Supremex Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 9, 2024

There are 5 speakers on the call.

Operator

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.

Speaker 1

I would

Operator

like to remind everyone that this conference call is being recorded on Thursday, May 9, 2024. I will now turn the call over to Melton Goulay of MVC Capital Markets Advisors. Please go ahead.

Speaker 2

Yes. Thank you. Good morning, and thank you for joining this discussion of Surpemix's financial and operating results for the Q1 ended March 31, 2024. The press release reporting these results was published yesterday after markets closed. It can also be found in the Investors section of the company's website at www.sapremex.com along with the MD and A and financial statements.

Speaker 2

These documents will be available on SEDAR Plus as well. A presentation supporting this conference call has also been posted on the website. Let me remind you that all figures expressed on today's call are in Canadian dollars unless otherwise stated. Presenting today will be Stuart Emerson, President and CEO of Supremex as well as Francois Boulduc, Chief Financial Officer. With that, I invite you to turn to Slide 40 of the presentation for an overview of the Q1, and I turn the call over to Stuart.

Speaker 1

Thank you, Martin, and good morning, everyone. We are encouraged with our Q1 performance, which is highlighted by sequential increases in adjusted EBITDA and net earnings when compared to the Q4 of last year. While finance likes to compare the period reported with the corresponding one in the prior year, businesses like ours have little that have little seasonality can utilize a sequential view to gauge performance. This is even more valid in this quarter as our markets continue to recover from the market corrections that followed the extremely strong performances of 2022 and in particular a record Q1 2023 that was clearly unsustainable. So while our Q1 twenty twenty four results do trail those of last year, Q1 was the best performance in the last four quarters.

Speaker 1

And as I just said, it marks substantial improvements on several fronts from the Q4 of 2023. Let's first look at our envelope business. Revenue was up nearly $3,000,000 from the previous quarter. Looking at the markets we serve, demand from bills and statements, our largest segment is still working through The direct mail market appears that it may have bottomed, but the The direct mail market appears that it may have bottomed, but the fundraising vertical remains quite lethargic given the squeeze on discretionary income. With direct mail gradually returning, our Royal Envelope operations gained momentum in the quarter and looking ahead, we have confidence that despite the unfavorable backdrop of high interest rates and inflation, direct marketers, fundraisers and charities can't remain on the sidelines indefinitely and out of a marketing channel that has a proven ROI.

Speaker 1

And we expect these channels to gradually gain momentum. The wholesaler and reseller verticals, a significant portion of our U. S. Volume remains quite soft. This softness is tied largely to general economic conditions for small businesses in the U.

Speaker 1

S. And the residential effects of excess inventory, particularly if compared to Q1 of last year. While volumes remain well below what we would call normal levels, like the other segments, we are seeing a gradual return to normalcy. As you would expect in a market that has a stable supply in a so called normal times, the reduction in demand has put pressure on price, but our team has done a very good job of selling our value proposition and maintaining price as evidenced by the margins generated by our envelope activities. The envelope segment EBITDA surpassed the 20% threshold this quarter, a feat only accomplished during the irrational exuberance period of 2022 and Q1 2023.

Speaker 1

This speaks highly about the quality of our teams, our discipline, ability to control costs and our customer network. Speaking of networks, ours got a little bigger last week with the acquisition of Forest Envelope, a regional specialty envelope manufacturer located in the Greater Chicago area. I have previously mentioned that we would be opportunistic buyer of Envelope Companies and this transaction fits that description to a tee. We will tuck in the acquired activities into our existing Chicagoland footprint and told the acquired employees that we will cease manufacturing within the forest operations within 45 days. At this point, we are evaluating what equipment, if any, and how many employees will transfer.

Speaker 1

We are working feverishly on retaining the customers from the transaction and expect to grow share of wallet with several, while simultaneously improving the utilization and absorption within the existing facilities and reaping other synergies. Turning to packaging, like the Envelope business activity remains soft, especially for markets whose business is more closely tied to discretionary spending and the ebbs and flows of the economy. In folding carton, operations have incrementally improved over the past couple of quarters and in Q1, our primary issue was largely around utilization and absorption. Volume from core customers in the health and beauty and the over the counter pharma verticals has been very choppy. The combination of up and down demand and a continued tight labor pool has made it difficult to align costs with revenue and attain the required levels of absorption.

Speaker 1

We continue to believe that some of the pressures on CPG will eventually ease, but it's been challenging the last few quarters. To combat this, in the short and medium term, our focus has been on cost control and penetration of the at home food market where we continue to make good progress. The e commerce packaging space The e commerce packaging space has been a bright spot in early 2024. Like the packaging segment overall, e commerce in general has been soft as consumers grapple with the effects of high and inflation. However, in our case, our unique product offerings and some good work by our sales teams have allowed us to penetrate new accounts and ride a wave of growth within others.

Speaker 1

We continue to position the Packaging segment for long term success. Our assets are 1st class. We've refocused and right sized the business units and we've reorganized to bring decision making closer to the action and to foster operating efficiencies and synergies across our operations. At this point, we require sales volume to leverage the improved operations and structure, But we are encouraged by our continued progress and are confident we are in a much better position to capitalize on our business development efforts and growth as the broader market and consumer confidence improves. With that, I'll turn the call over to Francois for a review of the financial results.

Speaker 3

Thank you, Stuart. Good morning, everyone. Please turn to Slide 41 of the presentation. Total revenues reached CAD 73,200,000 down from CAD88,400,000 in the same period last year, but up sequentially from CAD72,300,000 in Q4 of 2023. Envelope revenue was CAD53.4 million versus CAD64.5 million last year and up sequentially from CAD50.6 million in the Q4 of 2020 3.

Speaker 3

The decrease from last year mainly reflects lower volume, partially offset by a slight increase in average selling prices. Packaging and Specialty Products revenue was €19,800,000 versus €24,000,000 in Q1 of 2023 and sequentially down from $21,700,000 in Q4 of 2023. The year over year decrease reflects lower demand from certain sectors more closely related to economic conditions, which is partially offset by higher demand from e commerce related packaging solutions. Moving on to slide 42, adjusted EBITDA totaled $10,500,000 or 14.3 percent of sales compared to 18,800,000 or 21.3 percent of sales a year ago. The decline essentially reflects the effect of lower volume on the absorption of fixed costs.

Speaker 3

However, sequentially adjusted EBITDA is up from €9,000,000 or 12.4 percent of sales in Q4 of 2023. Envelope segment adjusted EBITDA reached $10,900,000 or 20.4 percent of sales versus $17,300,000 or 26.8 percent of sales last year. Sequentially, it is up from $8,700,000 or 17.2 percent of sales in Q4 of 2023. I direct your attention to the middle chart of Slide 42, which shows our envelope margins over the past 5 years. We recently we clearly see that the 20.4% margin in Q1 is above what we've achieved prior to the run up of 2022, despite more difficult market conditions, and I echo Stuart's comments about the quality of our team and network.

Speaker 3

In the Packaging and Specialty Products segment, adjusted EBITDA was $1,200,000 or 6.1 percent of sales compared to $3,100,000 or 16.1 percent of sales last year. Sequentially, the margin remains stable from Q4 2023. Corporate and unallocated costs amounted to $1,600,000 versus 2,300,000 last year. The decrease reflects a favorable adjustment to stock based remuneration expenses this year and severances a year ago. Turning to slide 43, net earnings reached CAD3.5 million or CAD0.14 per share versus 9,500,000 or $0.37 per share last year, but up sequentially from €700,000 or 0 point 0 $3 per share in Q4 of 2023.

Speaker 3

Adjusted net earnings amounted to 3,500,000 dollars or $0.14 per share in Q1 of 'twenty four versus $9,800,000 or $0.38 per share last year, but up sequentially from $2,200,000 or $0.09 per share in Q4 of 2023. Moving on to the cash flow on Slide 44, Our net cash flows from operating activities totaled CAD5,100,000 in Q1 of 2024 versus CAD7,500,000 last year. The variation reflects lower profitability, partially offset by reduced working capital requirements this year compared to last. Reflecting lower acquisitions of property, plant and equipment this year versus last, free cash flow was $4,700,000 up from $3,400,000 a year ago. Turning to Slide 45, our net debt stood at $53,500,000 as of March 31, 2023, down from CAD55.4 3 months earlier.

Speaker 3

This year over year decline in profitability, the ratio of net debt to adjusted EBITDA was 1.3x as of March 31, still well within our zone our comfort zone should I say of keeping it up below 2x. At the end of the quarter, we had more than 66,000,000 in available liquidity under our senior secured revolving credit facility, leaving us with plenty of flexibility to finance our operations and investments. During the quarter, we used our excess cash flow to repurchase 316,000 common shares for a consideration of $1,400,000 Since the end of the quarter, we've remained active on our NCIB by repurchasing 116,000 shares. Finally, the Board of Directors declared a quarterly dividend of $0.04 per common shares payable on June 21 to shareholders of record at the close of business on June 6. I turn the call back to Stuart for the outlook.

Speaker 3

Stuart?

Speaker 1

Excuse me. Thank you, Francois. Although 2024 is not off to a blazing start, the first quarter produced enough encouraging signs to be cautiously optimistic for the rest of the year. The markets that our two segments serve are showing signs of improvement and our 2 businesses have improved their cost structure, nimbleness and efficiency and continue to do so. In Envelope, we'll continue to nurture the Canadian market while pushing further expansion into the large U.

Speaker 1

S. Market where our market share remains in the 10% range. We continue to build our team and brand in the U. S. Northeast and Midwest.

Speaker 1

With EBITDA margins again north of 20% in the quarter in a time of relative weak demand, we continue to believe strongly in the cash flow generation of this segment. The tuck in acquisition of Forest reinforces this belief and the belief in our team and we expect it to add to an already strong platform. In Packaging, our asset base is outstanding. The footprint has been optimized and the business is running more efficiently. At this point, the missing ingredient is volume.

Speaker 1

Like an envelope, we are seeing a slow progression towards normalization. It will be gradual and possibly not linear. But when it happens, we'll be ready. But let me assure you, we're not casually waiting for normal. Our teams are in the field and developing new opportunities in new verticals like the At Home Food Market and leveraging our IP and exceptional equipment base to penetrate new business in existing verticals.

Speaker 1

As we've stated many times, we are committed to methodically building the business for the long term and our teams are eager to execute. As for additional expansion, our balance sheet remains strong as we continue to seek accretive acquisitions and investments. In the meantime, we'll continue to use our strong cash flow to methodically pay down our debt and repurchase shares. In closing, I want to thank our 1,000 plus employees for their commitment, dedication and hard work. Our two segments have been have proven to be resilient, capable and with sound fundamentals.

Speaker 1

We believe Supremix is on solid ground to benefit from an eventual rebound in volume. This concludes our prepared remarks, and we are now ready to answer any questions you may have.

Operator

The first question is from Max Ingram of Canaccord Genuity. Please go ahead.

Speaker 4

Hey, good morning guys. Thanks for taking my questions. My first question is on the packaging side. It looks like e commerce was a positive and maybe could be hitting an inflection point. Do you know what's driving that?

Speaker 4

I know you called out your sales efforts, but is there anything else? And then I guess depending on that answer, do you anticipate higher demand within e commerce through the rest of the year?

Speaker 1

Hi, Max. Thanks very much for the questions. Yes, look, it's a combination of the above like most answers are. We've taken on some new accounts and they've been very accretive and helpful to the absorption rates. And we have one sizable customer.

Speaker 1

We got in on the ground floor and it continues to grow almost exponentially and we've been the beneficiary of that and taken on more products as they've expanded. And we've been a beneficiary of some good work a couple of years ago and their ability to grow. What was the second question? Sorry.

Speaker 4

I was just going to say depending on the answer, do you anticipate the demand to persist, like the stronger e commerce to persist throughout the year?

Speaker 1

Yes, I think the consumer confidence, I hate to say economy, it's more of a consumer confidence and sort of discretionary spending. As that continues to grow and there continues to be pressure on e tailers to right size packaging and take advantage of whatever saving and postal savings we can offer them. And consumer confidence continues to grow. I see that segment continuing to grow and we'll be the beneficiary thereof.

Speaker 4

Thanks. That's really helpful. Thanks, Stuart. My next question is on the envelope side. Pricing was up a bit year over year, but that's improved since last quarter where I think the dynamics have pressured pricing.

Speaker 4

Is the stronger pricing this quarter result of mix? Or is it just the supply demand dynamics creating a favorable pricing?

Speaker 1

Yes. So very astute. It did improve quarter to quarter, but that's largely mix as opposed to any sort of change in the fundamentals. As I mentioned, direct mail was up and stronger in the quarter in terms of mix. And it has a much higher average selling price than bills and statements and wholesale type work.

Speaker 1

So it was really mix related. Okay.

Speaker 3

That's helpful. Yes.

Speaker 4

Sorry? No, that's good. And then just one quick last one for me would be on M and A. Congrats again on the Forest Envelope deal. Is there any improvements in valuations you're seeing in the market as a result of pressures on either the envelope or packaging side?

Speaker 4

Or is it more interest rate driven? Or maybe you're not seeing any changes in valuation? Any color there would be helpful.

Speaker 1

So you're are you saying improvements in the purchase price? Yes. There's downward pressure on the multiples paid. As people continue to be concerned about long term effects of sort of market conditions and secular decline. So there is a little bit of pressure that way.

Speaker 1

But on these small tuck ins, they tend to be more related to the seller being able to net enough income or cash to justify selling the business. So it's less about multiples and do I have am I going to have enough cash when I cash out.

Speaker 4

Okay. Okay, that makes sense. I'll pass the line. Thanks for taking my questions.

Speaker 3

Thanks, Max. You're

Operator

This concludes the question and answer session. I would like to turn the conference back over to Stuart Emerson for any closing remarks.

Speaker 1

Thank you, operator. Thank you all for joining us this morning. We look forward to speaking to you again at our next quarterly call. We also invite you to attend our Annual Meeting of Shareholders to be held later today at 11 am in Downtown Montreal. Until then, have a great day and we'll see you next quarter.

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Key Takeaways

  • Supremex delivered sequential improvements in Q1, with adjusted EBITDA rising to CAD 10.5 million and net earnings climbing to CAD 3.5 million compared to Q4 2023.
  • The envelope segment saw revenues increase by nearly CAD 3 million sequentially and achieved a 20.4% EBITDA margin, supported by disciplined cost control and the acquisition of Forest Envelope to expand its U.S. footprint.
  • Packaging revenues remained under pressure, but e-commerce packaging was a bright spot thanks to new account wins and strong unit growth, while the company focuses on cost control and at-home food market penetration.
  • Financially, Q1 revenues were CAD 73.2 million (down year-over-year), but free cash flow rose to CAD 4.7 million, net debt fell to CAD 53.5 million (1.3x adjusted EBITDA) and the company repurchased shares and declared a CAD 0.04 dividend.
  • Looking ahead, Supremex is cautiously optimistic, aiming to grow U.S. market share (currently ~10%), normalize packaging volumes gradually, pursue accretive M&A and continue deleveraging.
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Earnings Conference Call
Supremex Q1 2024
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