Supremex Inc.

Thank you, [Christine] [Ph]. Good morning, ladies and gentlemen.

My name is Danielle Ste-Marie. I'm an Independent Adviser and act as in an Investor Relations capacity for Supremex.

With us today is Stewart Emerson, President and CEO; and Steven Perreault, Corporate Controller. I would like to welcome you to today's conference call to discuss our financial and operational results for the first quarter ended March 31, 2021, which were released earlier today.

This call will be held in English. [Foreign Language] For a more detailed analysis of our results, please see our financial statements, our management discussion and analysis in our press release disclosed earlier this morning and available on the company's Web site and on SEDAR.

In addition, we posted a presentation supporting this conference call, which is available through the webcast and on our Web site. I would like to remind listeners that this conference call contains forward-looking information within the meaning of applicable Canadian securities laws, and I refer the audience to the forward-looking statements as detailed in the presentation supporting this conference call.

Furthermore, risks and uncertainties are discussed throughout the AIF, dated March 31, 2021, under the Risk Factor heading and updated in our latest MD&A. Unless stated otherwise, all figures are expressed in Canadian dollars.

During this call and on the accompanying presentation, we use various non-IFRS measures, including adjusted EBITDA. These terms are also defined in our MD&A.

With these formalities out of the way, I would like to turn the call over to Stewart Emerson, President and CEO at Supremex, to review this period's key operational highlights. Stewart?

Thank you, Danielle, and welcome everyone. Despite the obvious challenges, the company had a robust 2020, entered 2021 in a strong position, and proceeded to continue to build on that in Q1 with both revenue and profitability growth driven by our diversification strategy.

The pandemic continues to affect a portion of our customer base, however with the geographic and product diversification, combined with the implementation of our cost optimization plan initiated at the end of 2020, we experienced some of our best results in years. Clearly, we would never be able to achieve this without our dedicated teams.

And I'd like to take this opportunity to think them for once again standing up to the challenge and allowing us to successfully navigate this unprecedented situation. As always, our priority remains to safeguard the health and wellbeing of our employees and our community while we service our customers and execute our growth and profitability plan.

First quarter results continue to show the benefits of the three-pronged strategy. The first element of that strategy is to effectively manage the Canadian envelope business and extend our runway as far as possible.

The acquisition of Royal Envelope has proven to be highly accretive, and has allowed us to mitigate the effects of secular decline and the continued effects of lower demand for nonessential mail during the ongoing pandemic. Furthermore, the integration has allowed us to drive operational and cost synergies on the Canadian envelope platform, and freed up needed capacity for continued U.S.

growth. Second, our U.S.

envelope operations continue to do well and gain critical market share. We experienced a small volume decline in the quarter primarily from difficult comparables in the first quarter of last year, when a couple of key statement mailers built inventory as part of their business continuity plans in the wake of the onset of the COVID-19 pandemic.

The U.S. operations are becoming increasingly proficient at using their local manufacturing capabilities, while simultaneously securing high-volume orders to fill available Canadian capacity created by efficiencies in secular decline.

In spite of this, the effects of the stronger Canadian dollar and residual softness in the envelope market in general, I remain confident in our envelope strategy. And finally, our packaging and specialty products activities continue to grow primarily on the strength of our e-commerce offering, with both new and recurring volume, but also from the recent acquisition of Vista Communication Graphics, and from ongoing and steady improvements in our folding carton operations.

The latter's desirable pharmaceutical channel is doing extremely well, compensating for lower demand from certain consumer goods products' customers, primarily in health and beauty. [Again the] [Ph] growth and diversification strategy is also allowing us to generate higher margins.

In the first quarter of 2021, quarter-over-quarter profitability was driven by our Canadian envelope operations, which benefited from the synergies resulting from the Royal acquisition and the recently implemented cost optimization plan, followed by contributions from our growing e-commerce packing offering and the aforementioned strong performance in folding carton. While it affects U.S.

competitiveness and profitability, the strong Canadian dollar provides a benefit in all Canadian operations. Additionally, the support of the [cues] [Ph] which came in at C$0.6 million in Q1, 2021, and the cost control measures strictly implemented in Q1, 2020, and maintained through today also contributed to the strong results.

In aggregate, we believe this significantly extended the runway on the envelop platform thereby protecting its earning power and cash flow generation capacity while we methodically built out the packaging activities to capitalize on changing customer behavior both with e-commerce and in the transition away from single use plastic packaging. To date, our business model has proven to be resilient through this pandemic and our agility has been demonstrated by steady profitability improvements as we navigate this situation.

On the capital allocation front, with the ongoing threat of the pandemic, we continue to pursue conservative approach and maintain the suspension of our quarterly dividend. We have chosen the focus on our NCIB repurchasing 221,900 shares for total consideration of C$473,887 and further keeping net debt at the same level of C$53.7 million despite the C$2.7 million used to acquire Vista during the quarter.

Looking ahead, I expect the Envelop to remain soft for the next few quarters. However, I believe we'll continue to make good progress in the U.S.

with volume trending higher similar to what we have seen in the past few quarters. Finally on the envelop front, we continue to focus efforts on further improving operational efficiencies and leveraging our strong position in the envelop platform.

Summarizing the packaging business, the Vista integration is going very well. And we are awaiting arrival of the new equipment to add much needed capacity in the local market for e-commerce growth.

While the e-commerce offering still has a long sales cycle, our pipeline is strong and prospect conversion will definitely be aided with the new capacity in Indianapolis. Folding carton is performing well.

And we are encouraged by both the addition of some key resources and by ongoing and recurring volume. I would like to now turn the call over to Steven Perreault, our Corporate Controller for a review of financial results.

Steven?

Thank you, Stewart. Good morning, everyone.

Total revenue for the first quarter of 2021 was up 2.3% to C$53.6 million. Revenue from the Envelope segment was down 2.3% or C$0.8 million to C$38.3 million.

Canadian envelope revenue remained stable at C$26.2 million. Volume increased by 1.3% from the acquisition of Royal Envelope in February 2020, which compensated for the effect of the secular decline on the company's legacy as well as the sales and from the continued effects of the COVID-19 pandemic on non-essential envelop demand.

Average selling prices were lowered by 1.5% from last year's comparable period primarily resulting from the changes in the envelop mix. Revenue from the U.S.

envelop market decreased by 6.5% or C$0.8 million to C$12.1 million. The volume of unit sold decreased by 1.4% while average selling prices decreased by 5.2% mainly due to a negative foreign exchange translation effect of 6%.

Packaging and specialty product segment revenue grew by 15.4% or C$2 million to C$15.3 million primarily from new e-commerce customers on-boarded in 2020, growth within the existing accounts, contribution of the acquisition of Vista conclude on March 8, 2021, and folding carton sales from a pharmaceutical customer. First quarter EBITDA increased by 22.1% to C$9.4 million from C$7.7 million.

Adjusted EBITDA grew by 14.5% to C$9.5 million resulting primarily from higher packaging and specialty product sales. Operational efficiencies derived from cost optimization, improvements in folding carton manufacturing activities, and from the support of CEWS.

Adjusted EBITDA margins increased to 17.8% of revenue compared to 15.9% in the equivalent quarter of 2020. Excluding the contribution of CEWS, adjusted EBITDA margin stood at 16.7% of revenue in the first quarter of 2021.

Envelop segment adjusted EBITDA was up 5% to C$7.3 million. The operating profitability of Canadian envelop operation improved with the acquisition Royal Envelop in February 2020, which in addition to higher sales volume provided synergies in production, efficiencies and ship procurement.

On a percentage of segmented revenue adjusted EBITDA from the envelope segment was 19.1%, up from 17.7% in equivalent period of 2020. Packaging and specialty products segment adjusted EBITDA grew by 88.6% to C$2.5 million, primarily from higher e-commerce sales and efficiency gains in the work folding carton division.

Adjusted EBITDA margins from the packaging specialty operations increased to 16.1% compared to 9.9% in the equivalent quarter of 2020. Balance of the variation of the variance is primarily from non-favorable foreign exchange variance in the first quarter of 2021 compared to the equivalent quarter of 2020, which was partially offset by the contribution of the cues.

Q1 2021 net earnings were C$4.1 million or C$0.15 per share, compared with C$2.6 million, or C$0.09 per share for the equivalent period of 2020. Adjusted net earnings were C$4.2 million, or C$0.15 per share compared to C$3.1 million or C$0.11 per share during the first quarter of 2020.

Cash flows related to operating activities decreased to C$4.5 million from a negative net change in working capital adjustments. I would now like to turn the call over the analysts for questions.

Operator?

Hey, good morning, guys.

Hey, Neil.

So, can we just start talking about the envelope segment? So, you've had your acquisition last year.

We've now -- I think left all that growth. Where should we be looking at now with the growth expectations?

Are we going more into the normal secular decline, or is the last year kind of change the dynamics from your distribution partners or your customers?

Great question, Neil, and I wish I had a concrete answer for you. I have my view on it.

The break where the big question is, how much of the decline is in structural and how much of it is secular? I'm very thankful of that.

We think the market is down about 12% from its starting point last year. And [indiscernible] market I'm talking about.

And how much of that is structural versus how much of it is related to the pandemic, we've definitely seen a drop off in sort of non-essential mail or smaller mail, and direct mail obviously, which we expect to rebound when we kind of come out of COVID, which anybody's guess as to when, Q3, Q4. The other question is on the larger volumes, how much of it is structural versus secular?

So, I don't have a real good handle on it, but we expect some of it to bounce back, whether it gets back to sort of traditional secular decline. We don't know.

The good news is we have the U.S. platform and the U.S.

sales team. I actually addressed the U.S.

sales meeting this morning. They're revved up.

They're making good progress in the U.S. We've added a couple of resources.

They know their mandate, which is to increase volume in for the Canadian plants, while keeping their local plants full as well. That's a long answer to a short question, but the reality is, we're off 12% on the Canadian side.

We're making good headway in the U.S. We think we're going to be able to keep the Canadian plants that at high operating levels.

Okay. I'm thinking about Q2, specifically because this would be lapping where we probably saw a lot of de-stocking at your distributors, but is there any kind of like major items like census mailings or that type of thing that we should see in kind of lumpiness and think about over the next, say, three or four quarters versus last year in either market?

So, there was some census business in Q3, Q4 last year, but it was not anything like it was in the prior census years. The census mailings were cut more than in half.

So, I mean it's not as material as it was in prior discussions. We're seeing some good resilience with the distribution channels starting to come back online.

Right from January forward, they've started to come back more to more traditional levels. So that bodes well for us.

The U.S. economy is clearly gaining steam, which is good for us.

The only other one out of the lumpiness from last year would be the vote-by-mail, the business that we did, and I think we disclosed what that was, but it was pushing high six figures so in revenue, clearly won't be there in 2021.

And then I know your packaging segment, because it's not a really commodity type packaging. It's very specialized.

What is the pipeline look for? Because I'm trying to figure out what the lumpiness is going to look like as far as new kind of customers, new contracts that type of things that could come on board.

Can you give us any insight into what the pipeline looks like on that or, and if there's anything on the envelope side that would change?

Yes, so just for clarity, about half of our business is sort of traditional regular packaging, it's, you've been through the plant, I mean it's over the counter pharmaceuticals with the major brands, major consumer packaged good brands. So that business tends to be pretty stable.

Clearly the health and beauty segment took a hit over the last 12 months. But it was offset by some modest growth in on the pharmaceutical side.

So, the other part of the business, you're referring to more the e-commerce business, the lumpiness won't be there, unless you lose a contract. We've made -- we had good growth over the last three quarters partially as Steven said, because we on boarded a couple of major customers midway through Q1 last year.

Pipeline is really good. The challenge is we don't have any capacity at this time.

That's why the Vista Communication Graphics, or Graphic Communications, sorry, acquisition was important to us and the capital project put new capacity in the local market in Indianapolis was so important. So we can't -- right now we can't convert the pipeline because we just haven't had the internal capacity.

The equipment started to arrive this week in Indianapolis. We expected to be fully operational sort of Q3, at which point we can start to turn the dial and convert some of that pipeline.

That's sort of pent up, if you will. I hope that helps.

Yes. And the Vista aspect seems rather interesting as far as getting your actual capacity and ability to grow.

Just for I mean…

I wasn't really. We didn't really talk about this a lot, because it happened in the quarter, but -- it's a small acquisition.

However, it's not an infrastructure; it's got printing process in the location for packaging. It's a packaging converter.

It doesn't convert e-commerce packaging, but the skills and the equipment are very much in line with what we need for the e-commerce business. And by adding another line in there, like we have in Toronto and Montreal, adding a line in the local market, it's turnkey that has everything under one roof.

We think is critical to accelerating the ability to convert customers or convert prospects.

Yes, and I guess within the same kind of conversation there. As we start looking forward, I'm trying to think of ways that you can or you might accelerate the growth of the packaging segment.

And does Vista give you any ideas or capacity to increase kind of the product offering. So maybe another way to ask it, if we look at the products that you offer now, which are all about cardboard, folding carton, the paper, is there anything else that you can sell that would be different from that, but into the same kind of distribution channels to kind of broaden your product offering and be more valuable into some of those customers, or is it really more about tuck-ins and very incremental changes to your products or your solutions?

We're at this stage anyways steadfastly committed paper. We think it's the way to go.

It's the trend in the marketplace as companies are trying to reduce their packaging and use of plastic in their packaging and rightsizing packaging. So we're committed to paper.

The cross-sell opportunity is fairly substantial. We have preferred relationships with some major players, major packaging distribution companies in the U.S.

We happen to have those relationships on the envelope side, but some of our growth in the quarter came from traditional envelope customers that happen to have packaging divisions. So there is a tremendous cross-sell opportunity there.

We just have not had the capacity to be able to leverage that. And that's a big part of the e-commerce pipeline.

And the same with the corrugated business, the folding carton business just what it allows us to do they run one shift and they wanted to run one shift. We obviously have the capability and it's our mantra to run three shifts and spread costs out over a more volume.

So, I don't see us deviating too far in the near future from the product offering that we have today. We still think that there is lots of room for expansion within existing accounts on a cross-sell basis with the existing products.

Okay. Well, I mean, I appreciate what you've done with keeping the costs under control and working on the profitability and the efficiency.

So I've got to give you a lot of credit for that, but we always want to see more growth on the packaging.

Yes.

All right, that's it from me. Thanks.

Thank you, Neil.

Yes. Thank you for taking my call.

Hey.

Can you comment a little bit more about the packaging margins? In the first quarter you had, I believe, about 16.9%.

Do you see that creeping up to the same levels as your envelope margins? What's kind of the long-term target there?

So, the envelope margins are fairly healthy, primarily due to our position in the Canadian envelope market and market share scale, scope kind of competitive profile. Packaging margins have increased steadily as we've done two things, gotten our arms around the operations and providing operational support and efficiencies through the integration process and adding some new equipment.

And the other part is which Neil was referring to was being able to grow the sales to spread the cost out -- the fixed cost out over more volume. So we see it continues.

There is room to continue to improve them when I get the envelope that remains to be seen.

Right. That's a good color there.

And in terms of your acquisition pipeline at the moment, what are you seeing out there? Are you focused primarily on the packaging?

Or are you still kind of open to looking at envelope type acquisitions? Are there any kind of small tuck-in acquisition opportunities left there?

And also related to that what kind of powder do you have left in terms of your liquidity at the moment for large acquisition?

So, never is a long time, but I don't see us doing another envelope acquisition in the near future. We've been pretty clear that the envelope acquisitions in the U.S.

were designed solely to give us broader reach for capacity from Canada. We think our footprint there gives us access to about 60% of huge market of which we only have about 5% market share.

So there's no need to tuck-in another envelope company to give us more reach. It's more about adding the resources, delivering a compelling value proposition and just executing on the value proposition.

On the packaging side, I mean we've stated clearly that our objective is to be 50-50, sorry. Before I leave on envelope, there's really nobody left in Canada that would make sense for us at all.

We've said clearly we expect -- we want to be 50-50 packaging an envelope in the not too distant future the opportunity, but we pursued them to add Royal Envelope last year, which kind of made the delta a little bit tougher to reach, but we're going -- we expect to be able to do the 50-50 split through a combination of organic growth and M&A. We're comfortable with our liquidity, particularly as we continue to generate free cash.

Okay. So and in terms of your CapEx for this year, what are we talking about, is there much left in terms of spending on the Vista acquisition or is that already in budgeted for the current quarter?

The majority of it was committed last year. It's that long lead time on the equipment.

There's no major capital required or expected to be utilized in 2021 more maintenance capital at this time.

Okay. So, given the cash flow generation capacity, are you re-looking at reinstating the dividend at some point or was that -- are you still off the table?

No. As I said in my comments, I mean at this stage we're committed to, we're not through the pandemic yet.

We're committed to returning capital to shareholders through the NCIB and paying down debt.

All right, thank you.

All right, thank you.

Great. Thank you very much for your questions.

In summary, the wellbeing of our employees and servicing our customers at an extremely high level remains our number one priority. We're focused on optimizing operations, particularly on the envelope platform and continuing to extract synergies out of the Royal acquisition.

Simultaneously on the packaging side, we're focusing on optimizing Vista Graphic Communications and preparing it for new e-commerce capacity while working on the sales side to further grow both folding carton and e-commerce offerings by capitalizing on the industry trends. I believe our strong results over the last four quarters in the middle of an unforeseen crisis demonstrate the resiliency and fundamentals of our business model and the benefits of our diversification strategy.

We will continue to cautiously allocate capital, prioritizing debt reimbursement and when possible purchasing shares. Our long-term strategy remains the same, maximize the cash flow generation from envelope operations while further growing our packaging business in Canada and the U.S.

Our ultimate goal remains to achieve a 50-50 revenue split between envelope and packaging. This completes my closing results.

I look forward to our AGM on May 20 and appreciate you tuning in. Have a great day.