Intertape Polymer Group Inc.

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. 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 their 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 Intertape Polymer Group's Chief Executive Officer, Greg Yule, 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 reflect 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 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, May 12, 2021, at 10 a.m. Eastern Time. And we'll now turn the call over to Greg Yule. Mr. York, please go ahead.

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 website. 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 a 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 into our highest growth categories, which is now deriving 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 prioritized 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 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 e-commerce market, including water-activated tape, dispensing machines, protective packaging, and films. At 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 e-commerce retailers is sustainable into the long term. Industry estimates report the pandemic pulled forward two to five years of demand into the e-commerce market. Three-quarters of the global retail professional respondents to a Euromonitor survey expect that the pandemic has led to a permanent channel shift to e-commerce. So while e-commerce is expected to return to a more normalized growth rate than it experienced pre-pandemic, at those levels it is still growing significantly faster than the overall economy. The new adopters that started buying goods online during the pandemic have broadened the addressable market for the major e-commerce retailers. The omnichannel approach by retailers and the emphasis on e-commerce are aspects of society that the pandemic has actually changed for the better in our view. The composition of our product bundle positions us both to benefit from the changes in consumer behavior as e-commerce gains more and more market share from bricks and mortar, as well as to benefit from the broader economic recovery in more industrial markets like building construction, general manufacturing, and transportation. The macro demand we are seeing in the market remains strong. Demanded date in Q2 has been a continuation of Q4 and Q1. Our order book, which offers approximately four weeks of visibility, remains robust. At the same time, the upward pressure on raw material pricing that we've experienced since late 2020 has been unprecedented. In a rising price environment, we manage the business to protect the dollar spread between selling prices and the cost of raw materials and freight, and we are doing our job through 2021 to date. From a pure math standpoint, as prices increase and we retain the same dollar spread, margins will draw in slightly. In this environment, we believe it's worthwhile to review a few of the core tenets of how we manage our price strategy and how changes flow through our income statements. We utilize an at-will pricing strategy for the vast majority of our customer relationships, which is a fairly common structure in the markets we participate in. One of the reasons this approach is common is the high degree of variable cost in our cost base. On a percentage of cost of goods sold on a dollar basis, approximately 60% are raw materials and approximately 6% to 7% is freight. The recent changes in resin recent price changes in resins, specifically polyethylene and polypropylene, have moved to such an extent and so quickly that the competitive environment has had to react more quickly than it usually is the case. In a normal scenario, a price increase would be announced and customers would be given 30-day notice. In the current environment, we are seeing price increases announced with a seven-day notice period, and manufacturers are stipulating conditions that only normal purchasing volumes will be accepted in the interim to avoid inventory stockpiles with large orders at the lower price points. In isolation, if only one or two players in the market approach the price increases in this manner, it wouldn't work as customers would switch providers. In the current environment, with the economic recovery gaining traction, demand has been so strong that the market has accepted the rapid cycle of price increases. as customers are looking to fulfill orders from their end users. In our case, we have managed to effectively cover the price increases and retain our dollar contribution as evidenced by our gross margin for Q1 of 23.9% and adjusted EBITDA margin of 17.4. Once a price increase is implemented, it typically takes approximately 30 days to flow through our income statement. So there is a lag between price increases and capturing that margin. When we announced our outlook for 2021 in March, we mentioned we expected approximately 80 basis points of margin pressure on an annualized basis for 2021 as a result of managing to the dollar contribution and not to the specific margin level. That pressure won't hit all four quarters equally. It's an annualized view. As an example, we saw some pressure in Q1 and we expect to see some additional pressure in Q2. However, our expectation is that the margin profile remains intact. While pricing remains high, the market has so far effectively managed through the temporary supply shortages that were a result of the weather event in Texas and the interruption of the petrochemical supply chain. Which brings us to our outlook. This morning, we were updating our forecast for the full year 2021 based on our results to date and the strong demand and pricing dynamics we were seeing in the markets. We've adjusted our full year 2021 revenue range to 1.375 billion to 1.45 billion, an increase of almost 5% at the midpoint of the range compared to the outlook we shared in March. On adjusted EBITDA, we've increased the full year 2021 range to 235 to 250 million, an increase of just over 5% at the midpoint of the range we shared in March. At these levels, The implied adjusted EBITDA margin remains approximately 17% across the low, mid, and high ends of the range. This represents a significant step up from the historical adjusted EBITDA margin profile of the business in the last five years. The largest driver of the margin improvement over these historical levels are the leverage from our asset utilization and our past investment in our highest growth product categories like water-activated tape, films, and wovens. With the investments we announced on our March call for 2021 in high-return near-term projects, we believe that we are well-positioned to meet customer demand with our diverse product bundle and world-class low-cost manufacturing base. With that, I'll turn the call over to Jeff to review the financials. Jeff? 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, wovens, 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. Turning to page 8, gross margin was 23.9% in the first quarter, an improvement of more than 260 basis points compared to the same period in 2020. Greg called out the primary drivers of the margin improvement earlier. Specifically, one, effective management of the spread between selling prices and raw materials and freight costs, and two, favorable plant performance driven by the leverage we are getting on our assets across our manufacturing base. Adjusted EBITDA improved 59% to $60.3 million from $38 million in the same period last year. The improvement was primarily driven by the margin drivers I mentioned earlier, spread management and increased scale providing leverage on both fixed costs and the investments we made in our high-growth product categories. We delivered this growth while keeping our SG&A expense in line with last year, excluding share-based compensation expense. Cash flows from operating activities decreased by 11.8 million to an outflow of 28.9 million in the first quarter compared to the same period in 2020. The change is primarily due to working capital changes and an increase in federal income taxes paid. The working capital changes relate primarily to increased inventory, due to increased demand and raw material price increases, including pre-purchases, as well as share-based compensation settlements. Free cash flows were negative 38.2 million in the quarter, down 13.7 million compared to the same period of 2020. The change was primarily due to the working capital changes and taxes paid I just mentioned. Our outlook for the expected effective tax rate has been adjusted to 25 to 30% for the full year 2021, which is an increase from the 22 to 27% range we announced in March. The adjustment is mainly due to an unfavorable mix of earnings between jurisdictions. The range excludes any rate increases that may arise from U.S. tax legislation. We continue to expect cash taxes to be approximately 10% greater than income tax expense due to less availability of tax attributes and loss carry forwards that were available in 2020, as well as the impacts of bonus depreciation previously taken. We finished the first quarter with $351.1 million in cash and loan availability. Our total leverage ratio at the end of the first quarter, which includes the unsecured debt, was 2.3 times. Our secured net leverage ratio, which is our most important loan covenant, came in at 1.4 times, which is well within its limit of 3.7 times. The investments we have made in CapEx and acquisitions have structurally changed the business, resulting in an improved margin profile and stronger cash flow. We believe that both of these attributes are sustainable moving forward. Now I'll turn it back over to Greg for his closing thoughts.