Supremex Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the SUPREMAX, Inc. Fourth 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 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star, then 0. 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, February 22, 2024. I would now like to turn the conference over to Martin Goulet of MBC Capital Markets Advisors. Please go ahead.

Good morning, ladies and gentlemen. Thank you for joining this discussion of Supremix's financial and operating results for the fourth quarter in fiscal year ended December 31st, 2023. The press release reporting these results was published earlier this morning. It can also be found in the Investors section of the company's website at supremax.com, along with the MD&A and financial statements. These documents will be available on CEDAR Plus as well. A presentation supporting this conference call has also been posted on the website. Let me remind you that all figures expressed on today's call are in Canadian dollars unless otherwise stated. Presenting today will be Stuart Emerson, President and CEO of Supremex, as well as François Bolduc, Chief Financial Officer. With that, I invite you to turn to slide 40 of the presentation for an overview of the fourth quarter, and I turn the call over to Stuart.

Hey, thank you, Martin. Good morning, everyone. After an exceptional and record 2022, 2023 was a challenge across the envelope and packaging industries as customers worked through significant overstock positions, and curtailed demand as an outcome of high interest rates, inflation, and weaker consumer confidence. While a demand reset was forecasted for the first half of 2023, the widely anticipated and expected second half bounce back did not occur, and demand remained much softer than expected. As a result, our Q4 results and the full year for that matter are below what we are designed for, capable of, and where we expect them to be. It's easy to be disappointed, but I remind listeners that due to several well-documented factors and Supremex's ability to capitalize on them, 2022 was an unrealistic comparable for 2023 out of the gate, and it became less relevant as 2023 demand fell to below pre-COVID levels after the 2022 spike. Despite the volume challenges across the industries we participate in, and I don't want this to get lost in the noise, we generated a very impressive $15 million in free cash flow in the quarter and $40 million in free cash flow in the calendar year. This impressive cash generation machine allowed us to buy back shares, pay down a significant amount of debt, and allowed the board to confidently declare another dividend increase, our third increase in the past 36 months. That said, To continue to be the strong performer we are, we need to continue to evolve and adjust to our reality, and to realign proactively, we have taken several steps necessary to minimize the temporary negative impact of soft revenue numbers. In the envelope business, and as I said earlier, our ability to capitalize on unprecedented conditions in 2022 created an extremely tough comparative for 2023 in a stable environment, and 2023 was anything but stable. While not a perfect proxy, the calendar year United States Postal Service classifications that are typically associated with envelopes were down double digit percentages and over 12 billion units. A double digit decline in mail volumes plus the impact of destocking would point to a U.S. envelope purchasing reduction of over 20 billion units in the calendar year. While destocking is difficult to quantify and doesn't affect all manufacturers to the same degree, with our customer mix of wholesalers and resellers, destocking was material to Supremex. Despite the weighting of destocking and the temporary reduction in demand, we view our volume and market share in line with or slightly better than the overall market. Are we delighted with our sales numbers? No. Did we beat the temporary market adjustment? All indicators say yes, we beat the market. Importantly, our team did an exceptional job in maintaining margins in a period of soft demand and overcapacity, with average selling price in Canada and the U.S. up over 14% in 2023 versus 2022, excluding Royal Envelope. And with Royal Envelope's premium product mix, average selling price in the envelope segment was up in excess of 21% in 2022. 2023 from the strong 2022. Did our quest to hang on to average selling price and margin affect our volume? Perhaps, and it's something we discuss regularly, but we are firm believers that you can price your way out of weak volume much easier than you can volume your way out of poor pricing. It's just in our DNA. While we have a ways to go, those same USPS numbers show that the mail classifications closely linked to envelope volume are improving. with first class and marketing mail posting a 10 plus percent improvement in the rate of decline over Q2 and Q3, and we're seeing this in our incoming quoting and order activity. Despite all of the temporary but prolonged headwinds, thanks to a strong team and a nimble cost structure, our envelope business generated impressive margins in the high teens in the back half of the year. Our envelope teams continue to demonstrate their resiliency and adaptability. Turning to packaging, I'll start with we are not happy or satisfied with our results. We have terrific assets, products, and participate in desirable verticals and geographic markets. And the packaging industries have the same headwinds as envelopes. We were not nimble enough or deep enough to overcome the challenges to the same degree. We like to say there's no whining in envelope and packaging. And it was instilled in me a long time ago that it's a very fine line between an explanation and an excuse, but I'll take a stab at giving you some color while trying hard not to make excuses or whine. While we don't have the same empirical evidence we do with the United States Postal Service, we do have a number of anecdotal data points, including industry associations, M&A reviews, and maybe most importantly, contractual business that generally tracks with the wider industry. And all indications are that CPG-focused packaging businesses have been experiencing virtually the same volume-related challenges that Supremex packaging has been facing. I believe I used the analogy last quarter that for many right now, as weekly grocery bills significantly outpace wage gains, that bounce dryer sheets are a luxury item that many are foregoing as budgets get pinched. And consequently, the box manufacturer is getting squeezed as well, and this repeats itself across a number of verticals, including health and beauty, vitamins, and e-commerce purchases. It is fair to say that sales and volume road was bumpier than anticipated, and it has been for longer than anticipated time. However, like the envelope segment, the packaging segment also appears to be slowly coming out of a long slumber. And with significantly improved operations and a revamped sales team, we are well positioned to capitalize. We had a lot on our plate for 2023 with acquisitions to integrate and plants to relocate. In Q1 and Q2, we were completing the move and commissioning of our flagship folding carton location in Lachine and had much more cost overhang and inefficiencies than we would have liked. In January, we completed the acquisition of paragraph and domain and initiated integration. In May, we made a very small acquisition with Great Assets in GrafPak and integrated it into the Lachine location within 90 days. In June, we installed a new to us, six-colour 40-inch UV press in our over-the-counter pharma packaging business in Laval. And as announced, we completed the closure of the SaintiaSaint facility during the fourth quarter, sold excess equipment and transferred production to other locations in the Greater Montreal area. We expect these initiatives to result in total annual cost savings of approximately $1.5 million. In addition to that busy calendar, we also modified our packaging management structure and leadership team to operate a leaner and more focused business with general managers responsible for our folding carton, print communications, and e-commerce activities. We have been able to attract some experienced top talent to lead the business units, including a 30-year print and packaging executive that has moved into the general manager role at Paragraph, a 30-plus-year print and manufacturing executive that has moved into the general manager role at Quebec Folding Carton, and a former colleague of mine in the envelope business that left the organization a couple of years ago agreed to bring his 25 years of sales and operation experience back to the packaging unit in Indianapolis. All of these changes have occurred in the last 90 days. Furthermore, we are recruiting for new sales leadership in the e-commerce business unit and expect to have someone in place in the next 45 days. As part of this process, each business unit was refocused, right-sized, and made more flexible to adapt to evolving market conditions and business needs. Yes, it was a busy year in our Quebec packaging operations. In fact, maybe too busy, particularly in a sales environment that could have used more management attention in the business development area, but that's looking in the rear view. As with envelope, volume remains the short-term challenge, but we have put in place a structure that has brought decision-making closer to the shop floor and local sales office, which should enhance throughput and reduce costs, and these changes will allow us to leverage the scale, efficiency, and expertise of our facilities to be better positioned to capture growth opportunities in the markets we're targeting and generate synergies with the rest of our operations. With that, I turn the call over to Francois for a review of our Q4 results.