Supremex Inc. (SXP) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Supremex' Annual General Meeting of Shareholders and First Quarter of Fiscal 2020 Results Conference Call. [Operator Instructions] Following the AGM, management will present its operational and financial highlights for 2019 and the first quarter of 2020. After this presentation, we will conduct a question-and-answer session open only to investment professionals, registered shareholders or duly appointed proxy holders only. In order to ask questions, shareholders will have to provide their 15-digit confirmation number printed on their voting form. Duly appointed proxy holders will have to identify themselves as such. [Operator Instructions] 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 statement in the presentation supporting this conference call. Furthermore, risks and uncertainties are discussed throughout March 30, 2020, annual information form under the heading Risk Factors. I would like to remind everyone that this conference call is being recorded today, May 15, 2020. [Foreign Language] I will now turn the conference over to Mr. Robert Johnston, Chairman of the Board of Directors of Supremex. Please go ahead, sir.

Thank you, Julianne. [Foreign Language] Thank you, Julianne. Good afternoon, ladies and gentlemen. Welcome to the Annual General Meeting of Shareholders of Supremex. I'm Robert Johnston, Chairman of the Board of Directors of Supremex. On behalf of the Board of Directors and of the officers of the corporation, it is my pleasure to welcome all of our shareholders and our guests to this Annual Meeting of Shareholders of Supremex. In the current context of COVID-19 pandemic and the social distancing measures, this meeting is broadcast live via the Supremex website and via teleconference. [Foreign Language] Before starting the meeting, allow me to introduce the members of Supremex' management team who are present today: Stewart Emerson, [Foreign Language], President and Chief Executive Officer; and Guy Prenevost, [Foreign Language], Chief Financial Officer. [Foreign Language] In addition, I'd like to welcome all of our members of the management team of Supremex as well as our auditors, Ernst & Young. [Foreign Language] On behalf of the Board of Directors and shareholders, I'd like to thank them, along with all of the Supremex' other employees for their hard work and dedication, especially in these changing times. Now we'll proceed. [Foreign Language] I'd like to introduce our current directors of Supremex: Nicole Boivin, Stewart Emerson, Georges Kobrynsky, Dany Paradis, Steve Richardson, Andrew Sullivan, Warrant White and myself. [Foreign Language] Before I begin, I'd like to comment on the conduct of this annual meeting. [Foreign Language] Today's topics are found in the information circular sent to all shareholders. [Foreign Language] For shareholders present here today or on the call, [Foreign Language] if you have any questions, I'd ask you to please wait until the question period that will follow the meeting and management's presentation. I'd also ask that people wishing to address us identify themselves for the benefit of shareholders present and to confirm that they are shareholders themselves before asking their questions. With the consent of the meeting, I would ask [ Vanessa Cuatou ] to act as secretary of this meeting and appoint [ Epsen Mayo ] and Steve Gilbert from Computershare Investor Services as scrutineers to report on the holders of common shares present, to report on the number of common shares represented at this meeting and to tabulate the votes and disclose preliminary results of the votes taken at this meeting and to report thereon to the Chairman of the meeting.

Good morning, Mr. Chairman.

Good morning.

We, the undersigned scrutineers from Computershare Investor Services, hereby report that there are at least 2 shareholders and/or proxy holders present at this meeting representing in person or by proxy 10,811,838 shares or more precisely, 38.43% of the total 28,130,469 outstanding shares of Supremex Inc. [Foreign Language]

[Foreign Language] The secretary informed me that Supremex Inc. received confirmation from Computershare Investor Services that a notice of the annual meeting, a form of proxy and the proxy management circular were sent to all shareholders entitled to vote at the meeting. Supremex' consolidated financial statements for the year ended December 31, 2019, have been sent to all shareholders who so requested them. I request that a copy of each of these documents as well as Computershare Investor Services' declaration confirming that these documents have been sent to all shareholders be attached to the minutes of this meeting by the secretary. Under the general rules of Supremex, quorum has reached if 2 or more shareholders present in person or by proxy personally hold at least 10% overall of the votes attached to all outstanding shares. As you've just heard, the scrutineers have informed me and confirmed that at least 2 shareholders holding 10,811,838 shares or 38.43% of the outstanding shares are representing at this -- are represented at this meeting, well above the minimum number required for a quorum. I now declare that this meeting is readily called and properly constituted for the transaction of business. As the first item on the agenda, we find the reception of the consolidated financial statements of Supremex Inc. for the year ended December 31, 2019, and the auditors' report relating thereto. A copy of the consolidated financial statements and the auditors' report was sent to all shareholders who requested them. Since you've had the opportunity to review these documents, I would ask the secretary to attach to the minutes of the meeting a copy of the consolidated financial statements for Supremex for the year ended December 31, 2019, and the auditors' report thereto. Before proceeding to the adoption of resolutions, I would like to briefly comment on the voting procedures. Each common share gives the shareholder one vote on all matters to be discussed at the meeting. To present or second motions or vote, you must either be a registered holder of common shares of Supremex or have a power of attorney in due form. Voting on resolutions of the election of directors and the appointment of auditors will be taken by a show of hands but more practically by voice. To simplify the conduct of this meeting, we ask certain shareholders and proxy holders to present and support today's proposals. Each registered shareholder or proxy holder of common shares of Supremex Inc. having the right to vote today should have confirmed their attendance to the scrutineer. The first proposal concerns the election of directors of Supremex. In the information circular, Supremex Inc. proposes the following 8 people as directors of the company: Nicole Boivin, Stewart Emerson, Robert Johnston, Georges Kobrynsky, Steve P. Richardson, Andrew I. Sullivan and Warrant J. White. Again, this year, the shareholders have the right to vote -- right to withhold their votes for the election of each of the proposed directors. Proxy forms received prior to the meeting show that each director received the support of at least 95% of the shares voted by proxy. Would someone like to propose the nomination and election of these 8 people as directors of Supremex Inc.?

My name is [indiscernible]. I am a shareholder of Supremex, and I move that Nicole Boivin, Stewart Emerson, Robert Johnston, Georges Kobrynsky, Dany Paradis, Steve Richardson, Andrew Sullivan and Warrant White be elected as directors of Supremex.

Thank you, [ Laurette ]. Would someone second the proposal?

My name is [ Lynn Dejai ]. I'm a shareholder of Supremex Inc., and I second the motion.

Thank you, [ Lynn ]. There are no proposals to nominate other candidates or abstentions. Having received at least 38% of the shares voted by proxy, I hereby declare that the proposal is adopted and the election of the directors as official until the next annual meeting or until the election of their successors. The next matter being submitted to the shareholders concerns the appointment of auditors and the authorization of the Board of Directors to fix their remuneration. The Board of Directors on the advice of the Audit Committee recommends the renewal of the accounting firm Ernst & Young LLP to act as auditors of Supremex until the next Annual Meeting of Shareholders. Would someone like to present a proposal nominating the election of Ernst & Young LLP to act as auditors of Supremex until the next Annual Meeting of Shareholders?

My name is [indiscernible]. I am a shareholder of Supremex, and I move that Ernst & Young LLP, chartered accountants, be reappointed as auditors of Supremex until the next Annual Meeting of Shareholders or until their successor is appointed and that the Board of Directors of Supremex be authorized to fix their remuneration.

Thank you, [ Laurette ]. Would someone second the proposal?

My name is [ Lynn Dejai ]. I'm a shareholder of Supremex Inc., and I second the motion.

Thank you, [ Lynn ]. There are no proposals on the other candidates or abstentions. Having received at least 38% of the shares voted by proxy, I hereby declare the proposal adopted. This concludes the formal portion of the meeting. [Foreign Language] We will answer questions from registered shareholders or duly appointed proxy holders after the management presentation. I am also confirming that we have not received any questions relating to the meeting by e-mail. We will now close the meeting. May I have a proposal to close the meeting?

My name is [ Lynn Dejai ]. I am a shareholder of Supremex Inc., and I move that the meeting be terminated.

Thank you again, [ Lynn ]. Would someone second the proposal?

My name is [indiscernible]. I am a shareholder of Supremex, and I second the motion.

Thank you again, [ Laurette ]. [Foreign Language] I declare this meeting closed. [Foreign Language] On behalf of the senior management, the Board of Directors and the entire team of Supremex, I'd like to take this opportunity to thank you for coming to this meeting. I'd also like to thank you for your commitment, continued support and hope to see you in person next year. [Foreign Language] Thank you for your participation. I now invite management to present the financial results for 2019 and for the first quarter of 2020 and to discuss recent events. Stu, over to you.

Thank you, Rob. Now that the formal portion of the AGM is complete, management will give you a little color on 2019 and discuss Q1 and our 2020 focus areas. We'll do a high-level operational review of 2019, discuss the progress on the diversification strategy and some corporate development activities. We'll provide a high-level overview of Q1 2020. And then Guy Prenevost, the CFO of Supremex, will cover in more detail the financial information, followed by a Q&A. Next slide is all the standard regulatory language and forward-looking statements, which was covered by our host at the beginning. We'll start with a quick review of 2019. Going into the year, the current -- the situation in the market was not surprisingly, secular decline was continuing in the envelope space. We were dealing with rapid cost inflation, as you recall, through 2018 and into 2019. E-commerce was continuing to drive the growth in the packaging market. Operationally and from the operations perspective, the 2017 and 2018 packaging CapEx integration was to continue. Durabox physical move was complete in Q4 2018 (sic) [ 2019 ], but it was a steep learning curve, and we had incurred customer attrition. We had the ongoing integration of G2 and Stuart Packaging. We were in the process or we were ramping up for the ERP implementation in folding carton. We had some key personnel changes on the packaging side, sub departures, including the President of Stuart Packaging, the former owners of G2. So we had some key personnel ins and outs. And we had taken some rightsizing measures on the envelope platform that we called Project Canada, focused on Canadian envelope and getting it rightsized. That was to drive annual projected cost reductions of approximately $2.7 million. The strategy was, going into the year, to maintain our market position in Canada and double down on the low-cost producer aspect of it, maintain our margins through secular decline and optimize the capacity allocation. Clearly, we needed to grow our share in the U.S. envelope market and leverage our facilities and pursue that volume as an outlet for capacity from Canada. We wanted to accelerate the diversification into packaging and address the inefficiencies at Durabox, improve folding carton capabilities and grow the e-commerce business organically. The goal is to optimize shareholder value by improving the productivity to raise profitability, nurture the envelope platform and then take advantage of the CapEx and dividends. Next slide. It was really about -- on the envelope side and Canadian envelope side, it was really about leveraging our footprints, our capabilities to deliver compelling value and a compelling value proposition to our customers to continually bring them new value, new services, new capabilities and do that in the face of some significant headwinds. Goal, obviously, it's a good driver of cash flow generation for us. It's pretty straightforward. We needed to improve the price-to-cost relationship to bring the average selling prices up as a result of the cost inputs. The outcome was we had $91.7 million in revenue. Volume was down 12.6% and in comparison to Canada post transactional volumes down 11.3%. There's not a pure one-to-one relationship in terms of our volume and Canada post transactions, but that's probably the closest benchmark we have. And Canadian envelope remains -- even in spite of the headwinds remains a key contributor to the profitability and cash flow. Next slide. In the U.S., on the envelope side, the strategy is clear. We have to grow share in a very big market; and two, drive that volume to remain efficient on the Canadian plants. The outcome there was revenues were up 4.5% (sic) [ 4.8% ] to $45.5 million. Our volume was down slightly but less so than the U.S. first class mail rate. And there's a number of ins and outs that we talked about over the years, the primary piece being at the conclusion of a large contract that we had that the customer executed the shotgun clause. Average selling prices were up 7.7%, of which 2.4% was foreign exchange. And this is the big one. There was a 27% increase in units produced in Canada for the U.S. facilities -- or for the U.S. affiliates. So Canadian volume being down 12.6%, but we increased the volume in the U.S. by 20% off a slower -- or 27% off a slower base. Clearly, the U.S. affiliates are doing its job in terms of keeping the Canadian plants as full as they possibly can. The map on the right-hand side there clearly shows the blue brackets are the areas that we can cost-effectively serve from our facilities, both in Canada and the U.S., and there's lots of runway there to support Canada's volume requirements over a longer term. I'd also like to point out that while the blue brackets are outside of kind of Winnipeg's trading area, the group in Winnipeg has started doing an excellent job out of Winnipeg. In the Minneapolis and the upper U.S. planes, they continue to grow -- or they've really reached down and offset some of their capacity decline organically out of the Winnipeg location into the U.S. On the packaging side, we have 3 distinct businesses. We have the folding carton business. Going into -- the 2020 focus with them is really on health and beauty, food and pharma and to grow the capacities. Going into 2019, the goal, as we talked about earlier, was integrating G2 into Stuart Packaging. We had an ERP implementation, which was a little bumpy. By and large, it worked, but it was a distraction, and we're continuing to optimize ERP into 2020. We had significant issue with the main moneymaker there, and decommissioning and commissioning of a press created some inefficiencies that were now over. And -- but those -- that new press created some significant efficiencies and capabilities -- new capabilities for us. The division underperformed expectations, but -- and we've talked about 2020, it's performing quite well. The corrugated division has been a challenge. The goals were -- the goal was to address the inefficiencies, much, much, much longer than anticipated production ramp-up. We completely changed out the management team there. We've seen a significant operational improvement, and now we've renewed the focus on sales. We did significant R&M in 2019. And even in the first quarter of 2020, we think that's behind us. We're still ramping up. We're hopeful that the production issues are behind us with the -- with what we've spent. We just didn't get a chance to pressure test it before COVID really kicked in. We believe the equipment is all in good shape now, and we're ready to hit the road. But the food carryout business has been impacted fairly significantly by COVID. On the e-commerce side, this is a bit of a powder cake for us on a positive side. We had a customer setback in -- well-documented customer setback in 2019. We had a fair bit of customer concentration, and that impacted us significantly. But we've chipped away on the -- we've had some real nice wins on the subscription-based e-commerce platform. And frankly, COVID has changed shopping forever, in our opinion. The retail environment was under pressure prior to, and people have just become more and more comfortable with e-commerce and less and less comfortable, I believe, with retail shopping. And we think we are uniquely positioned there with our unique product offering, niche product in a large and very quickly growing market. Labels is a bit of a subsegment for us. We had a small label division inside the envelope division. The G2 acquisition also brought a small label division. We've put those together. We've put them under the envelope umbrella where most of the sales are generated. And right now, that division is very busy in cross-sell into envelope and into the folding carton division. On the packaging side, it really is a product diversification strategy. The goal is to -- right now, what we need to do is improve the efficiencies and costs and grow the business from the new capabilities. We've spent about $11 million in 2017 through 2019 on capital in that division, and we haven't seen the benefits of it the way we would have anticipated at this point, but the money has been spent. We're clearly disappointed in the results. One business has held its own, while the other 2 materially underperformed in 2019 but showing great promise and progress for 2020 and beyond. It's a Canadian-centric roll-up, and we're reaching into the U.S. for a little bit of growth to help support the Canadian sales. Overall -- next slide. Overall, we've made good progress in transitioning from a little Canadian envelope company to a geographic and product diversified business. We've yet to reap the expected benefits on the packaging side, but we're getting there and we are committed. We also think that the diversification has set us up to weather the current storm very nicely. Next slide, Danielle. Entering in 2020, the situation has not changed a lot from a market perspective. Secular decline continues in the envelope market. And now with COVID, we have the differences within that secular decline of essential and nonessential mail. E-commerce is driving the packaging market more so than ever before. And we're well situated both with our corrugate business and our fulfillment packaging business to capitalize on that. The inefficiencies -- some inefficiencies, I shouldn't say full inefficiencies because we've made significant progress, but there are some lingering inefficiencies on the corrugate side. We think we're ready to go when the market reopens, but time will tell on that side. But in early Q1, there were the inefficiencies. And folding carton is performing very, very well into Q1. We were off to a really good start. As we talked about in the press release and the MD&A, we really didn't get materially affected in Q1. There was definitely a slowdown. Each of our businesses are being affected a little bit differently. And even businesses within the individual businesses are being affected differently. Just anecdotally, we could talk about folding carton, where the cosmetic and fragrance business actually really started to slow down in January, early February, mostly because of supplies coming in from Asia and Europe into North America. So it started to hit a little bit sooner. But then on the other side of the business, the pharma side and the food side have really taken off for us and have been able to offset the decline sort of through the traditional cosmetic and fragrance side of the business. From a priority standpoint, maintaining that market-leading position in Canada is critical to us. We continue to strengthen the envelope platform. We'll talk a little bit about the Q1 M&A on the envelope side in a minute. We're focused on driving efficiencies and taking the synergies that we can and both protect our market share and margins at the same time. Growth in the U.S. is critical in the strategy, as we've talked about several times. And then, of course, the diversification into packaging. We're focused on raising the margins and taking advantage of the capital and the market opportunities that exist. From a COVID standpoint, really, really, really proud of the team and the local management and their employees. They've taken care of employees. They've taken care of customers. And it's a key part of what we do right now. And it's taken a fair bit of focus away from some of the issues, but we think we can walk and chew gum at the same time. But local management has really, really done an excellent job, both with employees and customers. Next slide is on the Royal Envelope acquisition. As you're aware, in February, we bought our largest competitor in Canada. This is the fifth time we've done that in our history. This was an aggressive play but strategic play in a declining market with a number of compelling reasons and hypothesis on the deal. We finished it in mid-February, $27.5 million purchase price. They are a Tier 1 envelope manufacturer, a formidable competitor for Supremex. But as a formidable competitor to Supremex means that under the Supremex umbrella, it brings some really unique and interesting opportunities forward to Supremex. They had 135 employees. Main facility was in Ontario and, again, Tier 1 manufacturer. There's some -- I think it's important that we understand the rationale. It really strengthens our operations in Eastern Canada. Envelope is a good cash flow generator, and this is no exception, provides additional capacity to grow in the U.S. envelope market. And not only equipment capacity, it's human resource capacity. We've talked about that a number of times. It helps maintain the higher utilization rates by pushing some of the volume that they were producing for other regions, pushing those to the Supremex regions. A complementary customer base that has embraced the combination of the 2 companies. And we really -- the intent is to reproduce the successful acquisition we had with Premier Envelope in Western Canada in 2015. The integration is going extremely well. A little bit of a challenge with social distancing and trying to limit the risk of cross-contamination. We've embedded a couple of our folks in the Royal facility prior to COVID. So they continue to be there and be the pipeline back and forth between the 2 locations. We've extracted the majority of the raw material synergies. That was fairly easy. We have a relatively small supply base on the envelope side in terms of paper suppliers, window film suppliers, adhesive suppliers. So we've done a really good job right out of the gate there. We've closed the small Royal plant in LaSalle. We did that in the first 3 weeks, transferred the skilled employees over to our LaSalle facilities, and we had a couple of terminations. And we're ready to go live -- getting ready to go live on the Supremex ERP implementation. Unlike the folding carton side, Supremex envelope division has an ERP that's well refined, well developed, and we went through the implementations in 2014 -- sorry, 2015, '16 and '17 in the envelope division. So we're well -- we're not nearly as concerned there as we were implementing a new system in the folding carton division. Q1 results, next slide. We did very well on the Canadian envelope side. The Royal acquisition has been a nice, nice addition and tuck-in to us. Modest slowdown in mid-March, but generally speaking, most of what we supply is sort of to essential businesses. The U.S. continues to grow. It's fulfilling its mandate of driving volume to Canada. On the packaging side, the residual headwinds continue, but it's mostly on secondary equipment at this stage. As I say, we think we've got it licked, but when we get back to full production after COVID, we'll have a better understanding there. And we've maintained the customer base through the challenges, credit to the team. They've worked hard with the customer and customer relationship. I talked about folding carton and the cosmetic piece, it slowed down. Pharmaceuticals much higher. Made a nice strong entry into the food market. Mostly capitalizing on sort of the heightened awareness of single-use plastics. Was well underway sort of Q3, Q4 last year, but the fruits of that labor have really sort of taken off in Q1 and into Q2 replacing plastics with corrugate or paperboard products and really able to leverage the good work we did in the commissioning of the press in 2018. On the e-commerce side, we talked many times about the e-commerce customer. That's now lapped after Q1. Several smaller wins but still nice-size wins due to some of our past efforts. Remember, this is a business that we're trying to grow and we're growing organically. It takes a little bit longer, but the team is really well positioned to capitalize on what's happening in e-commerce right now. So we have an excellent and diverse customer base. Many of them I know personally and they're long-term clients. We've got good representation, east, west, north, south. Our decentralized structure really fosters strong relationships. This pie chart here is really just representative of what happened in Q1. 80% -- but it will change with Royal Envelope as we digested a little bit more because 80% of the $30 million in sales are in the central region. So central region's percentage of the overall sales will be higher in subsequent quarters. On the -- next slide. On the packaging side, we've also got a strong, diverse customer base. Many of those customers rely on us for quality and design capabilities. And through the current crisis, our reputation for reliability has really been cemented. We've got more customers coming over to us or shifting a bigger share of their wallet to us because the team has done a real good job executing. And on the e-commerce side, they really rely on us for our know-how, and that's a differentiator for us in the market. Next slide, looking ahead. There's lots of -- like all businesses, we're spending a lot of energy on managing the effects of COVID-19. We're focused on leveraging what we've got on the envelope platform and on the diversification in packaging. On the balance sheet side, also like a lot of companies, we're managing liquidity, tightly managing costs and working capital. And on the capital allocation side and in an active prudence amid a lot of uncertainty, we suspended the quarterly dividend. CapEx and M&A is limited really to very essential projects, and debt reimbursement remains a priority. So there's a lot baked in there. It is fairly high level. There's a lot of detail underneath all of that, but I wanted to give you some insight. With that, I turn the call over to Guy Prenevost, our CFO, to discuss the results in more detail. So with that, Guy?

Thank you, Stewart. Good morning, everyone. Moving on to Slide 21. Total revenue for -- in fiscal 2019 was $191.7 million, a decrease of 1.8% from $195 million in 2018. Canadian envelope revenue was down 3.3% from a combination of secular decline and customer movements, but we successfully increased prices by 10.6% to mitigate input cost inflation. U.S. Envelope sales increased 4.8%, primarily as a result of price increases implemented throughout the year to offset input cost inflation. Packaging & Specialty decreased 4.1% from the loss of a large e-commerce customer, which was partially mitigated by higher folding carton sales from the acquisition of G2 Printing. Slide 22. Adjusted EBITDA decreased to $20.2 million versus $26 million, primarily from the inefficiencies in folding carton and the [ slowdown in ] anticipated production ramp-up at Durabox as well as the loss of the aforementioned e-commerce customer. Profitability of the envelope segment was in line with 2018. The remaining variance is mostly attributable to an unfavorable foreign exchange translation and the mark-to-market adjustment of deferred share units. Looking at other key metrics and results from the 2019 -- for 2019 on Slide 23. Net cash flow from operations increased to $20.2 million, and free cash flows were $9 million, up from $8 million in 2018. Earnings per share reached $0.25, up from a loss of $0.17 per share in 2018. A $16 million goodwill impairment charge in 2018 explains the bulk of the variance. We also declared dividends of $0.26 per share equivalent to 2018. Now moving on to our results for the 3-month period ended March 31, 2020, on Slide 24. Total revenue in the first quarter of 2020 was up 5.6% to $52.4 million. Canadian envelope revenue was up by 8.5% to $26.2 million from the contribution of the acquisition of Royal Envelope concluded on February 18, 2020, which compensated for the effects of the industry-wide secular decline on our legacy Canadian envelope business. Average selling prices remain unchanged from last year's comparable period. U.S. Envelope revenue was up 14% to $12.9 million. The volume of units sold increased by 14.6%, while average selling prices decreased by 0.5%. Revenue from Packaging & Specialty Products segment was down 6.3% to $13.3 million. In folding carton, growing demand for the pharmaceutical industry was mitigated by slower demand from the cosmetics and beauty industry. And at Durabox, corrugate boxes sales were impacted by production inefficiencies early in the quarter and lower demand towards the end of the first quarter. Adjusted EBITDA increased 27.2% to $8.2 million. Adjusted EBITDA margins were 15.7%, up from 13% in the equivalent quarter of last year. Adjusted EBITDA for the envelope segment was up by $0.8 million to $6.9 million, primarily from the acquisition of Royal Envelope, which provided additional revenue and synergies in production and procurement. Adjusted EBITDA margins from the envelope operations were 17.7%, up from 17.3%. Adjusted EBITDA from the Packaging & Specialty Products segment remained unchanged at $1.3 million. Operational efficiency gains in folding carton compensated for production inefficiencies and lower sales at the new Durabox facility and for lower e-commerce sales. Adjusted EBITDA margins in that segment were 9.9%, up from 8.9%. The balance of the variance is mostly attributable to a gain on foreign exchange translation in the first quarter of 2020 versus a loss in the comparable period of 2019 and to a lesser extent, a positive adjustment for the mark-to-market value of deferred share units compared to a negative adjustment in the -- in 2019. Slide 26, cash flows. Cash flows from operating activities were $8.1 million in the first quarter of 2020 compared with $3 million in the first quarter of last year. The improvement is mostly attributable to higher earnings and favorable working capital adjustments. Last 12 months cash flows from operations before working capital adjustment reached $21.2 million in Q1. Slide 27, capital allocation. Our ability to generate strong cash flows from our envelope platform has allowed us in the past years to invest in capital expenditures to support our diversification strategy. For the first quarter of 2020, our CapEx were limited mainly to maintenance expenditure, and we paid out $1.8 million in dividends. We also concluded the acquisition of the assets of Royal Envelope for $27.4 million financed through the existing credit facility. The net change to our long-term debt was $21 million in the quarter. Looking ahead, due to the unpredictable impact of the COVID-19 pandemic and potential future impact on our results and available cash, the Board of Directors decided to suspend the quarterly dividend as a prudent and preventive measure. This measure is intended to provide the necessary liquidity and flexibility to operate effectively through these uncertain times. We also remain dedicated to strengthening our balance sheet and reimbursing debt. On to Slide 28. We ended the first quarter of 2020 with net earnings of $2.6 million or $0.09 per share, up from net earnings of $1.8 million or $0.06 per share in the equivalent period of 2019. Free cash flows increased to $5.1 million from $2.1 million in Q1 2019. I would now like to turn the call over to the operator for the questions-and-answer period. Operator?

[Operator Instructions] Your first question comes from Neil Linsdell from Industrial Alliance.

So talking about April sales as you gave a little bit of color. Can you go into a little bit more detail as far as how that's coming about between the Canadian and U.S. operations and what you're expecting, say, May into June? Because I'm thinking about this as far as is this inventory destocking that's going to be happening at your distributors and it's going to be kind of a delayed lag that the economy probably restarts?

So I'll take sort of the anecdotal piece. It's -- the crystal ball is a little foggy. On the Canadian envelope side, a high percentage of what we do is bills and statements, and that's sort of the essential mail side. And then we have about 25% of our business is sold through resale and distribution through wholesalers to printers. And the print community has been impacted rather dramatically. So nonessential print, 1,000 here, 2,000 here, 10,000 there, printers have been essentially closed. But by extension, their smaller customers have essentially been closed, too. So we're not seeing -- we're not expecting any big bump there. On the U.S. side, because we have such small market share, even if the market contracts for a period of time of 10% or 15%, we shouldn't feel that -- or we should be able to offset that through growth in other areas. And the other one that's kind of hanging out there is vote by mail in the U.S. where we've made some nice pickups there ourselves, and we're at the table on several other larger opportunities. So we don't see sort of a big pent-up demand changing other than on the vote to mail side where there's an opportunity. On the packaging side of the business, we're rolling straight ahead with the e-commerce. We've got a real nice tailwind at this point. On the folding carton side, as I said, parts of our business are down and parts are up. But we do see a bit of a pent-up demand or a bubble kind of coming on the cosmetics and fragrance side. They really kind of shut that down in January, and orders were delayed or canceled altogether as there was trouble in Europe. And there's been purchases made -- maybe not at the same level, but purchases made all through the first quarter and into the second quarter. So when the economy opens up and people start going out again, we think there will be a bit of a restocking requirement on cosmetics and fragrances.

Okay. And you talked about Canadian organic -- or the Canadian growth, we've got 8.5% in the Canadian envelope. So -- but if you take out the Royal contribution, what would be the growth rate be?

Guy, you want to take that?

So if we look at Royal's contribution to the quarter, it's about $8 million in sales -- sorry, $4 million in sales, Neil. So -- can you ask the question again? Sorry, Neil.

I'm just looking at your Canadian envelope was up significantly, but that included the Royal. So I'm trying to figure out how I can back out the Royal [indiscernible] organic?

It's about $4 million. Yes.

$4 million in sales? And then if we look at the sales decline that you talked about in April and May, would it be across? You should expect the [indiscernible] include the Royal.

So for the company as a whole, we're talking about a -- including the new sales, we're talking about 6% decline. If you exclude the contribution from Royal, we're looking at a demand drop, that's up 20% if you're looking at apples-to-apples.

Right. Understood. And then can you just run through the credit facility? So you're talking about eliminating the dividend so you can focus on paying down debt and rightsizing the balance sheet. So can you just run through the credit facilities that you have available now and when that -- and the covenants and the maturities?

Yes. So right now, we're in pretty good shape on our covenants. We're at -- on our leverage -- the main ratio for us is the leverage at 2.83. Our covenant is at 3.25. So in normal times, this would be the spine and actually a little better than forecasted. Given the uncertainty now that we're going through in the drop in sales and the unpredictability of everything, so we're working with the banks, with our lenders right now to give us a little bit more breathing room on the leverage ratio.

Okay. And if I can, just one last question. Have you seen -- or can you just explain to us what you've seen as far as any supply chain issues coming into -- for any of your product lines and any staffing absenteeism or productivity impacts you think from the COVID-19?

Okay. So I can take that one. So on the supply side, there's really been no issue. A couple of things that are sort of opportunistic for us as volumes have declined. So all of the paper mills, for instance, are essential services, and they crank out paper, but they're not selling nearly as much as they once did. So there's some spot opportunities on the purchasing side for us. And kind of a byproduct of that is when we sell our waste, the waste has become more valuable because with the office towers all shut down and schools shut down, there's not a lot of blue box waste and the paper mills need fresh supply of recycled product -- recycled paper to go into the remake. So we -- waste revenues are up as well. Second part of that question was the employees. As I said in my comments, the team has done an exceptional job. We've got areas that are impacted a little greater than others. Our 2 folding carton facilities are in Laval and North Montreal, which are probably the 2 hot spots in all of Canada. But they've weathered it really well. We took a lot of proactive measurement -- measures in terms of social distancing, hygiene, awareness, good communication. Local leadership and human resources have done a great job there. From the absenteeism standpoint, it kind of bounces all over early on. We had a bunch of folks go into self-quarantine. We put measures in place in terms of compensation and waiving sort of short-term disability waiting periods for employees so that they wouldn't be tempted to come in for financial reasons if they weren't feeling well. I think, by and large, the employees have treated that very fairly, and we're appreciative of it. So it kind of runs the gamut, people in and out of quarantine, self-quarantine. But none of the operations have been materially impacted in terms of ability to produce and serve.

Can you say if you've had any employees test positive or massive outbreaks, obviously?

Sorry, what was the last part of that, Neil?

I assume there's not been any significant outbreaks at any of the facilities, but can you say if there's been any kind of positive test?

We had one positive test in one of the facilities, and that employee is now back to work.

Okay. Just actually one more thing. On the -- obviously, you're being prudent with the balance sheet. So you want to look at the cash flows and the CapEx levels. Can you give any guidance on -- so do you have a CapEx budget that you're expecting on kind of just the maintenance level this year? And if you do, because of this environment, see any kind of very opportunistic acquisitions, would you still go forward with that?

So from a CapEx standpoint, we've put a really tight lid on the CapEx. I mean there's pure maintenance, and even the maintenance CapEx is being scrutinized very, very carefully. So at this point, we're limited to absolutely necessary maintenance CapEx only. On the M&A side, I mean, we -- they would have to be -- the short answer is no. We're not going to jump into an M&A opportunity. We've got still residual work on the packaging side to do, and we've -- the Royal integration was only mid-February -- or Royal acquisition was only mid-February. So the short answer to that is opportunistic M&A, I just don't see it.

Operator, do you see any more people on the line? I guess there's no one else on the line. Stewart, would you take the line and -- for your closing comments?

Sure. Thank you, Danielle. And thanks, Neil, for your questions and everybody for attending today. Just closing statements. Like all companies in this unprecedented time, we're committed to managing the effects of COVID-19 pandemic on all fronts, employees and on our operations, our customers and our financial health and well-being. We've done an excellent job to date with the employee and safety and to our customers. And again, local management is to be commended for their attention and quick action. With the various cost-cutting measures we have in place, available liquidities and support from our lenders, I believe we're well positioned to weather what may or may not be ahead. The reality is we just don't know what lies ahead. With the diversification we have achieved, we're better positioned today to withstand this crisis than any time before in our history. We all know this too will pass at some point, and we remain dedicated to our long-term diversification strategy, the integration of Royal Envelope and addressing some of our operational issues that have plagued us in 2019 and, frankly, some of the lingering operational issues. We ended the quarter with close to 25% of our revenues from Packaging & Specialty Products. We've started to successfully integrate Royal. This is what we do well, and it showed in our first quarter results. While we're well on our way, we've only begun to scratch the surface of some of the synergies available to us. Our U.S. Envelope operations continue to grow and have lots of runway to feed our Canadian operations through these more difficult times. On the capital allocation front, we remain committed to bringing down our leverage by consistently reimbursing debt. And in this time of uncertainty, while likely unpopular, I believe we took a very prudent approach by suspending our quarterly dividend until further notice. Our large capital projects are mostly completed, and in light of the current situation, we'll be prudent in this area until we have more visibility. As I said in last quarter's closing remarks, we have great people working with us, good assets, and we're one of the fortunate businesses to still be operating at reasonably high levels in this COVID-restricted marketplace. This completes my closing remarks. I look forward to discussing our second quarter results with you in July. Thank you for your support. And for those of you in Canada, enjoy your long weekend. Thank you. Operator?

Stewart, I think we can say that this concludes the call. We can all disconnect now. Yes, we can all disconnect now.