Intertape Polymer Group Inc.
Q1 2021 Earnings Call Transcript

Published: 12 May 2021

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to Intertape Polymer Group's Q1 2021 Conference Call. During the call all participants will be in a listen only mode. Afterwords we will conduct a question-and-answer session. In order to maximize the efficiency of this event, the question period will be open to financial professionals only . Joining me from the company, I have Intertape Polymer Group's Chief Executive Officer, Greg Yull; and Chief Financial Officer, Jeff Crystal. I would like to caution all participants that in response to your questions and in our prepared remarks today, we will be making forward-looking statements, which reflects management's beliefs and assumptions regarding future events based on information available today. You are cautioned to not place undue reliance on these forward-looking statements as they are not a guarantee of future performance and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expected. Please see Slide 2 titled Safe Harbor Statement for a further discussion. During this call, we may also be referring to certain non-GAAP financial measures as defined under the SEC rules. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available at our Web site at www.itape.com. Please note that all dollar amounts are in US dollars, unless otherwise noted. I would like to remind everyone that this conference is being recorded, today, May 12, 2021, at
Greg Yull:

Thank you and good morning everyone. Welcome to IPG's 2021 first quarter conference call. Joining me is Jeff Crystal, our CFO. During the call, we will make reference to our earnings presentation that you can download from the Investor Relations section of our Web site. We've continued to experience strong demand through the course of the first quarter and into the second quarter. This is a continuation of the demand trend we've seen since last June and through the back half of 2020. This demand together with rising price environment, which I'll address in a moment, set the stage for another strong quarter for us. Revenue was up 24% to $346 million. Adjusted EBITDA was up 59% to $60 million. And despite the inflationary input price environment, we maintained an adjusted EBITDA margin of 17.4%, which is nearly up 400 basis point improvement from the same period last year. Our business is structurally different than it was five years ago. We deployed CapEx in 2017 and 2018 in our highest growth categories, which is now driving accretive growth. Our growth in e-commerce fulfillment market has diversified our business and provided us access to a high growth market where we are growing with customers around the globe. We made strategic acquisitions that strengthened our product bundle, providing consolidation opportunities and offering the ability to vertically integrate our supply chain to capture value from multiple points. We improved our capital structure and prioritize debt repayment to the point where our total leverage ratio is now 2.3 times. These initiatives have improved both our margin and free cash flow profile significantly. To the point where our outlook for 2021 for free cash flow is $80 million to $100 million at the same time as we're investing $100 million in CapEx, which is very different than 2017 and 2018 where free cash flow was $6.8 million and $15 million respectively with less CapEx. We are executing across the business. Our employees have managed through the pandemic with a focus on health and safety, respecting one another and looking to return home at the end of the day the same way they arrived healthy and safe. The job they've done since last March has been just tremendous, producing essential goods that support the needs of our customers and end users through the course of the pandemic. The plants continue to operate effectively and efficiently and the commitment of our supply chain team, our sales team and our customer support team has been outstanding through this challenging period. We saw growth across every major product category in Q1 compared to the same period last year. This growth continues to be led by products that serve the ecommerce market including water activated tape, dispensing machines, protective packaging and films. The same time we're seeing strong growth in our wovens category that primarily serves building construction where activity remains high. Based on third party industry estimates and market intelligence, we are confident that the share gains made by ecommerce retailers is sustainable into the long term. Industry estimates report the pandemic pulled forward two to five years of demand into the ecommerce market. Three quarters of the global retail professional respondents to a euro monitor survey expect that the pandemic has led to a permanent channel shift to ecommerce.
Jeff Crystal:

Thank you, Greg. On Page 7 of the presentation, we present an analysis of our revenue for the first quarter of 2021. Revenue was $345.6 million, an increase of more than 24% compared to the same period in 2020. Volume mix accounted for 20% of the increase compared to last year. As Greg mentioned, every major product category was up in the quarter with the primary drivers coming from water activated tape, protective packaging, films, woven and dispensing machines. We also saw strong growth in certain carton sealing tapes. Prices positively impacted revenue by 3% in the quarter with the remainder coming from foreign exchange impact.
Greg Yull:

Thanks, Jeff. It was a great quarter. The strong demand we experienced in the back half of 2020 continued into the first quarter and that we see more of the same into the second quarter to date. We are seeing growth across all major product categories. Our ecommerce growth is inline with the growth of the largest ecommerce players in the market. The investments in the acquisitions we've made over the last five years have structurally changed the business. We've managed through this first year of the pandemic and come out stronger having paid down debt and delivered strong free cash flow. We've managed the increases in raw material prices and effectively covered the spread on a dollar contribution basis between selling prices and raw materials and freight. We are investing this year in higher return, near term capacity expansion projects in our highest growth categories to keep pace with demand. We've met these challenges and opportunities, while at the same time, looking to future longer term opportunities. Earlier this summer, we expect to publish our third annual sustainability report. It expands on the progress we've made by increasing our disclosure on how we manage the business. We continue to certify major products under the Cradle to Cradle certification. Since our last call are acrylic tape and hot melt tape, which are primarily used for carbon sealing have achieved the Cradle to Cradle certification. We have invested in sustainability, certifying products and attracting talent to lead our initiatives because we see it as a long term growth driver for the business. Our product bundle offers customer a broad variety of choice to ensure we meet the evolving demands of customers and end users. The diversity of both our end markets and our product offering, as well as the essential nature of our products have been the core to the underlying performance of the business. We provide essential packaging and protective products for the economy. We've made a series of investments to build a world class low cost manufacturing base that can compete effectively in any market cycle. We are focused on executing our strategy to deliver for customers and users and shareholders, building a global leader in packaging and protective packaging solutions. I'd like to thank our employees. It has been a challenging year for everyone and these challenges still continue. I could not be more proud of how they've conducted themselves and the level of commitment to the organization they've demonstrated. It's truly tremendous.
Operator:

Your first question comes from the line of Michael Doumet from Scotiabank.
Michael Doumet:

First question, just on the $1 basis, volume growth was higher in Q1 than it was in Q3 and Q4 of last year, that's surprising for what typically is a seasonally weaker quarter. So I'm assuming again, all end markets were firing on all cylinders. But did you get a sense if there was any pull forward that happened in the quarter?
Greg Yull:

So, obviously, we implemented quite a bit of price increases in the quarter, Michael. And we were much more diligent just because of circumstances as it relates to pre buys on the way through. So historically, I would say that, these price increases and the ability of customers to pre buy at lower prices and build inventory was somewhat diminished on a historical basis, hard to know that exactly. But certainly, we managed that just because we had to through that process of the speed and the size of these increases. So if it continues, historically, I mean, we should see a build through the year but we're not calling for that now, because there are quite a few moving parts in there.
Michael Doumet:

And then to get a clarification on a comment relating to maintaining the Q1 sales momentum into Q2, and I'm assuming the sales momentum is sustained through the quarter. Is the right way to think about it that we should get, say 15% to 20% positive comp, or that the growth again, the 15% to 20%, would be incremental to the reversing declines of Q2 of last year?
Jeff Crystal:

I'm not sure I completely understand. But basically, I mean, we expect to see, obviously, the same momentum as we're saying going through Q1 into Q2, we're seeing the same thing. So you're definitely going to see a big -- and it's an easy comp versus Q2 of last year, of course. I mean, we can't give you the exact number around that. I'm not sure if I'm answering your question. Exactly.
Greg Yull:

Maybe this gets to Michael. Our order demand in Q2 at this point is very similar to where we were in Q1.
Michael Doumet:

I guess the question is, do we get the growth that we saw in Q1 plus kind of the negative comp last year? So presumably even higher than where Q1 is on a year-over-year basis, and it sounds like potentially.
Greg Yull:

I mean, you got a couple moving parts in there, because you've got the businesses that were tremendously down last year. So obviously, that's going to be the part that's easy cop, and I agree with you like you're going to have the growth over call it a normal quarter from last year versus this year, and then you have the abnormal growth because of the COVID impact. But then you also have the ecommerce, which had the full effect in Q2 last year. So that is a tougher cop for Q2 than in Q1 where we really didn't have much of an impact of that.
Michael Doumet:

And then one last, any way you can help us better pin down Q2 gross margins? You indicated that we should expect an 80 basis point margin compression for the year, which again, is kind of reflective of the higher prices and higher input costs. You mentioned that some of that was reflected in Q1 and more will be recognized in Q2. Based on that thinking, should we expect less than 80 basis points of margin compression quarter-over-quarter, is that correct?
Greg Yull:

I mean, all we could say is basically that Q2 it should be the full effect, because you see all these price increases that have gone into effect happen. I mean, certainly some happened last year and into Q1. So you're going to see more of an effect of that in Q2, which will put a little bit more pressure on the margin.
Operator:

Your next question comes from a line of Walter Spracklin from RBC Capital Markets.
Walter Spracklin:

So just on the price increases and the differentiation, and Greg, you did a great job kind of explaining at will pricing versus contractual pass through index mechanical pricing. And my question there then is, let's say as is generally expected that resin prices come back down perhaps in the near term? Is there an opportunity because you're not tied to any index that might automatically bring your price down? Is there a avenue here where because demand still is strong and everyone’s kind of behaving. Can you hold on to pricing even if resin prices are coming down?
Greg Yull:

Yes, I think there are circumstances that we can do that. I mean, certainly in that kind of environment, as you know, the adverse happens on the margin side, too. So your margins should go up. But certainly that spread that I referenced between sell price and raw materials has the opportunity to increase in that kind of environment.
Walter Spracklin:

Let me move on to your water activated tape segment. I know, oftentimes, when we ask the question of potential new entrants, you always highlighted that the market in aggregate was still, even though growing rapidly for you, historically, was still too small. You mentioned Greg in your in your prepared remarks that we pulled forward years of that growth. Is there any evidence that new entrants are starting to peek into this market now that it's growing so much and might look at taking a step in, or are you still in the same kind of competitive advantage that you had historically?
Greg Yull:

We haven't seen any movement in that regard. And again, I think it's still important even though the growth is still there and it's still high, we have a very high percentage of market share in that area, as you know. So the total size of the market might not be that attractive to people. But certainly, it's very big for us because of that high market share that we have.
Operator:

Your next question comes from the line of Stephen MacLeod from BMO Capital Markets.
Stephen MacLeod:

I just wanted to -- I know you talk a little bit about the end markets, and you saw sort of broad strength across all categories. But I was wondering if you just give a little bit of color around how you saw some of the non ecommerce markets trending coming out of Q4 and into Q1?
Greg Yull:

So in the general manufacturing area, certainly, we saw really good growth, and certainly a rebound in that area. Our wovens business really performed well, exceeding our expectations, as it relates to kind of budgetary forecasted levels. The retail side continues to perform well, some of that has to do with do it yourself work that's happening in the construction business. So we pretty much saw a broad increase there. Certainly, probably the transportation side lags a bit relative to those other segments but certainly, we saw good growth in that area as well. So we've seen a rebound in all of our end markets from where we were.
Stephen MacLeod:

And then maybe just thinking about the pace of revenue growth through the year, you gave some good color around Q2. Would you expect that price increases will have already been reflected for the most part by the time you get to the back half of the year? I guess maybe asked another way. Would you expect, based on what today for price increases, to positively impact that positive pricing impact in the back half of the year, or is that largely isolated to the first half of the year from what you can see now?
Greg Yull:

I would expect, when I when I think of the year and I commented on this in Q4 is, the first half is going to be pressured right, as we've articulated just from the math perspective. And then when you move forward, there should be a sequential margin improvement with all the information that we know now if it plays out that way.
Stephen MacLeod:

So first half margins, you’ve mentioned pressured, but you put up 260 basis points in improvement in the first, in Q1. Are you expecting to see similar, maybe not similar magnitude, but you're also expecting to see some of those margin offsets positively impacting margins in Q2?
Greg Yull:

So we're going to continue to see some of the stuff that we talked about from a structural change standpoint. So that's going to play out through the year. But of course, like we said, with these higher sell prices in preserving the spread dollars, we'll see that compression that compress on that side. So that's why we're not seeing the margins that we saw, call it, in Q4 that's the main reason. But yes, you’re still going to see outsized margins versus what we've historically have been at.
Operator:

Your next question comes from the line of Hamir Patel from CIBC Capital Markets.
Hamir Patel:

Greg, could you comment on the magnitude of price increases you're seeing in Q2?
Greg Yull:

From our raw material perspective or from a end user perspective?
Hamir Patel:

I guess, both.
Greg Yull:

So I would summarize in the raw material side that certainly some products we think have peaked and will start coming down, namely polypropylene, polyethylene just increased the price increase, just implemented price increase just a little while ago. We expect that to hold for a bit and see some tempering in the second half of the year in both of those categories. On the adhesive front, namely in the hydrocarbon area, we are continuing to see increases in that area. And we believe, as we sit here today, we've covered those increases. As it relates to end users, just because of the amount of products that we have and the channels we have, the company has implemented almost 20 price increases in the first quarter in varying product lines and varying channels. So certainly, we've been pretty active there. As we move through Q2, if we continue to see movement upwards in certain raw material inputs, we expect to implement further price increases to cover that spread in dollars. As we sit here now and I think about it sequentially from a pricing perspective week to week, which is the way we manage pricing effectivity, certainly, we continue to see that pricing effectivity on a percentage basis increase as we move through May.
Hamir Patel:

And I just want to ask about, given the demand growth you're seeing from ecommerce, do you think your own capacity growth initiatives at least for the call it the next two quarters can keep up with the demand if it stays elevated here?
Greg Yull:

Yes, so we feel good about getting through this year. Certainly, there's areas in the product lines that we're going to be sourcing material from the outside to supplement our own capacity. And that's why we feel really strongly about our investment in the CapEx side this year. And certainly, seeing the cash flows from those next year. So I think we're in good shape to make it through this year at these elevated rates. Typical in our business, specifically around e-commerce, it's somewhat seasonal. And we're continuing to build inventory to handle Q3, Q4 volumes in that area.
Operator:

Your next question comes from the line of David Ocampo from Cormark Securities.
David Ocampo:

I just wanted to circle back on your capital projects here. When we think about them, they're expected to be margin accretive and above your normal return thresholds. But as we head into 2022, are there any other low-hanging fruit projects that you can generate these outsized returns? Or should we expect future capital projects to go back down to your 15% hurdle rate?
Greg Yull:

And I just referenced certainly my comments on the Q4 call. Certainly, it's our hope that we continue to have opportunities to deploy capital at these kind of return metrics. So I think it's too preliminary to comment on that. Certainly, certainly, if we see an opportunity with those kind of returns, I mean we're going to continue to execute on it. But at this time, I have no update on that.
David Ocampo:

And then just a quick one here. It's sort of been a while since we talked about Nortech. Is that side of the business now generating the returns that you expected when you first acquired the business? As I know, the machining sales were a little bit slow in COVID, but it may have picked up some since then. Just wanted some color on that.
Greg Yull:

It's still lagging from where we expected to be at this point. Certainly, COVID had a huge impact in that business. And we've commented before that the COVID probably had the largest impact on that business of any of our businesses. I mean, it's not a very large business, as you know. I think from a size perspective, it would be very small. We have, as we've worked through the last six months, put some management teams in there and certainly, we're seeing a lot of order activity and new orders come into that facility. And I expect that business to continue to perform or to perform in an increased level as we move through 2021. That business is lumpy as typically most of those businesses are. But certainly, with where we are with our order backlog in that business, I expect the second half of this year for that business to perform significantly better than where it has in the last several quarters.
Operator:

Your next question comes from the line of Roger Spitz from Bank of America.
Roger Spitz:

Do you think 2021 working capital will be an inflow or outflow? And to what extent?
Greg Yull:

I mean it's certainly with these raw material prices, if they continue to remain elevated, that's going to be somewhat of a drag. We saw a little bit of that in Q1 with regards to inventory prices being higher. So really, I think that's going to depend on where raw materials go. But if we see some I guess easing up of that through the year, you may not see such a big impact by the end of the year. That's what I'd have to say.
Roger Spitz:

By the way, on March 31, how much was revolver drawn? And what was your availability under the revolver?
Greg Yull:

So I believe we had availability of $351 million I believe, in total. In terms of drawn, let me get that for you. So we had -- maybe you can ask the next question and I'll get back to you on that question…
Roger Spitz:

for 2022 CapEx, but in thinking about 2022 guidance, when we think about 2022 CapEx, should we think of it a lot closer to the maintenance level from 2021 or is it closer to the $100 million that we saw in 2021 guidance?
Greg Yull:

So I can't say right now, Roger. Certainly, it's going to be at the maintenance level, and our hope in that opportunity is to continue to invest organically in the business. But I think it's too early to kind of comment on 2022 CapEx at this point.
Jeff Crystal:

And then on your other question, so we were using about $235 million on the total $600 million facility.
Operator:

Your next question is from Ben Jekic from PI Financial.
Ben Jekic:

I just have two quick questions. Greg, one of them is, and I'm sorry if it was repeated, but you mentioned a metric I think 60% of costs were raw material and then you mentioned freight as well and I didn't catch some of those details.
Greg Yull:

So from a cost of goods sold, 60% are raw materials and approximately 6% to 7% are freight. So when you think of us managing our cost increases, that's where we've seen the largest increases on the raw material side obviously, and also in the freight side. And the combination of that is what we utilize to manage our dollar spread between sell price and cost.
Ben Jekic:

My second question, it's a little bit more open-ended. So we were talking about the pricing and this whole environment, but I wanted to ask if there is any impact, and I'm assuming the order variability from end customers is, there's probably ups and downs in production runs. Are there any issues in your setup costs? Like you've always been like an impeccable operation and that sounds like, have you encountered any challenges in that regard?
Greg Yull:

You mean from changeovers and things of that nature?
Ben Jekic:

I mean like different sizes of production runs and things like that. Like has there been anything of any significance there?
Greg Yull:

I would say just because of the volume of the orders coming through, I think we're experiencing in many cases, longer runs, not shorter runs. So I would expect that to be proven out by data that I haven't seen, but I would expect that operationally we're seeing longer runs, less changeovers than historically we have. But from an operations perspective overall, the plants continue to perform well, and we really haven't seen any change in that behavior or those results.
Operator:

Your next question comes from the line of Zachary Evershed from National Bank.
Zachary Evershed:

It's actually Thomas calling in for Zach. Most of my questions have been answered. So maybe one quick one. As we observe reopenings to North America, are you concerned about a negative mix shift with brick-and-mortar retail reopening?
Greg Yull:

I mean what we would say to that, I mean, obviously, we would expect to see growth in the brick-and-mortar side, which of course, would benefit the non-e-commerce parts of our business. So we could see some tailwinds there. From an e-commerce perspective, there could be a tempering of the growth, but we don't see this growth stopping. I mean, I guess that's the point. We may not see the same level of growth, but we see the growth still being quite outsized versus what the typical GDP growth would be or certainly brick-and-mortar would be. So for us, I think we might see some tempering of that, but I think that's just temporary in nature. And going forward, certainly, all the research reports we read, we expect to see e-commerce continue to take share and grow at an outsized pace in the future.
Operator:

Your next question comes from the line of Michael Doumet from Scotiabank.
Michael Doumet:

I wanted to address the consensus here for Q2. You commented that the sales momentum is continuing into Q2. It sounds like you're maintaining the price/cost spread. Q2 is often seasonally stronger. So is there a real reason on an EBITDA dollar perspective to see such a significant step down from Q1 into Q2?
Greg Yull:

We can't really comment on the consensus. What I would say is that, yes, typically, Q2 is the stronger quarter.
Michael Doumet:

And the price/cost spread has been so far maintained?
Greg Yull:

Correct, that's what we expect.
Michael Doumet:

And I guess switching over here, I mean, you've done everything right in the last couple of quarters, and that's had the added benefit of driving leverage ratios down quite substantially. And despite the capital investments you're making this year, leverage ratios are going to continue to decline. I mean, how do you think about especially where your shares are trading, how do you think about sort of balancing out considerations for share repurchases or M&A?
Greg Yull:

So I think we've got great runway here organically, as we've discussed in the past. We're still, from a leverage perspective, within that kind of range that we've always wanted to operate between 2 and 2.5. And I think as we move forward, certainly, we continue to evaluate any capital deployment plans, either around organic growth, M&A, dividends and share repurchases. Certainly, we need to see where the stocks settle out here on a go-forward basis. So I really can't comment any further than that outside of it's a discussion that we have at the Board level on a frequent basis, and we're going to evaluate all opportunities to increase shareholder value.
Operator:

There are no further questions. I now turn the call back over to Greg Yull for closing comments.
Greg Yull:

Thank you for participating in today's call. Just a reminder that later today at 12
Operator:

That concludes today's conference call. You may now disconnect.

Intertape Polymer Group Inc. Q1 2021 Earnings Call Transcript

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Q1 2021 Earnings Call Transcript