Supremex Inc.

Good morning, operator. [Foreign Language] Good morning, ladies and gentlemen.

My name is Danielle Ste-Marie. I'm an Independent Adviser and act in Investor Relations Capacity for Supremex.

With us today is Stewart Emerson, President and CEO; and Guy Prenevost, Chief Financial Officer and Corporate Secretary. I'd like to welcome you to today's conference call to discuss our financial and operational results for the second quarter ended June 30, 2020, which were released earlier today.

This call will be held in English. [Foreign Language] For a more detailed analysis of our results, please see our financial statements, our MD&A, and our press release disclosed earlier this morning and available on the company's website and on SEDAR.

In addition, we posted a presentation supporting this conference call, which is available through the webcast and on our website. I'd like to remind listeners that, this conference call contains forward-looking information within the meaning of applicable Canadian Securities Laws and I refer the audience to the forward-looking statement, as detailed in the presentation supporting this conference call.

Furthermore, risks and uncertainties are discussed throughout the December 31, 2019 MD&A under the heading Risk Factors. Unless stated otherwise, all figures are expressed in Canadian dollars.

During this call and on the accompanying presentation, we use various non-IFRS measures, including adjusted EBITDA. These terms are also defined in our MD&A.

With these formalities out of the way, I would like to turn the call over to Stewart Emerson, President and CEO at Supremex to review this quarter's key operational highlights and recent results.

Thank you, Danielle, and welcome everybody. I'll just apologize out of the chute here.

I'm in the middle of some unplanned dental work. So I struggle with some pronunciation I apologize.

We entered the second quarter of 2020 and amid significant uncertainty as a result of the COVID-19 pandemic, and the start of the shelter-in-place measures. From the very outset of this call, I'd like to applaud all of our employees, who work safely and with dogged determination to ensure uninterrupted service to our customers and for their support as we navigate this unprecedented situation.

As I said in Q1, the pandemic effects and – the pandemic affects and affected each of our businesses differently. While all of the businesses held up pretty well overall, I think it's important to note, none of our businesses or large customers were the beneficiary of the pandemic.

But on the other hand, we did have several customer lines of business and specific customers that were materially affected by COVID. Thankfully many of our envelope customers, including government entities, financial institutions and utilities are providers of essential products and services, and continued to mail through the quarter.

And while we don't serve the essential mailer market to the same degree in the U.S., we were able to continue to lean on our U.S. customers for volume, and received a nice boost in the quarter from vote by mail.

On the Packaging side, our customers operate in the food and pharmaceutical industries and increasingly in e-commerce, all of which held up well and were able to support those like cosmetics and fragrances, which did not. Despite the chaos around us, and having several lines of business and customers that were materially affected we delivered improved profitability, higher cash flows and reimbursed debt.

Our geographic and product diversification and ability to manage through crises served us very well in the second quarter, both on the revenue and profitability fronts, and we'll continue to do so going forward. While we're on geographic and product diversification, I think it's important to point out that 54% of our revenue in the quarter, and 52% of our revenue year-to-date come from Packaging and U.S.

Envelope. Said slightly differently, including the increased revenue from the Royal Envelope acquisition less than 50% of our revenue for both the quarter and year-to-date comes from Canadian Envelope.

Our main growth driver in the second quarter of 2020 was our Packaging and Specialty Products segment. Growth came primarily from new subscription-based e-commerce packaging customer relationships that we've been developing and nurturing since mid-last year.

These customers are large e-tailers, with whom we work to optimize their packaging by designing and developing solutions that enable them to significantly save on shipping costs, while providing a more dynamic opening experience that better allows them to showcase their brand. We also experienced modest growth in pharmaceutical packaging sales, which did not compensate for lower revenue from other packaging sales, primarily cosmetic and food customers.

U.S. Envelope also performed relatively well, considering the ongoing pandemic and our limited exposure to essential mail, with volumes declining by a mere 3.5%.

In Canadian Envelope, the acquisition of Royal Envelope partially compensated for the continued secular decline and the effect of the COVID-19 pandemic on our legacy business sales. On a consolidated basis Canadian Envelope revenues were down 4.7%.

Not only did this acquisition bring volume in the second quarter, the extracted synergies resulting from a quick start to integration and the improved operating efficiencies were significant contributors to the financial results, and we expect to enjoy many of these synergies going forward, and to be able to extract additional synergies, as the physical integration progresses. We announced with Q1 results that in April we were experiencing a revenue decline of approximately 20% on the legacy business and 6% including Royal Envelope.

Fortunately, between the combination of continued onboarding of e-commerce wins and a general improvement in market conditions starting in mid-May and into June, we were able to finish the quarter at essentially flat for the corresponding quarter in 2019. That doesn't mean we didn't have to scramble on the operations side to quickly get costs in line with reduced revenue and activity at the beginning of the quarter.

I'm really proud of local management across the organization on how quickly they were able to mobilize on both the health and safety and cost reduction front. Through their quick action and other liquidity preservation methods -- measures, including the tightening customer credit, aggressively managing DSOs and controlling inventory, we were able to weather the storm and generate slightly higher adjusted EBITDA and improved cash flows.

Of course, it's impossible for anyone to predict the duration and scope of the pandemic and its effect on the economy and we continue to take a very prudent approach as we manage through this new reality. We are tightly controlling our expenses and working capital and we'll continue to limit capital expenditures.

The improved EBITDA in the quarter and working capital improvement helped us generate strong cash flows from operations which we used to diligently reimburse debt. In the second quarter alone, we reimbursed $4.8 million of debt.

In order to remain prudent, but still returning short-term value to shareholders, we initiated a normal course issuer bid which we announced earlier this morning. This will allow us to purchase up to 5% of our issued and outstanding shares in the next 12 months.

Finally, we continue to prudently manage our operations and cash in light of the ongoing pandemic and its potential effects on the overall economy and our business. We continue to nurture and grow our packaging platform through investment in sales and marketing to continue growing our e-commerce fulfillment revenues and reduce volatility that may be attached to customer concentration.

To that end, at the end of July, Rob Young joined us as President of Packaging. Rob brings a wealth of relevant experience to Supremex and I am of the opinion, we punched above our weight class in securing his services.

Most recently Rob has been more focused on the operations side of the business. And anyone who has listened to our call in previous quarters knows that our packaging business will benefit from that specific expertise.

That said, Rob has significant P&L and sales responsibility with large well-known entities over his career in all of the print, direct mail, envelope and packaging industries. He's moved seamlessly into our organization over the last four weeks and brings a larger approach -- larger organization approach to structure and discipline and a different perspective on which we can build.

At the moment Rob is in the diagnostic stage in assessing the business and landscape and we're excited to have him. I'd like now to turn the call over to Guy for a review of our financial results.

Thank you, Stewart. Good morning everyone.

Total revenue for the three month period ended June 30, 2020 was $47.7 million in line with the second quarter of 2019. Revenue from the Envelope segment decreased by 3.5% to $32.8 million compared to $33.9 million in the second quarter of 2019.

Canadian Envelope revenue was $22.2 million, down 4.7% from $23.3 million. Volume increased by 6.7% from the contribution of the acquisition of Royal Envelope.

Excluding revenues from Royal Envelope, Canadian Envelope sales were down by approximately 26.8% resulting from the temporary closure of nonessential businesses during the second quarter and from the effects of the secular decline of the Canadian Envelope market. Average selling prices were 10.7%, lower than to last year's comparable period, primarily as a result of changes in the envelope mix sold during the COVID-19 pandemic.

Revenue from the U.S. envelope market was $10.6 million, down 1% from $10.7 million.

Volume declined by 3.5%, while average selling prices increased by 2.6%, primarily from a positive foreign exchange translation effect of approximately 3.6%. Revenue from the Packaging and Specialty Products segment was $14.9 million, an increase of 8.9%.

Revenue growth came from our e-commerce packaging business that onboarded new customer accounts in 2020 offsetting a reduction in folding carton sales. Packaging and Specialty Products represented 31.3% of the company's revenue in the quarter, up from 28.7% during the equivalent period of last year.

On a geographical segmentation basis in the second quarter of 2020, Canadian sales accounted for 66% of revenue and U.S. sales were 34% versus a 70%-30% split in Q2 2019.

EBITDA was $6.9 million, a 3.9% increase from $6.6 million, primarily from the contribution of Royal Envelope and higher e-commerce packaging sales. Adjusted EBITDA margins increased to 14.5% of revenue compared to 14.2% in the equivalent quarter of 2019.

On a segmented basis, the Envelope segment adjusted EBITDA was $5.7 million, up $0.5 million from $5.2 million. Profitability of the Canadian Envelope Corporation improved with the acquisition of Royal Envelope, which in addition to additional sales volume provided synergies in production efficiencies and procurement.

On the percentage of segmented revenue, adjusted EBITDA from the Envelope Corporation was 17.5%, up from 15.5% in the equivalent period of 2019. The Packaging and Specialty Products segment adjusted EBITDA was $1.9 million in line with the equivalent period of 2019.

Higher e-commerce sales compensated for the lower contribution from folding carton packaging. On the percentage of segmented revenue adjusted EBITDA from the Packaging and specialty products was 13.3% compared to 14.5% in the equivalent period of 2019.

Net earnings were $1.9 million or $0.07 per share for the three-month period ended June 30, 2020 compared with $1.8 million or $0.06 per share for the equivalent period of 2019. Net cash flows from operations were $18.9 million during the first six months of 2020 compared with -- compared to $8 million in the equivalent period of 2019.

The improvement is mainly attributable to higher net earnings and to a $6.9 million positive net change in the working capital adjustments. Earlier today, we announced that we had received approval from the TSX to purchase by way of an NCIB for cancellation approximately 1.4 million common shares, representing 5% of the issued and outstanding common shares as of August 12, 2020.

Purchase under the NCIB will be made through the facilities of the TSX or alternative trading facilities in Canada are eligible -- if eligible in accordance with applicable securities laws and regulations over a maximum period of 12 months beginning on August 17, 2020 and ending on August 16, 2021. Let's turn the call over to Stewart.

Thank you, Guy. Operator, are there any questions?

Thank you. Stewart I have basically two questions.

One is, are you looking at buying back shares over the next year as opposed to issuing a dividend over the next year? That's the first question.

The second is, does U.S. dollar declines expose you to a loss much in your U.S.

business?

Hi, Barry. Thank you for the question.

So I'll answer the last one first, because it's easiest. We're basically naturally hedged.

So there's really a loss on one side as a gain on the other. So we're not particularly concerned there at this time with the current split of sales and purchases.

On the dividend versus buyback, I mean, we suspended the dividend as you're aware. At this time, we're still evaluating the situation and the effects of COVID on the overall business and the economy in general.

On the buyback question, we did reinstitute our NCIB announced it this morning with the press release, and as a result, we intend to exercise on that and buy back shares.

Okay. One other question if I may.

And that is, will there be any flexibility in reducing your number of plants over the next year?

For obvious reasons, we won't answer that here. But, I mean, I think it's fair to say that we have a fair number of plants and we're addressing our cost structure on a regular and ongoing basis.

All right. Thank you very much.

Okay. Thank you operator.

If there's no further questions, I'll move to my closing remarks. In spite of the ongoing pandemic and -- our long-term strategy remains the same, grow our packaging revenues and reach a 50-50 split with envelope.

In the shorter-term, we are highly focused on addressing inefficiencies, increasing sales and raising profitability of our fairly extensive and well-equipped packaging platform. On the envelope side, there are more synergies to be had as we continue the integration of Royal Envelope.

And we're using the lessons learned from operating in the pandemic and our ability to tightly manage our cost structure under the new operating environment to challenge some of our traditional thinking. As we said on our last call, our primary objectives are to safeguard the well-being of our employees and customers, while we adapt and innovate, while finding new opportunities to profitably grow the business.

In order to continue maintaining a strong balance sheet today and beyond, we are tightly managing expenses and working capital, reimbursing debt and returning short-term value to shareholders by reinitiating our NCIB. We have emerged from the last few months of extreme uncertainty stronger than ever.

We have learned lessons, demonstrated our ability to manage through crisis and validated the resiliency of our business. We have a dedicated loyal employee base and good assets and we're one of the fortunate businesses to still be operating at close to pre-COVID capacity.

With that, I thank you very much for your time, and look forward to talking to you again in November.