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Edited Transcript of IPLP.TO earnings conference call or presentation 14-Nov-19 3:00pm GMT

Q3 2019 Ipl Plastics Inc Earnings Call

Dec 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Ipl Plastics Inc earnings conference call or presentation Thursday, November 14, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alan Walsh

IPL Plastics Inc. - 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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* Elizabeth Johnston

Laurentian Bank Securities, Inc., Research Division - Former Analyst of Research

* Michael Doumet

Scotiabank Global Banking and Markets, Research Division - Analyst

* Scott Douglas Fromson

CIBC Capital Markets, Research Division - Director of Institutional Equity Research & 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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Ladies and gentlemen, thank you for standing by, and welcome to the IPL Plastics Third Quarter 2019 Financial Results Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to Lead Head of Investor Relations, Paul Meade.

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

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Thank you, Andrew, and welcome everyone to today's call. Just before we begin, I would like to remind listeners that the statements about 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 statement in the forward-looking information on Slide 2 for more information.

Also note that we will discuss several non-IFRS financial measures this morning 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. - CEO & Executive Director [3]

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Good morning, everybody. Our Q3 performance reflects continuation of the trends experienced in quarter 2 as we continued our focus on delivering an improved margin and profitability performance through a range of initiatives even though this has had a short-term negative revenue impact.

Net income increased 54% to $7.4 million, up from $4.8 million in quarter 3 last year. This reflects an improved operating performance and stronger margin, which more than offset lower revenue. Adjusted EBITDA increased by more than 32% to $27.2 million as we benefited from lower resin cost, operational improvements and efficiencies and the positive impact of the Loomans acquisition. Adjusted EBITDA margin increased by 5.1% to 17.2%.

Our net debt to adjusted EBITDA ratio improved to 3.31x at the end of September compared to 3.64x at the end of June. Revenue declined by 6.3% in the quarter to $158.5 million. This was primarily due to negative foreign exchange movements and delay in the resumption of the automotive bin manufacturing, a reduction in the rollout of environmental containers in the LF&E division where the timing of tender rollouts can vary due to local issues but generally even out over time and lower revenue in the CPS division due to reduction in demand from CPS' largest customer. These impacts were partially offset by the positive contribution from Loomans, price increases and volume growth in CPS division in North America.

Our LF&E optimization efforts, which we have discussed previously, are continuing and are generating solid margins as evidenced from our recent improved quarterly performances.

In the RPS division, agricultural bin sales continued to recover from temporary delays experienced earlier in the year, and the division was impacted by poor weather in the United States. Sales increased by approximately 15% compared to the second quarter and 115% compared to the first quarter. Further delay in the resumption of the automotive bin manufacturing is expected to negatively impact our fiscal 2019 adjusted EBITDA by $2 million to $3 million due to the weaker revenue performance.

Turning to Slide 4. It is important to highlight that our strategy is delivering the improved performance and improved confidence in our outlook. Delivering organic growth is a continued strategic focus for IPL. Our short-term focus in 2019 is to deliver improved margin and profitability metrics.

Looking beyond 2019, we expect organic revenue growth performance to recover in 2020, underpinned by new contract wins and enhanced and restructured LF&E sales team, combined with ongoing divisional optimization initiatives and a return to growth in our RPS division, underpinned by improved trading conditions and market dynamics for our extensive range of bins and MacroTrac products.

Our strategy to deliver operational improvements and efficiencies is evidenced in the improvements underway in our LF&E division. The Q3 and Q2 results demonstrate that we are on track to improve our margins and core profitability levels during 2019 and beyond. Our goal is delivering sustainable adjusted EBITDA margin in the mid-teen levels in LF&E.

Cash generation and improving financial leverage is also a key part of our strategy. Our Q3 performance showed solid progress in strengthening our balance sheet. We are on track to achieve our year-end target of a net debt to adjusted EBITDA ratio of approximately 3x as working capital unwinds during the fourth quarter and new capital investment levels normalize to our expected future investment levels of circa 25% of EBITDA.

Strategic acquisitions continue to be a key part of our growth strategy, and we continue to see a solid pipeline of feasible acquisitions. However, our short-term focus is to deploy cash to deleverage our balance sheet. At this point, it's worth noting that our Loomans acquisition is performing well and continues to meet performance expectations.

Turning to Slide 5 of the presentation. Sustainability is essential to our business model as our customers are keenly focused on improving their sustainability footprint as well as highlighting publicly their sustainability credentials. Strong sustainability metrics are essential to be classified as a good socially and environmentally minded corporate entity. The plastic debate is maturing, and it is now recognized that plastics is essential to modern urban low-carbon lifestyles. Its characteristics of flexible shape molding, robustness and light weighting are essential to low-carbon transportation developments and to new food preservation techniques. Plastic has a lower carbon footprint to alternative packaging options such as glass, paper or metals.

All of our divisions are constantly working to redesign existing products and develop new ones that enhance circularity, recyclability and reuse. Recently, we've been working with new recycling technologies that enhance the value of the plastic waste stream while developing new performance indicators to align IPL with emerging trends in sustainability.

We look forward with confidence as to how the plastic debate develops and welcome continued regulation to our packaging industry. We view increased regulation as essential to promoting the use of virgin plastic polymers to only those easy to recycle, and secondly, to improving the level of investment in the waste recycling industries. The latter will ensure a greater supply of post-consumer recycled plastic for reuse in new product.

I will now invite Pat to discuss our third quarter financial performance in more detail.

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

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Thanks, Alan. In my opening remarks, our primary focus in 2019 has been to significantly improve margins and profitability even if it involves a short-term negative revenue impact. Q3 is largely continuation of the trends and issues experienced in the prior quarter. Q3 showed a strong improvement in profitability, EBITDA and cash generation albeit on a lower revenue line. As Alan mentioned earlier, we expect organic revenue growth to recover next year as we build on the sustainability of our performance in 2019.

Now turning to financial details of the Q3 performance on Slide 6. Revenue in Q3 2019 declined by 6.3% to $158.5 million. This decline is due to negative foreign exchange translation differences due to strengthening U.S. dollar and a reduction in sales volumes. Environmental container rollouts were lower in the LF&E division compared to Q3 2018, a quarter in which the revenues were unusually high. Revenue was also negatively impacted by lower agriculture and automotive bin sales in the RPS division.

Finally, our CPS division in Europe experienced lower demand from its largest customer. These issues were offset by volume growth in CPS division in North America, price increases and the contribution from the Loomans acquisition.

Gross profit increased by 14.2% to $32 million in Q3 while adjusted EBITDA rose 32.7% to $27.2 million versus $20.5 million in Q3 last year. Adjusted EBITDA margin increased by 5.1% to 17.2%, up from 12.1% in the prior year quarter.

Net income was $7.4 million, representing a significant increase of 54% from $4.8 million in Q3 last year. The positive variance is primarily due to the higher adjusted EBIT partially offset by higher finance cost and income tax charges. Adjusted net income was $9.9 million in Q3 2019 compared to $10.5 million last year. The prior year results include the credit arising from the reassessment of our corporation tax accrual at that time. Pro forma adjusted diluted earnings per share was $0.18 compared to $0.19 in Q3 last year.

Turning to Slide 7, which shows the revenue and adjusted EBITDA bridges for the third quarter with the Loomans revenue and adjusted EBITDA shown in the left corner of each chart for comparative purposes. You can see that the revenue decline was primarily attributable to lower volume, which represented a negative impact of $15.5 million in the quarter. Revenue was negatively impacted by $2.2 million each in terms of price, foreign exchange movement and other movements. The lower volume impacted adjusted EBITDA by $3.1 million. You can also see the impact on adjusted EBITDA from price pass-through, which was a negative of $2.2 million; and lower cost of goods sales, which was a positive of $9.9 million due primarily to resin and other efficiency benefits. The adoption of IFRS 16 also gave rise to a $1 million positive impact on adjusted EBITDA when compared to the prior year.

Turning to Slide 8, which shows the detail of the 9 months year-to-date period. The trend of lower volume in fiscal 2019 resulted in a $38.5 million reduction in revenue. While price was positive by $4.4 million, currency had a negative impact of $13.2 million in the year-to-date numbers with other movements accounting for a further reduction of $5.6 million in the 9-month numbers.

In terms of the 9 months adjusted EBITDA performance, the negative volume trend reduced adjusted EBITDA by $7 million, offset by price increase of $4.4 million and lower cost of goods sold of $12.7 million. SG&A was a modest negative on EBITDA as it increased by $0.8 million and the adoption of IFRS 16 was a positive by $2.9 million. Finally, the currency movements reduced the 9 months adjusted EBITDA by $5.2 million when compared to the 9-month period in 2018.

Turning to Slide 9, which details the Q3 key margin drivers. Resin cost declined to 38% of revenues in the third quarter, reflecting the benefits of lower resin prices and the benefits of the resin procurement program completed at the end of 2018. As is evident from the chart, freight costs have stabilized in fiscal 2019 following spikes last year. And we continue to be impacted by higher labor cost in North America due to both general labor inflation and new labor agreements.

Turning next to Slide 10, which provides you with an update on resin price movements. You can see the lower resin price trend continued into Q3, and the outlook is for a relatively stable resin price in the near term. The resin price outlook reflects adequate supplies and weaker demand as many chemical-based industries are experiencing slower demand, which is especially evident in the global automotive industry.

Turning to Slide 11, which provides an overview of our balance sheet metrics. Our balance sheet at the end of Q3 reflects increased nominal leverage levels relative to the end of fiscal 2018 due primarily to the acquisition of Loomans at the end of March of 2019. Q3 working capital is $123.2 million at the end of September 2019 compared to $88.2 million at the end of December 2018. The end of December 2018 number does not include the working capital of the Loomans business, which was acquired at the end of March. Our financial leverage ratio, defined as our net debt to the last 12 months adjusted EBITDA, reduced from 3.64x at the end of Q2 to 3.31x at the end of Q3 2019.

Turning to Slide 12, which provides details of our much improved quarterly and 9-month growth in cash generation when compared to the same period in 2018. Net cash flow from operating activities increased by 56% to $25.9 million in Q3, up from $6.6 million in the comparable quarter. Adjusted free cash flow increased by 4.7% to $19.3 million from $18.4 million in Q3 last year. The improved cash flows were primarily driven by improved operating performance. In the 9 months year-to-date period, net cash flows from operating activities was $35.3 million compared to an outflow of $3.2 million last year and adjusted free cash flow was $21.4 million compared to a deficit of $9 million last year.

Now turning to Slide 13 which provides an overview of our CapEx. Total CapEx spend in the first 9 months of fiscal 2019 was $38.1 million, down 12.4% from $44.2 million last year. The 2019 total includes $28.6 million of strategic and development CapEx and $9.5 million of maintenance CapEx. The year-over-year reduction in spending reflects the completion of the major CapEx program that began in fiscal 2016. The numbers also include additional CapEx in 2019 related to a major customer contract win in the CPS business during the second quarter of 2019. We expect the total CapEx spending to be in the range of $39 million to $44 million in 2019. Growth in our cash generation is expected to continue and underpinned our expectation to achieve a year-end net debt to adjusted EBITDA ratio of approximately 3x based on current exchange rates.

Turning to Slide 14, which details the performance of our LF&E division, which is our largest division. Our revenue declined by 13.9% to $73 million in Q3. Adjusted EBITDA increased strongly by over 40%. The revenue decline was largely driven by -- volume-driven as is evidenced from the left-hand side of the slide, and reflect management's continued focus on efficiency and optimizing the performance even though this involves negative revenue impacts.

In North America, LF&E revenues declined due to lower sales volume, pass-through of resin price movements and the impact from the small disposal of the Remer facility partially offset by price increases.

In Europe, lower revenue was due to negative foreign exchange movements and a decline in environmental container rollouts after a particularly strong period in Q3 of 2018. These negative impacts were partially offset by continued growth in both packaging sales and improved volume of industrial products. The 40% growth in the business profitability reflects a 6.5% improvement in adjusted EBITDA margin to 16.9% in Q3.

Now turning to Slide 15, which details the CPS divisional performance. CPS had strong improvements in both revenue and profitability in Q3, reflecting the benefits of the Loomans acquisition, positive volume and price dynamics and lower cost. Revenue in Q3 increased by 19.2% to $55 million, primarily attributable to the Loomans acquisition, which contributed $12.4 million of revenue to our European business. Sales volume of food packaging products in Europe also increased. However, this was offset in Europe by a reduction in demand from our largest European customer. In North America, the CPS business generated continued volume growth, which was somewhat offset by the pass-through of resin price movements. Unfavorable foreign exchange movement also impacted the CPS revenue in North America and in Europe.

Adjusted EBITDA increased strongly by 47.8% to $11.6 million from $7.8 million in Q3 last year, reflecting an adjusted EBITDA margin expansion of 4.1% to 21% in Q3 2019.

Turning to Slide 16 on the RPS divisional performance. RPS generated strong positive adjusted EBITDA and margin growth due to a lower resin cost and the impact of a corrective action program to realign the division's cost base early in 2019. However, revenue in the RPS division was $26.1 million in the third quarter, a decline of 19.7%, primarily reflecting the delay in the rollout of our automotive bins. While agricultural bin sales, which make up about 80% of the RPS revenue in the quarter, continued to rebound in Q3 and the low levels recorded earlier in the year due to the adverse weather, the sales recovery in agricultural bin volumes was insufficient to offset the negligible automotive bin [rev] during the period and the weaker Q3 MacroTrac sales performance relative to its very strong performance in H1.

Good cost adjustment ensured that adjusted EBITDA rose 16.1% to $5.5 million compared to $4.7 million last year, reflecting an adjusted EBITDA margin improvement of 6.5% to 20.9% in the quarter.

Turning to Slide 17, which details other adjusted EBITDA movements in Q3, which totaled a negative of $2.1 million. This reflects a lower contribution of $0.4 million from our small U.K. base metals recycling business due to lower metal pricing and increase in our central overheads of $0.6 million while IFRS 16 was a positive of $0.4 million, offset by negative movement in foreign exchange of $0.7 million in the quarter.

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

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

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Thanks, Pat. In terms of outlook, while we expect foreign exchange volatility to continue, we remain confident that our continuing optimization efforts will sustain our margin (inaudible) trend going forward. This is underpinned by a stable resin price outlook and our expectation for a continued satisfactory performance by both LF&E and CPS. RPS continues to be impacted by trading delays, which is now expected to impact fiscal 2019 performance or adjusted EBITDA by $2 million to $3 million, as I mentioned earlier. Our expectation for our overall group fiscal 2019 performance remains to deliver an improvement in operation and financial performance as evidenced from our recent 2 quarterly updates.

Looking ahead to 2020, our expectation is for top line revenue growth to recover due to new contract wins, benefit from the investment in our LF&E sales teams and business optimization measures and a more diversified RPS division with continued growth in agricultural bin volumes, a broader automotive bin product offering and additional opportunities within the MacroTrac segment.

So in conclusion, I want to reiterate some of the points I already mentioned, we are pleased with the recovery in our margins and see this as sustainable moving into 2020 and beyond. Our optimization efforts within the LF&E division continue, and we expect some additional efficiency in 2020. We delivered a significant improvement in free cash flow generation in quarter 3 and expect this to continue in quarter 4. We reiterate our year-end expectation of net debt to adjusted EBITDA of 3x.

The revenue performance is disappointing but does not signal any fundamental underlying trend in the business. The revenue numbers in quarter 2, quarter 3 and indeed in quarter 4 have been impacted by FX and the project nature of some aspects of our business, such as environmental containers, automotive bins and material handling products. Unfortunately, these have all occurred at the same time in 2019. We do expect an improvement in revenues in 2020 driven by a healthy pipeline of contract wins in CPS, a stronger performance and the broader product offering in RPS and an improved performance in the LF&E division, underpinned by our optimization efforts. We will deliver a significant improvement in operating and financial performance for 2019 compared to 2018.

Pat and I are now pleased to answer any questions you may have. So operator, you can open the line for 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 the line of Walter Spracklin with RBC Capital Markets.

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

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So just wanted to focus in on the -- your outlook into 2020. I think you did a good job there of highlighting the sustainability of many of the achievements you've made this year, particularly around margin improvement and then pushing out a little bit some deferral of revenue into 2020 that would suggest that 2020 is going to be a much better year both from a revenue perspective and holding onto the margin benefits, not to mention some of the benefits of the acquisition that will continue.

So I guess the key question then is around some of the lumpy areas, we'll start with RPS, where might -- so you have the Ford contract that will finish delivery next year. What's the risk then that upon completion of that Ford contract that there's not a replacement contract coming through in 2020 that won't lead to -- if not achieved won't lead to another year-over-year decline in that segment? And what's your visibility into replacing that contract in 2020?

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

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Okay. Thanks, Walter, and I'll take that question. So I suppose, first of all, we fully expect the existing contract to be completed. Obviously, we had anticipated that occurring in quarter 4. As we sit here today, that's likely to be a 2020 event. And that is unfortunately something that has been largely outside of our control in terms of completing that contract with the intention of both counterparties there to fully complete the rollout of that initial contract.

We have been working to expand the pipeline of opportunities with other automotive manufacturers, 3PL providers over the course of this year. I think the nature of this product on these types of projects -- they are project-based, as I said earlier, there is potentially quite a significant conversion cycle from when you have initial discussions and when you end up with a PO in your hand to start delivering the said products. But we have a pretty healthy pipeline of different opportunities that we're working on and not at all specifically around the automotive sector. We also note the product offering that we have within the automotive sector, and we have a couple of projects that we're working on there as well. And the other thing in terms of the investments that we've made into our facility in Shelbyville, those machines are also feasible for other manufacturing outside of pure automotive. So one of the areas that we have been putting a lot of focus on is our MacroTrac business, and there are some interesting growth opportunities there that we're working on for 2020 and there's a couple of other areas in the material handling space as well.

So I suppose the strategy is to try and eradicate what you might call the lumpy nature of some of these project-based and contracts by having a broader product offering and creating a healthy pipeline of opportunities across a number of different sectors.

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

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So if we look at your 2018 revenue up at $126 million and then 2019 coming in kind of the mid to low 90s, given the lumpy nature, it really isn't uncertainty on our -- from our modeling perspective on what number to plug in there. Should we look at growth in the low 100s? Or can you get back to your 2018 level? Or is there a risk that we kind of see the current level continuing?

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

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No. We would certainly anticipate an improvement in revenues over the 2019 number. Whether we get back to the 2018 level, I suppose I wouldn't like to say that today.

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

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Okay. And then a similar question, I guess, on the large format, environmental. You talked about a tough comp here with some environmental bin deliveries last year and going into the fourth quarter here. Where are we in terms of potential RFPs? Or are there anything -- is there anything on the horizon or in the pipeline for 2020 that would give you optimism that we can spur some growth in that segment through some -- what can be very lumpy wins but any of those potential into 2020?

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

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Yes. There's 1 or 2 pretty significant opportunities in the Canadian market that we're working on at the moment and that would lead to manufacturing and revenue in 2020. So we would expect some significant uplift in revenue in that segment in 2020 versus 2019.

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Operator [8]

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(Operator Instructions) Our next question comes from the line of Michael Doumet with Scotiabank.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [9]

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Apologize if you covered this on prior call. But just on the LF&E business on the sales restructuring there. I mean can you discuss that transition in a little bit more detail, I mean, whether it's a change in compensation plan or a change in personnel and what you expect in terms of optimization? I think you alluded to additional efficiencies in 2020 in that business.

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Alan Walsh, IPL Plastics Inc. - CEO & Executive Director [10]

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Michael, it's both. It's both. There's restructuring of the sales force, which is ongoing, I think a refocusing of efforts and a realignment of incentivization arrangements. So it's a combination of a number of things.

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

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Okay. And then just a second question. I noticed there's a step-down on a sequential basis from the revenue generation of Loomans. Just wondering if that is seasonality lumpiness or if there's anything else that we should consider there.

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Alan Walsh, IPL Plastics Inc. - CEO & Executive Director [12]

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No. There is some seasonality in that business. And part of its product offering is our containers for the dairy, ice cream segment, et cetera. So you would expect to see some tail-off from that business in quarter 3, quarter 4. And the other element of that business is purely manufacturing, which, again, is a project-based business, but there is some seasonality in there.

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Operator [13]

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Our next question comes from the line of Zachary Evershed with National Bank.

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Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [14]

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Quick question for you on the European inventory management. How should we think about that evolving in Q4 and 2020?

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Pat Dalton, IPL Plastics Inc. - CFO & Executive Director [15]

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Zachary, could you repeat the question? We didn't hear it.

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Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [16]

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Sorry about that. Addressing the European customer's inventory management, which is still ongoing, how should we think about that evolving in Q4 and 2020?

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Pat Dalton, IPL Plastics Inc. - CFO & Executive Director [17]

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I think that we would probably expect the same trend in Q4 in 2019 as we had in Q3. So we would expect that customer to be behind the Q4 comparable for 2018. But effectively, we would expect it to be in line in 2020 or at least in line with where they are in 2019. And we've had a number of discussions with that customer and as well as a fair level of visibility around that 2020 number at this point in time. So no further deterioration from the 2019 levels.

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Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [18]

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That's helpful. And for my second, given the organic growth outlook for 2020, do you see a pickup in CapEx levels over 2019?

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

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No is the answer to that. We need to be very clear on this because I think that one of the things the optimization program has done for us in LF&E is that we have identified fairly significant levels of unutilized capacity that we previously hadn't, I'd say, identified. And so at this point in time, certainly in the LF&E business, you can expect that we will grow that business without any significant CapEx investment.

Similarly for the RPS business, as we talked about, we have significant unutilized capacity available in the RPS business and particularly the investments in the automotive piece. And that capital is capable of being used for multiple products.

And then with respect to the CPS business, well, we talked about that large customer win in the last quarter, and we are investing that CapEx. So I think that's well known at this point in time.

So we would expect the guidance that we've given around CapEx in terms of no more than 25% of EBITDA, we would certainly expect to honor that in 2020.

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Operator [20]

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Our next question comes from the line of Scott Fromson with CIBC.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [21]

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So the EBITDA margin or the adjusted EBITDA margin looks, I would say, unexpectedly high. In your EBITDA bridge, you referenced lower COGS adding almost $10 million to year-over-year EBITDA in the quarter. And that translates into about 6 points of incremental EBITDA margin. How much of this delta is related to resin spread benefits that are really likely one quarter and indicative of lowering resin prices? And how much reflects sustainable cost reductions?

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Pat Dalton, IPL Plastics Inc. - CFO & Executive Director [22]

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I think -- and maybe Scott, if I could deal with your question. I think, firstly, just in terms of -- I think the quarterly EBITDA margins are always a little bit, I would say, misleading, especially when you look at our seasonality of our business in Q2 and Q3, you would always expect those EBITDA margins to be higher. If you look at our EBITDA margins year-to-date, our LF&E EBITDA margin is at 16% for the first 3 quarters of the year. Our consumer packaging business is about 19.7% and our CPS business -- and our RPS business at 18.6%.

The previous guidance we would have given for the LF&E business is to be around 15%, 16%, our consumer packaging to be 18% to 20% and RPS to be around 20%. So we would essentially effectively say that in terms of the 9 months year-to-date, we are pretty much heading towards in line with the guidance that we would have given around our annualized EBITDA margins. So I think that's the first point.

I think the second point in terms of resin. The resin benefit and the current share is different depending on the sectors that you're dealing with and depending on whether you're talking about the polypro or polyethylene piece of it. So if you -- maybe just to go back on an overall point that this time last year, we would have pointed to a significant improvement in operating performance in 2019 driven by that point in time, our resin procurement tender that we embarked on at that point in time it. And secondly, some of the EBITDA margin gain that you have seen at this point in time is related more to that tender process than to actual reductions in resin pricing in the marketplace. Because I think if you look at the actual reductions in resin pricing in the marketplace, if you think that our CPS business is pretty much 100% pass-through, well, all of those benefits will not go to margin in any event.

If you talk about LF&E business, about 70% of our LF&E business is polyethylene based, and there's only a small 5%, 6%, 7% reduction in PE. That again will not drive significant margin improvement in the LF&E business. And if you take our RPS business where there has been about a 20% reduction in polypro, that's the one part of margin improvement has come mostly from resin reductions. So I would say in response to your question, CPS margins nothing really to do with resin; LF&E, more to do with the resin tender in terms of the margin improvement and the operational improvement; and the RPS business, we would certainly say some of that is certainly due to lower-priced resin. Overall, a long-winded answer, as we think about 2%, and we've said that is really about the resin benefit.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [23]

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Okay. That's extremely helpful. And just on the restructuring cost, can you give a little bit of detail on how it was allocated among business segments? And what are the annual cost savings? So what can we think of as -- in terms of annual EBITDA margin improvement?

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Pat Dalton, IPL Plastics Inc. - CFO & Executive Director [24]

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I think maybe I'll talk about the LF&E segment in particular here. You recall that the LF&E business grew pretty fast in 2016, 2017. And 2019 has been more around internalizing some of the revenue growth that was actually subcontracted in previous years. So what we've done actually is taken out some fairly significant subcontracting cost out of the cost of sales. I think you're seeing a fairly significant improvement in cost of sales in that business. And therefore, in that business, we would say, as we've always talked about, most of that margin improvement is sustainable because effectively we've eliminated that outsourcing cost that was in that business.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [25]

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Okay. So does that mean that you've kind of achieved the 15% long-term margins in this business on a sustainable basis?

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

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I think as Alan would say, there's probably 2 more phases to go on this. One, we would say that we have certainly more optimization to do around the business. And the second thing, Scott, I would say is that we haven't probably -- we've addressed, I would say, some of the productivity issues. We've addressed some of our inefficient indirect labor. Probably the piece that we have to do is the automation piece in that business.

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Operator [27]

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Our next question comes from the line of Elizabeth Johnston with Laurentian Bank.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Former Analyst of Research [28]

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I just wanted to go back to some of the comments you made about the large European customer in terms of the inventory management that they're working through. Are you able to quantify approximately how much of a drag on sales that was in the quarter?

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Pat Dalton, IPL Plastics Inc. - CFO & Executive Director [29]

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I think about $2.5 million, Elizabeth, in the quarter.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Former Analyst of Research [30]

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And therefore, that similar drag you're therefore expecting in Q4. But after that, you would have lapped it, so then we're steadier. Is that it?

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Pat Dalton, IPL Plastics Inc. - CFO & Executive Director [31]

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That's right. Yes. And maybe, Elizabeth, just to give you a little bit more color on the $15.5 million volume reduction in Q3 because -- just in terms of what were the drivers of that volume reduction are. So we actually looked at the environmental containers piece. So when we looked at Q3 2019 versus Q3 2018, the environmental containers piece is around about a $5 million drag in that number of the $15.5 million. And the other piece of this, when you look at the material handling piece, again, that's about a $5 million drag in that $15.5 million. So these are the -- what we would call the project-based opportunities that we've had in the past. And the other piece of that is the RPS segment that you can actually see even in the revenue differential of just over $6 million, most of which is automotive, so when you compare Q3 2019 versus Q3 2018. And the other piece that I've now just called out for you is the European customer.

So when we analyze the decline in revenue internally, and just to reiterate the comments that Alan made, when you look at those pockets of revenue -- lower revenues, you can see that our core business is performing well and our CPS business is actually -- volume's growing.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Former Analyst of Research [32]

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Okay. Understood. That's helpful. And just my other question, going back to the automotive contract. I understand that a lot of the factor that play here are not within your control. But I wonder if you could speak to your level of confidence that these volumes will come back in the new year. Any kind of updated time line? Certainly, I understand that eventually you expect to complete the project. But is there any further risk that it gets pushed out until even later in 2020, for example?

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Alan Walsh, IPL Plastics Inc. - CEO & Executive Director [33]

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No. I think we would certainly expect the contract to complete in the first half of next year. And as I said in the few years, our focus is on working on a number of opportunities with both of the existing parties and a lot of other 3PL providers and players in the automotive space to expand the breadth of customers in that segment. So we do expect some meaningful recovery in the revenue in that segment in 2020.

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Operator [34]

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And I'm showing no further questions at this time. I will now turn the call back over to Alan Walsh, CEO, for any further remarks.

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Alan Walsh, IPL Plastics Inc. - CEO & Executive Director [35]

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Okay. Well, that concludes our call this morning. Thank you to everybody for joining us. And we will speak to you again in March of next year for our Q4 and full year results. Thank you.

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Operator [36]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.