Supremex Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2024

There are 5 speakers on the call.

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Supamix, Inc. Third 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

Before turning the meeting over to management, please be advised that this conference call will contain statements that are forward looking and are 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 this conference call is recorded on Thursday, November 7, 2024. I will now turn the call over to Martin Goulet of MVC Capital Markets Advisors. Please go ahead.

Speaker 1

Heath, and good morning, ladies and gentlemen. Thank you for joining this discussion of Supramax's financial and operating results for the Q3 ended September 30, 2024. The press release reporting these results was published yesterday after market close. It can also be found in the Investors section of the company's website at www.supremex.com, along with the MD and A and financial statements. These documents are available on SEDAR Plus as well.

Speaker 1

A presentation supporting this conference call has also been posted on our 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 Supremax as well as Francois Bolszuk, Chief Financial Officer. With that, I invite you to turn to Slide 38 of the presentation for an overview of the Q3, and I turn the call over to Stuart.

Speaker 2

Thank you, Martin, and good morning, everyone. Springx's operating performance further improved in the Q3. Our envelope volume was up year over year for the 2nd consecutive quarter, and in packaging, both sales and profitability posted gains driven by gradual improvements in market conditions and internal efficiencies. Once again, our free cash flow generation was solid, enabling us to further reduce debt and buy back additional shares for cancellation. To get more granular, first, let's look at the envelope business.

Speaker 2

Revenue was down slightly year over year as lower average selling prices outpaced volume gains. Volumes would have been even greater, but our ability to produce was negatively impacted by the previously announced facility consolidation in Toronto that we started in late August and was in full swing in September. I will provide you with more detail on that project shortly. Pricing pressure was anticipated given the significant bump during the supply shortage in 2022 early 2023 as the market gives back some of the gains made and our mix between the Canadian and U. S.

Speaker 2

Markets continues to evolve. We're encouraged with the year over year volume gains as the market continues to recuperate from the artificial highs of 2022 and the resulting artificial trough of 2023. It should be noted that part of the volume increase also comes from the Forest Envelope acquisition, the small tuck in completed in May of this year and now fully integrated into our Chicago operations. With this appreciable improvement in market conditions, the continued penetration of the large U. S.

Speaker 2

Market and our business development initiatives, our backlog is significantly stronger now than it's been since Q1 of 2023. As I mentioned earlier, Q3 saw some unexpected disruption from equipment employees being shuffled between the 3 plants as part of our facility consolidation in the GTA. There are a lot of moving pieces and this effect is temporary. But given the significantly improved backlog and the drop in units produced, we left a fair bit of money on the table in September. Close off on the consolidation.

Speaker 2

The critical path of exiting the Concord facility is on track. We decommissioned 20 pieces of equipment and have either sold or moved them to other Supreme X locations. Approximately 75% of the primary equipment that was slated to move have in fact moved and been recommissioned primarily in Mississauga and are back in production. The remaining 25% are slated to be complete by early December. More importantly, the employees that are so critical to our success have given us a resounding response.

Speaker 2

100% of the direct labor employees were offered transfers, 92 of them accepted and the vast majority of those employees are already in their new locations. We are fortunate to have a talented and deep envelope team. This is a significant undertaking, but they are on time and on budget and units produced in Toronto were up 25% in October versus the chaotic September. Even with those headwinds, and this is extremely important, our envelope adjusted EBITDA margin was close to 17% in the quarter. Yes, it's below last year's Q3, but is sequentially higher than the Q2 in spite of what was happening in the 3 large and materially important plants.

Speaker 2

While we're pleased with how the team navigated the quarter and it may be it may seem acceptable by historic standards, we can and will do better as we reap more benefits from the significantly improved backlogs and the consolidation once we exit the Concord facility next February. To remind listeners, we expect annual cost savings in excess of $2,000,000 once all measures are in place. These will come primarily from the reduction of rent and various fixed costs as well as some productivity improvements. Let's turn to our Packaging business where market conditions continue to gradually improve, which led to both higher sales and higher EBITDA. On the sales side, we've enjoyed gradual improvement in channels more closely correlated with the state of the economy, while our e commerce fulfillment business continues to have solid momentum.

Speaker 2

Once again, this quarter, margins have improved, reflecting the initiatives undertaken last year to improve operating efficiencies and achieve synergies within our network. Despite the gains made in both sales and EBITDA, margins remain below their true potential, primarily related to revenue and absorption, and we have made important progress as we continue to build our depth to have the right people in the right seats and build our sales organization. We have added a General Manager to our folding carton activities that brings with him a wealth of knowledge and experience, specifically in the Quebec and Ontario folding carton markets, and we're very excited about adding his talents to the group. With over 2 decades of experience in driving sales and operational excellence and a proven track record of managing multiple plants, we are very confident in his ability to leverage our solid customer base and outstanding asset base and the Supreme X employees and reputation. In addition to the new General Manager, we've added new plant managers in the 3 Montreal area plants and new sales talent in both Montreal and Indianapolis to double down on business development and customer reengagement.

Speaker 2

Before turning the call over to Francois, let me say a few words about our intention to do a sale leaseback transaction on 2 properties. Those of you that follow us closely know our real estate network includes 2 facilities that are owned while others while all others are leased. These two facilities are located in LaSalle, Quebec and in Etobicoke, Ontario and house our 2 primary envelope sales and manufacturing facilities and in fact, our South facility also houses our corporate offices. Given the current state of commercial real estate market in the Greater Montreal and Toronto areas, the timing is right to initiate a sale leaseback process, and today we announced our intentions to do just that. The net book value of the facilities is approximately $9,000,000 and the appraised value is approximately 57,000,000 dollars We believe upon a successful outcome, this process will unlock significant value that is not fully recognized by the market.

Speaker 2

With that, I turn the call over to Francois for a review of the financial results.

Speaker 3

Thank you, Stuart, and good morning, everyone. Please turn to Slide 39 of the presentation. Total revenue remained relatively stable, reaching $69,400,000 compared to $69,800,000 last year. Our envelope revenue was $47,500,000 versus $49,300,000 last year. The decrease reflects a 9.7% decrease in average selling price due to a less favorable customer and product mix.

Speaker 3

Nevertheless, our presence in the U. S. Continues to grow and was the main driver behind the 8.8 6.6 percent volume increase with the assets of Forest Envelope acquired in May also contributing to a lesser extent. Packaging and Specialty Products revenue was $21,900,000 up from $20,500,000 last year. The increase was driven by higher demand from e commerce related packaging solutions, while demand from certain factors more closely correlated to economic conditions was relatively stable compared to last year.

Speaker 3

Moving on to Slide 40. Adjusted EBITDA totaled $7,900,000 or 11.4 percent of sales compared to $11,700,000 or 16.8 percent of sales a year ago. Of this variation, approximately $1,900,000 is due to the difference in share price fluctuation patterns between the periods which impacted PSU, PSU valuation and FX losses. Envelope segment adjusted EBITDA reached $7,900,000 or 16.7 percent of sales versus $9,500,000 or 19.3 percent of sales last year. The year over year decrease reflects the lower average selling price in the U.

Speaker 3

S. Market. Sequentially, the envelope margin is 50 basis points above Q2. In the Packaging and Specialty segments, adjusted EBITDA was $2,500,000 or 11.3 percent of sales compared to $1,700,000 or 8.4 percent of sales last year. The increase is mostly due to the positive effect of optimization initiatives announced late in 2023.

Speaker 3

Finally, corporate and unallocated costs totaled $2,500,000 as opposed to a recovery of $500,000 last year. The year over year variation is mainly due to 2 factors the 2 factors mentioned earlier without which the increase would have been about 1,100,000 dollars Turn to Slide 41, please. In the Q3, Supermix recorded an asset impairment charge of $23,300,000 mainly for the goodwill of the Packaging segment. We also incurred restructuring expenses of $2,100,000 related to the optimization initiatives in the Envelope segment previously announced. Reflecting these changes, the net losses was $22,000,000 or a net loss of $0.92 per share versus net earnings of $5,000,000 or a net gain of $0.19 per share last year.

Speaker 3

Meanwhile, adjusted net earnings were $1,000,000 or $0.04 per share versus $4,000,000 or $0.16 per share a year ago. Moving on to the cash flow on Slide 42. Net cash flows from operating activities totaled $7,600,000 compared to $11,500,000 last year, as lower profitability was partially offset by higher cash generating from generation, sorry, from working capital management. For these reasons, free cash flow remained strong at $7,400,000 and this stream was in part used to further reduce our debt. Over the last 12 months, Supramax generated free cash flow of more than $38,000,000 representing $1.51 per share.

Speaker 3

Considering the recent share price, our free cash flow yield is currently in excess of 35%. Turning to Slide 43. Our the net debt stood at $46,200,000 as of September 30, 2024, just down over $4,000,000 in the last 3 months and more than $9,000,000 since the beginning of the year. Our ratio to net debt to of net debt to adjusted EBITDA remained stable at 1.3x compared to the end of the previous quarter, still well within our comfort zone of keeping it below 2x. At the end of the quarter, we had more than $71,000,000 in available liquidity under our senior secured revolving credit facility, leaving us with flexibility to finance our operation and future investments.

Speaker 3

During the quarter, we repurchased 295,000 common shares for a consideration of 1,200,000 thereby completing our normal course issuer bid program by repurchasing a total of 1,200,000 shares that was allowed. Given our intention to proceed with a sale leaseback transaction, which is a material event, we cannot renew the CBRE program and we will reassess in due time. As we could not return these funds to shareholders and considering the important gain expected from the sale leaseback transaction, the company has increased the quarterly dividends by 25 percent to 5 percent $0.05 per common share, sorry. The next dividend will be payable on December 20 to shareholders of record at the close of business on December 5. Now turning back to Stuart for the outlook.

Speaker 3

Stuart?

Speaker 2

Great. Thank you, Francois. So we've made tangible progress across our business. I believe our performance is still shy of its true potential. We have initiated several activities in the last few quarters to grow sales and improve efficiency and competitiveness of our two segments, and we are confident in our ability to execute on the plans.

Speaker 2

As I said earlier, the envelope backlog is very healthy, and I'm the first to admit that it's frustrating that we're in the middle of a consolidation as the market finally starts to recover. We are pulling every string possible to ensure we maximize our ability to produce in the short term as we optimize the cost structure for the long term. It's a little interim pain as we set the business up for the future. In Packaging, as I've said in the last couple of quarters and in my earlier remarks, the operations have vastly improved and at this point, the primary driver of EBITDA improvement is sales growth and the accompanying absorption. With improving market fundamentals gradually bringing demand back, the investment in the sales organization coupled with new management taking actions to further drive the business, we are on the right track to build this build on this quarter's strong performance.

Speaker 2

Both the Premax business segments are well positioned. We are an agile organization ready and eager to execute with a culture of continuous improvement, all while simultaneously methodically building this business for a long term and we are confident in our ability of achieving more in coming quarters. Finally, our already strong balance sheet will further strengthen once we realize the anticipated gain from the real estate transaction, providing us with even greater flexibility in our quest to return even more value to shareholders. In closing, as I said earlier, we have a lot of activities going on in both segments, and none of it happens without the dedication, passion and talent of our employees across the spectrum. I want to take this opportunity to acknowledge and thank them for jobs well done.

Speaker 2

This concludes our prepared remarks. We are now ready to answer your questions.

Operator

Thank you. We will now begin the question and answer session. And the first question comes from Max Ingram with Canaccord.

Speaker 4

Hey, guys. Thanks for taking my questions. My first question is on the end market, specifically in packaging. I know you had noted some strength in e commerce. Can you talk about some of the other segments that have taken a bit longer to recover?

Speaker 2

Hi, Max, and thanks for your question. It's primarily the Health and Beauty segment that's been sort of bragging over the last little while with the impact of inflation on inflation and interest rates on discretionary spending. So it's primarily health and beauty, where we've had our challenges. The customers are still there, just their volumes are We get a steady forecast from them and we see that improving. Our revenue from that segment has also improved significantly.

Speaker 2

And part of it is in new in the e commerce piece, it's also new customer gains as opposed to growth within. Shipments in the e commerce space within existing customers haven't materially changed. It's the ability to take on new volume.

Speaker 4

Okay. Thanks. That's helpful. My second question is on the U. S.

Speaker 4

Envelope business because the last couple of quarters, it looks like volumes have been pretty strong. Is there anything to call out there that's driving that? I know you had a new director of U. S. Sales, I think, and you had done some direct sales efforts.

Speaker 4

Just any more color you can provide on that would be helpful.

Speaker 2

Yes. Our new Director of Sales in the U. S. Is a long time industry veteran and has done a great job sort of bringing the team together and coalescing it. It.

Speaker 2

So yes, I'd be remiss if I didn't give him credit for that. The same with the Envelope President, Joe Baglione, who's very active on the sales side. But the market itself has improved. And I try to say artificial highs in 2022 resulting in artificial lows in 2023. I think we're coming back to some level of normalcy now.

Speaker 2

And all inventories have been worked through. I've been talking for a while, direct mailers have to get back in the mail. They can't stay out of it forever. There's some certainty with Postal Service now. Postal Service in the U.

Speaker 2

S. Renewed their incentives for mailers, even though there are some price increases, but direct mailers, they renewed their incentives there. So I think it's just the rising tide floats all boats as much as it is new wins, new gains.

Speaker 4

Okay. And then maybe last one for me would be, you guys have done a lot of optimization efforts. When you think about your operational footprint today, how do you are you comfortable with once these optimizations have kind of the details have been ironed out, are you comfortable with where you are today or is there always more to do?

Speaker 2

The answer is yes and no, I would say, and not to be coy by any stretch. Our plan is to build the business and to grow the share and grow our position in the marketplace. So the optimization that we did in packaging last year was the result of an acquisition in January that had a couple of facilities and we needed to sort of consolidate and bring those together and execute on the M and A hypothesis. That was that piece. And that's the packaging side and we're seeing the dividends today of that optimization.

Speaker 2

There's still room if we had to or needed to or the bottom fell out of something on the packaging side. There's still room, but that's not our plan. It's a lever we can pull if we have to, but the plan is to build the sales to drive the absorption through the facilities we have. On the envelope side, again, and I think I mentioned this in the last quarter, the optimization in Toronto is really around we did an acquisition in 2020 of our largest competitor and our most hated at the time competitor. And we probably could have consolidated it in 2020 when we did the acquisition.

Speaker 2

We were right in the middle of COVID and we needed some time for cultures to adjust and to come together. And that's why we took a short 5 year lease and that 5 year lease is up in February of next year. I wouldn't say it's been our it was our plan all the way along, but that was always a lever that we could pull and it was the right time to do it and go to full utilization on a 24, 5 basis in the other two facilities. And there are a couple of other along the same lines, there are other levers that we could pull if necessary, sort of optimize cost. But right now, the utilization levels are high or certainly will be in those facilities that we could do other things.

Speaker 2

The utilization level is high and there's no need to do that. I think once we're through it, unless it's a tuck in acquisition, our footprint is sort of optimized for now. And but there are always things we could do if we became necessary. I don't know. That's a long winded answer to a short question, but hopefully that helps.

Speaker 4

Yes. No, the detail is appreciated. Thanks, Stuart, and congrats on the quarter.

Speaker 2

Thanks, Max.

Operator

Thank you. This concludes our question and answer session. I would like to turn the conference back over to Stuart Emerson for closing comments.

Speaker 2

Hey, thank you very much, operator, and thank you to all for joining this morning. We really look forward to speaking with you again in the New Year. Thank you very much.

Operator

Thank you. This brings to a close today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

Powered by Quartr
Earnings Conference Call
Supremex Q3 2024
00:00 / 00:00