Supremex Inc. (SXP) Earnings Call Transcript & Summary

Hello, and welcome to the Annual Meeting of Shareholders of Supremex Inc. Please note that today's meeting is being recorded. If you participated in today's meeting and disclose personal information, you will be deemed to consent to the recording, transfer and use of the same. If you disclose personal information of another person in today's meeting, you will be deemed to represent and warrant to Computershare and the corporation that you first obtain all required consent for the disclosure, recording, transfer and use of such personal information from all appropriate persons before your disclosure. During the meeting, we'll have a question-and-answer session. You can submit questions or comments at any time by clicking on the message icon. It is now my pleasure to turn today's meeting over to Robert Johnston, Chairman of the Board of Directors. Mr. Johnston, the floor is yours.

Thank you. [Foreign Language] Good morning, 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 Virtual Annual Meeting of Shareholders of Supremex. Thank you for joining us. [Foreign Language] Together with me on the call today is Stewart Emerson, President and CEO; and Mary Chronopoulos, Chief Financial Officer. Also joining us today, we have members of the Board of Directors and other members of management. I would also like to introduce [ Rajeev Shamali ] of Ernst & Young LLP, our independent registered public accounting firm, who is also present remotely. [Foreign Language] On behalf of the Board of Directors and the shareholders, I would like to thank all of Supremex's employees for their hard work and dedication during the last year. 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. As this meeting is being held virtually, we think that it's necessary to set out a few rules for orderly conduct of the meeting. Registered shareholders and duly appointed proxyholders who wish to communicate with the members of the management team and the Board or who wish to present or ask a question in respect of a motion may do so using instant messaging on the virtual meeting platform. Please note that there will be a slight delay in the publication of the communications received. As described in our management circular, duly appointed proxyholders were required to register with our transfer agent and obtain a control code 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. However, 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 and which organization you represent, if any. Please be brief and to the point so that we have time to answer questions from all wishing to do so. Questions or comments containing inappropriate language or that are otherwise disruptive to the orderly conduct of the meeting will not be answered. Questions which were already answered or that were redundant or repetitive will not be answered. We may also combine questions from different shareholders about the same topic simply to avoid repetition. For the purposes of this meeting today, voting on all matters will be conducted by electronic ballot. Registered shareholders and duly appointed proxyholders 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 the discussion on each resolution prior to casting your votes. Only registered shareholders and duly appointed proxyholders of the corporation are permitted to participate in the voting. When you are asked to vote, you will receive a message on the virtual platform requesting you to register your votes. We'll only have 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 any questions on subjects not mentioned on the agenda. You can submit your question via the chat functionality on the platform. With the consent of the meeting, I would ask [ Vanessa Quarteau ] to act as secretary for this meeting and appoint Steve Gilbert and [ Pierre Girard ] from Computershare Investor Services as scrutineers to report on the holders of the common shares present at this meeting, to report on the number of common shares represented here today 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 received confirmation from Computershare Investor Services that a notice of annual meeting, a form of proxy and the proxy management circular were sent to all shareholders entitled to vote at the meeting. Supremex's consolidated financial statements for the year ended December 31, 2021, have been sent to all shareholders who so requested them. I request 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 via the secretary. Under the general rules of Supremex, a quorum is reached if 2 or more shareholders present in person or by proxy personally hold at least 25% overall of the votes attached to all outstanding shares. The scrutineers tell me that at least 2 shareholders holding 11,153,043 shares or 42.34% of the outstanding shares are represented at this meeting, well above the minimum number required for quorum. 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 for the year ended December 31, 2021, and the auditor's report relating thereto. A copy of the consolidated financial statements and the auditor's report was sent to all shareholders who so requested them. Since you have had the opportunity to review these documents, I'd 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, 2021, and the auditor's report relating thereto. Before proceeding to the adoption of resolutions, I'd 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 be either a registered holder of common shares of Supremex or a power of attorney in due form. To simplify the conduct of the meeting, we ask one shareholder to present and I will second all motions presented today. Having said that, would someone like to propose the nomination and election of 8 proposed nominees as directors of Supremex?

My name is Steven Perreault. I am a shareholder of Supremex, and I move that each of Nicole Boivin, Stewart Emerson, Robert P. Johnston, Georges Kobrynsky, Dany Paradis, Steven P. Richardson, Andrew I. Sullivan and Warrant J. White be elected as directors of Supremex.

Thank you, Steven. And my name is Robert Johnston. I'm also a shareholder of Supremex, and I second the motion. There are no other candidates proposed. And I now ask the shareholders to vote if they have not already done so. [Voting]

Mr. Chairman, the voting period on the directors is finished, and you have the preliminary results at your disposal.

Thank you. Having received at least 91.73% of the shares voted in -- by proxy in favor of the proposal, I hereby declare the proposal adopted. The next matter being submitted to the shareholders concerns the appointment of the auditors and the authorization through 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 for the nomination and election of Ernst & Young LLP to act as auditors of Supremex until the next Annual Meeting of Shareholders?

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

Thank you, Steven. Again, I'm Robert Johnston, a shareholder of Supremex, and I second the motion. Thank you. I now ask the shareholders vote if they have not already done so. [Voting]

Mr. Chairman, the voting on the nomination of auditors is terminated, and you have the results in front of you.

Thank you, and this was a nail-biter. Having received at least 99.99% of the shares voted by proxy in favor of the proposal, I hereby declare the proposal adopted. I will now turn to the shareholder proposals. We received 2 shareholder proposals from Mr. George Christopoulos in connection with this meeting. The statement supporting Mr. Christopoulos' proposals as well as the response from the Board are described in the management information circular made available to shareholders. Before I read the proposals, I'd like to thank Mr. Christopoulos for his proposals and the professionalism in his interaction with the Board and management. The first proposal, as submitted by Mr. Christopoulos, reads as follows: Supremex Inc. immediately sell and lease back 2 owned real estate properties located at 400 Humberline Drive, Toronto and 7213 Rue Cordner, Montreal and surface very significant hidden value of approximately $62 million or about $2.30 per share. Would someone like to present a proposal regarding this resolution?

My name is Steven Perreault. I am a shareholder of Supremex, and I move that the first proposal proposed by Mr. George Christopoulos be presented to the meeting.

I'm Robert Johnston, still a shareholder. And I second the motion. Thank you, Steven. I now ask shareholders to vote if they have not already done so. [Voting]

Mr. Chairman, the voting period is over on this proposal. And once again, you have the reports available to you.

Thank you. Having received at least 71.4% of the shares voted by proxy against the proposal, I hereby declare the proposal rejected. I will now read the second proposal submitted by Mr. Christopoulos: Supremex Inc. not pursue any business acquisitions or capital expenditures exceeding CAD 5 million in aggregate per fiscal year until Supremex's enterprise value divided by EBITDA or EBITDA multiple is over 5. Would someone like to present a proposal regarding this resolution.

My name is Steven Perreault. I am a shareholder of Supremex, and I move that the second proposal proposed by Mr. George Christopoulos be presented to the meeting.

Thank you, Steven. Again, it's Robert Johnston, a shareholder of Supremex. And I second the motion. I now ask shareholders to vote if they have not already done so. [Voting]

Mr. Chairman, the voting period is over. And once again, the report is available to you.

Thank you once again. And having received at least 73.09% of the shares voted by proxy against the proposal, I hereby declare the proposal rejected. A report disclosing the voting results for each applicable item of business will be filed on SEDAR promptly following the meeting, and a 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. We would now be pleased to answer any questions that shareholders may have. Registered shareholders and duly appointed proxyholders who have logged in using their control number can submit questions by clicking on the messaging icon. As previously mentioned, when asking a question, please indicate your name, which organization you represent, if any, and confirm that you are a registered shareholder or duly appointed proxyholder and indicate to whom your question is addressed. We have received no questions. So hearing no questions coming in, may I have a proposal to close the meeting?

My name is Steven Perreault. I am a shareholder of Supremex, and I move that the meeting be terminated.

Thank you, Steven. Again, Robert Johnston, also a shareholder of Supremex, and I second the motion. Thank you, everyone. [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 would like to take this opportunity to thank you for coming to this meeting. I would also like to thank you for your commitment and continued support and hope to see you next year. [Foreign Language] Thank you for your participation. I now invite Stewart Emerson for a quick review of the financial results for 2021. Registered shareholders and duly appointed proxyholders who have logged in using their control number can submit questions by clicking on the messaging icon. Over to you, Stewart.

Thank you, Rob. Good morning, everyone. I'm pleased to welcome you to Supremex's 2022 Annual Meeting of Shareholders. To all of those -- to all of you joining us via webcast, I want to thank you very much for your presence as well as for your continued support of Supremex. A document in support of the presentation is available in French on the platform. Since our last AGM, there have been a few changes to our senior leadership team. To set ourselves up for future growth, we have made the decision to move to a more traditional large company structure with fully developed envelope and packaging divisions and to build our executive team. With this in mind, I'd like to highlight 3 important additions in the past year. First, Mary Chronopoulos was appointed to the position of CFO. Mary is a highly accomplished financial executive with over 20 years of experience in finance with large private and public companies. She was previously Chief Financial Officer of Energir, a diversified energy company with over $2 billion -- $2.5 billion in sales and has held various executive roles in finance with several leading retail and consumer packaged goods companies, including Group BMR, Aldo Group and Saputo. The second is the addition of the position of President of the Envelope division. As U.S. envelope becomes a more material portion of the envelope segment, this new position will allow us to look at operations, pricing and go-to-market strategies more holistically. Joe Baglione and I have worked together shoulder to shoulder for 25 years. He's been with Supremex for over 30 years and is an accomplished envelope executive. He's been promoted to this newly created position. Joe started in operations, moved to sales and marketing and management roles and successfully progressed through the organization, becoming Vice President and General Manager of U.S. Envelope in 2018. Most recently, he held the position of Vice President and General Manager, Eastern Canada Envelope and Label, which represents approximately 85% of Canada's envelope revenues, and his plants produced the envelopes for over 50% of the U.S. envelope revenues. Murray Rundle has also been promoted to the -- to Vice President, Marketing and Innovation. Murray is also a 30-year Supremex employee and started his career in marketing. After several successful years in sales and sales management on the envelope side, Murray has been instrumental in guiding our e-commerce organization for the past 5-plus years. Murray's fingerprints are all over the IP we enjoy and our reputation as an innovative provider of right-size sustainable packaging geared to e-tailers. In his new role, Murray is responsible for continuing to build the Supremex brand and drive innovation, both on the product and manufacturing side in both the envelope and packaging segments. Mary, Joe and Murray join a growing list of senior leaders as we continue to build out the organization. Over the next year, we expect to announce other key additions to the team. On that note, let me provide a brief overview of operations. As many of you know, Supremex is a leading North American manufacturer of envelopes and a growing provider of paper-based packaging solutions. We have revenues of $226 million, operate 14 manufacturing facilities and 2 distribution centers and have over 825 employees. We operate in 2 similar markets, namely envelope and packaging, but they have very different characteristics. The envelope market has been in secular decline for over 10 years. The Canadian market is approximately $115 million in size and has declined, on average, by 6.5% per year. Supremex enjoys approximately 85% of this market. Conversely, the U.S. envelope market is approximately 20x greater than the Canadian market and has declined approximately 3.4% per year over the past several. Although we have less than 3% market share in the U.S., we can cost effectively shift to 60% of the market from our facilities. On the other hand, the packaging market continues to grow. Over the past 10 years, the Canadian market has averaged 11.8% growth per year while the U.S. market has grown at 11.2% on average over the past decade. Given these market trends, in 2014, we adopted a succinct growth strategy: one, leverage our Canadian envelope market position, our capacity and know-how as one of North America's five largest envelope manufacturers and utilize its attractive cash yield to fund the pivot to packaging. In other words, we set out to stabilize our envelope segment and build our packaging capabilities. Our focus is to achieve equal revenue split between the envelope and packaging segments. I note that as recently as 2014, only 7% of our revenues were generated in packaging, and today, it is 31%. We are well on our way. Allow me to provide an overview of our 2021 results and give you an update on where we stand with the execution of our strategy. Over the past 3 years, we have consistently improved our revenues and profitability metrics. We finished 2021 on a very strong note, with our top line increasing 10% and reaching a historic level of $226 million. Similarly, our adjusted EBITDA increased 20% to a record high of $39 million, and our net earnings more than doubled to $16 million or $0.58 per share. All lines of business contributed to this improved performance. We achieved these results despite the lingering effects from the pandemic, a tight supply chain for all paper grades, labor constraints, rapidly escalating costs across the board and a negative foreign exchange impact. More specifically, let's look at each product segment. Strikingly, our envelope segment, which has long been a concern for many, increased its revenues by 7% from $147 million in 2020 to $157 million in 2021. This segment represents 69% of total revenues. These excellent results were driven by a number of factors, including our ability to quickly implement cost increases, both in Canada and the U.S. in lockstep with rapid inflation. Additional available capacity unlocked in the Royal Envelope acquisition, which allowed us to both strengthen our position in Canada and to continue to slowly gain market share south of the border, the continued payoff on the strategy to grow our position in the U.S. market, the focused efforts and specific investments dedicated to strengthening our brand and our internal sales team, the COVID rebound as customers started to rebuild inventories and an improvement in the product -- in the mix of products sold. I would also like to point out that in order to provide additional volume and to support 2 strategic long-term customers in the Western New York market, we concluded a tuck-in acquisition of the manufacturing assets and inventory of Niagara Envelope at the beginning of 2022. Turning now to our packaging segment. Revenues increased in excess of 19% in 2021 to $69 million from $58 million in 2020. This segment now represents 31% of total revenues and 35% of adjusted EBITDA. These revenues were driven by a number of factors, including the strategic acquisition of Vista Graphic Communications concluded in Q1 of 2021. And now that it has been integrated and our new equipment is fully operational and fully manned, it takes some of the pressure off Canadian operations and provides needed capacity and capabilities for the e-commerce team in the U.S. market; a focused and robust CapEx plan executed in 2018 and 2019 to build additional capacity; a strong supply chain; the COVID rebound, particularly in the health and beauty segments; the ability to quickly pass through cost increases; and the continued improvement of our folding carton operations. Overall, our 2021 results are a testament to our product and geography -- geographic diversification, the resilience of our business model, strong relationships with suppliers and the dedication of our staff. Our team did an excellent job gaining market share, passing through cost increases, implementing cost efficiency measures and managing through the challenges linked to supply chain and labor issues. Looking at our diversification over the past several years, we clearly see that we have successfully managed the secular decline in envelope and materially diversified into packaging. Over this period, Supremex has grown, on average, 29% per year in packaging while successfully maintaining its revenues in envelope. Again, at the end of 2021, packaging represented 31% of total revenues. Our objective from the beginning, and it remains today, was to build this business for long term. Our performance clearly demonstrates that we are reaping the benefits of the foundational work laid over the past few years, including our strategic planning and capital projects. We are well on our way to transform the business. And the market seems to be taking notice. Since January 1, 2021, our stock price has increased 66% from $2.14 to $3.56 as at April 14, 2022. We also continue to provide a return to shareholders by buying back shares and recently reinstated our regular dividends. We are committed to continue to unlock shareholder value going forward. With that, I'll turn the call -- the meeting over to Mary Chronopoulos, Chief Financial Officer. Mary?

Thank you, Stewart. Good morning, everyone. Let me begin with a review of our 2021 profitability. Note that I will start with a few words in French and then complete my presentation in English. [Foreign Language] Looking at profitability by segment. For the envelope segment, adjusted EBITDA was $28 million in 2021, up 12% from $26 million in 2020. This increase is mainly due to higher revenue driven by increased volume and sales prices and operational efficiencies derived from the cost optimization plan. Therefore, adjusted EBITDA margins increased to 18.1%, up from 17.4% last year. For the packaging and specialty products segment, adjusted EBITDA was $14 million, up 60% from $9 million last year. The significant growth was primarily due to higher revenue driven by increased volume and sales prices, the contribution of the Vista acquisition, efficiency gains in the folding carton division and a favorable product mix. As a result, the adjusted EBITDA margin improved significantly to 19.7% compared to 14.7% last year. Note that in 2021 and 2020, a noncash asset impairment charge of $2.1 million and $2.8 million, respectively, was recorded related to the corrugated box packaging business. Given our higher EBITDA and lower financial charges, our profitability increased. Net earnings more than doubled to $16 million or $0.58 per share for 2021 compared to $7 million or $0.27 per share for the equivalent period last year. Likewise, adjusted net earnings increased to $17 million or $0.64 per share compared to $11 million or $0.41 per share for the equivalent period in 2020. Turning now to cash flow and capital deployment. We generated solid cash flows from operations of $30 million in 2021, down from $37 million last year, primarily due to unfavorable movements in working capital, particularly in accounts receivable and inventories, partially offset by higher profitability. Similarly, free cash flow decreased to $26 million in 2021 versus $34 million in 2020, mainly attributable to lower cash flows related to operating activities and higher CapEx. While we generated healthy cash flows, we deployed our capital prudently given the uncertainty related to the pandemic. Given the year, we used our cash to make acquisitions of $2.8 million, invest in CapEx and intangibles for $3.9 million, buy back shares for $3.3 million and paid down over $12 million of debt. More specifically, in 2021, we purchased 1.4 million common shares for cancellation under our NCIB program for a total consideration of $3.3 million. Now a brief update on dividend. On January 6, 2020, we announced the reinstatement of the company's quarterly dividend of $0.025 per common share after having suspended them in the early months of the pandemic. Since then, we've paid 2 dividends: 1 on February 15 and the other on April 8. Turning to the balance sheet. We ended the year in a solid financial position. Total debt stood at $45 million, down from $57 million at the end of Q4 2020 despite an amount of $2.8 million used to acquire Vista. We ended the year with a leverage ratio of 1.1x, a marked improvement over the 1.7x at the end of Q4, and we had over $56 million in available borrowing capacity to pursue our growth objectives. I will now turn it over to Stewart for the outlook.

Terrific. Thank you, Mary. Our long-term strategy remains intact: leverage our Canadian envelope market position, use excess Canadian envelope capacity and know-how to capitalize on the U.S. opportunity, maximize the cash flow to fund the pivot to packaging and unlock value for shareholders. And we have what it takes to make it happen. We've built the brand in packaging and U.S. envelope. The fundamentals of our business are solid. Our packaging backlogs are extremely strong, and we have available capacity. We continue to be able to pass on cost increases, and we have a strong team and diversified product offering. However, in the short term, we must still contend with lingering effects of the pandemic on our activities and on the global economic landscape. Three primary concerns are persistent supply chain issues, primarily with paper procurement, forecasted to last into 2023; labor competition and transport issues and their scarcity; inflation, which has the effect of rapidly escalating costs across the board. A playbook doesn't exist, but we are working hard to mitigate these impacts on our financial results, customers and employees, especially in light of the tight labor markets. As a result, we continue to tightly control our operating expenses and use working capital prudently. Priorities for 2022 include managing intensifying paper procurement issues, ensure that we pass cost inflation through to the market, continuing to focus on operational efficiencies, accelerating the search for strategic acquisitions in packaging and reorganizing each line of business around functions versus geography and to build out the organization. And finally, in 2022, we intend to start to work on our first ESG report. Although we have many initiatives in place on this front, we have not communicated them to the market. Our first step will be to do a materiality assessment and identify relevant metrics to track. With all the good that's been done and continues to be done, we anticipate our revenue to increase further in 2022 and our profitability to remain strong, particularly in the back half of the year as we project supply chain challenges to ease moderately in the second half. In closing, given our demonstrated ability to stabilize and grow volumes in the envelope segment, a significantly improved packaging platform and our strong financial position, we are well positioned to execute our growth strategy. Thank you for your attention. I will now turn the floor over to our operator.

This concludes the meeting. You may now disconnect.