Supremex Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Supremex, Inc. first quarter 2024 earnings conference call. At this time, all participants are in a 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, May 9th, 2024. I will now turn the call over to Martin Goulet of NBC Capital Markets Advisors. Please go ahead.

Thank you. Good morning. And thank you for joining this discussion of Supremix's financial and operating results for the first quarter ended March 31st, 2024. The press release reporting these results was published yesterday after markets closed. It can also be found in the investors section of the company's website at www.supremix.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 first quarter, and I turn the call over to Stuart.

Thank you, Martin, and good morning, everyone. We are encouraged with our first quarter performance, which is highlighted by sequential increases in adjusted EBITDA and net earnings when compared to the fourth quarter of last year. While finance likes to compare the period reported with the corresponding one the prior year, businesses like ours that have little seasonality can utilize a sequential view to gauge performance. This is even more valid in this quarter as our markets continue to recover from the market corrections that followed the extremely strong performances of 2022, and in particular, a record Q1 2023 that was clearly unsustainable. So, while our Q1 2024 results do trail those of last year, Q1 was the best performance in the last four quarters, and as I just said, it marked substantial improvements on several fronts from the fourth quarter of 2023. Let's first look at our envelope business. Revenue was up nearly $3 million from the previous quarter. Looking at the markets we serve, demand from bills and statements, our largest segment, is still working through some inventory, but it is about where it should be considering the industry's secular decline and generally remains fairly stable from quarter to quarter. The direct mail market appears that it may have bottomed, but the fundraising vertical remains quite lethargic given the squeeze on discretionary income. With direct mail gradually returning, our Royal Envelope operations gain momentum in the quarter. And looking ahead, we have confidence that, despite the unfavorable backdrop of high interest rates and inflation, direct marketers, fundraisers, and charities can't remain on the sidelines indefinitely and out of a marketing channel that has a proven ROI. And we expect these channels to gradually gain momentum. The wholesaler and reseller verticals, a significant portion of our U.S. volume, remains quite soft. This softness is tied largely to general economic conditions for small businesses in the U.S. and the residential effects of excess inventory, particularly if compared to Q1 of last year. While volumes remain well below what we would call normal levels, like the other segments, we are seeing a gradual return to normalcy. As you would expect in a market that has a stable supply in so-called normal times, the reduction in demand has put pressure on price, but our team has done a very good job of selling our value proposition and maintaining price as evidenced by the margins generated by our envelope activities. The envelope segment EBITDA surpassed the 20% threshold this quarter, a feat only accomplished during the irrational exuberance period of 2022 and Q1 2023. This speaks highly about the quality of our teams, our discipline, ability to control costs, and our customer network. Speaking of networks, ours got a little bigger last week with the acquisition of Forest Envelope, a regional specialty envelope manufacturer located in the greater Chicago area. I have previously mentioned that we would be opportunistic buyer of envelope companies and this transaction fits that description to a T. We will tuck in the acquired activities into our existing Chicagoland footprint and told the acquired employees that we will cease manufacturing within the Forest operations within 45 days. At this point, we are evaluating what equipment, if any, and how many employees will transfer. We are working feverishly on retaining the customers from the transaction and expect to grow a share of wallet with several, while simultaneously improving the utilization and absorption within the existing facilities and reaping other synergies. Turning to packaging. Like the envelope business, activity remains soft, especially for markets whose business is more closely tied to discretionary spending and the ebbs and flows of the economy. In folding carton, operations have incrementally improved over the past couple of quarters, and in Q1, our primary issue was largely around utilization and absorption. Volume from core customers in the health and beauty and the over-the-counter pharma verticals has been very choppy. The combination of up and down demand and a continued tight labor pool has made it difficult to align costs with revenue and attain the required levels of absorption. We continue to believe that some of the pressures on CPG will eventually ease, but it's been challenging the last few quarters. To combat this, in the short and medium term, our focus has been on cost control and penetration of the at-home food market, where we continue to make good progress. The e-commerce packaging space has been a bright spot in early 2024. Like the packaging segment overall, e-commerce in general has been soft as consumers grapple with the effects of high interest and inflation. However, in our case, our unique product offerings and some good work by our sales teams have allowed us to penetrate new accounts and ride a wave of growth within others. We continue to position the packaging segment for long-term success. Our assets are first class. We've refocused and right-sized the business units, and we've reorganized to bring decision-making closer to the action and to foster operating efficiencies and synergies across our operations. At this point, we require sales volume to leverage the improved operations and structure, but we are encouraged by our continued progress and are confident we are in a much better position to capitalize on our business development efforts and growth as the broader market and consumer confidence improves. With that, I'll turn the call over to Francois for a review of the financial results.

Thank you, Stuart. Good morning, everyone. Please turn to slide 41 of the presentation. Total revenues reached $73.2 million, down from $88.4 million in the same period last year, but up sequentially from $72.3 million in Q4 of 2023. Envelope revenue was $53.4 million versus $64.5 million last year, and up sequentially from $50.6 million in the fourth quarter of 2023. The decrease from last year mainly reflects lower volume, partially offset by a slight increase in average selling prices. Packaging and specialty products revenue was $19.8 million versus $24 million in Q1 of 2023, and sequentially down from $21.7 million in Q4 of 2023. The year-over-year decrease reflects lower demand from certain sectors more closely related to economic conditions, which is partially offset by higher demand from e-commerce related packaging solutions. Moving on to slide 42. Adjusted EBITDA totaled 10.5 million or 14.3% of sales compared to 18.8 million or 21.3% of sales a year ago. The decline essentially reflects the effect of lower volume on the absorption of fixed costs. However, sequentially adjusted EBITDA is up from 9 million or 12.4% of sales in Q4 of 2023. Envelope segment adjusted EBITDA reached 10.9 million or 20.4% of sales versus 17.3 million or 26.8% of sales last year. Sequentially, it is up from 8.7 million or 17.2% of sales in Q4 of 2023. I direct your attention to the middle chart of slide 42, which shows our envelope margins over the past five years. We clearly see that the 20.4% margin in Q1 is above what we've achieved prior to the run-up of 2022, despite more difficult market conditions. And I echo Stuart's comments about the quality of our team and network. In the packaging and specialty products segment, Adjusted EBITDA was $1.2 million or 6.1% of sales compared to $3.8 million or 16.1% of sales last year. Sequentially, the margin remains stable from Q4 2023. Corporate and unallocated costs amounted to $1.6 million versus $2.3 million last year. The decrease reflects a favorable adjustment to stock-based remuneration expenses this year and severances a year ago. Turning to slide 43, net earnings reached $3.5 million or $0.14 per share versus $9.5 million or $0.37 per share last year, but up sequentially from $0.7 million or $0.03 per share in Q4 of 2023. Adjusted net earnings amounted to $3.5 million or $0.14 per share in Q1 of 2024 versus $9.8 million or $0.38 per share last year. but up sequentially from $2.2 million or $0.09 per share in Q4 of 2023. Moving on to the cash flow on slide 44, our net cash flows from operating activities total $5.1 million in Q1 of 2024 versus $7.5 million last year. The variation reflects lower profitability partially offset by reduced working capital requirements this year compared to last. Reflecting lower acquisitions of property, plant and equipment this year versus last, free cash flow was $4.7 million up from $3.4 million a year ago. Turning to slide 45, our net debt stood at $53.5 million as of March 31, 2023, down from $55.4 million three months earlier. This year over year decline in profitability, the ratio of net debt to adjusted EBITDA was 1.3x as of March 31st, still well within our comfort zone, should I say, of keeping it up below 2x. At the end of the quarter, we had more than 66 million in available liquidity under our senior secured revolving credit facility, leaving us with plenty of flexibility to finance our operations and investments. During the quarter, we used our excess cash flow to repurchase 316,000 common shares for a consideration of $1.4 million. Since the end of the quarter, we've remained active on our NCIB by repurchasing 116,000 shares. Finally, the Board of Directors declared a quarterly dividend of $0.04 per common share, payable on June 21 to shareholders of record at the close of business on June 6. I turn the call back to Stuart for the outlook. Stuart?

Excuse me. Thank you, Francois. Although 2024 is not off to a blazing start, the first quarter produced enough encouraging signs to be cautiously optimistic for the rest of the year. The markets that our two segments serve are showing signs of improvement, and our two businesses have improved their cost structure, nimbleness, and efficiency and continue to do so. In envelope, we'll continue to nurture the Canadian market while pushing further expansion into the large U.S. market, where our market share remains in the 10% range. We continue to build our team and brand in the U.S., Northeast, and Midwest. With EBITDA margins, again, north of 20% in the quarter, in a time of relative weak demand, we continue to believe strongly in the cash flow generation of this segment. The tuck-in acquisition of Forrest reinforces this belief and the belief in our team, and we expect it to add to an already strong platform. In packaging, our asset base is outstanding. The footprint has been optimized and the business is running more efficiently. At this point, the missing ingredient is volume. Like an envelope, we are seeing a slow progression towards normalization. It will be gradual and possibly not linear, but when it happens, we'll be ready. But let me assure you, we're not casually waiting for normal. Our teams are in the field and developing new opportunities in new verticals like the at-home food market and leveraging our IP and exceptional equipment base to penetrate new business in existing verticals. As we've stated many times, we are committed to methodically building the business for the long term, and our teams are eager to execute. As for additional expansion, our balance sheet remains strong as we continue to seek accretive acquisitions and investments. In the meantime, we'll continue to use our strong cash flow to methodically pay down our debt and repurchase shares. In closing, I want to thank our 1,000-plus employees for their commitment, dedication, and hard work. Our two segments have proven to be resilient, capable, and with sound fundamentals. We believe Supremex is on solid ground to benefit from an eventual rebound in volume. This concludes our prepared remarks. We are now ready to answer any questions you may have.

We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 2. We will pause for a moment as callers join the queue. The first question is from Max Ingram of Canaccord Genuity. Please go ahead.

Hey, good morning, guys. Thanks for taking my questions. My first question is on the packaging side. It looks like e-commerce was a positive and maybe could be hitting an inflection point. Do you know what's driving that? I know you called out your sales efforts, but is there anything else? And then I guess depending on that answer, do you anticipate higher demand within e-commerce through the rest of the year?

Hi, Max. Thanks very much for the questions. Yeah, look, it's a combination of the above, like most answers are. We've taken on some new accounts, and they've been very accretive and helpful to the absorption rates. And we have one sizable customer. We got in on the ground floor, and it continues to grow almost exponentially, and we've been the beneficiary of that and taken on more products as they've expanded. And we've been the beneficiary of some good work a couple of years ago and their ability to grow. What was the second question? Sorry.

I was just going to say, depending on the answer, do you anticipate the demand to persist, like the stronger e-commerce to persist throughout the year?

Yeah, I think the consumer confidence, and I hate to say economy, it's more about consumer confidence and sort of discretionary spending. As that continues to grow and there continues to be pressure on e-tailers to right-size packaging and take advantage of whatever savings, postal savings we can offer them, and consumer confidence continues to grow, I see that segment continuing to grow and will be the beneficiary thereof.

Thanks. That's really helpful. Thanks, Stuart. My next question is on the envelope side. Pricing was up a bit year over year, but that's improved since last quarter, where I think the dynamics had pressured pricing. Is the stronger pricing this quarter a result of mix, or is it just the supply-demand dynamics creating a favorable pricing?

Yeah, so very astute. It did improve quarter to quarter, but that's largely mixed as opposed to any sort of change in the fundamentals. As I mentioned, direct mail was up and stronger in the quarter in terms of mix, and it has a much higher average selling price than bills and statements and wholesale-type work. So it was really mix-related. Okay. That's helpful. Yeah.

Sorry? No, that's good. And then just one quick last one for me. It would be on M&A. Congrats again on the forest envelope deal. Is there any improvements in valuations you're seeing in the market as a result of pressures on either the envelope or packaging side? Or is it more interest rate driven? Or maybe you're not seeing any changes in valuation. Any color there would be helpful.

Are you saying improvements in the purchase price? Yes. There's downward pressure on the multiples paid. You know, as people continue to be concerned about, you know, long-term effects of sort of market conditions and secular decline. So there is a little bit of pressure that way. But on these small tuck-ins, they tend to be more related to, you know, the seller being able to net enough income or cash to justify selling the business so it you know it's less about multiples and do i have enough am i going to have enough cash when i uh when i cash out okay okay that makes sense i'll pass the line thanks for taking my questions thanks max once again if you have a question please press star then one

This concludes the question and answer session. I would like to turn the conference back over to Stuart Emerson for any closing remarks.

Thank you, operator. Thank you all for joining us this morning. We look forward to speaking to you again at our next quarterly call. And we also invite you to attend our annual meeting of shareholders to be held later today at 11 a.m. in downtown Montreal. Until then, have a great day, and we'll see you next quarter.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.