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Edited Transcript of IPLP.TO earnings conference call or presentation 14-May-20 2:00pm GMT

·24 min read

Q1 2020 Ipl Plastics Inc Earnings Call Jul 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Ipl Plastics Inc earnings conference call or presentation Thursday, May 14, 2020 at 2:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Alan Walsh IPL Plastics Inc. - President, CEO, Executive Director & Interim CFO * Paul Meade IPL Plastics Inc. - Head of IR ================================================================================ Conference Call Participants ================================================================================ * Furaz Ahmad Laurentian Bank Securities, Inc., Research Division - VP of Research and Special Situations Analyst * Paul Bilenki TD Securities Equity Research - Associate * Ryall Stroud RBC Capital Markets, Research Division - Associate * Zachary Evershed National Bank Financial, Inc., Research Division - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen, and welcome to the IPL Plastics 2020 First Quarter Conference Call. (Operator Instructions) As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Paul Meade, Head of Investor Relations at IPL. You may begin. -------------------------------------------------------------------------------- Paul Meade, IPL Plastics Inc. - Head of IR [2] -------------------------------------------------------------------------------- Thanks, Amanda, and welcome, everyone, to today's call. Just before we begin, I would like to remind listeners that certain statements about future events made on this conference call are forward-looking in nature and are based on certain assumptions and analysis made by the company. Please refer to the cautionary statements on the forward looking information on Slide 2 for more information. And also note that we will discuss several non-IFRS financial measures on this call, and that all figures are in U.S. dollars, unless otherwise stated. I'll now hand over to Alan Walsh, CEO of IPL Plastics, to begin the presentation. -------------------------------------------------------------------------------- Alan Walsh, IPL Plastics Inc. - President, CEO, Executive Director & Interim CFO [3] -------------------------------------------------------------------------------- Thank you, Paul, and good day, everyone. And on Slide 3 of our investor presentation. We had a satisfactory start to 2020. We achieved 10.4% adjusted EBITDA growth in the first quarter, despite slightly lower revenue compared to Q1 last year. Revenue was in line, while adjusted EBITDA was ahead of market expectations. The growth in adjusted EBITDA highlights the progress we have made in our margin improvement program across all divisions. COVID-19 began to impact our operations at the start of March 2020. Since we have a facility in China, we had the advantage of its early adoption in coping with the virus, benefiting the early transfer of COVID-19 contingency measures across the group's manufacturing operations, which have been in place since March 2020. These measures place the health and safety of our employees as 1 of our highest priorities and by acting quickly and decisively, all sites have remained operational to date. In addition, we are focused on maintaining substantial free cash balances and a strong liquidity position for the foreseeable future. I would like to take this opportunity to thank all of our employees, suppliers and customers for their efforts in sustaining operations and understanding the constantly evolving COVID-19-driven changes. The IPL business model has proved resilient in its response to COVID-19's money challenges and the benefits of our diversified product range have acted as a natural hedge here, as weaker demand for some products has been accompanied by increased demand for other products. Turning to Slide 4. I'll now provide an overview of our first quarter performance. Slide 5 summarizes the quarter's performance. Our revenue was largely flat on the prior period, while profitability was enhanced as we generated stronger adjusted EBITDA margins driven by good progress across all divisions, lower resin costs and Loomans' contribution. Net income increased while cash flows were adversely impacted largely due to seasonal working capital growth. Our quarterly net debt closing position also reflects the cash flow movements and the completion of a small acquisition. In late January, we acquired the trade and assets of a U.K.-based injection molding company that manufactures material handling products for $4.1 million. Turning to Slide 6. I'd like to discuss how we are handling the response to COVID-19 and the resilience of our business model. The health and safety of our employees is of the utmost importance and we have all the appropriate and responsive contingency measures in place to protect our safety and wellbeing. We believe these contingency measures have served us well in terms of maintaining business continuity. And when combined with our end market and customer diversification, have reflected true in terms of resilient quarterly performance in challenging circumstances. All of our facilities are currently operational. They are all being treated as essential businesses in the countries in which they are located. We have suspended or deferred nonessential capital expenditures, carefully monitored working capital and implemented restructuring and cost reduction measures in areas where customer demand has been materially reduced. We have not experienced any supply chain or resin disruptions to date, nor has there been any logistical supply chain disruptions, even though stay-at-home orders have impacted some aspects. It is too early to assess the overall impact of COVID-19 on our business, as there are no reliable determinable trends yet. In the LF&E division, there has been a slowdown in sales of food service pails and environmental products. This has been partially offset by higher demand for material handling products. The CPS division has experienced a broad increase in sales volumes to the food industry. However, this has been partially offset by reduced sales to customers in the hospitality sector. In the RPS division, customer demand for MacroTrac products and automotive bins has reduced. Quarter 1 revenues were not significantly impacted by COVID-19 until March 2020. We expect quarter 2 will be more adversely impacted due to the global adoption of widespread containment measures in early March 2020 and there are consequential adverse economic impact. It is encouraging to see that governments are now tentatively reopening their economies, but we expect aspects of the containment measures will be retained as the new normal. Social distancing, contact tracing and isolation measures are going to be with us for some time. We expect to see further guidelines on distancing and other workplace practices to facilitate economic activity while preventing the spread of COVID-19. More broadly, global economic uncertainty will continue to impact our business. We will monitor the situation carefully and stay in close contact with our customers and suppliers. The financial assistance programs and policy responses from central banks and governments globally will provide some respite. A number of the industry sectors that we serve are proving to be relatively resilient to date, when compared with general market experience as it relates to COVID-19. Turning to Slide 9. I would now like to speak briefly about sustainability. On Slide 10, as you can see, from the high-level summary of our full year sustainability strategy on the right-hand side of the slide, the safety of our staff and the communities we operate in are a key priority. This enabled us to react quickly to the COVID-19 challenges by keeping all facilities operational. We've ensured that all COVID-19 risks are assessed early and protective measures were implemented immediately. Our sustainability strategy is being fully tested operationally in challenging circumstances and has been adapted quickly to evolving government COVID-19 regulations. So far, it has proved robust and fit for our purposes. Sustainability is essential to how we operate and engage with our employees, our customers and our care for the environment. I'll now provide more detailed analysis on our quarter 1 results. Turning to Slide 12. Revenue in Q1 2020 was $141.1 million, a slight decline on the comparable period, largely reflecting lower volume revenue in the LF&E and RPS divisions, partially offset by Loomans and volume growth in the CPS business in North America. Gross profit and gross profit margins increased. Adjusted EBITDA rose significantly by 10.4% to $19.1 million, reflecting solid adjusted EBITDA margin expansion across all divisions. These positive trends in gross profit, adjusted EBITDA and adjusted EBITDA margin were driven primarily by lower resin input costs, foreign exchange gain and the positive contribution from Loomans. Net income was $1.9 million compared to $1.1 million in quarter 1 2019. Adjusted net income increased by 4.5% to $4.6 million, primarily due to a tax credit of $1.5 million in Q1 2020, an increase of $0.4 million from Q1 2019. Diluted earnings per share were $0.3 (sic) [$0.03] in the quarter. Slide 13 provides the Q1 2020 bridges for revenue and adjusted EBITDA. On the revenue chart, you can see the $12.4 million positive contribution from Loomans. This was offset by an adverse $8.5 million volume impact, a $1.7 million adverse price impact and an adverse currency impact of $1.4 million. There was also a $1 million reduction in revenue attributable to the sale of our noncore Remer business in Minnesota, which was completed in August of last year. The quarter 1 adjusted EBITDA growth of 10.4% was supported by a $2.4 million positive contribution from Loomans, a $0.5 million positive impact from volume and across the table, the foreign exchange movements that provided a $3.6 million positive impact. These increases were partially offset by negative impact related to price, cost of goods sold and SG&A expenses, reflecting increased labor costs, increases in bad debt provision and some other operating expenses during the period. Slide 14 details our key margin drivers. Resin costs declined to 33% of revenue, while freight costs were flat. Labor costs increased to 25% of revenue from 21% in the comparable period, reflecting higher labor inflation and the timing of changes to the labor agreements in North America. Continued focus on operational improvements supported the growth in adjusted EBITDA to 13.5%. Slide 15 provides an update on resin pricing. You can see on the upper left chart, that high-density polyethylene price declined by 9.1% in Europe, while rising by a modest 1.2% in North America. Linear low-density polyethylene also increased by 1.2% in North America. Polypropylene index prices declined by 10.5% in Europe and 15% in North America quarter-over-the-quarter. If you compare polypropylene prices from sequential quarters, the average price declined by approximately 9.4% in North America and by 3.5% in Europe first quarter of 2020 compared to the fourth quarter last year. Polyethylene prices increased by 4% in North America in the same period. There is limited visibility regarding the market consensus on resin pricing, reflecting the ongoing volatility in the marketplace. Turning to Slide 16. Cash conversion is now a key priority for management and we have a range of measures in place to expect [to deliver] as the year progresses. Slide 17 provides the adjusted free cash flow reconciliation for the first quarter. Net cash flow from operating activity before working capital movements decreased by 12.3% to $14.3 million compared to $16.3 million in quarter 1 last year. After adjusting for adverse movements in working capital, we had a net cash outflow on operating activities of $8.9 million, versus a $5.1 million outflow last year. Adjusted free cash flow was an overflow of $16.2 million, versus $7.3 million outflow in Q1 2019. The reduced cash flows were primarily driven by an increase in working capital, finance costs and maintenance CapEx. Slide 18 details our balance sheet position at the end of Q1. The numbers here reflect the small acquisition of the trade and assets of a U.K. based injection molding company for $4.1 million I referred to earlier. We ended the first quarter with higher working capital of $107.5 million, reflecting the seasonal movements. Total assets were $900.6 million at the end of Q1. Net debt increased to $315.1 million and $297.4 million at the end of December, equivalent to a financial leverage ratio defined as net debt to the last 12 months adjusted EBITDA of 3.35x at the end of Q1 2020. That compares to 3.18x by the end of December 2019. Finally, our interest coverage ratio was 5.39x at the end of March 2020, similar to 5.37x at the end of fiscal 2019. Turning to Slide 19, which details CapEx spending in the period. Total CapEx spending was $12.4 million in the first quarter, down from $14.6 million in the comparable period; with Q1 2020 CapEx increase of $8 million from strategic and development CapEx and $4.4 million of maintenance Capex. CapEx declined by 72% in our RPS division, by 2% in LF&E, but it increased by 62% in CPS due to investments related to significant project wins in North America during 2019. Moving on to Slide 21 and the divisional performances. Slide 21 outlines the performance of our large LF&E division. We can see that revenue declined by 15% to $63 million, largely due to an $8.6 million decline in sales volume (inaudible) . Price and currency were also modestly adverse (inaudible) In North America, LF&E revenue declined by $9.2 million due to lower sales volumes, passthrough of lower resin prices and the disposal of Remer, partially offset by price increase. A revenue decline of $2 million in Europe was primarily due to a reduction in new environmental container rollouts. Adjusted EBITDA declined by 11.8% to $9.6 million, reflecting adverse volume price and SG&A movement, offset by lower cost of goods sold and favorable currency movement. The LF&E division generated strong margin expansion with adjusted EBITDA margin increasing from 14.6% in Q1 last year to 15.2% this year, which reflected favorable resin pricing and foreign currency gains, partially offset by increased payroll costs and increased bad debt provisions. Turning to Slide 22, which details the CPS' Q1 performance. Revenue increased by 28.7% to $58.3 million compared to $45.3 million in Q1 2019, reflecting positive volume growth and weaker pricing due to resin prices -- due to resin passthrough [movements]. CPS Europe revenue increased by $10 million due to the acquisition of Loomans, partially offset by lower demand from our largest European customer, which is in the electronics sector. CPS North America generated a $3 million increase in revenue due to continued volume growth, partially offset by the passthrough of resin price reductions. The Q1 revenue in the CPS division was also impacted by unfavorable foreign exchange rates in both Europe and North America. Adjusted EBITDA increased strongly by 44.5% to $11.1 million from $7.7 million last year. Adjusted EBITDA margin also increased strongly from 16.9% in Q1 2019 to 19% in Q1 2020. These positive improvements reflect contributions from Loomans, solid organic volume growth and foreign currency gains which more than offset resin passthrough price reductions and higher labor cost. Slide 23 shows the RPS performance in Q1 2020. Revenue declined by 5.5% to $15.7 million in Q1 2020. The decline was largely attributable to lower sales of MacroTrac temporary flooring products, which was partly offset by higher automotive bin volumes in the period. Agricultural bin sales were similar to Q1 2019. Adjusted EBITDA of $1.1 million was up 19.4% from $1 million last year. Adjusted EBITDA margin increased from 5.7% in Q1 last year to 7.3% this year, despite the lower sale volumes. This was achieved through lower resin costs and the corrective action taken to restructure and streamline the division's cost base. Turning to Slide 24, which details the contribution of the Other business segments. Adjusted EBITDA was a negative $2.7 million in Q1 2020. This reflects a 23.1% deterioration due to higher central overhead costs, which increased to [$14.3] million in Q1 2020, offset by favorable currency gains of $0.7 million in the period, a $500,000 reduction in adjusted EBITDA and after our U.K.-based metals recycling business. Turning to Slide 25 and our outlook and priorities. In terms of outlook, we expect second quarter revenues to be more adversely impacted by COVID-19 and the associated containment measures made by governments. These containment measures were significantly ramped up in the second quarter in most of the countries in which we operate. In this new COVID-19 environment, our priorities are clear: ensuring the health and safety of our employees, continuing to keep all 14 manufacturing facilities operational; delivering high-quality and safe products to our customers; eliminating or deferring non-essential capital spending; reducing costs by rationalizing the areas of the business where demand has dropped; and maintaining strong liquidity and balance sheet strength. In terms of outlook, market volatility and uncertainty surrounding the extent and duration of global government restrictions limits us from being able to make reliable estimates of the impact of COVID-19 on our revenues, cash flows and profitability for the remainder of 2020. However, we continue to believe the overall prospects of IPL remain positive. Our competitive strengths remain in place, including strong management, significant product and end market diversification, financial strength and resilience, and a well invested, high-quality asset base. To conclude, on Slide 26, I would like to reiterate our sincere thanks and gratitude to all of our employees, our suppliers and customers. With our commitment and understanding, given the challenging environment and maintain a business continuation in these most unusual and challenging times. Our group priority is to protect the health and safety of our employees and maintain a strong balance sheet and position the business to leverage opportunities from the future market recovery. Finally, yesterday, we also announced that Pat Dalton will step down from the CFO role in IPL. For the past 8 years, Pat has been a significant contributor for the development and growth of IPL, having led the transformation of the company's financial structure, the migration of IPL to TSX as a company. He leaves IPL with a strong financial and risk management team in place, which ensures a smooth transition of [receivers] and benefits. In this transition period, I will assume the CFO function on an interim basis, supported by our experienced and robust finance and risk management teams. Pat is departing by mutual consent, and on behalf of all of my colleagues and the Board of IPL, I would like to wish him everyday success in his future endeavors. I would now be pleased to answer any questions that you may have. So I'll now open the line for questions, please. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And your first question comes from Furaz Ahmad with Laurentian Bank Securities. -------------------------------------------------------------------------------- Furaz Ahmad, Laurentian Bank Securities, Inc., Research Division - VP of Research and Special Situations Analyst [2] -------------------------------------------------------------------------------- Just curious about what you're seeing thus far in Q2 and we're halfway into the quarter, in terms of demand across the segments. Has it deteriorated versus Q1? I know Q1 was relatively in line? -------------------------------------------------------------------------------- Alan Walsh, IPL Plastics Inc. - President, CEO, Executive Director & Interim CFO [3] -------------------------------------------------------------------------------- And as I said, I mean Q1, we didn't really see too much of an impact on COVID-19, very minimal impact in the latter part of March. And certainly, in Q2, we're seeing ups and downs -- more downs than ups, to be fair in the areas of (inaudible) I guess the areas of [reach.] So CPS is continuing to perform pretty solidly and in the LF&E segment, we're seeing some weakness in environmental container rollouts, weakness in food service pails and some strength in material handling segment of the marketplace. RPS' decline in volumes holding up. But we've now seen a falloff in their market trend volumes and it's all about these things. -------------------------------------------------------------------------------- Furaz Ahmad, Laurentian Bank Securities, Inc., Research Division - VP of Research and Special Situations Analyst [4] -------------------------------------------------------------------------------- Okay and then just to -- -------------------------------------------------------------------------------- Alan Walsh, IPL Plastics Inc. - President, CEO, Executive Director & Interim CFO [5] -------------------------------------------------------------------------------- Too early to say, it's a very fluid situation; it fluctuates. So it's really too early to identify any particular trends. -------------------------------------------------------------------------------- Furaz Ahmad, Laurentian Bank Securities, Inc., Research Division - VP of Research and Special Situations Analyst [6] -------------------------------------------------------------------------------- Okay. And I guess on the auto side, I mean that industry's been quite impacted. With regards to the auto bin, on the last call, you mentioned that you had signed some additional contracts. Has there been an update on those? And then, with regards to the previous contract, has that been completed now? -------------------------------------------------------------------------------- Alan Walsh, IPL Plastics Inc. - President, CEO, Executive Director & Interim CFO [7] -------------------------------------------------------------------------------- So the strong performance from automotive that are referenced in Q1 was driven by the completion of the contract from 2019. I should say we did not have a significant amount of revenue factored into our original forecast for FY 2020. The number of projects we're continuing to look at was -- the automotive industry has been largely closed for the past number of weeks, so we're not expecting any material recouping in that business for the remainder of the year. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- Your next question comes from Paul Bilenki with TD Securities. -------------------------------------------------------------------------------- Paul Bilenki, TD Securities Equity Research - Associate [9] -------------------------------------------------------------------------------- So I guess, my first question is on the agricultural bin sales. I know in your outlook, you said that it was a bit of an uncertain outlook and that it could be impacted by labor shortages for growers. My understanding is that a large portion of those orders are typically placed earlier in the year so I'm -- so what have you seen, I guess, on the early orders? And when do you expect to have better visibility on sort of the rest of the demand for that sector this year? -------------------------------------------------------------------------------- Alan Walsh, IPL Plastics Inc. - President, CEO, Executive Director & Interim CFO [10] -------------------------------------------------------------------------------- Yes. Paul, I think, labor shortages in that -- in the harvesting sector was certainly an issue and I think what we were seeing in Q1 was a reluctance on the part of farmers to commit to a significant amount of capital for bins given the uncertainty that was developing. We have seen some pickup in order demand there in the last number of weeks. I think that people have got their head around the whole COVID-19 situation, and people are starting to look forward (inaudible) we have -- we do have initial softness in the order backlog, which has increased quite a bit in the last couple of weeks. -------------------------------------------------------------------------------- Paul Bilenki, TD Securities Equity Research - Associate [11] -------------------------------------------------------------------------------- Okay. Great. That's very helpful. And recognizing margins were obviously a big focal point of yours in 2019, how do you expect margins will hold up and trend in this environment? -------------------------------------------------------------------------------- Alan Walsh, IPL Plastics Inc. - President, CEO, Executive Director & Interim CFO [12] -------------------------------------------------------------------------------- Well, we'd like to think we can continue to maintain our overall margin targets and that we have -- we've seen improvements in the prices, our margins have been improving consistently quarter-on-quarter, net of our trends in those quarters. And we'd like to think that we can maintain our overall group margin target somewhere around 15% for the year. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- Your next question comes from Walter Spracklin with RBC Capital. -------------------------------------------------------------------------------- Ryall Stroud, RBC Capital Markets, Research Division - Associate [14] -------------------------------------------------------------------------------- This is Ryall Stroud calling in for Walter. I'll be quick here, but just kind of looking at LF&E, we've heard, we've seen indications from some of the waste management, environmental services companies that activity in roughly mid-April started to sequentially improve week over week. So just kind of curious if you've seen kind of a similar trend there in maybe the sequential demand improvement or orders? Or is it still kind of too early to tell? -------------------------------------------------------------------------------- Alan Walsh, IPL Plastics Inc. - President, CEO, Executive Director & Interim CFO [15] -------------------------------------------------------------------------------- We've seen some improvements in small order quantities. And I don't think the trends that we are seeing -- I mean new rollout programs are being deferred for the second half of the year. So to the extent that you have markets where bins already exist, we have seen some improved demand here, but the bigger market, the market opportunity for us is about rollouts. And those projects have been deferred to the second half of the year. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- (Operator Instructions) Your next question comes from Zachary Evershed with National Bank Financial. -------------------------------------------------------------------------------- Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [17] -------------------------------------------------------------------------------- So first question for you. Obviously, this pandemic isn't truly comparable to previous economic downturns, but maybe if you could give us an idea, how has demand from these countries for environmental bins, and new orders you referenced (inaudible) from past recessions? -------------------------------------------------------------------------------- Alan Walsh, IPL Plastics Inc. - President, CEO, Executive Director & Interim CFO [18] -------------------------------------------------------------------------------- I suppose what I think -- what I can point to there is, I think our experience in the U.K. markets. And I mean we've got 2 very different marketplaces, is what I would say, between North America and Europe, the more developed market in Europe, and a more early-stage market in North America, in particular, where it's more focused around rollouts. Our business -- and our history in this business in Europe for the last 8 or 10 years, I think that the business has performed pretty strongly in a recession-type environment. And we're certainly seeing that and China is at the moment, is well-equipped, demand is holding up pretty well. And the reason for that is the market is not driven by rollout programs. It's an ongoing maintenance following [COVID] that way and the demand is holding up pretty well. -------------------------------------------------------------------------------- Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [19] -------------------------------------------------------------------------------- That's helpful. Another topic -- the resilience of resin cost. Did it come as a surprise for the management when overall demand is down? And given where oil prices are going as well? Have you had any success in attaining discounts? -------------------------------------------------------------------------------- Alan Walsh, IPL Plastics Inc. - President, CEO, Executive Director & Interim CFO [20] -------------------------------------------------------------------------------- We like to -- resin management, is obviously our biggest cost and we've put a lot of focus and have a dedicated resin management team and monitor this on a regular basis. So yes, we like to retain flexibility in terms of locking in pricing, but also being able to purchase volumes in the spot market. So I think there is attractive pricing out there at the moment. But as I said in my remarks, there's also a huge amount of uncertainty. That's because I think it's the natural expectation of people is that it's a 1-way street with resin cost. I think cost cuts start to happen, you could see refineries starting to shut down for (inaudible) and there's an effect on pricing in the market. So a lot of uncertainty. So again, no, it's open dialogue, no determinable trends, a lot of volatility in that sector as well. -------------------------------------------------------------------------------- Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [21] -------------------------------------------------------------------------------- Great. Got it. And then last one for me. Given RPS' difficulties in end markets, is there any possibility to redirect that capacity to other end markets in the short term? -------------------------------------------------------------------------------- Alan Walsh, IPL Plastics Inc. - President, CEO, Executive Director & Interim CFO [22] -------------------------------------------------------------------------------- We're looking at all of those things and the material handling market, in particular, is one area of the market that we're putting a lot of focus on at the moment. And what I would say is we have a machine park within RPS that could be repurposed for other product areas. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- Okay, and I would now like to turn the call back over to Alan for his closing remarks. -------------------------------------------------------------------------------- Alan Walsh, IPL Plastics Inc. - President, CEO, Executive Director & Interim CFO [24] -------------------------------------------------------------------------------- Okay. Thank you, Amanda. And that concludes our call today. Thanks to everybody for joining us. We look forward to speaking with you again after we report our second quarter financial results in the summer. And we wish everybody good health. Thank you. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may now disconnect. Everyone, have a great day.