CA - Supremex Inc. (SUMXF) Q4 2022 Earnings Call Transcript
Supremex, Inc. (SUMXF)
Q4 2022 Earnings Conference Call
February 23, 2023, 10:00 ET
Company Participants
Stewart Emerson - President, CEO & Director
Mary Chronopoulos - CFO & Corporate Secretary
Conference Call Participants
Liam Dotchison - Cormark Securities
Naji Baydoun - iA Capital Markets
Gianluca Tucci - Haywood Securities
Presentation
Operator
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Supremex' Q4 2022 Earnings Conference Call. [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, February 23, 2023.
I will now turn the conference over to Mr. Stewart Emerson, President and CEO. Please go ahead, sir.
Stewart Emerson
Good morning, ladies and gentlemen. I'm here with Mary Chronopoulos, Chief Financial Officer of Supremex. Thank you for joining us for this discussion of the financial and operating results for our fourth quarter and fiscal year ended December 31, 2022.
Our press release reporting these results was published earlier this morning. It can also be found in the Investors section of our website at www.supremex.com, along with our MD&A. These documents will be available on SEDAR as well. We also posted a presentation supporting this conference call on our website.
Let me remind you that all figures expressed on today's call are in Canadian dollars unless otherwise stated.
Let's turn to Slide 39 for an overview of the fourth quarter. Supremex had another very solid quarter with revenue growth of 19%, a 12th consecutive quarter of year-over-year improvement in adjusted EBITDA and a 36% increase in net earnings. This performance concludes a remarkable year in 2022 for the company as we produced strong revenue growth, higher margins and robust cash flow. Mary will provide additional details on our performance in a few minutes, but let me take a moment to just the business.
Our Envelope segment had another very solid quarter, although it was facing a tough comparable due to an exceptionally strong fourth quarter in 2021. This was our first period with Royal Envelope, which contributed close to $10 million in revenue over 2 months. The integration is going extremely well, and our teams are focused on ensuring we harvest all sales and cost synergies available to us and to drive efficiencies and cross-sell opportunities to meet a wide range of needs for existing and new customers.
On the cross-sell side, I'm pleased that we've been successful in making inroads after just a few short months, but we have really only just begun to tap into this potential, and we're excited about what the future may bring. On the Envelope side, as the second largest manufacturer in North America, we have the scale and know-how to further enhance our presence in the vast U.S. market through geographic and product expansion, and we see attractive growth opportunities both in direct mail and through conventional channels.
Turning to Packaging. Just before Christmas, we successfully completed the first relocation of our Town of Mount Royal folding carton operations to its new home and machine where the corrugate box activities were wound down. Decommissioning, moving and recommissioning all of the equipment was a distraction in the last half of the year and production was affected for approximately 8 weeks in November and December. As anticipated, these disruptions had a negative impact on our packaging sales and profitability during the fourth quarter.
Operations are largely back to normal, and we are pleased with how well the team executed this move on an extremely tight time line during a period of constrained supply chain for both supplies and a tight labor market. This relocation is an important step in our packaging strategy. We can increasingly focus our attention on profitably growing folding carton activities. By relocating into a much larger and efficient facility, we can also easily accommodate additional equipment and volume with existing or new customers.
Another important development in our packaging business occurred in early 2023 with the acquisition of Paragraph, an integrated provider of folding carton packaging and point-of-sale displays for cosmetic, pharmaceutical, food, confectionery and retail sectors. With 2 facilities, one on the island of Montreal and the other 50 kilometers to the East, Paragraph brings an excellent track record for quality, proven know-how and capabilities as well as strong customer relationships.
Speaking of customers, it's important to note there was no material overlap of customers between Paragraph and legacy Supremex. Not only does this acquisition further enhance our folding carton offering in Quebec, but is also expected to yield important synergies with the rest of our network. For the 12-month period ended October 31, 2022, Paragraph had generated sales of approximately $38.6 million.
With that, I turn the call over to Mary for a review of the Q4 financial results.
Mary Chronopoulos
Thank you, Stewart. Good morning, everyone. Please turn to Slide 40 for our Q4 top line review. Total revenue was up 19% to $78.8 million from $66.2 million last year. Revenue from the Envelope segment rose 30.1% to $60.7 million. The on growth reflects a $9.7 million revenue contribution from the acquisition of Royal Envelope completed on November 1.
Revenue was also favorably impacted by an average selling price increase of 48.8%, which mainly reflects more favorable customer and product mix in U.S. operations as well as pricing adjustments to mitigate input cost inflation. These factors were partially offset by a volume reduction, which was mainly due to very strong demand in the fourth quarter of 2021.
Packaging and Specialty Products segment revenue amounted to $18.1 million versus $19.6 million last year. The decrease essentially reflects the wind down of the Durabox operations and the impact on sales of relocating the TMR folding carton facility. These factors were partially offset by higher sales in our other folding carton facility and in e-commerce-related activities.
Moving on to Slide 41. Consolidated EBITDA stood at $13.7 million in the fourth quarter of 2022 versus $10.1 million in the previous year. While adjusted EBITDA amounted to $15.3 million, up from $12.2 million in the fourth quarter of 2021. As a percentage of revenue, the adjusted EBITDA margin reached 19.5%, up from 18.5% a year ago.
Envelope segment adjusted EBITDA totaled $14.9 million compared to $8 million last year. This sharp increase was driven by higher revenue in part reflected by the Royal acquisition as well as higher average selling price due to a more favorable customer and product mix in the U.S. Adjusted EBITDA margin was 24.5%, up from 17.1% in the corresponding period of 2021.
In the Packaging and Specialty Products segment, adjusted EBITDA was $3.9 million compared with $6.2 million over the same period last year. This decrease is attributable to lower revenue from the Durabox wind down, our folding carton relocation, which interrupted production over a 6-week period, causing another absorption of fixed costs. Adjusted EBITDA margin was 21.6% compared to 31.7% for the same period in 2021. Corporate and unallocated costs were $3.5 million in the fourth quarter of 2022, compared to $2 million last year. The variation mostly reflects an unfavorable adjustment for deferred and performance share units due to share price appreciation.
In Q4 2022, we incurred restructuring expenses of $1 million related to the relocation of the folding carton plant and the wind down of Durabox. These expenses mainly consist of inventory write-down, severances and expenses for decommissioning and moving equipment.
Turning to Slide 42. Net earnings reached $6.7 million or $0.26 per share, up from $4.9 million or $0.18 per share last year. Adjusted net earnings stood at $7.9 million or $0.31 per share in the fourth quarter of 2022 versus $6.4 million or $0.24 per share a year ago.
Turning to cash flows on Slide 43. Net cash flow from operation -- operating activities totaled $11.7 million in the fourth quarter of 2022 versus $13.8 million in Q4 of 2021. The year-over-year variation is mainly attributable to higher working capital requirements, primarily due to an increase in inventories, partially offset by higher profitability. Reflecting the same factors, free cash flow was $10.2 million in the fourth quarter of 2022 compared to $12.3 million for the same period last year.
Looking at our financial position, Slide 44 shows that our total debt amounted to $54.7 million as of December 31, 2022, versus $44.6 million at the beginning of the year. The increase is essentially related to the acquisition of Royal Envelope for a consideration of $28.3 million, partially offset by debt repayments totaling approximately $18 million for the year.
Net debt, which includes deferred financing costs and cash, stood at $52.5 million. As a result, we concluded 2022 with a net debt to trailing 12-month adjusted EBITDA ratio of 0.9x compared to onetime in 2021. This improvement was achieved despite closing an acquisition at year-end, which added to debt without the corresponding EBITDA contribution, which speaks highly about our cash flow generation ability.
At the end of the year, we had $65 million in available liquidity under our senior secured revolving credit facility of $120 million. Even factoring in the Paragraph acquisition, we still have sufficient flexibility to finance our investments in operations.
Yesterday, our Board of Directors declared a dividend of $0.035 per common share payable on April 7, 2023, to shareholders of record at the close of business on March 23. The declared dividend represents a 16.7% increase over the previous dividend paid and a 40% increase over the dividend paid a year ago, thus showing our Board's confidence in our ability to generate solid cash flows while retaining sufficient resources to further grow the business.
I turn the call back to Stewart for the outlook. Stewart?
Stewart Emerson
Thank you, Mary. We're very confident in that 2023 will be another solid year for Supremex. While we do see some recalibrating of inventories with some of our U.S. envelope customers, demand for our products remain solid and we have good backlogs. We have a solid track record of efficiently managing costs and inflation, and we will remain disciplined in that regard.
While supply chains have improved and market conditions have returned to more normal levels in the paper market, the labor market remains tight. In Envelope, the additional capacity and geographic market expansion provided by the Royal Envelope acquisition has considerably broadened our reach in the U.S. and we have an excellent vehicle to make a significant push in the direct mail channel, where we previously had little activity.
In packaging, with move behind us and the critical mass and new capabilities afforded by the Paragraph acquisition, we feel really good about how we're positioned for 2023 and beyond. In addition to the growth opportunities presented by the Royal and Paragraph acquisition, we are excited by the potential synergies and efficiencies that can be unlocked. For those of you that may have not had the time to do math, allow me to assist. If we add the acquisitions and subtract the Durabox wind down, our current revenue run rate is approximately $350 million with an Envelope to Packaging mix of roughly 70:30.
Our objective continues to be to build the business methodically for the long term. But over the midterm, our eyes are set on growing packaging activities to about 50% of revenue by the end of 2025. The market is fragmented and a strong balance sheet provides flexibility in looking for strategic initiatives that create value.
In closing, I'd like to thank all Supremex employees for an exceptional performance in 2022. We have really solid teams in both Canada and the U.S. and in both Envelope and Packaging. These achievements would not have been possible without their talent, commitment and dedication.
This concludes our prepared remarks, and we will now be pleased to answer any questions you may have.
Question-and-Answer Session
Operator
[Operator Instructions]. Your first question comes from Liam Dotchison with Cormark Securities.
Liam Dotchison
So the Envelope segment had good revenue growth at up 30% year-over-year in Q4, but it looks like that was all price gains and the implied volume performance was negative in a pretty meaningful way. So can you provide some color on where the volume is lost, and then maybe reference what's going on kind of between Canada versus the U.S.?
Stewart Emerson
Liam, so 2021, so the revenue -- I mean, that was the largest quarter by far in Supremex' history on the Envelope side. It was the beginning of the really tight push. We were at unsustainable levels in terms of production and we chewed through a bunch of inventory at that time. So the comp was incredibly difficult to meet, and we sort of signaled that the previous time -- in the previous call.
And the volumes are being affected as we've kind of come out of this extremely tight supply market. I wouldn't call it panic buying, but there was a lot of buying, and we were guilty of it ourselves when you didn't know when you were going to be able to get paper again, you took every available stitch while our customers did the same thing on the on the Envelope side. And now they're just recalibrating inventories a little bit, doing it down and it's going to take a little bit of time to see production levels at the same rate. Does that answer your question?
Liam Dotchison
Yes, that's great. Just on that supply chain comment there, Stewart, does that mean there's any loss of ability to opportunistically win any Envelope business on the back of what was a relatively stronger supply chain now that it means less given that overall normalization?
Stewart Emerson
I don't know about last. I think we're focused on the Royal Envelope sort of capabilities and push on that side into a new market, into new geographic markets. But yes, as paper eases, some competitors that may have struggled on the supply chain side now have more ready access to paper, which impacts the level of competition.
Liam Dotchison
Okay. Got it. And then just regarding the segment's pricing gains, that's 49% year-over-year. Can you provide some color on what to expect kind of going forward with the price? And do you think you can hold price at that current level? Or is it deflating in either Canada or the U.S. or both as inputs deflates and the supply chain normalizes?
Stewart Emerson
Yes. So yes, 50% increase in average selling price. Some of that was FX. Some of it was some -- I wouldn't call it up -- opportunistic pricing opportunity. We had to build in some additional costs for paper that was not at sort of regular market rates. So there's a confluence of things. But I also think that I know that there was a significant change in our customer profile over the last year.
The team strategically went after -- we sort of jettisoned opportunistic buyers and replaced them up the value chain with customers more program-oriented. So there was a pretty significant mix change as well. We think that puts us in a pretty good position sort of on a go-forward basis, it's stickier sales and we can add more value to the process. But supply and demand and as supply opens up a little bit, it will get more competitive.
Liam Dotchison
Got it. Just turning quickly to the Packaging statement here. It looks like you had very good organic growth when adjusting for Durabox. So can you just comment on where that success is coming from and then whether that trend is holding so far into 2023?
Stewart Emerson
Yes. So the e-commerce business continues to perform very well. We've got the Indianapolis packaging facility running extremely well, and it's chewing through work extremely well. There were some price gains passing through inflation or cost inflation but also just some good product mix change. So it was a confluence of a number of things. we think the team did an amazing job through the move. They shifted production to a smaller facility in Laval. They premade as much product as they possibly could, and they got the move done in a very timely fashion with -- and service customers. They -- not all the customers got everything they wanted, but we served customers very well through it as well. So it's a confluence of a number of good things that happened.
Liam Dotchison
Awesome. Just quickly, too. Can you provide any update on what you're seeing with the acquisition pipeline, maybe between the 2 segments?
Stewart Emerson
Well, we're still catching our breath at this point, but we also know that -- we also know that the seeds we sow today, we'll be able to reap them somewhere down the road. And we have to keep that moving. I would say that we're focused entirely on Packaging. There's nothing happening on the Envelope side. It doesn't mean we don't reserve the right to do something, but we are really focused on getting to 50-50.
And we basically exhausted the Quebec market, I would say. There's not much here to look at. So our attention is now Ontario and the Northern U.S. states.
Liam Dotchison
Okay. Just last one here from me. on the Royal Envelope acquisition. It's tracking ahead of the type of revenue that you guys originally disclosed. So can you just comment on where that success might be coming from so far?
Stewart Emerson
We've had some decent gains, nothing material, but sort of blocking and tackling. We also changed or tweaked some of the pricing very early on. And Q4 direct mail tends to be better than the summer quarters. It's got a little more seasonality to it. If you think about direct mail, they try not to mail the customers that are on vacation in the summer. So the fourth quarter tends to be higher, to begin with.
Operator
Your next question comes from Naji Baydoun with iA Capital Markets.
Naji Baydoun
Sorry, I joined late, but I heard some of the comments about sort of supply chain dynamics and how that could lead some competition on the Envelope side and you mentioned a bit on the revenue drivers on Packaging. But just more broadly, can you talk about sort of your view on 2023? And what are some of the other market dynamics in each of your businesses for the year?
Stewart Emerson
Additional color. There is some -- as I said, there is some inventory recalibration happening through the customer supply chain. And we're doing the same. We have too much inventory as well, and we're sort of paring back our purchases, and it kind of continues through the supply chain. So there's fewer replenishment orders happening at this time and into the beginning of the second quarter, I would say.
So as manufacturers, we're still chasing orders to keep our backlog strong, and that leads to more competition. And those competitors that may not have had paper now have -- they've either built out their supply chain or the domestic mills are providing them with more paper. But they're still constrained on the labor side, I would say. I mean, even if Supremex has the same issues. But -- we think we take care of our employees pretty well. And labor remains tight. Paper is more readily available. The industry can make more envelopes today than it did at Q4 last year.
Naji Baydoun
Okay. So when you think about those things, what does that mean in terms of your expectations for both organic growth this year and also margins like our are margins essentially going to be a bit weaker? Or do you think there are still some other efficiencies you can maybe extract and try to offset some of these that you mentioned?
Stewart Emerson
Yes, good question. I mean we're really excited about the synergies at both Royal and that Paragraph on the packaging side. So extracting those being a little more efficient through the organization. But in reality, we didn't have any room for organic growth in the Envelope space until we acquired Royal. So really, organic growth in the Envelope space is really going to come from the additional capacity at Royal.
On the Packaging side, they didn't get the big lift. The market wasn't as constrained as the Envelope market was. They didn't get the big lift from an average selling price or margin on a per order basis. So that dynamic is really not going to change. And we do have room in that space for organic growth.
So to summarize, Packaging, we think, we'll be okay on the organic growth side. Envelope, the only organic growth is going to come from the Royal Envelope facility and our capability there. And then on the Legacy Envelope business, we think there will be a little bit of contraction on price, but we think we can offset it with sort of the margin gains we can get through the synergies.
Naji Baydoun
Okay. So when you say, just to be clearer, on organic growth, you're talking about the net of both pricing and volume together, correct?
Stewart Emerson
Yes.
Naji Baydoun
Okay. Just a couple of more questions. So the Paragraphs and Royal Envelope, just any updates on how the integration is going? Are they performing relatively in line with expectations? And maybe what's your kind of, call it, 100-day plan or key initiatives for both of those businesses?
Stewart Emerson
So the integrations are going very well in both -- on both fronts, 2 different teams, if you will, an Envelope team and a Packaging team. So first, it's a bit of a playbook versus to sort of calm employees down, settle any angst that might be out there, work with the teams, get to know the customers, top 50 customers as quickly as we can, get into the pricing models as quickly as we can to understand those and areas to improve on that side. And then you're into the ticking the boxes of operational efficiency, where can we run product most cost effectively while still servicing the customer. It's early. It's only been 3 months with Royal with Christmas in between. It's only been in a month with Paragraphs.
The employees have accepted us very well. The vendors are transitioning the business effectively, and there were no surprises in either business.
Naji Baydoun
Okay. Sounds like things are moving along well there. Just a final question for me on capital allocation. Bit of a head scratcher to be honest, the dividend increase. I mean it only slightly moves up your yield, whereas the stock is still trading one out of 15% free cash flow yield. So even with the run-up in the share buyback would still make more sense over dividend increases from a pure financial optimization perspective. So just any update on why the dividend increase now and any changes to capital allocation priorities here.
Mary Chronopoulos
So thanks, Naji. I mean it's why we decided to increase the dividend at this point in time was just based purely on the fact of the company's performance. So we've performed very, very well, and we feel that this is a great opportunity to continue to reward shareholders who believe in our story and believe in our growth trajectory.
Like you mentioned, the dividend doesn't necessarily impact our ability to continue to grow via acquisitions. And we just wanted to reiterate that we're very confident and the Board is very confident in our ability to execute on the strategy and still reward shareholders in the process.
Naji Baydoun
Okay. I mean, yes, it's only about $0.5 million of extra dividend payments here. So it's not super material. Just on that final note. So as your view or the Board's view on dividends changed in the sense of top setting either a dividend payout policy or maybe a more kind of consistent dividend growth targets? Or is that still kind of in discussions?
Mary Chronopoulos
It's still in discussions. It's actually something we discussed just very recently. So it's under consideration. So maybe more to come on that over the next couple of quarters.
Naji Baydoun
Okay. Sounds good. Good results.
Operator
[Operator Instructions]. Your next question comes from Gianluca Tucci with Haywood Securities.
Gianluca Tucci
Most of my questions have been asked already. But in terms of all the various dynamics at play in both Packaging and Envelope, what are your margin expectations on a consolidated basis for this year?
Mary Chronopoulos
Margin expectation on a consolidated basis. So Gianluca, it's going to be -- so our current margin expectations are going to remain somewhat stable. To what we've seen -- what we've published thus far, like Stewart mentioned, there could be some areas of the business that may feel a little bit of contraction, but that will be offset in part by the synergies generated from the recent acquisitions. So margins in the low 20% range is probably what we're going to see in 2023.
Gianluca Tucci
Okay. That's good color. And in terms of your CapEx plans, can you share some insight on your plans for growth and maintenance CapEx for this year?
Mary Chronopoulos
So our growth and maintenance CapEx fluctuates year-over-year. But this year, we're expecting to spend anywhere between $4 million and, say, $6 million. That's what we have earmarked for 2023.
Gianluca Tucci
Great. And then just lastly, on the Packaging side, how much is e-commerce comprise of that business today?
Stewart Emerson
We don't normally provide that level of detail on the business, but it's just -- doing some math in my head. It's around 25% to 30% and growing.
Gianluca Tucci
Excellent. Congrats on the quarter.
Operator
Thank you. There are no further questions at this time. Mr. Emerson back over to you.
Stewart Emerson
Great. Well, thank you all for taking the time to tune in today. And we look forward to talking to you again after our Q1. Thanks, a million, and have a great day.
Operator
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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Supremex, Inc. (SUMXF) Q4 2022 Earnings Call Transcript