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Edited Transcript of IPLP.TO earnings conference call or presentation 11-Mar-20 10:00pm GMT

Q4 2019 Ipl Plastics Inc Earnings Call

Mar 30, 2020 (Thomson StreetEvents) -- Edited Transcript of Ipl Plastics Inc earnings conference call or presentation Wednesday, March 11, 2020 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alan Walsh

IPL Plastics Inc. - President, CEO & Executive Director

* Pat Dalton

IPL Plastics Inc. - CFO & Executive Director

* Paul Meade

IPL Plastics Inc. - Head of IR

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Conference Call Participants

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* Frederic Tremblay

Desjardins Securities Inc., Research Division - Analyst

* Michael Doumet

Scotiabank Global Banking and Markets, Research Division - Analyst

* Paul Bilenki

TD Securities Equity Research - Associate

* Stephen MacLeod

BMO Capital Markets Equity Research - Analyst

* Walter Noel Spracklin

RBC Capital Markets, Research Division - MD & Analyst

* Zachary Evershed

National Bank Financial, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the IPL Plastics 2019 Fourth 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. You may begin.

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Paul Meade, IPL Plastics Inc. - Head of IR [2]

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Thanks, Ally, and welcome, everybody, to today's call. Just before we begin, I'd like to remind listeners that certain statements of future events made on this call are forward looking in nature and are based on certain assumptions and analysis made by the company. Please refer to the cautionary statements and forward-looking information on Slide 2 for more information.

And also please note that we will discuss several non-IFRS financial measures on the call and that all figures are in U.S. dollars unless otherwise stated.

I will now hand you over to Alan Walsh, CEO of IPL Plastics, to begin the presentation.

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Alan Walsh, IPL Plastics Inc. - President, CEO & Executive Director [3]

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Thank you, Paul, and good evening, everyone. Pat Dalton, our Chief Financial Officer, is also with me today.

Fiscal 2019 was a year of progress and delivery of key objectives for IPL Plastics. At the start of fiscal 2019, we committed to delivering improvements across a number of key financial metrics to reinsure -- to reassure investors about the sustainability of our business model by delivering improved operating performance, profitability and cash flow. I'm pleased to say that we have done exactly that.

We have rebuilt our adjusted EBITDA margins and delivered an improved and sustainable operational performance in fiscal 2019. We have substantially increased our cash generation and reduced our capital expenditure, leading to a significantly improved net leverage position at the end of fiscal 2019. This is just 9 months after acquiring Loomans which has been fully consolidated and integrated and continues to perform to expectations. IPL is now a stronger and more efficient business, but there is still scope for further efficiencies, which we will be targeting in the year ahead.

Turning to Slide 5. Here, you can clearly see the delivery of our objectives across some key metrics. Net income increased very significantly by $12.1 million to $13.9 million. Adjusted EBITDA increased by 17.2% in fiscal 2019 primarily due to lower resin input costs, operational improvements, efficiencies and the effect of the Loomans acquisition. Adjusted EBITDA margins were rebuilt to 15.1% with margin expansion across all 3 of our divisions.

Our cash generation from operations grew very strongly by $70.6 million, supporting a solid improvement in our net debt position at fiscal year-end, which is 3.18x EBITDA, a 17.8% improvement only 9 months after the Loomans acquisition. Excluding the impact of IFRS 16 and foreign exchange movements on the opening net debt balances, we essentially achieved our year-end target ratio of 3x net debt to EBITDA. These strong results were achieved on a lower revenue performance, which declined 8%, as we focus on sustainable higher-margin manufacturing and operation efficiencies. Trading so far in fiscal 2020 has started satisfactorily across all divisions, and we expect a recovery in revenue growth over the year, particularly in the second half. I will come back to this in our outlook comments.

Turning to Slide 6. The circularity is central to our business model. Today, we also published our sustainability report for fiscal 2019 on our new rebranded website, which consolidates all our individual brands and websites under the IPL umbrella to strengthen our customer relationships and market presence. Our sustainability report highlights the progress we have made since announcing our 2019 to 2002 (sic) [2020] sustainability strategy in late 2018. All this work demonstrates our journey to becoming a global leader in returnable, reusable and recyclable packaging solutions. Our customer conversations are increasingly focused on how to increase the use of recycled plastics, plan for future circularity and enhance recyclability through new and innovative product designs.

Turning to Slide 7. The debate about plastic in our environment continues to mature. Awareness of major deficiencies and investments in the necessary recycling infrastructure needed to recover post-consumer plastic is increasingly emerging, and the role of plastic is more and more seen as a necessary element to deliver a modern urban, low-carbon lifestyle. The environmental footprint of plastics is significantly lower than that of alternative materials like glass, metals and paper. Our recent report estimated that 4.1 tonnes of alternative materials are required to replace just 1 tonne of plastic in consumer applications.

During fiscal 2019, IPL's commitment to sustainability in involved the investment of almost $10 million in R&D, innovation and product development, and recycled plastic accounted for 14% of our total resin usage in 2019. We continue to view new and progressive government regulation as a positive and welcome trend to accelerate and promote increased use of recycled content and increased investment in the waste recycling industries.

Turning to Slide 8, where we provide details of how advanced IPL sustainability credentials are by division. Our products have clear advantages in society and in many instances, are contributing positively to the new circular economy. In all divisions, our products are on trend and well ahead of the 2025 commitments that global brands are acutely focused on achieving. Our products have many unique advantages to alternatives, so it is important that we address negative publicity and misinformation surrounding plastic packaging in the media, which is often based around generalizations. You can see the containers in our RPS and LF&E divisions have well-established multiple reuse and end-of-life recycling advantages. This eliminates costly one-way packaging systems and enables customers to meet their sustainability goals. Our CPS packaging solutions have significantly lower carbon footprints to alternative packaging forms and can also be recycled at end of life, contributing positively to customer sustainability targets.

Finally, turning to Slide 9, which shows just how well positioned IPL's products are in terms of reduce, reuse and recycle in the waste hierarchy of most preferred and least preferred rankings. We do not manufacture any products that need treatments such as incineration or landfill disposal as all our products are in the beneficial categories of reduce, reuse and recycle. Our LF&E division has a leadership position in the manufacture of waste segregation containers in the U.K. and Canadian markets. Our RPS division has a leadership position in returnable container manufacturing in North America. And all our CPS containers are 100% recyclable and are fully compatible with emerging government regulations and policies and leading brand commitments on recyclability.

I'll now hand over to Pat to discuss our fourth quarter and fiscal 2019 financial performance in more detail.

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Pat Dalton, IPL Plastics Inc. - CFO & Executive Director [4]

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Thanks, Alan. I would like to preface the financial review by highlighting the transformation of the cash generation capacity of the business, which delivered adjusted free cash flow of $47 million in Q4 and $68.4 million in the year. This reflects the significant progress achieved in delivering margin expansion and operating efficiencies across the business. This, in turn, has offset weaker revenue performance especially in Q4.

The drivers of the weaker revenue are unchanged from those communicated to you in prior periods. There are no new factors other than the recent emergence of the coronavirus and its potential to disrupt supply chains, operations and customer purchasing patterns. To date, we have not seen any disruption, but this situation is evolving.

2020 has started satisfactorily across all divisions, and we are fully focused on sustaining the improved 2019 financial metrics performance and also delivering a recovery in our revenue growth performance in 2020.

Turning to Slide 10. I will start with a review of our fourth quarter performance. Revenue in Q4 2019 declined by 16% to $136.1 million. The Q4 revenue decrease was primarily due to the pass-through of lower resin input prices, a significant reduction in our automotive bin sales in the RPS division, reduced demand from CPS' largest customer in the electronics sector and lower environmental container rollouts in the LF&E division and a negative foreign exchange impact related to a stronger U.S. dollar. These impacts were partially offset in the quarter by revenue contribution of $11.5 million from the Loomans acquisition, continued organic volume growth in the CPS business in North America and some price increases.

Gross profit declined by 10.9% to $22.9 million, while adjusted EBITDA rose by 4.4% to $18.4 million in Q4 2019. The increase in adjusted EBITDA was achieved despite the lower revenue and was attributable to lower resin costs, operational improvements, the positive impact from Loomans and the positive impact from the adoption of IFRS 16. Gross profit margin rose to 16.8%, and adjusted EBITDA margin increased strongly to 13.6% in the quarter. We had a net loss of $3.1 million in Q4, and our adjusted net income was $1.6 million in the period. And pro forma adjusted diluted earnings per share was at $0.03. The increase in the net loss in Q4 in 2019 compared to Q4 in 2018 was driven by a significant increase in the tax charge of $2.9 million in Q4 2019 compared with Q4 2018.

Turning to Slide 11, which provides the revenue and adjusted EBITDA bridges for fiscal 2019 and Q4 2019. As you can see, the biggest contributor to the revenue decline in both periods was lower volume, which reduced revenue by $72.4 million in fiscal 2019 and by $33.9 million in the fourth quarter of the year. Revenue was also impacted by $12.6 million in fiscal 2019 related to adverse foreign exchange movements. Price impacts were negligible, while Loomans contributed $37.5 million of revenue in fiscal 2019 and $11.5 million in the fourth quarter.

Adjusted EBITDA growth was supported by reductions in cost of goods sold, which boosted adjusted EBITDA by $17.8 million in fiscal 2019 and by $5.1 million in the fourth quarter. Loomans added $8.2 million of adjusted EBITDA in fiscal 2019 and $2.5 million in the fourth quarter. And as discussed earlier, adjusted EBITDA in both -- was positively impacted by the adoption of IFRS 16.

Turning to Slide 12, which provides an overview of our margin drivers. Resin costs declined to 38% of revenue in the fourth quarter compared to 44% in Q4 last year. This decline was due to lower resin input costs from the impact of improvements in our resin procurement program. These factors, combined with the operational improvements we implemented in fiscal 2019, benefit our adjusted EBITDA margin performance.

With regard to other input costs, freight costs have stabilized after the initial spikes in 2018. We experienced labor cost increases in North America in 2019 driven by both inflation and labor agreements. However, it is important to point out that the labor percentage increase in Q4 2019 is also impacted by the lower revenue denominator.

Turning to Slide 13, which provides some more detail on resin, which is our largest cost item. You can see in the chart at the top of this page that index price has declined significantly in Q4 2019 compared to the fourth quarter of 2018. In January, polyethylene prices increased by $0.04 in North America. And while we could see some further upward price pressures in the first quarter of both polyethylene and polypropylene given recent volatility in oil prices, we now suggest that this trend is unlikely. The longer term outlook for resin pricing is that prices for the remainder of 2020 will be broadly in line with those which we've seen in 2019.

Turning to Slides 14 and 15, which highlights the strong free cash flow generation and debt reduction achieved in 2019. You can see that cash generation was much improved in both the 3-month and 12-month periods of 2019. Net cash flow from operating activities increased very strongly to $54 million in Q4 2019, up from $21.8 million in the same quarter last year. Adjusted free cash flow also rose strongly to $47 million compared to $23 million in Q4 last year.

And turning to fiscal 2019. Net cash inflow from operating activities rose very substantially to $89.3 million from $18.7 million in fiscal 2018, while adjusted free cash flow increased fivefold to almost $68.4 million from $14 million in the prior period -- in the prior year.

Turning to Slide 16, which details our balance sheet and related metrics. We ended 2019 with working capital of $83.5 million. Our net debt position at year-end was $297.4 million, down more than $22 million from the $319.5 million recorded at the end of September 2019. Our financial leverage ratio, which is defined as the ratio of our net debt to our last 12 months adjusted EBITDA, was 3.18x at year-end versus 3.31x at the end of September. And finally, our interest coverage ratio was 5.37x at the end of fiscal 2019.

Turning to Slide 17, which provides a net debt bridge for fiscal 2019. The 41.3% year-over-year increase in net debt, which you can see in the second row, reflects the Loomans acquisition. After stripping out a $22.4 million impact from the adoption of IFRS 16 leases and the $3.2 million foreign exchange impact on opening net debt balances, net debt on a like-for-like basis, including the acquisition of Loomans, was $271.9 million at the end of December 2019. This equates to a financial leverage ratio of 3.04x, essentially in line with our previously disclosed target of 3x for the end of fiscal 2019.

Turning to Slide 18, which details our capital investment activity. Total CapEx spending in fiscal 2019 amounted to $46.1 million, which includes $33.3 million of strategic and development CapEx and $12.8 million of maintenance CapEx. Our CapEx spending declined by almost 15% in fiscal 2019 compared to $54.2 million in 2018. This reflects the completion of the capital investment program that began in fiscal 2015.

We are anticipating CapEx of $37 million to $40 million in fiscal 2020, a continuation of the decline in CapEx spending. Our 2020 estimate includes a $5 million of additional CapEx related to a CPS customer contract win, which we discussed in the last conference call. Our 2020 CapEx also includes a provisional amount of $3 million involving the potential IT spend.

Turning to slides 19 and 20 to review our divisional performance, which all achieved very good progress on margin expansion during fiscal 2019 and also during the final quarter of 2019. Slide 20 provides an overview of our largest division, our LF&E division. Quarter 4, revenue declined by 22.8% to $56.7 million compared to $73.5 million in Q4 last year. In North America, our LF&E revenue declined due to lower sales volumes, pass-through of lower resin prices and the disposal of the Remer facility, partially offset by price increases. The revenue decline in Europe was primarily due to a reduction in environmental container rollouts following a particularly active period for rollouts in Q4 2018.

Despite the lower revenue and gross profit, we generated stronger margins and adjusted EBITDA in the quarter. This is attributable to the lower resin costs, price increases, reduced personnel costs and other operational improvements in North America. Adjusted EBITDA increased 5% to $7.5 million, and adjusted EBITDA margin expanded strongly to 13.2% in Q4 2019.

Turning to Slide 21, which details our CPS divisional performance in quarter 4 2019. Revenue increased 13.5% to $52.4 million, primarily reflecting the Loomans acquisition as well as increased sales volumes of food packaging products in both Europe and North America. These positive impacts were partially offset by lower demand from our largest European customer, which operates in the electronics sector and also due to the pass-through of resin price reductions, particularly in North America. Adjusted EBITDA increased 18% to $7.7 million. The improvement is due to a $2.5 million contribution from Loomans in the quarter as well as organic volume growth.

Turning to Slide 22, which details the performance of our RPS division. Revenue in quarter 4 declined by 36.7% to $23.5 million. The decline was attributable to a reduction in sales of automotive and agricultural bins and lower MacroTrac sales following a very strong sales of this product in the first half of 2019. Adjusted EBITDA in the RPS division was $4.5 million, and adjusted EBITDA margin improved strongly to 19.1% primarily due to lower resin input costs, product mix changes and the measures taken to restructure the RPS division earlier in 2019.

I will now turn it back to Alan to make some concluding remarks.

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Alan Walsh, IPL Plastics Inc. - President, CEO & Executive Director [5]

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Thank you, Pat. Our 2019 performance reflects strong progress in rebuilding margins, improved operational performance and significantly improved cash generation. We look forward to sustaining this trend into 2020 and delivering another year of improved profitability. Regarding the outlook of our largest input cost item, resin, prices are expected to remain broadly stable following the declines in 2019. We expect foreign exchange volatility to continue. We have made a good start to the year with trading in all 3 of our divisions off to a satisfactory start with no adverse impact to date from the recent Canadian rail disruption.

The coronavirus continues to impact an increasing number of countries, and it is evolving on a daily basis. It may give rise to temporary supply chain issues depending on duration and level of disruption, which may lead to cost increases. We are continuing to make prudent contingency plans to minimize potential adverse manufacturing and customer disruptions.

We expect top line revenue growth to recover in 2020, particularly in the second half. This positive revenue development outlook is underpinned by contractual wins secured by the CPS division in North America. In LF&E, we expect the pickup in sales volumes of both material handling products and environmental bins as well as some additional new contract wins to support revenue growth. In our RPS division, trading conditions and market dynamics for our extensive range of bins and MacroTrac products is expected to support growth.

We are focused on delivering an overall improvement in adjusted EBITDA in 2020 and sustaining into 2020 the improvement in the adjusted free cash flow generation profile delivered in 2019. Our expectations for 2020 envisages revenue growth recovery, continued focus on operational efficiencies, a stable resin pricing environment with further progress in resin procurement strategies and a more normalized level of capital investment.

That concludes our remarks, and we're now happy to take any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Walter Spracklin of RBC Capital Markets.

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Walter Noel Spracklin, RBC Capital Markets, Research Division - MD & Analyst [2]

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So I guess limiting to 2 questions, my first would be on overall revenue growth that's built into your expectation for year-over-year growth with a back half recovery and in particular, looking at some of the lumpy aspects of the LF&E division, the RPS division, understanding that you'll have some auto deliveries from the original contract. Is there any built into your expectation for revenue growth in 2020? Is there any expectations for added RPS auto contracts that are not yet won or large -- or municipalities in the LF&E division that is projected but not yet secured?

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Alan Walsh, IPL Plastics Inc. - President, CEO & Executive Director [3]

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And thanks, Walter. The -- on the auto side, first of all, I mean we haven't built in anything exceptional into our numbers for 2020. We're completing the balance of the original contracts as we speak. We have secured 1 or 2 new customers, and I would say we've taken a very conservative approach to forecasting sales volumes within the automotive segment in 2020.

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Walter Noel Spracklin, RBC Capital Markets, Research Division - MD & Analyst [4]

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So did you say that you have secured 1 or 2 new customers in automotive?

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Alan Walsh, IPL Plastics Inc. - President, CEO & Executive Director [5]

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We have, yes.

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Walter Noel Spracklin, RBC Capital Markets, Research Division - MD & Analyst [6]

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Okay. That's great. And then moving for second question here, same lines here for your CPS division. What would you say outside of the Loomans acquisition would be your organic growth assumptions underpinning your revenue expectations on a price and volume basis.

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Alan Walsh, IPL Plastics Inc. - President, CEO & Executive Director [7]

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I think outside of Loomans -- and it's really the focus is on North America. We obviously have the contract that we won last year coming onstream at present. That is we are commissioning the second production line there as we speak. And you will see the full effect of that contract in the second half of the year, but there will be an effect in the first half of the year. So that drives a significant level of growth in the North American business in 2020. Outside of that, I'd say there's a pretty healthy pipeline of opportunities there, and there is substantial enough organic growth in that business. It's performing pretty well.

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Walter Noel Spracklin, RBC Capital Markets, Research Division - MD & Analyst [8]

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So substantial being kind of mid- to high single digit is a fair number.

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Alan Walsh, IPL Plastics Inc. - President, CEO & Executive Director [9]

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Yes, that's a fair assumption, yes.

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Operator [10]

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Our next question comes from Michael Doumet of Scotiabank.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [11]

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Maybe just going back to the guidance. Just going back to the guidance, I mean, you specify more revenue growth in the second half. I'm just thinking with Loomans, as a contributor in Q1, as well as the auto deliveries in presumably the first half, are you considering any declines, I guess, excluding those 2 in the first half.

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Pat Dalton, IPL Plastics Inc. - CFO & Executive Director [12]

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I believe, Mike, we are not at this point in time, but I guess what we would say is that the -- on a like-for-like basis, when you look at the, particularly what I'll call the project-based revenue, so I think it was a talk about materials handling, our environmental containers rollouts, we would certainly get some lumpiness in Q1 again out of 2020. So certainly, we would expect that the -- there are a number of what I would call large format new contracts and CPS new contracts kicking in, in the first quarter, which essentially, we would say, that will mean that the revenue growth will be more -- will certainly have greater visibility on that -- those contracts turning on and ramping up in the second half of the year. And for that reason, we are saying that, effectively, the revenue growth will be more visible in the second half of the year.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [13]

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Okay. No, that's helpful. So maybe just a second question just on the longer term view here of the business. I mean you provided us with some soft targets for margins across your businesses and you mostly achieved that in 2019. But while margins have worked, I think you probably want a little bit more out of revenues and you're alluding to that here in terms of the second half growth. I mean is there a return metric that you guys are targeting? I don't know if it's ROIC or ROE that you're, longer term, looking to achieve.

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Pat Dalton, IPL Plastics Inc. - CFO & Executive Director [14]

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I would say, Michael, that, generally, we are targeting the divisions to achieve the EBITDA guidance margin that we would have given, which would be kind of 20% for RPS, 18% plus for the CPS business and north of 15% for the LF&E business. And that is generally the way we try and measure the performance of these businesses.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [15]

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And maybe just a follow-up to that, excuse me, but on a project basis, I mean, do you have targets that you specifically look for in IRRs or anything of that sort?

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Pat Dalton, IPL Plastics Inc. - CFO & Executive Director [16]

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Yes. I mean, typically, Michael, just to mention that we would normally look for a 15% after-tax project-based IRR return.

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Operator [17]

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Our next question comes from Stephen MacLeod of BMO Capital Markets.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [18]

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I just wanted to follow up on the questions around the outlook. I just wanted to confirm. It sounds as though you're obviously expecting a positive impact from revenues weighted to the second half of the year, and that will flow through to the EBITDA line. But do you also -- are you also forecasting margin growth or guiding to margin growth for 2020?

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Pat Dalton, IPL Plastics Inc. - CFO & Executive Director [19]

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I think the underlying that we would be pointing to a favorable resin environment, and we would be pointing to very favorable resin procurement arrangements year-on-year. So in answer to your question, yes.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [20]

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Okay. Okay. And then -- okay, that's great. And then just my second question, just turning to the autos business. You cited in the MD&A, January 2020 you secured, I think it was, 17,000 auto bins as well as, I think, a smaller order from a new customer. Could you just give a little bit of color around how that size compares to sort of some of the loss business you saw last year?

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Alan Walsh, IPL Plastics Inc. - President, CEO & Executive Director [21]

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Well, just to add -- just to clarify on that, Stephen, the 17,000 is the balance of the contract from last year. And so that's being produced at the moment. And there's 5,000 units with a new customer, and that could lead to a bigger amount of units in due course. They're effectively trialing the products within their proving system at the moment.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [22]

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Okay. So that's sort of an initial order of 5,000 units with a potential to increase that over time. I guess is that dependent sort of on customer satisfaction?

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Alan Walsh, IPL Plastics Inc. - President, CEO & Executive Director [23]

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Exactly. And just to add on, on the auto box, and I don't want to get too focused on this, but we have sought, and we would have explained this in the previous quarters, to diversify the customer base and some of the uses for that container into other applications as well, all broadly within the automotive sector. We have secured some additional sales for variations of that product in other automotive applications. So we've been pretty cautious in terms of how we've forecasted sales volumes in that segment for 2020. Sitting here today, we're in a pretty good position with the numbers that we've factored in for that -- [this portion]. We don't want to be necessarily getting too focused on automotive in 2020 either because of a lot of other parts of the RPS business.

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Operator [24]

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(Operator Instructions) Our next question comes from Paul Bilenki of TD Securities.

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Paul Bilenki, TD Securities Equity Research - Associate [25]

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Just getting back to the quarterly results. It looks like the declines in revenue actually accelerated in the fourth quarter. Just sort of simplistically, about half of your volume decline for the full year took place in the fourth quarter. So is there anything specific you can call out there as to why things appear to have weakened in the fourth quarter?

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Pat Dalton, IPL Plastics Inc. - CFO & Executive Director [26]

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I think, Paul, there is some very clear guidance in the quarterly bridges, but I would point you in particular to the RPS segment. Whereby in Q4 2018, we will have had significant production for the automotive boxes at that point in time. And you'll recall that those issues came to an abrupt halt pretty much around February and March of 2019. So that's a very significant part of it. And the other thing I would point to is that when you look at the LF&E segment in terms of the volume decline there, there were a couple of environmental container rollout contracts in Q4 of 2018 that didn't reoccur in 2019. So I would describe essentially those declines as being project-based revenue declines, which are somewhat unpredictable and hard to turn on and turn off. And so as a consequence, you did -- exactly as you pointed out, pretty much 50% of the volume decline did come in Q4.

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Paul Bilenki, TD Securities Equity Research - Associate [27]

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Okay. But nothing sort of out of the ordinary that you expect to continue going forward?

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Pat Dalton, IPL Plastics Inc. - CFO & Executive Director [28]

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No.

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Paul Bilenki, TD Securities Equity Research - Associate [29]

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Other than those items you've cited previously?

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Pat Dalton, IPL Plastics Inc. - CFO & Executive Director [30]

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No. And essentially, just to answer that question, what we do have visibility is that we do have visibility about number of customers, and we point to the CPS significant customer contracts, whereby one of the systems related to that customer has now been installed. The second one will only be installed in April of 2020. And therefore, we have visibility around the revenue stream for that into the second half of 2020. And again, a similar issue in relation to a larger customer win in the LF&E division, which is just starting to turn on at this point in time.

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Paul Bilenki, TD Securities Equity Research - Associate [31]

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Okay. And then just as my follow-up, I was hoping for a little bit more clarity on the coronavirus impact. And you cited -- or you stated that you haven't seen a material impact to date. But I guess based on what you've been hearing from customers, do you see potential for either project delays or new customer launch delays or anything on that side? Or any sort of end market weakness at this point in time?

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Alan Walsh, IPL Plastics Inc. - President, CEO & Executive Director [32]

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I suppose the first thing I'd say is who knows. It's an evolving situation. Every day you wake up, something else has happened. A couple of points I would make, though, we obviously have the manufacturing facility in Shanghai in China. We took all appropriate precautionary steps there, complied with local guidelines, et cetera. We witnessed no impact whatsoever in terms of our operations there, which are fully operational at this point in time.

In terms of end customer demand, we've experienced nothing to date. Obviously, there's concern around ability to continue to supply, no issues in any of our manufacturing facilities. We're taking all necessary precautions and preventative steps, et cetera, as I'm sure every other company is. But it's one of those situations where you just do not know and it's dangerous to actually speculate at this point in time around potential outcomes because it's the great unknown.

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Operator [33]

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Our next question comes from Zachary Evershed of National Bank.

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Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [34]

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So just following up on the volume losses. You made reference to further lumpiness to come off in Q1 '20. Looking at the full year 2019, how much of your revenue there was attributable to one-off contracts in that how much has to come off before we're really at the skeleton core business with reliable reoccurring revenue?

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Pat Dalton, IPL Plastics Inc. - CFO & Executive Director [35]

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I would say, Zachary, when we look at 2019 and you look at the -- how the business performed -- and I'm sure that there's much more volume declines that could actually happen than came off in 2019, especially when we look at a pretty weak environmental containers market and material handling market, particularly in North America. Some of the issues in the U.K. where we have some certainly smaller declines and environmental competitors and then really, when you look at the RPS segment, pretty well most of that was related to the automotive box. So I think in answer to your question, I don't think that we see a material risk in further volume declines on a year-on-year basis.

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Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [36]

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That's actually very helpful. And then for the follow-up, just following up on Walter's question earlier. We did touch on RPS, but dialing in on LF&E. Do you have the material handling and environmental contracts in hand, signed and done? Or are you expecting to land those later in the year to contribute in H2?

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Alan Walsh, IPL Plastics Inc. - President, CEO & Executive Director [37]

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It's the latter. We would expect a number of them to land in H2.

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Operator [38]

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(Operator Instructions) We have a question from Frederic Tremblay.

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Frederic Tremblay, Desjardins Securities Inc., Research Division - Analyst [39]

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I just wanted to touch on the free cash flow outlook for 2020. Obviously, saw a major improvement in 2019. Do you expect that to continue in 2020? And given the revenue profile that you're guiding to being back-end weighted, is it similar for free cash flow as well? Meaning, is your free cash flow generation going to be stronger in the second half?

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Pat Dalton, IPL Plastics Inc. - CFO & Executive Director [40]

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Frederic, it is absolutely the case. We would expect that the -- that 2020 would essentially be a mirror of 2019. We would expect that as we ramp up production in the first half and certainly in Q1 of 2020 that there will be a working capital outflow. And then we would, therefore, expect that our net leverage position will certainly rise now in -- at the end of March and drop at the end of June. And then we would expect a significant cash inflow in the back half of 2020, and that's a pattern I think that this business has followed over many years.

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Frederic Tremblay, Desjardins Securities Inc., Research Division - Analyst [41]

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That's helpful. And then on the leverage, you have a leverage range that you're targeting by the end of 2020?

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Pat Dalton, IPL Plastics Inc. - CFO & Executive Director [42]

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I think what we would like to say is that we would certainly be thinking that this business would certainly generate pretty much the same level of debt paydown in the second half of 2020 as we did in the second half of 2019. And if you look at the overall debt reduction between June and December of 2019, we're talking pretty close to $50 million of a net debt reduction. So hopefully -- and that's where we're committed in our minds.

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Operator [43]

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I'm showing no further questions at this time. I'd like to turn the call back over to Alan Walsh for any further remarks.

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Alan Walsh, IPL Plastics Inc. - President, CEO & Executive Director [44]

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Thank you, Valerie, and that concludes our call this evening. Thank you to everybody for joining, and we look forward to speaking with you again in May when we report our quarter 1 results. Thank you.

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Operator [45]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.