Supremex Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 10, 2023

There are 5 speakers on the call.

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Supremax's Q1 2023 Earnings Conference Call. At this time, all participants are in listen only mode. Following the presentation, we will conduct a question and answer session.

Operator

Instructions will be provided at that time for you to queue up for questions. Before turning the meeting over to management, please be advised that this conference call will contain statements that are forward looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. I would like to remind everyone that this conference call is being recorded on Wednesday, May 10, 2023. I will now turn the conference over to Stuart Emerson, President and CEO. Please go ahead.

Speaker 1

Thank you, operator. Good morning, ladies and gentlemen. I'm here with Stephen Perrault, Interim Chief Financial Officer of Supremex. Thank you for joining us for this discussion on the financial and operating results for our Q1 ended March 31, 2023. Our press release reporting these results was published last evening.

Speaker 1

It can also be found on the Investors section of our website at w w supremeax.com along with our MD and A. These documents will be available on SEDAR as well. We also posted a presentation supporting this conference call. Let me remind you that all figures expressed on today's call are in Canadian dollars unless otherwise stated. Supreme X had another strong quarter with revenue growth of nearly 40%, a 13th consecutive year over year improvement in adjusted EBITDA And a 50% rise in net earnings.

Speaker 1

The revenue growth was both organic and by recent acquisitions, namely Royal Envelope and Paragraph in the Packaging segment. Stephen will provide additional details in a few minutes, but let me take a moment discuss with you the business dynamics. Our Envelope business had another exceptional quarter as we delivered on the solid bookings we had at the beginning of the period. Execution on a clear strategy also continues to bear fruit as we benefit from a better sales and customer mix in our U. S.

Speaker 1

Activities. We continue to drive a greater proportion of our business from program oriented and end user customers, which tend to be stickier and have a higher margin profile. In doing so, we have moved up the distribution channel with less reliance on wholesalers and brokers. Q1 also marked the 1st full period with Royal Envelope, which contributed approximately $12,000,000 in revenue. The operational integration has progressed well.

Speaker 1

And as I said in the last quarter, we see attractive growth opportunities both in direct mail and conventional channels, And we are only beginning to tap this potential. As you are aware, the U. S. Market is of significant size And with our scale, know how and expanded offering, we have been ambitious in looking for revenue synergy from cross selling our respective product offerings to satisfy a wider range of needs for both existing and new customers. Excuse me.

Speaker 1

Turning to packaging, we have made considerable progress and continue to build impressive scale, But candidly, we expected more in the quarter. The shortfall was primarily due to residual inefficiencies following the relocation of the Town of Mount Royal folding carton plant to the Lachine facility. This move, while a remarkable feat by our operations team, It was a significant distraction and impacted productivity and efficiencies. Not surprisingly, the inefficiencies had a negative impact on packaging sales, Absorption and Margins in Q1. We continue to make progress on the commissioning at a steady pace.

Speaker 1

The relocation constitutes an essential step in our packaging strategy as this larger and more efficient facility will easily accommodate more equipment and volume to assist in reducing costs while building the business. Q1 was also our Q1 with Paragraph And it generated just less than $8,000,000 in revenue. The integration has more moving pieces than a traditional single product acquired company, So we've made good progress and we believe these operations will yield important synergies within our expanded network. And on the topic of expansion, on Monday, we announced the acquisition of Graf Pak, a manufacturer of folding carton packaging solutions to several commercial markets, including food and cosmetics. Located on Montreal's West Island, GrabPack is a relatively small business with sales $6,700,000 It is a perfect synergy tuck in with our existing operations in the Greater Montreal area.

Speaker 1

In announcing the transaction, we informed employees that within 90 days, we intend to move their activities to the new Lachine facility, which is less than 15 kilometers away. We expect this tuck in operation to rapidly yield synergies within our folding carton group. With that, I turn the call over to Stephen for a review of the Q1 financial results.

Speaker 2

Thank you, Stuart. Good morning, everyone. Q1 2023 was another record quarter for Supremax. Turning to our top line review. Total revenue was up 39.8 percent to $88,400,000 from $63,300,000 last year.

Speaker 2

Revenue from the Envelope segment rose 44.4 percent to $64,500,000 This solid growth includes a $12,000,000 Revenue contribution from the acquisition of Royal Envelope completed last November. Revenue was also favorably impacted by an average selling price increase 40.1%, which mainly reflects more favorable customer and product mix in U. S. Operations as well as pricing adjustments to mitigate input to cost inflation. Packaging and Specialty Products segment revenue amounted to $24,000,000 up 28.7 percent from $18,600,000 last year.

Speaker 2

This increase reflects and residual impact on sales of relocating the folding carton facility. Looking at EBITDA, Consolidated EBITDA was $18,500,000 in the Q1 of 2023 versus $12,100,000 in Q1 2022, While adjusted EBITDA reached $18,800,000 up from $12,100,000 last year. As a percentage of revenue, the adjusted EBITDA margin was 21.3%, up from 19.1% a year ago. Envelope segment adjusted EBITDA totaled $17,300,000 compared to $10,000,000 last year. The sharp increase primarily reflects the Royal Envelope acquisition as well as higher margins related to a more favorable customer and product mix in the U.

Speaker 2

S. The adjusted EBITDA margin was 26.8%, up from 22.4% last year. In the Packaging and Specialty Products segment, adjusted EBITDA was $3,800,000 compared to $4,200,000 last year. This decrease reflects the residual effect on profitability from relocating the folding carton facility, partially offset by the contribution from Paragraph. Adjusted EBITDA margin was 16.1% compared to 22.5 percent for the same period in 2022.

Speaker 2

Corporate and unallocated costs were $2,300,000 in the Q1 2023 compared to $2,100,000 last year. The slight increase is mainly due to higher compensation related expenses. Now looking at net earnings. Net earnings reached $9,500,000 or $0.37 per share, up from $6,300,000 or $0.24 per share last year. Adjusted net earnings amounted to $9,800,000 or $0.38 per share in the Q1 of 2023 versus $6,300,000 or $0.24 per share a year ago.

Speaker 2

Turning to cash flow. Net cash flows from operating activities totaled $7,500,000 in the Q1 of 2023 versus $200,000 in Q1 2022. The year over year variation is due to higher profitability and a reduction in working capital requirements. Free cash flow was $3,400,000 in Q1 2023 compared to minus $100,000 As the aforementioned factors were partially offset by higher CapEx this year compared to last. Looking at our financial position, our total debt amounted to $81,400,000 as at March 31, 2023 versus $54,700,000 as at December 31, 2022.

Speaker 2

This increase is essentially related to the acquisition of Tirograph for consideration of $27,100,000 Net debt, which excludes deferred financing costs and cash,

Speaker 1

stood at $79,000,000

Speaker 2

As a result, our net debt to trailing 12 months adjusted EBITDA ratio was 1.2x as at March 31, 2023 versus 0.9x as at December 31, 2022. At the end of the quarter, we had $39,900,000 in available liquidity under our senior secured revolving credit Finally, the Board of Directors declared a quarterly dividend of $0.035 per common share payable on June 23, 2023 to shareholders of record at the close of business on June 8. I turn the call back to Stuart for the outlook. Stuart?

Speaker 1

Thank you, Stephen. As I've said as we've said many times, we are methodically building this company for the long term. Our strategy is relatively simple and universally understood by our management teams. Leverage our market position, capacity, know how and cash flow in envelope to fund the pivot to packaging. We are pleased with the progress made in its execution, but we are not satisfied.

Speaker 1

In the immediate term, our priorities are to integrate the recent transactions to harvest all synergies. This includes making further inroads in the U. S. Direct mail market for our envelope operations, leveraging larger capacity of our revamped Lachine folding carton facility and packaging and integrate both of the 2023 packaging acquisitions. Our revenue run rate is approximately $350,000,000 and our Q1 sales exceeded its proportional share.

Speaker 1

This said, we expect some softness in the second and potentially third quarter as customers work through higher inventories built through panic buying during last year's constricted supply. Fast forwarding to this year, those customers must work through their excess inventory During a time of general market softness resulting from the economic uncertainty and our new order intake has been negatively impacted. Required after a tumultuous 2022 in both segments we serve and we expect a return to normalcy in Q2 and into Q3. Fortunately, for Supremax, we can rely on a solid reputation and wide geographic and product reach to help mitigate the adverse effects We continue to drive toward our midterm objective of achieving a fifty-fifty balance between envelopes and packaging by the end of 2025. Currently, our run rate is roughly seventy-thirty.

Speaker 1

To reach our objective, we need approximately $150,000,000 in new packaging business. While we have identified organic growth opportunities, about 80% of the additional revenue should come from M and A, Ideally with a cadence of 1 per year using a healthy balance sheet to acquire, integrate and deleverage before moving on to the next target. With the recent additions, we feel our presence in Quebec is now optimized and we are ready to expand to new territories, either in the Ontario market We're in U. S. Markets where we already have a presence to benefit from natural synergies.

Speaker 1

Supreme X has a solid balance sheet and generates Strong cash flow. This provides us with the flexibility to look for strategic initiatives that create the most value for our shareholders. In conclusion, I thank all Supreme X employees for their excellent performance. We are privileged to have solid teams in both Canada and the U. S.

Speaker 1

As well as in both envelope and packaging. These achievements would not have been possible without their talent and dedication. We will now be pleased to answer any questions you may have. Operator?

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. One moment please for your first question. Your first question comes from Kyle McEwen with Cormark Securities. Please go ahead.

Speaker 3

Hi, everyone. Just to start off with the Envelope segment, your pricing seems to be landing higher than I thought And fully sticking at those higher levels. And my question is what we should expect going forward, immediate and midterm with sector supply chains Now loosened and your input costs likely deflating, should we expect envelope pricing to start deflating? And maybe as part of your answer, you can Address Canada and the U. S.

Speaker 3

Market dynamics.

Speaker 1

Yes. So that's the $64,000 question, Kyle, Q1 was largely booked in Q3, Q4. So those orders were in house, in place, already pre priced. We are seeing sort of the natural return of questions around pricing and people We're in last year, they were more concerned about supply and availability. Today, they're asking about both Availability and price.

Speaker 1

How far that ebbs is remains to be seen. We actually did have a little bit of pullback on ASP average selling price in the U. S. In Q1, kind of hidden a little bit by continued growth in Canada. So as the supply and demand gets more imbalanced, the natural conversation, I don't know what that number is and nor do I care to predict how far or how much pressure there will be there, but there will definitely be some.

Speaker 1

Obviously, Canada is less so given our market share and market position. And it really comes down to how quickly I think it really comes down to how quickly customers work through their inventories And those that have sort of stayed out of the mail for a period of time because of the economic uncertainty, how quickly they get back into it We'll dictate sort of where our competitors go on price. But I do like our position. I mean, where we were a year ago and where we are Today with the customer mix is going to give us some insulation on any downside.

Speaker 2

Okay. Thanks for that color. That's helpful. Again on the

Speaker 3

envelope segment, your comments pointed that you're losing volume relative to the temporarily very strong period in 2022. I'm just looking for a little more detail on exactly what's going on. Are you losing client accounts that no longer need you as sector supply Shortages are gone? Or are you just losing volume from clients that you're keeping, but they're just chewing through their inventory? Or is it both?

Speaker 1

It's a little bit of both, but it's more of the latter than the former. So yes, there's been a few customers that have Gone somewhere else for a better price or something that really needed us in 2022, but there's not very much of that. Most of it is wholesalers that have they were buying as much product as they could possibly get And we were supplying and others were supplying. For example, we have a large wholesaler in New England and their units Purchased this year are down 61%, but they haven't moved a single item from us. They're just chewing through the inventory.

Speaker 1

They say they're 2 weeks away from being able to put replenishment orders back in the system. It's more of that type of impact than customers leaving us.

Speaker 3

Got it. Understood. Okay. And then mid term beyond all this lapping noise, is the goal with your Envelope segment to still have Flattish organic volume growth or in other words, do you still expect you can take enough share in the U. S.

Speaker 3

Market to offset those Canadian secular declines? Like how does the view on your Runway in the U. S. Changed at all?

Speaker 1

Not at all. In fact, it's actually improved a little bit with the acquisition of Royal. We have some capacity there and it takes us into a market that we weren't terribly familiar with.

Speaker 3

Okay. I'll leave it there. Thanks for the answers.

Speaker 1

Thanks, Kyle.

Operator

Followed by 1. Your next question comes from Najeeb Baidu with IA Capital Markets. Please go ahead.

Speaker 4

Hi, good morning. Just to pick up the line of questions on envelopes, can you just give us a bit more details about the sales mix Because volumes were also up in the quarter, how is that looking and what are some of your expectations on hotel mix and volumes for the rest of the year?

Speaker 1

So as we said in the statements, I mean, we think volumes are going to be softer in 2, we've already seen sort of a softening as customers work through that inventory. How it looks and how quickly people come out of it is So it remains to be seen. And then we get the other dynamic is on the direct mail side, The not for profits or fundraisers have significantly diminished their direct mail in the quarter, just as Inflation has affected people's ability to inflation and concern, I guess, have been impacted people's ability Donate or will to donate to not for profits. And then on the banking side, the credit card solicitation acquisition business, interest rates have sort of made it a bit complex for mailers to Put their offers together to get people to switch balances and so on and so forth. So it's really hard to tell, Najee.

Speaker 1

I mean, there We're involved in so many segments with so many moving parts. The degree in each segment is really hard to put our finger on. But we do expect volumes be down in the Q2, but it's a temporary thing as we work through sort of just some resetting.

Speaker 4

Understood and appreciated. So dynamic sort of issue with a lot of moving pieces. Maybe just switching to the Packaging side, Can you help us just a bit more with the sort of the impacts in the quarter from the relocation? And I guess, big picture, What is sort of your expected sort of growth rate for the business now that Durabox, like that noise is out And then you have the 2 acquisitions that you just announced.

Speaker 1

Yes. So I mean we had a lot of, call it, unabsorbed labor in the quarter, In Q4 and in Q1, commissioning the press that we bought At the end of January, the press was there, but getting it commissioned and up and running, you had a lot of sort of direct labor and hanging around, helping with the commissioning. And we just didn't get the absorption, the revenue the sales revenue didn't drive the Exorption that it normally does. Same labor, lower sales, I guess, is the easiest way to put it and Close right through to the bottom. It's largely behind us, just a little bit of residual stuff there and just getting organized And being efficient and getting workflows sort of ironed out in the new facility.

Speaker 1

Tucking in the graph pack piece We'll add a fair bit of contribution to the facility and we'll take a lot of cost out associated with the rents and overheads and indirect labor In the Graf Pak business, we're still of that $150,000,000 we think 80 It has to come from M and A, so the balance would be organic growth over the next 3 years.

Speaker 4

It sounds like maybe there's still Some impacts in Q2 then from the relocation, but that's to a lesser extent. And any updates on the integration of Paragraph? I mean, it's I think the business was a bit of a lower margin when you acquired it, but how is that integration going? When do you expect to maybe be More advanced on that process.

Speaker 1

Yes. As I said in my remarks, I mean, it's this is really the first acquisition we've done. It's Not been sort of a single product that's either an envelope or a pure package. There are some ancillary businesses around it and we're just trying Untangle those, takes a little bit longer than the pure tuck in. We've grabbed synergies from paper, headcounts.

Speaker 1

I would say we're on track with the synergy side, but just getting our arms around it has taken us a little bit longer.

Speaker 4

Okay. I appreciate that. And I guess maybe just one last question. Any updates on the CFO search process? That would be helpful.

Speaker 1

Yes. We've made good progress. We hope to have something announced here in the next couple of weeks. I've been through a Robust interview process and had a candidate meet with the Board and it's We're full steam ahead and hopefully have something to announce here shortly.

Speaker 4

Okay. Thank you very much and congrats on the good quarter.

Speaker 1

Okay. Thanks, Najee.

Operator

There are no further questions at this time. Please proceed.

Speaker 1

Great. Thank you very much, operator. So thank you all for joining us this morning. Hope to see a few of you at the AGM this morning. And For those of you that we don't see, thank you for joining and we look forward to speaking to you again with our next quarterly call.

Speaker 1

Thank you, operator.

Operator

You're welcome. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

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Earnings Conference Call
Supremex Q1 2023
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