Supremex Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Supreme X Fourth Quarter 2024 earnings conference call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question and answer session. To join the question queue, you may press star then one under telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star then zero. Before turning the meeting over to management, please be advised that this conference call will contain certain statements that are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. I would like to remind everyone that this conference call is being recorded on Thursday, February 20, 2025. I will now turn the call over to Martin Goulet of NBC Capital Markets Advisors. Please go ahead.

Thank you, operator. Good morning, ladies and gentlemen. Thank you for joining this discussion of Supreme X's financial and operating results for Fourth Quarter and Fiscal Year end of December 31, 2024. The press release reporting these results was published earlier this morning, and it can also be found in the Investors section of the company's website at .supremex.com along with the MDNA and financial statements. These documents are available on C plus as well. A presentation supporting this conference call has also been posted on the website. Let me remind you that all figures expressed on today's call are in Canadian dollars unless otherwise stated. Presenting today will be Stuart Emerson, President and Chief Executive Officer, as well as Francois Bolduc, Chief Financial Officer. With that, I invite you to turn to slide 38 of the presentation for an overview of the Third Quarter and out of the Fourth Quarter, sorry. And I

turn the call over to Stuart. Hey, thank you, Martin. And good morning, everyone. I will apologize in advance for any background noise you might hear directly above our heads. Out of an abundance of caution, we have a firm cleaning the snow off the roof after the storms over the weekend in Montreal, and they happen to be right over our heads at this point. Apologize in advance. So getting into it, Supremex concluded 2024 with a solid Fourth Quarter financial results. Our envelope volume was up year over year for the Third Consecutive Quarter, while our core packaging business continued to recover. Both adjusted EBITDA margins in both segments improved significantly in terms of margins and absolute dollars. These important gains were driven by optimization initiatives put in place over the past year that had a positive impact on operations, procurement, and productivity. This progress reflects the ongoing efforts of our teams throughout the organization. While there is still room for further improvement, I would be remiss if I didn't take this opportunity to thank our employees for their belief in the plan, passion, and steadfast commitment to continuous improvement. First, let's look at the envelope business. Revenue was down .5% in the quarter on a year over year basis as lower average selling prices outweighed slight volume gains. Volume gains reflect our U.S. activities where market conditions continually to gradually recover and our sales teams successfully push for additional business. A portion of the volume increase can also be attributed to the tucking acquisition of Forest Envelope last May, now fully integrated in our Chicago operations. In Canada, units sold were tempered with the Canada Post labour disruption in November-December, but despite that disruption and uncertainty, CAD volumes were in line with traditional secular decline. Frankly, manufacturing and selling more units in the quarter was a remarkable feat given the major undertaking associated with the consolidation in the Greater Toronto Area, where three of our largest facilities underwent an overhaul as we consolidated from three plants to two. As part of the consolidation, a total of 21 pieces of envelope manufacturing and printing equipment were moved and another 20 were decommissioned. The team charged with the project did a remarkable job and the employees in the affected facilities are to be commended for staying focused on producing high quality envelopes cost-effectively and safely. I'm pleased to confirm that the last pieces of equipment have moved as planned and that we will exit the Concord facility next week on time and on budget. With the lease expiring at the end of February, we will have recurring rent savings going forward and the business will be the beneficiary of a more efficient operating network and we have already started to reap noticeable productivity gains while higher volume in remaining installations improves absorption over a lower cost base. As I said last quarter and several times over the last 10 years, we are fortunate to have a deep and talented envelope team. Now that all measures are firmly in place, we should fully achieve the expected annual cost savings run rate of more than $2 million going forward. With respect to selling price, pressures were anticipated given the combination of our mixed evolution between Canadian and U.S. markets and U.S. manufacturers giving back a portion of the gains made in 2022 and early 2023 when supply was constrained. During the last call, I called out a stronger backlog and this remains the case in early 2025 and we expect to deliver these orders with better margins. Supporting this statement and despite the Toronto consolidation distraction and disruption impacting Q4, envelope adjusted EBITDA margin reached .8% which was 160 basis points improvement over Q4 last year and also up sequentially more than 2 percentage points. We have yet to fully harvest the benefits from the optimization efforts and consequently believe there is room for further improvement. Turning to packaging, while revenue was lower, the shortfall was primarily connected to the Q4 2023 restructuring of the specialty products business following the closure of a facility outside of Montreal which narrowed the focus of the business and materially reduced costs. We do not talk a lot about volume and average selling price in the packaging segment. While units sold were down over 50% in the quarter, average selling price was up in excess of 200% and the segment margins improved. We have focused the business on lower touch, higher value activities and reduced our costs appropriately. Sometimes less is more. Outside of the restructuring dynamics, our core markets continue to rebound with solid demand from e-commerce fulfillment packaging activities and improvements in channels more closely related to discretionary consumer spending. In fact, we recorded our first -over-year folding carton revenue growth in several quarters which can be attributed to new business wins, recovery of the health and beauty channel, and a build out of our sales organization. Margins continue to gain momentum reflecting the initiatives undertaken in the aforementioned restructuring in late 2023 to improve operating efficiencies and achieve synergies, focus on more value added products and the work done to improve absorption. As indicated last quarter, we've gone back to a more traditional small business structure in the last quarter, we've added a new packaging of general managers in each line of business to be entrepreneurial and focused on driving their individual businesses to greater performance. We added a new general manager in folding carton in late 2023, increased our sales presence and profile and have upgraded talents in all of our businesses over 2024. With most cost-related initiatives in place, we focus our efforts on building volume. We are re-engaging with customers that may have left or reduced their spending with us, are knocking on new doors and getting new wins and leveraging narrow focus, improved talents, and a better cost structure to drive volume. And with better absorption, we'll be able to deliver the growth at improved margins. With that, I turn the call over to Francois for review of the financial results.

Thank you, Stuart. Good morning, everyone. Please turn to slide 39 of the presentation. Q4 total revenue amounted to $69.1 million compared to $72.3 million last year. The envelope revenue was $48.8 million versus $50.6 million last year. The variation reflects a 4% decrease in average selling price, mainly due to a less favorable customer and product mix between the U.S. and Canada. The volume increased by half a percent, driven by a greater increase in the U.S. and Canada. The overall revenue represents in the U.S. including the contribution of forest envelope acquired last May. Packaging and specialty products revenue was $20.3 million versus $21.7 million last year. The decrease is mostly due to a lower revenue, partially offset by higher demand from e-commerce related to packaging solutions. Meanwhile, demand from certain sectors more closely correlated to economic conditions was relatively low compared to last year. Moving on to slide 40, adjusted total $12.9 million or .7% of sales compared to $9 million or .4% of sales a year ago. As Stuart mentioned, we are pleased to report margin improvement in our two business segments. Envelope adjusted reached $9.2 million or $18.8 million of sales versus $8.7 million or .2% of sales last year. The year over year increase reflects benefits from optimization measures announced last July as well as procurement optimization initiatives. Packaging and specialty products adjusted at the lowest $2.4 million or .6% of sales compared to $1.4 million or .1% of sales last year. The increase is mostly due to positive effect of optimization initiatives announced late in 2023 and the procurement optimization initiatives. Finally, we had a corporate and unallocated recovery of $1.4 million as opposed to a cost of $1 million last year. The year over year variation is mainly due to a foreign exchange gained to revaluation of foreign trade receivables and a favorable adjustment of the DSU and PSU reflecting different price share valuations this year compared to last. Turning on to slide 41, as a result of higher EBITDA, net earnings amounted to $5.8 million or 23 cents per share versus $0.7 million or 3 cents per share last year. Adjusted net earnings were $5.2 million or 20 cents per share versus $2.2 million or 9 cents per share a year ago. Moving on to slide 42, our net cash flows from operating activities totaled $9.2 million compared to $14.8 million last year. The reduction reflects working capital requirements this year as opposed to a release last year when we were coming off the high inventory levels partially offset by higher profitability. We are continuing to proactively manage inventory and improve working capital. For the same reasons, free cash flow was $8.7 million versus $15.1 million last year, we concluded 2024 with free cash flows of $31.7 million or $1.29 per share. This represents a free yield of 36% given the recent share price. Turning to slide 43, our net debt stood at $41.2 million as of December 31, 2024, down more than $5 million in the past three months and more than $14 million over the course of the year. Our ratio of net debt to adjusted EBITDA improved to 1X versus 1.3X at the end of the previous quarter, well within our comfort zone of keeping it below 2X. At the end of the quarter, we had more than $77 million in available liquidity under a senior secure revolving credit facility, leaving us with the flexibility to finance our operations and future investments. Finally, the board of directors declared a dividend, a quarterly dividend of $0.05 per common share payable on April 4th to shareholders of records at the close of business on March 20th. With this, I will turn it back to Stuart for the outlook. Stuart?

Great, thank you Francois. As we begin the new year, the logical first question to ask ourselves is, are we in a better position than we were a year ago? The answer is a resounding yes. Our fourth quarter results are evidence of our progress and we believe there is still more to come. As we diligently work on achieving all cost savings and efficiency gains while sustaining our efforts to generate additional revenue, we continue to methodically build the business for the long term and set Supreme X up for continued success. Driven by strong sales teams and high quality assets, both our envelope and packaging operations are well positioned in their respective fields. In envelopes, our backlogs remain improved. We continue to gain traction in the vast U.S. market and our Canadian operations are even more efficient as a result of the Toronto project. In packaging, operations are restructured and led by new hands-on management focused on driving cost efficiency and sales growth while outside business fundamentals improve. We have a strong balance sheet that will further strengthen once we realize the plan sale and success. We continue to progress on this front but will only transact if it is in the best interest of shareholders. In closing, after spending the last few quarters launching and driving initiatives to improve the productivity, efficiency and competitiveness of the two businesses, we are now focused on execution and we are confident in our ability to leverage the spade work over the coming quarters. We have talented teams that remain motivated to achieve and surpass our lofty objectives and I thank them for their unwavering dedication and support. This concludes our prepared remarks. We are now ready to answer your questions.

We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. The first question comes from Max Ingram with Kanakor Genuity. Please go ahead.

Hey, thanks for taking my questions. Congrats on the quarter. The first question for me was I was hoping to get more color on the impact of the Canada post strike. Any impact it had on the quarter and maybe any quantum you could put around the impact would be helpful.

Hi, Max. It's Stuart. Thank you for your question. The Canada post question is a little bit different. The reality in the Canadian market is most of the mail is bills and statements and those statements have to be delivered or have to be prepared and eventually delivered. What major mailers do is they continue to prepare the mail and they just don't induct it into Canada post. Once the disruption is over, they induct a backlog because there are lots of trucks, double the amount of trucks showing up at the depots. There is no real impact in the short term. It's complete speculation on what it does to longer term demand destruction if customers switch. In that short one month period, it doesn't affect us at all. If our market was a big direct mail market, which it's not, you would see mailers holding off and not mailing. That's not the dynamic in the Canadian market.

Okay. That's helpful. Thanks. Then a second related question this might be too early to gauge, but any color you could give would be helpful on the postage increase that went into effect January and how maybe some of the conversations you're having, anything we should be thinking about moving forward?

Yeah, I think there's something we need to be careful of on so the press grabs postage increases and they always talk about the price of a stamp or a coil of stamp or a book of stamps and the reality is we don't make our living on people that are putting stamps on envelopes. The impact of the price increases the major mailers, it's not directly correlated to the increase in the price of stamps. They negotiate different pricing with Canada Post and get different discounts based on the mail preparation work they do, sorting it into postal codes and things like that. We just need to be careful that we're not reading the headline and assuming that PD Bank has got a 25% increase in their postage costs. It's significantly less than that for major mail users. They negotiate directly with Canada Post and get volume

discounts. Right, okay that's helpful. Then just one last one if I can sneak one in and you touched on it a bit in the release, but can you help us think about how we should, when we think about potential tariff impacts, I know it's difficult to put a fine point on this, but I'm compelled to ask and just get your thoughts on it.

Sorry Max, you're only allowed two questions. Put me back in the queue. Sorry for my bad attempt at humor. Yeah, so I mean tariffs is a big question, a lot of work's been done on it. I mean there's certainly a lot of unknowns at this point and I think both countries understand that there's negative impacts on both sides of the border if there's a protracted trade dispute. So we believe cooler heads will prevail, but while we're hopeful on the situation that it'll be resolved by March 1st or shortly thereafter, we continue to do what we can to mitigate any potential impact. I think right out of the gate we should make it clear that from a Supreme X standpoint, cross border really only affects the envelope business materially. There's a little bit on the packaging side, but you could take a third of our business and just say there's virtually no impact. I don't really want to provide a lot of detail, but sort of in anticipation of the question, got a sort of few points. On the raw material side, particularly paper and window film, based on what was originally announced, we feel we can flex the supply chain where there's almost zero impact on raw materials. On the finished goods side, we can leave it at there's not a lot of finished goods currently in the racks in Canada that will eventually find their way to the U.S. and that our warehouses in the U.S. are pretty adequately stocked. I got a bit of a war chest there. From a manufacturing standpoint, there is a symbiotic relationship as you know between the envelope plants and the U.S. sales team. There's only so much of the Canadian made volume that can be produced in our U.S. plants, but we've taken several steps to ramp up the production in the U.S. if that's required. We meet almost daily to assess our preparedness and strategize on other meaningful opportunities to mitigate any potential risk. That said, we're as much in the dark as anybody else in terms of potential implementation and duration. With so little information, we're not comfortable speculating or quantifying any potential impacts on the tariff side, but we've done a lot of preparation work and think we've mitigated what we can, but we continue to look at it. I know that's a non-answer in terms of quantifying, but we've done a lot of work and we won't have to push a lot of stock across the border over the next few months.

Okay, appreciate it. That's a ton of great color. Thanks again and congrats on the quarter.

Thank you, Max.

The next question comes from Benangelo Volpe with Beacon Securities. Please go ahead.

Hey, good morning guys. You shouldn't have let Max ask the third question. He kind of took mine, but congratulations on the results nonetheless. So just looking at EBITDA margin improvement, I was kind of wondering if there are any additional factors outside of the optimization efforts leading to these improvements and if we can kind of expect these margins to hold in line with this range.

Yeah, so that's a very good question. But Max, we had three questions and Max brought them all up, so we're good. No, no. So seriously, based on the comments that we had earlier, our mix is definitely helping us. Like Stuart was talking about, when you're comparing quarters to quarters, the packaging segment got better and that will continue to improve for sure based on the different changes we've made, which is 2023 we had the reorg that we've done. And then also Stuart alluded in the comments about the packaging, the facility closing that we had northeast of Montreal. So that has also an impact on the, obviously on the sales because we had lower sales, but on the profitability as well with lower margins. So I would say the trend is good. We're coming back. We did have a couple initiatives that are paying off in the quarter, and that may not repeat, but nothing significant. We continue to focus on delivering month after month profitability in line with what we've been doing in the past month. So yeah, it'll continue to be improving over the next quarters.

Okay, great. Thanks for the comment on that. And then just moving over to cash flow, it's seeing continued strong free cash flow generation. Just wanted to look at in terms of capital allocation, is the focus going to remain on paying down debt and potential M&A on the packaging side? And if you're looking at M&A on the packaging side, can you discuss kind of the pipeline of opportunities that you guys are seeing there, whether it be geographically or size and fit?

Yes, that's a good question. So from a capital allocation standpoint, I mean, obviously, like we've expressed in the previous quarters, we were really focused on getting our the operations organized and focusing on the packaging and getting this back on track with different reorgs we've done. Project North America was another big initiative for us to focus on. But in the meantime, we're constantly looking at the best options, whether it's NCIP or, you know, acquisitions. So we're going to continue to look at that in the next few months. And yeah, and then pay down the debt like we've been doing. So yeah, these options are all there and we constantly reassess based on what's going on. And from an M&A standpoint, that, you know, we constantly look and there are opportunities in both segments of our business that are available for us.

Okay, great. Thanks for answering my question, guys. And once again, congratulations on a strong result. I'll hop back into the queue.

Thank you. Thanks, Daniel.

This concludes the question and answer session. I would like to turn the conference back over to Stuart Emerson for any closing remarks.

Great. Thank you, operator. And thank you all for joining us this morning. We look forward to speaking to you again in our next quarter call in May. Stay warm, stay safe, and we'll talk to you soon. Bye-bye.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.