Supremex Inc.

Thank you, operator. Good morning, ladies and gentlemen, and thank you for joining us for Supremex' Fourth Quarter and Year-end Conference Call.

My name is Jennifer McCaughey from MaisonBrison Communications, an 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.

Following their comments, we will open the call for questions. For a 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 posted a presentation supporting this conference call, which is available through the webcast and on our website. I would like to remind listeners that this conference call contains forward-looking information within the meaning of applicable Canadian securities laws.

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 31, 2021, under the heading Risk Factors and updated in our latest MD&A.

During this call and in the presentation, we use various non-IFRS measures, including, but not limited to, EBITDA, adjusted EBITDA, adjusted net earnings, adjusted earnings per share and free cash flow. These terms are defined in our MD&A.

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

Thank you, Jennifer, and welcome, everyone. I'm extremely pleased with our Q4 and full year 2021 results.

We finished the year on a very strong note with our top line reaching a record level of $226 million. 2021 revenue was up over 10%, net earnings more than doubled to $15.7 million or $0.58 per share.

Moreover, Q4 was the eighth consecutive quarter of year-over-year improvement in adjusted EBITDA. Impressively, all lines of business contributed to this improved performance.

Packaging segment revenues increased in excess of 19% in 2021 and it now represents over 30% of total revenues. Strikingly, our Envelope segment, which has long been a concern of the business and investors alike, increased 7% year-over-year, primarily on the backs of U.S.

envelope growth and a supply chain that held up remarkably well and afforded us some customer penetration opportunities. Holistically, our strong supply chain and dedicated workforce were instrumental in the quarter, and the local management teams continue to do an exceptional job on both fronts.

Our objective has been to build the business for the long term. The 2021 performance clearly demonstrates that we are reaping the benefits of the foundational work laid over the past few years, including the strategic plan and important capital projects.

Let me provide a brief update on operations and current activities. First, the Vista Graphic Communications integration.

The new equipment is now fully operational and fully manned. This takes some pressure off our Canadian operations and provides needed capacity and capabilities for the e-commerce team in the U.S.

market. Second, the team continues to work diligently on the planning of the move of the folding carton plant in the Town of Mount Royal to an alternative location in the Greater Montreal region.

We initially believed that we would be able to avoid this in 2022, but it is not to be. Move is expected to be completed at the end of Q2 or the beginning of Q3, which is traditionally the slower summer season.

We anticipate that redundancy built into the system should keep disruptions to a minimum, but if it's important that we get it right. Finally, a few weeks ago, we concluded the acquisition of the manufacturing assets and inventory of Niagara Envelope, a very, very small regional manufacturer based in Niagara Falls, New York.

This tuck-in acquisition allows us to provide additional volume and support to a couple of large long-term customers in the Western New York market. In summary, I'm super pleased with the quarter and how we ended the year.

The future looks promising on many fronts. With that, I'd like to now turn the call over to Mary for a review of the Q4 financial results.

Mary?

Thank you, Stewart. Good morning, everyone.

Turning to Slide 44 of our Q4 top line review. Total revenue was up 21.2% to $66.2 million from $54.6 million last year.

Revenue from the Envelope segment was up 15.3% to $46.7 million. Canadian envelope revenue decreased by 2.8% to $26.7 million.

The volume of units declined by 12.6% due, in part, to timing as capacity was allocated to service new business opportunities in the U.S. In addition, the long-term secular decline continues to affect the envelope market.

This was partially offset by the increase in average selling price, which rose 11.2% from last year's comparable period, primarily resulting from price increases swiftly implemented to reflect rising input cost inflation and some changes in the product mix. Revenue from our U.S.

envelope activities increased by 53.5% to $19.9 million. The volume of units sold increased by 53.7% from efforts dedicated to increase penetration of 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. The company's strong supply chain and dedicated workforce also played in its favor.

Packaging and specialty products segment, revenue grew by 38% to $19.6 million, primarily from the acquisition of Vista coupled with organic growth across our lines of business. Consolidated EBITDA more than doubled to $10.1 million in the fourth quarter of 2021.

Consolidated adjusted EBITDA increased by 32.7% to $12.2 million from $9.2 million in the fourth quarter of 2020 and represents the eighth consecutive quarter of year-over-year improvement. This increase resulted from higher revenue in both segments driven by increased volume, sales prices and operational efficiencies derived from the cost optimization plan.

It was partially offset by the higher cost of materials and the winding down of the CEWS and CERS programs. Adjusted EBITDA margins increased 18.5% compared to 16.9% in the equivalent quarter of 2020.

Envelope segment adjusted EBITDA was up 12.8% to $8 million. This increase was primarily due to higher revenues, driven by increased volume, sales prices and operational efficiencies derived from the cost optimization plan.

Adjusted EBITDA margin was 17.1%, down from 17.5% in equivalent period of 2020. Packaging and specialty products segment's adjusted EBITDA was $6.2 million, up 166.8% or $3.9 million from the $2.3 million in the fourth quarter last year.

The significant increase is mainly explained by higher revenue driven by increased volume and sales prices. The contribution of the Vista acquisition and a favorable product mix.

Adjusted EBITDA margin was 31.7% compared to 16.4% in the equivalent period of 2020. In the fourth quarter of 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.

Net earnings were $4.9 million or $0.18 per share for Q1 2021 compared to $300,000 or $0.01 per share for the equivalent period last year. Adjusted net earnings increased to $6.4 million or $0.24 per share compared with $3.7 million or $0.13 per share for the equivalent period in 2020.

Turning to cash flow and capital deployment on Slide 47. Cash flow related to operating activities increased to $13.8 million in the fourth quarter from $11 million in Q4 of 2020, mainly due to higher profitability, partially offset by unfavorable movements in working capital.

For the full year, cash flow from operations decreased to $30 million from $37 million, primarily due to unfavorable movements in working capital, particularly in accounts receivable and inventories, partially offset by higher profitability. Similarly, free cash flow increased to $12.3 million in the fourth quarter compared to $10.1 million for the same period last year.

For the full year, free cash flow decreased to $26.1 million versus $34.4 million, mainly attributable to lower cash flow related to operating activities and higher CapEx. In the quarter, we used our cash primarily to invest in CapEx for $1.1 million and repurchased shares for $1 million, as you can observe on Slide 48.

For the year, we used our cash to make acquisitions for $2.8 million, invest in CapEx for $3.4 million, buyback shares were $3.3 million and paid down $10 million of debt. More specifically, during the fourth quarter, the company purchased 406,900 common shares for cancellation under its current and prior NCIB program for a total consideration of $1 million.

In 2021, the company purchased 1.4 million common shares for a total consideration of $3.3 million. Subsequent to the end of the period, an additional 59,000 shares were purchased for cancellation for a total consideration of $171,419.

Now a brief update on the dividend. On January 5, 2022, the Board of Directors declared a dividend of $0.25 per common share payable on February 15 to the shareholders of record at the close of business on January 31.

On January 6, 2022, we announced the reinstatement of the company's quarterly dividend after having suspended them in the early months of the pandemic. In line with this, yesterday, the Board declared a dividend of $0.25 per common share payable on April 8, 2022, to shareholders of record at the close of business on March 24, 2022.

Turning to the balance sheet on Slide 49. We ended the year in a solid financial position.

Total debt stood at $44.5 million, down from $56.8 million at the end of Q4, despite -- 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 2020.

In addition, we had over $70 million in available liquidity to pursue our growth objectives. I will now turn the call back to Stewart for the outlook.

Stewart?

Great. Thanks, Mary.

Looking ahead, the long-term outlook continues to be very good. We continue to maintain a very strong position in Canadian envelope.

We have built the capabilities and brand in packaging and U.S. envelope.

The fundamentals are good, and we have capacity in our packaging businesses. However, it is important to point out that in the short term, we must still contend with the lingering effects of the pandemic on our activities and on the global economic landscape.

The 3 primary concerns are persistent and growing supply chain issues, primarily with paper procurement in the envelope business forecasted to last into 2023. The sustainability of demand, in other words, how long does the demand continue to outpace supply.

And third, inflation, which has the effect of rapidly escalating costs across the board. Our ability to procure sufficient paper is the most pressing issue.

We are bumping up against some of the very issues that our competitors had in Q4, but just a few months later. As I said, our supply chain held up better than most, but we are unable to escape it forever.

We are feeling the pain in Q1 almost exclusively on the envelope side, and we believe it will be increasingly challenging to procure sufficient paper in the first half of the year. This is a North America-wide, if not worldwide issue, and certainly not limited to envelope and packaging and has put significant stress on buyers and sellers alike.

The inability to secure enough paper has forced us to reduce orders, extend lead times and, in some cases, cancel orders altogether for existing customers. And it has certainly created many missed sales opportunities.

We are being as judicious with paper allocation as possible and are having to make some hard choices as we triage orders. To be candid, we expect to get lower utilization rates for the next several months.

A playbook doesn't exist, and we're working hard to mitigate the impact on revenue, earnings and employees, especially in light of tight labor markets. The Niagara Envelope acquisition recently completed will offer modest mitigation in the short term but very modestly.

We've been communicating with customers on a regular basis, and we are prioritizing along the lines of pre-committed bills, statements and other essential mail first, long-standing committed volumes second. And if we have a window, we're fitting in jobs based on other contractual commitments.

It's frustrating. We took care of our workforce through COVID, and they rewarded us in Q4 with overtime and high levels of productivity.

We've done everything right as a company on the supply chain side and respecting our long-term relationships with suppliers. And opportunities abound primarily because others reach this situation before us and the good work we've done over time, yet we're looking at a paper shortfall over the next few months.

However, there's a silver line in both near term and long term. That is as the paper mills are signaling that they will be more selective with who they sell to, and we believe Supremex will be at the top of almost all of the list as mills reset their customer bases over the coming quarters.

In the meantime, we're working through it and all customers are enduring longer than normal lead times and having certain forms put on hold until we have better visibility. In an effort to mitigate all of these effects, we continue to tightly control our operating expenses and use working capital prudently.

Despite the aforementioned challenges, we do have many positives. Our packaging backlogs are extremely strong, and we have enough paper to hit previous revenue levels.

We continue to be able to pass on price increases and improved margins, and we have a strong team and a diversified product offering. With all of that, and in summary, overall, we anticipate revenue to increase further in 2022 and our profitability to remain strong, particularly in the back half of the year as we believe the supply chain challenges will persist in the first half.

Priorities for 2022 include managing our paper procurement issues, execute the TMR plant move in Q2 with minimal disruptions, continue to focus on operational efficiencies and accelerate the search for strategic acquisitions in packaging. In terms of capital deployment for 2022, we expect to pay quarterly dividends, continue to buy back shares in line with our NCIB and look forward to accretive acquisitions in line with past practices.

Our long-term strategy remains intact, leverage our Canadian envelop position, use excess Canadian envelope capacity and know-how to capitalize on the U.S. opportunity and maximize the cash flow to fund the pivot to packaging.

Recall that our target is to generate 50% of our revenue from the packaging segment by 2025, and our 2021 revenues in packaging are over 30% of consolidated revenues. To accelerate this shift, we are intensifying our search for strategic acquisitions.

Even our scale in the envelope segment and a significantly improved packaging platform and our strong financial position, we're well positioned to execute on the growth strategy. This concludes our prepared remarks, and we will now be pleased to answer any questions you may have.

Well, congratulations, guys. That was a very, very good quarter.

Just wondering, obviously, the U.S. envelope business, a big surprise on how strong that growth was.

You talked about some of the growth drivers. Is there any kind of like onetime inventory issues that boosted that number up artificially?

Or is this kind of like the new level because you've been gaining market share?

It's the latter, Neil. We've -- there's been -- we don't carry a lot of inventory for U.S.

sales. It's basically make and ship products.

So we were able to take advantage of the strong supply chain where maybe some of our competitors couldn't. And the team has done a really good job of avoiding sort of a one-hit wonders and locking up more program work but have more legs to them and a little stickier.

So we think we're in good shape to continue the growth in 2022.

Okay. That's good to hear.

On the packaging side, I mean, you talked about some of the supply constraints that you're seeing on the envelope piece, but it's not hitting your corrugate. Everything on the packaging side is better positioned for growth.

Is that correct?

Yes. So in Q3 and in my remarks, I mean it's tight on the paper side in packaging, but it's manageable, and we have enough paper to maintain the revenue that we have.

It's -- the challenge is getting more paper to increase revenues materially. So it's tight, but we've got enough.

On the paper side and on the...

And the paper side and packaging.

And so -- okay, and type of constraints or you're well positioned to deal with all of them. So as we look at -- you've got that little tuck-in acquisition in Niagara.

Are there other -- the big emphasis obviously has to be on growing the packaging side. But on U.S.

envelope, considering how well you're doing, is -- are the paper supply issues going to be hitting a lot of other kind of potential tuck-in acquisitions that you can take advantage of to further consolidate in the U.S. market, do you think?

Well, yes, on the envelope side, for sure. And just the Niagara acquisition was very small.

It's -- we're really going to dedicate all of its capacity to 2 customers that we have super relationships with and want us to take on more. But one of the conditions of the acquisition was to validate the paper supply chain for them, which they have enough paper to get them through June, actually, but it's small.

So when we look at acquisitions, I mean their supply chain, the quality and security of their supply chain is an important consideration. So yes, it will be a key part of due diligence in anything we look at.

Well, I'm also thinking about the fact that you seem to be better positioned in perhaps a lot of your other competitors, specifically, I guess, maybe in the U.S. market that you can really leverage that to add more value to people that have been thinking about selling.

Yes. Sorry, I missed that part of it, Neil.

It's really true. I mean the mills, it's been a buyer's market in paper for 2 decades, and it's now supply and demand are out of balance the other way.

And the mills are really indicating that they're going to be more selective as they come out of this. And I really think Supremex is a destination customer for most of those mills, geographic proximity, just the way we give them the visibility and the way we live it up to our commitments over time.

So yes, we will come out of it, I think, faster than a number of other suppliers or a number of other manufacturers and will create more opportunity for us.

Okay. It also sounds -- I mean, you're always very, I guess, cautiously optimistic about your opportunities.

On the packaging side, in addition to acquisitions that we hope you do, are you seeing a lot of opportunities in the pipeline for organic growth on major projects or programs that you've been advancing specifically on the packaging?

So yes, I mean, the packaging business grew in the 20% range last year. Some of it was M&A, but a fair bit of it was organic growth.

And I talked about frustration on the envelope side that we could do more if we had more paper. The packaging side is essentially the same way.

We've got good products, niche products, got IT, calling value proposition. With Vista, we've added more capacity.

Folding carton, we have more capacity. But getting more paper to drive 20% more growth is -- right now, it's a challenge on the packaging side.

So I am cautious. I'm confident in our ability to replicate the revenue.

I just want to caution on can we deliver double-digit growth again in 2022 based on paper availability.

I wasn't going to ask if you could grow 20% or 25% next year, but if you want to answer that.

That's okay.

Just on the move that you have to do in TMR and that, what kind of onetime costs do you have baked into the plan for this year and which quarters would we have them in, you know that?

So there will be some onetime expenses coming up. They will occur primarily in Q1 and Q2 with a little bit trickling in into Q3.

So they've all been baked into our plan and to the outlook that Stewart has provided.

Can you quantify an amount over the entire period?

It's still under current review. So it's something that we can possibly take offline and discuss further at a later stage.

Okay. Just on the positioning, we're seeing, I mean, more and more, both retail and institutional investors are very much focused on sustainable investing, ESG issues.

How do you think Supremex as a whole is positioned? And is this being discussed maybe at management at the Board level about how you guys deal with it, both internally and to your clients?

So Neil, we're actually doing quite a bit with our clients already on the ESG front. But we do agree that ESG is an increasingly important topic, and it is a priority for the organization.

So the organization is planning on doing more on this front in 2022.

Okay. And just lastly, I mean, I think I already have a handle on it, but do you have any specific, I guess, maybe order of priorities on the capital, the cash flow that you've got between the dividends, NCIB, CapEx and acquisitions?

Is it going to be very opportunistic? Or do you have specific weightings between those kind of 4 elements.

So we've -- we're comfortable with the dividend, and Mary talked about the share buyback that is through August this year. So we're comfortable there.

We've paid down a lot of debt in 2021. Our leverage is extremely low.

And my -- I mandate in my statement was pretty clear that we're ramping up our M&A activity, have a fairly robust pipeline, nothing imminent today, but certainly, a fair bit of activity. That helps?

Okay. Great.

Well. I just want to see if there's anything I missed.

Okay. Congratulations again on the great quarter.

Great. Thanks very much, Neil, for your questions.

I just want to take this opportunity to thank our leadership team and the employees for delivering the outstanding results in Q4 and 2021 in aggregate and through some very turbulent times. They work hard and smart.

They've been dedicated and focused, and I'm deeply appreciative of their support. Thank you for joining us on the call.

We look forward to speaking to you again after our next quarter. Thank you.