Q3 2020 Intertape Polymer Group Inc Earnings Call
Andrew Polymer group Q3, Twentytwenty conference call during.
During the call all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session.
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Joining me from the company I have entity polymer groups.
Chief Executive Officer, Greg fuel.
Chief Financial Officer, Jeff Crystal.
I would like to caution all participants and 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.
You are cautioned to not place on.
Reliance on these forward looking statements as they are not guarantees of future performance and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those.
As 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 the.
FCC rules.
A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available at our website at www Dot <unk> Dot com.
Please also note that all dollar amounts are in us dollars unless otherwise noted.
I would like to remind everyone that this conference is being recorded today November 12, Twentytwenty at 10 am Eastern time.
And we'll now turn the call over to Greg <unk> Mr. Yu. Please go ahead.
Thank you and good morning, everyone welcome to IP G 2023rd quarter Conference call. Joining me is Jeff Crystal.
CFO.
During the call we will make reference to our earnings presentation that you can download from the Investor Relations section of our website.
It was an outstanding quarter for the business.
It all starts with our team.
We supply a central packaging and protective products to our distribution and end user customers.
Our employees continue to perform exceptionally well as we deal with the changes to our work and life as a result of the pandemic.
Their commitment to show up and to perform their work in a safe and professional manner makes me proud, but it doesnt and when they walk out of the plant were office their safety and health outside of work is just as important.
And at this time and they have demonstrated respect for their colleagues and their communities in this aspect as well.
Their emphasis on working safely and servicing our customers has ensured an uninterrupted supply of the essential products we produce.
This work has resulted in our strongest quarter ever the numbers.
Speak for themselves when compared to the prior year's quarter.
323 million in revenue in the quarter up 10%.
64, and a half million in adjusted EBITDA up 40%, which.
Which translates into a 20% adjusted EBITDA margin and $59.2 million in.
Cash flow generation up 52% over.
Over the course of the past five years, we've invested in the business to build a world class low cost manufacturing base with an emphasis on our key growth markets.
We made these investments for a specific purpose to be competitive regardless of the economic site.
Michael.
Those investments have set the stage for what you are seeing now the.
The pandemic has impacted businesses differently, depending on the markets they serve.
What is becoming clear to us is a structural change underway in E commerce, which is very favorable to us.
Increased demand in this.
Ecommerce market as well as in building construction and a return to positive performance in most of our other end markets was an important component of the growth we are experiencing.
On the other side of the equation is the performance of the business our plants continue to perform extremely well.
Continue to effectively manage the spread between selling prices and raw material costs.
And the cost reduction program that we implemented earlier this year is providing benefits each.
Each of these elements contributed to our strong results in the third quarter.
After the initial onset of the pandemic a comment.
Common question, we received from investors was when would the business return to its 2019 run rate.
We have now exceeded that run rate based on the third quarter.
As we open the fourth quarter, our order book to date remains strong and is consistent with what we saw in the third quarter.
We as a result, we provided an outlook for the fourth quarter across a number of key metrics. This morning.
Revenue in the fourth quarter is expected to grow by 10% or more compared to the same period last year.
Adjusted EBITDA is expected to be between 58 and $63 million in the fourth quarter.
And free cash flow is expected to be between 35 million to $45 million.
The free cash flow figure takes into account a planned increase in our expected capital expenditures to a more normalized range.
Which brings us to our capital allocation strategy debt.
Debt repayment remains.
Our number one priority for capital.
With a robust performance in the third quarter, we repaid more than $49 million in debt and drove down our total leverage ratio to 2.7 times.
As we've mentioned previously our targeted ratio is two to two and a half times and we've made great.
Progress on approaching that range in the quarter. However.
However, as we've said before we need to be able to walk and chew gum at the same time.
Our performance has created greater flexibility than what we initially envisioned at the onset of the pandemic.
This morning, we announced the board has declared.
Rate, 6.8% increase to the fourth quarter dividend to 15, and three quarter cents per share or 63 cents on an annualized basis.
This increase represents an incremental draw of approximately 2.4 million of cash on an annualized basis the.
The dividend increase.
Increase represents our confidence in the ongoing cash flow generation of the business.
At the same time with this flexibility we've decided to increase our capital expenditure budget for 2020 to support growth initiatives in our key verticals primarily E commerce.
Year to date, we've invested 20.
$21 million in Capex, which put put us on track to meet our initial outlook of $30 million to $40 million, we established in March.
Based on the growth we are experiencing in the E. Commerce end market. We've adjusted our 2020 full capex to be between 45 and $50 million, which is still well.
Well within the range of a normal annual investment, which we have previously stated between $40 million to $60 million.
These new investments support the growth, we experienced in ecommerce demand by accelerating capacity expansion and product categories.
Independent research reports the major E commerce.
Commerce retailers have experienced strong growth since the onset of the pandemic.
The report suggests the growth is being exhibited in a couple ways.
Number one an increase in active customer base, bringing new participants into the market that have not used ecommerce previously number to an increase in order frequency.
Customers are ordering more often across a wider range of products.
Packaging products targeted at ecommerce will benefit from these growth drivers.
The demand we are experiencing water activated tape and certain protective packaging products reflect the growth experienced by the major E Commerce players.
The reports highlight that the structurally higher ecommerce adoption and order frequency will remain a tailwind into 2022 and beyond.
The shift from brick and mortar to E commerce benefits us because of our disproportionately larger market share as many E commerce players.
Okay use water activated tape as their preferred box closure method, which is not the case in brick and mortar retail.
E Commerce is not only an important vertical from a volume perspective, but it is also accretive to our adjusted EBITDA margin profile of the overall business.
We also continue to see.
Airs on demand in the building construction end market, which benefits, our wovens and industrial tape categories.
On the Wovens business the investment we made in building capacity in India and the acquisition of my Weve have improve the margin profile of this category.
Historically, the Wovens business under for.
Mr formed the average corporate margin profile, but that is no longer the case.
Investment decision to build the Wovens Greenfield in India has met its objectives through both structurally and materially improving the profitability and EBITDA contribution of this business.
This is even more meaningful given the current.
Current Tailwinds, we are seeing in the building construction customer channels over.
Overall, the diversity of both our end markets and product offering as well as the essential nature of our products have been core to the underlying performance of the business.
We believe one of the key strengths of our of the product bundle moving forward will be our.
Profitability to offer customers and their end users sustainability benefits, we continue to invest in both new products as well as qualifying existing products against recognized incredible sustainability standards in the market so customers and end users can make informed decisions.
As an update we recently received cradle to cradle certification for two additional products number one our woven Nova shield structure membrane wovens product, which is.
Proven material of choice for fabric buildings in all clients number two our stretch films.
That are used to palletized goods for shipping in total we've now received the cradle to cradle certification on four major product lines, including the early earlier certifications for water activated tape and shrink film.
It is an understatement to say that this year has been a challenging environment, but we believe.
He the actions we have taken a put us in a strong position to compete effectively through any market.
We are seeing the benefits in profits and cash flow from the investments we've made over the past five years, both in Capex and M&A and our performance in the third quarter supports our conviction, we have built a business that.
Generates free cash flow serving essential markets.
With that I'll turn it over to Jeff to review the financials, Jeff. Thanks.
Thank you Greg on page eight of the presentation. We present, an analysis of our revenue for the third quarter revenue was $323 million an increase of 10%.
I'll leave it to the same period in 2019, the change was primarily due to increased demand and products with significant ecommerce end market exposure.
Volume mix accounted for 9% of the increase compared to last year, primarily due to strength in water activated tape mailers and voin, Phil each of which could address the ecommerce market as well.
Well as woven which address the building construction market.
In terms of underperforming categories, there was nominal pressure and acrylic and masking tape, but it was marginal compared to the same period last year.
Lower prices impacted revenue by less than 1%, which were predominantly related to the management of spread.
On lower raw materials.
Turning to page nine gross margin was 26% in the third quarter, an improvement of 422 basis points compared to the same period in 2019.
Greg called out the drivers of the margin improvement earlier, specifically, the effective management of the spread between selling prices and.
Material and freight costs and favorable plant performance as a result of both the leverage of increased production to meet demand and the benefit of the cost savings implemented in response to the pandemic.
Adjusted EBITDA improved 40% to $64.5 million compared to the same period last year.
In recruitment was primarily driven by the margin drivers I mentioned earlier being spread management and plant performance as well as cost savings measures within our SGN a expenses.
Cash flows from operating activities improved by $19.2 million to $67.5 million in the third quarter compared to the same period and 29.
Centene the improvement was primarily the result of the higher gross profit.
Free cash flows improved by 20.2 million to $59.2 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.
As Greg mentioned, we have it.
Increased our targeted range of capital expenditures for 2020 to $45 million to $50 million to address strategic growth projects, primarily related to E commerce demand.
Our outlook for the expected effective tax rate remains unchanged at 20% to 25% cash taxes paid in 2020 are expected to have.
Estimated income tax expense, which was taken into consideration when establishing the free cash flow outlook for the fourth quarter of $35 million to $45 million, which Greg referenced earlier.
We expect the free cash flows for the fourth quarter of 2020 to be inline with the same period in 2019 once you take into consideration.
Properties Capex to address the strong ecommerce the man and the increase in cash taxes.
Based on the third quarter results, our liquidity and the capital structure, which were strong entering the pandemic have improved even more.
We finished the third quarter with $372.2 million in cash and loan available.
Singularity.
Our total leverage ratio at the end of the third quarter, which includes the unsecured debt was 2.7 times, which is an improvement of six tenths of a turn from the prior period.
We do not have any maintenance covenant on total leverage.
Our secured net leverage ratio, which is our most important loan covenant came in for 10.
A bit of a turn lower at 1.4 times compared to the second quarter of 2020 at that level is well within its limit of 3.7 times.
With the onset of a second wave of new case counts in a number of regions. The duration of the pandemic is clearly uncertain. What we do know today is how our business performed during both the severe.
10th Downs experienced from March through June as well as the less restrictive, but still abnormal environment. We find ourselves in today, we will continue to manage the business to ensure both the safety of our employees and high level of service to our customers in order to deliver for our shareholders.
Now I'll turn it back over to Greg for his closing closing thoughts Greg.
A lot. Thanks, Jeff It was a great quarter, we endured the uncertainty of the first half of 2020, we had to be agile and proactive and we were the business demonstrated resiliency in the third quarter and based on the outlook that we have announced today, we expect more of the same in the fourth quarter.
It's human nature to want to return to normal.
Channel, it's familiar and well understood, but we are operating in a new environment changes have taken place in the market that I believe will under the new participants using ecommerce have accelerated the transformation of retail.
The increased focus on sustainable attributes in the supply chain is not going to disappear and we.
As we all focus on safe and healthier lifestyle choices, our business delivers on both fronts.
We provide essential packaging and protective products for the economy. We have made a series of investments to build a world class low cost manufacturing base that can compete effectively in any market cycle.
And as we continue to make disciplined investments as necessary in markets, where demand is growing like E commerce and sustainability.
It's an engine that delivers strong cash flows.
We have a strong balance sheet and liquidity position that offers us the flexibility to be both defensive and offensive depending on the market cycle. These.
These are the essential characteristics that position us to come out the other side of this pandemic in a very strong position in the market.
I'd like to thank our employees. This is a challenging situation for everyone I could not be more proud of how they have conducted themselves and the level of commitment to the organization. They have demonstrated its truly.
The tremendous with that I will turn the call back to the operator to open up the question and answer period. Thank you.
A question Please press star.
Keith.
Your first question.
Scotiabank.
Fantastic quarter guys.
Okay.
The sales increases no doubt impressive.
And I think we're all going to try to parse out.
How much of the increase was structural versus cyclical.
That will end part to.
Depend on how much ecommerce is driving the growth versus other categories.
As well as gauging Latin.
Overall restocking.
Any way you can provide us with.
Our range of ecommerce contribution to the organic growth or any general comments there.
So I'll make a couple comments just overall, we take a restocking we're.
We look at kind of sequential chart. This.
Of our order book.
We really havent seen.
Anything but increased demand as we moved out of the shutdown so certainly restocking.
Doesn't appear to be apparent in our order book at this point like it hasn't dropped off in other words.
And then.
Here just on the margin side and then Jeff can comment on ecommerce you on the margin side, when we think of the operational performance of the business.
Certainly you look at the contribution that we have out of our Indian operations in the quarter.
Those played a key role in the EBITDA improvement outside.
Of ecommerce.
Yeah, and then in terms of growth when we think of a quarter I mean, certainly E. Commerce was the leader in terms of generating the growth in the quarter.
Which which as you know we saw in Q2 as well.
And as we mentioned in our prepared remarks.
We read all these more formal.
Reports coming out there on the E commerce industry and certainly.
We believe that that is a structural change that has accelerated the growth of E commerce, and we intend to see that continue.
But then we also saw good growth as we mentioned in our in our disclosures around the building construction and retail side that.
That was quite strong and again the building construction you see the stats out there.
At our public and then even on the retail side and we saw some good demand you know some of that may have been restocking, but some of it but a lot of it is also related to people who are doing things at home do it yourself things a lot of those types of supplies were were seeing.
Seeing heavy growth in the quarter and continued we continue to see that trend as well.
Well, not taking vacations and moving and with the work from home type setups being somewhat permanent for a lot of people or at least partially permanent.
So we see good trends in those areas as well and then when I think about the rest of the business like given the general.
No manufacturing transportation food and beverage.
We saw some marginal decreases I guess when you look at the quarter, but really it was almost flat to last year. So there wasn't really as much weakness in those categories as you might have expected so.
And we continue to see that as well.
Your next question.
RBC capital market.
Yes, thanks, very much great quarter, everyone very impressive.
I'd like to add to it.
Yes to asking do.
Yes.
Sure Hi, Ron your whole program, obviously, when we bring.
Youre right youre going to fish.
In the Carolinas last time it it's certainly certainly suggested there was low.
Did that low cost relative to the whole load of water activated.
But.
Is that when we look into next how much have you built in with this.
Growth Capex that you're spending in the fourth quarter and should we see their frac or.
A larger than normal range cap and in 2021 as you further look to take advantage of the E. Commerce growth are there any.
Yes, so good morning Walter.
You kind of broke up quite a bit there on the question, but I think I've got that just have it. So if I don't cover it properly. Please let me know.
So with some of the work that we're doing right now on accelerating our capex for this year.
Some of that has to do with just de bottlenecking.
In certain cases some production.
So upgrading of existing equipment that will give us incremental capacity.
You know as it relates to the Midlands facility I think you referenced.
We have not announced any further expansions in that facility at that point so.
So what we see right now is not expanding that facility and then as we look into 2021.
Certainly the company has got lots of opportunities here from an organic perspective to grow.
We're just working through our budgets right now and certainly will.
We'll come out with with some.
On the Capex guide I assume when we announce Q4, so it's too early to talk about that.
At this point, but I will reiterate that like in a normal state I mean, this business from a capex perspective should run about $40 million to $60 million a year.
Okay that makes sense makes sense hopefully.
You can hear me, a little bit better hero switched over headsets.
Actually much better perfect. Okay. Just my follow up question here is really on your pipeline you mentioned its.
It's a strong order book and.
And you like what you see as you go into ecommerce here or.
Go into the ecommerce peak.
How much visibility do you.
Moving to 2021, obviously, we're going to be putting together our own numbers here as we look out to 2021.
And your order book give you visibility six months three months out and and those comments are they really applying to the fourth quarter or do they extend here into 2021.
Well listen I think certainly there is some extent.
And there as we referenced kind of a structural change that we're seeing in the business right. So you know.
I'm not going to I'm not going to comment too much on on next year. The other comments I will make is some of the.
Capture that we made from an operational improvement perspective, certainly we expect that to carry forward.
And as you look at the revenue.
New increases on our guide in Q4 plus 10.
Or greater than plus 10.
Certainly there is a lot of leverage there as we move through.
Our fixed asset base.
There, Yeah, I guess well answer to your question I mean, but when we actually see in our order books typically three to four weeks out.
And for the most part so I wouldn't have really strong visibility into that okay. That's that's those are my two thanks very much guys great quarter.
Thank you.
Our next question.
Yes.
Yes.
Thank you good morning, guys great great.
Congrats on the great quarter. Thanks.
Thank you.
I just wanted to circle around on the gross margin in a very strong Q3 and I'm. Just wondering if you can talk about some of the puts and takes us or roll into Q4.
Yes, sure. So I think when you think about Q.
For and what we are what we expect to see even just based on our guidance. There you can see that the EBITDA margin. If you run a few scenarios on ranges in revenue and.
And EBITDA that we provided should still remain at an elevated level there may be a slight dip from the Q3, when you think of the EBITDA margin.
Well as potentially the gross margin.
Full in a little bit and Thats, because we did have as I mentioned on the last call in August in Q2, because we had to take shut downtime as a result of a decrease in demand due to the covance shutdown, we have to recognize all of the costs that were unabsorbed than in our into our inventory in Q2, So we kind of got.
Hard harder in Q2 for.
For those shutdown costs, which typically would roll along with your inventory right. So so Q3 benefited a little bit from that but again thats not a massive benefit so I would expect that to be a little bit of a headwind going into into Q4, but besides that you have the cost savings initiatives you've got the platform.
Performance you got the management of the spread and we expect to see the same trend there.
Okay. That's good that's helpful. Thank you.
And then I just wanted to clarify.
Greg.
To an earlier question.
With respect.
Thomas Capex investment you said that you're not expanding Midland certainly give a little bit of color of where that incremental capacity is going on the E commerce side.
So we have we have two facilities that manufacture that product and we're doing some de bottlenecking on the other facility and that's my reference to.
To that Capex.
Certainly when we think of that business as well we're looking at.
Adding some capability as it relates to specifically around printing.
So those are those are where the capacity expansions are going right now.
Okay. That's a that's great. Thank you and congrats on a great quarter.
Thank you.
Your next question.
Okay.
Next Securities Your line is open.
Good morning, My first one here is on on nor attack it looks like sales in the quarter or were better than the previous quarter.
But it still looks like it's losing money on the bottom line what are some of the factors driving that and and do you have a good pathway to profitability.
Yeah. So when we talked about this a couple of times I mean, so the Nortech was one of our harder hit businesses as a result of all the the Covance shutdown and just generally the pandemic.
Because as you know Nortech services, the automate automated packaging industries that they produce heavy packaging equipment and so we saw a lot of customers delaying orders.
You know early on in the pandemic and certainly have seen that over the life of the.
Remained or most of the year and so we are starting to see that.
Alleviate that we're starting to see customers come back to the table.
To fulfill orders that were previously made as well as getting more traction on new orders. So we think that this is a temporary issue.
And we expect to see a lot more strength going into 2021.
That's great. My next one here I just wanted to circle.
I think on the margins, even if I take the midpoint.
Looks like at that 18 in Afghanistan, and previously you guys talked about.
15% as more of your long term target.
Can we assume that this is sustainable going forward and this is sort of the new model.
So our target was always greater than 15%.
A sense like it wasn't 15%, so I would always caveat that.
And look what the visibility that we have right now and what we see as it relates to all of those factors that we discussed.
We see that margin.
Staying there where we are.
With what we see right now.
Got it okay. Thank you so much.
Sure.
Your next question is from riders.
With bank of America.
Thank you good morning.
Thanks Roger.
You're 2020 guidance implies Q4, 20 got Capex of 26 to 27 million.
Our kind of at the midpoint I'm, assuming I'm doing my math correct.
Correctly.
Can you ramp up their spend.
That quickly and do you have the 2021 capex.
Mary.
Right.
So on the on the Capex, specifically, we expect to ramp.
That quickly in Q4, there were a lot of projects that we've been looking at for the last 2345 months.
That we're executing on.
So we feel like we can execute on that.
Sometimes it gets a little lumpy with with order acceptance and down payments and things of that nature, but that's that's the visibility we have right now.
As it relates to 2021 is as I said earlier.
We're going through the budgeting process right now.
And we're really not going to provide an update until we get through in March certainly theres lots of opportunities here.
From an organic growth perspective, however.
Hi, Thanks, and the other thing is.
If I heard your prepared remarks correctly.
Thank you gave 2020 cash taxes of $35 million to $45 million in line with your outlook for taxes.
Now the 35 to 45 million was the Q4 free cash flow guidance.
Okay, no cash taxes, yes cash stock.
Taxes are expected to basically approximate the income tax expense.
Yes, Angie thank you very much.
Thanks Roger.
Your next question is from Scott.
Your line is open.
Thanks, Good morning, gentlemen, just wanted to circle back on ecommerce.
Are you.
They break down year over year growth and ER and revenues as a total of.
As a percentage of total revenue.
Okay.
Of ecommerce Congress, yeah, we haven't broken it down, but but certainly the E commerce would be a large piece of it.
Like I said, we saw a significant.
African growth as well in the building construction retail channels too and Scott we expect to.
The end of this year recalibrate that we have that disclosure at the end of Q1 the end markets we serve.
And we would expect to update our shareholders with that at the end.
2020, when we announce Q4.
Okay, that's great and.
Can you talk about how much of that growth without giving figures you Congress is water activated tape and how much is protective packaging.
Yes, I mean, we saw we saw tremendous growth in both.
Honestly.
Water activated tape was definitely a very strong growth growth driver and certainly on a larger product line.
But we saw tremendous growth when you think of voice fill in protective packaging of both paperboard fell plastic void fill as well as mailers and then on top of that I would also incur.
So that that we've seen tremendous growth in our.
Dispensing equipment.
That we sell into E commerce.
So with the machinery going what the consumable.
And then on top of that we've continued to deploy.
Our service around those.
Piece of equipment in these fulfillment centers.
So obviously you have some big customers, but it sounds like you're getting some pretty good growth out of order.
One of the smaller customer base.
Folks have never really been baking in the online presence and so.
Correct, Yeah, what we're seeing there.
And that's a good question or comment on what we're seeing there is obviously the percentage growth being much higher than than the bigger people.
And in some degree they're playing catch up so weve definitely benefited from that.
In that space in ecommerce as well.
That's a that's sounds fair deal there looks like.
Showing much lighter growth just a little bit over 3% in the last quarter.
Are you seeing the final question are you seeing any change in customer usage patterns between water activated tape and ER and polymer tapes.
I would I would say like as a percentage of what's being consumed I would say is.
Shifting somewhat the same we're seeing opportunities. However, I would I would throw at that we're seeing opportunities globally to convert from plastic to water activated tape and in some cases convert from plastic to a pressure sensitive paper tape.
Those would be in place.
This is like Asia into parts of Europe. So certainly there is opportunity there to convert from another ceiling method.
Maybe just one more can you give us an idea on margin dollars difference between the two.
Between.
Between water activity.
Dividend tape in the a and the polymer.
Yeah, I would say yes.
I would say on the margin side, it's pretty close on.
On a dollar basis or percentage basis anticipate percentage basis. Okay. Okay. Great. Thanks very much appreciate your taking my questions. Thank you.
Yeah.
Next question is from Zachary.
No Bank financial your line is open.
Morning, everyone, congrats on the quarter and Q4.
First question for you on across the company, what kind of available capacity do you have existing facilities, so underutilized assets.
Yeah, we don't we.
What was that because its very difficult with just within the mix and many of our products have multiple steps. They have to go through to get to their final component. So you have extrusion you have coating you have converting you have printing you have things of that nature. So it's a pretty complicated capacity exposure.
What I would say though is.
In many of our areas that we are participating within E. Commerce, we are bumping into some capacity issues in those areas.
And you're seeing some of our reaction to that through.
The increase.
And our Capex guide for 2020, and we think there are as I said earlier, some opportunities specifically around de bottlenecking.
Some of the equipment that has capacity restrained.
And move forward and open up some capacity.
But I would say I would also.
I would also say that that just to give you a little color because again the capacity question that difficult.
To answer it.
In most of our plants right now we are busy very busy.
[music].
That's helpful. Thanks.
Mentioned in selling printing equipment to help de bottlenecks.
So a lot line outside plant.
Can you give us any other examples of specific debottlenecking application.
Well certainly in protective packaging certainly we're looking at our Mailer business and de bottlenecking some of our equipment on our mailer side, so again going into.
The commerce on the Mailer side on the equipment manufacturing side on the dispensing equipment.
Or de bottlenecking that process as well to increase capacity.
And then within our tape area.
Specifically on our coders that's.
Thats why.
Where we're doing a fair amount of de bottlenecking as well and that that has to do with our facility in the national Wisconsin.
Thank you very much.
Last one for me and I do appreciate the color on gross margins. So far the different puts and takes I know accounting treatment the potential headwind.
Even there.
Looking specifically.
Spread piece, though.
Can you hold onto that uptick for the long term because I know that previously you mentioned that some customers have very good visibility onto that spread and they push back.
Yes, so listen I think I think a comment on not that I can only speak to what we see right.
And now and we feel good about managing that spread right now and where we are and we see that going forward just as our guidance indicates into Q4.
Hard hard to predict on a longer scale perspective, but but again, just boiling back to ER or going back to kind of our strategy.
Go around our assets and going back to our operational improvements that we've made in our facilities certainly.
Certainly we don't plan on giving those up on a go forward basis.
Not at the end of the day helps your spread because in many cases.
Your waist numbers are lower your productivity is up.
Right and you can pick up some spread between sell price of raw materials.
That's great. Thanks, I'll turn it over.
Thanks.
Your next question is from.
Scotia capital your line is open.
Michael there.
Yeah, Hi, guys.
Not doing great on the phone today, but.
Just following up.
Greg.
Our answer to my question at the beginning I think in response to.
The restart on trend you had indicated.
Sales continue to increase.
Actually.
The lockdown.
And into Q4.
This year, we put on Prime day that was in Q3 last year and overall, we should presumably expect ecommerce and strengthen in Q4. So it feels like there's a pretty good job.
Sales and profit sequentially.
I just like asking are there offsets that we should consider in Turkey for.
From a from a demand perspective correct.
Correct.
I do not see them look I see when I think of I think of where we were from a trough demand perspective, you know that pretty much hit April may is everyone knows and.
We saw a pretty sequential like even performance June July and then August September up and Thats continued.
So so when you think of kind of where we were a trough to peak, we kind of peaks on a consistent basis August September October.
Hi.
Okay.
And then.
Going back to previous answer if I heard you correctly, you'd indicated that EBITDA margin or the improvement was essentially.
Essentially structural so.
So your Q3 margin was 20% in at the low end of your Q4 guidance implies about an 18%.
Margin is that the range, we should expect going forward.
Well like I said I think the the 20% like I said was was somewhat high just because of some of the accounting treatment of the cost going from Q2.
But certainly when we think of the 18%.
At this point, we don't see.
The reason why without cap you maintain of course, we are there is a lot of uncertainty in the market and what's going to happen for next year, but at this point.
Based on the cost the cost measures that we've taken based on how our plans are performing based on the leverage that we're getting from filling up some of the investments that we've made.
And based on that.
And that we have we.
We don't see that going down.
Got you okay in the last quarter Okay.
Our capital deployment discussions were focused on debt repayment. It looks like with these results your Q4, and I guess going forward free cash flow improves and your leverage rate.
Ratios are reduced quite substantially.
Where do we think outlet deployment beyond organic growth and dividends at this point.
So you know as we stated right now as we sit here today were.
We're focused on debt repayment search.
Certainly as we move into 2021 certain.
Certainly as that.
Stated before is we're still interested specifically around bolt on acquisitions, specifically things that can add.
Products to our.
Platform, if you will within ecommerce and leverage our platform an E. Commerce, so certainly that could be an area of deployment, but.
But but at.
The other day right now as we sit here our focus is on that debt repayment and getting to within that normalized range of two to two and a half times leverage.
Gotcha. Thank you guys. Thank.
Thank you.
Your next question is from Roger Smith with Bank of America. Your line is.
Okay.
Thank you for the follow up just wanted to ask what do you have any guidance on Q4, working capital inflow or outflow.
As part of that 35 to 45 million.
Free cash flow.
Yeah, we don't give specific guidance, but you know normally in Q4, we do see a nice on Rob.
Wrapping up our working capital and so what we did say is when you compare to last year, we should see something similar to what we saw last year minus the capex because obviously the capex is back loaded this year as well as the cash taxes will be somewhat elevated this quarter versus last year. So if you take those things out we should be somewhat.
Similar to last year and that will give you an idea. If you look at last years working capital move and what we might see.
Thank you very much.
No problem.
I'll now turn the call back over for closing remarks.
Thank you if there are no and no other further questions.
Thank you for participating in today's call. We look forward to speaking with you again following the release of our fourth quarter 2020 results in March of 2021 in the meantime, I Hope you and your family stay safe and healthy. Thank you very much.
This concludes today's conference call you may now disconnect.
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