Intertape Polymer Group Inc.

Ladies and gentlemen, thank you for standing by. Welcome to Intertape Polymer Group's Q4 2020 conference call. During the call, all participants will be in a listen-only mode. Afterwards, 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. At that time, those with questions should press star followed by the number one on the telephone keypad. If at any time during the conference you need to reach an operator, please press star followed by zero. Joining me from the company, I have Interstate Polymer Group's Chief Executive Officer, Greg Yall, 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 will reflect management's beliefs and assumptions regarding future events based on information available today. You're cautioned not to 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 two, titled Safe Harbor Statement, for 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 website at www.itape.com. Please note that all dollar amounts are in U.S. dollars unless otherwise noted. I would like to remind everyone that this conference is being recorded today, March 12th, 2021 at 10 a.m. Eastern time. And we'll now turn the call over to Greg Yell. Mr. Yell, please go ahead.

Thank you and good morning, everyone. Welcome to IPG's 2020 fourth quarter and year-end 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 website. 2020 was quite a year across a number of fronts for our families, our communities, and our IPG business. It was an outstanding year from a business perspective. Revenue was up 5% to more than $1.2 billion despite the pandemic. Adjusted EBITDA was up 23% to $211 million. Adjusted EBITDA margin was up more than 250 basis points to 17.4%. and free cash flow was up 54% to 134 million. The business rebounded incredibly well from the temporary demand depths we experienced in late April and early May during the first wave of the pandemic. Our team members performed exceptionally well during this period of uncertainty. They demonstrated a professionalism to our customers, our suppliers, and to one another. Their emphasis on working safely and servicing our customers ensured an uninterrupted supply of the essential products we produce to end users. IPG is structurally different today than what we were in 2016. The end markets where we are experiencing our strongest demand are the same ones where we have made investments in the past five years, in products like water-activated tape, protective packaging, wovens, and films. The growth in the e-commerce end market is a clear accelerant for the business that we believe will persist after the vaccines are successfully rolled out. E-commerce is now neck and neck with general manufacturing as the two largest end markets that we serve. In 2020, e-commerce represented 27% of our end market demand and general manufacturing came in at 28%, followed by food and beverage, building construction and retail in that order. Our e-commerce business grew by more than 40% in 2020, which is in line with the largest e-commerce retailer. Independent third-party reports estimate that sales through the e-commerce channel will continue to grow for many years to come at a macro level. The pandemic simply served to pull forward e-commerce adoption and establish a new base from which future growth is expected to continue. Our exposure to this outsized growth in the e-commerce channel is one of the most significant differences in our business today. This morning, we announced plans to install a new water activated tape line to increase our production to keep pace with this demand growth. The new line will be installed within our existing plant footprint. We expect installation in late 2021 and commissioning in the first half of 2022. This investment demonstrates the confidence we have in our demand outlook. With the growth and free cash flow generation we delivered in 2020, we made significant progress on our debt repayment. Our total leverage is now 2.2 times adjusted EBITDA, which is down 7 tenths of a turn compared to the end of 2019. Our target is to operate within a range of 2 to 2.5 times. With this balance sheet strength and the growth we're experiencing across multiple product categories, we are investing in organic growth to expand capacity across not only water-activated tape, but also in protective packaging, mailers, wovens, and films, which represents our highest growth categories. These projects represent low-risk, near-term opportunities that increase our production capacity in areas where the demand outlook is strong. They offer shorter-term investment horizons and higher return thresholds than the previous projects that were greenfield in nature. There are no new greenfield projects in this expansion. In total, we expect to invest approximately $100 million in capital expenditures in 2021, consisting of $70 million in capacity expansion projects, $10 million in digital transformation and cost savings, and the remaining 20 million for regular maintenance. Based on the 70 million in capacity expansion, we expect to generate more than $100 million in incremental revenue on a run rate basis by the end of 2022, with additional growth in 2023 and beyond. We expect the after-tax IRR from these capacity expansion projects to be north of 20%. We are able to invest for this growth and expand production capacity while still generating strong free cash flow in 2021, which is quite different than in 2017 or 2018. This morning, we announced our outlook for fiscal 2021. We anticipate revenue to be between $1.3 and $1.4 billion, which represents growth of 11% at the midpoint of the range. We anticipate adjusted EBITDA for 2021 to be between $220 and $240 million, which represents growth of 9% at the midpoint of the range. We anticipate free cash flow of between 80 to 100 million, which takes into consideration our anticipated total capital expenditures for 2021 of approximately 100 million that I mentioned earlier. There are a few important takeaways from that outlook. We are confident in the growth trajectory of the business. The business is structurally different today, with the ability to invest in near-term growth projects and maintain strong free cash flow generation. Our revenue and adjusted EBITDA outlook also takes into consideration the significant movement in raw materials we have recently seen, specifically increases in polypropylene prices and, to a lesser extent but still impactful, polyethylene prices. We have a track record of effectively managing the spread between raw materials, freight, and selling price across multiple cycles over the course of the last decade. We manage the spread to retain dollar contribution. With that in mind, you can see across the high, mid, and low points of the outlook ranges that as selling prices rise and we look to retain dollar contribution, margins draw in to some degree. We have already announced price increases to reflect the rising price of raw materials. As a reminder, once we announce a price increase, it normally takes approximately 60 days to hit our income statement. Based on the current situation, we anticipate approximately 80 basis points of margin pressure on an annualized basis, which has already been taken into consideration in our 2021 outlook metrics of revenue and adjusted EBITDA. We are preparing to emerge from the pandemic in a strong position to deliver continued growth. Sustainability is expected to be a core pillar of our growth strategy as we address the needs of key end markets like e-commerce with sustainable solutions. Our work to achieve cradle-to-cradle certification on major product categories like water-activated tape, films, and membrane structure fabric demonstrates our commitment to embrace sustainability throughout the organization as well as the product bundle. In the fourth quarter, all of our major product categories outperformed the same period in 2019 from a volume mix perspective. The demand we are seeing in the first quarter from a sales and order book perspective is a continuation of 2020. Based on the strength of the business, we are investing to expand production capacity in our highest growth verticals. We consider these projects no brainers. We could stand pat and allow others to address this demand, but that would certainly not be in the best interest of our shareholders and customers. Growth opportunities are immediately in front of us, and we believe inaction would limit shareholder returns and jeopardize our ability to support our customers. We have built a global leader in packaging and protective solutions. These are lower-risk capital projects within our existing footprint in areas where we are very comfortable with future demands. We think that is a great opportunity for any company to have. At this point, I'll turn the call over to Jeff, who will provide you with additional insight into the financial results. Jeff? Thank you, Greg.

On page eight of the presentation, we present an analysis of our revenue for the 2020 fourth quarter and fiscal periods. Revenue increased 18% to $344.1 million in the quarter, up $52.6 million compared to the same period in 2019. On an annual basis, revenue increased 5% to just over $1.2 billion, up $54.5 million compared to fiscal 2019. Volume mix was the primary driver of growth in both periods, up 16% and 5% in the quarter and fiscal year respectively. As Greg mentioned, our highest growth product categories in the quarter and the annual period were in the areas where we invested in CapEx and acquisitions during the past five years. Specifically, water-activated tape, air pillows, mailers, and machines. During the quarter, we also experienced strong growth among a number of our industrial and carton sealing tapes. Essentially, all of our product categories were up in the quarterly period versus the comparable period in 2019, save a couple of nominal categories. On an annual basis, the most significant underperformers were carton-sealing tapes, excluding water-activated tape, as well as some industrial tapes, both the result of effects of COVID-19 on some of the non-e-commerce customer channels. Price positively impacted revenue by 1% in the quarter, and we experienced a drag of 1% in the annual period. The remaining differences in the period are made up of the one acquisition in 2020, Nortec, which we closed in February of 2020, as well as foreign exchange. Turning to page 9, gross margin was 25.7% up more than 500 basis points in the fourth quarter and 23.8% up 250 basis points in the annual period compared to the corresponding periods in 2019. The improvements in both periods were primarily due to the increase in spread between selling prices and raw material costs as well as plant performance and the associated operating leverage benefits due to the acid base running at increased capacity. Adjusted EBITDA increased by 55% to $67.7 million and 23% to $211.1 million in the fourth quarter and fiscal 2020, respectively, compared to the corresponding periods in 2019. The improvements in both periods were primarily due to organic growth in gross profit. Adjusted EBITDA margin was 19.7%, up more than 460 basis points, and 17.4%, up more than 250 basis points in the quarterly and annual periods respectively compared to 2019. These improvements reflect effective management of the spread between pricing and raw materials and freight, as well as plant performance and operating leverage that I mentioned earlier. We are monitoring the impact of the recent weather-related events in Texas on our supply chain. We carried sufficient inventory of our key residents from the fourth quarter into the first quarter. Production of key raw materials in Texas is already coming back online and in some cases and scheduled to be back up later this month in other cases, according to industry reports. We intend to manage the situation to protect our customers by keeping them in supply while managing our dollar spread to protect our contribution profit dollars. For 2021, we expect an effective tax rate in the range of 22% and 27%. excluding the potential impact of changes in the mix of earnings between jurisdictions, as well as any changes resulting from potential U.S. tax legislation that increases rates for 2021. We expect cash taxes to be approximately 10% higher than income tax expense due to less availability of tax attributes and loss carry-fors, as well as the impact of bonus depreciation previously taken. Cash flows from operating activities were 88.8%, $6 million, up 21% in the quarterly period, and $179.6 million, up 33% in the annual period compared to the corresponding periods in 2019. Free cash flows were $63.8 million in the fourth quarter, unchanged from the same period in 2019 due to the increased capacity-related capex in the fourth quarter of 2020 that we announced on the third quarter call. CapEx totaled $25 million and $46 million in the fourth quarter and annual periods respectively. In the annual period, free cash flow increased 54% to $133.8 million compared to fiscal 2019. The improvement in the annual period is primarily due to the increase in gross profit. Keep in mind that we typically experience business seasonality to show negative free cash flow in the first quarter and the majority of cash flows from operating activities and free cash flows are generated in the second half of the year. Our secured net leverage ratio decreased to 1.1 times at the end of 2020, well below the covenant of 3.7 times. The secured net leverage ratio is the most important ratio that is relevant to our covenants, therefore we view it as the highest priority. Our total leverage ratio, including the unsecured debt, decreased to 2.2 times down one half turn from 2.7 times in the sequential period. As Greg mentioned, with our strong balance sheet position and the demand we are experiencing, the business is in a great position to deliver organic growth. We remain open to potential acquisitions that strengthen our product bundle in our growth markets or provide consolidation opportunities where we can apply our buying power and our expertise in operational efficiency. However, our primary focus today is executing on the demand immediately in front of us to grow organically. I'll turn it back over to Greg for his closing thoughts.