Q4 2020 Intertape Polymer Group Inc Earnings Call
Ladies and gentlemen, thank you for standing by.
Would you entertain polymer group Q.
Q4, 'twenty 'twenty conference call during.
During the call all participants will be in a listen only mode.
Afterwards, we will conduct a question and answer session.
To maximize the efficiency of this event for questions here it will be open to financial professionals.
At that time does for questions should press star followed by the number one on the telephone keypad.
Is that any time during the conference you need to we can operator, Please press star followed by channel.
Joining me from the company I have entertained polymer group Chief Executive Officer, Craig Dahl.
Chief Financial Officer, Jeff Crystal.
I would like to caution all participants that in response to your questions and in our prepared remarks today, we won't be making forward looking statements, which reflect managements beliefs.
And assumptions regarding future events based on information available today.
You are cautioned not to place undue reliance on these forward looking statements are not a guarantee of future performance and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expected.
Please see slide two titled Safe Harbor statement for further discussion.
During this call. We may also be referring to certain non-GAAP financial measures as defined under the S. E T bills.
A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available on our website.
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Please note that all dollar amounts are in U S.
US dollars unless otherwise noted.
I would like to remind everyone that this conference is being recorded today March 12th 2021 at 10 am eastern time.
I'll now turn the call over to Greg Yao Mr. Yao. Please go ahead.
Thank you and good morning, everyone welcome to Ipg's, 2024th quarter and year end Conference call. Joining me is Jeff Crystal our CFO during the call we will make reference to our earnings presentation that you can download from the Investor Relations section of our website.
2020 was quite a year across a number of fronts for our families our communities and our IPG business. It was an outstanding year from an ENT business perspective revenue was up 5% to more than 1.2 billion. Despite the pandemic adjusted.
Adjusted EBITDA was up 23% for 211 million adjusted EBITA margin was up more than 250 basis points to $17 four per cent and.
And free cash flow was up 54% to $134 million.
The business rebounded incredibly well from the temporary demand that we experienced in late April and early may during the first wave of the pandemic.
Our team members performed exceptionally well during this period of uncertainty.
They demonstrated professionalism to our customers our suppliers and to one another their emphasis on working safely and servicing our customers ensured an uninterrupted supply of essential products, we produce to end users.
IPG is structurally different today than what we were in 2016.
The end markets, where we are experiencing our strongest demand are the same ones, where we've made investments in the past five years and products like water activated tape protective packaging woven and films.
The growth in the E Commerce and market is a clear accelerant for the business that we believe will persist after the vaccines are successfully rolled out.
E Commerce is now neck and neck with general manufacturing as the two largest end markets that we serve.
In 2020 E Commerce represented 27% of our end market demand and general manufacturing came in at 28% followed by food and beverage building construction and retail and that order.
Our E Commerce business grew by more than 40% in 2020, which is in line with the largest e-commerce retailer in.
Independent third party reports estimate that sales for the E. Commerce channel will continue to grow for many years to come at a macro level.
The pandemic simply serve to pull forward e-commerce adoption and establish a new base from which future growth is expected to continue.
Our exposure to this outsized growth in the E. Commerce channel is one of the most significant differences in our business today.
This morning, we announced plans to install a new water activated tape line to increase our production to keep pace with this demand growth.
The new line will be installed within our existing plant footprint, we expect installation in late 2021 and commissioning in the first half of 'twenty 'twenty two.
This investment demonstrates the confidence we have in our demand outlook.
With the growth in free cash flow generation, we delivered in 2020, we made significant progress on our debt repayment. Our total leverage is now 2.2 times adjusted EBITDA, which is down seven tenths of a turn compared to the end of 2019.
Our target is to operate within a range of two to two and a half times.
With this balance sheet strength and the growth we're experiencing across multiple product categories. We are investing in organic growth to expand capacity across not only water activated tape, but also in protective packaging mailers woven and films, which represents our highest growth categories.
These projects represent low risk near term opportunities that increase our production capacity in areas, where the demand demand outlook is strong.
They offer shorter term investment horizons and higher return thresholds than the previous project that were greenfield in nature.
There are no new greenfield projects in this expansion.
In total we expect to invest approximately $100 million in capital expenditures in 2021.
Consisting of $70 million in capacity expansion projects $10 million in digital transformation and cost saving and the remaining $20 million for regular maintenance.
Based on the $70 million in capacity expansion, we expect to generate more than $100 million in incremental revenue on a run rate basis by the end of 2022 with additional growth in 2023 and beyond we expect the after tax IRR from these capacity expansion projects to be north of 20%.
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We are able to invest for this growth and expand production capacity, while still generating strong free cash flow in 2021, which is quite different than in 2017 or 2018.
This morning, we announced our outlook for fiscal 2021.
We anticipate revenue to be between 1.3, and $1 4 billion, which represents growth of 11% at the midpoint of the range.
We anticipate adjusted EBITDA for 2021 to be between 220, and $240 million, which represents growth of 9% at the midpoint of the range, we anticipate free cash flow of between $80 million to $100 million, which takes into consideration our anticipated total capital expenditures for 'twenty.
21 of approximately 100 million that I mentioned earlier.
There are a few important takeaways from that outlook.
We are confident in the growth trajectory of the business the business.
This is structurally different today with the ability to invest in near term growth projects and maintain strong free cash flow generation.
Our revenue and adjusted EBITDA outlook also takes into consideration the significant movement in raw materials, we have recently.
But <unk> seen specifically increases in polypropylene prices and to a lesser extent, but still impactful polyethylene prices.
We have a track record of effectively managing the spread between raw materials freight and selling price across multiple cycles over the course of the last decade.
We manage the spread to retain dollar contribution.
With that in mind, you can see across the high mid and low points of the outlook ranges that is selling prices rise and we look to retain dollar contribution margins draw in to some degree.
We have already announced price increases to reflect the rising price of raw materials.
As a reminder, once we announce a price increase it normally takes approximately 60 days to hit our income statement.
Based on the current situation, we anticipate approximately 80 basis points of margin pressure on an annualized basis.
Which has already been taken into consideration in our 2021 outlook metrics of revenue and adjusted EBITDA.
We are preparing to emerge from the pandemic in a strong position to deliver continued growth.
Sustainability is expected to be a core pillar of our growth strategy as we address the needs of key end markets like E Commerce with sustainable solutions, our work to achieve cradle to cradle certification on major product categories like water activated tape filmed in membrane structure fabric demonstrates our commitment to embrace sustainability.
Billety throughout the organization as well as the product bundle.
In the fourth quarter all of our major product categories outperformed the same period in 2019 from a volume mix perspective.
The bit the demand we're seeing in the first quarter from a sales and order book perspective is a continuation of 2020.
Based on the strength of the business, we are investing to expand production capacity in our highest growth verticals.
We consider these projects no brainers.
We could stand Pat and allow others to address this demand, but that would certainly not being the best interest of our shareholders and customers.
Growth opportunities are immediately in front of us and we believe inaction would limit shareholder returns and jeopardize our ability to support our customers.
We have built a global leader in packaging and protective solutions.
These are lower risk capital projects within our existing footprint in areas, where we are very comfortable with future demand.
We think that is a great opportunity for any company to have.
At this point I'll turn the call over to Jeff who will provide you with additional insight into the financial results.
Jeff.
Thank you Greg on page eight of the presentation. We present, an analysis of our revenue for the 2024th quarter and fiscal periods revenue increased 18% to $344 $1 million in the quarter up $52 6 million compared to the same period in 2019.
On an annual basis revenue increased 5% to just over $1 2 billion up $54 5 million compared to fiscal 2019.
Volume mix was the primary driver of growth in both periods up 16% and 5% in the quarter and fiscal year respectively.
As Greg mentioned, our highest growth product categories in the quarter and the annual period, where in the areas, where we invested in capex and acquisitions during the past five years.
Specifically water activated tape air pillows mailers and machines.
During the quarter, we also experienced strong growth among a number of our industrial and carton sealing tapes.
Essentially all of our product categories were up in the quarterly period versus the comparable period in 2019 save a couple of nominal categories.
On an annual basis, the most significant underperformers, where carton sealing tapes, excluding water activated tape as well as some industrial tapes. Both the result of effects of COVID-19, and some other non e-commerce customer channels.
Price positively impacted revenue by 1% in the quarter and we experienced a drag of 1% in the annual period. The remaining differences in the period are made up of the one acquisition in 2020, Nortek, which we closed in February of 2020, as well as foreign exchange.
Turning to page nine gross margin was 25, 7% up more than 500 basis points in the fourth quarter and 23, 8% up 250 basis points in the annual period compared to the corresponding periods in 2019 the.
The improvements in both periods were primarily due to the increase in spread between selling prices and raw material costs as well as plant performance and the associated operating leverage benefits due to the asset base running at increased capacity.
Adjusted EBITDA increased by 55% to $67 $7 million and 23% to $211 $1 million in the fourth quarter and fiscal 2020, respectively compared to the corresponding periods in 2019.
The improvements in both periods were primarily due to organic growth in gross profit.
Adjusted EBITDA margin was 19, 7% up more than 460 basis points, and 17, 4% up more than 250 basis points in our quarterly and annual periods, respectively compared to 2019.
These improvements reflect the effective management of the spread between pricing and raw materials and freight as well as plant performance and operating leverage that I mentioned earlier.
We are monitoring the impact of the recent weather related events in Texas on our supply chain, we carried sufficient inventory of our key resins from the fourth quarter into the first quarter production of key raw materials in Texas is already coming back online and in some cases.
And scheduled to be back up later this month and other cases. According to industry reports, we intend to manage the situation to protect our customers by keeping them in supply while managing our dollar spread to protect our contribution profit dollars.
For 2021, we expect an effective tax rate in the range of 22, and 27% excluding the potential impact of changes in the mix of earnings between jurisdictions as well as any changes, resulting from potential U S tax legislation that increases rates for 2021.
We expect cash taxes to be approximately 10% higher than income tax expense due to less availability of tax attributes in loss carryforwards as well as the impact of bonus depreciation previously taken.
Cash flows from operating activities were 88.6 billion up 21% in the quarterly period, and $179 6 million up 33% in the annual period compared to the corresponding periods in 2019.
Free cash flows were $63 8 million in the fourth quarter unchanged from the same period in 2019 due to the increased capacity related capex in the fourth quarter of 2020 that we announced on the third quarter call cash.
Capex totaled $25 million and $46 million in the fourth quarter and annual periods respectively.
In the annual period free cash flow increased 54% to $133 8 million compared to fiscal 19, the improvement in the annual periods, primarily due to the increase in gross profit.
Keep in mind that we typically experienced business seasonality to show negative free cash flow in the first quarter and the majority of cash flow from operating activities and free cash flows are generated in the second half of the year.
Our secured net leverage ratio decreased to one one times at the end of 2020, well below the covenant of three seven times the.
The secured net leverage ratio is the most important ratio that is relevant to our covenants there for we view it as the highest priority.
Our total leverage ratio, including the unsecured debt decreased to two two times down one half turn from two seven times in the sequential period.
As Greg mentioned with our strong balance sheet position and the demand we are experiencing the business is in a great position to deliver organic growth. We remain open to potential acquisitions that strengthen our product bundle in our growth markets or provide consolidation opportunities, where we can apply our buying power and our expertise in operational efficiency. However.
However, our primary focus today is executing on the demand immediately in front of us to grow organically.
I'll turn it back over to Greg for his closing thoughts Greg.
Thanks, Jeff It was essentially one year ago today that the onset of the pandemic began to change the way, we live and work in many ways. It feels a lot longer than just one year.
Our team and business has performed exceptionally well as a vaccine rule. Though continues we are excited about the position of the business and the growth opportunities in front of us.
The growth in the E Commerce channel disproportionately benefits us given our high market share and product product categories, we sell into like water activated tape.
The demand resilience of our other other end markets in the second half of 2020 and now into 2021 gives us confidence in our ability to grow our films and woven product categories.
The business is structurally different today with the investments and acquisitions, we've executed since 2016.
We have a world class low cost manufacturing asset base, our margin profile is stronger and sustainable our free cash flow generation is stronger and our balance sheet is in great shape, our 2021 outlook demonstrates the confidence we have in the business to continue to perform we.
We are executing our strategy to deliver long term value for our shareholders I'd like to thank our employees 2020, and even 'twenty 'twenty. One to date have certainly been a challenge I believe better days are ahead.
I am proud of how our team has conducted 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 to open up for question and answer period. Thank you.
Thank you as a reminder to ask a question. Please press star followed by the number one on your telephone keypad to withdraw your question. Please press the pound key.
Our first question will come from Michael Day May from Scotiabank. Please go ahead. Your line is open.
Hey, good morning, guys good morning, Michael.
Great quarter again.
So just a first question on guidance.
If I look at your Q3 in your queue for you.
Generated.
An average adjusted EBITDA of about 65 million per quarter.
On the other hand at the upper end of your 2021 EBITDA Guide do you expect to generate an average quarterly EBITDA of $60 million. So I'm just trying to reconcile the two I mean, obviously appreciating the seasonality I wanted to maybe just get your take on how much of this has to do with you.
So either higher resins.
Tough second half comps are just a healthy amount of conservatism.
Yeah.
Good question, So I mean, basically the way we look at it I mean, obviously there are certain things like we discussed last year. When you look at the two quarters and some stuff that we saw as headwinds coming into this year, one being some costs coming back into the business.
So things that were deferred last year or put on a shelf will come back into it. So youll see some additional costs in that that flow through somewhat in SG&A as well as some of the cost of sales. So that's one reason the.
The other part is like we discussed is that rising raw material environment. So that is going to impact to some degree I mean, that's something we are working really hard to cover but there could be some temporary impacts and again the uncertainty around.
What that's going to look like throughout the year at the uncertainty around some of the impacts of those short term impacts of the Texas storm.
So some of that we baked in some some conservatism to account for some of those things.
So those would be the really the two biggest kind of impact that youre going to see in there for.
To account for that but overall I mean, I think at the end of the day.
It's tough for us as some of these uncertainties related to Covid and how everything's going to rollout once the vaccines are in place what does demand look like in that back half of the year and then what are resins do and what does that look like.
Gotcha, Okay and on the <unk>.
Other residents piece you highlighted just to make sure I heard it right 80 basis points of margin pressure already accounted for in your 2021 guidance.
Yes, yes, so that's basically just the math right. So that's where we believe we're going to cover and essentially you just have the same profit dollars on a higher revenue number.
So like we said I mean in our guidance at the midpoint, we're at around 17% without that we'd probably be closer to 18.
Gotcha, Okay, and then the second question.
On Capex I mean, thanks for the commentary there.
Just in terms of what you expect on projects and timing, you've obviously had strong revenue growth in 2020.
While your Capex is paired back quite.
Quite a bit due to COVID-19.
Should we view 2020, one capex is sort of a catch up year here I guess.
The bigger picture question here is that should investors view your energy business.
Essentially a growth company or or will the company eventually you'll have to step back and maybe go into harvest mode Post 2021.
So I think for the visibility we see right now certainly.
Growth is a key component of our go forward strategy here.
And as we commented on the e-commerce growth that we experienced in 2020.
We just don't have the capacity installed to handle that kind of volume and <unk>.
<unk> been growing off of that base. So we feel really confident about our growth prospects certainly into the.
The next couple of years tied to that capital.
And as we move further through this year on a go forward basis.
Hope is is that we continue to see that kind of growth and continue to have the ability to deploy capital into those markets that are growing at that rate in.
The other comment I would make as well on those projects as we commented on the fact that.
The IRR is above 20% in and those projects are all in house and are in our current facilities.
So those are good paybacks. Thank you.
Thank you.
Your next question comes from Daryl Young from TD Securities. Please go ahead. Your line is open.
Morning, guys. Congrats on a good result.
Thank you.
Just with regards to the $100 million of incremental revenue from from the gross projects would that be.
Effectively already pre sold type of type.
Type of demand or is that you're just expecting based on the number of units you can you'll be able to produce post post investment.
So some of it is pent up demand that we currently have I mean, some of the products.
For some of the capacity that we're putting in we're currently outsourcing. So there's a small piece of that the balance would go into our expected growth rates into that business. So certainly not pre sold per se.
But we have good line of sight in those areas most of that capital.
Certainly as going into e-commerce.
And we believe we've got good line of sight on forecasting out in that area.
Okay great.
And then.
When we look at the 40% growth in E Commerce.
Is there is it.
Fairly consistent across all the protective packaging as well as is water activated tapes or one product that's significantly outsized.
Well I think from a dollar perspective, just leaving aside percentages for a SEC for the dollar perspective, you know our biggest exposure there is on the tape category.
On a percentage basis, though we saw higher growth percentages in other product categories into E Commerce.
<unk> in our films area.
And our protective packaging area. So the percentage is in those areas.
We're certainly much higher than the tape category.
Gotcha, and then one last one.
Some of the more traditional industrial manufacturing aerospace type.
<unk> markets.
How much upside remains for us from a reopening trade there would you say or have you kind of normalized.
The order book already.
Yeah, I mean, I would say in some of the industries that are more under pressure certainly there could be some more upside there you know as things start to recover.
Could see some some favorability once people are able to travel again.
And things can pick back up.
We would expect to see something there I don't know how much of a needle mover that's going to be at this point.
Because certainly we've seen some recovery.
And a lot of our a lot of our end markets I'd say, probably transportation has been the laggard, but again, it's not a huge percentage of our revenue.
Got you alright, thanks, very much guys. Thank you.
Your next question comes from Stephen Macleod from BMO Capital markets. Please go ahead. Your line is open.
Thank you good morning, guys good morning.
Okay.
I just wanted to focus in a little bit on the gross margin, yes, youre going to color and definitely the full year.
Expectation that it's down 80 basis points is helpful.
Is it safe to assume that that pressure would be like the pressure would be felt more acutely in Q1, just because of the extreme raw material inflation that we've seen with the inflation with the gross margin headwinds sort of beginning to dissipate as the year progresses.
I would put it more on the first half.
Probably more impactful in the second quarter.
We do that from a from an expectation on raw materials, just as we progressed through the year certainly we're at peak now.
Specifically around the resin front, we expect to see some.
Tempering on that price front.
Cost front some time in <unk>.
May June time timelines, so we will see that on our P&L within 60 days after that so so I think it's a first half for right now with the way we look at it.
Okay.
Okay. That's that's helpful.
And have you seen any ex any.
Any specific supply disruptions or is it more just the inflation that youre dealing with like do you have any inputs that have completely come offline and you've actually had.
Disruptions in accessing that supply.
Well certainly it's been a very busy time in the last six weeks.
Dealing with supply chain and people.
People offline, we've had most chemical companies or plastics companies declare force majeure.
Most are back up operational as we sit here today, there is still some offline.
Certainly we've seen tightness in.
In supply.
From a from an inventory perspective, we really started building inventory from a raw material perspective in Q4, namely in the resin side polypropylene polyethylene.
And carried that through to the beginning of this year prior to the.
For the storms in Houston.
I would still say that supply disruption is a possibility. It has been minimized I believe dramatically over the last week.
From from our perspective, and we believe that we're going to be able to carry through but things are going to get tight for sure.
Okay. Thanks for that color.
And then maybe just finally, you mentioned leverages come down nicely.
And you talk you mentioned a little bit about acquisitions can you give a little bit of color around what kind of targets you would potentially be looking at with respect to end markets is it safe to assume that it would largely be E. Commerce focused stores or is there more opportunity beyond that.
Yes, so our focus really hasnt changed much as it relates to M&A I mean, we're certainly still looking at product lines that can differentiate ourselves.
From a <unk>.
Technology perspective, and a margin perspective.
And areas that primarily are bolt on acquisitions at this point, where where we believe we can take someone's product and put it into our platform and supercharge the growth of that product into that vertical.
Not to say that theres not further opportunity to do consolidation within the industry because I believe there are but certainly our primary focus is to look at companies that have technology or differentiated products and.
And in some cases disruptive products that we believe we can put into our platform and and really supercharge the topline growth.
Okay. That's great. Thank you so much guys.
Thank you.
Your next question comes from Walter <unk> from RBC Capital markets. Please go ahead. Your line is open. Thanks, operator, good morning, everyone. Good morning.
My question is about your capacity now and how much capacity youre, bringing on in the E Commerce side.
Guidance is suggesting you can approach double digit here.
Growth in revenue in 2021 would you would you consider yourself then to be kind of at a capacity level.
Net growth from that point on we will really come from the expansion and that we might see.
A slowdown in that growth rate or do you have plenty of capacity to grow again in 2022.
The demand would warrant such that when your capacity comes online call. It later in 'twenty 2022.
Or into 'twenty, three that you wouldn't have to kind of turn away business.
In the interim.
We think that the projects that we're investing in now.
Well I mean, a lot of that will come online sort of midway or into 2022 with really the benefits starting to hit that back half for back end of <unk>.
2022, so so certainly we see.
Runway to grow with that capacity.
Well into 2023, and even into 2020 for Us I think.
Those investments will certainly propel us to a level, where we're not turning away business per se, but of course if.
We continue to see double digit expansion in E. Commerce, I mean, theres going to be a point, where theres going to be a point, where you want to invest again, right and where you're going to have to expand again, but certainly these are certainly going out of the block or unblock a lot of a lot of constraints, we have now and really help us growth in the next couple of years.
And my second question is how much do you have runway to grow with your existing customer in terms of market share of their tape demand if I would ask it differently Amazon what percentage of their total tape is water activated tape with your product and therefore could you grow share with that company and then how much.
More run or how much more opportunity would you have to.
To develop new customers that are on the E. Commerce side that would also look to your water activated tape product in a much larger way.
So good question.
So not to be customer specific but when we look at E Commerce and.
And individual customers within E. Commerce, we are definitely selling a bundle of products and services into those accounts in and when you think of market share.
As it relates to the specific tape products.
A lot of that share gain will be outside of North America.
So around the world, whether that's Europe Asia.
South America, so there's still opportunity there, but there's a lot of opportunity within that segment to broaden the product offering.
And we've done so this year I made reference to.
The percentage of growth areas of other product lines much higher than our tape product lines. So that would be within stretch protective packaging and then when you start looking at.
Potential for.
Things such as Kirby Mailer, which is a curbside recyclable mailer.
Certainly opportunities within that perspective, as well and then I'd also remind everyone that within that segment. We also provide a pretty extensive service program, where we have service tax within the facilities servicing equipment, not just our equipment, but equipment within those facilities.
And that just puts us closer to the customer and much more in tune to the customer so for the product offering within that segment is pretty broad.
And I think there are still opportunities to take share in the tape category, specifically in North America, I think that's going to be more of a growth strategy as e-commerce take share of the retail spend.
That's a good point maybe Greg.
Could you even ballpark it for us on an industry without getting customer specific but is water active water activated tape as a percentage of total all e-commerce boxes that comment peoples doors I mean is it.
Is it 10% is it 50% just to ballpark it for us to give some of the if it is a superior product, which ought to see some of your customers believe it to be.
It gives us.
A good line of sight as to how much how much growth is embedded in it.
If it if it grows and customer adoption.
Tough tough to answer that Walter I think I think when you look at at tape you. Just you really need to look at boxes, and obviously tape rides with boxes and it's the amount of packaging that is done within boxes, which.
It would be above definitely 50% of all packages sent out by E Commerce would be in a box.
I don't know if that helps you.
Get to your answer a little bit but but.
But I'd say or well over 50% would be in a box.
Alright, Thank you very much for the time appreciate it.
Thank you.
Your next question comes from Scott from Thomson from CIBC. Please go ahead. Your line is open.
Good morning, gentlemen, good morning, Scott.
A couple of questions on what you're hearing on the competitive front are you hearing a new capacity build in some of your E. Commerce products I mean, obviously packing materials like the Inflatables and fillers are pretty well developed markets, but can you talk about the situation of water activated tapes.
Yeah, we really haven't seen anything in that area spin.
Specifically around water activated tapes certainly there has been some capacity expansions in.
In protective packaging geared towards e-commerce.
Well I won't get into the details here, but certainly there has been expansion we've done some.
A lot of that having to do with with mailers.
And I think you'll continue to see that on a go forward basis, and certainly we plan on participating in that growth in that category.
No I understand that three MFC exited that market.
We're not hearing any chatter that theyre going to assuming that's correct.
You're not hearing any chatter that theyre going to reenter.
No and I don't think they were ever in that business.
For producing product I think they were sourcing product yet.
Okay makes sense.
No just.
On the on the.
The pricing pressures are there.
The ability to pass through pricing increases over the long term is there any chatter from your customers on.
Pushed back or.
Fact that their minting it so much that a penny here or there.
Packaging doesn't matter.
Well look I mean, there's always pushback from an inflationary perspective I think this situation is certainly in my career is quite unique.
Certainly raw materials were rising prior to the.
The weather issue in Texas. So there was pressure on the supply chain within raw materials prior to that.
And I think when you look at the amount of.
Production that was offline you know at one point, probably 80, 90% of <unk>.
Production was offline for a period of upwards of two weeks put a lot of pressure on supply chain. So then when you when you move forward to the customer side.
It's one of those circumstances that everyone is in that exact position.
And it becomes a bit of an issue about supply and less of an issue around price.
Not to say that theres, not pushback to get price increases, but certainly we've communicated extensively with our customers around the fact that we believe that we're well positioned to ride through this from a supply perspective, even with pricing pressure.
And when you go forward, we expect as I mentioned earlier, certainly on the resin side for things to subside somewhat I think they'll still level out at above levels. We were at in Q4, but I think youre going to see some some reduction in that on the second half certainly of this year.
Thanks that makes sense final question are there any product categories that you would think of selling or look at selling to other recycle capital or return capital to shareholders.
Not at this time nothing that we can disclose.
Perfect. Thanks, very much Jonathan.
Your next question comes from David Ocampo from <unk> Securities. Please go ahead. Your line is open.
Good morning, everyone. Good morning.
I just wanted to follow up on Walter's question about capacity utilization when we think about you.
Manufacturing footprint can you add a reasonably add more lines based on the square footage so that you have or.
As we enter 2022 and 2023, you'd probably have to do another greenfield.
Certainly when we look at our plant footprint.
Our plans have always been to expand existing facilities. So it could be a bit of a brownfield, where we're just blowing out a wall and pouring concrete.
Certainly in the in the plants that we've built recently in 2017 and 18, we always had the vision of doing that to make sure that we have the land to expand.
Certainly in many plants there are further opportunities to put new capacity within the four walls of the existing building and then on top of that.
When you look at technology and upgrades to equipment, you're you have opportunities to deploy capital there were you know.
On the same footprint basis, you can produce 30%, 40% more product.
You swap out the old equipment for a piece of new equipment. So certainly from our perspective, we don't see any need.
And our next three to five year kind of look for Greenfields.
So we are comfortable that in many instances, we will be able to expand capacity within the four walls and in areas that we can't we will be able to do.
Kind of a brown field, if you will and move a wallet.
The infrastructure to support that.
That's helpful and final one here just following up again on the capital allocation and then when I look at your free cash flow numbers and the EBITDA guidance that you provided it does look like you guys are going to get under that but to turn leveraging range.
Range that you guys are comfortable with so how should we think about capital allocation as you could trend below two times is that something where you just harvest for cash and wait for an acquisition opportunity or do you start returning capital to shareholders yes.
Yes, certainly from my perspective, the whole business that we continue to see opportunities to deploy capital for organic growth.
And we continue to see kind of the trends that we're seeing now.
On a go forward basis, I think that's the highest return of capital for our shareholders.
And certainly you know what.
The time, if we could do get below that two times levered certainly that.
The discussion that we're going to have at the board about capital allocation, if we don't see that organic growth from AR.
Our growth perspective, or a capital perspective and or.
And acquisition.
That's great that's it for me thank you.
Thank you.
Your next question comes from Zachary <unk> from National Bank Financial. Please go ahead. Your line is open.
Morning, everyone. Congrats on the quarter. Thank you.
Building on your indication that the odds of supply disruption have come down but it does remain an outside possibility. If there is a delay and production can be brought back online in Texas and in a timely fashion do you have even put options to your global footprint.
Yes, we do.
But we have to remember that the supply chain disruptions global right now right from a from a shipping ocean freight perspective, as well and certainly on the raw material front things are things are really tight.
If there is a disruption I don't see it as being a long period of time or material as we sit here today.
We certainly in certain adhesives have been tight.
But as we as we sit here this morning.
<unk>.
Production facilities are getting back up and running they might not be running at a 100%, but they are back up and running.
And we've seen over the last.
In that specific area around adhesives, we've seen.
Supply be freed up somewhat over the past kind of five days.
So I think there is I mean listen I think I think your point around.
Opportunities from Asia, and North America is relevant though because when we look at the assets that we do have in Asia, we do have the ability to produce products here or there.
Not the full capacity that we would need but certainly for any temporary disruptions there could be some support there from a north American facility or an Asian facility.
That's really helpful color. Thanks.
And then can you tell us more about the digital transformation piece of the Capex budget.
Yeah sure. So what we're doing is and then this has been more on to a small extent the last I'd say year year and a half is looking at.
Digital transformation within our plant operations.
So we've been investing in technology with regards to artificial intelligence, some robotics as well and really just modernizing the way we manage our business and we ran actually a really good pilot of certain artificial intelligence technology in our Utah plant and it's been just a massive success.
And solving problems that were just not able to be solved with with traditional methods with disparate systems and big data right. So you can imagine youre looking at a lot of things and people were just managing this the way they always have and now with new technology, it's possible to two identify trends and issues that were previously just hidden.
So we've already seen some nice cost savings from that pilot and so we're moving forward with a more mass scale deployment of some of these technologies throughout our plants and <unk> and expect to see cost savings coming through over the next few years. So that's the crux of it.
Net interesting thanks.
And then on the topic of e-commerce penetration.
We're on the same page in terms of the pull forward in the long term growth, but do you foresee any directional weekend in ecommerce partners as breaking our brick and mortar reopened.
Well I think when you go forward certainly the growth rates will slow down on a percentage basis.
We've factored that into our forecast, but I think youre still going to see growth, but it won't be it will not be at the same level as we've experienced certainly this year.
So there will be some movement there from a retail spend perspective, but again when you think of the adoption rate I mean, you see that the information as well.
I think those consumers.
Are going to continue to use that platform and I think that platform is going to continue to see growth and I expect us to participate in that growth on a go forward basis.
Absolutely and then just one more for me.
Are your M&A opportunities are abundant, but they just don't make sense on the valuation front and if that's the case, what's the size of the gap between what you are willing to pay and what transactions are occurring.
Yeah, I think that's hard to answer because it's a very transaction specific.
But there is there are there has been and there continues to be challenges around valuation for sure with cheap money out there competition from private equity and now you've got the specs out there as well looking to deploy capital.
Pretty much anything so there is no question that that valuation is an issue and I think that that plays out more when we look at the larger deals something medium to large.
Is where you'll see typically a competitive process and people have those kinds of expectations.
Like we've said, we still believe that we can identify bolt on acquisitions on the smaller side like you've seen us doing at.
At reasonable multiples call it in the.
Mid to high <unk> call it single digits.
It would be probably the sweet spot.
And then I'll, let Greg touched on a couple of times. There's also when we look at disruptive technologies disruptive products things of that nature companies that might be in a bit of an earlier stage of their growth and we want to take their products and supercharge that growth in those cases, obviously the multiple that is less relevant.
Because you were talking about a company that probably isn't generating a ton of EBITDA, but has a ton of room for growth. So in those cases again, we have to evaluate case by case, but that gives you kind of the landscape of what we're looking at.
I appreciate the answers thanks, I'll turn it over alright. Thank you.
We have no further questions I would like to turn the call back over to Doug Gulling for closing remarks.
Thank you for participating in today's call. We look forward to speaking with you again following the release of our first quarter 2021 results in May Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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