Supremex Inc.

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00:35 Thank you, operator. Good morning, ladies and gentlemen, and thank you for joining us for Supremex third quarter conference call.

My name is Jennifer McCaughey from MaisonBrison Communications and Investor Relations consulting firm supporting Supremex with IR activities. With me today is Stewart Emerson, President and CEO and Mary Chronopoulos, Chief Financial Officer and Corporate Secretary.

01:01 Following their comments, we will open the call for questions. For more detailed analysis of our results, please see our financial statements, MD&A, and press release published earlier this morning and available on the company's website and on SEDAR.

In addition, we've posted a presentation supporting this conference call, which is available through the webcast and on our website. 1:24 I would like to remind listeners that this conference call contains forward-looking information within the meaning of applicable Canadian Securities Laws.

Please refer to the forward looking statements as detailed in the presentation supporting this conference call. Furthermore, risks and uncertainties are discussed in the annual information form dated March thirty one twenty twenty one under the heading Risk Factors and updated in our latest MD&A.

1:54 During this call, and in the presentation, we use various non-IFRS measures, including adjusted EBITDA and adjusted net earnings. These terms are defined in our MD&A.

Unless stated otherwise, all figures are expressed in Canadian dollars. 2:09 With that, let me turn the call over to Stuart.

02:13 Thank you, Jennifer And welcome everyone. Let's turn to slide forty three of the investor presentation for an overview of the third quarter.

I'm extremely pleased with our third quarter performance, which included strong sales growth in both segment and the second consecutive quarter of year-over-year improvement in adjusted EBITDA. We maintained our growth momentum with revenues up nine point nine percent and adjusted EBITDA up eight percent over the same period last year.

We achieved these results despite a negative currency conversion and extremely tight supply chain for all paper grades and rapidly escalating costs across the board. These results are estimate to our product and geographic diversification, resilience of our business model, strong relationships with suppliers and the dedication of all our staff.

Our team did an excellent job gaining market share, passing through price increases, implementing cost efficiencies and managing through the challenges linked to supply chain and labor issues. 03:12 Turning to operations, the integration of this is on track and the new equipment has arrived and is in the process of commissioning.

More specifically, glue is running live jobs and the [Indiscernible] currently being installed. Not unlike a lot of companies staffing has and the biggest challenge we faced in Indianapolis, but the local team has stepped up and are working overtime to ensure we service customers well the HR team with the full court press on recruiting and onboarding.

Once complete, this investment will provide our e-commerce team with much needed capacity, new capabilities and improved efficiencies in the local U. S.

Markets. 03:46 In terms of footprint after closing the Edmonton facility and downsizing the Edmonton facility, we have begun the planning of the move of our folding carton plant in the Town Mount Royal to an alternative location in the Greater Montreal region.

This move expected to be completed in the second quarter of twenty twenty two is required as a result of the expropriation of our current facility for the Royal Mount Project. The team is working diligently on the projects, so we can transition with minimal disruptions to operations.

We are well down the path of site selection and between the three folding carton locations and external partners, there's good redundancy built into the network. 04:24 There is ample time with the support of our external and internal Supremex resources to make this transition smooth, efficiently and with minimal disruption to customers.

We will incur one time cost for the project, which will be largely recorded in the first half of twenty twenty two and we expect our annual rent expenses to be higher than what we are currently pay. Organizationally, we have made some important strides in our structure to support future growth.

04:51 Anybody, that's all of the company for any period of time appreciates that we have been meet lean management team. To set ourselves up for future growth, growth we have made decision to move to more traditional large company structure with full-fledged envelope packaging divisions and to build our executive team.

In line with this objective, I'm excited to highlight that we have created two new executive positions, which will improve our bench strength and better position the company for future growth. 05:17 First position is a President envelope.

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 only has been with Supremex for over thirty years and has been promoted to this newly created position.

Joe and I worked side by side for twenty five years. Joe took on sales, marketing and management roles and successfully progressed through the organization becoming Vice President and General Manager of U.

S. Envelope in twenty eighteen.

Most recently he has held the position of Vice President and General Manager of Eastern Canada envelope and label, which represents approximately eighty five percent of Canadian Envelopes Revenue and his plans to produce the envelopes for over fifty percent of the U. S.

envelopes revenue. 06:05 Joe has extremely talented a subject matter expert and Supremex is part of this DNA.

Joe as a known entity, a proven leader, and I look forward to continue working closely with them in his new capacity. We also created the position of Vice President, People and culture.

This is an important next step for Supremex at a senior HR executive. We consciously selected the title of people and culture to reflect the growing challenges in labor markets and I'm pleased to welcome Leslie Sutherland to this position.

As Leslie is a highly accomplished strategic human resource leader with over twenty five years of experience with large private and public companies as well as governmental organizations. 06:44 Before joining Supremex, she was Vice President, Human resources and business operations at Toronto Global, an arms-length organization representing municipalities in the Toronto region.

I'm convinced that Leslie has experienced since we will make an immediate contribution to the team, to welcome Aboard Leslie. Over the next few quarters, we are hoping to announce other key additions to the team.

In summary, we had another very good quarter and our positioning the company for future growth. 07:11 With that, I'd like to turn the call over to Mary for a review of our Q3 financial results.

Mary?

07:16 Thank you, Stewart. Good morning, everyone.

Turning to slide forty four of the presentation for our top line review. Total revenue was up nine point nine percent to fifty four point eight million dollars from forty nine point nine million dollars last year.

Revenue from the envelope segment was up eight point five percent to thirty seven million dollars. Canadian envelope revenue grew by two point seven percent to twenty point three million dollars.

Average selling prices increased by eight point five percent from last year's comparable period primarily resulting from price increases swiftly implemented to reflect rising input cost inflation and from changes in the product mix. This was partially offset by a volume decrease of five point three percent stemming from the secular decline affecting the envelope market.

08:01 Revenue from our U. S.

Envelope activities increased by eighteen point seven percent to fourteen point seven million dollars. The volume of units sold increased by eight point nine percent from efforts dedicated to increase penetration to the U.S.

envelope market and from the rebound in demand in recent quarters from certain channels that were more affected by the pandemic lockdown measures. Although price increases were implemented in the U.

S. Market, our average selling price when translated in Canadian dollars were immaterial given the negative foreign exchange translation during the period.

08:35 Packaging and specialty products segments, revenue grow by twelve point eight percent to seventeen point eight million dollars primarily from the acquisition of this Vista Graphic Communication concluded on March eight twenty twenty one coupled with organic growth. EBITDA and adjusted EBITDA increased by eight percent to eight point seven million dollars from eight point one million dollars in the third quarter of twenty twenty.

This increase resulted from higher sales volumes in both segments and operational efficiencies derived from the cost optimization plan. It was partially offset by higher cost of materials and lower recorded subsidies.

Adjusted EBITDA margins decreased to fifteen point nine percent compared to sixteen point two percent in the equivalent quarter for twenty twenty. 09:22 In our envelope segment, adjusted EBITDA was up nineteen point five percent to six point nine million dollars driven by higher sales volumes and operational efficiencies derived from the cost optimization plan.

Adjusted EBITDA margin was eighteen point six percent up from sixteen point nine percent in the equivalent period of twenty twenty. In our packaging and specialty products segment, adjusted EBITDA decreased twelve point two percent to two point six million dollars.

These results reflect an unfavorable product mix, partially offset by increased sales volumes and the contributions of the Vista acquisition. 10:00 Adjusted EBITDA margins was fourteen point four percent compared to eighteen point five percent in the equivalent period of twenty twenty.

Driven by higher adjusted EBITDA, net earnings and adjusted net earnings increased to three point four million dollars or zero point one two dollars per share compared to two point seven million dollars or zero point one zero dollars per share for the equivalent period in twenty twenty. 10:21 Turning to cash flows and capital deployment on slide forty seven, cash flows related to operating activities decreased slightly to six point seven million dollars from seven point two million dollars in Q3 twenty twenty mainly due to a negative net change in working capital adjustments, partially offset by higher profitability.

10:39 Similarly, free cash flow decreased to four point eight million dollars in the third quarter compared to five point one million dollars for the same period last year. We used our cash primarily to invest in CapEx for one point five million dollars and repurchase shares for seven hundred thousand dollars as you can observe on Slide forty eight.

On August twenty seven twenty twenty-one, we received approval from the TSX to renew our NCIB and purchase for cancellation up to one point three million dollars of our common shares, representing approximately five percent of our twenty six point nine million dollars issues outstanding common shares as of August eighteen twenty twenty one. 11:18 Purchases under the NCIB will be made over a maximum period of twelve months beginning on August thirty one twenty twenty one and ending on August thirtieth twenty twenty two.

During the third quarter, the company purchased two hundred and ninety two thousand four hundred common shares for cancellation under its current and prior NCIB program for a total consideration of seven hundred thousand dollars. Year-to-date, the company purchased a little over one million common shares for a total consideration of two point three million dollars, subsequent to the end of the period, an additional one hundred and fifty thousand three hundred shares were purchased for cancellation for total consideration of three hundred forty seven thousand eight hundred and fifty five dollars.

11:59 Turning to the balance sheet on slide forty nine. During the quarter, we entered a series of annuity buyout transactions in order to reduce the risk profile associated with our defined benefit pension plan.

We ended the quarter in a solid financial position total debt stood at fifty two point one million dollars down from fifty six point eight million dollars at the end of Q4 twenty twenty despite an amount of two point seven million dollars used to acquire Vista Graphic Communications in Q1 twenty twenty one. We ended Q3 twenty twenty one with a leverage ratio of one point six times, a marked improved over the two times at the end of Q4 twenty twenty.

12:35 We also have over fifty million dollars in available liquidity to pursue our growth objective. I will now turn the call back to Stewart for the outlook.

Stewart?

12:43 Thank you, Mary. So, I was looking ahead, we expect the demand for our products to remain strong in the fourth quarter in the twenty twenty two driven by increased activity, customers rebuilding inventory, a potentially emergence of direct mail, robust pipeline in folding carton and e-commerce solutions and our sales initiatives in the U.

S. That said, we must still contend with the lingering effects of the pandemic on our activities and on global economic landscape.

The three main concerns are persistent supply chain issues, primarily with paper procurement forecasted the last into twenty twenty three. Second, a rapidly escalating costs across the board and third, labor shortages which are constraining us from additional production hours and improving capacity utilization.

That said, we're very well positioned to manage through these challenges given the strength of our team and our diversified product offering. Our backlogs are strong, and we are confident in our supply chain.

We believe we'll get an update to satisfy the man created in twenty twenty one and generate some modest growth in twenty twenty two, but the tightness in the supply chain might indeed our ability to maximize the demand opportunity in front of us. 13:57 Furthermore, we are currently operating at full capacity given the labor at our disposal and continue to successfully pass on price increases.

In an effort to mitigate all these effects, we continue to tightly control our operating expenses and use working capital prudently. In short, our near term focus includes managing challenges related to the pandemic, integrating the Vista acquisition and completing the commissioning of the new equipment, transitioning to more value added products in packaging, improving our customer mix in the U.

S. Building our bench strength, continuing to optimize our production capacity and capabilities to support our growth markets and planning the move of our TMR plan.

14:38 In summary, we expect to continue to build on the momentum and finish twenty twenty one on a strong note. Our long term strategy remains intact.

Leverage our Canadian envelope capacity, knowhow and cash flow to fund the pivot to packaging. Recall that our target is to generate fifty percent of our revenue from the packaging segment by twenty twenty five and our last twelve months revenues in packaging are at thirty percent of consolidated revenues.

To accelerate this shift, we are intensifying our search in strategic acquisitions. Given our scale in the envelope segment and our strong financial position, We are well positioned to execute on our growth strategy.

This concludes our prepared remarks. We'll now be pleased to answer any questions you may have.

Operator?

16:00 Yeah, good morning guys. Congratulations on pretty good results, especially given the environment.

I'm talking about the average selling price increases that we're constantly seeing. Are we getting to any kind of point where this is going to become problematic and you're going to get customers that seek alternatives to your products?

or is this more of changing mix or just everybody's accepting because of the inflationary environment? What do you see for that?

16:32 It's a good question. Neil, I mean, I would say it's the latter.

Right now, customers are more concerned about supply than they are about pricing. They see their day to day personal lives and especially, but the shortness of supply, a lot more concern about and I get the product versus what it's going to cost to get the product, the long-term effect on sort of decline or secular decline.

Our products tend to be a relatively small portion of the cost of the end product for their customers. For instance that bank statement costs, the banks two point five zero dollars, three dollars to prepare in mail and our product is zero point zero two or zero point zero three dollars of that to fifty dollars or zero point zero three dollars.

So, we don't take our products, but the overall inflation will certainly have people asking questions about whether they should be using the product or not.

17:37 Okay. But you are in a relatively good position on that equation.

So when you talk about you are at full capacity now given the constraint. So this is, I guess mostly labor constraints that you're talking about and is that the same in all the different facilities and regions that you operate?

17:59 Yeah. We're right out against it from a labor standpoint, that the plans are, the plans are running well.

They've got very good backlogs. It's a bit tight roll block with between securing paper and having the machine time or the labor to run the machines, but it's across the entire organization.

18:23 Okay. Because I'm just wondering if suddenly you get an influx of labor and that or would you be able to substantially increase your production capacity?

Is that I am just wondering is that completely the constraint that you're looking at right now?

18:42 Last combination of the two. I mean, I would say there's a about twenty percent capacity, maybe a little bit more in the pipeline like in the organization, if you fully staffed, all of the primary equipment, there's probably another twenty percent.

The challenge would be getting twenty percent more paper to operationalizes.

19:05 Okay. And that's what…

19:05 We think, for my report – for my comments, I mean, we think, I mean we're in discussions with our suppliers and our supply chain. Supremex is a customer that suppliers like to have.

We give them good forecast like the disability we treat them fairly and we bear bills. All of them have said they will – they will try, they expect they'll be able to get us more paper in twenty twenty two, which will allow us some additional growth.

19:39 Okay. And you've been talking for years, I think about how your relationships with your suppliers, so that's not really surprise.

That you're well positioned given the environment that we're in. Is there anything else I'm thinking on glue, ink anything else that you use that's really making any kind of restrictions or was it mainly the labor and the paper then?

20:01 It's labor and paper, and there's a little bit on that corrugated side, It's available just lead times are much longer, limit flexibility, but by and large it’s paper.

20:13 Okay. And then you've made comments specifically about M&A ramping up your strategy and I guess that would be focused on the packaging side.

But you've actually done a lot of acquisitions if I look at your charts here over the years as well. So, how is your approach changing?

Are you just putting more resources into it? Would you be going outside what your normal criteria were for acquisitions?

Going forward?

20:43 So, I mean, we referenced the change in the organization structure and a lot of that designed to bring some people in so that senior management has more time to dedicate the M&A, so that's part of it adding Joe, will take a burden off some of the responsibility I have on that side. But Leslie as well on the HR side.

So, I wouldn't say we're not changing our approach, but we're freeing up more time and resources to work on M&A. 21:18 Is there a second question?

Oh, yes. Our strategy remains same in terms of filter.

We said very clearly that when we went to the packaging that we would focus in a geographic area acquire until we got two the lot diminishing returns and then we would change our attention to another geographic market, we think we've done that in Montreal. Our attention is turned to the rest of Canada, and we have pretty robust pipeline.

21:53 Okay. And then just one more on the equipment that you're having installed right now.

Is there any kind of jump that we can expect at a certain date, and you've got a backlog of requirements that you are just waiting to be able to get out the door or is this going to be more of a gradual ramp of as this capacity is added?

22:15 A jump concerns me a little bit to that, but it adds a significant amount of capacity in an area in geographic region where we're having tremendous success. So, we've been significantly constrained on that E-commerce side from a capacity standpoint.

This adds, potentially add six thousand more hours of production. So, I wouldn't commit to jump, but it really is going to help us take advantage of opportunities.

The another nice thing there is in the local Indianapolis market, we partnered with a mill, that's given us allocation for twenty twenty two that we think will allow us to meet our growth objectives.

23:10 Okay. I didn't need to put work your mouth as far as gun, so but the intent of the questions really to look at.

So, the capacity that you're putting in and the equipment and all the changes that you're making is really too address demand that is pretty much holding there. This is not, we are going to put in the capacity and that we're going to go out and try and sell it?

That's…

23:35 Correct.

23:38 Okay. All right.

Well, good luck. Thanks.

23:39 Thanks, Neil.

23:50 Thank you all for joining the call. We look forward to speaking to you at our next quarterly call and have a great weekend.

Thank you.