Supremex Inc.

Thank you for standing by. Welcome to SUPREMEX Q2 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties here in the conference, please press star followed by the zero for operator assistance at any time. 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, August 11, 2022. I will now turn the conference over to Stuart Emerson, President and CEO. Please go ahead.

Good morning, ladies and gentlemen. I'm here with Mary Chronopoulos, Chief Financial Officer at Supremex. Thank you for joining us for this discussion of the financial and operating results of our second quarter ended June 30, 2022. Our press release reporting Q2 results was published earlier this morning. It can also be found on our website at www.sprimax.com, along with our MD&A. These documents are all available on CDAR as well. In addition, we've posted a presentation supporting this conference call, which is available through the webcast and on the company's website. Let me remind you that all figures expressed on today's call are in Canadian dollars unless otherwise stated. And so with all of the formalities and fine print out of the way, allow me to get on to the president and CEO's comments. Let's turn to slide 43 for an overview of the second quarter. I'm very pleased with our strong results with top line growth in excess of 20% in the quarter and significantly higher margins in both segments. Q2 was the 10th consecutive quarter of year-over-year improvement and a record quarter in adjusted EBITDA. Net earnings more than doubled to $7.4 million, or 28 cents per share. These results were driven by improved pricing, mix, and increased volume in the envelope segment, and both a better product mix and improved margins and operations in packaging this year versus last. Mary will provide additional details on our performance in a few moments, but I'd like to take a few minutes to discuss our performance and market dynamics. In envelope, I assure you we're not in the bottom of the ninth inning with two men out. In fact, there's still a lot of ball to be played, and the count is in our favor. First, we have an extremely strong team, and we have been setting ourselves up for this success since we made the decision to both consolidate the Canadian envelope space and aggressively pursue growth in the U.S. a few years ago. We have the scale associated with being in the top five largest envelope manufacturers in North America. We have coast-to-coast reach and a dominant position in Canada. We have strategically grown our footprint in the U.S. market, methodically built the brand, and developed an excellent reputation in the vast U.S. envelope market, while still only enjoying approximately 5% market share. Second, on the procurement side, we have spent several years purposefully cultivating and nurturing relationships with Tier 1 suppliers and have built a supply chain that is as good or better than anyone in the business, and we've been rewarded. Additionally, we've been creative and used an outstanding balance sheet to successfully secure new sources of supply to augment and complement core suppliers. In doing so, we've had the necessary raw materials to capitalize on constrained envelope supply. Third, and I'm really proud of this, across our organization, at the height of the pandemic, we made prudent and fortuitous decisions on our most important resource, our people. We have first-rate teams on the floor. While overall market demand dropped significantly and times were tough at the height of the pandemic, Supremex continued to grow and maintained our workforce where the broader industry made the tough decision to furlough. As a result, as the market bounced back, we didn't have to scramble to bring back or find new staff. As we all know, labor in general is scarce, skilled labor is even more scarce, but we made a conscious decision to support our workers and we have not been affected as much as many of our competitors. Make no mistake, there are two forces at play in the envelope space today, and they're going to be with us for some time. Paper is going to remain tight for the foreseeable future. Those with strong supply chains and good balance sheets have a distinct advantage. The North American envelope and to the North American envelope industry cannot make nearly as many envelopes today as it could pre-pandemic. And let's face it, workers that were furloughed from envelope plants and found new jobs many in emerging industries are not going to return to former employers anytime soon. The market is significantly constrained and we are extremely well positioned and this is why year-to-date envelope units are appreciably up and sales are up significantly. The runway and envelope has been considerably extended, some of it by things we have done, some of it by decisions of our competitors made in a time of crisis. In keeping with the baseball analogy, Not only are we not behind with two outs in the bottom of the ninth, we actually have the lead, there's nobody out, and we're ahead in the count. In packaging, we continue to progress nicely. Year-to-date sales are up the double digit. We're passing through inflationary costs and adding margin. Our core packaging businesses are both enjoying year-to-date revenue growth with folding carton and e-commerce up by very high single digits. Our improved product mix, which, along with continued improved operations, has seen segmented EBITDA in the packaging increase significantly both in the quarter and year-to-date. Our packaging businesses are performing very well. In addition to what I just discussed, we have two key developments on the packaging side to share with you. First, last week we announced the appointment of Simon Provencher as president of our packaging operations. With over 20 years in the industry, Simon brings extensive experience and great leadership qualities to the team. We are confident he can take this segment to the next level and provide additional bandwidth as we continue to pursue M&A in packaging. Second, we have positive news in regards to the move of our Town of Mount Royal folding carton plant. Although we renegotiated at lease extension earlier this year, we have since received an early termination notice from the lessor. Given the dynamics of the packaging markets we operate in and the assessment of core, non-core in our offering, we have elected to transfer the Town of Mount Royal folding carton business to the DuraBox facility in Lachine and to gradually wind down DuraBox's corrugated packaging activities. This strategic repositioning will result in better utilization of our manufacturing footprint and capacity, provide some cost avoidance, and will and will significantly focus on value-added products. With that, I turn the call over to Mary to review the Q2 financial results. Mary?

Thank you, Stuart. Good morning, everyone. Please turn to slide 44 for our Q2 top-line review. Total revenue was up 20.7% to $62.5 million from $51.8 million last year. Revenue from the envelope segment rose 30.2% to $45.9 million The growth reflects an average selling price increase of more than 20% from last year's comparable period, primarily implemented to mitigate input cost inflation. Unit volumes increased by 7.9%, reflecting higher sales in the U.S. and sustained demand recovery from channels more affected by the pandemic. Packaging and specialty products segment revenue remain relatively stable at $16.6 million, as growing sales of folding carton products stemming from a favorable product mix were offset by a decrease in corrugated sales. Moving on to slide 45, consolidated EBITDA and adjusted EBITDA both reached $13.9 million in the second quarter of 2022, up from $8.6 million in the second quarter of 2021. This increase resulted from higher sales volume and selling prices, partially offset by the higher cost of materials and the absence of government subsidies this year versus last. As a percentage of revenue, the adjusted EBITDA margin recorded a robust increase to 22.3% compared to 16.5% a year ago. Envelope segment adjusted EBITDA was up 83.1% to $11.6 million compared to the same period last year. The significant increase essentially reflects higher revenue driven by an increase in the average selling price and a more favorable product mix in the U.S. Adjusted EBITDA margin was 25.3%, up from 18% in the equivalent period of 2021. In the packaging and specialty product segment, adjusted EBITDA was $3.3 million, up 35.7% over the same period last year. This increase is mostly due to a higher average selling price, leading to higher profitability for folding carton and e-commerce. Adjusted EBITDA margin was 19.6% compared to 14.5% in the corresponding period of 2021. Corporate and unallocated costs were $900,000 in the second quarter of 2022 compared to $200,000 for the same period last year. The variation reflects the phasing out of government subsidies and severances partially offset by a foreign exchange gain and a favorable adjustment of the deferred shared units. Turning now to slide 46, net earnings and adjusted net earnings stood at 7.4 million or 28 cents per share for Q2 2022 compared to 3.4 million or 12 cents per share for the equivalent period last year. Turning to cash flow and capital deployment on slide 47, net cash flows from operating activities reached 10.4 million in the second quarter of 2022, up from 4.9 million in Q2 2021. the year-over-year variation is mainly attributable to higher profitability. Similarly, free cash flow amounted to $10.2 million in the second quarter of 2022 compared to $4.5 million for the same period last year. In the quarter, we used our cash primarily to reduce the balance of our revolving credit facility by a net amount of $8.2 million. As shown on slide 48, we also returned funds to shareholders through $1.3 million in dividends and $700,000 in-share repurchase. More specifically, during the second quarter, the company purchased over 215,000 common shares for cancellation under its normal course issuer bid program. Subsequent to the end of the period, nearly 74,000 shares were also purchased for cancellation. The current program is set to expire on August 30th and we intend to renew it. With the debt reduction, our financial position continues to improve. Slide 49 shows that on June 30, 2022, total debt stood at $36.7 million, down from $44.9 million three months earlier. Similarly, we concluded the second quarter with a leverage ratio of 0.8 times down from 1.1 times three months ago. During the quarter, we entered into a three-year senior secured revolving credit facility of $120 million, which replaced the previous revolving and termed facilities. It matures in May 2025 and can be extended by subsequent one-year periods subject to lender's approval. At the end of the second quarter, we had approximately $83 million in available liquidity under this facility to pursue our growth objectives. Given our solid financial position, the Board declared yesterday a 20% increase in the quarterly dividend to $0.03 per common share. This increase, only seven months after reinstating payments, shows the confidence the Board has in our ability to continue to generate solid cash flow while ensuring we maintain sufficient resources to further grow the business. In keeping with the new amount, the next dividend of $0.03 per common share will be payable on September 23, 2022, to shareholders of record at the close of business on September 8, 2022. I turn the call back to Stuart for the outlook. Stuart?