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Ladies and gentlemen, thank you for standing by. Welcome to Intertape Polymer Group's First Quarter 2018 Conference Call and Webcast. [Operator Instructions] Your speakers for today are Greg Yull, CEO; and Jeff Crystal, CFO.I would like to caution all participants that in response to your questions and in our prepared remarks today, we will be making forward-looking statements, which reflect management's beliefs and assumptions regarding future events based on the information available today. The company undertakes no duty to update this information, including its earnings outlook, even though if situation may change in the future. You are therefore cautioned to not place undue reliance on these forward-looking statements as they are not a guarantee of future performance and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expected. An extensive list of these risks and uncertainties are identified in the company's annual report on Form 20-F for the year ended December 31, 2017, and subsequent statements and factors contained in the company's filings with the Canadian security regulators and the U.S. Securities and Exchange Commission.During this call, we may also be referring to certain non-GAAP financial measures as defined under the SEC rules, including adjusted EBITDA; adjusted EBITDA margin; trailing 12-month adjusted EBITDA; leverage ratio; and free cash flows. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measure is available at our website at www.itape.com and are included in its filings, including the MD&A filed today.Please note that variance, ratio and percentage changes referred to during this call are based on unrounded numbers, and all dollar amounts are in U.S. dollars unless otherwise noted.I would like to remind everyone that this conference is being recorded today, Thursday, May 10, 2018, at 10 a.m. Eastern Time.And I will now turn the call over to Mr. Greg Yull. Mr. Yull, please go ahead, sir.
Thank you, operator, and good morning, everyone. Welcome to IPG's 2018 First Quarter Conference Call. Joining me is Jeff Crystal, our CFO. After our comments, Jeff and I will be happy to answer any questions you may have. During the call, we will make reference to our earnings presentation that you can download from the Investor Relations section of our website.Turning to Page 3 of our presentation. The first quarter results were in line with our expectations both in terms of top line and bottom line profitability. We are very pleased with the solid 14.5% year-over-year increase in revenue supported mainly by the contribution from the Cantech acquisition and the increase in average selling price. Our gross margin 21.3% was lower than the first quarter of last year, which was 22.7%, excluding the impact of the insurance proceeds related to the South Carolina flood of $2.1 million recorded in the prior year quarter and average -- and higher average freight costs, which have affected the entire industry. Adjusted EBITDA of $30.2 million was up almost 7% over the first quarter of 2017, excluding the same insurance proceeds recorded last year. On page 7, capital expenditures reached just over $18 million for the quarter, and we are still expecting a total between $80 million to $90 million this year. We've continued to successfully leverage our new Midland North Carolina manufacturing facility, and the capacity expansion plan is progressing on schedule. As we have announced, we spent approximately $48 million on the first phase of this greenfield expansion and expect to end up spending an additional $14 million to $16 million on the second phase to double the capacity of this facility by early 2019. This will represent a total investment of between $52 million to $54 million that is strategically targeted to the fast-growing e-commerce customer channel. We continue to be excited by the growth opportunities within e-commerce, both in water-activated tapes as well as other products in our bundle, such as tape dispensing machines, packaging films and protective packaging. We are also pleased by the progress of our other capital projects, including our 2 greenfield projects currently being executed in India. Both projects are still on track to be completed in the first half of 2019. As such, the investment in the Indian greenfield projects as well as all the other announced capital projects in 2017 and '18 are expected to fully contribute to our results by the end of 2019, with the full annual benefit to be achieved in 2020. It is at that point where we would expect to achieve more sustainable leverage on our fixed expenses as well as our target run rate investment returns. Turning to Page 8. On June 29, 2018, we will pay a quarterly dividend of $0.14 per share payable to shareholders of record as of June 15. I will also mention that we continue to work through the exit of our minority partners in our Powerband partnership. This has taken longer than expected, and we hope to reach an agreement in the near future. Despite this, our partners have fully handled -- handed over the management of Powerband to our IPG-appointed local management team, so this exit process is not affecting the day-to-day operations or the greenfield project. As we mentioned last quarter, while the stand-alone business continues to operate with compressed margins due to higher raw material costs and a tough international competitive environment, we are seeing strong benefits of higher sales and profitability in that product line in North America directly resulting from the acquisition. The setup of the Capstone joint venture in our woven product business is in the final stages of the demerger process. In that, we've almost completed the rollover of assets from the Airtrax business into Capstone. As previously announced, we expect that the Airtrax business will include approximately $11 million of revenue with a valuation nearing $12 million. We expect that this rollover will be finalized by the end of the second quarter of this year. At this point, I'll turn the call over to Jeff, who'll provide you with additional insight into the financials. Jeff?
Thank you, Greg. I would now like to refer you to Page 9 of the presentation, where we present an analysis of the revenue for the first quarter of 2018. First quarter revenue increased by 14.5% to $237.2 million from $207.1 million a year ago. The $30.1 million increase was primarily due to additional revenue of $16.1 million from the Cantech acquisition, and an increase in average selling price, including the impact of product mix, which had a favorable impact of approximately $14.5 million. This includes a favorable product mix variance primarily in film and certain tape product categories and price increases in film, woven and certain tape products. The selling price increases affecting the 2018 first quarter results were largely related to the increased input cost and corresponding price increases announced in the fourth quarter of 2017. On a sequential basis, revenue decreased only slightly by 0.1%, driven mainly by a decrease in sales volume from the expected seasonality in certain Carton-Sealing Tape product categories, largely offset by an increase in average selling price, including the impact of product mix. Turning to page 10. Gross profit totaled $50.5 million for the first quarter of 2018, a $1.3 million or 2.7% increase from $49.1 million a year ago. Gross margin was 21.3% this quarter versus 23.7% last quarter and would have been 22.7%, excluding the $2.1 million of insurance proceeds from the South Carolina flood recorded in last year's quarter. Gross profit increased, primarily, due to additional gross profit from the Cantech acquisition. This was partially offset by the nonrecurrence of insurance proceeds and an increase in average freight costs, which also resulted in a decrease to gross margin. On a sequential basis, gross margin decreased from 22.8% in the fourth quarter of 2017, primarily due to a decrease in the spread between selling prices and raw material costs and an increase in average freight costs. Currently, the gross margin compression resulting from a decreasing spread and an increase in average freight cost is expected to be temporary as selling price increases announced in the first quarter of 2018 are having a positive effect on gross margin in the second quarter of 2018. SG&A totaled $29.1 million for the first quarter, a $3.2 million or 12.1% increase from $26 million a year ago. The increase was primarily due to an increase in employee-related costs, including salaries and other short-term benefits to support growth initiative and additional SG&A from the Cantech acquisition. SG&A also included M&A cost totaling $1.5 million and $0.7 million in the first quarter of 2018 and 2017 respectively. Adjusted EBITDA decreased 0.6% to $30.2 million in the first quarter from $30.4 million in last year. The $0.2 million decrease in adjusted EBITDA was primarily due to an increase in SG&A and a nonrecurrence of insurance proceeds of $2.1 million realized in the first quarter of 2017, partially offset by adjusted EBITDA contributed by Cantech and an increase in gross profit. This represents an increase of almost 7%, excluding the insurance proceeds from the prior year. In the fourth quarter 2017, the company recognized a $9.6 million net tax benefit, primarily due to the remeasurement of the U.S. net deferred tax liability using the lower U.S. corporate tax rate provided under the Tax Cuts and Jobs Act enacted into law on December 22, 2017. This onetime benefit did not reoccur in the first quarter of 2018. And as a result, our effective tax rate increased to 21.6%, which remains in line with our expectations for 2018 of 18% to 23%, barring any changes in the mix of earnings between jurisdictions and any new guidance or legislative revisions made with respect to the Tax Cuts and Jobs Act. This tax impact as well as a decrease in foreign exchange gains contributed significantly to a decrease in net earnings of $10 million from $21.3 million for the fourth quarter of 2017.As you will note on Page 15, cash flows from operating activities in the first quarter decreased $9.5 million to an outflow of $20.1 million, primarily due to a decrease in cash flows from working capital items. The decrease in cash flows from working capital activities contributed to the decrease in free cash flows of $5.8 million to negative $38.5 million. Both of these results were expected as the first quarter is normally when we require a larger investment in working capital for seasonal inventory builds due to higher anticipated sales and a settlement of annual customer and employee incentive as compared to the end of the fourth quarter, which is when we expect to deplete a large portion of that inventory build. Free cash flows are additionally impacted by the expected relatively high level of CapEx. The company had total cash and loan availability of $136.5 million as of March 31, 2018, compared to $186.6 million as of December 31, 2017. The decrease in cash and loan availability was primarily due to an increase in net borrowings to meet seasonal working capital needs and to fund the capital expenditures. We ended the first quarter of 2018 with a leverage ratio of 2.5 compared to 2.1 at the end of the fourth quarter of 2017. Day sales outstanding increased to 42 in the first quarter of 2018 from 41 in the fourth quarter of 2017. Trade receivables increased $4.7 million to $111.3 million as of March 31, 2018, from $106.6 million as of December 31, 2017, primarily due to an increase in the amount and timing of revenue invoiced later in the first quarter of 2018 as compared to later in the fourth quarter of 2017.Days inventory increased to 67 in the first quarter of 2018 from 65 in the fourth quarter of 2017. Inventories increased $21.9 million to $150.2 million as of March 31, 2018, from $128.2 million as of December 31, 2017, primarily due to an increase in production as part of a planned seasonal inventory build and the increase in raw material costs. Greg will now provide the company's outlook. Greg?
Thanks, Jeff. Before I review the outlook on Page 16, I'd like to reiterate that the gross margin compression on sequential basis in the first quarter of 2018, resulting from a decrease in spread and an increase in average freight cost, is expected to be temporary. We've previously discussed the fact that when there are very sharp spikes in raw material prices that occur within a very short time frame, there could be some short-term timing effects due to this time -- due to the time that it typically takes for the effect of the increase to manifest itself onto the income statement. We have been implementing price increases beginning with the 2017 hurricane season and continue to do so to mitigate raw material and freight cost increases in early 2018. Selling price increases announced in the late fourth quarter of 2017 and in the first quarter of 2018 are having a positive effect on the gross margin in the second quarter of 2018. And we remain confident in our ability to pass on price increases to our customers in a majority of these cases as we, and our industry in general, have done in the recent years. Moving on to the outlook for the fiscal year and second quarter of 2018. Excluding the potential impact of acquisitions and significant fluctuations in selling prices in response to raw material cost fluctuations, we anticipate 2018 revenue growth to remain similar to that of 2017, primarily reflecting the timing of the Cantech acquisition last year, the year-over-year growth rate is expected to be higher in the first half of the year than in the second half of the year. And revenue in the second quarter of 2018 is expected to be greater than in the same period last year. We remain confident in our adjusted EBITDA guidance for fiscal year 2018, which is still expected to be between $135 million and $145 million and greater in the second quarter of 2018 than the same period last year. In conclusion, we continue to focus on executing our capital expenditure project supported by near-record levels of investment and anticipate achieving benefits from some of these investments in 2018, with the full benefit being realized towards the end of fiscal 2019 and into 2020. The same timing is expected for the full year run rate synergies related to the Cantech integration of $2 million to $4 million. This integration continues to progress as planned. We believe that our level of capital expenditure investments will return to a more normalized level in 2019, barring any unforeseen additional investments driven by catalysts such as additional M&A. As such, we would expect the company will generate -- we expect that the company will generate much higher free cash flow starting in 2019, then building in 2020 and future years. We progress through the second quarter of 2018 with confidence and continue to put in place the building blocks that we believe will help us achieve our goals for fiscal 2022 and subsequent years. This completes my presentation. At this point, Jeff and I are open to answer your questions. Operator?
[Operator Instructions] Our first question comes from the line of Maggie MacDougall from Cormac.
Wondering if you can disclose how much Cantech added to your Q1 revenue?
Q1 revenue, yes, it's actually in one of the slides. It's $16.1 million.
Okay. And then, on the gross margin compression that you saw quarter-over-quarter from Q4. Also wondering, if you can sort of segment out or perhaps give an idea of magnitude between the increase in freight cost and other raw material cost inflation in terms of which was the bigger impact?
Yes. We haven't broken that out. I mean, what I would say is that they are both significant, but we haven't broken it out.
Okay. And the pricing that you have put through for Q2 to offset some of that cost increase. At this point in time, is that enough considering that gas prices have continued to go up, and freight cost could potentially continue to rise over the next few months?
Yes. So when we look at that, and we make comment to that, as you know, in our April results, we've seen the benefit of those cost increases. Certainly, we're dealing with what we know right now and or react in an appropriate manner if other price increases come down in the future. One thing that happened that was different this quarter, except maybe in Q1 is, for example, our polypropylene price did not settle until the third week in January. So in the third week of January, it settled to tell us what we were paying on January 1. So we went through 3, 4 weeks without knowing what the price was, and that price went up $0.09 a pound, dramatically like that. So those kind of swings are very hard to manage. I think -- and we're trying to clearly articulate that, given time, we'll get that back and we're seeing that in our results in April at this point.
Okay. And then just wondering if you could lastly give an update on the status of Powerband. And if you saw much improvement in margin there, if it's been sort of status quo over -- what you experienced in the last half of 2017?
I would say, on a sequential basis, it's pretty much status quo. It's the same. Again, we have a standalone business that certainly is under pressure historically, and the margins are compressed. We certainly have a dramatic increase in our North American business, both in profitability here and in revenue, and that's associated with the Powerband acquisition. So on a consolidated basis, the business is performing well, but the standalone business in India is certainly still under pressure at this point.
Our next question comes from the line of Neil Linsdell from Industrial Alliance.
Just on the price increases that you're talking about that we should see some benefit in Q2. Is this a -- have you gone to all your customers and you've done -- you've put your price increases in or is this something that's -- it's constantly evolving, and you're talking to clients? I'm just wondering if everybody's kind of settled down for a period of time.
Well, they're in place. The last group of pricing we put in was April 30 -- or April 15. So that's in place, and we saw increases that we put in place at the end of November, certainly, start roll in through the P&L as we progress through Q1. But the April results -- the pricing is in April's results, which means the pricing's in place.
Okay. And in previous quarters, we've talked about some -- I think it was Chinese suppliers, and you had some irrational pricing. It seemed to have settled down, I think, last quarter. Any kind of resurgence or anything going on in the market that we should be looking at?
No. I think it's pretty similar. I mean, look, the place that we're experiencing the most competitive pressure right now is on that Powerband business, and that really hasn't changed. So that's the area of intensity that I would highlight. The rest is more normal or consistent with what we've seen in the past.
Okay. And then you were just talking about your 2022 targets. So previously, when we -- when you were first starting up life, when we were talking about longer-term targets of getting to about, I think, it was $1.5 billion in revenue. Can you just update us on your long-term targets as far as revenue by whatever date and margin contribution at that point?
So those targets are still in place. And I think we've made good progress towards getting there. And as we've -- so nothing's really changed as it relates to either timing or the goal. I would say that, as we said in the past, we can only do so much organically. So M&A will have to play a role for us to get there. So the goal is $1.5 billion in sales and greater than or around $225 million of EBITDA and with an EBITDA margin of 15% or greater.
Okay. That's what I was looking for. And I was just wondering if anything that you've done in the meantime with Powerband, with the Cantech or anything like that puts you further and ahead of that schedule, or basically, that's all in line with what your strategic plan was?
No, I mean, it's -- we knew that within that strategic plan, we would have to do M&A. So -- no, those are just contributing to essentially what we were hoping to happen.
Okay, so everything on track?
Yes.
And then, just in a more general -- When you purchased Cantech, you -- I think there were some product lines, which were nice complementary or diversified away from where you are selling now. Are there any other kind of segments that you'd like to get further into? Or you're seeing more opportunities because of the Cantech purchase?
No. I mean, we mentioned, they have some product lines with good brand names, especially within Canada. So we've mentioned a couple of those in certain sports tapes and certain building and construction tapes as well, so we're certainly leveraging that. I think, beyond that, I mean, most of the tapes they have are tapes that we already produce. So certainly, we've discussed optimization of capacity and efficiencies around those products. But I think those are the -- really, the 2 main categories, and maybe there's another one as well, [ sorry ], with -- in medical as well that they have, but those will be it.
I think the other thing that I would add there is that, we're in the midst of integrating their system from an ERP perspective. And then once that's accomplished, I think there will be more opportunity to cross-sell there because we'll be one consolidated company from a system's perspective so from a customer-facing perspective and supply chain perspective.
Yes. That's what I was thinking about, specifically, I think the medical opened up a lot of very large opportunities that you could get further into with a lot of customers?
I wouldn't necessarily say in the medical side, where I would be more inclined is in the building, construction side within, specifically the retail kind of DYI side in -- specifically in Canada, but certainly in the U.S. as well. And then on the athletic tape side as well.
Okay. And -- sorry, just one more housekeeping. We've talked about your CapEx spending. I think maintenance CapEx, if you take out a lot of the growth projects, we're talking about $30 million or so -- $35 million per year. So as we go out past the 2019 completion of the build-out on your current projects, would that still be kind of a valid maintenance CapEx number?
I think, well -- I think it could be. I mean, I think, for us, we think we'll be somewhere in that -- around where depreciation is. I mean, we'll be probably running at close to $40 million of depreciation on an annualized basis. I mean, it could be $30 million, it could be $40 million, it could be $50 million. Maybe a little higher, but it should be in that range.
[Operator Instructions] Our next question comes from the line of Ben Jekic from GMP Securities.
I have 2 questions, both relatively qualitative to the extent that you want to talk about it. My first question is on exposure to raw materials compared to let's say, 2, 3 years ago before your capital deployment phase started. Like, are you -- is your exposure greater, same or smaller, and which of the resins have been added? Or just give us some dynamics around that, please.
Well, I would think that it's the same. Certainly, what has changed somewhat is geographical exposure to raw materials just with us moving into India specifically. So we probably have the same mix or ballpark mix between polyethylene, polypropylene and things of that nature. Just some of those sourced products now will be out of Asia as opposed to North America.
Okay. And then my second question is, just a little bit more on competitive pressures. You just said, I think, that where you are feeling it mostly is Powerband. Maybe if you can just jog our memory, like, where is that coming from and for what kind of shipments? Is it shipments within Asia or heading to North America? And then has there been any kind of drastic changes in any other product lines?
Well, that's the one that we're experiencing the most intensity, and that's both in the Europe -- both -- and in the North America. It's a situation that I believe will work itself out by increasing. At the end, the net result will be an increase of the spread between selling price and material cost. And I think that, over time, will work itself out, and I'm confident that it will. It's hard to predict when it does. Certainly, the input costs in Asia are staying at a very high level and just to refresh everyone's memory, when we bought that business, we were paying $900 a metric ton for BA. We're currently paying somewhere between $1400 to $1600 metric ton for BA, butyl acrylate, which is the main component for adhesives. So I think that will over time work itself out. It's just -- it's just is one of those quarter-to-quarter things at this point. In relation to the balance of our business, we do live in a competitive world here where we're fighting for orders. I would say that, that landscape has not necessarily changed since the last time we updated it. So -- did that answer your question, Ben?
Mr. Yull, there are no further questions at this time. I will now turn the call back to you. Please continue your presentation or closing remarks.
Thank you, operator, and thank you for participating in today's call. We look forward to speaking with you, again, following the release of our second quarter results in August. Thank you.
Thank you. Please note that a replay of this call can be accessed as of 1 p.m. today Eastern Central Time. You may access this recording by dialing (855) 859-2056 and entering the passcode 6864098. This concludes today's call. And you may now disconnect.