Supremex Inc
TSX:SXP
Supremex Inc
TSX:SXP
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Good morning. My name is Matthew, and I will be your conference operator today. At this time, I would like to welcome everyone to the Supremex Inc.'s second quarter results conference call.[Operator Instructions] Thank you. Danielle Ste-Marie, you may begin your conference.
Thank you, Matthew. Good morning, ladies and gentlemen. My name is Danielle Ste-Marie. I am an independent adviser and act in an investor relations capacity for Supremex. With us today is Stewart Emerson, President and CEO; and Guy Prenevost, Chief Financial Officer and Corporate Secretary.I would like to welcome you to today's conference call to discuss our financial and operational results for the second quarter ended June 30, 2018, 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 management discussion and analysis 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 would 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 statements as detailed in the presentation supporting this conference call. Furthermore, risks and uncertainties are discussed throughout December 31, 2017 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, adjusted net earnings and net debt to adjusted EBITDA ratio. 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 events. Stewart?
Thank you, Danielle, and welcome, everyone. I thank all of you for joining us here today to discuss our second quarter results, which are showing steady improvements on the strength of our diversification strategy.Growth from our packaging business more than offset the decline in the envelope market leading to a 14% increase in total revenue in the quarter. More specifically and impressively, organic growth from the legacy packaging and specialty product group more than offset the decline in Canadian envelope. We experienced growth in all 3 of our packaging product categories, that is, folding carton, corrugate, e-commerce fulfillment packaging and specialty products.Our folding carton offering is now our largest packaging category and remains the cornerstone of our growth strategy. It has been exactly 1 year since we completed the acquisition of Stuart Packaging, our first acquisition in this space and I can say that we are currently experiencing the most positive growth scenario that we had envisioned when we acquired the business in July of 2017.Since then, we have invested almost $1.5 million in new equipment, thereby removing a capacity constraint and opening significant growth opportunities at Stuart Packaging and we've grown our share of wallet with existing customers in a manner consistent with our pre-acquisition model. Early in this second quarter, we completed our second acquisition in folding carton. Unlike Stuart Packaging, G2 did not have any specific capacity constraint. As a result, we're quite excited by the growth opportunity it presents and we know we can significantly grow this business with minimal investment and a concerted sales push.With these 2 very impressive facilities both with available capacity, we're well positioned to supply large multinational corporations operating in the pharmaceutical, health and beauty and food markets. These are markets that value high-quality products, quality assurance rigor, innovative solutions, supply chain reliability and business continuity plan. As a result, we are investing in our sales capabilities and targeting these higher-value sectors in the folding carton packaging market that can offer both steady growth and higher margin potential.As for our corrugate business at Durabox, we are now in the final stages of moving this operation to its new modern facility and commissioning our new corrugator and die cutter. The equipment has been delivered, installed and beta tested. Full commissioning and training by the OEM is scheduled to start on Monday and we expect it to be fully operational by the end of the current quarter or beginning of the fourth quarter. We do expect some non-recurring short-term expenses in the third quarter as we plan to run our new equipment simultaneously with our legacy equipment. We believe this is a prudent risk mitigating approach. These additional expenses will be partially mitigated by lessening our reliance on external corrugate procurement.We expect to decommission the current facility at the end of the third quarter or start of the fourth quarter. We also anticipate that once the new facility is up and running, producing more board in a more efficient environment and at a lower cost, the increased capacity and capability will benefit both our food packaging, mainly pizza boxes, and our e-commerce protective packaging offerings.And while I discuss this portion of our packaging business last, our e-commerce fulfillment packaging and specialty products group continues to exceed expectation to the point where organic revenue growth from this area alone offsets the revenue decline in Canadian envelope. It's very impressive. While I am very excited about what we've done and what we are building on the packaging side, I'm especially proud of this portion of our business. Only a few short years ago did we start incubating this division inside one of the Toronto envelope plans and it continues to grow and impress, almost like the [ little engine that could ]. We are very pleased with our progress and excited by the prospects of continuing to grow in the e-commerce space.Finally, to close on packaging in general and e-commerce specifically, I want to acknowledge the team we have built and continue to build. They are focused and dedicated. We have strong operators in place across the platform and we believe we are well positioned to continue to expand these businesses.While secular decline continues to be a major headwind, there are a couple of underlying factors that affected our results in the quarter and I'd like to address them specifically as it relates to envelope. The first is inflation. We're in a period of significant cost inflation. By the time the most recently announced paper price increase occurs in September, it will be the industry's third increase in 2018. This has a major impact on operations, sales and margins. While we are very adept at passing through increases and we will eventually get all the increases implemented, as good as we are, it is virtually impossible to raise pricing in lockstep with increased costs [ 3x ] in 3 quarters.To illustrate my point many of the largest publicly traded printers and forms manufacturers in North America who have recently reported their earnings are experiencing pressure on COGS. And I suspect it's from higher paper prices they've been unable to pass on in lockstep with their occurrence. Well, as I said, with our position in the Canadian envelope market we are fairly adept at passing through increases, we never said we could do it in lockstep with 3 increases in 3 quarters. We will get them through, but it takes time.Other than secular decline, the second factor that has affected our Canadian envelope performance is movement of orders between distributors and manufacturers. This is an important concept. Over the past 2 quarters we've talked about ebbs and flows of customer movement and I recognize that this is a rather nebulous statement. I'd like to provide more context and color to better illustrate what we mean.As I explained on the previous call, approximately 60% of what we sell in the Canadian envelope market is through one channel of distribution or another. The ebbs and flows we mentioned are really referring to lost orders or contracts and be the movement of orders between distributors. By far the largest impact on Canadian units has been the movement of orders, contracts and accounts between distributors. This impact is even greater than the impact of secular decline on our Q1 and Q2 Canadian units. The way it works is, if you enjoy a large piece of business with one distributor and that customer loses the business to a competitor more often than not the winning competitor has used another envelope manufacturer in their bid for the total business. What's important to understand is the units still exist in the market or at least most of them still exist. But they have moved from one supplier to another often the result of almost nothing the envelope manufacturer did or didn't do.As a result of the secular decline and this ebb and flow, we reported a 12.4 unit decline in Q2. However, the market is not down anywhere near that much and we're working hard with all of our customers, both direct and indirect, to recoup the units we lost as collateral damage, while at the same time being conscious of cost increases and how our actions affect the broader market.On the U.S. envelope side, we're experiencing the same challenges as we are in the Canadian envelope market with respect to cost increases and passing them through in lockstep as they happen. While the U.S. market has improved recently in terms of cost pass-through, we are less optimistic about the ability of our U.S. operations to pass through 100% of the increases than we are in our Canadian operations. Our U.S. sales teams better understand, are well-versed and more committed to passing through the increased cost than ever before, but on some level they are at the mercy of the broader -- of what the broader market does. Remember, we have less than 5% market share in the U.S. and do not have significant influence, at least yet.Additionally, like I just did for our Canadian envelope sales, I'll provide more color and context to explain our sales variances in the U.S. over the past quarter. As Guy will explain later, units sold were down 6.5% in the quarter and candidly that's a disappointment, at least on the surface. However, in looking deeper into the numbers 140% of the decline came from 2 customers. Supremex' decision not to renew a contract it inherited with the purchase of Bowers Envelope -- from the beginning, I knew it was a marginal contribution contract. It came up for renewal 6 months after the acquisition, and I didn't feel we're in a position to walk away, so we renewed in 2017. With all the good things that have been happening for us in the U.S. and the customer wins, we felt more confident and did not renew in 2018. In our mind it was addition by subtraction. Bowers Envelope is healthier today than it was at any time in 2017. The second was the end of a strategic alliance in Western New York. And this was a situation where we embedded 2 envelope machines and 9 employees in a customer's plant some 7 years ago. I negotiated this deal personally prior to becoming the CEO. It was initially a 4-year agreement and we had 3 1-year extensions. There were provisions in the agreement that might be referred to as a shotgun clause and wisely the customer exercised this option. It was a terrific agreement for both parties, but the agreement ran its natural course. As you might expect Supremex transitioned the business and the employees to the customer in a professional manner and we are still on exceptional terms and we maintain a service agreement with them. And since these 2 accounts represent 140% of the decline, it also means we won a fair share of new business. All that said, we are cautiously optimistic about what's been transpiring in the U.S. and have made some changes in the investments in our sales force. We've added 2 very strong sales resources that come to Supremex directly from other envelope manufacturers, one in Indianapolis, one in Columbus, Ohio. We also did a sales upgrade in Western New York that we're excited about.And with a strong operator now in place in the U.S., we have gained the confidence of our employees and customers. So after all of that and a couple of ordinary quarters, I am happy to see our operating profitability and earnings have improved and are heading in the right direction. I am confident that we continue in this direction as we work to build operational leverage and execute on our M&A road map.With this I'll turn the call over to Guy for a review of our financial results in the second quarter ended June 30, 2018. Guy?
Thank you, Stewart, and good morning, everyone. Revenue for the second quarter ended June 30, 2018 increased by 13.8% reaching $46.8 million. Revenue growth comes entirely from packaging and specialty products, which represented 32.6% of the company's revenue in the second quarter of 2018.Revenue from the Canadian envelope market was $21.9 million, a decrease of 10.9% from $24.5 million recorded during the second quarter of 2017. The reduction in volume of 12.4% results primarily from the combined effects of industry-wide secular decline, ebbs and flow of order movement between customers and timing of orders. This was partially mitigated by an increase in the average selling prices of 1.8%.Revenue from the U.S. envelope market was $9.7 million, a decrease of 6.9% in the second quarter of 2017. The volume of units sold decreased by 6.5% from the non-renewal of a low margin contract from the acquisition of Bowers Envelope and the end of a strategic production alliance with a longstanding commercial partner. This was partially mitigated by new customer wins and growth in various accounts. Selling price increases implemented in 2018 were offset by the conversion effect from a stronger Canadian dollar during the period, resulting in a net decrease of 0.4% in average selling prices.Revenue from packaging and specialty products was $15.2 million, an increase of 147% compared to the prior year, primarily resulting from the acquisition of Stuart Packaging, concluded on July 20, 2017 and of G2 Printing and Pharmaflex announced in -- on May 1, 2018 and from organic growth from the corrugated and e-commerce packaging offerings.Adjusted EBITDA improved to $6.1 million in the second quarter of 2018, compared with $5.4 million in the equivalent quarter of 2017, representing an increase of 13.8%. Adjusted EBITDA margins were at 13.1% and in line with last year's equivalent quarter. Growth from packaging and specialty products more than offset the negative effects of the secular decline in the envelope business. The second quarter of 2017 operating results included a loss of $0.3 million attributable to the Printer Gateway's operations which were shut down in January 2018.Net earnings reached $3.1 million or $0.11 per share for the second quarter of 2018 compared with $2.8 million or $0.10 per share for the equivalent quarter in 2017. Adjusting for the $0.3 million provision for contingent remuneration related to the Stuart Packaging acquisition and a gain on disposition of assets of $0.4 million net of income tax, the adjusted net earnings reached $3 million or $0.10 per share for the three-month period ended June 30, 2018, compared with $2.8 million or $0.10 per share for the equivalent period in 2017. Operating activities generated cash of $4.2 million compared with $5.2 million during the equivalent period of 2017.The Board of Directors declared a quarterly dividend of $0.065 per common share payable on October 12, 2018, to the shareholders of record at the close of business on September 28, 2018. This represents an increase of 8.3% over the declared dividend during the equivalent period of 2017. During the second quarter of 2018, we purchased 100,000 common shares for cancellation under our NCIB program for a total consideration of approximately $349,000. Since its renewal on August 3, 2017, the company purchased a total of 177,142 common shares for cancellation under its existing NCIB program for a total consideration of [ $666,000 ].Earlier today, we also announced the renewal of our NCIB. For the next 12 months, starting August 8, 2018, we can purchase for cancellation up to 500,000 common shares representing [ 1.77% ] of the issued in outstanding common shares. Earlier in July, we amended our credit facility from $65 million to $75 million. This additional lending capacity will support us in the execution of our growth and diversification strategy.Our net debt to adjusted EBITDA ratio increased to 1.9x after the acquisition of G2 Printing during the second quarter of 2018. Stewart?
Thank you, Guy. Again, while never satisfied, I am pleased that we continue to make strides in our operating performance despite challenging conditions. I believe our attention to detail on the legacy business serves us well as external forces continue to create a challenging market, and I believe our diversification strategy is paying important dividends and is poised for even greater success. We're building a strong foundation and a differentiated packaging business through acquisition and organic growth. We are prudently spending on growth CapEx and the one major program underway is almost fully executed. When complete, we'll have additional available capacity to meet growing demand.Looking ahead, I am confident in our ability to; one, further execute on our M&A road map on the folding carton side; two, generate organic growth across our 3 packaging categories; and three, manage the effects of the decline of the Canadian envelope business on our operating profitability.We are also working on specific action items that have the potential to improve our profitability and growth. Although we experienced some unforeseen but reasonably expected challenges in the last quarters, we are dedicated to implementing price offsets with input cost inflation. We are actively working to regain market share in the Canadian envelope space and continuing our sales outreach in the U.S. envelope market. We are aggressively pursuing cost control and containment in our Canadian envelope operations. We continue to make strides in executing on our synergistic opportunities within our packaging group as a result of the M&A and of our pure growth notably with our e-commerce protective packaging offering.Yes, there are many challenges ahead, but through the hard work and dedication of our 800-plus employees, we are better equipped to meet those challenges today than we have been in a very long time and I want to thank all the 800-plus of them for their sizable contribution.I'd now like to turn the call over for questions.
[Operator Instructions] Your first question comes from the line of Neil Linsdell with Industrial Alliance.
So if we can just take the segments one by one. On the Canadian envelope side, we're still looking at an overall market decline of around 5%, is that right?
The Canada Post number for Q1 was [ 4 point something ] on the transactional mail side. So yes, 5% -- I mean pick a number, there is a range there, yes.
So if I look at it from 2 aspects or between you competing with the other players in the market where you're the dominant player, are you losing business that you think is -- you're going to be able to recoup when you are talking about how business shifts between the distributors and could you expect to get back 50% of that, 100% [ of that ] over time or how are you envisioning that?
Yes, this is something that we've been dealing with for 30 years, 20 years, where the distributors have really taken things over. I think if you want to think about it in the context of you've got a number of larger players out there that are competing for a piece of the business, sometimes you are a collateral damage, sometimes you're a winner for no particular reason of your own. So the competitors that have -- our customers that have lost the business are not sitting on their hands. They're out there aggressively fighting to win back, A, the business they lost or other customers and we're actively supporting them. What the number is, I mean, who knows, I mean what percentage comes back, which percentage doesn't, we can't predict that.
Well, I guess what I'm more asking is is this kind of more permanent damage as far as what's happened so far and then going forward we can still look at generally 5% decline or if there may be quarters we look at over the next 12, 24 months where you're actually going to have either an improvement in volumes because you've won some of this business back or some kind of recoup or are you just really forecasting [ the hardship declining ] going forward?
That's a different question and that's a good question. So what we do is, we plan conservatively or plan for the worst and hope for the best. So your point being that business has moved from us and it's been 2 full quarters plus a little bit now, that business has moved from one distributor to the other. If you say that business has completely gone and you expect to go back to more reasonable 5% levels and then if they win back some of that business and we're net winners, then the 5% will be less than that. I think that's the best way to look at it and that's the way we look at it.
Okay. So on the U.S. envelope side, I am kind of surprised -- initially I was kind of surprised that you weren't doing better because of the disruption with the major player in the U.S. market and the troubles that they're having. But with the explanation that you just gave on the conference call, when you talk about having lost low margin business, are you now getting more capacity that you're going to be able to get higher margin business or how is the capacity utilization and how are you making up for that revenue loss?
So the effects of -- so the effects of the -- the effects of the loss in the Canadian market and the plan and the growth in the U.S. market has benefited the Canadian market -- our Canadian envelope plant and that was the plan all the way along. So the addition by subtraction, we walked away from some high touch point low margin business in the local market, replaced it with higher margin easier to produce business in the local market and we've been able to grow beyond that to put some units in the Canadian plants, which was the plan all the way along. Has it opened up a tremendous amount of capacity, we backfilled most of the capacity in the U.S. with the growth with other customers and we've actually oversold what was there with volume that came into the Canadian plants. So -- I mean, we keep -- we're plugging away. I think I talked on the last call or maybe the one previously is what we are now striving for is a better mix of business. We have more business -- a high percentage of our business goes through a channel of distribution and we're now trying to add more direct business to better margin, stickier business than the distribution business. I don't know whether that answers your question or not, but...
Yes, [ I was kind of ]...
The point I was trying to make is, if we hadn't grown in the U.S. and we experienced a 12.5% decline in Canada, the Canadian operations would have done a lot worse than they did. We were able to offset or mitigate the impact of the 12.5% decline in Canada by plugging U.S. units in there, which was the strategy all the way along going back 3 years.
Okay. And then I guess the bottom line I was looking for there is so this is actually more a positive news or -- the U.S. is actually going better than you would look out from these financial results as you're much more optimistic about what's going on there?
I sure am.
And then on the packaging, can you kind of recap the investments that you're making? Obviously you have it in the Q2 financials now as far as the cost. But through the remainder of the year and then into 2019 the investments that you're making so you are cash out and the cost savings that we should be able to expect and when we might be able to expect them?
Yes. So we're almost done on the CapEx side. The Stuart Packaging CapEx that I talked about was actually last year, it was in 2017, a little bit at the beginning of 2018, I am being told here. And then the only other sort of significant CapEx is on the Durabox side, which is in the $5 million to $6 million range, most of which has already been spent, the majority of which has already been spent. It's now sort of cleanup add-on stuff that you'll see in Q3 and Q4, which was sort of in the $5 million to $6 million range.
Okay. And the cost savings...
So there's really nothing -- most -- everything else is sort of maintenance CapEx. I mean, there's really not a lot -- there's nothing -- not a lot left to do at Stuart, there is really nothing to do at G2. Talked about Durabox. If we do something -- if the continued growth on the e-commerce side that continues and we might have to add a folder or something along those lines, but it's not material, it's not significant.
So -- and then the flip side, the cost savings that you're expecting and the time frame that we might be able to see that out as all these stuff ramps up?
Well, it's not really cost savings, it's growth, planning for growth.
Okay. [ So you will ] get some savings from doing the corrugating in house [indiscernible]?
Yes, yes, we'll -- I mean that will be part of it, but -- I mean the majority of the growth comes from -- the majority of the CapEx project has been around growth.
And there's no additional...
We have talked about -- sorry Neil, we have talked about -- there was -- pick a number 20%, 25% of what we do has very limited margin because we have to procure outside. We'll now be able to bring that in and it'll be in-house, as opposed to outside. So there will be margin gain there, you're 100% right. We expect some efficiencies because you don't have to double handle or move things in an inefficient plant, but I mean really the upside is going to come from sales growth.
And then there's no further or no significant synergies as you start to look at what [ you can disclose ] rationalizing any operations [indiscernible].
That's different than -- That's different than CapEx. I mean it was one of the bullets I said there was really -- we're really focused right now on taking advantage of the synergies that are available, particularly on the folding carton side, on the purchasing side, on potential consolidation of [ roles ] and into one location, not the plant, but moving sort of back office things into one plant taking advantage of benefits of that. We're also experiencing -- we're also trying to take advantage of the synergies associated with the e-commerce side. I mean, we talked about significant growth there. We need to leverage our new purchasing power in that area as well.
But there's no specific [ dollar value you are going to give for us ]?
No.
I have to ask every quarter.
I know you always do.
And last thing I'll just leave it off, you mentioned you've had the benefits over a year with Stuart Packaging on the share wallet that we were initially talking about with clients that have been saturated on how much business they could do. You've run through the bulk of that benefit or are we still continuing to see improvements from that side?
I would say there is room, but I'm not banking on them. I mean we continue to pack away and plug away and do the blocking and tackling with those accounts. Financially there is room because we're a much larger organization and we don't have those constraints of purchasing share of wallet. But we are not building our models or business on continuing to get 50% of our customers' purchases. Plan for the worst, hope for the best.
[Operator Instructions] Your next question comes from the line of Ahmad Shaath with Beacon Securities.
I guess the first question is regarding how do you see the capacity in the market in general [ and in the ] envelope market whether it's in Canada, U.S. or at least the region that you aim to serve and how has that -- has materialized in the competition and you're losing or gaining ground in market share?
Well, there's a lot in that question. So let's just talk Canadian. So if our units are down 12.5% in the quarter and we have a couple of smaller Canadian competitors, significantly smaller than we are, Canadian competitors, it stands to reason that their volume is up by the difference between that -- our 12.5% loss, the secular decline, their units are up. So they're operating at very, very high levels, I would say. The capacity -- the majority of the capacity remains with Supremex or the available capacity remains with Supremex. I think the bigger constraint that we didn't really talk about, but the bigger constraint in both the Canadian and U.S. envelope markets are the paper conditions. What's driving these 3 increases in 3 quarters is that paper supply is incredibly tight, incredibly tight. If you've been a smaller purchaser of envelope paper, they are allocate -- the mills are allocating just what you've purchased in the last 2 or 3 months. If you're a larger player like Supremex being the third or fourth largest in North America, we have a little bit more availability and flexibility in terms of -- or a little more leverage with the mills, let's say. But even a company like Supremex the paper is very tight, lead times are way out there. So it's not like the local market competitors could just phone up the mill and ask for another 15% or 20% of paper. They just -- they can't get it because the market is so tight and that's really what's driving these price increases. So that goes to the point, but I think where you're trying to get at or I am surmising where you're trying to get to is how much more risk is there that your local market competitors are going to take it. Who knows, but they do have -- they have some constraints as well, both from a capacity and from a paper supply standpoint. U.S. market, in the markets that we operate in, it hasn't really changed much from a pure capacity standpoint. The structural change with Cenveo and such, they haven't really done anything in our local trading markets. So capacity hasn't materially changed. But I would say that the -- it's clear to us and everybody is feeling the tightness or the pinch of supply of paper.
So in your guess, I guess, how much do you think these smaller guys can keep up fulfilling the distributors before they feel -- they really feel the squeeze and they can't really use any more of their capacity and you guys gain market share back from them?
I don't -- this is just management's opinion. I don't have any specific insight but I think they are already there. And by the indications that we're getting in the market from other customers that service reliability has gone down -- of our competitors has gone down significantly as they've taken on additional business. So I personally think they're there but who knows.
Who knows. And how is that looking on the U.S. side?
I think, the U.S. supply-demand balance is very different than Canada. I think there's a fair bit of capacity, machine capacity. The constraint now being availability of paper. So in the U.S. Supremex doesn't have a paper constraint because its volume is down 12% than Canada. So we can take that paper and ship it to the U.S. operations or have it shipped to the U.S. operations or we can continue to have it shipped here but make the U.S. volume in Canada. So -- where our competitors in the U.S., so there's lots of machine capacity, let's say, in the U.S, the constraint -- we don't have the same constraint from a paper standpoint as our U.S. competitors do, A, because we're a little bit larger and, B, because we've lost those units in Canada, we still have access to the paper for the units we lost, if that makes any sense [ for you ].
Yes -- no, no -- that makes sense. And then I guess you mentioned, Stewart, that you have some more one-time cost in the second half. Can you help us with how they are going to come about in Q3, Q4 and what is the magnitude we should be looking at? Is it like [ $100,000 or $1 million ]?
I don't -- [ we are never ] looking at a P&L, I haven't done that. It's not material in Supremex. I mean, the facility that -- I assume you're talking about the Durabox duplication that we talked about. I mean, Durabox operates in a -- currently operates in a 37,000 square foot old facility. I mean, we've got duplicate rent for a quarter, you've got a shipper for a quarter and you got remediation, cleaning up the building before you -- as you exit, but it's not -- we're not talking [ of ] $1 million. I'd have to refer to my project notes and I just don't have them.
[ I guess on the ] e-commerce side, what are you seeing the drivers, is it Amazon, is it...
Sorry, Ahmad, [ you're cutting in and out ].
Is that better now? Sorry.
Yes.
On the e-commerce side, like can you give us a little bit more color about the drivers of that business in terms of product lines, in terms of retailers and where do you see that and how do you feel about that going forward?
Yes, I don't want to talk about specific customers at this point. We did have a couple of really nice size -- nice size wins. We've got lots of interesting things in the pipeline. We renewed a couple of contracts. It's the blocking and tackling that's been done over the last several [ not ] years but over the last several quarters. The dedicated team we've put in place, we've a person in Columbus, Ohio, which is a major e-com hub. We've added a little bit of capacity here in the LaSalle operation to go with what we have in the Toronto operation. We've taken one of our best and brightest from the Supremex organization started 2 weeks behind -- or 2 weeks after me and he is dedicated 100% to e-com fulfillment now. It's the product of a lot of good hard work -- good planning, good hard work. And it's -- there are a couple of good-size wins in there, but there are a number -- the aggregate of a number of smaller ones as well is pretty impressive.
Would you be able to give us a little bit of breakdown of U.S. versus Canada on the packaging side or at least on the e-commerce side?
We don't typically do that. Obviously, it doesn't take a lot to figure out that the U.S. market is significantly larger than the Canadian market in terms of opportunity. So you can...
[indiscernible] And in terms of like where do you see now that you've done -- the bulk of your growth CapEx is pretty much done as far as I understand. So where do we see a run rate of maintenance CapEx going forward? Is it -- $1.5 million per quarter is a fair assessment given the health of the equipment that you guys have in the new packaging business. So where do you see the maintenance CapEx?
I'd tell you, the operators would love it if it was $1.5 million a quarter. We are -- we'll be back on sort of a more traditional run rate of around $2 million a year.
$2 million, a year?
A year.
Okay. Okay. And in terms of maintenance CapEx.
As I said, the operators would love to have $1.5 million a quarter to work with.
Okay. And I guess we should start seeing that [ run like ] more of a 2019 -- starting 2019 because you still have some CapEx to be done in packaging this year?
I would say that's fair.
How much of growth CapEx you have left this year?
As I said in my previous comment to Neil, we've got the bulk of it through, but I'd say picking a number I'm just trying to remember the schedule, but it's about $1 million, $1.5 million maybe.
$1 million or $1.5 million. Okay, okay. That's fair. And I guess [ if you adjust ] from an overall level now, we're probably looking this year at a -- at the best maybe a flat year-over-year EBITDA. And with all what you've seen now in packaging and the shift in volumes in the envelope in 2019 how should we look [ at that on ] EBITDA growth and on free cash flow growth level absent any new acquisitions?
It's a -- that's an area where we're not going to go. It's a mix. And I think what I was trying to say in my initial comments where there are some known things that are happening, there is a lot of unknown things happening. We don't provide guidance. I talked about that we're under inflationary pressures on the -- and I should have mentioned in my comments that -- I talked about paper and raw material inflation in the envelope side, it's basically the same in the packaging side, paper in general, there's tremendous pressure. And in fact we spent a lot of time -- I mentioned the U.S. sales group are better equipped today to deal with passing through increases and the effects of the increases. One area we've had to spend a lot of time in the sort of the owner-operator environment of the packaging businesses is the effects of passing through increase or not passing through increases to the sales team and making sure that they were well equipped to have those conversations with customers and understanding. But there's a lot in the mix, Ahmad, and we're not providing guidance on what that looks like going forward.
And I guess you mentioned that, how is your ability in passing through price increases on the packaging side compared to envelope side?
Much easier, there tends to be -- while there is not as much overcapacity is the biggest driver. The big guys that are larger players in that folding carton space are like Supremex are in the Canadian envelope side, they're very aggressive at passing them through. But still if you lag, the customer will let you lag. And then the other part is that the contracts tend not to have longer lag times like some of the envelope contracts do. In the envelope side, just to be clear, on the envelope side it's not that the group doesn't want to do it. You have provisions in the contract of how frequently you can increase prices for changes in cost. [indiscernible] January 1 and July 1, well if you get an increase in March you got to suck that up until July 1. Some you can only increase 2 times a year, some you can only increase to a certain percentage over the course of 12 months. That's the envelope side. The packaging side isn't encumbered, at least the areas that we deal in on the packaging side doesn't have those same sort of limitations and constraints.
Okay, that's helpful. And lastly, on the M&A pipeline. I know now you are at 1.9x leverage and you have probably, I think, $20 million on your facility and how are you thinking about using that cash or liquidity on the M&A front?
Our focus on the M&A side hasn't changed. No big bets at this stage, focused on sort of tuck-in -- complementary businesses or pure tuck-ins, but no big bets, a little bit more of the same.
How is the pipeline looking?
It's good -- good. We continue to -- we got our M&A department, which is me, working on it on a daily basis. So it's -- no, it's where you would expect it to be with us.
We have no further questions. I'll turn the call back to our presenters for any closing remarks.
Okay. Well, thanks, Neil and Ahmad, for the questions. And for my closing remarks just I'll leave it at, I'm really pleased with -- that our packaging businesses have more than offset the negative effects of lower envelope revenues and volumes in the quarter. Revenues increased almost 14%, our adjusted earnings grew by 4.4% and 33% of our revenues in the quarter are now coming from our growing and profitable packaging businesses. Cash flows remained strong. We have reasonably low leverage, additional leverage capacity and growing management bandwidth. These are all requirements needed to accelerate our diversification strategy and then further improve our operational leverage. We also remain dedicated to creating shareholder value by way of dividends and by renewing our share buyback program as Guy announced earlier today. This concludes my closing remarks. Thank you, everyone. I look forward to our next conference call later in the fall. And for those of you in Ontario, enjoy your long weekend.
And this concludes today's conference call. You may now disconnect.