Intertape Polymer Group Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the Intertape Polymer Group's Q3 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 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 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 U.S. dollars unless otherwise noted. I would like to remind everyone that this conference is being recorded today, November 12, 2021, at 10 a.m. Eastern Time. I will now turn the call over to Greg Yule. Mr. Yule, please go ahead.

Thank you, and good morning, everyone. Welcome to IPG's 2021 Third 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 the website. A year ago, it was a challenge to see how we could deliver growth of such strong quarters in the back half of 2020. Demand was still high for e-commerce and we experienced a rebound in our other end markets as the economy opened. Q3 and Q4 of 2020 were two of the best quarters in IPG's history. We knew they'd be tough to top. Revenue was $396 million, up 23% from what was already a great quarter in 2020. Demand remains strong. Our open order position today is as large as it has ever been. We continue to see organic growth and volume mix off the strong comparison periods in the second half of 2020. Volume mix growth was up 4% in the quarter from the record performance we delivered in Q3 2020. The revenue growth would have been approximately $12 to $14 million higher in the quarter if not for the supply chain and labor constraints we are experiencing in the market. Despite the dramatic increases in the cost of raw materials, we continue to cover the spread between selling price and raw materials, as well as a smaller impact from freight costs. Adjusted EBITDA was $63 million, down just slightly from the strong comparison period last year. The ability of the business to deliver in this challenging environment is a function of the changes we have made to the business in the past five years and the experience and expertise of the team to navigate the supply chain and labor issues that manufacturers are experiencing globally. IPG is structurally different today, which has allowed us to compete effectively and demonstrate outsized growth since the onset of the pandemic. One of the positive structural differences is our exposure to e-commerce fulfillment. end market and the strategy we've deployed to grow that aspect of our business. Even with the economy beginning to return to normal post the pandemic, e-commerce remains an end market where we expect to show double-digit growth. Third-party industry forecasts expect e-commerce to reach 38% of total core retail sales by 2026, growing from a 25% share in 2020. The largest player in that market is expected to grow its online sales by 16% per year through 2026. Our e-commerce exposure represents approximately 27% of sales in 2020, and we expect it to be similar in 2021 as a rebound from other end markets catch up from the downturn experienced in 2020. We service a broad array of players in the e-commerce market. Within e-commerce, our sales to the larger player in the market mirror its market share, which means the majority of our e-commerce sales reside with other players in the market. We are not a one trick pony when it comes to e-commerce. Our largest product category, water activated tape, demonstrates strong growth in the quarter and continues to be a workhorse for us. However, our approach of bringing a bundle of products to customers is highly effective. We are seeing major contributions to growth from dispensing machines, service technicians, that service machines onsite at fulfillment centers, as well as protective packaging. In short, we are offering e-commerce players a much broader range of offerings than just water activated tape to earn a larger market share with them. And it's working. Our e-commerce offering grew significantly faster in Q3 than the online sales of the larger player in the market in the double digits off of a record comparison period in 2020. Based on this strength, we believe IPG can grow at GDP plus growth levels, with the plus coming from our exposure to e-commerce, which continues to take share in the core retail market, and as well, higher growth verticals of the economy, like building construction. We are also experiencing headwinds in the broader market. We are not immune to supply chain constraints and the freight and logistics challenges that other manufacturers are experiencing globally. Paying up for raw materials is just one piece of the puzzle of our supply chain and procurement team. Together with our sales team, they have done a great job in covering the spread effectively, which I'll address in a moment. Securing supply of critical raw materials and ensuring significant labour at the plant level have been extremely challenging in this environment. We are working with multiple suppliers to maintain sufficient inventory. We are holding higher raw material inventory to ensure we have supply. We have certain plants that are managing operations with less staff than what allows for optimal production. In short, we are managing through the constraints, although it's not easy. Another key aspect of how our business is different today is our margin profile. Our at-will pricing strategy is working extremely effectively in the face of dramatic raw material price increases we've endured since the fourth quarter of 2020. Our primary objective is to protect the dollar contribution, which we've done. However, as the selling price increases and we protect the spread by covering higher input costs, the math of that equation puts pressure on our margins, which is clear in our results today. Our adjusted EBITDA margin Q3 was 15.9%, which is down from 20% in the same period last year. The major driver of this change was the mathematical impact of similar margin dollars on a higher revenue dollar. as well as certain cost containment and reductions we implemented in the face of the pandemic that temporarily improved the margin in 2020. $54 million of the increase in revenue is a result of price increases. The simple math shows that backing out the large price increases from revenue results in an adjusted EBITDA margin of 18.5%. This calculation demonstrates the margin we would have earned in the raw material environment that existed prior to this inflationary period. In my 30 years in the industry, we've never experienced this movement and speed in raw material pricing. The team has done a great job managing the business through this cycle. How long raw material prices remain at elevated levels is difficult to predict. We have started to see some downward movement in pricing, and some third-party sources like IHS forecast a further easing in 2022. From where we sit, predicting the direction they'll head or when is a difficult call. Our priority is continuing to manage our suppliers to ensure we secure product and continuing to manage our customers' expectation to ensure we protect the spread and deliver products to our customers. What we know is that as pricing eases, we have a track record of managing for consistency in the dollar contribution which will mean margins moving back up. The structural change in the business have fundamentally improved our forward margin profile to well north of the 15% range. In terms of our outlook for the remainder of the year, we announced updates this morning giving higher selling prices driven by the persistence of higher raw material costs. We expect revenue for the full year of 2021 of between $1.5 and $1.54 billion dollars, which represents 25% growth over 2020 at the midpoint of the range. Our adjusted EBITDA for the full year 2021, we expect to generate between 245 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 between 70 and 80 million in fiscal 2021. This metric is unchanged. We still expect to unwind working capital as pricing and supply constraints ease and capture that free cash flow in future periods. However, the timing of that unwind is difficult to predict at this stage due to the persistence of high raw material pricing and the global supply chain constraints. We continue to execute our capacity expansion plans. We remain committed to investing the entire $100 million allocation originally planned for 2021 Although at this stage of the year, it's clear that some of it will spill over into 2022. As a result, we've lowered our CapEx line item for fiscal 2021 to approximately $85 million from the prior estimate of $100 million. We also remain committed to the original timelines for the projects to be online and producing approximately $100 million in incremental production on a run rate basis by the end of 2022, with more upside beyond that period. These are projects where we have clear line of sight on demand in the market today and offer IRRs of plus 20%. The business is in a great position to perform. We are effectively managing the raw material challenges. We've covered the price and maintained supply in the face of ongoing strong demand. We are allocating capital to key product categories where we are experiencing our highest growth. The capabilities of our team to manage these dynamics is extremely impressive. With that, I'll turn it over to Jeff to review the financials.

Jeff? Thank you, Greg. On page 9 of the presentation, we present an analysis of our revenue for the third quarter of 2021. Revenue was $395.6 million, an increase of 23% compared to the same period in 2020. Volume mix accounted for 4% of the increase compared to last year. As Greg mentioned, the primary demand driver remains e-commerce and the outsized growth we are experiencing across a wide range of customers in that vertical. As a result, our product categories that support e-commerce performed well in the quarter off a strong comparison period in 2020, those being dispensing machines, water-activated tape, and protective packaging, as well as certain carton sealing tapes like hot melt that serve a range of markets. Price positively impacted revenue by 17% in the quarter, with the remainder coming from acquisitions and foreign exchange. The price impact was due to the multitude of price increases implemented to ensure we maintained our dollar spread, which Greg covered earlier. Turning to page 10, gross margin was 22% in the third quarter, a change of approximately 400 basis points compared to the same period in 2020. The primary pressure on the margin was a 350 basis point impact of maintaining our dollar spread on higher average selling prices. Adjusted EBITDA was 63 million, a decline of 1.5 million from the same period last year. The change was primarily a result of increased SG&A due to the reintroduction of a more normalized cost base required to support the growth of the business versus the cost reduction strategies implemented in 2020 as a result of COVID-19. These costs were partially offset by higher gross profit. However, that gross profit could have been higher without the impact of the missed revenue opportunity in the third quarter from the supply chain constraints Greg mentioned earlier. Cash flows from operating activities were $42.6 million in the third quarter compared to $67.5 million in the same period in 2020. The change is primarily due to working capital changes. Free cash flows were $20.2 million in the quarter compared to $59.2 million in the same period in 2020. Our working capital and free cash flow are bearing the brunt of the global supply chain challenges manufacturers are managing. We are carrying a higher inventory to ensure availability at higher price points, which exacerbates the issue. We believe the incremental working capital tied up due to the global supply chain issues and higher raw material pricing is in a range of approximately $55 to $65 million. As raw materials normalize and once the supply chain constraints ease, we expect working capital to return to historical levels and generate incremental free cash flow in future periods. We finished the first quarter with $463 million in cash and loan availability, and our total leverage ratio at the end of the third quarter was 2.3 times. The investments we have made in CapEx and acquisitions have structurally changed the business. resulting in an improved margin profile and strong cash flow profile. We believe that both of these attributes are sustainable moving forward. Finally, our effective tax rate for the quarter was 17.7%, which reflects a favorable mix of earnings between jurisdictions. As a result of the mix of earnings experience to date, we are adjusting our effective tax rate guidance for the fiscal year down from a range of 25% to 30% to a range of 22% to 25%. Now I'll turn it back over to Greg for his closing thoughts. Greg? Thanks, Jeff.