Supremex Inc. (SXP), a leading North American manufacturer of envelopes and provider of packaging solutions, has announced its financial and operational results for the first quarter of 2024.
The company showed a sequential increase in its Envelope business revenue, attributing the growth to an improving direct mail market. Despite softness in the Packaging (NYSE:PKG) segment, e-commerce packaging grew, driven by unique product offerings and dedicated sales efforts.
The company reported adjusted EBITDA of $10.5 million, a decrease from the previous year but an improvement from the last quarter of 2023. Net earnings were $3.5 million, and net debt stood at $53.5 million.
Supremex also highlighted its strategic acquisition of Forest Envelope and its optimistic approach to long-term growth, despite a slow start to the year.
Key Takeaways
- Supremex's Envelope business experienced revenue growth, driven by a stronger direct mail market.
- The Packaging segment remained soft overall, except for e-commerce packaging, which saw growth.
- Adjusted EBITDA for Q1 was $10.5 million, down year-over-year but up from Q4 of 2023.
- Net earnings reached $3.5 million, with net debt at $53.5 million.
- The acquisition of Forest Envelope is part of the company's expansion strategy.
- Over $66 million in liquidity is available under the senior secured revolving credit facility.
- The company repurchased 316,000 common shares for $1.4 million in Q1 and an additional 116,000 post-quarter.
- A quarterly dividend of $0.04 per common share will be paid on June 21.
- Supremex is cautiously optimistic for the remainder of the year and plans to expand in the US market.
Company Outlook
- Supremex plans to continue its expansion in the US, focusing on building its team and brand in the Northeast and Midwest.
- The company is optimizing its Packaging segment's asset base and actively seeking volume growth.
- New opportunities are being explored in verticals such as the at-home food market.
- Strong cash flow will be used to pay down debt and for further share repurchases.
Bearish Highlights
- The wholesaler and reseller verticals in the Envelope business remain soft due to general economic conditions.
- Adjusted EBITDA and net earnings have decreased compared to the same quarter last year.
Bullish Highlights
- The acquisition of Forest Envelope is expected to enhance Supremex's product offerings and market reach.
- E-commerce packaging growth is bolstered by unique products and sales efforts.
- Pricing improvements in the Envelope segment have been noted, especially with direct mail.
Misses
- No specific financial targets or expectations were missed as reported in the earnings call summary.
Q&A Highlights
- Stewart Emerson (NYSE:EMR) highlighted the acquisition of new accounts and a sizable customer contributing to growth.
- Emerson anticipates persistent demand for e-commerce packaging throughout the year.
- Downward pressure on purchase price multiples for M&A was noted, with smaller tuck-ins related to sellers justifying their cash receipts.
- Emerson invited attendees to the Annual Meeting of Shareholders for further discussion.
Supremex remains committed to its long-term strategy and is poised to leverage its operational strengths and market opportunities to drive future growth.
The company's leadership team is focused on navigating the current economic landscape while maintaining a strong balance sheet and delivering shareholder value.
Full transcript - None (SUMXF) Q1 2024:
Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Supremex Inc. First Quarter 2024 Earnings Conference Call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. [Operator Instructions] 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 Thursday, May 9, 2024. I will now turn the call over to Martin Goulet of MBC Capital Markets Advisors. Please go ahead.
Martin Goulet: Thank you. Good morning, and thank you for joining this discussion of Supremex' financial and operating results for the first quarter 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.supremex.com, along with the MD&A and financial statements. These documents will be available on SEDAR+ 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 Stewart Emerson, President and CEO of Supremex, as well as Francois Bolduc, Chief Financial Officer. With that, I invite you to turn to Slide 40 of the presentation for an overview of the first quarter, and I turn the call over to Stewart.
Stewart Emerson: Thank you, Martin, and good morning, everyone. We are encouraged with our first quarter performance, which is highlighted by sequential increases in adjusted EBITDA and net earnings when compared to the fourth quarter of last year. While finance likes to compare the period reported with the corresponding one the prior year, businesses like ours 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 2024 results do trail those of last year, Q1 was the best performance in the last four quarters. And as I just said, it marks substantial improvements on several fronts from the fourth quarter of 2023. Let's first look at our Envelope business. Revenue was up nearly $3 million from the previous quarter. Looking at the markets we serve, demand from bills and statements, our largest segment is still working through some inventory, but it's about where it should be considering the industry secular decline, and generally remains fairly stable from quarter-to-quarter. 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. 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.S., and the residential effects of excess inventory, particularly if compared to Q1 of last year. While volumes remain well below of 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 feet only accomplished during the irrational exuberance period of 2022 and Q1 2023. 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 tea. We will tuck in the acquired activities into our existing Chicago land 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. We are working feverishly on retaining the customers from the transaction and expect to grow share of wallet with several, while simultaneously improving 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. 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 has been a bright spot in early 2024. Like the Packaging segment overall, e-commerce in general has been soft as consumers grappled with the effects of high interest 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. We continue to position the Packaging segment for long-term success. Our assets are first class. We've refocused and rightsized 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.
Francois Bolduc: Thank you, Stewart. Good morning, everyone. Please turn to Slide 41 of the presentation. Total revenues reached $73.2 million, down from $88.4 million in the same period last year, but up sequentially from $72.2 million in Q4 of 2023. Envelope revenue was $53.4 million versus $64.5 million last year and up sequentially from $50.6 million in the fourth quarter of 2023. 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 $19.8 million versus $24 million in Q1 of 2023 and sequentially down from $21.7 million 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 $10.5 million or 14.3% of sales compared to $18.8 million or 21.3% of sales – percent of sales a year ago. The decline essentially reflects the effect of lower volume on the absorption of fixed costs. However, sequentially, adjusted EBITDA is up from $9 million or 12.4% of sales in Q4 of 2023. Envelope segment adjusted EBITDA reached $10.9 million or 20.4% of sales versus $17.3 million or 26.8% of sales last year. Sequentially, it is up from $8.7 million or 17.2% 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 Stewart's comments about the quality of our team and network. In the Packaging and Specialty Products segment, adjusted EBITDA was $1.2 million or 6.1% of sales compared to $3.1 million – sorry, $3.8 million or 16.1% of sales last year. Sequentially, the margin remained stable from Q4 2023. Corporate and unallocated costs amounted to $1.6 million versus $2.3 million 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 $3.5 million or $0.14 per share versus $9.5 million or $0.37 per share last year, but up sequentially from $0.7 million or $0.03 per share in Q4 of 2023. Adjusted net earnings amounted to $3.5 million or $0.14 per share in Q1 of 24 versus $9.8 million or $0.38 per share last year, but up sequentially from $2.2 million 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 $5.1 million in Q1 of 2024 versus $7.5 million 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 $4.7 million, up from $3.4 million a year ago. Turning to Slide 45. Our net debt stood at $53.5 million as of March 31, 2023, down from $55.4 million 3 months earlier. 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 million 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 $1.4 million. 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 share payable on June 21 to shareholders of record at the close of business on June 6. I turn the call back to Stewart for the outlook. Stewart?
Stewart Emerson: 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 two 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.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. 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. 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. 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 proven to be resilient, capable and with sound fundamentals. We believe Supremex 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: We will now begin the question-and-answer session. [Operator Instructions] The first question is from Max Ingram of Canaccord Genuity. Please go ahead.
Max Ingram: Hi. 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? 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?
Stewart Emerson: 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 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 the beneficiary of some good work a couple of years ago and their ability to grow. What was the second question, sorry.
Max Ingram: 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?
Stewart Emerson: Yes. I think the consumer confidence, I hate to say economy, it's more about consumer confidence and just sort of discretionary spending. As that continues to grow and there continues to be pressure on e-tailers to rightsize packaging and take advantage of whatever savings, a postal savings, we can offer them. And consumer confidence continues to grow. I see that segment continuing to grow and will be the beneficiary thereof.
Max Ingram: Okay. That's really helpful. Thanks, Stewart. 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. Is the stronger pricing this quarter a result of mix? Or is it just the supply-demand dynamics creating a favorable pricing?
Stewart Emerson: Yes. So very astute. It has – 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. So it was really mix related.
Max Ingram: Okay, that's helpful.
Stewart Emerson: Yes.
Max Ingram: Sorry.
Stewart Emerson: No, that's good.
Max Ingram: And then just one quick last one for me. It would be on M&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? Or is it more interest rate driven? Or maybe you're not seeing any changes in valuation. Any color there would be helpful.
Stewart Emerson: So are you saying improvements in the purchase price?
Max Ingram: Yes.
Stewart Emerson: 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. 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.
Max Ingram: Okay. That makes sense. I will pass the line. Thanks for taking my questions.
Stewart Emerson: Thanks Max.
Francois Bolduc: Thank you, Max.
Operator: [Operator Instructions] This concludes the question-and-answer session. I would like to turn the conference back over to Stewart Emerson for any closing remarks.
Stewart Emerson: Thank you, operator. Thank you all for joining us this morning. We look forward to speaking to you again at our next quarterly call. And we also invite you to attend our Annual Meeting of Shareholders to be held later today at 11:00 a.m. in Downtown Montreal. Until then, have a great day, and we'll see you next quarter.
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