Supremex Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Supremix second quarter 2023 earnings conference call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question and answer session. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star then zero. 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 the 10th, 2023. I would now like to turn the conference call over to Stuart Emerson, President and CEO. Please go ahead.

Thank you, operator. Good morning, ladies and gentlemen. Thank you for joining us for this discussion of the financial and operating results for the second quarter ended June 30th, 2023. Our press release reporting news results was published earlier this morning. It can also be found in the investors section of our website at www.spremax.com, along with our MD&A and financial statements. These documents will be available on CDAR as well. We also posted a presentation supporting this conference call on our website. Let me remind you that all figures expressed on today's call are in Canadian dollars unless otherwise stated. I'm joined today by Francis Balduq, Supremex's new Chief Financial Officer. Francois joined us in early July and brings more than 25 years of experience as a financial executive with large private and public companies. We are very pleased to have him on board as the company will benefit from his leadership skills and expertise in all matters related to business strategy, M&A, and capital management. Let's turn to slide 39 for an overview of the second quarter. For our usual format, Francois will provide additional details in a few minutes, but let me take a moment to discuss our market dynamics. To be candid and direct, our results are primarily reflective of the temporary effects of three external forces and internal inefficiencies in one of the folding carton plants. From a revenue standpoint, the most material impact we experienced in Q2, as we predicted and commented on after both Q4 and Q1, were the effects of certain customers working through substantial inventories accumulated through panic or overbuying in 2022 when supply was very tight. This was felt primarily in the envelope segment where seven long-term resale customers accounted for 40% of the U.S. unit decline in the legacy envelope business. This was purely a destocking exercise moderately exacerbated by a soft economic environment. Second, High interest rates and high inflation have impacted our markets in two ways. First, in packaging, and I think you'll understand this, reduced availability of discretionary income for items like fragrances, cosmetics, and other health and beauty items adversely affects a core and high value-added segment in our folding carton division. Additionally, and this isn't obvious to most casual observers, High interest and inflation affects smaller charitable donations many charities like the Humane Society, the Cancer Society, Wounded Warriors, and others rely on, particularly in the U.S. market. That is, if home budgets are being squeezed by the high cost of groceries and increased mortgage and car payments as a result of higher interest rates, they are less likely to make the small donations This prompted major fundraisers to abandon or seriously curtail their mailing plans in Q2. Finally, on the revenue front, high and fluctuating interest rates materially dampened credit card solicitation mailers as issuers tried to ascertain what incentives made sense. Imagine being a credit card issuer trying to determine whether zero interest or 1% interest or 3% interest or No interest for six months or whatever was viable if it's unclear rate hikes are over or not. The cumulative effects of working through bloated inventories and reduced discretionary income took a toll on Supremex and our markets in Q2. From an internal efficiency standpoint, obviously a reduction of volume has a negative absorption effect in all of the facilities. that the issues were compounded in Q1 and Q2 by the underperformance of operations in the relatively newly commissioned Lachine facility. It's the same people operating essentially the same equipment, albeit in a new facility, that underperformed. It was a confluence of issues, including the rush nature of exiting the TMR location and commissioning the Lachine facility at the end of 2022, And the quote-unquote distraction associated with the paragraph acquisition in January and the graph acquisition in May and subsequent 90-day consolidation, which is now completed, spread local management a little too thin and a general malaise due to soft backlogs. The combination of temporarily reduced volumes across most business units and a primary facility that underperformed led to the tepid results. The promising news is that we see volumes trending back to some level of quote-unquote normalcy in the second half. Resellers have started to replenish inventories. Credit card issuers and fundraisers can't and are not staying on the sidelines indefinitely. They need new clients and they need donations. Forecasts and booking from the health and beauty segments are encouraging. In envelope, we've been diligently re-engaging with customers we couldn't serve during the tight supply period of 2022 and engaging with new customers by leveraging our strong brand to continue to gain market share. As you may infer from my earlier comments on direct mail, Royal Envelope had a weaker quarter with revenue of $9.1 million. However, we are buoyed by renewed activity in July and August and more robust mailing plans we have seen for the balance of 2023. The operational integration at Royal has gone well. We've extracted important synergies and we are actively seeking opportunities to leverage our scale, capabilities, and expanded offering to both existing and new customer relationships acquired in the acquisition. In Canada, year-to-date units in envelope are basically flat for a couple of key reasons. Due to our market share and geographic proximity, we were able to manage the inventories of our resale customers effectively. And as a result, those customers have not had to work through over inventory situations. And given the small direct mail market in Canada, the downturn related to available discretionary spending and fluctuating interest rates that I discussed earlier were much less dramatic. In the packaging and specialty product segment, revenue from our core pharma and food segments were strong. Sales in the e-commerce business were also strong and exceeded the prior year. Activity in the retail sector was off at a level consistent with overall market data, and as previously mentioned, the health and beauty segment has been a challenge, but their forecast for the second half looks encouraging. Operationally, we completed the integration of the graph pack operations into the machine facility within the 90 days as planned. As we referenced when we concluded the transaction, this is a perfect example of a pure synergistic tuck-in that can provide benefits both on the revenue generation and cost reduction side. As I mentioned in my earlier comments, with the paragraph acquisition in January and the graph acquisition and integration largely completed in May and June, coming immediately on the heels of the consolidation of the former County Mount Royal facility, we experienced some inefficiencies which disrupted normal flow of activities. As a result, in packaging, the combination of lower demand from certain markets and operational inefficiency, we had a sales and profitability shortfall. Having said that, the consolidation of holding carton activities at Lachine is an essential component of our packaging strategy. This facility should and will be the jewel of our packaging operation. It houses great equipment, has an optimal workflow, and has a group of employees that have proven they can deliver results. With paragraph operations now under our wing for two quarters, the graph pack closure and consolidation complete, and a growing backlog, we are confident that our experienced management team and committed employees will work through their ailments quickly. With that, I turn the call over to Francois for a review of the Q2 results.

Thank you, Stuart. Good morning, everyone. I'm very pleased to join Supremex, a dynamic, well-managed, and financially strong company. Please turn to slide 40. Total revenue was up 14.6% to $71.7 million from $62.5 million last year. Revenue from the envelope segment rose 7.3% to $49.3 million. The increase reflects a $9.1 million revenue contribution from the acquisition of Royal Envelope completed last November. Revenue was favorably impacted by an average selling price increase of 33.6 percent, which mainly reflects more favorable customer and product mix in our U.S. operation, as well as the year-over-year effect of pricing adjustment made in 2022 to mitigate input cost inflation. Conversely, volume decreased almost 20% as a result of lower industry demand, as Stuart mentioned. Packaging and specialty product segment revenue amounted to $22.4 million, up 34.7% from $16.6 million last year. This increase reflects a $7.8 million contribution from PowerGraph, higher e-commerce-related sales, and the integration of the graph pack operations in our Lachine facility. These were partially offset by the wind-down of the DuraBox operations in 2022, reduced demand from certain markets, more closely correlated to the economic conditions, and the residual effect on sales and inefficiencies from consolidating the folding carton operations in Les Chins while integrating Paragraph and GraphPack. Moving on to slide 41. Consolidated, there was $9.4 million in the second quarter of 2023. versus $13.9 million last year, while adjusted EBITDA amounted to $9.6 million compared to $13.9 million a year ago. As a percentage of revenue, the adjusted EBITDA margin was 13.3%, down from 22.3% last year. Envelope segment adjusted EBITDA totaled $9.7 million compared to $11.6 million last year. This decrease is mainly due to the effect of lower volume on the absorption of fixed costs. As a percentage of revenue, the adjusted EBITDA margin was 19.6% compared to 25.3% last year. Now, in the packaging and specialty product segment, adjusted EBITDA was $1.7 million versus $3.3 million last year. The decrease reflects lower demand from sectors more closely related to the economy that affect fixed-cost absorption and the residual effect of inefficiencies from consolidating folding carton activities and pollution, while integrating acquisitions. As a result, adjusted EBITDA was 7.4% compared to 19.6% for the same period in 2022. Corporate and unallocated costs were $1.8 million in the second quarter of 2023 compared to $900,000 in 2022. The increase is mainly due to foreign exchange loss and an unfavorable adjustment to stock-based remuneration expenses. Turning to slide 42, net earnings reached $2.1 million or $0.08 per share versus $7.4 million or $0.22 per share last year. Adjusted net earnings amounted to $2.2 million or $0.09 per share in the second quarter of 2023 versus $7.4 million or $0.28 per share a year ago. Moving on to cash flow on slide 43, Despite lower profitability, net cash flows from operating activities remain solid, amounting to $10 million in Q2 2023 compared to $10.4 million last year, mainly due to a positive cash stream from working capital. For the same reason, free cash flow held relatively steady at $9.8 million in Q2 2023 compared to $10.2 million a year ago. In the quarter, we used our cash flow to finance the acquisition of GrassPak, and proceed with net repayments of $3.1 million on our revolving credit facility. We also would earn an aggregate of $2.1 million to shareholders through dividend payments and the repurchase of 56,700 common shares. Looking at our financial position on slide 44, total debt was reduced to $78.2 million as of June 30, 2023, from $81.4 million as of March 31st. reflecting the aforementioned debt repayment. Net debt, which excludes deferred financing costs and cash, stood at $76.9 million. As a result, our net debt to trailing 12-month adjusted EBITDA ratio was 1.3x as of June 30, 2023, versus 1.2x three months earlier. At the end of the quarter, we had $43 million in available liquidity under our secure senior secure revolving credit facility of 120 million, leaving us sufficient flexibility to finance our investments and operations. Finally, the Board of Directors declare a quarterly dividend of 3.5 cents per common share payable on September 22nd, 2023, to shareholders of record at the close of business on September 7th. I turn the call back to Stuart for the outlook. Stuart?