Intertape Polymer Group Inc

TSX:ITP

Earnings Call Transcript

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to Intertape Polymer Group's Third 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 information available today. The company undertakes no duty to update this information, including its earnings outlook, even though its 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 Securities Regulators and the U.S. Securities and the 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; adjusted net earnings; and free cash flows.A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available at our website at www.itape.com and are included in its filings, including the MD&A filed today.Please also note that variance, ratio, percentage -- I'm sorry, 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, November 8, 2018, at 10 a.m. Eastern Time.I will now turn the call over to Greg Yull. Mr. Yull, please go ahead, sir.

[Gregory A. C. Yull, CEO, President & Non]

Thank you, operator, and good morning, everyone. Welcome to IPG's 2018 Third 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.It was a strong quarter. Revenue was up almost 15%. Adjusted EBITDA was up almost 16% compared to the same period last year. We successfully completed the Polyair transaction, which we discussed on our Q2 call, and we successfully completed a $250 million senior unsecured notes offering, which Jeff will address in a moment.Last quarter, we discussed our 2022 growth objectives and how we compete in the industry. I want to touch that -- touch on that again this morning. But today, I also want to highlight the action we're taking to deliver on that growth and why we're so confident and excited about our future. Our 2022 targets for the business consist of achieving $1.5 billion in revenue, $225 million in adjusted EBITDA and 15% adjusted EBITDA margins. With the run rate of the existing business, including the ongoing capital investments and the six acquisitions we have completed since 2015 and the related synergies, we are very confident in our ability to deliver additional organic growth. But in order to achieve our targets, we will require a couple of modest acquisitions depending on their scale.I want to be clear that as we identify and review additional acquisitions, our investment criteria will focus on the strategic and accretive nature of the targets. The success of the business in the long term is more important than achieving our 2022 targets by paying up for an acquisition. As such, we will remain prudent in our approach as we evaluate targets and will not chase them for the sake of achieving a growth target.So how do we compete in today's market? Based on our experiences, customers and distributors are attracted to a simpler, straightforward relationship. They want to deal with fewer vendors and buy more from each of them, if the price and performance are right. They are looking for credible partners with scale and breadth. We deliver on both fronts. As one of the largest manufacturers in the sector that provides a comprehensive product offering, our scale on long-standing relationships in the industry provide us access to the major industrial distributors. We have designed our product bundle to offer these distributors and their end customers a more streamlined method to procure a wide array of quality, low-cost packaging and protective solutions.What do we mean by streamlined? Based on our experiences, distributors want to turn inventory more frequently, and our ability to deliver a product bundle with a broad product offering of skews on a more frequent basis supports that objective. Another central principle of how we compete is by investing in world-class, low-cost manufacturing assets. As part of strengthening our product bundle, we are investing in existing facilities to ensure we're as efficient as possible and prudently building out our capacity for products where we believe demand is growing.In 2016, we made a decision to implement a 2-year program reinvesting cash flow into the business to significantly increase our capital expenditures. By the end of this calendar year, we will have invested approximately $170 million in CapEx across our facilities. We are in the final stages of this program. Our new Midland facility, which serves the e-commerce segment with water activated tape already has its first line operational and the second line scheduled to commence operations in Q1 of 2019. Our greenfield Capstone and Powerband facilities in India are each scheduled to commence operations in the first half of 2019. These three new operations, consisting of the second Midland line and the greenfield Capstone and Powerband facilities, represent approximately $65 million in capital spent. We expect that most of this capital will be spent by the end of 2018, save a small amount as we complete Powerband and Capstone in the first half of 2019. In total, the investment in these three new operations makes no contribution to top line revenue today, but it will shortly. These are world-class facilities that stand to improve our competitiveness and strengthen our product bundle either through lower cost production or production scale.Upon commencing commercial operations as we build the order book, these projects will make a meaningful contribution to the business. With respect to the order book, in the case of Midland, the first operating line is already at capacity and we believe sufficient growth exists within the e-commerce vertical, but the second line will scale effectively and work constructing -- and we've constructed the facility to allow the addition of more lines, if necessary. The new Powerband facility will be base loaded with carton sealing tape volume currently produced at a higher cost in our Cantech facilities, as a strong starting position. Finally, the new Capstone facility will have immediate orders from our North American woven business, which are currently being sourced from third parties.These are complex operations. They aren't light switches that turn on the moment they're installed. Timelines vary by project. But generally speaking, our larger investments can take up to 12 to 18 months to reach optimal efficiency. For context, we invest in projects targeting returns of at least 15% on an IRR basis. And in the case of the second Midland line, the $14 million to $16 million in CapEx project leverages the investment already in place from the original project, so we expect to exceed that hurdle rate. That should provide you with some visibility on the impact of the $65 million in new projects and the CapEx that we're investing above our typical maintenance CapEx.Reaching the end of this investment cycle and understanding the economics is exciting, and it's why we're so confident as we enter this next phase of growth. We have added scale, expanded our geographical footprint, strengthened our product bundle and driven efficiencies across our operations with these investments. And we will have completed this capital project from a position of strength in the market with the economy performing well.In 2019, we intend to return to a more normalized level of CapEx investment in the range of $40 million to $60 million a year. In the event the situation necessitates it, we believe the annual CapEx requirements could be reduced to approximately $15 million a year, including the recent Polyair acquisition, without inhibiting our ability to service our customers. We are investing in and acquiring assets that we believe will provide continued growth to the company and improve our competitiveness in key segments of the market in North America like protective packaging, water activated tape and packaging films.Our integration activities for the Cantech and Polyair acquisitions are progressing well. In the case of Cantech, we remain confident in our ability to deliver on our synergy targets, and the closure of the Johnson City facility is proceeding on plan. In the case of Polyair, it is still in the early days, but the coordination of the sales team, the integration of the administration and our work on the operation side are each proceeding well. We have already had early success in our cross-selling strategy both from IPG accounts ordering Polyair products and Polyair accounts ordering IPG products. As I said, it's still early, but we are confident that Polyair represents a strategic acquisition that strengthens our product bundle with protective packaging solutions.At this point, I'll turn the call over to Jeff, who'll provide you with additional insight into the financials. Jeff?

[Jeffrey Crystal, Chief Financial Officer]

Thank you, Greg.I would now like to refer you to Page 7 of the presentation, where we present an analysis of our revenue for the third quarter of 2018. Revenue increased by almost 15% to $279.1 million. The $35.6 million increase was primarily due to the Polyair and Airtrax acquisitions, which contributed 9% of the increase and an increase in average selling price, including the impact of product mix, which contributed almost 4% of the increase.Volume increased overall by 2% in the quarter compared to the same period last year. It's important to keep in mind that given the breadth of our product bundle, the relationship between volume and price is difficult for our investors to decipher. Unit volume across different SKUs is measured in the different units. And depending on the complexity or differentiation of the SKU, the unit price and margin profile can vary widely. We're evaluating alternative metrics, if any, that would provide help to improve our shareholders' visibility in this -- into this relationship, while still protecting competitively sensitive information.As it relates to the third quarter, our acrylic carton sealing tape is a prime example of a lower priced product, where volume fluctuations can impact overall volume materially, but have a much less significant impact on revenue and profit. Excluding acrylic carton sealing tape, sales volume grew 4.4% compared to the same basis last year. On a sequential basis, revenue increased 12% and was primarily due to the Polyair and Airtrax acquisitions and an increase in sales volume of approximately 6.9%, or 3.3% excluding carton -- acrylic carton sealing tape, primarily due to an increase in certain tape products. This was partially offset by a decrease in average selling price, including the impact of product mix.Turning to Page 9. Gross profit increased 16% to $58.9 million in the third quarter from $50.9 million in the same period last year. Gross margin was 21.1% in the third quarter compared to 20.9% in the same period last year. The change is primarily due to an increase in the spread between selling prices and combined raw material and freight costs, partially offset by an increase in plant-related operating costs. We continue to see opportunities to drive additional efficiencies at the plant level.Periodically, unexpected costs can be experienced at a plant as a normal course of operating multiple manufacturing facilities. These costs can also include budgeted cost saving targets at a plant that were not fully achieved, but the plant continues to operate efficiently. We experienced unexpected costs during the course of the year at the plant level. These costs can be characterized as either inefficiencies caused by unplanned equipment maintenance, staffing changes and higher than anticipated medical costs, as well as the budgeted cost savings that were not achieved. One example in the third quarter from one of our larger plants was higher material waste from two older lines that required additional calibration. We have dealt with the issue and the lines are operating effectively.On a sequential basis, gross profit increased by 8% and gross margin decreased by 75 basis points. The decrease in gross margin is primarily due to an unfavorable product mix and an increase in plant-related operating costs that I referenced earlier.SG&A expense increased by $14.7 million to $33.4 million in the third quarter compared to $18.8 million in the same period last year. The increase was primarily due to a $10.1 million increase in share-based compensation, driven primarily by an increase in the fair value of cash-settled awards in the third quarter of 2018 as compared to a decrease in fair value in the third quarter of 2017 as well as $3.1 million of additional SG&A from the Polyair and Airtrax acquisitions.On Page 10, you can see adjusted EBITDA increased by 16% to $37.6 million for the third quarter compared to $32.4 million for the same period last year. The $5.1 million increase was primarily due to organic growth in gross profit and adjusted EBITDA contributed by Polyair. In the third quarter, we made an $11.3 million discretionary contribution to our U.S. defined benefit pension plans. These plans are now wholly funded on an accounting basis and as a result, we expect to reduce future contribution requirements and certain plan administration expenses. We were able to deduct this contribution on the 2017 tax return at the higher 2017 U.S. corporate tax rate, which resulted in a tax benefit, which was partially offset by the reversal of the related deferred tax asset recorded using the lower corporate tax rate provided under the Tax Cuts and Jobs Act for a net tax benefit of $1.3 million recognized in the quarter.The effective tax rate decreased to 15.7% in the three months ended September 30, 2018 as compared to 25.6% in the same period in 2017. This decrease was primarily due to, one, the reduction in the U.S. statutory corporate tax rate as a result of the Tax Cuts and Jobs Act; two, a net tax benefit related to the discretionary pension contribution, I just mentioned; and three, a favorable change in the mix of earnings between jurisdictions. The favorable impacts were partially offset by the elimination and limitation of certain deductions in the U.S. as a result of the Tax Cuts and Jobs Act.Cash flows from operating activities decreased by $9.6 million to $14.2 million in the third quarter compared to the same period last year. The decrease was primarily due to the discretionary pension contribution I just mentioned and an increase in inventories primarily related to an increase in raw material costs and purchases, partially offset by an increase in gross profit and a decrease in cash taxes paid mainly as a result of the TCJA.Free cash flows were negative $8.9 million in the quarter compared to negative $4.9 million in the same period last year. The change was primarily due to the discretionary contribution to the U.S. pension plans. I mentioned earlier, partially offset by a decrease in capital expenditures. The company had total cash and loan availability of $111.3 million as of September 30, 2018 compared to $186.6 million as of December 31, 2017. The decrease in cash and loan availability is primarily due to an increase in net borrowings to fund the Polyair acquisition and seasonal working capital requirements.Subsequent to quarter end, we announced the closing of an offering of $250 million of 7% senior unsecured notes due in 2026. The offering provides us greater flexibility in our capital structure, along with the opportunity to lock-in a fixed rate amid historically attractive interest rate environment. The offering resulted in net proceeds of approximately $243.8 million after deducting underwriting fees and estimated expenses. We use the net proceeds from the offering to repay a portion of our borrowings outstanding under the $600 million credit facility and to pay related fees and expenses, as well as for general corporate purposes.As Greg mentioned earlier, we expect to see a significant reduction in capital expenditures in 2019 to a range of approximately $40 million to $60 million. At these levels, our ability to generate free cash flow improved significantly compared to 2017 and 2018, and we intend to prioritize a portion of that cash towards the repayment of debt.Days sales outstanding increased to 46 in the third quarter of 2018 from 41 in the second quarter of 2018. Trade receivables increased to $138.2 million as of September 30, 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 third quarter of 2018 as compared to later in the third quarter of 2017, as well as the impact of the Polyair acquisition.Days inventory decreased to 65 in the third quarter of 2018 from 70 in the second quarter of 2018. Inventories increased to $161.4 million as of September 30, 2018, up from $128.2 million as of December 31, 2017. The change is primarily due to the additional inventory from the Polyair and Airtrax acquisitions, an increase in production, including the utilization of completed capacity expansion projects, as part of our planned inventory build in anticipation of higher expected sales, and an increase in raw material costs and purchases.Greg will now provide the company's outlook. Greg?

[Gregory A. C. Yull, CEO, President & Non]

Thanks, Jeff.With this morning's announcement, we are reiterating our outlook for 2018 revenue and narrowing our adjusted EBITDA range within the bounds of our previous guidance, given we're nine months into the year. These expectations exclude any significant fluctuations in selling prices caused by unforeseen volatility in raw material prices.We anticipate revenue growth in 2018 to be within -- between 16% and 18% compared to 2017, and adjusted EBITDA to be between $140 million to $143 million, which has been narrowed from the previous expectation of between $140 million and $150 million for the year. We are narrowing the guidance to the lower end of our prior range primarily due to the plant related cost that Jeff mentioned earlier. We view these items as day-to-day operational issues that are part of operating multiple manufacturing facilities, which require consistent and vigilant management. We have taken the corrective action on most -- on the most immediate of these issues, and expect that they will [ be substantially ] addressed in the coming quarters.As such, we expect both revenue and adjusted EBITDA in the fourth quarter of 2018 to be greater than in the same period last year. We are executing a strategy to deliver long-term value for our shareholders. Strengthening our product bundle by investing in our facilities and operations to drive efficiencies and acquiring businesses that consolidate our position will complement our offering in growth markets or with key distributors, with a disciplined approach that is focused on ensuring these acquisitions are accretive to the business and our growth moving forward.We appreciate the support, commitment that our investors have demonstrated through our 2-year capital investment program, and we look forward to updating you on our progress.With that, I'll turn the call back to the operator to open up the question-and-answer period. Thank you.

[Operator]

(Operator Instruction) And our first question comes from Michael Doumet with Scotiabank.

[Michael Doumet, Analyst]

Greg, just going back to the comment around narrowing guidance to the lower end, I think you referenced the plant related costs there that Jeff also spoke about in his comments. Could you just elaborate a little bit on that so we just get a better feel for maybe the length of the headwind?

[Gregory A. C. Yull, CEO, President & Non]

Well, I mean, like I mentioned in my comments, I mean, we've addressed the most pressing of these issues. Jeff, gave you an example of where in one of our older larger plants we had to make some corrective actions as it relates to the performance in those plants. We're also seeing health care costs increase in our plants. But for the -- when we think of the issues that we faced in Q3, these are fundamental blocking and tackling issues in my mind, and we can work our way through these in a relatively expeditious manner.

[Michael Doumet, Analyst]

Okay, that's helpful. And maybe if we start to think about the three facilities that have come online in the next several months and thinking about 2019 and considering obviously the comments around 12 to 18 months before getting to optimal efficiency, I'm just trying to think about the slope of profitability that we should be expecting, again just to think about how start startup costs and period costs could flow into the beginning of 2019.

[Gregory A. C. Yull, CEO, President & Non]

So I think it's important when we think about the 12 to 18 months. You're talking about getting efficiency levels from a yield perspective, or uptime perspective of narrowing the gap, for example, like a 95% yield ratio to a 98% yield ratio, right. So when you think about 12 to 18 months, you're really fine-tuning kind of the operations of the business. As it relates to ramp, I don't know, Jeff, if you want to...

[Jeffrey Crystal, Chief Financial Officer]

Yes. I mean, certainly we're going to see a ramp. I mean, like Greg said, from an efficiency standpoint, it definitely is going to take us some time. And especially when you look at a greenfield facility, you're hiring a lot of new people. So it's not just calibrating the machinery and optimizing the process, but it's also the -- just getting people sort of fine-tuned on operating that machinery. I mean, you look at our Indian facilities, I mean, you're talking about a lot of people. So there's no question there's going to be a ramp in efficiency, and then there's the ramp in sales. I mean, we talked about in the Indian facilities, I mean we're going to certainly have a base loading in the Powerband facilities related to some carton sealing tape volume that we're producing in Cantech that can be moved over. And the same thing on the Capstone side, you've got a base loading of the volume that we're currently buying externally from Asian suppliers, and that's going to move to the Capstone plant. So I mean, I think you're going to pick those up, but then you still have to go out and get sales, and that's certainly going to be ramped over time. So certainly, when you look at 2019, I think both from an efficiency standpoint as well as from a sort of a loading of capacity standpoint, you're certainly not going to get there all in 2019. But we expect that to ramp quite nicely, and certainly nicely into 2020.

[Gregory A. C. Yull, CEO, President & Non]

And I think it's important to acknowledge that we are on schedule with our expected or forecasted ramp in all of those plants.

[Jeffrey Crystal, Chief Financial Officer]

Yes.

[Michael Doumet, Analyst]

But maybe thinking about -- we're trying to put numbers in a model here. And as soon as you start these facilities, given that you've base loaded some of those sales and it somewhat sounds like a vertical integration based on that, but how do we think about profitability in the initial quarters? I mean, is it initially negative? Or is it closer to breakeven and then ramping up gradually to -- towards that optimal efficiency?

[Jeffrey Crystal, Chief Financial Officer]

You know what? It's definitely not negative. I mean, because basically we go through -- like even when you think of from an accounting standpoint, typically, when you're really starting up those operations and you're actually skewing off whether it's additional ways or spending additional time on it, that's part of the commercialization of the machine and that's actually a capitalizable item. But by the time you actually commercialize the line, you are operating at a profitable level. And you basically are operating at a level that's not a target profitability certainly, like Greg said, but that's not something meaningful. So I would say that from a P&L standpoint, you certainly won't see a lack of profitability in those lines once we're operating, but certainly that's going to ramp to a better level over time.

[Operator]

Our next question comes from the line of Neil Linsdell with Industrial Alliance Securities.

[Neil Linsdell]

Let's go back to the Polyair acquisition. And when you made the acquisition, you were talking about the benefits that you expect it to get through your distribution networks and stuff. Can you talk a little bit about how that's going and if we're going to continue to see some improvements there?

[Jeffrey Crystal, Chief Financial Officer]

Yes. So I mean we're still pretty early in that integration, but it has gone as well as we expected, maybe even a little more. We had that just in -- recently, we had our largest trade show called [ PRMMA ] where we -- it was the first time that we were able to present to our customers, in that kind of fashion, the bundle of products with the integration of the Polyair products. We have a lot of cross-selling targets that have been identified and starting to execute upon, and we've had some early wins. So I feel very confident about that acquisition, I feel very confident about our ability to deliver on the synergies, and I think again it fits very well strategically, both at the distribution level and at the end user level as it relates to specifically around our bundle of products. So I'm happy with where we are right now and look forward to continuing to see success on the cross-selling side, and also on the cost side from an operation perspective.

[Neil Linsdell]

That sounds really good. And with -- if we were looking at the new facilities in India that you've been -- that are coming online in 2019. Can you talk a little bit about, I think, in the raw material costs and availability of products in India versus North America? And also with the labor, how if that's proceeding as far as your ability to ramp up on the employee base there?

[Gregory A. C. Yull, CEO, President & Non]

Yes. I mean, like -- just with the labor side first. As Jeff mentioned, I mean, in a logical [ way ], especially with the Capstone, it is fairly labor intensive as it relates to number of people. And certainly we're actively onboarding employees now. We have the opportunity or the luxury of having a facility in India that's operating similar type equipment through the acquisition of Airtrax, and that's provided us a vehicle to train these people live time on equipment that they will be operating with the startup of Capstone. So certainly there is a lot of energy and activity around that onboarding of the people. As it relates to raw materials, certainly availability is not an issue. Raw materials and our assumptions that we built into our business case in both Capstone and Powerband are still intact as it relates to both input costs and sell prices out of those locations into Intertape.

[Neil Linsdell]

Okay, good. And just lastly, we talked -- I mean, over previous quarters, it's come up before about competitive selling prices. You had competitors, which were selling at unsustainably low prices. How is the environment right now?

[Gregory A. C. Yull, CEO, President & Non]

Yes. So I mean, overall, the environment is very similar to what it was last quarter. I don't think there's many changes. I mean, certainly we're seeing a competitive intensity still out of our Powerband operation, our existing operation on acrylic carton sealing tapes. So certainly there is pressure on that front. But then, that's not a very material part of our total business. Certainly on an integrated basis, that business continues to do well from a margin perspective. But I would say, it's more status quo. I mean, listen, we're in a competitive business. We got to ensure we have low-cost world-class assets, we got to make sure that we're selling at market prices, and I think the company is positioned well to execute on them.

[Operator]

[Operator Instructions] Our next question comes from the line of Ben Jekic with GMP Securities.

[Ben Jekic]

I have two quick questions. Could you refresh our memory in terms of where -- in which businesses do you deal with distributors and which businesses do you deal with direct customers? I think that the business with distributors is still sort of dominating, but I think you're starting to add businesses where you're dealing with direct customers.

[Gregory A. C. Yull, CEO, President & Non]

Yes. So we don't disclose the percentage, but think about it this way, most of our tapes and films and protective packaging business channels through distribution. Certainly we have strong relationships with a number of large end users, where that's facilitated through our National Account Program. In some cases, we will be selling and billing directly; other cases, we will be utilizing the distribution network to fulfill on a supply chain basis, but most of our business is through industrial type distributors.

[Ben Jekic]

And is there a difference in terms of passing any changes in input costs in -- are you receiving more resistance from distributors, or when you negotiate with distributors, or when you negotiate with end users?

[Gregory A. C. Yull, CEO, President & Non]

Well, it depends where the relationship is held, right. Primarily we're negotiating, we're pushing through at the distribution level as opposed to the end user level. But in the cases where we hold the relationship with the end user, we will be actively pursuing those kind of price changes.

[Operator]

Our next question comes from Walter Spracklin with RBC.

[Walter Noel Spracklin, Analyst]

So I guess my first question is with regards to your revenue growth forecast for 2018. If memory serves, you were kind of guiding us kind of in the range of that -- the more recent growth closer down to the 10% or 11% level. Has something significantly changed in terms of your efforts to get pricing through here in the third and fourth quarter that resulted in that? Or is it more on the -- your activation on the plant side on an operating basis? What would be the main cause for the change in your revenue guidance for 2018?

[Jeffrey Crystal, Chief Financial Officer]

Our revenue guidance hasn't actually changed. So we're at that 16% to 18%. What we have narrowed is our guidance on the EBITDA, and that was mainly related to, like Greg said, some of the plant related issues that we've been having certainly more pronounced in the third quarter. We expect a little bit of that in the fourth quarter as well. So that's really the majority of the reason why that would be the case.

[Walter Noel Spracklin, Analyst]

Okay. I was -- I had notes here that you're guiding similar to 2017. [ It last ], but I probably missed the...

[Gregory A. C. Yull, CEO, President & Non]

That was -- yes, that was before the Polyair acquisition.

[Walter Noel Spracklin, Analyst]

Okay. So including Polyair -- okay, got it.

[Gregory A. C. Yull, CEO, President & Non]

Yes. So we revised that in August. We brought that up to 16% to 18% just to factor in the Polyair acquisition.

[Walter Noel Spracklin, Analyst]

Okay. Yes, makes sense. You also touched on your ability to get pricing through in terms of recouping some of the input cost increases. Are those in -- are you getting success in the formal contractual -- building into your contracts? Or is this something you're just simply renewing at a higher rate? How are you getting that pricing through? And related, are -- and I guess you addressed this, but your competition, do you feel like they're doing the same now? Or do you see any market share losses if they're not doing the same, if you are successful in passing it all?

[Gregory A. C. Yull, CEO, President & Non]

Yes. I can't really comment too much on competitors. But certainly from our perspective, most of our business from a pricing perspective [ is out well ]. And I think when you look at certainly what we've executed on so far this year and past years, we're able to pass those costs on. Mostly from just a normalized price increase announcement typically takes about 60 days to get on the P&L. Typically, we have about 60 days' worth of inventory on in-house [ at the old ] cost. So the company has done a very good job of managing those kind of cost increases like we've experienced so far this year, which included, by the way, things like freight cost.

[Walter Noel Spracklin, Analyst]

Okay. And then last question. You touched on the improving free cash flow -- excuse me, the improving free cash flow was going to come with a lower CapEx spend, and of course that's going to step down even further, Greg, I mean, if you get down to the $15 million level. You mentioned that you're going to be very judicious with respect to acquisitions. And Jeff, you mentioned you wanted to pay down debt. Can you give us an extent to what -- how much you -- what's your target leverage, so how much of any incremental free cash flow will you attribute to debt? And absent any acquisitions, is your plan just to keep your powder dry? Or could you see either a dividend increase or a buyback down the road?

[Gregory A. C. Yull, CEO, President & Non]

So when we look at 2019, our three key focus areas are, number one, to ramp up our operations, specifically, the two in India, the one in Midland expansion there, and also kind of work through operational opportunities with the existing asset base; number two, integrate our Polyair business, realize the synergies; and number three, generate free cash flow and pay down debt. So we've articulated that in a normalized environment. We want to run this business somewhere between 2 to 2.5 times levered. And we're going to focus on paying down our debt as we move forward. Certainly, from an acquisition perspective or other opportunities, we will be very diligent and prudent in the way we look at those. But we're comfortable where we are right now as it relates to dividends and just focusing on generation of free cash flow to pay down debt at this point.

[Walter Noel Spracklin, Analyst]

Okay. But once you get to the 2 to 2.5, and absent any acquisitions, are you more apt to keep cash growing in anticipation of future acquisitions? Or could you revisit your dividend payout policy?

[Jeffrey Crystal, Chief Financial Officer]

I think, like we said, I mean, we still certainly have our goals in mind for 2022. And in order to get to those goals, I mean, we certainly can get a lot of way there with what we have to get to those goals we talked about doing a couple more acquisitions. So for us, right now, certainly we plan to deleverage over the next number of periods. And let's say, once we get there, I mean certainly we see opportunity to invest in acquisitions like that potentially other investments in the business. So what I would say is, at this point, our plan is to really just pay down the debt, focus on that, have that dry powder available for those opportunities and go from there.

[Walter Noel Spracklin, Analyst]

Okay. And last question. Greg, you mentioned that you want to be judicious and you underlined that a couple of times. Is that to indicate that the prices you're seeing out there right now are not attractive? Is it simply a -- or is it simply a matter of there's just no offers out there? And how do you see it trending? Is it -- has it -- is it improving from your perspective in terms of getting more realistic in terms of multiple required for a transaction to get done? Or are you seeing a lot more competition out there that is keeping the price higher?

[Gregory A. C. Yull, CEO, President & Non]

We've certainly seen, over the last sort of while, multiples from a seller's perspective increase, we've seen multiples from a private company or a public company [ comp ] perspective decrease, and that gap become broader. So certainly, from our perspective, we see that correcting over time. We think it will because I don't think it's sustainable where it is. And we're just going to be very prudent and diligent about the opportunities that we do take from that perspective because we do not want to pay up for these acquisitions.

[Operator]

Our next question comes from Maggie MacDougall with Cormark.

[Maggie Anne MacDougall, Director of of Institutional Equity Research]

Wondering if you guys could give us a little bit of color on, now that you've got the Midland capacity expansion coming online, and if that were to [ sell out ]. And then, with Polyair, also add what would the company's exposure be to the e-commerce end market?

[Gregory A. C. Yull, CEO, President & Non]

Yes. So we haven't disclosed that in terms of what the overall exposure. And like we said in the past, what makes it difficult, it certainly adds some visibility into pieces of that business. But because we sell through -- primarily through distribution and don't get point of sale data, it makes it difficult to know exactly where all of those products are going. But what I would say is, when we think about the volume that we do know about, it is certainly growing at the highest rate. And when we think about all our channels, it is becoming more significant. But in terms of a percentage of our business, it's not a huge percentage of our business. That just gives you an idea.

[Maggie Anne MacDougall, Director of of Institutional Equity Research]

Okay. Excuse me. And so the other thing I wanted to ask about and it sort of circles back on the projects that you have coming online in India and with Midland as well. I would assume, just because the Midland facility is currently sold out, that that IRR progression is going to look a lot different from the Powerband and Capstone projects in India. So that one is sort of aside. The other two -- I guess, there's three buckets at a high level to think through for modeling in 2019 and that would be bring the lines into productions or turn them on and do they work and then sell the capacity, and maybe those -- [ these things ] happen concurrently and then get things working efficiently. So when you look at those to-dos, are there any areas where you would want to say, okay, Q1, Q2, let's be a little cautious here with investors or investors should think cautiously in that time frame to allow us the time needed to get those things running? Or do you think it's going to be a bit more plug and play supposing you guys have better color on that than we would just because you know the machinery and the training that's required to get things up and going?

[Gregory A. C. Yull, CEO, President & Non]

Yes. So I mean, just -- I'll let Jeff answer or get some feedback here. But from my perspective, the guide right now is that those two plants in India will be operational in the first half of next year, right. So when you think of impact on Q1, Q2, it's going to be pretty de minimis. As we move through the year, then you should start seeing impact into Q3, Q4.

[Maggie Anne MacDougall, Director of of Institutional Equity Research]

Okay. And what do you anticipate in terms of selling the capacity? Or is that something that you're going to see a competitive push back on?

[Gregory A. C. Yull, CEO, President & Non]

Yes. I mean, so certainly, like we said, I mean, number one, we've got, like I mentioned earlier on one of the other questions, we've got a base loading in both of those plants. So certainly there's already sales that we have that we're just going to literally shift into being produced at both of those plants, so that's a piece of it. And then in terms of going and getting out other share, we're talking about, let's say, on the Capstone side, there's no question that we've been in a competitive disadvantage in that woven -- in those woven products for a number of years. We feel pretty confident that with a cost base that we can compete and the relationships that we have that we can go and get certainly that market share back. And like -- and the same thing like on our tapes and films and protective packaging side, there's a lot customers there that certainly don't want to be single source, don't want to have -- want a reliable good supplier. And so we certainly meet those criteria and we're pretty confident of getting those sales. And then on the Powerband side, that's the hot melt carton sealing tape that we talk about going in there. And there, essentially we're at a capacity in North America. So we're certainly going to see growth just literally from the growth in that product line coming out of North America. And then also having that in India at a low cost level gives us the opportunity to potentially enter into other markets like the European market, where we currently sell acrylic carton sealing tape. So we definitely see opportunity there, but again that's going to be a more gradual ramp.

[Maggie Anne MacDougall, Director of of Institutional Equity Research]

Okay. So based on all the conversation on the call today around what's going to happen next year in India, turning these plants on, it sounds to me as though -- and correct me if this is inaccurate, sounds to me as though you have fairly good visibility to break even when they become operational simply because you've got some base loading capacity in-house that you're going to be moving over into the Indian facilities. Is that the correct way to think about this?

[Gregory A. C. Yull, CEO, President & Non]

Yes, we feel pretty good that we'll be operating profitably in those plants. And as I mentioned earlier, in terms of the real start-up inefficiencies -- and the worst inefficiencies are usually in that commissioning process, so when you're really starting up the machines, calibrating everything. And those costs are specifically capitalized, so you won't see that flowing through the P&L. That will be part of the capital costs, which shouldn't be significant. And so by the time you're operating, you should be operating at a profitable level.

[Maggie Anne MacDougall, Director of of Institutional Equity Research]

Okay. Just one final housekeeping question. I noticed that you guys started calculating in adjusted earnings per share this quarter, which is not something you've done in the past and it's not an unusual thing for a company to do. But I'm just curious why you decided to make that change today.

[Jeffrey Crystal, Chief Financial Officer]

Yes. Again, I mean, we feel like, just like in our EBITDA, certainly you see these kind of onetime fluctuations and things that sort of skew the results and really don't, I guess, properly portray the underlying performance of the business, so we just [ want to give ] a better idea to have a full P&L view of, call it, an adjusted number that really better reflects the underlying performance, just like our adjusted EBITDA does.

[Operator]

Mr. Yull, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation, or closing remarks.

[Gregory A. C. Yull, CEO, President & Non]

Thank you for participating in today's call, and we look forward to updating you in the coming months. Thank you very much.

[Operator]

Please note that a replay of this call can be accessed as of 1 p.m. Eastern Time today. You may access this recording by dialing 855-859-2056 and entering passcode 3078387. This concludes today's conference call and webcast. You may now disconnect.