So going back to what I answered in the question before about our commentary last night in the earnings document, we’re going to be making an increase we expect in CapEx in fiscal year 2025. And those have very good IRRs, and we like those projects, but there’s limits to how much we can do in a given period of time and also do so while ensuring operational execution. So if I step way back right now, we’re really doing as we’ve said for the last 12 months, 18 months, stay focused on what’s most important from an operational and customer improvement perspective. And when the need for capital in that bucket get filled up and there’s excess cash that we can use to either build liquidity and bring down our debt or earning yield or buy shares, we continue to do that.
And once again, we think our new leverage policy and the target of continuing to delever down towards the 2.5x mark, we’ll keep the bar high in terms of what investments we do, whether it’s organic or share buyback or anything else.
Meredith Burns: Thanks, Robert. So I’ve got a related question that I’m going to have Sean answer this time. Could you please remind us of what IRR thresholds we target for each of the capital allocation activities you identified on Page 3 of the earnings document, namely operating expense growth investments, CapEx for new products and enhancing productivity, M&A, repurchasing shares and debt repurchases?
Sean Quinn: Sure. I’ll remind everyone what we’ve said in the past. And then I think there’s probably a practical overlay on top of that, that, that might even be more relevant. So the ones that we talked about historically and the residual risk that’s dependent as well was 10% for OpEx or CapEx investments in well-understood areas, where we have a long track record of driving returns and things that are very close into how we run the business every day, 15% for M&A of profitable businesses or for new product introduction areas that are adjacent to the ones that we know well and then 25% for investment in either new geographies or riskier new product introduction. And so those have been outlined in Robert’s past annual letters and other venues.
A lot has changed since we talked about those publicly, the last time, most importantly, cost of debt is a bit higher. And we’ve also learned some lessons about some of those areas of capital allocation, in particular, new developing geographies. And so the bar there is very high, practically speaking. Given the commentary that we gave last night and also the leverage policy that we’ve outlined, there’s really – we have a strong desire to continue to maintain our focus and operational rigor. And so practically speaking, I think organic investments should right now have a bar that’s a bit higher than that, let’s call it 12% plus. But some of it, like some of the CapEx opportunities that we see for next year, will be much higher than that and very quick payback.
So this should be very obvious. We’re – from an M&A perspective, as we’ve said, we’re not considering material M&A right now. And so anything that we’ve done there, which has been relatively small or even anything that we would expect to consider in the near future, which would also be smaller, would have that very obvious high returns. And that’s how I would classify anything that we’ve done in our very recent past, and that would be 20% plus. So it should be just extremely obvious and relatively small. For share repurchases, Robert went through that, and so I won’t repeat what he went through there. And then for debt repurchases, that return threshold is a bit lower. And I think the framework there is a bit different. So if we have sufficient liquidity, which we do, and we have cash on the balance sheet that is excess cash that’s earning money market return right now, let’s say, 5% plus, we can compare that to buying bonds.
And if we can do that at a known yield in excess of 10%, which we’ve been able to do, that also reduces our gross debt and there’s no execution risk attached to that, that’s a no-brainer. And so that’s been the framework we’ve used for those. And again, that’s more of a function of cash liquidity position and then the relative opportunities to use excess cash.
Meredith Burns: Thank you, Sean. All right. Another question for Robert. Robert, can you please elaborate on why philosophically it makes sense to run our business with 2.5x leverage and not 1x leverage or 4x leverage?
Robert Keane: So in summary, philosophically, not 4x because 2.5x makes us much more robust and resilient and not 1x because debt does have clear advantages in returns to equity. And we think the new policy strikes the right balance between those. But to dive a little bit more behind that, the 2.5x, which is approximate – or we could go below that is not the output of a spreadsheet. There’s a lot of discussion that got it there. But when we did look at it analytically and factoring in the possibilities of shocks to profitability, including future mega shocks like the pandemic we had four years ago and also considering the cost of debt at different leverage levels, we pretty quickly got to the 3x leverage and then the discussion continued from there about what’s the advantage of delevering further than that.
I would say it’s not for Cimpress, a question about optimizing tax benefits of financing costs because of the way our corporate structure works, we don’t get benefit of all of our interest costs. So there is a cost of capital part of this. There’s a risk management piece from being more robust. And there’s an intangible piece of this, which is how do we want to sleep at night and how do we want to operate the business. Again, stepping way back to the pandemic, we were in the midst of turning around Vista when the pandemic hit, we chose to continue that turnaround, but it led to an uncomfortably high leverage, which we’ve now come back out of and we’ll go further. Another factor we talked about, and again, there’s no overriding factor in this conversation, but just to expose you to some of the conversations we had in a world of real interest rates, which are materially higher, and having seen the shocks that have happened, we think delevering is just healthy and will help us through that volatility.
