Earnings call transcript: Supremex Inc. Q4 2024 earnings beat expectations

Supremex Inc. (SXP) reported its fourth-quarter earnings for 2024, surpassing analyst expectations with an earnings per share (EPS) of $0.20, compared to the forecasted $0.1817. Despite a revenue shortfall, with actual revenue at $69.08 million against a forecast of $74.84 million, the company’s stock surged by 12.81% to close at $4.05. According to InvestingPro analysis, the stock appears fairly valued at current levels, with a Financial Health Score rated as "GOOD". This positive stock movement reflects investor confidence, possibly driven by operational efficiencies and strategic initiatives highlighted during the earnings call.

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Key Takeaways

• Supremex Inc. exceeded EPS expectations, reporting $0.20 against a forecast of $0.1817.
• The company’s revenue fell short of expectations, reaching $69.08 million.
• Stock price increased by 12.81% following the earnings announcement.
• Operational efficiencies and cost-saving measures contributed to improved EBITDA margins.

Company Performance

Supremex Inc. demonstrated robust performance in Q4 2024, with significant improvements in profitability metrics despite a decline in total revenue compared to the previous year. The company’s strategic focus on operational efficiencies and restructuring efforts in its packaging segment have started to bear fruit, as evidenced by the increase in adjusted EBITDA to $12.9 million, representing 18.7% of sales, up from 12.4% the previous year.

Financial Highlights

• Revenue: $69.1 million, down from $72.3 million year-over-year.
• Earnings per share: $0.23, up from $0.03 the previous year.
• Adjusted EBITDA: $12.9 million, an increase from $9 million last year.
• Free Cash Flow: $8.7 million, compared to $15.1 million in the previous year.

Earnings vs. Forecast

Supremex’s actual EPS of $0.20 exceeded the forecast of $0.1817, marking a positive earnings surprise of approximately 10%. However, the revenue of $69.08 million fell short of the projected $74.84 million, reflecting a miss of about 7.7%. This mixed performance suggests that while profitability improved, top-line growth remains a challenge.

Market Reaction

Following the earnings announcement, Supremex’s stock rose by 12.81% to $4.05, reflecting strong investor sentiment. This movement positions the stock closer to its 52-week high of $4.53, indicating renewed confidence among investors. InvestingPro data shows analyst targets ranging from $3.52 to $3.69, with a unanimous "Strong Buy" recommendation. The stock’s performance contrasts with broader market trends, highlighting the company’s unique position in its sector.

Outlook & Guidance

Supremex remains optimistic about its future prospects, focusing on executing recent optimization initiatives and exploring potential mergers and acquisitions. The company plans to continue managing working capital efficiently and is closely monitoring potential tariff impacts. Guidance revisions were not provided, but the company expressed confidence in its strategic direction.

Executive Commentary

CEO Stuart Emerson (NYSE:EMR) emphasized the company’s long-term strategic goals, stating, "We continue to methodically build the business for the long term and set Supremex up for continued success." Emerson also highlighted the importance of operational restructuring, noting, "Sometimes less is more," in reference to the packaging segment’s improvements.

Risks and Challenges

• Potential impacts from trade tariffs between the US and Canada.
• Continued challenges in the Canadian market due to labor disruptions.
• Dependency on e-commerce packaging demand recovery.
• Macroeconomic pressures that could affect consumer spending.
• The need to manage debt levels while exploring acquisition opportunities.

Q&A

During the earnings call, analysts inquired about the minimal impact of the Canada Post strike and the company’s preparedness for potential US-Canada trade tariffs. Supremex’s management addressed these concerns by outlining their strategic focus on debt reduction and potential acquisitions, underscoring their commitment to maintaining financial stability and growth.

Full transcript - Supremex Inc. (SXP) Q4 2024:

Conference Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Supreme X Fourth Quarter twenty twenty four Earnings Conference Call. At this time, all participants are in listen only mode. Following the presentation, we will conduct a question and answer session.

Before turning the meeting over to management, please be advised that this conference call will contain certain 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, 02/20/2025. I will now turn the call over to Martin Goulet of MBC Capital Markets Advisors. Please go ahead.

Stuart Emerson, President and Chief Executive Officer, Supremex: Thank you, operator, and good morning, ladies and gentlemen. Thank you for joining this discussion of Supremix’s financial and operating results for fourth quarter and fiscal year ended 12/31/2024. The press release reporting these results was published earlier this morning, and it can also be found in the Investors section of the company’s website at www.supremax.com along with the MD and A and financial statements. These documents are available on CyroPlus 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 Chief Executive Officer as well as Francois Boulduc, Chief Financial Officer. With that, I invite you to turn to Slide 38 of the presentation for an overview of the third quarter and or the fourth quarter, sorry, and I turn the call over to Stuart. Thank you, Martijn, and good morning, everyone. I will apologize in advance for any background noise you might hear.

Directly above our heads, out of an abundance of caution. We have a firm cleaning the snow off the roof after the storms over the weekend in Montreal and they happen to be right over our heads at this point. So, apologize in advance. So getting into it, Spring Mix concluded 2024 with a solid fourth quarter financial results. Our envelope volume was up year over year for the third consecutive quarter, while our core Packaging (NYSE:PKG) business continued to recover.

Both adjusted EBITDA margins in both segments improved significantly in terms of margins and absolute dollars. These important gains were driven by optimization initiatives put in place over the past year that had a positive impact on operations, procurement and productivity. This progress reflects the ongoing efforts of our teams throughout the organization. While there is still room for further improvement, I would be remiss if I didn’t take this opportunity to thank our employees for their belief in the plan, passion and steadfast commitment to continuous improvement. First, let’s look at the envelope business.

Revenue was down 3.5% in the quarter on a year over year basis as lower average selling prices outweighed slight volume gains. Volume gains reflect our U. S. Activities where market conditions continually to gradually recover and our sales team successfully push for additional business. A portion of the volume increase can also be attributed to the tuck in acquisition of Forest Envelope last May, now fully integrated in our Chicago operations.

In Canada, units sold were tempered with the Canada Post labor disruption in NovemberDecember, but that disruption and uncertainty, CAD volumes were in line with traditional secular decline. Frankly, manufacturing and selling more units in the quarter was a remarkable feat given the major undertaking associated with the consolidation in the Greater Toronto Area, where three of our largest facilities underwent an overhaul as we consolidated from three plants to two. As part of the consolidation, a total of 21 pieces of envelope manufacturing and printing equipment were moved and another 20 were decommissioned. The team charged with the project did a remarkable job and the employees in the affected facilities are to be commended for staying focused on producing high quality envelopes cost effectively and safely. I’m pleased to confirm that the last pieces of equipment have moved as planned and that we will exit the Concord facility next week on time and on budget.

With the lease expiring at the February, we will have recurring rent savings going forward and the business will be the beneficiary of a more efficient operating network and we have already started to reap noticeable productivity gains, while higher volume in remaining installations improves absorption over a lower cost base. As I said last quarter and several times over the last ten years, we are fortunate to have a deep and talented envelope team. Now that all measures are firmly in place, we should fully achieve the expected cost annual cost savings run rate of more than $2,000,000 going forward. With respect to selling price, pressures were anticipated given the combination of our mix evolution between Canadian and U. S.

Markets and U. S. Manufacturers giving back a portion of the gains made in 2022 and early twenty twenty three when supply was constrained. During the last call, I called out a stronger backlog and this remains the case in early twenty twenty five and we expect to deliver these orders with better margins. Supporting this statement and despite the Toronto consolidation distraction and disruption impacting Q4, Envelope adjusted EBITDA margin reached 18.8%, which was 160 basis points improvement over Q4 last year and also up sequentially more than two percentage points.

We have yet to fully harvest the benefits from the optimization efforts and consequently believe there is room for further improvement. Turning to Packaging. While revenue was lower, the shortfall was primarily connected to the Q4 twenty twenty three restructuring of the Specialty Products business following the closure of a facility outside of Montreal, which narrowed the focus of the business and materially reduced costs. We do not talk a lot about volume and average selling price in the Packaging segment. But while units sold were down over 50% in the quarter, average selling price was up in excess of 200% and the segment margins improved.

We have focused the business on lower touch higher value activities and reduced our costs appropriately. Sometimes less is more. Outside of the restructuring dynamics, our core markets continue to rebound with solid demand from e commerce fulfillment packaging activities and improvements in channels more closely related to discretionary consumer spending. In fact, we recorded our first year over year folding carton revenue growth in several quarters, which can be attributed to new business wins, recovery of the health and beauty channel and a build out of our sales organization. Margins continue to gain momentum, reflecting the initiatives undertaken in the aforementioned restructuring in late twenty twenty three to improve operating efficiencies and achieve synergies, focus on more value added products and the work done to improve absorption.

As indicated last quarter, we’ve gone back to a more traditional small business structure in packaging of general managers in each line of business to be entrepreneurial and focused on driving their individual businesses to greater performance. We added a new General Manager in Folding Carton in late Q3, increased our sales presence and profile and have upgraded talents in all of our businesses over 2024. With most cost related initiatives in place, we focus our efforts on building volume. We are reengaging with customers that may have left or reduced their spending with us, are knocking on new doors and getting new wins and leveraging narrow focus, improved balance and a better cost structure to drive volume. And with better absorption, we’ll be able to deliver the growth at improved margins.

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

Francois Boulduc, Chief Financial Officer, Supremex: Thank you, Stuart. Good morning, everyone. Please turn to Slide 39 of the presentation. Q4 total revenue amounted to $69,100,000 compared to $72,300,000 last year. The envelope revenue was $48,800,000 versus $50,600,000 last year.

The variation reflects a 4% decrease in average selling price, mainly due to a less favorable customer and product mix between The U. S. And Canada. The volume increased by 0.5%, driven by a greater presence in The U. S, including the contribution of Forest Envelope acquired last May.

Packaging and Specialty Products revenue was $20,300,000 versus $21,700,000 last year. The decrease is mostly due to a lower revenue, partially offset by higher demand from e commerce related to packaging solutions. Meanwhile, demand from certain sectors more closely related to economic conditions was relatively stable compared to last year. Moving on to Slide 40. Adjusted EBITDA totaled 12,900,000 or 18.7% of sales compared to $9,000,000 or 12.4% of sales a year ago.

As Stuart mentioned, we are pleased to report margin improvement in our two business segments. Envelope adjusted EBITDA reached $9,200,000 or $18,800,000 of sales versus $8,700,000 or 17.2% of sales last year. The year over year increase reflects benefits from optimization measures announced last July as well as procurement optimization initiatives. Packaging and Specialty Products adjusted EBITDA was 2,400,000 or 11.6% of sales compared to $1,400,000 or 6.1% of sales last year. The increase is mostly due to the positive effect of optimization initiatives announced late in 2023 and the procurement optimization initiatives.

Finally, we had a corporate and unallocated recovery of $1,400,000 as opposed to a cost of $1,000,000 last year. The year over year variation is mainly due to a foreign exchange gain to revaluation of foreign trade receivables and a favorable adjustment of the DSU and PSU reflecting different price share valuations this year compared to last. Turning on to Slide 41. As a result of higher EBITDA, net earnings amounted to $5,800,000 or $0.23 per share versus $700,000 or $0.03 per share last year. Adjusted net earnings were $5,200,000 or $0.2 per share versus $2,200,000 or $0.09 per share a year ago.

Moving on to Slide 42. Our net cash flows from operating activities totaled $9,200,000 compared to $14,800,000 last year. The reduction reflects working capital requirements this year as opposed to a release last year when we were coming off the of a high inventory levels, partially offset by higher profitability. We are continuing to proactively manage inventory and improve working capital. For the same reasons, free cash flow was $8,700,000 versus $15,100,000 last year.

We concluded 2024 with free cash flows of $31,700,000 or $1.29 per share. This represents a free cash flow conversion ratio of $0.79 based on an adjusted EBITDA and a free cash flow yield of 36% given the recent share price. Turning to Slide 43. Our net debt stood at $41,200,000 as of 12/31/2024, down more than $5,000,000 in the past three months and more than $14,000,000 over the course of the year. Our ratio of net debt to adjusted EBITDA improved to 1x versus 1.3x at the end of the previous quarter, well within our comfort zone of keeping it below 2x.

At the end of the quarter, we had more than $77,000,000 in available liquidity under our senior secured revolving credit facility, leaving us with the flexibility to finance our operations on future investments. Finally, the Board of Directors declared a dividend, a quarterly dividend of $0.05 per common share payable on April 4 to shareholder of record at the close of business on March 20. With this, I will turn it back to Stuart for the outlook. Stuart?

Stuart Emerson, President and Chief Executive Officer, Supremex: Great. Thank you, Francois. As we begin the new year, the logical first question to ask ourselves is, are we in a better position than we were a year ago? The answer is a resounding yes. Our fourth quarter results are evidence of our progress and we believe there is still more to come.

As we diligently work on achieving all cost savings and efficiency gains, while sustaining our efforts to generate additional revenue. We continue to methodically build the business for the long term and set Supremax up for continued success. Driven by strong sales teams and high quality assets, both our Envelope and Packaging operations are well positioned in their respective fields. In Envelopes, our backlogs remain improved. We continue to gain traction in the vast U.

S. Market and our Canadian operations are even more efficient as a result of the Toronto project. In Packaging, operations are restructured and led by new hands on management focused on driving cost efficiency and sales growth while outside business fundamentals improve. We have a strong balance sheet that will further strengthen once we realize the planned sale and leaseback transaction announced last quarter. Acting prudently and responsibly, these things take time and we continue to progress on this front, but we’ll only transact if it is in the best interest of shareholders.

In closing, after spending our last few quarters launching and driving initiatives to improve the productivity, efficiency and competitiveness of the two businesses, we are now focused on execution and we are confident in our ability to leverage the spade work over the coming quarters. We have talented teams that remain motivated to achieve and surpass our lofty objectives and I thank them for their unwavering dedication and support. This concludes our prepared remarks. We are now ready to answer your questions.

Conference Operator: We will now begin the question and answer session. The first question comes from Max Ingram with Canaccord Genuity. Please go ahead.

Max Ingram, Analyst, Canaccord Genuity: Hey, thanks for taking my questions. Congrats on the quarter. First question from me was I was hoping to get more color on the impact of the Canada Post strike. Any impact it had on the quarter and maybe any quantum you could put around the impact would be helpful.

Stuart Emerson, President and Chief Executive Officer, Supremex: Hi, Max, it’s Stuart. Yes, so thank you for your question. The Canada Post question is a tough one to answer. As I said in my remarks, it was in line with our volume in Canada was in line with traditional secular decline, in fact, maybe even a little bit better. The reality in the Canadian market is most of the mail is bills and statements and bills and statements have to be delivered or have to be prepared and eventually delivered.

And what major mailers do is they continue to prepare the mail and they just don’t induct it into Canada Post. And then once the disruption is over, they induct. There’s a big backlog within Canada Post because there’s lots of trucks, double the amount of trucks showing up at the depots. And so there’s no real impact in the short term. And it’s complete speculation on what it does to longer term demand disruption if customers switch.

But in that short one month period, it doesn’t affect us at all. Now if our market was a big direct mail market, which it’s not, you would see mailers holding off and not mailing, but that’s not the dynamic in the Canadian market.

Max Ingram, Analyst, Canaccord Genuity: Okay. Okay, that’s helpful. Thanks. And then, sort of a second related question would be, this might be too early to gauge, but any color you could give would be helpful on the postage increase that went into effect January and how maybe some of the conversations you’re having, anything we should be thinking about moving forward?

Stuart Emerson, President and Chief Executive Officer, Supremex: Yes, I think there’s something we need to be careful of on. So the press grabs postage increases and they always talk about the price of a stamp or a coil of stamp or a book of stamps. And the reality is we don’t make our living on people that are putting stamps on envelopes. The impact of the price increases to major mailers, it’s not directly correlated to the increase in the price of stamps. So it’s they negotiate different pricing with Canada Post and get different discounts based on the mail preparation work they do, the sorting it into postal codes and things like that.

So we just need to be careful that we’re not reading the headline and assuming that TD Bank has got a 25% increase in their postage costs, it’s significantly less than that for major mail users. They negotiate sort of directly with Canada Post and get volume discounts.

Max Ingram, Analyst, Canaccord Genuity: Right. Okay. That’s helpful. And then just one last one, if I can sneak one in. And you touched on it a bit in the release, but can you help us think about how we should when we think about potential tariff impacts, I know it’s difficult to put a fine point on this, but I’m compelled to ask and just get your thoughts on it.

Stuart Emerson, President and Chief Executive Officer, Supremex: Sorry, Max, you’re only allowed two questions.

Max Ingram, Analyst, Canaccord Genuity: Put me back in the queue.

Stuart Emerson, President and Chief Executive Officer, Supremex: Sorry for my bad attempt at humor. Yes, so I mean tariffs is a big question. A lot of work has been done on it. I mean, there is certainly a lot of unknowns at this point. I think both countries understand that there is negative impacts on both sides of the border if there is a protracted trade dispute.

So, we believe cooler heads will prevail. But while we are hopeful on the situation that it will be resolved by March 1 or shortly thereafter. We continue to do what we can to mitigate any potential impact. I think right out of the gate, we should make it clear that from a Supremex standpoint, cross border really only affects the envelope business materially. There’s a little bit on the packaging side, but you could take a third of our business and just say there’s virtually no impact.

I don’t really want to provide a lot of detail, but sort of in anticipation the question got a sort of a few points. On the raw material side, particularly paper and window film, based on what was originally announced, we feel we can flex the supply chain where there’s almost zero impact on raw materials. On the finished goods side, we can leave it at there’s not a lot of finished goods currently in the racks in Canada that will eventually find their way to The U. S. And that our warehouses in The U.

S. Are pretty adequately stocked. They got a bit of a war chest there. From a manufacturing standpoint, there is a symbiotic relationship, as you know, between the Canadian envelope plants and the U. S.

Sales team and there’s only so much of the Canadian made volume that can be produced in our U. S. Plants, but we’ve taken several steps to ramp up the production in The U. S. If that’s required.

We meet almost daily to assess our preparedness and strategize on other meaningful opportunities to mitigate any potential risk. That said, we’re as much in the dark as anybody else in terms of potential implementation and duration. And with some information, we’re just we’re not comfortable speculating or quantifying any potential impacts on the tariff side. But we’ve done a lot of preparation work and think we’ve mitigated what we can, but we continue to look at it. I know that’s a non answer in terms of quantifying, but we’ve done a lot of work and we won’t have to push a lot of stock across the border over the next few months.

Max Ingram, Analyst, Canaccord Genuity: Okay. Appreciate it. No, that’s a ton of great color. So, thanks again and congrats on the quarter.

Stuart Emerson, President and Chief Executive Officer, Supremex: Thank you, Max.

Conference Operator: The next question comes from Donangelo Volpe with Beacon Securities. Please go ahead.

Donangelo Volpe, Analyst, Beacon Securities: Hey, good morning, guys. You shouldn’t have let Max ask the third question. He kind of took mine, but congratulations on the results nonetheless. So just looking at EBITDA margin improvement, I was kind of wondering if there are any additional factors outside of the optimization efforts leading to these improvements and if we can kind of expect these margins to hold in line with this range?

Francois Boulduc, Chief Financial Officer, Supremex: Yes. So that’s a very good question. But Max, we had three questions and Max brought them all up, so we’re good. No, no. So seriously, the over the based on the comments that we had earlier, our mix is definitively helping us.

Like Stuart was talking about when you’re comparing it quarters to quarters, the packaging segment got better. And that will continue to improve for sure based on the different changes we’ve made, which is 2023. We had the reorg that we’ve done. And then also Stuart alluded in the comments about the packaging, the facility closing that we had in Northeast Of Montreal. So that has also an impact on the obviously on the sales because we had lower sales, but on the profitability as well because that was lower margins.

So I would say the trend is good. We’re coming back. We did have

Max Ingram, Analyst, Canaccord Genuity: a couple

Francois Boulduc, Chief Financial Officer, Supremex: So we did have a couple initiatives that are paying off in the quarter, but and that may not repeat, but nothing significant. We continue to focus on delivering month after month profitability in line with what we’ve been doing in the past month. So, yes, it will continue to be improving over the next quarters.

Donangelo Volpe, Analyst, Beacon Securities: Okay, great. Thanks for the color on that. And then just moving over to cash flow, I’m seeing continued strong free cash flow generation. Just wanted to look at in terms of capital allocation, is the focus going to remain on paying down debt and potential M and A on the packaging side? And if you’re looking at M and A on the packaging side, can you discuss kind of the pipeline of opportunities that you guys are seeing there, whether it be geographically your size and fit?

Francois Boulduc, Chief Financial Officer, Supremex: Yes. That’s a good question. So from a capital allocation standpoint, I mean, obviously, like we’ve expressed in the previous quarters, we were really focused on getting our the operations organized and focusing on the packaging and getting the SPAC on track with the different reorgs we’ve done. Project North America was another big initiative for us to focus on. But in the meantime, we’re constantly looking at the best options, whether it’s NCIB or acquisitions.

So we’re going to continue to look at that in the next few months. And yes, and then pay down the debt like we’ve been doing. So yes, these options are all there and we constantly reassess based on what’s going on. And from an M and A standpoint, we constantly look and there are opportunities in both segments of our business that are available for us.

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

Stuart Emerson, President and Chief Executive Officer, Supremex: Great. Thank you, operator, and thank you all for joining us this morning. We look forward to speaking to you again in our next quarterly call in May. Stay warm, stay safe, and we’ll talk to you soon. Bye bye.

Conference Operator: This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

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