Supremex Inc. (SXP) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Supremex 2026 Second Quarter Earnings Conference Call. [Operator Instructions] 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 Friday, July 31, 2026. I will now turn the conference over to Martin Goulet of MBC Capital Markets Advisors. Please go ahead.

Thank you, operator. Good morning, ladies and gentlemen. Thank you for joining this discussion of Supremex' financial and operating results for second quarter ended June 30, 2026. 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 are available on SEDAR+ 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 Stewart Emerson, President and CEO of Supremex; as well as Norm Macaulay, CFO. With that, I invite you to turn to Slide 14 of the presentation for an overview of the second quarter, and I turn the call over to Stewart.

Thank you, Martin, and good morning, everyone. Well, the momentum we built through the back half of last year carried into the second quarter of this year. Revenue grew across both businesses, adjusted EBITDA margin expanded meaningfully and importantly, we returned to strong positive free cash flow after a seasonally soft first quarter. Consolidated revenue was up 8.5% year-over-year to $71.6 million, and adjusted EBITDA rose almost 34% to $7.8 million. Our margin expanded 210 basis points to 10.9% from 8.8% a year ago. And I want to pause on that number because it's the clearest evidence yet of the earnings power of the platform we've assembled. That kind of operating leverage, converting revenue growth into disproportionate EBITDA growth is exactly what we set out to build, and it reflects both improved volume and a disciplined cost management as operating and SG&A expenses grew more slowly than revenue. Stepping back for a moment, the story we've been telling you for several years is that of a company extending the runway of its legacy envelope business and using the strong reliable cash flow to build a growing packaging platform. Packaging grew 19% and now represents 37% of our revenue, up from 1/3 a year ago. The transition is not a slide in the deck anymore. It's showing up in our results. None of that happens without our people, and I want to thank our teams across each and every one of our facilities, the folks on the plant floor in sales and in our support functions who have executed through a period of real change this quarter, including several acquisitions and plant consolidations. Their hard work is what turns this strategy into performance. Now let's turn to operations, beginning with Packaging, our growth engine. Packaging delivered another strong quarter. Segment revenue was up 19% year-over-year to $26.4 million. And if you exclude our small noncore commercial print business, the balance of the segment driven by folding carton actually grew almost 28%. Folding carton continues to benefit from share of wallet gains with large multinational consumer packaged goods customers in health and beauty and over-the-counter pharmaceuticals from new business wins and the contribution from the Trans-Graphique acquisition we completed last July. We also enjoyed impressive growth in our e-commerce secondary packaging activities with impressive new wins, ongoing expansion within existing U.S. customers and the impressive reactivation of one of our very first large e-commerce packaging wins that has now been brought back to the Nest. The headline event of the quarter for packaging was our acquisition of Goldrich Printpak, which closed on June 5. At approximately $30 million in revenue, Goldrich is a sizable first foray into the Greater Toronto area folding carton market, Canada's largest packaging market and is a natural extension of the strategy we have been executing. Its manufacturing facility has been well invested in with a skilled workforce and outstanding assets some of which bring brand-new capabilities to Supremex and it gives us a base in Ontario from which to further pursue acquisitions. We acquired it on a cash-free debt-free basis for approximately $34 million, funded through a new acquisition term loan and our credit facility. We also continue to build scale in labels. In the quarter, we completed the acquisition of iFlex Labels, a small Saint Laurent manufacturer, and we are consolidating those operations along with our existing Laval Labels facility into our Lachine folding carton plant. The build-out of the Lachine facility is underway now, and we expect the consolidation to take place by the end of 2026. Labels are highly synergistic with folding carton. Customers who buy cartons very often buy labels and label customers very often buy cartons. And by putting these operations under one roof and Lachine gives us both cost synergies and a stronger platform to cross-sell. On profitability, Packaging delivered an adjusted EBITDA margin of 12.9%, holding steady with last year even as we absorb the acquisition and integration activity. And excluding the drag from the commercial print, the underlying margin is meaningfully higher. As we capture synergies across the network, we see further upside ahead. Turning to Enveloppe, our cash engine. Revenue was up 3.2% year-over-year to $45.2 million. Encouragingly, this quarter, the growth was driven by both price and volume. Average selling price was up 2% and volume was up 1.1%. That is a noticeable inflection. For several quarters, we've been talking about average selling price as a headwind, and this quarter, it turned into a tailwind. The volume gains came from the acquisitions we completed in 2025, Enveloppe Laurentide and Elite Envelope, along with new customer wins and share of wallet growth in the U.S. market and a modest rebound as we cycle through the Canada Post labor disruption, which weighed last year. Just as important as the top line is what happened below it. The Enveloppe operating expense ratio improved to 71.7% of segment revenue from 73.8% a year ago. That improvement reflects the operational efficiencies from the optimization initiatives we launched in January in our U.S. operations. The additional volume flowing through our facilities and the synergies from the Laurentide and Elite acquisition. The result was Enveloppe adjusted EBITDA of $7 million or 15.6% of revenue, up from 14.1% last year, a 150 basis point improvement. Those optimization initiatives remain ongoing and progressing largely on track and on budget. To give you a sense of the investment behind them, we recorded a $1.6 million of restructuring expense in the first half, most of it in the first quarter related to these U.S. Envelope initiatives and the label reorganization I mentioned a moment ago. That is money we are spending deliberately to take cost out and capture synergies, and we expect to keep it contributing to margin expansion as we move through the balance of the year. With that, I turn the call over to Norm for a review of the financials.

Thank you, Stewart. Good morning, everyone. Please turn to Slide 15 of the presentation. Q2 total revenue came in at $71.6 million, up 8.5% from $66 million in the second quarter of 2025. As Stewart noted, Packaging and Specialty Products revenue was $26.4 million, up 19%, driven by folding carton share of wallet gains, e-commerce expansion and the Trans-Graphique contribution, partially offset by the continued softness in our commercial print business, where revenue declined approximately $0.5 million in the quarter and about $1 million year-to-date. Excluding that decline, the balance of the segment, driven by folding carton grew 27.6% in the quarter and 22.2% year-to-date. Enveloppe revenue was $45.2 million, up 3.2%, reflecting a 2% increase in average selling price and a 1.1% increase in volume. Turning to Slide 16 on profitability. Adjusted EBITDA totaled $7.8 million or 10.9% of revenue, up from $5.8 million or 8.8% of revenue in last year's second quarter, an increase of nearly 34%. In Packaging and Specialty Products, we generated an adjusted EBITDA of $3.4 million or 12.9% of revenue, up from $2.9 million in the second quarter of 2025, with the margin essentially stable as higher volume was offset by softness in the Commercial Print segment and by acquisition activity. I would note that in the quarter, the Commercial Print drag on profitability was proportionately greater than its revenue decline. Its gross margin was down approximately $0.7 million from the second quarter of last year. And excluding Commercial Print, second quarter segment adjusted EBITDA would have been approximately $3.7 million or 16.8% of segment revenue. For the first half, those same figures are approximately $7.4 million and 18%, which gives you a cleaner view of the underlying packaging profitability. Enveloppe adjusted EBITDA was $7 million or 15.6% of revenue, up from $6.2 million or 14.1% in last year's second quarter. The improvement mainly reflects the favorable impact of higher volume on the absorption of fixed costs and the improved operating expense ratio Stewart described earlier. Finally, corporate and unallocated costs were $2.6 million compared to $3.2 million in the second quarter of last year, mostly due to the nonrecurrence of a foreign exchange loss recorded in the quarter. Turning to Slide 17. Adjusted net earnings for the quarter were $1.4 million or $0.06 per share versus $0.1 million or breakeven per share in the same quarter last year. On a reported basis, we returned to profitability with net earnings of $1 million or $0.04 per share compared with a net loss of $0.3 million or $0.01 per share in the second quarter of 2025. Moving to cash flow on Slide 18. Net cash flows from operating activities were positive $4.3 million, a significant improvement from $0.3 million in the second quarter of last year, reflecting lower working capital requirements and higher net earnings. As a result, free cash flow was positive $3.6 million in the quarter compared with essentially 0 in the same quarter last year. I would note that these results were achieved even as we deliberately invested roughly $5 million in inventory in our existing operations during the first half, most of it in the second quarter, a prudent measure given the variability in our operating environment. In other words, the quarter's free cash flow came after absorbing that investment, which underscores the strength of the underlying cash generation. This is a notable turnaround from the first quarter when working capital, including the settlement of taxes on last year's sale leaseback had temporarily pressured cash flow. Turning to Slide 19 and the balance sheet. Net debt stood at $40.1 million as at June 30, and our ratio of net debt to adjusted EBITDA was 1.22x compared to essentially 0 at the end of last year. That increase is entirely attributable to the financing of the Goldrich and iFlex acquisitions. Even after funding those transactions, we retained significant availability under our credit facility to fund future acquisitions. During the quarter, we repurchased approximately 14,000 shares under our normal course issuer bid. And earlier this morning, we announced our intention to renew the NCIB subject to TSX approval, allowing us to repurchase up to 10% of our public float over the coming year. Finally, the Board of Directors declared a quarterly dividend of $0.05 per common share payable on September 11, 2026, to shareholders of record at the close of business on August 27, 2026. I turn the call back to Stewart for the outlook. Stewart?

Thank you, Norm. Please turn to Slide 20. As I said at the outset, we're pleased with the quarter and cautiously optimistic on the outlook. Our operating environment still has variability in it. Economic and trade uncertainty, postage increases and reduced service at the United States Postal Service and the reputational challenges that Canada Post. But we have meaningful levers within our control, and we are pulling them. In Enveloppe, we will keep leaning into the vast and fragmented U.S. market, relying on our reputation and geographic reach to grow revenue while proactively managing our cost base. The January optimization initiatives in our U.S. operations and the reorganization of our label business into Lachine remain ongoing and are progressing on track and on budget. In packaging, we see a significant and growing opportunity, particularly in folding carton. Renewable recyclable paperboard that is increasingly favored as brand owners move away from single-use plastics. Combined with continued e-commerce growth and with brand owners increasingly treating premium packaging as part of the product itself, this is one of the largest and fastest-growing categories in North American packaging. Our strategy is to use the capacity, expertise and cash flow of the Enveloppe business to keep building scale in folding cartons and in adjacent niches and over time, to move towards a more balanced revenue split between our 2 segments. Goldrich is a major step in that direction. With respect to capital deployment, our appetite for M&A remains strong. We will continue pursuing acquisition opportunities that leverage our existing footprint while increasingly evaluating more substantial targets in packaging. And we remain committed to rewarding shareholders through our regular quarterly dividend and the repurchase of our shares. Before I close, let me return to where I started. The transition towards packaging that we have described for several years is now clearly working. You can see it in the revenue mix, in the margins and in the cash flow. That progress is the product of a lot of hard work by our people, and I want to thank them again for their commitment and adaptability through a very active quarter. We are cautiously optimistic. We have levers within our control, and we intend to keep pulling them. This concludes our prepared remarks and are now ready to answer your questions.

[Operator Instructions] Our first question today is from Donangelo Volpe with Beacon Securities.

I guess we're going to touch on tariffs a little bit. I know it's a little bit early to talk about the potential impact. But I'm just wondering if you can kind of quantify some of the annual revenues with projects -- or products manufactured in Canada and sold into the U.S. And if -- I guess, on the potential to shift production of these facilities, what kind of cost and timing would be needed to do so?

Donangelo, thanks for the question. And obviously, sort of knew what was coming. Just on the split of revenue manufactured in Canada and sent to the U.S., we'd rather not discuss that for competitive reasons. As I said in the prepared remarks, we have several levers to pull. Some of them I can share and a couple I'd rather not. But what we can share, I mean, first, we know hope isn't a strategy, but we're encouraged that the parties continue to talk and the recent past history showed that cooler has prevailed when we ran into this at the first half of last year. I can tell you that we're staging as much product, both finished goods and raw materials across the border in advance of the August implementation date and continue to stock up there so they're ahead of the -- any potential tariffs. We've recently staffed up due to some of the growth that we're seeing and anticipating, we've recently staffed up in our Indianapolis packaging facility, and we can take on more down there. In Enveloppe and Chicago and Douglas have available capacity, and they'll run over time to do what they can to help us out. But clearly, there'll still be a gap. Just to help on that side, we're not accepting orders for shipments between August 18 and the 28th. We'll instead sort of chew through a rather extensive backlog and not ship across the border or limit what we ship across the border in that time. And we'll continue to build inventory that Norm talked about that we did in the second quarter. I mean, obviously, it's a concern, but we've been doing everything we can. We do expect an impact. We don't deny that if the tariffs are implemented, and we'll advise the market as soon as we can quantify it reliably. But be assured, we're planning as aggressively as we can. Probably doesn't help you a whole lot, but rather not talk about how much cross-border we have at this point.