendment/waiver.  And I think a 13% yield might not tell us as much as we hope here.  This isn't like an AER where there's a bunch of liquid debt across the maturity spectrum with pretty good price discovery.  This is one issue on a B- rating.  It could just tell us how much one or two of those that paid 105 at issuance are tired of the pain and/or are not set up to be distressed investors.  Further, the single B rated universe is yielding something in the 9's while CCC's (rated by S&P) and over 20%.  So the 13% is still ballpark. 

[chompsterama]

Regarding your comment on this being a mediocre business, I would have to respectfully disagree. Even at your stated $150m of steady-state earnings, this business only required ~$279m of net tangible assets to operate in 2018/2019. That's a RNTA of ~55%. We may be overpaying for the business at these prices if your $150m of steady-state earnings is correct, but that's still a damn good business.

 

Yes, this is a very good point. Chomp is somewhat correct: the churn and low LTV makes this a very challenging business. But the negative working capital and mass customization make Vistaprint a very, very good business. It is these core economics which allowed Vistaprint to become a "financial engineering story" and "roll-up" in the first place. It also allowed management to ignore the core business and get tempted by too much debt.

 

Another important point: the economics for mom-and-pop print shops were already challenging. These lockdowns will accelerate the offline to online transition.

 

I understand what widenthemoat is saying with RTNA.  Problem is you can't buy that - you buy multiples of TNA+debt and that return still depends on massive ad spend because the business has little recurring revenue, lots of competition, and they're selling commodity products.  This RTNA was exactly Buffet's argument with KHC - but fortunately for KHC, they sell branded consumer staples, and sales wouldn't fall off a cliff if they stop ad spend.  That's not the case here.  Slowing ad spend today juices the near-term net margins, ROIC, etc. but I fear that won't last.  Fortunately, they had the benefit of recently turning down spend combined with a fantastic economy.  They couldn't permanently turn down ad spend otherwise revenue would fall by a greater and great percentage the further along we go. 

[patientcapital]

Return on net tangible assets is not the correct way to think about a business.

 

Intangible assets on the balance sheet (goodwill, intangible assets) represent actual dollar amounts that Robert Keane paid to buy things (through equity, cash, or debt). This is why we always include intangible assets in the denominator of the return on invested capital calculation.

 

If we look at their most recent 10-Q, their total invested capital was $1.5 billion USD, not $279 million. If we use that $150m "steady state" number you provide that's a 10% ROIC.

 

Invested capital in this case = total assets ($2.0B) - cash and equivalents ($37m) - accounts payable ($217m)  - accrued expenses ($237m) - ST deferred revenue ($33m).

[spartansaver]

Return on net tangible assets is not the correct way to think about a business.

 

Intangible assets on the balance sheet (goodwill, intangible assets) represent actual dollar amounts that Robert Keane paid to buy things (through equity, cash, or debt). This is why we always include intangible assets in the denominator of the return on invested capital calculation.

 

If we look at their most recent 10-Q, their total invested capital was $1.5 billion USD, not $279 million. If we use that $150m "steady state" number you provide that's a 10% ROIC.

 

Invested capital in this case = total assets ($2.0B) - cash and equivalents ($37m) - accounts payable ($217m)  - accrued expenses ($237m) - ST deferred revenue ($33m).

 

I think both ways are useful. One tells you about the actual economics of the underlying businesses, and the other tells you the returns that management has earned on its acquisitions.

[widenthemoat]

Return on net tangible assets is not the correct way to think about a business.

 

Intangible assets on the balance sheet (goodwill, intangible assets) represent actual dollar amounts that Robert Keane paid to buy things (through equity, cash, or debt). This is why we always include intangible assets in the denominator of the return on invested capital calculation.

 

If we look at their most recent 10-Q, their total invested capital was $1.5 billion USD, not $279 million. If we use that $150m "steady state" number you provide that's a 10% ROIC.

 

Invested capital in this case = total assets ($2.0B) - cash and equivalents ($37m) - accounts payable ($217m)  - accrued expenses ($237m) - ST deferred revenue ($33m).

 

I think both ways are useful. One tells you about the actual economics of the underlying businesses, and the other tells you the returns that management has earned on its acquisitions.

 

Yeah, thats how I think about it as well. Warren sums it up nicely in his 1983 annual letter. Please see below.

 

We believe managers and investors alike should view intangible assets from two perspectives:

 

In analysis of operating results – that is, in evaluating the underlying economics of a business unit – amortization charges should be ignored. What a business can be expected to earn on unleveraged net tangible assets, excluding any charges against earnings for amortization of Goodwill, is the best guide to the economic attractiveness of the operation. It is also the best guide to the current value of the operation’s economic Goodwill.

 

In evaluating the wisdom of business acquisitions, amortization charges should be ignored also. They should be deducted neither from earnings nor from the cost of the business. This means forever viewing purchased Goodwill at its full cost, before any amortization. Furthermore, cost should be defined as including the full intrinsic business value – not just the recorded accounting value – of all consideration given, irrespective of market prices of the securities involved at the time of merger and irrespective of whether pooling treatment was allowed. For example, what we truly paid in the Blue Chip merger for 40% of the Goodwill of See’s and the News was considerably more than the $51.7 million entered on our books. This disparity exists because the market value of the Berkshire shares given up in the merger was less than their intrinsic business value, which is the value that defines the true cost to us.

 

Operations that appear to be winners based upon perspective (1) may pale when viewed from perspective (2). A good business is not always a good purchase – although it’s a good place to look for one.

 

In other words, in my view, Cimpress fits the bill for perspective (1). Whether it fits the bill for perspective (2) is up for debate.

[patientcapital]

I see what you're saying, but I don't disagree with the interpretation of that quote.

 

WEB is saying that amortization of intangibles / impairment of goodwill (the income statement items) are a non-cash charge, so you shouldn't subtract them if you want to see the true earnings power of the business you bought. I agree with this.

 

What he is not saying is you should also disregard goodwill & intangibles; the balance sheet item.

 

In other words, we should be looking at the intrinsic cash earnings of the CMPR business (adding back amortization), and then compare those earnings to the total invested capital. This figure includes the full purchase price of the companies purchased (this includes the carrying value of goodwill & intangibles). Buffet further states that you should increase the invested capital denominator by adding back the accumulated amortization of of intangibles/goodwill that had previously been charged off so we're looking at it apples to apples.

 

If an asset has an underlying ROIC of 50%, and Robert Keane / Cimpress built those assets himself, he gets full 50% ROIC credit. If he makes an acquisition, he would only get the full 50% ROIC credit if his acquisition cost was equal to the cost of the underlying invested capital. Instead, since he paid up for those assets, the goodwill/intangibles goes on the balance sheet and ROIC is diluted.

[spartansaver]

I see what you're saying, but I don't disagree with the interpretation of that quote.

 

WEB is saying that amortization of intangibles / impairment of goodwill (the income statement items) are a non-cash charge, so you shouldn't subtract them if you want to see the true earnings power of the business you bought. I agree with this.

 

What he is not saying is you should also disregard goodwill & intangibles; the balance sheet item.

 

In other words, we should be looking at the intrinsic cash earnings of the CMPR business (adding back amortization), and then compare those earnings to the total invested capital. This figure includes the full purchase price of the companies purchased (this includes the carrying value of goodwill & intangibles). Buffet further states that you should increase the invested capital denominator by adding back the accumulated amortization of of intangibles/goodwill that had previously been charged off so we're looking at it apples to apples.

 

If an asset has an underlying ROIC of 50%, and Robert Keane / Cimpress built those assets himself, he gets full 50% ROIC credit. If he makes an acquisition, he would only get the full 50% ROIC credit if his acquisition cost was equal to the cost of the underlying invested capital. Instead, since he paid up for those assets, the goodwill/intangibles goes on the balance sheet and ROIC is diluted.

 

The business doesn’t know what you paid for it. It’s capital requirements to grow won’t all of a sudden get higher because you paid a high price for the business.

[chompsterama]

I'll just point out again that bonds are at $74 with decent volume.  Unsecured creditors believe there is no equity value here (barring something like a really anxious bondholder wanting out). 

[widenthemoat]

I'll just point out again that bonds are at $74 with decent volume.  Unsecured creditors believe there is no equity value here (barring something like a really anxious bondholder wanting out).

 

Can you point me in the direction of where you are seeing these bonds? Can you buy them on Fidelity?