Description

CMPR 7% notes are timely and provide equity-like upside (30% - 40% p.a. to ~18-mths out likely refinancing), w/ downside protection (leverage should track well below 4x over next 12-18 months). Additionally, the $600MM 7% note due 2026 is unique as it matures 2-years inside of the TL, which probably helps accelerate CMPR management’s focus on proving out the margin turnaround story (discussed below, focus is on core Vista biz segment). Less than 1-mth ago, CMPR management told the market they are focused on improving margins particularly around the “core Vista” biz segment (new Vista CEO appointed who’s highly regarded in the organization) and is targeting Adj EBITDA to be ~$400MM w/in the next 18-months (FYE June 2024). I believe the credit story “works” if Adj EBITDA tracks above $300MM (i.e. low hurdle) and believe ~$350MM+ is very achievable (see assumptions below), but think management will provide a credible path to much higher outcomes (>$400MM). At ~$350MM of EBITDA, net leverage will track inside of 4x (factoring in FCF generation) and at ~$400MM of EBITDA, net leverage should track inside of ~3x (factoring in FCF). If we fast-forward 18-months (once FYE June 2024 results in hand), the biz should be on strong footing to refinance the 7% note well ahead of it turning current.

Won’t rehash the prior write-ups on CMPR as these write-ups largely focused on top-line story (level of acceleration and / or deceleration and multiple applied). With a credit perspective, industry checkings have been favorable as supports a growing top-line both on core Vista as well as the adjacent businesses driven by continued market share gains, and providing a more robust “solution” (digital and design) for businesses. Given top-line is likely one of “growth” (not decline absent nasty multi-year recession), the focus of my work has been on the cost structure and better understanding how the biz got to its current situation (i.e. consolidated EBITDA margins previously ~15% vs currently tracking in the high single digits). Mgmt is guiding to $400MM 18-mths out (13% margins), and my guess is $350MM (11% margins) will be more than enough to facilitate a refinancing of the 7% notes (inside of 4x leverage). Management has scheduled a call on March 21^st to provide details of the go-forward 18-months and path to margin turnaround which will be important …

Why now: CMPR will provide an update on bridging FYE 2024 on March 21^st. There are multiple buckets of cost opportunity that the company can focus on (both controllable items as well as one large external item): 1) internal cost cutting initiatives (TBD on size, but my guess is >$50MM), 2) pricing initiatives (biz has ability to price more efficiently, my guess is >$25-$50MM of opportunity), 3) pulling back on some of the large investments over the past few years (my guess is >$25 - $50MM) and 4) external costs starting to abate (transportation costs, energy, paper, ink) – TBD on this last bucket but a very large bucket if & when it normalizes as COGS has gone up by ~$250MM over the past 18-months. Lastly, the new Vista CEO (Baumgartner) is credible and feedback we’ve heard is that Chairman / Keane specifically choose the recent appointment as there is a solid path back to high teens margins (i.e. Florian is viewed v favorably, and not a scapegoat). To help re-frame, Vista previously generated 21-27% segment margins (18 – 21) … which compares to sub-10% current margins. Moving forward, ~15% Vista margins is very attainable (drives >$350MM consolidated EBITDA) and “credit wins” in that scenario as leverage is <4x … and ~17.5%+ Vista margins (below 21-27% historical) likely gets the biz back to ~$400MM+ EBITDA and leverage <3x (factoring in FCF generation).

Divergent view: Mgmt recently appointed Florian Baumgartner to lead Vista – industry feedback is that founder / Chairman / Robert Keane had been deliberating this move and chose Jan 23 (i.e. now) as there is real opportunity to improve the margin structure (i.e. Florian not appointed to swiftly fall on his sword). I’m assuming Florian will be able to drive mid-teens margins from Vista which drives ~$350MM of consolidated EBITDA and my guess is that CMPR management will make the argument in late March on why ~17.5%+ is also realistic (~$400MM consolidated EBITDA).

More importantly, I don’t think >$350MM consolidated EBITDA is a long putt. Why – 1) Company invested >$100MM on various internal projects over the past few years. There’s an ability to pull back on $25 - $50MM (very controllable) imho. Additionally, 2) input environment negatively impacted CMPR in FYE June 22 and 23E and my guess is COGS exploded by >$250MM past 18-months. CMPR has commented on recent abatement in logistics / transportation not to mention energy / paper / ink as well as recouping margins w/ pricing initiatives (which takes time). My sense is pricing initiatives can drive >$25 - $50MM and the inputs abating could be the x-factor (>$50MM). Upshot is that bridging ~$350MM seems v attainable and perhaps there is a shot at $400MM+ if inputs don’t continue to inflate higher (i.e. stable is good).

Summary Financials: As noted below, margins on Vista segment have compressed from ~21 – 27% historical FY 2018 – 2022 … to sub-10% FYE June 2023E. Couple drivers include 1) investments in the biz (my guess is >500 bps) and 2) external COGS pressure (>500 bps). As mgmt. focuses on less internal investment, and pricing initiatives, think decent portion of the margin is recoverable (i.e. 15% margins). To get back to 21 – 27% probably requires significant input abatement which I’m not smart enough to underwrite (nor do we need it), but ~17.5% would drive $400MM of consolidated EBITDA (<3x net leverage).

Cap structure: As noted below, $1.1Bln TL matures 2028, and factoring in >$200MM of cash implies $900MM of net secured debt. The $600MM 7% note trades at ~70, w/ ~20% YTM and ~10% cash-on-cash yields. Additionally, there is ~$1Bln current market cap and management (Keane) has significant skin-in-the-game.

Catalysts:

March 21^st conference call on margin turnaround

KPIs over next 6 – 12 months

Market cap expansion (currently ~$1Bln) also provides credit support

Ultimately, refinancing the next debt maturity (7% note due June 2026)

Catalyst

March 21^st conference call on margin turnaround

KPIs over next 6 – 12 months

Market cap expansion (currently ~$1Bln) also provides credit support

Ultimately, refinancing the next debt  maturity (7% note due June 2026)