Intertape Polymer Group Inc.

Ladies and gentlemen, thank you for standing by. Welcome to Intertape Polymer Group's Q2 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'd like to caution all participants that in response to your questions and 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 two 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 also note that all dollar amounts are in the U.S. dollars unless otherwise noted. I'd like to remind everyone that this conference is being recorded today, August 11, 2021, at 10 o'clock a.m. Eastern Time. And now I'll turn the call over to Greg Yoll. Mr. Yal, please go ahead.

Thank you and good morning, everyone. Welcome to IPG's 2021 second 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. It was an outstanding quarter with strong demand across all our major product categories. Revenue was $377 million, up 41% from the depths of the pandemic last year. Adjusted EBITDA was $65.7 million, up 60%. Based on our confidence in the business and its strong and sustainable cash flow profile this morning, we announced an increase to our dividend of 8% on an annualized basis, bringing it to $0.17 per share or $0.68 on an annualized basis per common share. The demand trend in the third quarter remains strong at this stage of August. We typically have approximately three to five weeks of forward visibility, and our current order book is as strong as it's ever been. Today, we are focused on three key elements to drive near-term performance. Number one, protecting the dollar contribution spread between selling price and cost of raw materials and freight in an inflationary environment. Number two, securing sufficient supply to ensure we can meet customer demand across our product bundle. In this market, we are not just having to pay more for raw materials, but we need to ensure we can source them. Number three, efficiently operating our manufacturing assets to ensure optimal capacity is maintained, which includes the health and safety of our team and assets. We are executing across each of these three parameters. The team, across sales, customer support, supply chain management, and operations has performed exceptionally well to deliver these results. Demand was strong during the quarter across all of our key product verticals. We also saw growth across all our key product categories. The growth was led by films, wovens, curtain sealing tapes, water-activated tape, dispensing machines, protective packaging, and industrial tapes. You can see the influence of some of the hardest hit categories in Q2 of 2020, which were up significantly on a year over year basis in Q2 2021. However, even our e-commerce vertical, which was up approximately 40% in fiscal 2020, continued to show double digit growth in Q2, despite a much tougher comparison to the strength we saw through the initial lockdowns in Q2 of 2020. We continue to experience strong demand into the third quarter across key categories, where we have made investments in CapEx and acquisitions like water-activated tape, protective packaging, wovens, and carton sealing tape. We expect e-commerce to remain a growth driver for us. We sell into a broad range of players in the e-commerce market, while growth through the pandemic reached 40% or more for the largest e-retailers, That level is obviously not sustainable. However, many small and large retailers have invested hard dollars in their e-commerce channel over the course of the past 18 months, and they expect a return on those investments. So we don't expect them to turn off the channel. In addition, e-commerce retailers have accelerated their penetration into a broader range of demographic groups, which should act as a tailwind to the ongoing share gains of e-commerce versus brick and mortar retail for the years ahead. We continue to expect growth in our e-commerce vertical well above GDP in the low to mid-teens, based on third-party forecasts that cover the coming years ahead. We have strengthened our product bundle with the acquisition of NuevoPak, a manufacturer that designs and develops a range of machines to provide void fill and cushioning protection packaging solutions. NuevoPak was already a strategic supplier, so this acquisition extends our footprint up the value chain, capturing the value of the dispensing machine and the paper void fill conversion, as well as securing supply for these important inputs. We believe the Nuevo PAC acquisition positions us to sell to a broad range of e-commerce customers and strengthens the sustainability profile of our product bundle. While its contribution in the current fiscal year will be relatively modest, We believe that our scale and customer relationships set us up to deliver accretive growth with this new addition to our product formula. We believe sustainability will be a long-term driver in the packaging and protective market. We are investing in both new products that offer sustainability benefits for customers, like curbside recyclable products, as well as certifying our existing products with the Cradle to Cradle certification. During the second quarter, we published our annual sustainability report. The report expands on our prior work. It highlights our progress and includes increased reporting as we embrace sustainability across the organization as one of our core strategic pillars and long-term growth opportunities. To meet customer demand, we are expanding production capacity across multiple products. These are high-value strategic products, including a new water-activated tape line and additional capacity for our films, wovens, and protective categories. As a result, as an update, we've invested approximately $25 million to date of the $100 million in growth and maintenance capex budgeted for fiscal 2021. We fully intend to commit the entire $70 million budgeted for capacity expansion, but there is a possibility that some of these expenditures may slip into the early 2022. This should not affect the timing of the realization of the $100 million in incremental revenue on a run rate basis that we expect in place by the end of 2022, and with additional revenue upside beyond 2022. Moving on to the supply landscape, prices remain volatile and sourcing supply remains challenging. At the time of the Q1 call, I commented that we thought raw material prices had peaked, and the third-party forecast informed that outlook. Since May, we've continued to see upward pressure on raw materials. Third-party forecasts now expect the current elevated pricing to persist through the end of calendar 2021. To manage these pressures, we've implemented more than 30 individual price increases across various product lines since the beginning of 2021. In a normal environment, these price increases would take approximately 60 days to hit our income statement, consisting of a 30-day notification period for price increase, and then another 30 days to realize the revenue. Given the high demand environment and the rapid price changing in raw materials, the market is accelerating this process in certain cases, such that we are seeing shorter notification periods for price increases, and we are also seeing the market be more aggressive in limiting the amount of pre-buying during the notice period to normal levels to prevent stockpiling lower cost products. Given the high demand levels and the production capacity restraints across the competitive landscape, the dynamics of the market have been and continue to be disciplined. As a result, in his past periods of volatile raw material prices, we effectively managed to cover the dollar contribution spread between the selling prices and the combined raw material and freight cost increases. As we expected in this inflationary period, the simple math of this pricing strategy dictates as the raw material prices rise and we protect the dollar contribution, our margins narrow slightly. Despite this impact, we maintained our adjusted EBITDA margin at 17.4% in Q2, which is a 210 basis point improvement from the same period last year. For the remainder of fiscal 2021, we expect the math of higher pricing and protecting the dollar contribution to impact margins by approximately 150 basis points, compared to what they would have been had prices remained steady with what we saw at the end of 2020. This impact has already been included in our updated guidance, which I will address in Paying for inputs is one thing, but securing sufficient supply has also been a challenge. Our supply chain team has been managing this very effectively. They've kept us in product, and we've built raw material inventory during Q2 to both ensure we have sufficient supply and mitigate higher pricing. This strategy has impacted our free cash flows, as we are now using more working capital. However, when pricing and supply constraints ease, we expect these working capital levels to unwind and generate higher free cash flows in future periods. We view this as a timing issue and a responsible strategy to ensure we meet the demand in the near term. It is not a permanent level of working capital required to run the business, a permanent new level. Based on the performance of the business to date, our order book and the current outlook for demand, as well as the persistence of higher selling and raw material prices, we are updating our outlook for the remainder of 2021. We expect revenue for the full year of 2021 of between 1.425 billion to 1.5 billion, which represents 21% growth over 2020 at the midpoint of the range. On adjusted EBITDA for the full year 2021, we expect between 245 million and 255 million which represents growth of more than 18% over fiscal 2020 at the midpoint of the range as we continue to protect the dollar spread. We expect free cash flows of between 70 to 80 million in fiscal 2021, which is a reduction from what we communicated in May due to the impact that increased demand, supply chain constraints, and higher selling prices and raw material prices have on working capital. However, As I mentioned, we expect to unwind working capital as pricing and supply constraints ease and capture that free cash flow in future periods. The business is in a great position to perform in the second half of 2021 and beyond. We are effectively managing the raw material challenges. We've covered on price and maintained supply in the face of ongoing strong demand. We are allocating capital in key product categories where we're experiencing our highest growth, We're bringing new production capacity online in both the second half of 2021 and to a greater extent in 2022, which will fuel our continued organic growth in the future. The capabilities of our team to manage these dynamics is extremely impressive. As the individual responsible for tracking their progress, I could not be more proud of how they've performed since March of 2020. With that, I'll turn it over to Jeff to review the financials.

Jeff? Thank you, Greg. On page nine of the presentation, we present an analysis of our revenue for the second quarter of 2021. Revenue was $376.7 million, an increase of 41% compared to the same period in 2020. Volume mix accounted for 27% 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 films, wovens, carton sealing tapes, water activated tape, dispensing machines, and protective packaging. Price positively impacted revenue by 12% in the quarter, with the remainder coming from foreign exchange impact. The price impact was due to the multitude of price increases implemented to ensure we maintained our dollar spread. Turning to page 10, gross margin was 23.7% in the second quarter, an improvement of approximately 240 basis points compared to the same period in 2020. The primary drivers of the margin improvement were favorable product mix driven by continued growth of our e-commerce related products and the recovery of many other margin accretive industrial products compared to last year and effective management of the spread between selling prices and raw material and freight costs. Adjusted EBITDA improved 60% to $65.7 million from $41 million in the same period last year. The improvement was primarily driven by the margin drivers I mentioned earlier, product mix, and spread management. Cash flows from operating activities were $22.2 million in the second quarter compared to $40.5 million in the same period in 2020. The change is primarily due to working capital changes, including higher inventory at higher prices to ensure supply in this high-demand, supply-constrained environment. and an increase in federal income taxes paid, partially offset by the increase in gross profit. This compares to COVID-19-related declines in demand and conservative working capital management strategies implemented in 2020 in response to that uncertainty. Free cash flows were $6.4 million in the quarter compared to $35.3 million in the same period in 2020. The change was primarily due to the working capital changes I just mentioned, as well as higher capital expenditures. We finished the first quarter with $487.1 million in cash and loan availability. Our total leverage ratio at the end of the second quarter, which includes the unsecured debt, was 2.2 times. In June, we issued $400 million in new senior unsecured notes that bear interest at 4.375% and used the proceeds to redeem the $250 million 2018 senior unsecured notes, which carried a 7% interest cost. We also entered into a new $600 million credit facility that replaces the prior one. In doing so, we have extended the term to June 2026 and gained greater flexibility with a more favorable covenant structure and slightly better pricing and a $300 million accordion feature if needed. The investments we have made in CapEx and acquisitions have structurally changed the business, resulting in improved margins and a strong cash flow profile. We believe that both of these attributes are sustainable moving forward. Now I'll turn it back over to Greg for his closing thoughts. Greg?