Supremex Inc. (SXP) Earnings Call Transcript & Summary

Hello, and welcome to the Annual Meeting of Shareholders of Supremex, Inc. Annual Meeting 2021. Please note that today's meeting is being recorded. [Operator Instructions]. You can submit a written question at any time by clicking on the message icon at the top of your screen. Please note that your registered name will be announced along with your question during the Q&A session following the formal portion of the meeting. Guests will not be able to submit questions. [Operator Instructions]. If you experience technical difficulties during the meeting, please click on the support link on the broadcast screen. It is now my pleasure to turn today's meeting over to Robert Johnston, Mr. Johnston, the floor is yours.

Peter, thank you. [Foreign Language]. Good morning, ladies and gentlemen. Welcome to the Annual Meeting of Shareholders of Supremex. I'm Robert Johnston, Chairman of the Board of Directors of the company. 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 virtual Annual Meeting of Shareholders of Supremex. Thank you for joining us. [Foreign Language] Together with me on the call is Stewart Emerson, President and Chief Executive Officer of the company. Also joining remotely today, we have members of the Board of Directors and the members of management. I would also like to introduce Rajeev [indiscernible] of Ernst & Young LLP, our independent registered public accounting firm. [Foreign Language] On behalf of the Board of Directors and the shareholders, I'd like to thank all of Supremex employees for their hard work and dedication, particularly since the onset of the COVID-19 pandemic. Your health and safety remain our #1 priority. [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 and available on SEDAR. Given the current COVID-19 pandemic and the restrictions imposed in connection they are with, and our commitment to protect the health and safety of the public and our shareholders, team members, including the directors, officers and employees and other stakeholders, the meeting is being held only virtually. [Foreign Language] As this meeting is being held virtually, we think it's necessary to settle a few rules for the orderly conduct of the meeting. Registered shareholders and duly appointed proxy holders who wish to communicate with the members of management -- of the management team and the Board of Directors, we ask them to present or ask a question in respect to the motion, when they are doing so, using instant messaging system on the Lumi virtual interface. Please note that there will be a slight delay in the publication of the communications received. As described, in our management proxy circular, duly appointed proxy holders were required to register with our transfer agent and obtain a control member prior to this meeting in order to participate, vote and ask questions during the meeting. Questions will generally appear shortly after they are submitted, but will only be addressed during the question period at the end of the meeting, provided that questions regarding procedural matters or directly related to the motions before the meeting may be addressed during the meeting. Shareholders logged in as guests are able to attend the meeting, but will not be able to vote or ask questions. When asking a question, please indicate your name, which organization you represent, if any, confirm that you are a registered shareholder or a duly appointed proxy holder and indicate to whom your question is addressed. Questions commenting inappropriate language or other otherwise disruptive -- that are otherwise disruptive to the meeting and the orderly conduct of the meeting will not be answered. Questions which were already answered or that are redundant or repetitive will also not be answered. We may combine questions from different shareholders about the same topic simply to avoid repetition. For the purposes of the meeting today, voting on all matters will be conducted by electronic ballot. Registered shareholders and duly appointed proxy holders will be asked to vote on all business items. Voting will be open at the beginning of the meeting and will remain open throughout the meeting. This will allow you to choose to vote on each resolution as soon as voting opens or wait until the conclusion of discussions on each resolution prior to casting the votes. Only registered shareholders and duly appointed proxy holders of the corporation are permitted to participate in the voting. When you are asked to vote, you'll receive a message on the virtual platform, requesting you to register your votes. You'll have only a certain amount of time to do so. [Foreign Language] I would ask you to please wait until the question period that will follow the meeting if you have questions on subjects, not mentioned on the agenda. You can submit your questions via the chat function on the platform. With the consent of the meeting, I would ask Vanessa Baquero to act as Secretary to this meeting and appoint Steve Gilbert and [indiscernible] from Computershare Investor Services as scrutineers to report on the holders of common shares present at this meeting, to report on the number of commentaries represented here and by proxy at this meeting and to tabulate the votes on any ballot taken at this meeting and to report thereon to the Chairman of the meeting. The Secretary informed me that Supremex Inc. received confirmation from Computershare Investor Services that a notice of the annual meeting, a form of a proxy and management circular were sent to all shareholders entitled to vote at this meeting. Supremex's consolidated financial statements for the year ended December 31, 2020, 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 the documents have been sent to shareholders be attached to the minutes of this meeting by the secretary. Under the general rules of the Supremex Inc., a quorum is reached when 2 or more shareholders are present in person or by proxy, personally holding at least 10% overall of the votes attached to all outstanding shares. The scrutineers tell me that at least 2 shareholders holding 9,506,445 shares or 34.48% of the outstanding shares are represented at this meeting, well above the minimum number required for a quorum. As such, I now declare that this meeting is regularly 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, 2020, and the auditors report relating thereto. A copy of the consolidated financial statements and the auditor's report was sent to all shareholders who requested it. 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 of Supremex for the year ended December 31, 2020, and the auditor's report thereto. Before proceeding to the adoption of resolutions, I'd like to briefly comment on the voting procedures. Each common share gives shareholders 1 vote on all matters to be discussed at the meeting. To present or second motions or vote, you must be either a registered holder of common shares of Supremex or have a power of attorney in Q4. To simplify the conduct of this meeting, we asked 1 shareholder to present, and I will second all motions presented today. Would someone like to present a proposal nominating for election 8 people as Directors of Supremex.

My name is Stephen Perol, and I am a shareholder of Supremex, and I move that Nicole Boivin, Stewart Emerson; Robert B. Johnston; George Kobrynsky, Dany Paradis, Steven P. Richardson; Andrew I. Sullivan and Warren J. White to be elected as Directors of Supremex Inc.

Thank you, Stephen. For the record, my name is Robert Johnston. I am a shareholder of Supremex, and I second the motion. Danielle, are there any further nominations for questions regarding this matter?

Mr. Chairman, there are no further nominations or questions at this time.

There are no other candidates proposed, and I now ask that shareholders vote if they have not already done so. [Voting]

Mr. Chairman, this is Steve, the scrutineer from Computershare Investor Services. The voting on the election of directors is completed, and you have the preliminary results at your disposal.

Thank you, Steve. Having received at least 93% of the votes voted by proxy, I hereby declare -- voted and by proxy, I hereby declare the proposal is adopted. The next matter being submitted to the shareholders concerns the appointment of the auditors and authorization for the Board of Directors to fix the 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 some would like to present a proposal nominating Ernst & Young LLP to act as auditors of Supremex Inc. until the next annual Meeting of Shareholders?

My name is Stephen Perol. I am a shareholder of Supremex, and I move that Ernst & Young LLP chartered professional accountants be reappointed as auditors of Supremex, Inc. until its annual meeting of shareholders or until a successor is appointed. And that the Board of Directors of Supremex Inc. be authorized to fix their remuneration.

Thank you, again, Stephen. And once again, for the record, I'm Robert Johnston, I am a shareholder of Supremex, and I second the motion. Danielle, are there any questions regarding this matter?

Mr. Chairman, there are no questions at this time.

Thank you, Danielle. As mentioned at the beginning of this meeting, voting today will be conducted by electronic ballot. Voting opened earlier during the meeting. If you have not yet cast your vote in respect to each of today's business items in this meeting, please do so now. Once electronic ballot closes, the voting page will disappear and your votes will automatically be submitted. [Voting]

This is Steve Gilbert, the Scrutineer. Once again, I confirm that the voting is terminated on the appointment of auditors, and you have the preliminary results at your -- in front of you.

Thank you, Steve. Having received at least 99% of the shares voted by proxy hereby declare the proposal adopted. A report disclosing the voting results for each applicable item of business will be filed on SEDAR promptly following the meeting and report on the election of each Director will be disclosed in a press release to be issued following the meeting. This concludes the formal portion of the meeting. May I have a proposal to close the meeting?

My name is Stephen Perol. I am a shareholder of Supremex Inc., and I move that the meeting be terminated.

Thank you, once again, Stephen, and I am Robert Johnston, and I am a shareholder, and I second the motion. Thank you, everyone. I move that the meeting is now terminated. [Foreign Language] On behalf of the senior management, the Board of Directors and the entire team at Supremex, I would like to take this opportunity to thank you for coming to the meeting. I would also like to thank you for your commitment and continued support. And I hope to you in person next year. [Foreign Language] Thank you for your participation. I now invite Stewart Emerson for a quick review of the financial results for 2020 and for the first quarter of 2021. Again, registered shareholders and duly appointed proxy holders who have logged in using their control number can submit questions by clicking on the messaging icon. Stu, over to you.

Great. Thanks very much, Rob. Jumping ahead to Slide 8. I'll do a quick review of 2020 and an overview of 2020 -- Q1 2021, as Rob indicated. We'll talk a little bit about the strategy, about the results in each of the lines of the business. The diversification effect on the path we set out on and a little bit on capital allocation in the Q1, this year. 2020 was a very [ challenging ] year for all businesses and Supremex was certainly no exception, and we performed very well, particularly given the disruptions. And I'll just start with a quick review on Slide 9 of the strategy and some of the action items we did in 2020 to -- around each of the individual strategies. It's pretty straightforward. Canadian Envelope. The plan all along was to maintain our position as the leading player, a low cost producer, optimize our capacity across the platform and just maintain margins while the business goes through secular decline. In order to do that, in 2020, we acquired Royal Envelope, which was our largest competitor, primarily based in Concord, Ontario, suburb of Toronto. We spent a lot of time and had great success in integrating and taking the synergies and quickly reimbursing the associated debt of the transaction. We've set out to optimize the Envelope platform with the cost reduction plan and those synergies and then the existing -- the existing capacity and new capacity associated with the synergies and new capacity added. We wanted to increase U.S. volume in the Canadian plants. And we did that with growth of -- in excess of 10% year-over-year despite the pandemic envelopes produced in Canada and shipped to the U.S. The second prong of the strategy is in the U.S. market, U.S. envelope market. And the plan is to link very closely with the Canadian strategy, which is to grow our market share by leveraging our facilities in the U.S. market and growing sales beyond the capacity in the U.S. facilities and producing them in Canada to offset secular decline. We dedicated more resources to profitably grow the business and to expand our reach. We focused on operational excellence within the locations, both in Massachusetts and Indianapolis. And then, as I said, we grew the volume by 10% -- by greater than 10% in 2020 produced in the Canadian facilities, keeping productivity high and utilization rates strong. And then the third element is packaging and specialty product and the mandate to diversify into packaging. The strategy going into 2020 was improved folding carton capabilities with the new equipment we added in 2019 to grow our e-commerce business and address some of the inefficiencies in the corrugate operations. The action items that we were able to complete were, we utilized the folding equipment in folding carton to support e-commerce packaging growth in a cross-sell environment. We grew our pharmaceutical packaging significantly, and we pushed into food packaging, focused primarily on green alternatives to single-use plastic. The threat of the COVID pandemic [ started around ] mid- to late February and early March. The team was very proactive, quickly implemented measures to safeguard the health and safety of employees, the community at large, and we took on some aggressive cost mitigation strategies. We employed a prudent capital allocation approach through the pandemic. We prioritized debt repayment as the main driver. And we've received some support from the Canadian Wage Subsidy (CEWS) as a result of some significant declines in some of our lines of business. Going to Slide 10, reviewing results of each of the individual lines of business, interested in Canadian Envelope and maintaining that market leadership. Revenues were up 6.5% to $97.6 million in 2020, primarily from the result of the Royal acquisition, which compensated for the COVID-19 and secular decline. Overall, our Canadian Envelope volume was up 12.3% versus a decline of 10.5% in Canada post-transaction mail volumes. Again, primarily as the result of the Royal acquisition. Average selling prices were down 5.1%, and that was from the changes in the envelope mix sold during the pandemic. Large volume statement envelopes kept moving during the pandemic, where direct mail -- higher selling price items like direct mail or small orders, nonessential were halted. So average selling price declined. The strategy all along was to protect the envelope platform. That's a key contributor to profitability and cash flow. And the organization did a very good job in that regard and onboarding Royal envelope. In Slide 11 in the U.S. envelope. And the whole plan there is to gain market share. It's a big market, USD 1.8 billion. We've now positioned ourselves from our Canadian locations. And with our 3 U.S. locations, we think we can ship effectively to about 60% of the U.S. market, assuming that envelope can ship cost effectively, about 800 kilometers. Our revenues were up 7.5% to almost $49 million, primarily from a gain in market share, and we were a beneficiary of some of the -- by mail atleast that was in the news quite frequently through the end of the year. Volume was up 10.1% versus 4.2% decline at the USPS. So we grew while the overall market was contracting. Our average selling price was down 2.3%. Some of it was COVID-related envelope mix and some of it was unfavorable foreign exchange conversion. So as I said, we grew volume and efficiencies to the Canadian facilities by increasing the units produced in Canada by 10.6% to the U.S. On the packaging side, we grew our profitability significantly. Revenues were up 6.5% to $58 million, primarily from e-commerce customers that we on-boarded early in the year. Adjusted EBITDA was up 84% to $8.6 million, again, primarily from e-commerce sales, but also from improving efficiencies in the folding carton operations. Adjusted EBITDA margins improved from 8.5% due to -- if -- we had some inefficiencies in folding carton primarily, up to 14.7% in 2020. In 2020, we really started to leverage the CapEx program that we initiated in 2017 through 2019. And we now have ourselves a nice diversified business on the packaging side that's poised for growth. So Slide 13 and just talking about the diversification. Revenue was $205 million. Canadian Envelope now represents less than 50% of our total revenues. EBITDA was up 7.7% to $27.2 million. Adjusted EBITDA was up 28% to $32.4 million, which included $1.9 million from Qs. Adjusted EBITDA margins went from 13.2% to 15.8%. And I think the increase and the improvements clearly demonstrate the resiliency of the business model and the benefits of our diversification strategy. But again, Canadian Envelope, it's 48% of revenues, U.S. Envelope 24% of revenue and packaging stood at 28% of total revenue. Looking ahead at cash generation and capital allocation on Slide 14. We generated strong cash flow, $16.5 million of free cash and a 61% cash flow conversion rate. We followed a prudent capital allocation mandate, really focused on reducing debt, and we reimbursed most of the $27 million we used to acquire Royal Envelope by the year-end. We paid $3.7 million in dividends in 2020. Part of that was declared in Q4 2019 and Q1 of 2020 prior to COVID. We spent $2.6 million on CapEx. And we purchased $400,000 towards the NCIB to acquire 305,700 shares as a mean to return capital to shareholders. I head to Slide 15, the '20 -- just looking ahead at the 2021 priorities, similar to 2020, frankly, on the operational side. Again, we anticipated and expected that we would be closer to the back end of COVID than we really are. Our focus continues to be on safeguarding employees and remaining a secure source of supply for our customers and continuing to adapt and innovate primarily on the packaging side. In Canadian Envelopes, we continue to manage the effects of secular decline or -- work on operational efficiencies, protect cash flow and continue to integrate Royal Envelope. U.S. Envelope, we'll grow our -- we'll continue to grow our market share, continue to be better in the local markets, but also continue to grow the business in the $1.8 billion market, so that we can continue to keep Canadian capacity and utilization rates high. And then on the packing and specialty product side, driving profitable growth to increased e-com capacity that we're in the process of commissioning in an Indianapolis facility. Further improving our operational efficiencies across the platform, driving profitability and continuing to move towards a 50-50 long-term objective split between packaging and envelope. On the financial side, because of COVID-19, we'll continue to take a prudent approach on the capital allocation. We'll protect that balance sheet. We will optimize shareholder value by focusing on growth and cash flow generation. Other than the Indianapolis e-commerce growth CapEx of $1.5 million that we initiated late last year, we don't anticipate any growth CapEx for 2021. We'll continue to focus on deleveraging and continue with the NCIB. Speaking of the Indianapolis project on Slide 16. With [indiscernible] there, it's a relatively small acquisition, but an important one to Supremex. We acquired Histography Communications in Q1 of 2021. They're a provider of print and folding carton packaging based in Indianapolis, Indiana, about 8 miles from our envelope facility. The rationale for this bolt-on acquisition was really to get access to a local market for our e-commerce platform. We were completely out of capacity in Ontario and Québec, and 61% of our sales go into the U.S. Midwest and ship within 100 miles of Indianapolis. So clearly, it didn't make much sense to put the new capacity in the Canadian market and continue to put product on trucks. So we acquired a cost turnkey operation, which brings us much closer to the e-commerce base and brings us much needed capacity for our e-commerce packaging customers in the U.S. Midwest. We're applying some modest CapEx, and we'll build a fully integrated e-commerce hub in the e-commerce hotbed in the U.S. Looking ahead to Q1 2021, the results, we had a strong start to 2021. Revenue was $53.6 million versus $52.4 million, an increase of 2.3%. Adjusted EBITDA was $9.5 million versus $8.3 million in Q1 of last year, an improvement of 14%. Adjusted EBITDA margin, 17.8% versus 15.9% last year, an improvement of almost 12%. Cash flows -- our free cash flow was $6.9 million versus $5 million last year, an improvement of 37.2%, and net debt at quarter end was exactly the same, $53.7 million as it was in the Q2 last year. Overall net earnings, $4.1 million versus $2.6 million last year, an improvement of 58.5% and earnings per diluted share of $0.15 versus $0.09 in the prior year. So with that, I'm happy to take any questions, but that is the end of my presentation. Danielle, do we have any questions? Very awkward platform.

No, we have no questions.

Usually I like to mix with members attending the AGM, but these are strange times indeed. And with no questions, I'll turn it back to the operator. Thank you very much. Have a great day, and stay safe out there.

Peter, I think we're ready to end the AGM.

Thank you, ma'am, and this concludes the meeting. Thank you for your participation. You may now disconnect.