Supremex Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Suclumex Inc. Second Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. Following the presentation, we'll 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 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, May 9th, 2020. Oh, sorry. On August 8th, 2024. I will now turn the call over to Martin Goulet of NBC Capital Market Advisors. Please go ahead.

Thank you and good morning. Thanks for joining us for this discussion of Supremix's financial and operating results for the second quarter ended June 30th, 2024. 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 www.supremex.com, along with the MD&A and financial statements. These documents will also be available on CEDAR+. And 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 GAN dollars unless otherwise stated. Presenting today will be Stuart Emerson, resident and CEO, as well as François Bolduc, CFO. With that, I invite you to turn to slide 40 of the presentation for an overview of the second quarter, and I turn the call over to Stuart.

Hey, thank you, Martin. Good morning, everyone. I'm happy to report that both of SupremeX's two operating segments continued their recovery in the second quarter. Our envelope volume increased by high single digits, and after several challenging quarters, profitability from our packaging business showed significant improvement. And as has become fairly predictable at this point, we continue to generate strong free cash flow, enabling us to declare a dividend, further reduce debt, and buy back nearly a half a million shares. To get a little more granular, let's first look at our envelope business. As I said, envelope volumes were up high single digits in Q2, which was punctuated by a 25% increase in U.S. volume versus Q2 2023, and a 12% increase in U.S. volume over the first quarter of this year. U.S. envelope volume was 52% of units sold in the quarter, compared to 46% in Q1 and 45% in Q2 2023. We continue to make impressive progress in the important U.S. markets. While volumes seem to be steadily improving and pricing still volatile with the softness in the market, the reduction in the global envelope average selling price was driven almost predominantly by the change in mix between Canada and the U.S. and by the change of mix within the U.S. envelope market. While average selling price is generally a good indicator in envelope, in this particular instance, in this particular quarter, mix played a larger role than it normally does. The volume was also influenced very slightly downward by two months from the tuck-in of forest envelope. With respect to the forest envelope acquisition, I'm pleased to report that the integration process was completed according to plan, both on time and on budget. Their activities were seamlessly tucked into our Chicago operations within 90 days of close, and we were out of the facility within those 90 days. Approximately 40% of the employees were offered and accepted transfers, and operations and absorption in the existing Chicago facilities should see a nice bump as a result. While the production integration is complete, we remain focused on achieving sales and cost synergies by deploying efforts to grow our share of wallet with regional customers, both from the Chicago facilities and via the entire Supremex footprint. EBITDA margins in the segment remained above 16%, not as strong as in the first quarter, but still within historical precedence. That said, we continue to look for, explore, and find new ways to do things more efficiently and or in a more cost-effective manner. Supporting the latter, on July 24th, we announced initiatives to reduce costs, improve absorption and efficiency, and significantly reduce fixed costs within our envelope operations, primarily in the Greater Toronto Area. First, and with the least impact, we ceased manufacturing in a very small facility in Niagara Falls, New York, which was essentially catering to two customers in upstate New York. Only two machines and four employees were affected, and we are adapting the premises to operate as a very low-cost distribution center for U.S.-bound freight in advance of a larger reorganization in the Greater Toronto Area. The GTA announcement was of our intention not to renew the lease of the Concord facility upon expiry next February. The plan essentially calls for the most efficient equipment in the GTA to be concentrated in the two remaining facilities, Mississauga and Etobicoke, where we have talent, ability, and scale. With the concentration of equipment, we expect several well-producing machines will become redundant in Toronto, and they will be redeployed as replacement upgrades to two of the U.S. facilities, improving capabilities, capacity, and cost closer to U.S. customers. To be clear, this was, as always, a prudent, productive planning measure and not a move indicative of deteriorating business conditions. Quite the contrary. As I said earlier, the envelope market has improved steadily over the past three or four quarters, and we are coming off a quarter where we continue to grow and further penetrate a rebounding U.S. envelope market. In fact, we anticipate we will produce more envelopes in 2025 than in 2024, but we will do it with improved utilization levels on less equipment in a much smaller footprint with significantly less fixed costs. These initiatives are expected to deliver annual cost savings in excess of $2 million once all measures are in place. Let's move on to the packaging business. We are certainly pleased with the profitability improvement in the quarter, but we are not satisfied. This quarter's improvement is a result of several initiatives undertaken late last year to improve operations and achieve synergies within the Greater Montreal Area's three plants, and by cost reductions within the Indianapolis packaging facility. Our packaging EBITDA margin was just short of 14%, a level we had not seen in several quarters. To be very frank, these margins are nowhere near the true potential of the segment, given our equipment-based capabilities and capacity, but are improving. The operations are much improved, and there's a difference between where we are and where we think we should be is almost exclusively driven by the top line, or more succinctly, the soft top line. Volumes continue to be soft in some of our key verticals, including with our largest customer in the segment, and the effects of volume didn't transition with us after the close of the facility in Sainte-Sainte last fall. Those declines are still affecting absorption, which is a much different issue than not having the ability to produce efficiently and effectively. Volume is magic. Our teams work hard to improve network efficiency and optimize our asset base. These efforts must now be leveraged by an improved order flow, and we have a few impressive wins over the past few weeks, both in folding cart and in e-commerce, which should help backstop growth in the packaging segment in coming quarters. With that, I turn the call over to Francois for review of the financials.

Thank you, Stuart. Good morning, everyone. Please turn to slide 41 of the presentation. Total revenues reached 69.3 million, down 3.3% from the same period last year. Envelope revenue was 49.5 million, up slightly from 49.2 million last year, driven by an 8.4% volume increase, partially offset by a 7.4% decrease in average selling price. Both of these variations are indicative of our growing presence in the U.S. market, where increased penetration leads to higher volume, but a more competitive landscape is reflected in a lower pricing. Packaging and specialty products revenue were 19.9 million compared to 22.4 million last year. The decrease reflects lower demand from certain sectors, more closely correlated to economic conditions, partially offset by higher demand from e-commerce related packaging solutions. Moving on to slide 42, Adjusted EBITDA totaled 9 million or 13.0% of sales compared to 9.6 million or 13.3% of sales a year ago. Our envelope segment adjusted EBITDA reached 8 million or 16.2% of sales versus 9.7 million or 19.6% of sales last year. The decrease is due to a greater proportion of sales coming from our U.S. markets. In the packaging and specialty product segment, adjusted EBITDA was 2.7 million or 13.7% of sales compared to 1.7 million or 7.4% of sales last year. The increase is mostly due to the effect of optimization initiatives announced in late 2023 and to a lesser extent, the reversal of provisions related to previous acquisitions. Finally, corporate and allocated costs were relatively stable year over year at 1.7 million. Now turning to slide 43, net earnings reached 2 million or 8 cents per share versus 2.1 million or 8 cents per share last year. Adjusted net earnings amounted to 2.1 million or 8 cents per share in Q2 2024 versus 2.3 million or 9 cents per share a year ago. Moving on to slide 44, Our net cash flow from operating activity totaled 10.2 million in Q2 of 2024, up slightly from 10.0, 10 million last year. A lower working capital requirement were partially offset by reduced profitability. Given net disposals of property, plant, and equipment this year, free cash flow amounted to 10.9 million, up 9.8 million a year ago, from 9.8 a year ago. This free cash flow was in part used to reduce further our debt. Turning to slide 45, net debt stood at 50.4 million as of June 30, 2024, down from 53.7 million three months earlier and 55.4 million at the beginning of the year. Our ratio of net debt to adjusted EBITDA remains stable at 1.3x compared to the end of the previous quarter, still within our comfort zone of keeping it below 2x. At the end of the quarter, we have more than $69 million in available liquidity under our senior secured and revolving credit facility, leaving us with the flexibility to finance our operations as well as future investments. During the quarter, we also used our excess cash flow to repurchase more than 492,000 common shares for a consideration of $1.9 million. Since the end of the quarter, we remain active on our NCIB, we're purchasing slightly over 150,000 shares for 600,000, 0.6 million, sorry. Finally, the Board of Directors declared a dividend of 4 cents per common shares payable on September 20th to shareholders of record at the close of business on September 5th. With this, I turn it back to Stuart for the outlook. Stuart? Thank you, Francois.

PreMix is well positioned to benefit from a market recovery driven by its improved sales organization, a more effective network, and as we reorganize operations in Niagara Falls and Toronto, a lower cost structure. We've regained our position as a nimble, cost-effective organization, ready and eager to execute. In envelope, we continue to leverage our position and strengthen the Canadian market and have good momentum in the U.S., and we continue to push hard for further expansion. Over the last several quarters, we've added a director of U.S. sales, an industry veteran, and business development resources focused on direct mail within the financial services sector. Those investments and others are paying off as backlogs have improved significantly in an improving sector. We like our position, platform, and cost structure as we head into the second half. In packaging, the operations have momentum, and we expect to build on the efficiency gains demonstrated this past quarter. As I said before, the path to demand normalization will be gradual and not linear. The demand for packaging tracks very closely with consumer confidence, inflation, interest rates, and disposable incomes. Volumes by customer are generally down as households make tough decisions on where to spend their available dollars in grocery outlets, drugstores, or in online shopping. Like everyone else in our industry, we are out there looking for new clients to fill the void. We are using strong value propositions, IP, investing class assets, and operating structures to pursue new business. As I mentioned earlier, we have some nice wins over the last several weeks, both in e-commerce and folding carton, and have a healthy order book. Our balance sheet remains very strong, which should allow us to finance our acquisitions and investments. In the meantime, we remain focused on maximizing cash flow generation and to support prudent capital allocation. In closing, I want to thank our employees and the management team for their hard work and unwavering commitment as, together, we continue to build a supreme X for today and tomorrow. This concludes our prepared remarks, and we're now ready to answer your questions.

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'll 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. The first question comes from Max England with Kennecott Genuity. Please go ahead.

Hey, thanks for taking my question. Stuart, I know you mentioned it in your remarks, but can you talk a little bit more about the Niagara optimization, and then maybe any of the implications for the business? Just want to get a sense of the impact.

Yeah. Hi, Max, and thanks for asking that in question. It's an important step, and its potential impact, you know, we're a little frustrated that it didn't seem to be missed on announcement day. You know, to do that, I really need to kind of take you back to 2020 when we purchased Royal Envelope in Toronto, the first Royal Envelope we purchased. You know, the acquisition gave Supremex the Canadian market share it has today and was a great acquisition for us, sort of positioned us that way. But for the 30 years preceding the acquisition, we were bitter rivals in the industry. And I know it because I was in the middle of it most of the time. When we did the acquisition, we weren't operating at close to full capacity. They weren't operating at close to full capacity. And, you know, we probably could have sort of tucked it in quicker, but we knew that it was going to take time to heal old wounds, assimilate cultures, build trust, and all of that's happened. And at the time, we elected to take a five-year lease instead of our traditional 10-year lease because we wanted time to integrate appropriately and our U.S. operations to become a little bit more mature. So we knew this day would come when it was a prudent decision to reduce our costs in Canada and improve our capabilities within the U.S. as well. So the reality is when we dug into the numbers, we had improved operations so much that There was some socializing of the orders over too many machines spread out over too much real estate. If you want to think about it that, and you've been through a couple of the plants, 55% of the volume was produced on days, 30% was on afternoons and 15% on midnights across all of the equipment. That in itself is not the most efficient way to operate, but the strategy served us well in terms of integration. And then when they layered on a potential rent increase of a million dollars per year, close to a million dollars per year when we come out of this lease, you know, it was all pretty academic at that point. So, now it's all in the execution, and I guess this is where it really, you know, the rubber hits the road. We'll have the exact same number of machines in Mississauga and Etobicoke when this is done, but it will be the best, most productive machines from the existing fleet. We'll run almost all of them three shifts, five days a week instead of heavily weighted on days and virtually nothing in the off shifts. And we'll concentrate the same unit production over fewer machines. So virtually every hourly employee was offered a transfer, and the majority of them took us up on it. I think we only lost a few people of retirement age that used the announcement as a catalyst to make a decision that we all knew was coming at some point. There's a lot of work to be done in terms of the move, but there's a staging process that provides redundancy and reduces the risk. Since we're not running three shifts, when the first machine goes down, the operators from that machine will move to a similar machine and run it on the off-shift, thus keeping the capacity the same. And at the end of the sort of the Toronto move, several pieces of equipment in Toronto that will be decommissioned represent upgrades or capacity improvements in Massachusetts and Indianapolis, and they'll be deployed to those locations, you know, to give us more capacity. We're disappointed the street didn't seem to understand or appreciate the $2 million reduction in fixed costs that's going to happen sort of – Q1, Q2 of next year. I mean, it's pretty imminent, and it's all sort of fixed costs, so it goes away sort of immediately. But we're going to be able to produce the exact same number of envelopes or more, but with a much lower fixed cost.

Does that help? All right. Yeah, no, that's a ton of color. That's really helpful. Thanks, Stuart. One more on the envelope side for me. Volume's improved nicely. Can you talk a little bit about what we were seeing there? I know like the US was really strong. So has demand stabilized? Any color would be helpful.

Yeah, well, I wouldn't say stabilized. I think it's not where it was in 2021 and 2022, but it's coming back at a nice, consistent, gradual pace, sustainable pace. So overall, the industry is busier. which puts less pressure on price and more units available to us. So, yeah, and there was, you know, there was some mix with inside of the U.S. market. You know, we took a couple of nice pieces of business, big volumes, sort of lower, you know, lower profile, lower cost, lower sell price, which kind of adversely affects the mix from an average selling price standpoint. But the units are really good and the backlogs are strong for Q3 and Q4. So we're expecting a good second half to the year.

Right. Okay. Thanks. And then just one more quick one for me on the packaging side. Really good to see the EBITDA margins. I think it's an LTM high. On the demand side for packaging, The last couple of quarters, we've seen pressure on certain segments related to discretionary spend like health and beauty. Any change with those or is those still, I mean, my gut would say no, but I'll pass it to you.

Your gut would be right. I mean, any change in that space is not discernible. It's the efforts of getting out and meeting new clients, talking to new clients, some wins on the new business side, maybe both with existing customers and brand new customers to the organization. And the wins that I referred to in my comments were largely new customers and new opportunities. So I would say it's more of a share gain than our customers getting back to more normal volumes. If both happen, that's fantastic.

Yeah. Okay. Understood. That's it for me. Thanks for taking my questions. I'll pass them on.

Thanks, Max.

Once again, if you have a question, please first start, then 1. If there are no more questions in the queue, this concludes the question and answer session. I would like to turn the conference back over to Stuart Emerson for any closing remarks.

Stuart Emerson Great. Thank you, operator, and thank you for joining us this morning. Enjoy the rest of your summer, and we look forward to speaking to you again at our next quarterly call. Great. Thanks. Have a good day.

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