Q1 2020 Earnings Call
At that time goes with question 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 that I have entertain polymer group's chief Executive Officer, Great Yelp, and Chief Financial Officer, Jeff Crystal I would like to costs and all participants.
In response to your questions. It in our prepared remarks today, we'll 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 I guarantee of future performance are subject to a number of risks and uncertainties that could cause actual results to differ much.
It really from those expected. Please see slide two titles Safe Harbor statement for further discussion during this call we'd baby.
Referring to certain non-GAAP financial measures as defined under the FCC rules, a reconciliation of the non-GAAP financial measures to the most.
Directly comparable GAAP measures its available at our website at Www Dot I P. H E Dot com.
Please note. These 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 May 13, 2020 at 10 am Eastern time, and we'll now turn the call over to Greg ill. Mr. Yell. Please go ahead.
Thank you and good morning, everyone. Welcome Die PGS, 2021st quarter Conference call, joining me as Jeff Crystal our CFO.
During the call, we'll make reference to our earnings presentation that you can download from Investor Relations section of our website <unk>.
A lot has changed since our fourth quarter call just two months ago.
At that point, we're only beginning to recognize the significance of the health and economic challenges facing all of us.
We are approaching today's call a little differently than normal because these are not normal time.
We've increased our level of disclosure to provide as much visibility as possible into where we stand given the covert 19 pandemic and its impact on the economy and on our business.
Coming into this pandemic our business is much stronger than at any time during which I have let it.
Well aligned the reasons behind that in a moment.
The information, we're providing today based on the data available and what we're seeing in the market currently.
We're not wearing rose colored glasses on the demand side, we expect the worse could still come where we could be in it right now, but this is equally important we're not going to be a dooms. There. It serves no purpose for us to speculate no one knows with certainty the duration of the pandemic for the full.
Packed on the economy.
These are the primary reasons why this morning, we withdrawn or 2020 full year guidance and replaced it with guidance for the second quarter, which I'll touch on in a moment.
What we know today is that the profile of the business. The investments we've made the diversified portfolio of customer child channels and products as well as the flexibility of our capital structure placed us in a strong position to come out the other side of this situation to compete effectively in the market.
I will touch briefly on the first quarter highlights and then move directly into how we're managing the business through the pandemic.
Revenue and adjusted EBITDA were in line with our expectations that we sat prior to the outbreak revenue was up slightly to 279 million driven by favorable volume and mix I mean <unk> acquisition of Nortech.
Adjusted EBITDA was 37.5 million down slightly just as we caution with our guidance at the time of the Q4 call due mainly to the timing of facility downtime and inventory planning initiatives.
We experienced strong growth in the second half the quarter and our ecommerce business with both both water activity as well as protective packaging.
Overall, the demand side held up reasonably well through March despite the shelter in place practices introduced across much of North America mid month.
But in the balance of April and now early may we've seen weaker demand.
Three high level priorities are guiding how we manage through the pandemic.
First and foremost is a health and safety of our employees.
Second is protecting our world class low cost assets that we have invested and this priority is further by the delivering on the first priority.
Third is protecting our customers by continuing to deliver the essential goods they need from up.
Which involves working closely with our suppliers to mitigate any potential disruption in our supply chain and to deliver the high level of customer service that we're known for with our customers.
Turning to page four.
Our first priority health and safety has taken on increase importance for everyone.
It's a top priority of ours at all times the culture safety, we've established in or day to day operation really pays off in this current situation.
A couple of new measures that we've implemented.
We're practicing social distancing on the plant fourq to protect employees at times like this the relatively low labor intensity of our operations is beneficial.
Take a look at the hotel on the fly that does a shot of a platform for taken last year. There are only two people visible on this working line.
Greater attention on our part had been implemented and how Pete employees enter and exit and use common areas.
We've also increased the sanitization disinfectant and cleaning of equipment implants to mitigate risk.
And we have provided protective piece coverings to all employees.
We believe the measures we've implemented.
We're helping employees feel sufficiently safe to show up to work, we're monitoring absenteeism and wallet up slightly isn't one would expect it is only 10% in North America. Despite the shelter in place practices.
At that level, we're not experiencing any impact on our topline nor any material impact on production.
The health and safety of our employees puts us in a great position to protect our assets moving to page five.
All of our plants our operational today.
We review the various orders and guidelines in the local jurisdictions across our portfolio and a result of our products being defined as an essential service we are operating across the board.
We appeared to the shutdown in India announced on March 24.
But each of the four facilities are now deemed essential and have reopened.
Albeit three at less than 100% capacity.
We are truly proud of the fact that our products are essential to our customers and the end users and that we have been able to continue operating or facilities officially in the face of this pandemic. This is a testament to all of our hardworking and dedicated employees, who come to work everyday to make this happen.
The breadth of customers and industries, we serve bodes well through the whole situation.
Based on your feedback and given the importance of understanding how the pandemic could affect different markets, we're providing our estimates of the diversity of our end markets on page six.
This is data that we're presenting for the first time.
We do not have access to the street point of sale data because the vast majority or sales are through distributors. So this chart is not precise.
But in the course of identifying what products should be deemed essential we gained greater visibility into where our products end up which gave us additional confidence, but these estimates are reasonable approximations of our end market exposures.
This represents our estimate for fiscal 2019, not today, nor the impact of the pandemic.
But we believe it's helpful I understand the impact of the outbreak on our business.
On the right hand side of the chart, our the verticals that should be growth drivers were stable end markets, specifically the E commerce growing and food and beverage providing stability. The breakdown on this chart between general manufacturing and transportation appears skewed towards the manufacturing, but we believe transportation represent.
A larger portion and it's difficult to say for from manufacturing in certain areas.
On the right hand side or the major product categories, where we're seeing growth stability or demand pressures.
As I mentioned earlier, we have withdrawn our revenue adjusted EBITDA and free cash flow guidance for fiscal year 2020 in light at the high level of macroeconomic uncertainty caused by cobot 19.
It is simply too difficult to triangulate through the end of the year the duration of the pandemic with a diversity of our end markets the different puts and takes and the expected changes in raw material pricing.
However, this important visibility into our business and know how it's being impacted by Cobot 19. This morning, we provided an interim look at our performance with data available through maybe eight and an outlook for the second quarter.
We do not expect to provide quarterly guidance going forward.
We finished march and a strong position, but as we progressed through April demand change to show a more on favorable trend overall.
As of May eight sales are down 10% compared to the same 38 day period in 2019.
Looking forward to the end of the second quarter with the sales data available today and an order book that stretches two to four weeks forward, we expect revenue to be between 235 million and 250 million and adjusted EBITDA to be between 29, and 34 million in the second quarter of 2020.
The weakness is showing up in volume mix across various products, including industrial Tate films, and part and feeling tapes outside of water activated.
What we know today is that the real driver favorability in our business is E commerce or E. Commerce customers are running at peak holiday season, right. This is having positive impact not just in our water activate tape category, but also air pillow systems and mailers that protective packaging category overall is relatively.
Stable with E commerce demand offsetting the pressure in other markets we serve.
Our Midland in Menasha assets that produced water activity, our operating extremely well.
Even before the demand growth from the pandemic midlevel is operating at a level that hit our investment hurdle target for the capital investments on both the initial line and more recently installed second line.
This is a great outcome for the business and validation for those investment.
We understand that the extent of the current Tailwinds in E. Commerce is a direct result of the shelter in place practices across North America. However, we believe that the current buying behavior consumers will positively impact the long term fundamentals and accelerate the ship a bricks and mortars retail to the ecommerce channel.
This would only be good news for us since we would expect to gain disproportionately favorable market share in this shift.
Ecommerce is one of our primary growth drivers tracking or E commerce customers as they expand in North America around the world our product bundle of tapes and protective packaging and our new offerings that provide sustainability benefits from less waste and greater recyclability put us in a great position to grow in the.
E Commerce market.
As an example, we recently qualified or reinforced water activity as recyclable, which expands on the sustainability progress we announced earlier this year.
We're also experiencing new business from our Wovens application directly related to depend then sites are using wovens a shelter for testing locations and healthcare related service. In addition, as part of our commitment to support our healthcare workers, we're providing wolf woven material for surgical gallons as part of the buildup of <unk>.
Any.
On the other side of the demand curve in the current environment, Our general manufacturing building construction transportation and retail.
Based on the current order patterns it is difficult to unpack the negative impact on demand in these end markets versus the effect of de Inventorying at the distributors, which we are aware is happening.
We saw similar situations in 2008 2009 as well as in the fourth quarter of 2015 on films when oil prices fell.
In each of those cases once distributors worked through their inventory order patterns rebounded and in this case that would give us a clearer view of demand in those end markets.
We've seen some early signs that distributors may have worked through their inventory in certain carton feeling tapes and films, but it's still too short of a period at this stage to draw definitive conclusions.
In the face of the situation, we are highly sensitized to cash management protecting our cash just like we protect our hard assets.
We are implementing a measures to mitigate costs and have a flexibility in certain aspects in the near term as it relates to non essential or new project.
Companywide salary position hiring freeze the postponement of annual pay increases for salaried stuff and suspension of business travel and entertainment.
In March we also announced a reduction of our cap ex range to 30 to 40 million in fiscal 2020, which provides us with additional flexibility. We will continue to respond accordingly on the cost side on a go forward basis, depending on the depth and duration of the economic downturn.
On the production side all facilities continue to operate but we have flexed and we'll continue to flex capacity on specific lines to ensure production is aligned with demand and we're not building inventory.
This is especially true given the recent price pressure in oil.
We're not seeing yet in the same pressure in our raw materials, but it's fair to expect in over the coming months.
We are extremely cognizant of inventory levels in a falling raw material environment.
The investments in the acquisitions, we've made over the past four years of strengthen their product bundle and provided a world class low cost manufacturing asset base that can compete affection efficiently.
Through market cycles, the nature of the pandemic any actions taken to prevent a greater crisis our unparalleled.
We are appropriately cautious, but also confident that how we entered this situation positions us to whether it and come out strong on the other side.
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 first quarter.
Revenue increased 2.4% to $278.9 million compared to the same period and 29 team.
The increase was primarily due to a 2.3 million improvement in volume and mix and a 2 million dollar increase from the Nortech acquisition in February that we discussed on the fourth quarter call.
These improvements were partially offset by price, which was a 2.7 million headwind driven mainly by decreases in raw material input prices.
The positive drivers within volume and mix in the quarter or water activated tape and protective packaging with pressure coming from certain carton feeling tapes as well as industrial tapes.
Turning to page 10, gross margin was up 32 basis points to 21.1% than the first quarter compared to the same period and 29 team.
The improvement in margin from the first quarter 2019 is primarily due to the increase in spread between selling prices and combine raw materials breakout, which was partially offset by an increase in costs related to the inventory planning initiatives, we mentioned on the fourth quarter call.
Looking at the profile of our cost base the nature of our business is skewed to the variable side cost side versus fixed cost, which is a significant benefit in the face of the pandemic.
Ron materials, our most significant costs, which are variable accounting for approximately 60% of our cost of sales.
Approximately 6% to 7% of the cost of sales as freight another variable direct labor is relatively low from a manufacturing standpoint at only about 6% and the remainder is overhead which has both a fixed and variable component.
So from a cost perspective, we believe we have the appropriate leavers.
To flex production as appropriate as Greg referenced earlier.
Adjusted EBITDA was 37.5 billion or point 8 million lower than the same period last year. This decrease is mainly driven by the increase in SGN, a and 2020, excluding the favorable in the effect of the stock based compensation benefit which resulted from the net impact of an increase in salary related costs that were larger.
We offset by a decrease in variable compensation and reductions in anticipated discretionary defined contribution plan contributions.
Cash flows from operating activities improved by 2.4 million to an outflow of 16.1 million in the first quarter compared to the same period and 2019.
The improvement was primarily the result of a decrease in cash used for working capital items and an increase in gross profit.
These increases were largely offset by an increase in federal income taxes paid.
Turning to page 11 in a normal environment. The business has a natural seasonality in working capital as we build inventory in the first half of the year in advance of both the higher volume third and fourth quarter periods from retail activity perspective, as well as our planned factory maintenance schedule, which occurred primarily at mid year.
In the fourth quarter that build unraveled with the seasonal nature of higher retail activity in the context of covert 19 that trend trend should remain true in the second quarter, but depending on the duration of the pandemic the build in the second half of the year is not known at this point.
Free cash flows improved by 12.8 million to negative 23.5 million in the quarter compared to the same period and 2019, primarily due to a decrease in capital expenditures.
Given the natural seasonality the business, we expect negative free cash flows in the first quarter and then to progressively build more positive cash flows through the course of a normal year as I mentioned earlier.
And the current environment liquidity and the capital structure are critical to durability.
We entered the pandemic in a strong position in each case.
We finished the first quarter with $329.1 million in cash and loan availability.
Our secured net leverage ratio, which is our most important loan covenant was 1.8 times well within its limit of 3.7 times.
The ratio ticked up slightly by four tenths of a turn in the quarter due to the Nortech acquisition and the normal seasonality of our working capital that I mentioned earlier.
From a capital structure perspective, the $250 million dollars a senior unsecured notes issued in October of 2018 is critical to the flexibility we have today.
The unsecured offering provides greater flexibility on the key secured net leverage ratio covenant was significantly de risked the balance sheet.
Basically the 250 million of unsecured notes is not included in our secured leverage covenant calculation.
Based on feedback from analysts and some investors most feel this is not well understood broadly so we'll keep driving this point home for folk.
Our total leverage ratio at the end of the first quarter, including the secured or unsecured that came in at 3.4 times moving in line with the Nortech acquisition and the working capital seasonality I referenced.
We do not have any maintenance covenant on total leverage. So this is not put us at any risk under our credit agreements again. It is our secured that leverage ratio covenant of 1.8 times that is measured versus our limit of 3.7 times.
As Greg mentioned earlier, we are managing cash to preserve our priorities of debt repayment and maintaining the dividend.
We entered this downturn in a much stronger position then was the case in 2008.
The 20% plus margins we are running today are about double where we weren't in 2008 at these levels. It provides us a much greater degree of flexibility and buffer compared to where the business was that so we feel very confident from my perspective on a relative basis.
Our market share in ecommerce provide greater diversity in terms of customers end markets and favorable buying behavior through this pandemic.
And with our strategic Capex program completed we were able to reduce our capex spend this year, having already made significant investments to increase scale and improve efficiencies.
With the onset of the co in 19 pandemic and the uncertainty of his duration. We are announcing this morning that we're not actively pursuing any acquisitions until such time that the outlook for the economy's stabilizes.
There are simply to greater risk to accurately model, a company's future EBITDA and cash flow metrics at this stage.
Once the economy stabilizes, we believe the flexibility of our capital structure, the strong financial position in which we entered the situation the scale of our business and our ability to consolidate targets and generate cost synergies will provide opportunistic acquisitions.
As a result of putting our M&A strategy on pause and the uncertainty as to the depth and length of the current macro economic downturn, we have decided to remove the 2022 targets for revenue and adjusted EBITDA today.
The 2022 targets were established in 2016 at that point the business was significantly smaller generating approximately $780 million in revenue and a little over 100 million and adjusted EBITDA.
As we have consistently highlighted successfully achieving the 2022 targets required several additional acquisition.
We have always strive to maintain our commitment to be discipline and not overpay for acquisitions to achieve targets that were based on a certain level of M&A activity and a very different economic environment.
As such we believe it as appropriate to withdraw those 2022 targets.
Now I'll turn it back over to Greg for his closing closing thoughts Greg.
Thanks, Jeff prior to the pandemic, we'd implemented a series of measures to visit position us for success, we completed a $160 million plus capital investment program in 2017 in 2018.
We acquired businesses that strengthen our product bundle and expanded our customer base.
We've improved our margin profile through disciplined management of the spread between the selling price and the cost of raw materials.
We restructured our capital stock with the bond offering in 2018 that Jeff mentioned, specifically to improve our financial flexibility in the event of a downturn.
We increased our dividend last year, and we remain committed to that level of dividends, providing comfort to our investors.
We supply essential products to a diverse range of customers and end markets and our packaging tapes and protective solutions offer outsize exposure to E commerce growth and the shift in retail behavior.
These are the essential characteristics that position us to come out the other side of this pandemic in a strong position in the market.
Before closing I'd like to thank all of our employees. This is a very challenging situation for everyone.
I could not be more proud of how they've conducting themselves and the level of commitment to the organization. They have demonstrated its truly tremendous.
With that I'll turn the call back to the operator and open up the question and answer period. Thank you.
Thank you, ladies and gentlemen, we will now conduct a question and answer carried for analysts if analysts would like to register a question. Please press star followed by the number one on your telephone keypad, you'll hear to tell on prompt to acknowledge your question. If your question asked and answered you issue with all your registration. Please press the pound on your telephone keypad, if you're using a speaker phone. Please lift your handset buffer and.
During your request one moment please for the first question.
First question comes from the line of Michael domain with Scotiabank. Please proceed with your question.
Hey, good morning, guys.
Born free Michael.
So I'm going to start I'm, just trying to square off the Q2 revenue guide.
Which implies an 8% revenues.
At the midpoint.
Basis.
And try to spread off with your comments at the company sales to maybe.
Declined.
10 percentage I mean, just a steeper decline in the second half of Q2 just.
In your opinion.
Okay distributors and what does that mean for Q3.
Well listen I'm, we're not going to be predicting kind of Q3, but certainly what we're seeing right now and what we've seen historical historically in environments all the downturn.
Or even a downturn in oil is we've seen destocking happen at the inventory level at some point typically or historically consumption demand lines up with our demand, but theres a period of time, where our demand is lower than the actual consumption that demand happening in the industry.
Hard to predict when that happens I mean, typically it usually takes about a quarter to kind of worked through.
And right size that inventory so that you line up more to two consumption demand.
But we've seen that historically in its hard to articulate or to know for sure.
What amount of de Inventorying is happening.
Okay and put Greg just strategically I mean, you did comment the early signs distributors.
We're finishing.
You are seeing less de stocking figure this year.
Yeah, I mean look I mean, we've seen them units in a finite period of time I mean couple of days a week, we've seen some pickup.
But I'm not going to call that that's going to continue for the quarter.
And move forward, it's just it's too it's too unpredictable.
No fair enough.
Very uncertain times.
So maybe just sticking against you guide.
Midpoint implies a 200 basis points of margin compression I wanted to get your sense on whether the bulk of that.
You were expecting from lower gross margins are lower overhead absorption I mean are you planning that you are.
He stainless is to maintain your gross margin dollar.
Yeah, I mean, I mean look like certainly we're going to come under pressure in Q2 like you mentioned about lower overhead absorption. So we're trying to flex our plans.
The match up with the demand that we're seeing.
And the and the unfortunate while unfortunate impact without of course as you have less absorption of your fixed costs and that does that European al. So there will be an impact of that certainly in.
In Q2, so from a cash flow perspective, that's not necessarily an impact because we would have incurred those costs anyway, but.
Certainly from a piano perspective, you have that hitting.
Okay.
And like it's really just flipping to.
The dividend here.
The initial 2020 guys.
Pledged to the dividends would be twice covered by free cash flow lower sales.
Lower resin prices should reduce our working capital requirements through the year and what's your comfort level.
As it relates to being able to fund the dividends.
Free cash flow generation.
[music].
Yeah. So as I mentioned in my prepared remarks, we're comfortable where we are right now.
The board reviews. It every.
Quarter and.
With what we know right now, we're comfortable with where that dividend is and.
And plan to keep that in place.
I mean, we don't know we don't know like anyone else. We don't we don't know what the future hold we don't know Q3 Q4, I mean, when you when you think about it.
You could apply some logic to it that says you know the shutdowns could have a more dramatic impact on Q2, and you could make an assumption that with a lot of businesses starting up into phase one at least in North America.
You should see some some demand increase but but again those those are just thoughts that I have on on a go forward basis.
Yeah.
I think they line up with my thoughts as well, but Greg I appreciate the comments.
Hello, Thank you.
Thanks, Michael.
Your next question comes from data young with TD Securities. Please go ahead with your question.
Morning, guys.
My questions around the ecommerce site.
I guess is proving to be very attractive.
Goodness.
She previously.
Just wondering if you're seeing any.
Entrance of new competitors or do you want moving into that space or talks about.
Currently just given how well it's been going.
No we have not had any insight on that or heard anything about that.
Okay and then.
Sense of the magnitude of the cost savings from from the fall in oil prices and resin prices currently.
Yeah really hard to predict so when you think of some of the big Big bigger buys on the resin side basically we sit here.
So far this year and were flat because there was an increase that went through in the beginning of the year and that increase has come down in the last the remember the exact date, but certainly in the last 30 days were basically flat.
As I mentioned in my remarks.
Fair to assume that you're going to see some falling raw material prices.
Both as input costs drop.
Feedstock costs drop.
And also demand wanes, but we don't have any order of magnitude right now it's actually been surprisingly stable for the most part.
Okay.
Yeah, that's it for me thanks.
Thank you.
Next question comes from Stephen Macleod with BMO capital markets. Please proceed with your question.
Thank you good morning, guys.
Okay.
Morning.
Just a couple of questions.
You did some good color around the end market breakdown. So thanks for thank you for getting that color.
Can you talk a little bit about.
What markets outside of E commerce, and acute and beverage like where you're seeing above or below average demand declines.
Yeah. So I mean, I would say that in like the transportation like we expected I mean, we're certainly thing a lot of pressure there as you know certain plant shutdown.
Industry shut down a you know I would say on the.
On the building and construction there it's been somewhat mixed because we've had certainly declines in certain areas, but like we said in our woven business, which has you know probably the highest percentage of ability and construction out of our portfolio. We've had some upside with for related to the temporary structure so structure fabric too.
Big basically temporary tenants for testing facilities or temporary hospitals and things like that.
So we've seen an uptick there we've also seen an uptick in volume related to material going into making surgical gallons that specifically in Canada. So we're actually selling too.
Several textile are holding companies that are manufacturing these accounts for the for the government and for the for the medical and healthcare industry.
So we sort of seen a mixed bag. There you know even on the retail side, it's certainly been under pressure, but we've also seen some mixed bag there too with.
Some some order patterns of a quite positive at times and somewhat negative at other times.
So again, you know, but I would say that outside of E commerce, and food and beverage certainly there's more pressure.
General sense.
And just add onto that so yes, I mean, you just think of in the transportation segment. We have we have a fair amount of product going out of our protective packaging business into transportation.
That was shutdown and has been shutdown.
In the midst of starting up right now.
Certainly in the in we've got a pocket of aerospace.
You know that basically shut down I don't know what the recovery rates going to be there probably pretty low but.
Certainly we've seen some pockets of just pure shutdowns on that side and again, we do see pockets of.
Strength in certain building construction products and some channels, but but as Jeff said, it's it's a mixed bag.
Okay. That's a that's helpful. Thank you.
Maybe just extending that within transportation.
How much of it goes into the aerospace business versus automotive or other end markets.
Or is actually our aerospace market would not be a significant portion of the automotive would be much larger.
Okay and are you seeing automotive demand begins to pick up as planned something back upwards that too soon to.
Too soon.
Okay. Okay. So that's that's fine.
Maybe just as you think about the cadence through the year Q2 Q3 Q4.
And given the fact that an uncertainty sort of run slide but would you expect.
Q2 to potentially be a trough in terms of year over year declines like do you see on your order book or from distributors any indication that there would be a pickup in demand on a relative basis through the back half of the year.
I mean look that's that's the question that everyone struggling with right.
Certainly if you look at bank forecast you would expect that on a go forward basis, but.
In our perspective, it's too early to call.
Yeah, I think you know like we said, we're not going to make those predictions, but what we see now it's certainly with US the stay at home orders being lifted to some degree again, nobody knows whether that's going to generate a ton of more infections and you're going to have a double dip but at the same time in the near term, we expect that to be positive because there's things that are shut down that won't be in the near term. So.
Well that would be certainly and that positive.
But again and then there was that the inventory effect, which we discussed earlier, which again, we don't know what that's really going to look like and the timing of that.
But that could be a not positive as well, but that could call. So.
But again I'm not going to predict whether the trough or not at this point.
Okay.
And then and then you gave some color around let's.
Fixed versus variable on cost of goods sold are you able to give that same color fresh tonight.
No that we haven't given that color and SDMA I would say I mean, the majority of asked you in a would be would be fixed there are some variable components in there certainly the variable compensation, which we don't breakout, but you know there's others variable compensation in there there is also.
Sales related costs like commissions, internal and external which would be variable. So there are definitely a variable component within there, but I'd say the majority would still do you have fixed costs.
Okay. Okay. That's that's great. Thank you very much disagree.
Next question comes from Walter Spracklin with RBC capital markets. Please proceed with your question.
Hi, Good morning, everyone. This is a riled strike calling in for all the struck at RBC. Thanks, Good morning.
Just wanted to touch on E commerce quickly with cured and getting your thoughts on how significant the impact of E. Commerce is been since depend began and maybe if you're able to quantify what that benefit looked like toward the end of the quarter and internet.
Yeah, So I mean, <unk>, where we aren't we aren't willing opened our quantifying about at this point, but what we can say is that E. Commerce has been like Greg said in his in his prepared remarks as been just operating at peak levels. So we've seen it certainly the large customers like Amazon I mean.
Operating like they are operating at peak, we've seen massive increases in volume coming from other ecommerce a providers such as Walmart and target and so no question at peak at and like we said that that's affecting several product lines. So not only our water activated tape, but we've seen our air polo systems as well as.
Mailers, just knocking the lights out.
Okay. That's that's that's really helpful and then with leverage looking to take a bit higher during the quarter and M&A now being put on hold it seems where where do your capital allocation priorities. Currently currently lie and you expect that free capital generation going forward would primarily be directed towards debt repayment until.
Visibility on M&A improves.
Yeah, I mean, our priority before this was debt repayment and it's certainly still is debt repayment and as we said with M&A being shut down.
You know that is is the option.
Okay. Then one just one last one for me.
Did the bit of a headwind in the corner in the quarter I'm, just a trend that you're seeing it may as well and then in terms of whats, causing this pressure.
And they're starting to look for concessions or have you seen competitor talked lower pricing pricing to try to attract volume.
Great color there.
Sorry, I missed the beginning of your question.
It was around pricing.
Yes, the with with pricing acting as a headwind in the quarter just curious.
What what caused that Ben.
[music].
Competitive.
The lower prices to track volumes are customers looking for concession.
Yeah, that's what that was driven really by raw material decreases primarily in polyethylene, but really over the back half of last year into this year. So so that's something that was expected.
And again you know when we managed bad we've always managed to the spread we always try to make sure we protect the spread between sell price and raw materials and freight.
You know so for US certainly we expect it to give up some of that as lower raw material environment persists about that was really have just normal.
Pressure from customers normal normal competitive pressures again that markets very disciplined.
You know nothing related to what's going on now and we're not really seeing any any impact or any change in the way competitors are behaving based on what's happening now.
Okay. That's great. Thanks, a lot I'll Oh.
Okay. Okay.
Next question comes from Kneeland dealt with industrial Lyons. Please proceed with your question.
Funding.
Just two quick things here.
Are you seeing I know you don't have a lot of clients. So.
Visibility.
But how are you seeing any kind of trends or any kind of insight into geographic.
Impacts on your sales or better.
Well certainly from an impact perspective, when we look at our business in the northeast.
Of the U.S. certainly that has been.
Hurt more than other parts of the country. So so I I would say it would follow the intensity of cobot 19.
The higher intensity of Copel 19 in an area of the lower the sales have been so certainly west coast East Coast.
But outside of that it's hard to.
Get any more granular than that.
Yes.
And you mentioned on the raw materials pricing, but have you had any.
Like chain issues.
As far as or concerns about getting.
You know raw materials are goods or anything that's critical.
Okay.
Yeah, we we have been very fortunate in our ability to keep our supply chains intact from raw material perspective.
And certainly we had issues over the past nine weeks and and we worked our way through it. So so everything is intact as of right now.
All right.
Yeah.
Okay.
And Mr. yield there are no further questions at this time ill now turn the call back to you. Please continue with your presentation or closing remarks.
Thank you for participating in today's call. We look forward to speaking with you again following the release of our second quarter 2020 result in August in the meantime, I Hope you and your families are safe and healthy. Thank you.
Please note that that a replay of this call can be accessed as of one P.M. today eastern daylight time by pressing dialing one 800 585, Athree six seven within North America, and one for 166 to one for six where two for international callers you may now disconnect your lines.
[music].