28 November 2023

Supreme plc

("Supreme," the "Company" or the "Group")

Unaudited Results for the Half Year Ended 30 September 2023

Record levels of revenue, Adjusted EBITDA¹ and pre-tax profit driven by growth across all product categories, alongside extensive operational progress

Strong Q3 trading to-date resulting in a further significant profit upgrade for FY 2024

Supreme (AIM:SUP), a leading manufacturer, distributor and brand owner of fast-moving consumer products, announces its unaudited results for the six-month period ended 30 September 2023 ("H1 2024" or the "Period").

Financial Highlights

·      Revenue growth of 63% to £105.1 million (H1 2023: 64.6 million) driven by:

o  The ElfBar distribution opportunity, which generated £26.4 million revenue in the Period and has been reported within "Branded Distribution" in the segmental analysis;

o  Strong organic growth of £8.7 million arising from Lighting (21% growth), Vaping (17% growth) and Sports Nutrition & Wellness (17% growth); and

o  The contribution of prior-year acquisitions, which reported growth of £5.4 million.

·      Adjusted EBITDA¹ up 88% to £15.2 million (H1 2023: £8.1 million) driven by incremental revenue and improved margins with very modest investment in overheads to support the reported revenue growth

·      Pre-tax profit up 179% to £12.3 million (H1 2023: £4.4 million)

·      Adjusted net debt (i.e. excluding IFRS 16 leases)⁴ of £4.8 million (H1 2023: £12.9 million), representing less than 0.2x adjusted LTM EBITDA, with unutilised borrowing facilities of £35 million

·      Interim dividend of 1.5 pence per share declared (H1 2023: 0.8 pence)

Operational Highlights

·      Delivered a strong operational performance, further underscoring Supreme's unique operating model and product set

·      Completed the fit-out of 'Ark' warehouse on-time and on-budget with minimal disruption to the wider business. Ark has become the Group's new principal warehousing and distribution centre which will support both organic and acquisitive growth

·      25% increase in vaping production capacity of Manchester-based manufacturing site to accommodate the manufacturing operations of all three vaping businesses acquired in FY 2023 and to support further organic growth

·      Rolled out and significantly scaled the new ElfBar distribution opportunity, including new customer onboarding and extensive product testing, which demonstrates the Company's ability to adapt quickly to new opportunities

·      Announced a number of proactive measures to combat underage vaping, which Supreme strongly believes should be adopted by all industry players:

o  Reduce the use of colour in 88vape packaging;

o  Discontinue the use of coloured hardware for all 88vape disposables;

o  Use only age-appropriate naming conventions to describe 88vape flavours;

o  Trade only with retailers and e-tailers who commit to having robust age verification controls in place; and

o  Make recommendations to retail customers to locate vapes away from confectionery.

Outlook

·      The second half of FY24 has begun very well; with continued growth reported across all divisions within the Group

·      This strong performance in the core business and the growing breadth of ElfBar distribution, combined with a tightly controlled overhead base have led the Board to, again, significantly increase its expectation of full year profitability for the year ending 31 March 2024 ("FY 2024")

·      The Group now expects trading for FY 2024 to be significantly ahead of company-issued guidance, with revenue guidance of around £210 - 225 million and Adjusted EBITDA¹ guidance of approximately £32 - 35 million, an increase of around £4.5 million compared to the previous company-issued guidance⁵, with around £1.5 million of the incremental Adjusted EBITDA¹ arising from the core business and around £3.0 million incremental Adjusted EBITDA¹ arising from the ElfBar distribution opportunity

·      The consultation on possible new UK e-cigarette regulations ends on 6 December 2023. The Group remains confident that the Government will continue to recognise the important role that the vaping industry plays in delivering the country's 'Achieving Smoke-free 2030' initiative

·      Supreme remains ideally positioned to deliver ongoing profit growth and the Board remains confident in its ability to manage change

Sandy Chadha, Chief Executive Officer of Supreme, commented:

"I am delighted to report another exceptional period of trading for the Group, delivering record revenue and profit growth. This strong performance has been undoubtedly driven by our established vaping activities, alongside solid sales momentum across the remainder of the business including sales growth in Lighting of 21% and Sports Nutrition & Wellness of 17%.

In light of our growing presence across the UK vaping sector, we remain highly vigilant to the growing problem of underage vaping and welcome any preventative measures that prevent the supply of vape products to underage individuals whilst acknowledging the important role that the vape industry will continue to play in delivering the UK Government's 'Achieving Smoke-free 2030' initiative.

Looking ahead, the second half of the year is shaping up to be another significant period for Supreme. The Group remains ideally placed to continue to deliver robust operational and financial progress as we strive to deliver ongoing profit momentum."

Investor Presentation

Management will be hosting a presentation for investors in relation to the Company's interim results on 28 November 2023 at 2pm BST. To register for the event, please go to:

https://www.equitydevelopment.co.uk/news-and-events/supreme-investor-presentation-28november2023

¹ Adjusted EBITDA means operating profit before depreciation, amortisation and Adjusted items (as defined in the financial statements).

² Adjusted Profit before tax means profit before tax and Adjusted items (as defined in the financial statements).

³ Adjusted EPS means Earning per share, where Earnings are defined as profit after tax but before amortisation of acquired intangibles and Adjusted items (as defined in the financial statements).

⁴ Adjusted net debt (excluding IFRS 16 leases) means net debt as defined in the year-end financial statements but excluding the impact of IFRS16.

⁵Company-issued guidance immediately before this announcement for the year ending 31 March 2024 was revenue of £195 - 205 million and Adjusted EBITDA¹ of £28 - 30 million.

The information contained within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulation (EU) No. 596/2014 which is part of UK law by virtue of the European Union (withdrawal) Act 2018. Upon the publication of this announcement, this inside information is now considered to be in the public domain.

Enquiries:

About Supreme

Supreme supplies products across five categories; Batteries, Lighting, Vaping, Sports Nutrition & Wellness, and Branded Distribution. The Company's capabilities span from product development and manufacturing through to its extensive retail distribution network and direct to consumer capabilities. This vertically integrated platform provides an excellent route to market for well-known brands and products.

The Group has over 3,300 active business accounts with retail customers who manage over 10,000 branded retail outlets. Customers include B&M, Home Bargains, Poundland, Tesco, Sainsburys, Morrisons, Amazon, The Range, Costcutter, Asda, Halfords, Iceland and HM Prison & Probation Service.

In addition to distributing globally-recognised brands such as Duracell, Energizer and Panasonic, and supplying lighting products exclusively under the Energizer, Eveready, Black & Decker and JCB licences across 45 countries, Supreme has also developed brands in-house, most notably 88vape and has a growing footprint in Sports Nutrition & Wellness via its principal brands Sci-MX and Battle Bites.

investors.supreme.co.uk/

Chief Executive Officer's Review

Introduction

I am delighted to report that the Company delivered an excellent operational and financial performance in H1 2024, underpinned by the impressive performance of our Vaping activities and solid organic growth across our remaining categories.

This record performance is evidenced by a 63% increase in Group revenues to £105.1 million (H1 2023: £64.6 million), alongside an 88% increase in Adjusted EBIDTA¹, growing to £15.2 million (H1 2023: £8.1 million). This growth further underpins the inherent confidence we have in our business and our end markets and highlights the positive trading momentum we have generated since the beginning of the current financial year, having upgraded market guidance a number of times.

From our new operational facilities to exciting product launches, Supreme continues to invest in all areas of the business and enhance our reputation across the UK retail arena as a trusted and responsible manufacturer, brand owner and distributor of staple consumer goods.

We have high ambitions for FY 2024 and beyond, and we remain fully focused on delivering on our ambitious growth targets.

Operational Review

The ongoing cost-of-living crisis is a pressing problem impacting individuals of all demographics, and Supreme remains firmly committed to helping alleviate some of these financial pressures by developing and supplying everyday items at affordable prices to support families across the UK. By leveraging our vertically integrated platform, we are able to focus on accelerating our routes to market whilst identifying opportunities to secure new retail partners to increase the accessibility of our products.

Supreme's move into its new warehouse facility during the Period was completed seamlessly and without disruption to distribution. Intended to further streamline the Group's supply chain, 'Ark' is now our principal storage and distribution centre, with administrative staff set to join our warehousing and distribution team and move into the state-of-the-art offices at the site in early 2024.

Not only will the new facilities provide Supreme with options to accommodate any future M&A, but the transition to 'Ark' also supports our organic growth plans, enabling us to focus on expanding our manufacturing and distribution capabilities across the core categories of Vaping and Sports Nutrition & Wellness. Continued marginal gains in manufacturing reported in H1 2024, including new ways to onboard and train our manufacturing personnel and new manufacturing equipment, have also improved the efficiency of the Group's operations.

In June 2023, Supreme was selected as a master distributor for the UK's leading vaping brands, ElfBar and Lost Mary. The success of this opportunity illustrates the agility of Supreme: we have never distributed third party vaping brands before so to have done this at such scale and to roll out so quickly is testament to the business' distribution capabilities and our ability to adapt. The distribution opportunity also entailed third-party testing and compliance measures which again were adopted without delay. Supreme now supplies ElfBar and Lost Mary products to some of the UK's biggest retailers, including Tesco, Morrisons, One Stop and WHSmith, significantly expanding our retail footprint. The appointment has surpassed initial expectations, and management anticipates the contribution of the distribution of ElfBar and Lost Mary brands across FY 2024, based on current legislation, will be around £7 million of Adjusted EBITDA¹ from around £60 million of revenue.

In terms of M&A, we have continued to assess opportunities in line with our acquisition criteria and we are especially keen to broaden our portfolio and continue to be a multi-faceted consumer goods business. We had around £35 million of unutilised borrowing facilities at the Period end and we continue to monitor, screen and analyse M&A opportunities.

In reference to the FY 2023 M&A, we have further integrated the Liberty Flights business during the Period and on 1 November 2023, we consolidated their manufacturing and warehousing into our principal Trafford Park site. Further synergies were also realised in the Period by onshoring some of their manufacturing that was previously undertaken in China. The Superdragon business (acquired on the last day of the previous financial year) has also been fully integrated into Supreme during the Period with minimal directly attributable overheads required to operate this revenue stream.

Vaping

The Vaping division delivered an outstanding performance in H1 2024, generating revenues of £42.1 million (H1 2023: £31.8 million), a significant increase of 32%. This includes revenue for owned-brand disposable vapes of £8.0 million (H1 2023: £3.9 million). Please note, the revenue for third-party disposable vapes (ElfBar and Lost Mary) is reported separately in our Branded Distribution category and totalled £26.4 million for the Period (H1 2023: £nil).

Vaping gross profit as a percentage of sales increased from 38% to 41% owing to further synergistic gains from manufacturing expansion and the addition of the brands acquired in FY 2023.

Consumer demand for both reusable and disposable products was strong throughout the Period, and our 88vape brand successfully expanded both its product range and market share, with approximately 1.3 million individuals now regularly using the brand. In H1 2024, the Group's R&D team has been working on developing and perfecting an own brand pod-system vaping device.

M&A is a fundamental aspect of our vaping growth strategy, and, since being integrated into the business, recently acquired brands including Liberty Flights, Cuts Ice and Superdragon have significantly scaled Supreme whilst further diversifying its customer base.

As evidenced by our strategic work for HM Prison and Probation Service ("HMPPS"), where Supreme has helped create a risk-free vaping environment within the prison system by producing innovative, tamper-proof vaping devices, we have a history of working alongside the UK Government on nationwide vaping initiatives.

The UK Government, in its April 2023 'Achieving Smoke-free 2030' initiative, confirmed its view that vaping remains "the most effective" tool to ease smokers away from cigarettes. This was, of course, a conclusion reached after consultation with leading healthcare officials and one which corroborates the findings of 'The Khan Review: Making Smoking Obsolete', an independent review commissioned by the Government in June 2022. Supreme's overarching strategy has always been to support a tobacco-free UK by offering both credible and safer alternatives for nicotine consumption and to-date, our own brand, 88vape, has played a significant role in assisting people in quitting smoking.

In light of the ongoing debate about the concerning rise in underage vaping, post-period end we announced a number of proactive measures across our 88vape range as follows:

·    Reduce the use of colour in 88vape packaging;

·    Discontinue the use of coloured hardware for all of the brand's disposables;

·    Use only age-appropriate naming conventions to describe 88vape flavours;

·    Trade only with retailers and e-tailers who commit to having robust age verification controls in place; and

·    Make recommendations to retail customers to locate vapes away from confectionery.

We firmly believe these measures provide a viable blueprint for the industry to follow and believe any regulation will take time to enact. We are confident that the UK Government will seek to strike a sensible balance between addressing the recent environmental and underage vaping concerns whilst also not slowing down their efforts to become a smoke-free country by 2030, which was a cross-party objective of the Government announced in 2019.

With reference to environmental matters, we have now begun to roll out vape disposal units across the B&M retail estate in a bid to encourage more responsible disposal of single-use devices. More importantly, Supreme will use its influence and its network to encourage other players in the industry to follow suit.

Sports Nutrition & Wellness

The Sports Nutrition & Wellness category delivered revenues of £8.9 million (H1 2023: £7.6 million), a strong 17% year-on-year improvement. Gross profit as a percentage of revenue grew to 27% (H1 2023: 18%), again the result of raw material prices beginning to normalise and the gains made in our manufacturing techniques.

Reflected in its strong H1 2024 performance, Sci-MX has benefitted from the Group's strategic rebrand and continued investment in R&D and marketing. With manufacturing of the protein powders brand now in-house, we have significantly increased the efficiency of our supply chain, accelerating the delivery of these products to market whilst also reducing the Group's carbon footprint.

As anticipated, inflationary pressures, particularly those on whey protein concentrates, began to subside during the Period, and this has validated the Company's FY 2023 decision to support retailers through the well-publicised price hike, which will help consolidate our already entrenched relationships with key suppliers for many years to come. The gradual reduction in raw material prices has improved margins in the category, and we regard the expansion of our protein product portfolio as an important long-term growth driver for the Group as we continue to explore commercial opportunities to expand our presence in the UK market.

Supreme's own vitamins brands Millions & Millions and Sealions performed well in H1 2024, and we expect to generate strong demand for our wide array of products as we enter the peak seasonal trading period for the market. New product launches have enabled the Company to capture a larger portion of the market, whilst also opening up additional cross-sell opportunities that we are beginning to capitalise on.

Branded Distribution (previously 'Branded Household Consumer Goods')

As previously communicated, management chose not to report the ElfBar revenue stream within Vaping so as not to dilute or detract from its core Vaping business. ElfBar is not owned or manufactured by Supreme, so has an entirely different financial profile to the Group's core Vaping business and, in fact, is much more aligned to the profile of our existing Branded Household Consumer Goods category, which was already becoming non-core to the Group given efforts over the last two years to scale back this business unit. 

The division, now entitled 'Branded Distribution', reported total revenue of £30.6 million in the Period (H1 2023: £3.4 million), growth of £27.2 million. £26.4 million of this was from the ElfBar distribution agreement whilst the remaining £0.8 million arose from growth in its core business, which is the distribution of branded household laundry and cleaning brands. The addition of ElfBar has not notably changed the margin profile of the category.

Lighting

The Lighting category delivered a strong performance in the Period as the Group continued to prioritise stabilisation. Despite continued challenging trading conditions where some retailers remain overstocked, revenues grew to £7.5 million (H1 2023: £6.1 million), whilst gross profit increased 47% to £2.8 million (H1 2023: £1.9 million).

Since H1 2023, we have made sustained progress recovering the category, facilitated by the agreement of license extensions with key partners Energizer and Eveready announced towards the end of FY 2023, as well as our new contract agreement with Black and Decker, a reputable brand familiar to consumers and retailers alike.

The Group is focused on further strengthening the category and ensuring it maintains its position as a go-to manufacturing or distribution partner for leading brands in the space looking to extend their market share.

Although market headwinds are still prevalent across the lighting sector, we have made steady progress returning the Lighting division to normality and are heading in the right direction with the traditionally busier Q3 trading period imminent.

Batteries

The Batteries division generated revenues of £15.9 million (H1 2023: £15.7 million), up 1% year-on-year. This represents a solid performance from what is historically a dependable category for Supreme partly due to the stickiness of the product. Gross profit as a percentage of sales rose to 13% (H1 2023: 11%) due to product mix within the category.

Supreme is the UK's largest distributor of the product, responsible for over 30% of the UK battery market. Through cross-sell initiatives with our extensive retail network, we have successfully attracted additional customers in the Period, with retailers cognisant that batteries are, and will continue to be, essential products for consumers.

Supreme works with a number of leading brands that are committed to sustainability and we are delighted that almost all the batteries we sell come in plastic-free packaging and include recycled materials. We are committed to continuing to innovate and evolve our packaging, as well as manufacturing and distribution procedures, to ensure we fulfil our ESG aspirations for the category.

Dividend

The Board proposes an interim dividend of 1.5 pence per share in line with the Company's stated dividend policy of 25% of profit after tax. This dividend will be payable on 12 January 2024 to shareholders on the register at 8 December 2023. The ex-dividend date is 7 December 2023.

Outlook

Through a combination of organic and acquisitive growth, the Vaping category was once again the standout performer for the Group. Supreme's distribution capabilities and customer footprint are unparalleled in the vaping industry and continue to strengthen.

As an industry leader, Supreme acknowledges the wider concerns of youth vaping and remains fully supportive of any proactive measures or changes in legislation that potentially restricts specific products, packaging, flavours or point of sale in the UK.

Supreme's unique operating model is built around providing products at affordable prices without having to sacrifice quality, an objective that is becoming all the more important amidst the cost-of-living crisis which is showing no signs of abating.

The Group has made a strong start to the second half of FY 2024. As a result, the Group now expects trading for FY 2024 to be significantly ahead of company-issued guidance, with revenue guidance of around £210 - 225 million and Adjusted EBITDA¹ guidance of approximately £32 - 35 million, an increase of around £4.5 million compared to the previous company-issued guidance⁵, with around £1.5 million of the incremental Adjusted EBITDA¹ arising from the core business and around £3.0 million incremental Adjusted EBITDA¹ arising from the ElfBar distribution opportunity.

The Board remains pleased with the Group's ongoing financial and operational strategic progress and believes Supreme remains ideally positioned to deliver ongoing profit growth.

Sandy Chadha

Chief Executive Officer

27 November 2023

Chief Finance Officer's Review

Introduction

I am delighted to present the financial results for the Period. The Group traded strongly and this is evidenced in the metrics presented below.

Revenue

Revenue grew by £40.5 million (+63%) to £105.1 million (H1 2023: £64.6 million). £26.4 million of this growth came from the ElfBar distribution opportunity, £8.7 million from organic growth in the core business and the remaining £5.4 million from the businesses acquired in FY 2023. In terms of the £8.7 million organic growth, half arose in Vaping where demand continued to grow across all product ranges and the other half was driven by growth in Sports Nutrition & Wellness (17% growth year on year) and Lighting (21% growth).  

Gross profit

Gross profit for the Period was £28.5 million (H1 2023: £18.2 million), growth of 57%. Gross profit as a percentage of sales of 27% was broadly in line with prior year and was the result of noteworthy increases to the gross profit % in Lighting, Vaping and Sports Nutrition & Wellness offset by the lower gross profit % arising from the distribution of ElfBar. Gross profit as a percentage of sales in Lighting rose from 31% to 38%, owing to sales mix and consolidation of supply chain, Vaping gross profit % increased from 38% to 41% owing to further synergistic gains from manufacturing expansion and the addition of the brands acquired in FY 2023 and Sports Nutrition & Wellness gross profit % increased from 18% to 27% as a result of the ongoing recovery of the raw material inflation we reported last year combined with economies of scale achieved by bringing the Sci-MX manufacturing in-house.

Adjusted EBITDA¹

Adjusted EBITDA¹ was £15.2 million (H1 2023: £8.1 million), growth of 88% and Adjusted EBITDA¹ as a percentage of sales increased from 13% to 14%, demonstrating the strength and cost-effectiveness of Supreme's business model where we can add incremental sales into the business without the need for extensive incremental overhead resource to support this. In absolute terms, overheads grew by £3.2 million - a result of increased selling costs (which typically rise directly with sales) including listing fees in respect of the ElfBar distribution opportunity, cost-of-living pay-rises implemented across the business in September 2022 and overheads in respect of the FY 2023 acquisitions.

Depreciation and amortisation

Depreciation increased to £1.8 million in the Period (H1 2023: £1.4 million) as a result of the capital expenditure that was incurred in H2 2023 and H1 2024 in respect of the Ark fitout and also due to the Ark lease reported under IFRS16. Amortisation increased to £0.8 million (H1 2023: £0.5 million) due to the intangible assets acquired as part of the FY 2023 M&A programme.

Adjusted items

Adjusted items totalled £0.5 million credit in the Period (H1 2023: £1.4 million debit). This was a result of the share-based payment charge of £0.6 million (H1 2023: £0.7 million), a credit of £1.6 million in respect of the open foreign exchange forward contracts (H1 2023: £0.4 million credit); its volatility year-on year is precisely why this entry is reported as an Adjusted item. £0.4 million charge was also reported in respect of redundancies relating to the businesses integrated into Supreme's core business during the Period.

Finance costs

Finance costs rose to £0.8 million (H1 2023: £0.4 million) due to the increased interest expense in respect of the newly added leases under IFRS 16 and higher borrowings during the period (in order to finance the investment in ElfBar working capital as shown below in the cash flow summary) at a higher rate of interest compared to the prior period.  

Dividends

The Board has declared an interim dividend of 1.5 pence per share in line with the Company's stated dividend policy of 25% of profit after tax. This dividend will be payable on 12 January 2024 to shareholders on the register at 8 December 2023. The ex-dividend date is 7 December 2023.

Cash flow 

During the Period, the Group reported a net cash outflow of £2.7 million. This included an investment of £16.4 million in working capital to service the ElfBar opportunity across trade debtors, stock and deposits to the manufacturer in China. This investment was partly financed by a £5.5 million drawdown on the Group's borrowing facilities with the remainder being financed from free cash. Before this investment, the Group generated £16.8 million of operating cash in the Period. Some of this cash was reinvested back into the business in the form of capex (namely the fit out of Ark) and also to service the deferred consideration obligations associated with the FY 2023 acquisitions.  In relation to Ark specifically (a one-off capex investment project to fit-out the facility for it to become the Group's principal warehousing and distribution site going forward), this represented £2.3 million of the £2.8 million capital expenditure reported in the Period.  

Net debt

At the Period end, the Group had access to a £25 million RCF facility (£15.3 million undrawn) and a £20 million invoice financing facility (£20 million undrawn). Adjusted net debt (before IFRS 16)⁴ was less than 0.2x of adjusted LTM EBITDA¹.

Suzanne Smith

Chief Finance Officer

27 November 2023

¹ Adjusted EBITDA means operating profit before depreciation, amortisation and Adjusted items (as defined in the financial statements).

² Adjusted Profit before tax means profit before tax and Adjusted items (as defined in the financial statements).

³ Adjusted EPS means Earning per share, where Earnings are defined as profit after tax but before amortisation of acquired intangibles and Adjusted items (as defined in the financial statements).

⁴ Adjusted net debt (excluding IFRS 16 leases) means net debt as defined in the year-end financial statements but excluding the impact of IFRS16.

⁵ Company-issued guidance immediately before this announcement for the year ending 31 March 2024 was revenue of £195 - 205 million and Adjusted EBITDA¹ of £28 - 30 million.

CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION OF SUPREME PLC

Consolidated Statement of Comprehensive Income

Note 1: Adjusted EBITDA, which is defined as profit before finance costs, tax, depreciation, amortisation and adjusted items is a non-GAAP metric used by management and is not an IFRS disclosure.

All results derive from continuing operations.

Consolidated Statement of Financial Position