Q2 2020 Intertape Polymer Group Inc Earnings Call
During the call all participants will be in listen only mode.
Afterwards, we will conduct a question answer session in order to maximize the efficiency of this event. The question period will be open to financial professionals only.
At that time doses 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 entered the polymer group's Chief Executive Officer, Greg Hill, and Chief Financial Officer, Jeff Crystal.
I would like to caution all participants that in response to your questions and then our prepared remarks today, we will be making forward looking statements, which reflects 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 I see or not I guarantee of future performance.
Under a 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 SEC 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 teeth Dot 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 August 13th 2020 at 10 o'clock am eastern time.
And we'll now turn the call over to Greg You'll Mr. Yu. Please go ahead.
Thank you and good morning, everyone welcome to RPG, 2022nd quarter Conference call. Joining me is Jeff Crystal our CFO.
During the call, we'll make reference to our earnings presentation, you can download from the Investor Relations section of our website.
The second quarter was the most challenging period the company had experienced since I accepted leadership.
I could not have been more proud of how our employees are performed since the onset of the pandemic in mid March.
The team manage a great deal of uncertainty difficult decisions were made through it all our employees demonstrated her professionalism to our customers our suppliers and to one another.
Our emphasis on working safely in servicing our customers insured on on interrupted supply, albeit central products, we produce to end users.
Revenue came in higher than we anticipated a 270 excuse me 267.8 million in the quarter.
Adjusted EBITDA outperformed our expectations at 40.4 million.
Our adjusted EBITDA margin quarter of more than 15% benefited from the tremendous performance of our plans and our time, we decisions to caught or avoid discretionary spending.
These results through this initial stage of the pandemic demonstrate both the a central nature of our product and the resiliency of the business to macro economic change the duration of the pandemic and the potential of further waves remain unknown.
But what is clear today is that I P. D managed through the first wave and we continue to do the same as wires cases increase in various jurisdictions, our employees remain safe and our facilities remain operational.
We are not far better position now to deal with future ways of the pandemic than we were in March.
Our balance sheet remains strong and our substantial liquidity provides us with the flexibility to be either defensive or offensive, depending on the timing of the macroeconomic recovery.
Most importantly, the business demonstrated its ability to generate free cash flows.
One other things based on our strong product offering to our customers the efficiencies instilled in our operations the capital investments we've made it in our world class low cost manufacturing base and our recent acquisitions.
Free cash flow was 35.3 million.
An increase of 72% compared to the same period last year.
The seasonal nature of our business typically generates progressively more cash flow in each quarter, all things being equal.
With the actions we took in the quarter the level of free cash flow was more pronounced then the same quarter in prior years.
Our highest priority for free cash in the near term remain debt repayment at the same time as visibility improves in end market demand and at the appropriate time, we will continue to invest in accretive acquisitions and return to more more normal levels of capital expenditures.
But we're not at that stage today.
In terms of end market demand the diversity of both our end markets and our product offering as well as the essential nature of our product insulated the business from the full impact of the economic downturn in the second quarter.
The trough in mid May demand across the portfolio dipped as long as approximately 20% down compared to the same period last year.
This consisted of declines across multiple end markets, including general manufacturing transportation retail and building construction as well as de stocking by a number of our distributors.
These pressures were partially offset by the strength in the E Commerce end market, specifically as it relates to our water activated tapes and certain protective packaging solutions, such as voice fill system and mailers.
Demand started to recover in late May and ended June and we continue to see positive trends across product categories.
Given the rapid change in demand and the pace of the demand recovery. We experience just in Q2 alone it remains very challenging to be definitive with an outlook.
As a result at this point, we will not be providing specific ranges for revenue.
Adjusted EBITDA, we're free cash flow for the third quarter or the remainder of the fiscal year.
What we can say from a high level is that we're seeing a broad based recovery across essentially all product categories, but to differing degrees.
Demand for specific products that were significantly impacted by the pandemic is returning to more typical levels, specifically certain industrial tape like masking and duct tape certain carton feeling tapes like hot melt as well as structural.
We're also seeing increased demand and wovens, particularly in our building construction products supplied by our Indian woven facilities.
These Indian facilities are essentially sold out, forcing lead time extensions, which is a great result, after the investments we've made in those facilities.
Demand continues to be very strong across our E commerce off E commerce offerings.
Independent research reports the major ecommerce retailers have experienced strong growth since the onset of a pandemic a shelter in place practices.
Both accelerated the transition to E commerce from brick by brick and mortar retail and expanded the product categories in the verticals and consumer demographics that we're underpenetrated prior to the pandemic.
The demand, we've experienced and water actually tape and certain protective packaging products reflect the growth experienced by the major ecommerce players.
The independent reports suggest a pandemic has pulled forward two or more years of demand into the E Commerce channel.
They suggest the cobot 19 crisis May result, in a structural shift, creating a long term change in the way people shop.
The reports highlight the structurally higher E commerce adoption will remain a tailwind, which they believe will lead to sustain faster ecommerce growth in the second half of 2020 and into 2021.
Our exposure to this outsize growth outsized growth in the E. Commerce channel is the most significant difference in our business today versus where we were entering the last downturn in 2008.
And is a clear offensive element in the type of market disruption caused by the pandemic.
At the same time, we also have an improved margin profile and have greater flexibility in our balance sheet liquidity position versus 2008, which are great defensive attributes.
The pandemic May result in a permanent shift in the composition of our end markets in the event E. Commerce growth is sustained at current levels.
Not only can we grow from this tailwind in E commerce, but the ship benefits us because of our disproportionately larger market share as many large ecommerce players use water actually tape as their preferred box closure method, which is not the case in brick and mortar retail.
As we discussed on our first quarter conference calls the investments we've made in water actually tape capacity at the middle Midland facility have achieved our investment return threshold.
The acquisition of Paul here in 2018, and Nortech earlier this year increase our exposure to the E commerce channel by extending our product offering with new protective packaging and automation products.
Specifically target ecommerce retailers.
From an operations perspective, we have implemented cost saving measures across the company since March.
These included taking production offline at certain part plants during the second quarter to better match supply with the demand we were seeing in the market.
This downtime caused a temporary drag on our results in the quarter as fixed overhead was not fully absorbed by our lower production levels in harder hit product categories.
However plant performance remained very strong despite this downturn, which reflects the investments we've made in our employee talent health and safety programs and our world class low cost manufacturing assets.
Three of our four assets in India are at capacity.
Highlighted by the demanded Wovens that I mentioned earlier, the hedge facility, which produced carton ceiling tape has remained hasn't remaining unused capacity, but from both a unit and dollar perspective. Its contribution is immaterial to the business.
Continue to build our order book for that one facility.
Overall, while India is a relatively small component of the business the strategic investments, we've made to diversify our production and raw material supply have proven successful.
The capability to backward integrate into the two Indian woven facilities with the acquisition of my Weve is a great example of that.
Our asset base and our team are the pillars that ensure us to compete effectively across cycles in the packaging and protect the solution markets.
We have a track record of effectively managing the spread between raw materials and selling price across multiple cycles in the last 10 years.
Currently we are seeing higher prices for both polypropylene and polyethylene the key resins across our various product lines.
We expect to be able to manage the spread to retain dollar contribution going forward.
As we move on from the demand lows experienced in April and May the business has demonstrated its durability and religious resiliency, the blocking and tackling that we executed from an operations perspective within the plants in the first stage of the pandemic has evolved.
We're consistently performing at levels that exceeded our expectations for 2020.
With these fundamental operation operational measures and processes intact, we're transitioning our focus looking ahead and preparing for the next phase of growth.
Ecommerce headlines our strategy for continuous innovation.
We believe opportunities exist for both new products and more sustainable product offerings.
Nortech is a great example of our expand product offering that can deliver benefits to ecommerce retailers through packaging automation within their facilities that can use our existing tapes protective packaging and films as consumables.
We continue to invest in products that offer sustainable benefits for both our E commerce customers as well as our broader customer base.
On this front earlier this year, we established our water actually tapes as recyclable and more recently or EXL film plus shrink built.
We're also investing in the launch of a new curbside recyclable protective mailer as part of our Kirby line of sustainable products.
In July we published our second annual sustainability report titled We package, we protect and we sustain.
We're very proud of this year's report and it is significantly expanded from the prior one in new dressing how we manage for sustainability in the operations of the business.
Encourage you to view it on our website to see the progress we've made.
We believe our customers and end users will increasingly pursue sustainable solutions and practices in their choice of packaging and protective product suppliers. We're committed to most importantly, embracing sustainability, but also increasing our disclosure on it so our customers and other important stakeholders can make informed.
Decisions.
As we mentioned on the first quarter call given the disruption in the market during the past five months, we stepped back from any near term M&A opportunities.
Our confidence in a targets future cash flow generation was simply too uncertain to get comfort zone.
However, as a recovery gains traction we believe opportunities for smaller deals may present themselves.
We intend to be opened to these opportunities within an appropriate level of discipline for the prevailing market outlook and still maintain the flexibility of our liquidity position.
We believe the initiatives, we've implemented have put us in a stronger position to whether another potential virus case wave.
From a cost savings and productivity perspective, the team and the plants are performing as strong as we've ever experienced.
The investments we've made in the plant and the acquisitions in the end markets, where we've seen the strongest opportunities for growth going forward.
The business has demonstrated an ability to be nimble and generate cash flow through a very challenging period.
With that I'll turn it over to Jeff to review the financials Jeff.
Thank you Greg on page seven of the presentation. We present, an analysis of our revenue for the second quarter revenue was $267.8 million a decrease of 9.4% compared to the same period in 2019. The change was primarily due to a decrease in volume mix, primarily due to the net impact of the covert 19.
Pandemic on our demand.
Revenue was 10% above the midpoint of the range. We provided on the first quarter call as a result of stronger demand in the back half of the quarter than we anticipated.
Volume mix accounted for 8.3% of the decrease compared to last year with demand declines in industrial tapes pardon feeling tapes, excluding water activated tape and film products. The impact was partially offset by strength in water activated tape and protective packaging, specifically mailers and avoid fill each of which address that you E Commerce Mark.
Good.
Lower prices impacted revenue by 1.5% primarily related to films carton feeling tapes and woven.
Turning to page eight gross margin was 21.1% in the second quarter, a decrease of 79 basis points compared to the same period in 2019.
Pressure in margin was primarily due to capacity optimization and the second quarter to better align with lower demand as a result of the pandemic, which resulted in unabsorbed overhead costs as Greg referenced earlier.
This pressure was partially offset by net improvement another plant related operating costs due to the cost savings initiatives, we implemented in the face of the pandemic.
Adjusted EBITDA was 40.4 million or only 8.5% lower than the same period last year.
The decrease compared to last year was primarily driven by lower gross profit as a result of the demand impact of the pandemic as well as the capacity optimization. Both mentioned earlier. These pressures were partially offset by a decrease in SDMA as a result of the cost savings initiatives we implemented.
At $40.4 million adjusted EBITDA was 28% above the midpoint of the range. We provided on the first quarter call as a result of stronger demand in the back half a quarter than we anticipated and cost savings measures implemented.
These measures included the capacity optimization to match demand that Greg reference a companywide salaried position hiring freeze the postponement of annual pay increases for salaried staff the delay of non essential capital projects and suspension of business travel and other discretionary spending.
In the second quarter certain positions were eliminated as part of an employee restructuring and then initiative. This restructuring resulted in cash charges for termination benefits of $2.7 million in the quarter and is expected to yield estimated annual savings of $4.7 million in wages salaries and other short term benefit.
With the effect of additional adjusted EBITDA of approximately 1.8 million in 2020.
Minimal additional charges are expected to be occurred in the third quarter 2020 as this initiative is completed.
We incurred $1 million in M&A costs during the second quarter, which is in line with a three to 4 million of total integration costs. We expect for 2020 that we referenced on the fourth quarter call. We continue to expect the integration costs for the full year to be within that range.
The range excludes noncash purchase price accounting adjustments and due diligence costs associated with evaluating other M&A opportunities.
Cash flows from operating activities improved by 8.6 million to 40.5 million in the second quarter compared to the same period in 2019.
The improvement was primarily the result of effective management of working capital, including inventory management customer collection timing of payments and the cost savings initiatives I just mentioned.
It's important to keep in mind that the business has a natural seasonality in normal conditions were working capital is viewed as we build inventory in the first half of the year to prepare for the higher volume third and fourth quarter periods from a retail activity perspective.
In the context of Kobin 19, we believe the business has continued strong cash flows in the third and fourth quarters of 2020 in the event. The man maintains its current base and normal trajectory.
Free cash flows improved by 14.8 million to 35.3 million in the quarter compared to the same period in 2019. The improvement was primarily due to the increase in cash flows from operating activities and the lower level of capital expenditures, we announced on the fourth quarter call as one of our precautionary measures.
We continue to believe that capital expenditures for 2020 will be in the 30 million to $40 million range. However, we have adjusted our outlook for the expected effective tax rate to be lower we're now expecting 20%, 25% from the earlier expectation of 25% to 30% as a result of a favorable mix of Ernie.
Between jurisdictions.
Cash taxes paid in 2020 are still expected to approximate the income tax expense.
As Greg mentioned liquidity and the capital structure are critical to the durability and the current climate, we entered the pandemic in a strong position in each case.
We finished the second quarter with $340.5 million and cash and loan availability.
Our secured that leverage ratio, which is our most important loan covenant remain unchanged from the prior quarter at 1.8 times well within its limit of 3.7 times.
From a capital structure perspective, the $250 million of senior unsecured notes issued in October of 2018 is critical to the flexibility we have today.
Senior unsecured notes provide greater flexibility on the key secured debt leverage ratio covenant, which significantly de risks the balance sheet.
Basically the $250 million of senior unsecured notes is not included in our secured leverage ratio covenant calculation.
Our total leverage ratio at the end of the second quarter, including the unsecured debt was 3.3 times, which is an improvement of 110th of one turn from the prior period.
We did not have any maintenance covenant on total leverage. So this does not put us at any risk under our credit agreement. It is our secured net leverage ratio covenant of 1.8 that as measured versus our limit of 3.7 times.
In closing as we proceed into the second half of the year. We believe it is beneficial to highlight the external factors that may influence the business.
From a tailwind perspective, the sustainability of the increase in ecommerce growth is a major factor. The reopenings have supported our industrial vertical and given distributors the confidence to restock inventory to more normal level.
Finally, the cost saving measures, we implemented will have a greater impact in the back half of the year than we experienced in the second quarter.
On the other side of the ledger the unpredictability of the case counts in the impact that figure could have on potential new shutdowns, which would likely be more regional at this time.
As well as the macroeconomic environment as government assistance programs expire could create potential challenges.
Lastly, the raw material pricing impact, Greg mentioned earlier, where we expect to manage.
The dollar contribution.
It is too early to promise the worst is over but given the disruption to the economy in April and May we certainly have a much better understanding of how our business can perform through such a challenge and we believe that we are much better positioned to manage the next potential weve cases.
Now I'll turn it back over to Greg for his closing thoughts Greg.
Thanks, Jeff to sum up it's important in today's situation to remain cautious but at the same time recognize that we have a better understanding top forward from here.
In mid April and on through jet and May we were managing a significant level of uncertainty as it relates to end market demand and distributor destocking with approximately 80% of our business servicing the U.S market. The increase case counts in July or unsettling, but at this stage. It does not appear that the broad based shutdown.
Measures of March and April will be repeated and even if they were in some form we now have a good idea what that would look like to our business and how we could effectively managed through it.
We have tested a trough in the end market demand and started to see recovery.
We supply essential products to diverse range of customers and end markets.
The investments and acquisitions, we've made since 2016 or in the areas, where we see the best opportunities for growth.
Plus our exposure to E commerce sets us up well as it is expected to maintain its momentum through the second half of 2020 and into 2021.
The measures and protocols, we've implemented since the onset of the pandemic have enabled us to not only remain operational but have delivered productivity gains.
Our balance sheet liquidity position offered defensive and offensive flexibility depending on the duration of the pandemic and the opportunities we see in the market.
These are essential characteristics that position us to come out the other side of this pandemic in a strong position in the market.
Before closing I.
I would like to thank our employees, that's a very challenging situation for everyone.
I could not be more proud of how they conducted themselves and the level of commitment to the organization they have demonstrated.
It is truly tremendous.
With that I'll turn the call back to the operator to open up the question and answer period. Thank you.
Linda.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound or hash key.
Please standby have only compiled acuity roster.
Our first question comes from the line of Michael domain with Scotiabank. Your line is now open.
Hey, good morning, guys.
Good morning, Michael.
First off great quarter.
I guess the question first one is once you get a better sense for the monthly revenue guidance. So just on your Q1 call. I mean, you indicated that revenues in April through call. It early may were down 10% year released today.
Talked about demand being down 20% at the low point to the quarter.
To get back that 9% that we saw for the full quarter of math tells me that we are close to flat in June so I'm wondering.
If you can talk about sort of the dynamic exiting Q3.
Whether you're seeing overall pent up demand.
Any color there with Greg.
Yes, or no I think thats, a pretty good assessment of what happened. So I mean as you said I mean, we started off.
As we mentioned on our May call any early early April certainly looking quite favorable and then saw this trough happen through the back half of April into the first half of May and then started to see things recover as things started to reopening so yes June was.
Only the best month out of the three by far and we've seen those trends continue.
As we are saying in into Q3.
Okay, great and age to tell us that further on slide five.
You categorize some of the trends.
You know and product categories.
Under strongly favorable and favorable.
Hi, sort of look at those.
Categories, It looks like more than 50% of your revenues would be categorized under strongly favorable it and or favorable.
Does that.
Jive first does that indicate that you might actually be seeing some positive momentum early Q3.
Yes look I mean, I think I think the way you characterize that's fair I do believe there's no. We look at the order demand and certainly there's noise in there that is hard to distinguish.
But I think overall look we're we're in Q3, we're feeling good about where we are definitely with our order book.
And we've seen we've seen demand come back in the areas that were the weakest.
And certainly on the.
The strongly favorable side that has just continued so so certainly we've seen a very nice rebound.
Okay great.
Encouraging for sure and maybe if I can just sneak one last in.
The woven being in the strongly favorable category.
I think does surprise me somewhat I mean I was wondering if that's all.
Homebuilding or at least for the most part homebuilding.
And if you can just give us an update on.
Given the investments that you've made in that category, how far along the.
The margin improvement journey, you are in that woven business.
So I would say overall from a demand perspective on the woven business we did have.
Some new products will through into Q1 Q2, you know that had to do with medical gallons. So we had some offset there that really helped some of the softness that we're experiencing at the time in areas like building construction and other areas.
And then on a go forward basis, we've really seen a nice rebound in all of their end market exposure areas with the exception of oil and gas.
Certainly that is still a laggard, but when you think of where the businesses.
Certainly in building construction certainly in AG.
We've continued to see strengths there.
As it relates the investments that we've made were as as I mentioned in the call. Those two facilities that we havent, India supplying or woven products are currently sold out.
So from a margin profile, we're really starting to see the effect of that on the piano and expect to continue to see that as we move through the latter half of 2020.
Okay, Great again nicely, Doug thanks for answering questions.
Thanks, Michael.
Our next question comes from the line of Stephen Macleod with BMO capital markets. Your line is now open.
Thank you good morning, guys.
Morning experience wondering.
I wanted to follow up just on the previous other questions with respect to kind of Q3 to date trends. She gave you give some color around.
Trends by product type.
Can you talk a little bit about trends by end market.
If you had slide five and you took that Pie chart and broken up can you talk about where you would see some of the.
Puts and takes maybe excluding ecommerce.
Okay. So I'll look at it on a sequential basis.
Works.
So certainly when we think sequentially into Q3.
On the on the high side, certainly fulfillment E. Commerce building construction definitely very strong retail continues to be very strong food and beverage continued its strength right.
On the general manufacturing side, I would say that we've seen a significant recovery sequentially is still some weakness in that category and I would tie that into the transportation market as well certainly a very nice rebound from where we were in Q2.
But still softness in those two specific end markets.
Okay. That's a that's helpful.
I guess, what research to say that the tailwinds are sort of offsetting the headwinds from where we stand.
Assessments.
Yes pretty fair.
Right.
Okay. Okay, that's great and then just on the cost side.
Jeff I just wondering if you could quantify if you did already I apologize, but you talked about the larger impact cost savings in the back half of your can you talk about what that number would look like on a full year basis.
Yeah, we haven't quantified that always quantified as the a the restructuring plan that we put in place. So that we expect to yield at $1.8 million and Thats really all going to be in the second half because there was really nothing in the in the second quarter related to that and then there will be additional cost saving measures, which we haven't quantified.
Related to obviously know raises and and some of the discretionary spending the reduction in travel.
So you should start to see that roll through Q3 in Q4 materially than Q2.
Okay. Okay, that's great.
Maybe just finally on the gross margin negate some color around the movements in resin prices.
And you expect to manage the dollar but when you look at all the puts and takes with respect to demand and resin price inflation.
How do you expect gross margin to evolve into the queue into Q3 in Q4.
So.
I think with where we are right now.
And with on a sequential basis with what happened in Q3 was fixed costs.
Margins should improve on a sequential basis into Q3.
And with regards to raw materials I mean, we've always said as we always manage that dollar spread. So that's that's what we're going to manage to in this case too with the inflationary environment at this point on resin.
So assuming we manage that dollar spread dollar for dollar you could see some reduction in margin right as you head to the back ended the year, but again that all depends on how much how well we do there.
Well, we've got right back to manage that that dollars breadth.
Okay. Okay. That's that's great. Thank you and congratulations on a good quarter.
Thanks.
Our next question comes from the line of Walter Spracklin with RBC capital markets. Your line is now open.
Hi, Thanks, very much good morning, Greg one Jeff how are you doing.
All right.
Good good show on the cost you mentioned wage freeze is obviously you've taken extraordinary moves here to reduce costs amid the lower lower volume environment wont those costs come back like aren't you more the kind of a job shop as oppose.
As to you know.
A company that might see more kind of.
Incremental savings or or.
As volume comes back can you really expand merging or Shouldnt, we I know, Greg you mentioned, you expect margin enhancement, but.
Even given the dilution from.
Resin price pass throughs, I would've thought margins would have kind of gone back to where they were before as you relax. Some of these kind of one time extraordinary cost measures that you've taken into consideration here.
Yes. So certainly good question. So certainly on a on a go forward basis, when things get back to whatever new normal is you'll have some costs come into the company.
That that will be reposition, but when you think of the totality of the cost savings that we've taken and when I say that I conclude our operational performance within the facilities.
We don't expect to give those back.
On a go forward basis, and then and then the other piece specifically around SG today.
It's hard to determine.
How much of that SGN, a or what a new normal specifically on the selling side cost side.
We get too because certainly we've learnt as an industry and as companies to manage that differently and and manage it effectively so I'm not sure what cost.
Get permanently taken out just because of a structural go to market change.
So Jeff I don't know if you haven't yet I mean, I mean, I think a tierpoint Walter I mean, there will be something that will come back as there has been some projects we put on hold some discretionary spending around that no consultants and things like of that nature would certainly will benefit us through this year, but as we pick up and get back to a normal and pick up those projects again, you'll see some of that come back.
At the same time you know at this point, we're not planning any merit increases this year, so essentially your skipping a year.
So you're sort of a year ahead could there be merit increases next year, possibly if things continue to improve.
So the certainly you'd see that but then you look at stuff like that travel and entertainment type of category, which isn't isn't insignificant for us.
That I think like probably many others and all kinds of industries are probably going to see that stay down for quite some time.
I think we've we've been very successful with working remotely obviously leveraging all of these video conferencing tools and and we certainly saw benefit in that and I think you're going to see a permanent shift in the use of that and more frequently. So I think that we're going to see a permanent reduction in that travel and entertainment category, which should.
Good and then I think also the restructuring plan you know it what it does is it helps you sharpening your pencil and I think it really gave us a good look across the organization at optimizing some positions and so forth and functions and I don't think all that's going to come back I think a lot of that will be perfect.
So with all those gyrations going on in terms of end market I know you get this question a lot so Alaskan again anyway.
Commerce is a total of your business now that you've seen a lot of youre kind of industrial revenue falloff in some.
We'll come back nicely, but others as you alluded to will not come back as much and Meanwhile.
Greg You mentioned your prepared remarks E. Commerce is two three years fast forwarded.
Just is there any broad sense you can provide us is to the new or now updated.
End market exposure you have in the ecommerce channel.
At this point, we can't comment on that I would imagine Walter will end up commenting on that at the end of this year and reestablishing.
Those percentages by end market.
Difficult to do on a per quarter basis, but certainly that percentage of overall revenues, increasing yes, yes lots of moving parts.
Obviously, yes, it's hard to do on a quarterly basis I hear you. Okay. And then last question here is on the theory or thesis around onshoring.
Lot of talk about it particularly around.
Strategic products and I know you mention on your woven and certain number of your product you are showing into that that new avenue of growth.
In domestic markets, but my question is really weather.
Is there a new opportunity that might emerge here that when you look at some of your.
Structurally impaired and market.
And then you could you contrast that with some of these new growth that that is emerging.
Could you like you did with E.
Ecommerce and really build new plants around and E commerce product could you envision refurbishing or building from scratch new plants that are designed to provide a local kind of.
No strategic manufacturing presence in it from a domestic standpoint.
Well, what I would say to that as I mean, certainly we've seen some opportunities for new products like we said like certainly this.
Fabric, we've been producing for medical gallons has been highly successful.
And certainly that I can imagine the Canadian government or other governments here may may like to have that onshore.
At this point, we're able to do that with the capacity. We have so we don't have any plans to necessarily build or.
Invest in a large amount of capex to support businesses like that but there could be some motivation to have that ability of which we do.
Monks customers, who want to make sure you have an onshore capability.
We've been successfully doing already so so certainly we do see opportunity there, but I don't think thats going to turn into like some big Capex investment I got it. Okay. That's all my questions appreciate the time.
Okay.
Our next question comes from the line of Scott from some with RBC. Your line is now open.
Good morning, just wonder if you could talk about.
What.
You may see with changing.
Consumer industrial demand.
How it's going to impact your cap is capex an acquisition strategies I know you you said that thats kind of.
Delayed, but I'm wondering if you're able to do you need to re purpose, so industrial production facilities to ecommerce.
Products and could this include asset closures.
Well look I don't think we have any line of sight of having structural problems within our industrial markets or manufacturing facilities. At this point right. So to start with I don't think thats.
That's that is not where we are right now to start with right. So that we're not talking about re purposing.
Any assets at this point, Yeah, I know I mean I think.
Obviously, we saw the trough in demand in Q2, and certainly that would just lot forever you might have opportunities to let's say re purpose a certain amount of capacity, but since the Matt has come back.
As you see in our trends I mean, you're seeing some some favorability in some but it's again, it's not moderately unfavorable so certainly not a big opportunity there to re purpose capacity, even if it would stay at the current trend.
Okay, just a question on.
Resin are you seeing price increases in your resin inputs.
To that.
Sources are showing.
It has gone up.
From the latter part of Q2.
And how do you see this playing in the pass through structures.
Impact on margins.
Yes so.
A lot last question first on the margin side, we really.
Concentrate on spurt protecting our dollar spread between revenue and raw material cost. So thats our number one so in a highly.
Inflationary environment and raw materials, you could see margins come down and dollars stay hole on a go forward basis, certainly we've seen a fair amount of movement in both polyethylene polyethylene has moved the most we've seen movement within the polypropylene spectrum recently.
And as we manage through that we plan on passing those costs through.
The channel some of those have already been implemented.
Both on the buy side of us buying higher cost raw materials, and importantly on the sell side with us selling at a higher price to cover those costs the impact.
We will pretty much stem out into the latter part of Q3 into Q4, and and we expect to again manage that dollar spread on the way through.
Would it.
Would it be similar situation with your paper based products, particularly those for ecommerce.
Yes on the paper side, we really haven't seen that much movement.
And in some cases on paper.
We are locked in on from a pricing perspective.
But we do not see much exposure on the paper side and then even just continuing on with raw materials were seeing declines in some hydrocarbons that we utilized for adhesives, namely ESI SNC five.
And and that's somewhat of an offset or a partial offset to some of the other headwinds we're seeing.
Great. Thanks, that's helpful.
Okay. Thank you.
Our next question comes from the line of Zachary ever Shen with National Bank financial.
Your line is now open.
Good morning, everyone sticking my question back.
Morning.
Just one quick one for you with the strength that we're seeing in E. Commerce end markets, we're expecting a little more on the Nortech acquisition.
How do you square the performance there with the Tailwinds that we're seeing.
Yes, so the Nortech nortech situation as it relates to E. Commerce is more of a kind of forward looking development engagement with our ecommerce verticals.
And not whole strategic push around automation at that level is more intact now than it was before coated.
The struggles that we're having on a day to day basis at Nortech is just the pure blocking and tackling around acceptance of equipment.
Certainly factory acceptance test acceptance testing is a struggle getting people into our facility to sign off on the equipment and then also want to go forward basis.
Getting people out in the field to install that equipment has been problematic since cobot 19 hit.
I think the whole exercise around E commerce being accelerated a couple of years will further accentuate.
The fact of where the need for automation on a go forward basis. So I don't know if that answers your questions I.
Yes, it's really helpful.
Yes, I'll turn it over.
Thanks.
As a reminder, ladies and gentlemen, please press star one on your telephone keypad to ask a question.
Our next question comes from Neil Lin style with industrial Lions. Your line is now open.
Thanks, Good luck guys congratulations on the quarter.
Thanks.
Just.
Kind of a clarification on your facilities in India I'm, just wondering about the resiliency of your Indian operations as we start to see.
Actually more coated cases, there with the hub and labor.
The labor situation in India versus how you do operations in North America is there much more of the labor content.
And I know the North American facilities, you have very well equipped for automation for social distancing that same thing with India.
Yes. It is so so at a very high level.
Our ending facilities were basically implementing the same policies and procedures as it relates to protocols around.
Cobot 19 in those facilities.
Certainly when you think of just woven products as a whole versus our take facilities.
There's a higher labor content in woven products.
And look at the end of the day, we're managing as best we can these these situations in all of our plant.
And have pretty.
Structured procedures and protocols in place.
And then we also have procedures and protocols in place if we have a covance positive test in one of these facilities.
So that's that's basically AOS, just continuing to manage through that situation, but.
But I wouldn't I don't.
I don't think if you walk through a plant in India, you'd see that many more people than you award in North America as it relates to.
Congregation or density of employees.
Okay, so equally well position.
Loan I remember when we did the the Investor Analyst day in Midland We were looking at different things that your clients were looking at as far as innovation as far as their packaging needs is there anything in the current environments.
Yes.
Is changing or may discussions that are going honors everybody just trying to figure out how to manage would correct.
Yeah, I mean, I think what what's really happening is obviously the acceleration of E. Commerce is creating more urgency right for products in that channel.
So we talk about our Kirby.
Recyclable Mailer that without is something that market is just frosting at the mouth about and needs in light of ecommerce picking up steam the same thing with our other products with our our XL wrap and other products within that channel. So we're seeing a lot of demand coming there and certainly when they see new pro.
Products. There is just that much more urgency is what we're seeing but I wouldn't say, you're saying you're seeing necessarily a change in new products or a change in new product strategy from pretty co, but it's just maybe more of an urgency around it.
Okay. Thanks.
Thank you thanks Neil.
Our next question comes from the line of Steve It Ocampo with Cormark Securities. Your line is now open.
Good morning, everyone.
Good morning.
I just have sort of a longer term question I know this year most of your free cash flow be directed at.
Really knocking down the leverage but as we've kind of exit Toby you sort of indicated that you made some acquisitions down the road. How are you guys balancing that with share buybacks and really keeping the leverage down I know you guys have indicated in the past that you want to keep it up to two and half but would go up front for an acquisition just just trying to square that online.
So look I mean, I think I think overall the visibility around you know future cash flows of businesses is still somewhat cloudy right. So on an M&A side its.
As I mentioned in my prepared remarks, it's still uncertain.
Focus around debt repayment is still there and once we get to that kind of two and half times leverage I mean, we've got a lot of opportunity there too.
Distribute capital and reallocate priorities.
But it's hard for us to comment on that on a go forward basis until we get there I mean.
As we said our number one goal is to repay debt.
In the midst of doing that we can still do some small acquisitions on the way through and still be capable of paying down debt.
That's great. Thank you.
Thank you.
And there are no further questions at this time.
Thanks Lindsay Thank you for participating in today's call. We look forward to speaking with you again following the release of our third quarter 2020 results in November in the meantime, I Hope you and your families stay safe and healthy. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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