Supreme Share Discussion Threads

[taursus] 18/4/2023 14:27

Biotechbull

Thanks for your comments about my post.

I agree with your comments about adding back amortisation of acquired intangibles. Supreme has not been consistent between its half-year and full-year results with its treatment of these. At H1 FY22 and FY23, all the intangible amortisation was added back in arriving at adjusted PAT. But at the full year in FY22 just the amortisation on “customer relationships” and “trade names”, which are written off over 5 years. For instance, at the half-year in FY22, £146k was added back (all the intangible amortisation), and at the full year just £196k out of £378k total intangible amortisation.

If the same approach is adopted this year (and why wouldn’t it be?), there would be nearly £1m to add back (last year’s £196k plus 10/12ths of 20% of the “customer relationships” and “trade names” acquired with Liberty). And about £1.15m in FY24. This add-back is not in the Equity Development note, as you say. Adjustment for this would take fully diluted adjusted EPS to 10.2p for FY23 (from 9.4p per ED) and 11.5p for FY24 (from 10.6p per ED).

Regarding your points A & B in response to my original post. I agree these should be favourable factors for the gross margin percentage in Lighting & Sports Nutrition in FY24. In the case of Sports Nutrition, where the margin toughed in H2 in FY22 (and especially Q4), the whey price factor should also have impacted the gross margin percentages favourably in H2 in FY23, whether viewed Yoy or sequentially. (Management indicated on the H1 call that the margin in this division should be bit better in H2 this year v. H1 this year). The Lighting margin was slightly down in H1 this year v H2 last year (1.7ppts); management indicated on the H1 call that Lighting should be slightly better in H2 this year v. H1 this year. In other words, viewed Yoy the Lighting gross margin percentage in H2 should be down only slightly, and slightly better sequentially.

Taking management at its word, this means that--either year on year or sequentially--substantially all of the fall in the overall gross margin percentage in H2 this year must be in Vaping, assuming batteries has been stable.

Re your point C, I can see that dilutive effect on the gross margin percentage of Liberty will have been felt more in H2 as it was only acquitted in June 2022. (I have access only to the ED note and there wasn’t any detail given from which to work out gross margin dilution). Also that if the pods can be produced in-house rather than in China this should be good for margins. Has Supreme confirmed the pods can be produced more cheaply in-house?

Re your point D, I don’t think Supreme acquired the keys to the new warehouse until March (see Paul Hill interview with the CEO) so I doubt there were much, if any, double costs moving Liberty production to Manchester.

It is therefore likely that the margins on disposables are as low as you suggest, or at least materially below Supreme’s historic Vaping margins. Since flotation the story has been that the gross margin percentage will mechanically improve as Vaping, being the fastest-growing category and with the highest gross margin percentage, becomes a larger part of the overall cash gross margin. If it turns out that some/most of the incremental sales in Vaping are (or will be) at a much lower gross margin percentage than either Lighting or Sport Nutrition (normalised), the story would no longer be true. In other words, it would take a higher increase in sales than has hitherto been assumed to achieve operational leverage on the cost base below the GP line. Let’s hope the FY results bring clarity.

Regarding the new warehouse there should be costs in H2 as the lease was signed in mid-November. But the majority of these will be lease costs and below the adjusted EBITDA line in the form of depreciation and interest. It also remains to be seen how many, if any, of the other costs associated with the new warehouse (eg, business rates, insurance, utilities etc) have been treated as “adjusted items” in FY 23 by Supreme/the brokers. Also how the lease costs of existing premises (£1m+ still outstanding at the end of March 23) and the costs of the move to the new warehouse have been treated by the brokers in the FY24 forecasts. (I see ED has “adjusted items” of £2.7m for FY24).

It won’t be until July,as you say,that we get any real clarity on this, and it will take a least a year before we see what operational/manufacturing efficiencies are available from the move in the form of getting greater productivity out of the cost base.

[boonboon] 18/4/2023 12:16

Next year's numbers are assuming no acquisitions.If they get one or two early in the year they might upgrade.

[biotechbull] 18/4/2023 12:10

Well recognised Topvest. re Amortisation, see my last post. Re tax - I don't think so. The other source of downgrade to this Mar23 year is higher financial expenses, but those will drop materially in 2024 and 2025 now that there's no net debt, no 'non bank interest' (those facilities now merged with the bank facility), and now only tiny amortisation cost of the arrangement fee on that new facility. Lease interest may rise with the new leased warehouse but net net the total Finance Costs line, which both brokers raised to £1.1m cost FY23, will be c half that in a year or two's time. Brokers still have it flat at £1.1m.

[ga_dti] 18/4/2023 08:24

Latest CEO interview discussing financial highlights, tremendous revenue growth in the vaping business, the Government’s Smokefree 2030 initiative and the outlook for 2024 -

[biotechbull] 17/4/2023 17:41

Also both brokers are now deducting all of amortisation when they calculate from Adjusted EBITDA to Adjusted Earnings. But historically (2021 and 2022) Supreme 'adds back' the acquisition-related elements of amortisation; and in 1H23 it seems they added back ALL of the amortisation. Surely Supreme's 2023 and future 'Adjusted Earnings' will add back most/all this amortisation, as other companies in UK do, which would lead to a good beat on EPS. In my view the brokers have this wrong by roughly £1 to £1.2m in the FY24 year.

[topvest] 17/4/2023 17:19

A positive update, but better Turnover and EBITDA led to slightly lower than expected EPS numbers, so maybe a higher tax charge or amortisation. Still a great little company with strong potential. Should move back to 150p in due course, as an initial step. We need to see growing EPS to achieve that, so may be 6-12m off full recovery in my view even though I did double-up recently.

[boonboon] 17/4/2023 15:44

To an extent, but didn't go back for more details on the cuts ice sale and what this means for international opportunities.

[biotechbull] 17/4/2023 15:34

Excellent post Taursus. A pleasure to see someone doing real work. Berenberg note calls out following 3 explanations for short term margin weakness, on which I elaborate:
A) high variable margins of the lost Lighting sales. Lighting is high GM%,33% in 2022, and the lost business, being FOB, had no distribution cost attached to it. Temporary, assuming you believe co when they say Lighting sellthrough is now recovering. Maybe £12m off revenues YOY, but profit will be -4m to 5m YOY.
B) Input cost pressures in Sports/Wellness. Until we get divisional breakdown in July it's hard to know exactly, but roughly speaking flat top line 23 vs 22 yet c. 4ppts (nearly £1m) off gross profit. We know they hedged whey late and high so they haven't yet benefitted much if at all from its sharp fall (See Eq Devt note). But it was clearly some post-Covid superspike now normalising.
C) Acquired businesses lower margin (Liberty Flights) and likely some double costs while they move production to Manchester. Both largely temporary as insourcing production will fix Liberty margins. See broker notes at time of its acquisition.

I would add:
D) maybe late in 2023 double costs from this new warehouse

All those A-D should reverse at least partially in 2024.

And you are right, Vaping margins way lower YOY in H2 (and also H1). We don't know how much lower until July (NB Berenberg and Eq Devt have quite different gross profit numbers so can't both have been guided by mgmt). But plausibly 10ppt lower GM% YOY. That's partly mix effect from Liberty (At the time I estimated about 3-4%, again much of this will be reversed once liberty' pod production is in-housed) but I think mostly Disposables mix. E.g. if in H2 disposables were 25% of sales up from 0% the year before or c. 10% in 1H, and disposable gross margins are 20%age points lower, that's a 5%age point GM% headwind YOY. Is that permanent? Kind of, but I expect Supreme to become more efficient on disposables once it's not a brand new product being rushed to market: purchasing scale in volumes, smoother/slower shipping, etc. Could be some other effects pushing down margins. Price (hope not) / product mix / channel mix / ...

I don't think Elf has been out of the market at all by the way?

[brummy_git] 17/4/2023 15:19

Simon Thompson at Investors Chronicle upgrades Supreme to a BUY from Hold.

[ali47fish] 17/4/2023 14:06

taursus - too long winded for me to gain understanding- any chance of brief resume focussing on what is at stake please!

[taursus] 17/4/2023 13:59

While the sales numbers released today are very strong, what is absent is any explanation of why drop-through to EBITDA is non-existent. The Equity Development note does nothing to explain this. Turnover will be £20m higher in FY23 than last year but adjusted EBITDA will be about £1.5m-2m lower. Or put another way, adjusted EBITDA will be flat Yoy in H2 when turnover will be about 20% higher (£85m v £70m).

Given that Vaping is the fastest-growing division and the highest gross margin, Vaping’s gross margins must have plummeted Yoy in H2. Was this due to huge growth in low-margin disposable vapes (bought in rather than manufactured) as a result of “favourable market conditions” (ie, absence of Elf Bars from the market)? And what portion of these sales are one-off?

It looks like the Vaping gross margin in H2 fell to about 35% v. 38% in H1 (and compared with 44% in H2 last year).

Conversely Equity Development’s numbers for next year, given the increase in opex that will come from inflation, assume a big drop-through to EBITDA of at least £3.5-4m on an increase in sales of £12m. This is a drop-though rate which is higher than the average group gross margin of around 28% in the last two years. Without more detail on the moving parts within Vaping, the underlying shape of the numbers is difficult to understand and whether next year’s forecasts are conservative or not. Cash generation looks great, though.

[nfs] 17/4/2023 13:58

Excellent results , added this morning

[davidn67] 17/4/2023 09:14

Great interview

[purplepelmets] 17/4/2023 08:09

Great comeback. Hoping divi is restored

[edmonda] 17/4/2023 07:54

"A positive update of further momentum" (new research note with audio summary here:

Supreme has issued a Trading Update for FY23 performance (year to 31 March) which it expects to be ahead of market expectations, and again in FY24 to slightly exceed the current market outlook. We have revised up our FY23 revenue outlook by 8.5% and, for FY24, by 7.6%.

At the Interim we raised our outlook on the basis of strong results (see ED report 29th November 2022: "H1 23 results buoyed by strong performance from Vaping"): FY23 revenue by 7% to £138.3m, and FY23 EBITDA (adj.) by 6% to £18.5m. The subsequent Trading Update added evidence of continuing positive momentum (see ED report 10th January 2023: "Positive trading update – strong busiest quarter").

On the basis of the strength of trading Supreme now reports, we again raise our outlook: FY23 revenue, in line with the trading update, by 8.5% to £150.0m and (adj.) EBITDA by 5.2% to £22.6m. For FY24 we have raised our revenue outlook by 7.6% to £162.0m and (adj.) EBITDA from £22.2m to £22.6m. There is evident margin dilution to 13.9% from our prior 14.7% estimate; this principally reflects the surge in Vaping revenue such that FY23(E) already exceeds our prior FY24 estimate.

Our Fair Value remains 190p/share – a price indicative of a FY24 EV/EBITDA of 9.4x (see note for full details).

[brummy_git] 17/4/2023 07:39

After posting a ‘better than expected” FY'23 H2'23 performance, CEO Sandy Chadha of Supreme takes me through the group’s:

Long term vision, key USPs & growth strategy. Start
Trading update and benefits of vaping to help smokers quit. 04:15
Supply chain and M&A strategy. 12:40
New product development & FY’24 outlook. 15:20

[brummy_git] 17/4/2023 07:02

Better than expected FY23 results & upgraded guidance from FMCG products group Supreme today.

Thanks to a standout performance from Vaping alongside improved conditions within Lighting.

All the details here.

[dr biotech] 16/4/2023 11:07

Probably due a trading update this week. Hopefully will be better than last years.

[brummy_git] 11/4/2023 16:30

Many thanks eagle eye for the very kind words

[eagle eye] 11/4/2023 15:31

Congrats Paul Hill for Vox Markets.
What a great service you offer private investors.
I'm sure I'm not the only person here sharing this sentiment.
Keep up the good work!
Best wishes
Eagle Eye

[brummy_git] 09/4/2023 05:39

Yes I'm Paul Hill. Happy Easter everyone

[podgyted] 08/4/2023 18:50

You are Paul Hill and I claim my £10.

[brummy_git] 07/4/2023 13:32

Supreme discussed here yesterday on Vox markets - starts 11:10

[davidn67] 07/4/2023 13:07

https://videos.voxmarkets.co.uk/moment/44810/supreme

[11_percent] 05/4/2023 11:02

Am looking for an entry point here......but share price still in a down trend.

Trend now very shallow......lets see a reversal.




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