Mr. Stewart Emerson reports

SUPREMEX ANNOUNCES Q2 2023 RESULTS

Supremex Inc. has released its results for the second quarter ended June 30, 2023. The company will hold a conference call to discuss these results, today at 10 a.m. Eastern Time.

Second quarter financial highlights and recent events

• Total revenue increased by 14.6 per cent to $71.7-million, from $62.5-million in the second quarter of 2022.
• Envelope segment revenue up 7.3 per cent to $49.3-million, from $45.9-million in the prior year.
• Packaging and specialty products segment revenue of $22.4-million, up 34.7 per cent from $16.6-million last year.
• Net earnings were $2.1-million, compared with $7.4-million last year.
• Earnings per share of eight cents, versus 28 cents a year ago.
• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $9.6-million, or 13.3 per cent of revenue, versus $13.9-million, or 22.3 per cent of revenue, a year ago.
• Acquisition on May 8, 2023, of Graf-Pak Inc., a provider of folding carton packaging solutions located in the province of Quebec.
• Appointment of Francois Bolduc as chief financial officer of the company, effective July 4, 2023.
• On Aug. 9, 2023, the board of directors declared a quarterly dividend of 3.5 cents per common share, payable on Sept. 22, 2023, to shareholders of record at the close of business on Sept. 7, 2023.

"Our second quarter results reflect the temporary effect of inventory adjustments by certain customers and lower demand from sectors more affected by inflation and interest rate levels," said Stewart Emerson, president and chief executive officer of Supremex. "The first half of 2023 was a very busy period, especially for our packaging operations, as we consolidated a significant portion of our folding carton activities under one roof in Lachine while also integrating two acquisitions. Our envelope business continued to generate a solid free cash flow which allowed us to fund our expansion and reduce debt by $3.1-million this past quarter."

"Although disappointed with the transitory profitability reduction in packaging, we are excited with the significant potential of the Lachine facility. Its considerable footprint will enable us to further expand folding carton production to better meet additional demand from this growing market. In this regard, the Graf-Pak operations have been successfully merged into Lachine and we continue to assess initiatives to further optimize efficiency and achieve synergies by leveraging available capacity," concluded Mr. Emerson.

Summary of three-month period ended June 30, 2023

Revenue

Total revenue for the three-month period ended June 30, 2023, was $71.7-million, representing an increase of $9.2-million, or 14.6 per cent, from the equivalent quarter of 2022 essentially reflecting the acquisitions of Royal Envelope Corp., Impression Paragraph Inc. and Graf-Pak.

Envelope segment

Revenue was $49.3-million, representing an increase of $3.4-million, or 7.3 per cent, from $45.9-million in the second quarter of 2022. The increase reflects a $9.1-million contribution from the Royal Envelope acquisition, an average selling price increase of 33.6 per cent from last year's second quarter primarily reflecting a more favourable customer and product mix in U.S. operations, and price increases implemented throughout 2022 to mitigate input cost inflation, as well as a favourable currency conversion effect. These factors were partially offset by a lower volume of units sold following last year's over-ordering in a time of tight supply, and macroeconomic effects of rising interest rates and higher inflation. The envelope segment represented 68.7 per cent of the company's revenue in the quarter, compared with 73.4 per cent during the equivalent period of last year.

Packaging and specialty products

Segment

Revenue was $22.4-million, up 34.7 per cent from $16.6-million for the corresponding quarter of 2022. The increase is attributable to a $7.8-million contribution from the Paragraph acquisition, while the activities of Graf-Pak have been integrated into the pre-existing operations of the company, and higher demand for e-commerce packaging solutions. These factors were partially offset by the wind down of the Durabox operations in 2022, lower demand from certain sectors more closely correlated to economic conditions and the residual effect on sales from the inefficiencies from consolidating the folding carton operations in Lachine concurrently with integrating acquisitions. Packaging and specialty products represented 31.3 per cent of the company's revenue in the quarter, up from 26.6 per cent during the equivalent period of last year.

EBITDA (earnings before interest, taxes, depreciation and amortization) and adjusted EBITDA

EBITDA was $9.4-million, down from $13.9-million in the second quarter of 2022. Adjusted EBITDA amounted to $9.6-million, compared with $13.9-million for the same period last year. The decrease reflects higher operating and selling, general and administrative expenses. The adjusted EBITDA margin was 13.3 per cent of revenue, compared with 22.3 per cent in the equivalent quarter of 2022.

Envelope segment

Adjusted EBITDA was $9.7-million, compared with $11.6-million in the second quarter of 2022. This decrease mainly reflects a lower volume of units sold following last year's over-ordering in a time of tight supply which negatively impacted the absorption of fixed costs. On a percentage of segmented revenue, adjusted EBITDA from the envelope segment was 19.6 per cent, compared with 25.3 per cent in the equivalent period of 2022.

Packaging and specialty products segment

Adjusted EBITDA was $1.7-million, versus $3.3-million in the second quarter of 2022. This decrease is mainly explained by lower demand from certain sectors more closely correlated to economic conditions, which negatively impacted the absorption of fixed costs and by the residual effect on profitability of inefficiencies from consolidating the folding carton operations in Lachine concurrently with integrating business acquisitions. On a percentage of segmented revenue, adjusted EBITDA from the packaging and specialty operations was 7.4 per cent, compared with 19.6 per cent in the equivalent period of 2022.

Corporate and unallocated costs

The corporate and unallocated costs were $1.8-million in the second quarter of 2023, compared with $900,000 in the second quarter of 2022. The increase is essentially attributable to a foreign exchange loss and, to a lesser extent, an unfavourable adjustment related to the DSUs (deferred share units) and PSUs (performance share units) during the quarter.

Net earnings, adjusted net earnings, net earnings per share and adjusted net earnings per share

Net earnings were $2.1-million or eight cents per share for the three-month period ended June 30, 2023, compared with $7.4-million or 28 cents per share for the equivalent period last year.

Adjusted net earnings were $2.3-million or nine cents per share for the three-month period ended June 30, 2023, compared with $7.4-million or 28 cents per share for the equivalent period last year.

Summary of six-month period ended June 30, 2023

Revenue

Total revenue for the six-month period ended June 30, 2023, was $160.1-million, representing an increase of $34.3-million, or 27.3 per cent, from the equivalent period of 2022 essentially reflecting the acquisitions of Royal Envelope, Paragraph and Graf-Pak.

Envelope segment

Revenue was $113.7-million, representing an increase of $23.2-million, or 25.6 per cent, from $90.5-million in the six-month period ended June 30, 2022. The increase is attributable to a $21.1-million contribution from Royal Envelope, an average selling price increase of 36.6 per cent from last year primarily reflecting a more favourable customer and product mix in U.S. operations, and price increases implemented throughout 2022 to mitigate input cost inflation, as well as a favourable currency conversion effect. These factors were partially offset by the volume reduction in the second quarter. Envelope represented 71.0 per cent of the company's revenue in the period, versus 72.0 per cent during the equivalent period of last year.

Packaging and specialty products segment

Revenue was $46.4-million, up 31.5 per cent, from $35.3-million in the corresponding period of 2022. The increase reflects a $15.6-million contribution from the Paragraph acquisition and higher demand for e-commerce packaging solutions. These factors were partially offset by the wind-down of the Durabox operations in 2022, lower demand from certain sectors more closely correlated to economic conditions and the residual effect on sales from the inefficiencies from consolidating the folding carton operations in Lachine concurrently with integrating acquisitions. Packaging and specialty products represented 29.0 per cent of the company's revenue in the first half of 2023, compared with 28.0 per cent during the equivalent period of last year.

EBITDA and adjusted EBITDA

EBITDA was $27.8-million, up from $26.0-million in the first six months of 2022. Adjusted EBITDA was $28.4-million, up from $26.0-million for the same period a year ago. This increase reflects higher total revenue, partially offset by the higher material and labour costs as well as higher selling, general and administrative expenses. The adjusted EBITDA margin reached 17.7 per cent in the first half of 2023, versus 20.7 per cent in the first half of 2022.

Envelope segment

Adjusted EBITDA was $26.9-million, up from $21.6-million in the first half of 2022. This increase was primarily due to higher revenue, driven by an increase in the average selling price and a more favourable product mix in U.S. operations, partially offset by the effect of lower volume on the absorption of fixed costs. On a percentage of segmented revenue, adjusted EBITDA from the envelope segment was 23.7 per cent, compared with 23.8 per cent in the equivalent period of 2022.

Packaging and specialty products segment

Adjusted EBITDA was $5.5-million, compared with $7.4-million in the first half of 2022. This decrease mostly reflects lower demand from certain sectors more closely correlated to economic conditions which impacted the absorption of fixed costs and the residual effect on profitability of inefficiencies from consolidating the folding carton operations in Lachine concurrently with integrating acquisitions. On a percentage of segmented revenue, adjusted EBITDA from the packaging and specialty operations was 11.9 per cent, compared with 21.1 per cent in the equivalent period of 2022.

Corporate and unallocated costs

The corporate and unallocated costs were $4.0-million compared with $3.0-million in the first half of 2022. The increase resulted mainly from a foreign exchange loss and severances.

Net earnings, adjusted net earnings, net earnings per share and adjusted net earnings per share

Net earnings were $11.6-million or 45 cents per share for the six-month period ended June 30, 2023, compared with $13.7-million or 52 cents per share for the equivalent period last year.

Adjusted net earnings amounted to $12.1-million or 46 cents per share for the six-month period ended June 30, 2023, compared with $13.7-million or 52 cents per share for the equivalent period in 2022.

Liquidity and capital resources

Cash flow

Net cash flows from operating activities were $10.0-million for the three-month period ended June 30, 2023, compared with $10.4-million for the same period in 2022. The slight decrease is attributable to lower profitability mostly offset by lower working capital requirements this quarter compared with the equivalent period of 2022.

For the six-month period ended June 30, 2023, net cash flows from operating activities reached $17.5-million, compared with $10.6-million in the equivalent period of 2022. The increase is mainly attributable to lower working capital requirement partially offset by lower profitability.

Free cash flow amounted to $9.8-million in the second quarter of 2023 compared with $10.2-million for the same period last year. The slight decrease mirrors a similar reduction in cash flow from operations.

Free cash flow amounted to $13.2-million in the six-month period ended June 30, 2023, compared with $10.1-million in the corresponding period of 2022. The increase is mainly attributable to higher cash flow from operations, partially offset by higher acquisitions of property, plant and equipment.

Normal course issuer bid (NCIB)

During the three and six-month periods ended June 30, 2023, the company repurchased 56,700 common shares for cancellation under its NCIB program for a total consideration of $300,000.

Subject to the approval of the TSX, the company intends to renew its NCIB which expires on Aug. 30, 2023.

Debt and leverage

The company's total debt increased to $78.2-million as at June 30, 2023, compared with $54.7-million as at Dec. 31, 2022. The increase is essentially attributable to the acquisitions of Paragraph and Graf-Pak for considerations of $25.7-million and $6.0-million, respectively, net of cash acquired, partially offset by debt repayment resulting from a solid free cash flow generation.

Dividend declaration

On Aug. 9, 2023, the board of directors declared a quarterly dividend of 3.5 cents per common share, payable on Sept. 22, 2023, to the shareholders of record at the close of business on Sept. 7, 2023. This dividend is designated as an eligible dividend for the purpose of the Income Tax Act (Canada) and any similar provincial legislation.

Outlook

Since the beginning of 2023, new order intake has slowed appreciably as customers work through excess inventory built via over-ordering in a time of tight supply in 2022 and macroeconomic conditions including rising interest rates and high inflation, which has adversely affected discretionary spending. The company expects these conditions to affect its operations in the third quarter and potentially into the fourth quarter. Supremex will rely on its solid reputation and geographic reach to assist in mitigating a slowdown while continuing to tightly control expenses.

The company will continue to focus on integrating the Royal Envelope, Impression Paragraph Inc. and Graf-Pak business acquisitions, while actively seeking to capture all sales and cost synergies. As planned, Graf-Pak's operations have been merged into the Lachine facility and the company continues to assess optimization initiatives to leverage Lachine's larger capacity.

With respect to capital deployment for 2023, the company will continue to look for strategic acquisitions, mainly in the packaging and specialty products segment, while sustaining capital returns to shareholders.

Aug. 10, 2023 -- second quarter results conference call

A conference call to discuss the company's results for the second quarter ended June 30, 2023, will be held Thursday, Aug. 10, 2023, at 10 a.m. Eastern Time.

A live broadcast of the conference call will be available on the company's website, in the investors section under webcast.

To participate (professional investment community only) or to listen to the live conference call, please dial the following numbers. The company suggests that participants call in at least five minutes prior to the scheduled start time:

Confirmation No.:  10022126

Local (Vancouver) and international participants, dial:  604-638-5340

North-American participants, dial toll-free:   1-800-319-4610

A replay of the conference call will be available on the company's website in the investors section under webcast. To listen to a recording of the conference call, please call toll-free 1-855-669-9658 or 604-674-8052 and enter the code 0277. The recording will be available until Thursday, Aug. 17, 2023.

About Supremex Inc.

Supremex is a leading North American manufacturer and marketer of envelopes and a growing provider of paper-based packaging solutions. Supremex operates eleven manufacturing facilities across four provinces in Canada and six manufacturing facilities in four states in the United States employing over 1,000 people. Supremex's growing footprint allows it to efficiently manufacture and distribute envelope and packaging solutions designed to the specifications of major national and multinational corporations, direct mailers, resellers, government entities, SMEs (small/medium enterprises) and solutions providers.

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