RTimages/iStock via Getty Images The following segment was excerpted from this fund letter. We have also been looking northward for opportunities and a new holding I’d like to mention is Supremex Inc., a manufacturer of envelopes and packaging materials with operations in Canada and the US. Over time, Supremex has built its envelope business, both organically and through acquisitions, to the point where it now occupies a dominant position in the Canadian market. Envelopes are certainly not a growth market—I may have finally found something less exciting than rural telecoms! — but the expected perpetual decline here all but guarantees that nobody will attempt to build a new envelope manufacturing facility. Supremex is essentially the “last man standing” in a declining industry, the result of which is pricing power. Indeed, the selling price of Supremex’s envelopes was up 30% year-over-year in the third quarter without any noticeable effect on the volume of sales. Some of the price increase was due to inflationary pressures, but the increase more than compensated for increased raw materials costs, allowing Supremex to earn record margins. Supremex is aware that the envelope market is in decline and is dedicating its cash flow and acquisition efforts toward the growing packaging market. Packaging has been a hot area due to the steady growth of online retail and the movement away from plastic toward more environmentally friendly, recyclable paper and cardboard packaging. Just days ago, Supremex announced the acquisition of Paragraph, a Quebec packaging producer. But Supremex isn’t just an acquirer. Management also likes to reward shareholders with significant share buybacks and regular dividends. Despite its recent successes, the market still views Supremex as a dinosaur. Shares change hands at just 6.5x trailing earnings, a ratio that is sure to fall once fourth quarter 2022 results are reported. Looking ahead, the recent acquisitions of Paragraph and a small US envelope producer, Royal Envelope, will further bolster results. Harvesting cash flows from a declining business to reinvest in a more promising segment is not the easiest tightrope to walk, but so far, Supremex is managing the transition with excellence. Disclosures Investment in Alluvial Fund are subject to risk, including the risk of permanent loss. Alluvial Fund’s strategy may experience greater volatility and drawdowns than market indexes. An investment in Alluvial Fund is not intended to be a complete investment program and is not intended for short term investment. Before investing, potential limited partners should carefully evaluate their financial situation and their ability to tolerate volatility. Alluvial Capital Management, LLC believes the figures, calculations, and statistics included in this letter to be correct but provides no warranty against errors in calculation or transcription. Alluvial Capital Management, LLC is a Registered Investment Advisor. This communication does not constitute a recommendation to buy, sell, or hold any investment securities. Performance Notes Net performance figures are for a typical limited partner under the standard fee arrangement. Returns for partners’ capital accounts may vary depending on individual fee arrangements. Alluvial Fund, LP has a fiscal year-end of December 31, 2022 and is subject to an annual audit by Cohen & Company. Performance figures for year-to-date periods are calculated by NAV Consulting, Inc. Year-to-date figures are unaudited and are subject to change. Gross performance figures are reported net of all partnership expenses. Net performance figures for Alluvial Fund, LP are reported net of all partnership expenses, management fees, and performance incentive fees. Contact Alluvial welcomes inquiries from clients and potential clients. Please visit our website at alluvialcapital.com, or contact Dave Waters at info@alluvialcapital.com or (412) 368-2321. Click to enlarge Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
