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Ladies and gentlemen, thank you for standing by. Welcome to Intertape Polymer Group's Q4 2020 Conference Call. [Operator Instructions] Joining me from the company, I have Intertape Polymer Group's Chief Executive Officer, Greg Yull; and 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 will be making forward-looking statements, which reflect management's beliefs and assumptions regarding future events based on information available today. You are cautioned not to place undue reliance on these forward-looking statements as they are not 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 2 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 SEC rules. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available on our website at www.itape.com, http://www.itape.com.Please note that all dollar amounts are in U.S. dollars unless otherwise noted. I would like to remind everyone that this conference is being recorded today, March 12, 2021 at 10 a.m. Eastern Time.And we'll now turn the call over to Greg Yull. Mr. Yull, please go ahead.
Thank you, and good morning, everyone. Welcome to IPG's 2020 Fourth 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 a business perspective. Revenue was up 5% to more than $1.2 billion despite the pandemic. Adjusted EBITDA was up 23% to $211 million. Adjusted EBITDA margin was up more than 250 basis points to 17.4%. And free cash flow was up 54% to $134 million. The business rebounded incredibly well from the temporary demand depths 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 the 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 have made investments in the past 5 years, in products like water-activated tape, protective packaging, wovens and films. The growth in the e-commerce end 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 2 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 and construction and retail in that order. Our e-commerce business grew by more than 40% in 2020, which is in line with the largest e-commerce retailer. Independent third-party reports estimate that sales through the e-commerce channel will continue to grow for many years to come at a macro level. The pandemic simply served 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 2022. This investment demonstrates the confidence we have in our demand outlook. With the growth and free cash flow generation we delivered in 2020, we made significant progress on our debt repayment. Our total leverage is now 2.2x adjusted EBITDA, which is down 7/10 of a turn compared to the end of 2019. Our target is to operate within a range of 2 to 2.5x.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, wovens 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 outlook is strong. They offer shorter-term investment horizons and higher return thresholds than the previous projects 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 savings, 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%. 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 billion 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 million 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 2021 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 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 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 as 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, films and membrane structure fabric, demonstrates our commitment to embrace sustainability 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 demand we are 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 stay in path and allow others to address this demand, but that would certainly not be in 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 8 of the presentation, we present an analysis of our revenue for the 2020 fourth 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 were in the areas where we invested in CapEx and acquisitions during the past 5 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 were carton sealing tapes, excluding water-activated tape, as well as some industrial tapes, both the result of effects of COVID-19 on some of the 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 1 acquisition in 2020, Nortech, which we closed in February of 2020 as well as foreign exchange.Turning to Page 9. 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 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 the quarterly and annual periods, respectively, compared to 2019. These improvements reflect 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 in 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 and loss carryforwards as well as the impacts of bonus depreciation previously taken.Cash flows from operating activities were $88.6 million, 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. 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 period is primarily due to the increase in gross profit. Keep in mind that we typically experience business seasonality to show negative free cash flow in the first quarter and the majority of cash flows from operating activities and free cash flows are generated in the second half of the year.Our secured net leverage ratio decreased to 1.1x at the end of 2020, well below the covenant of 3.7x. The secured net leverage ratio is the most important ratio that is relevant to our covenants, therefore, we view it as the highest priority. Our total leverage ratio, including the unsecured debt, decreased to 2.2x, down 0.5 turn from 2.7x 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 and operational efficiency. 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 1 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 1 year. Our team and business has performed exceptionally well. As the vaccine rollout 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 in product categories we sell into, like water-activated tape. The demand resilience of our 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 have 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 are executing a strategy to deliver long-term value for our shareholders.I'd like to thank our employees. 2020 and even 2021 to date have certainly been a challenge. I believe better days are ahead. I'm proud of how our team has conducted themselves and the level of commitment to the organization they have demonstrated. It's truly tremendous.With that, I'll turn the call back to the operator to open up the question-and-answer period. Thank you.
[Operator Instructions] Your first question will come from Michael Doumet from Scotiabank.
Great quarter again. Just the first question on guidance. If I look at your Q3 and your Q4, 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, you expect to generate an average quarterly EBITDA of $60 million. So just trying to reconcile a little bit, too. I mean, obviously, appreciating the seasonality, I want to maybe just get your take on how much of this has to do with either higher resins, potentially tough second half comps or just a healthy amount of conservatism.
Yes. That's a 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 2 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 shelf will come back into it. So you'll see some additional cost, and that flows through somewhat in SG&A as well as some of the cost of sales. So that's one reason.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, the uncertainty around some of the impacts, the short-term impacts of the Texas storm. So some of that, we baked in some conservatism to account for some of those things. So those would be the -- really the 2 biggest kind of impact that you're going to see in there to account for that. But overall, I mean, I think at the end of the day, what's tough for us is some of these uncertainties related to COVID and how everything is going to roll out once the vaccines are in place, what does demand look like in that back half of the year, and then what do resins do, and what does that look like.
Got you. Okay. And on the resins piece, you highlighted, just to make sure I heard it right, 80 basis points of margin pressure already accounted for in your 2021 guide?
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%.
Got you. Okay. And then the second question on CapEx. I mean, thanks for the commentary there just in terms of what to expect on projects and timing. You've obviously had strong revenue growth in 2020. Meanwhile, your CapEx has pared back quite a bit due to COVID. Should we view 2021 CapEx as sort of a catch-up year here? I guess the bigger picture question here is should investors see Intertape as essentially a growth company? Or will the company eventually look to step back and maybe go into harvest mode post 2021?
So I think with the visibility we see right now, certainly, growth is a key component of a 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 even growing off of that base. So we feel really confident about our growth prospects, certainly into the next couple of years tied to that capital. And as we move further through this year on a go-forward basis, the 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. And the other comment I would make as well on those projects is, we commented on the fact that the IRR is above 20%. And those projects are all in-house in our current facilities.
Your next question comes from Daryl Young from TD Securities.
Congrats on a good result. Just with regards to the $100 million of incremental revenue from the growth projects, would that be effectively already presold type of demand? Or is that what you're just expecting based on the number of units you can -- you will be able to produce post investment?
So some of it is pent-up demand that we currently have. I mean, some of the products that were -- or 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 presold per se, but we have good line of sight in those areas. Most of that capital certainly is 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 water-activated tapes? Or is there 1 product that's significantly outsized?
Well, I think from a dollar perspective, just leaving aside percentages for a sec, from a dollar perspective, 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, namely in our films area and our protective packaging area. So the percentages in those areas were certainly much higher than the tape category.
Got you. And then one last one. Some of the more traditional industrial, manufacturing, aerospace type end markets, how much upside remains from a reopening trade there would you say? Or have you kind of normalized in your order book already?
Yes. I mean I'd say in some of the industries that are more under pressure, certainly, there could be some more upside there. As things start to recover, we could see 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 in 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.
Our next question comes from Stephen MacLeod from BMO Capital Markets.
I just wanted to focus in a little bit on the gross margin. You gave some good 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 -- from an expectation on raw materials, just as we progress 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 sometime in May, June time lines. So we'll see that on our P&L within 60 days after that. So I think it's a first half right now with the way we look at it.
Okay. That's helpful. And have you seen any specific supply disruptions? Or is it more just the inflation that you're dealing with? Like, do you have any inputs that have completely come off-line, and you've actually had disruptions in accessing that supply?
Well, certainly, it's been a very busy time in the last 6 weeks, dealing with supply chain and people off-line. We've had most chemical companies or plastics companies declare force majeure. Most are back up operational as we sit here today. There's still some off-line. Certainly, we've seen tightness in supply. 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 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 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. And then maybe just finally, you mentioned the leverage has come down nicely. And you mentioned a little bit about acquisitions. Can you give a little bit of color around what kind of targets you'd potentially be looking at with respect to end markets? Is it safe to assume that it would largely be e-commerce-focused? Or is there more opportunity beyond that?
Yes. So our focus really hasn't changed much as it relates to M&A. I mean, we're certainly still looking at product lines that can differentiate ourselves, both from a technology perspective and a margin perspective in areas that primarily are bolt-on acquisitions at this point, 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 there's no 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 in some cases, disruptive products that we believe we can put into our platform and really supercharge the top line growth.
Your next question comes from Walter Spracklin from RBC Capital Markets.
So my question is about your capacity now and how much capacity you're bringing on in the e-commerce side. Your guidance is suggesting you can approach double-digit here, growth in revenue in 2021. Would you consider yourself then to be kind of at a capacity level that growth from that point on 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, if the demand would warrant such that when your capacity comes online, call it, later in 2022 or into '23 that you wouldn't have to kind of turn away business in the interim?
Yes. We think -- I mean, the projects that we're investing in now will, 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 or back-end of 2022. So certainly, we see a runway to grow with that capacity well into 2023 and even into 2024. So 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 expansions in e-commerce, I mean, there's 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 to deblock or unblock a lot of constraints we have now and really help us grow through 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 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 individual customers within e-commerce, we are definitely selling a bundle of products and services into those accounts. 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 on the percentage 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 Curby 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 techs 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 customers. So 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 takes share of the retail spend.
Yes. That's a good point. Now maybe, Greg, could you even ballpark it for us on an industry without getting customer-specific? But is water-activated tape as a percentage of total all e-commerce boxes that come at people's doors, I mean, is it 10%? Is it 50%? Just to ballpark it for us to give some of the -- if it is a superior product, which, obviously, some of your customers believe it to be, it gives us a good line of sight as to how much growth is embedded if it grows in customer adoption.
Tough to answer that, Walter. I think when you look 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 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 I'd say well over 50% would be in a box.
Your next question comes from Scott Fromson from CIBC.
A couple of questions on what you're hearing on the competitive front. Are you hearing of 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?
Yes. We really haven't seen anything in that area, specifically around water-activated tapes. Certainly, there has been some capacity expansions in protective packaging geared towards e-commerce. I won't get into the details there. But certainly, there's been expansion. We've done some. A lot of that having to do 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 3M actually exited that market. You're not hearing any chatter that they're going to -- assuming that's correct, you're not hearing any chatter that they're going to reenter?
No. And I don't think they were ever in that business producing product. I think they were sourcing product.
Yes.
Okay. Makes sense. Now just on the pricing pressures or the ability to pass through pricing increases over the long term. Is there any chatter from customers on pushback? Or is the fact that they're minting it so much that a penny here or there on packaging doesn't matter?
Well, look, I mean there's always pushback from an inflationary perspective. I think this situation, certainly in my career, is quite unique. Certainly, the raw materials were rising prior to 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, at one point, probably 80%, 90% of production was off-line for a period of upwards of 2 weeks, put a lot of pressure on supply chain. So then 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 an issue around price, not to say that there's 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 you're going to see some reduction in that on the second half, certainly of this year.
That makes sense. Final question. Are there any product categories that you would think of selling or look at selling to either recycle capital or return capital to shareholders?
Not at this time. Nothing that we can disclose.
Your next question comes from David Ocampo from Cormark Securities.
I just wanted to follow up on Walter's question about capacity utilization. When we think about your manufacturing footprint, can you add or reasonably add more lines based on the square footage that you have? Or as we enter 2022 or 2023, you could 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 plants that we've built recently in 2017, '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 4 walls of the existing building. And then on top of that, when you look at technology and upgrades to equipment, your -- you have opportunities to deploy capital there where on the same footprint basis, you can produce 30%, 40% more product if you swap out the old equipment for a piece of new equipment.So certainly, from our perspective, we don't see any need in our next 3- to 5-year kind of look for greenfields. So we're comfortable that in many instances, we'll be able to expand capacity within the 4 walls and in areas that we can't, we'll be able to do kind of a brownfield, if you will, and move a wall out and add the infrastructure to support that.
Yes. That's helpful. And final one here. Just following up again on the capital allocation. And 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 2 turn leverage range that you guys are comfortable with. So how should we think about capital allocation as you trend below 2x? Is it something where you just harvest the cash and wait for an acquisition opportunity? Or do you start returning capital to shareholders?
Yes. Certainly, from my perspective, the hope is 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, at the time, if we do get below that 2x levered, certainly, that's the discussion that we're going to have at the Board about capital allocation, if we don't see that organic growth from a growth perspective or a capital perspective and/or an acquisition.
Your next question comes from Zachary Evershed from National Bank Financial.
So 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't be brought back online in Texas in a timely fashion, do you have import options through your global footprint?
Yes, we do. But we have to remember that the supply chain disruption is global right now, right, from a shipping ocean freight perspective as well. And certainly, on the raw material front, 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 sit here this morning, those production facilities are getting back up and running. They might not be running at 100%, but they're 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 5 days. So I think there is -- I mean, listen, 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.
And then can you tell us more about the digital transformation piece of the CapEx budget?
Yes, sure. So what we're doing is we've -- and then this has been going on to a small extent, the last, I'd say, 1 year, 1.5 years, 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 traditional methods with disparate systems and big data, right? So you can imagine you're 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 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 expect to see cost savings coming through over the next few years. So that's the crux of it.
That's interesting. And then on the topic of e-commerce penetration, I think we're on the same page in terms of the pull forward in the long-term growth. But do you foresee any directional weakness in e-commerce orders as brick-and-mortar reopens?
Well, I think when you go forward, certainly, the growth rates will slow down on a percentage basis, and we factored that into our forecast. But I think you're 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 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 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're willing to pay and what transactions are occurring at?
Yes. I think that's hard to answer because it's a very transaction specific. But there is -- or 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 stacks out there as well, looking to deploy capital, pretty much anything. So there's no question that valuation is an issue. And I think 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 reasonable multiples, call it, in the mid to high, call it, single digits, would be probably the sweet spot.And then like 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 is less relevant because you're 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.
We have no further questions. I would like to turn the call back over to Greg Yull 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.