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Edited Transcript of ITP.TO earnings conference call or presentation 11-Nov-19 3:00pm GMT

Q3 2019 Intertape Polymer Group Inc Earnings Call

SAINT-LAURENT Nov 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Intertape Polymer Group Inc earnings conference call or presentation Monday, November 11, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gregory A. C. Yull

Intertape Polymer Group Inc. - CEO, President & Non-Independent Director

* Jeffrey Crystal

Intertape Polymer Group Inc. - CFO

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Conference Call Participants

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* Ben Jekic

GMP Securities L.P., Research Division - Director and Special Situations Analyst, Equity Research

* Maggie Anne MacDougall

Cormark Securities Inc., Research Division - Director of of Institutional Equity Research

* Michael Doumet

Scotiabank Global Banking and Markets, Research Division - Analyst

* Neil Linsdell

Industrial Alliance Securities Inc., Research Division - Head of Research and Equity Research Analyst of Consumer Products & Special Situations

* Scott Douglas Fromson

CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst

* 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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Ladies and gentlemen, thank you for standing by. Welcome to the Intertape Polymer Group's Q3 Earnings Conference Call and Webcast. (Operator Instructions) Your speakers for today are Greg Yull, CEO; and Jeff Crystal, CFO.

I would like to caution all participants that in response to your questions and in our prepared remarks today, we will be making forward-looking statements, which reflect management's beliefs and assumptions regarding future events based on information available today. The company undertakes no duty to update this information including its earnings outlook, even though its situation may change in the future. You are, therefore, cautioned to not place undue reliance on these forward-looking statements as they are not a guarantee of future performance and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expected.

An extensive list of these risks and uncertainties are identified in the company's annual report on Form 20-F for the year ended December 31, 2018, and subsequent statements and factors contained in the company's filings with the Canadian securities regulators and the U.S. Securities and Exchange Commission.

During this call, we may also be referring to certain non-GAAP financial measures as defined under the SEC rules including adjusted EBITDA, adjusted EBITDA margin, adjusted net earnings, adjusted earnings per share, secured net leverage ratio, total leverage ratio and free cash flows. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available at our website at www.itape.com and are included in its filings included the MD&A filed today.

Please also note that variance, ratio and percentage changes referred to during this call are based on unrounded numbers, and all dollar amounts are in U.S. unless otherwise noted.

I would like to remind everyone that this conference is being recorded today, November 11, 2019, at 10:00 Eastern Time. Now I will turn the call over to Greg Yull. Mr. Yull, please go ahead, sir.

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [2]

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Thank you, and good morning, everyone. Welcome to IPG's 2019 Third Quarter Conference Call. Joining me is Jeff Crystal, our CFO.

Before we begin this morning, it's important to recognize the significance of the day. On behalf of IPG, I'd like to thank all of those that gave the ultimate sacrifice as well as all our veterans that have served and continue to serve on this Veterans Day and Remembrance Day.

During the call, we'll make reference to our earnings presentation that you can download from the Investor Relations section of our website. It was another strong quarter. Revenue was up more than 5%. Adjusted EBITDA increased more than 22% to $46 million, and our adjusted EBITDA margin reached 15.7%. From the top line perspective, the growth was driven by our acquisitions as well as strong performance within water-activated tapes and protective packaging due to increased demand. We describe the business as a GDP-plus growth profile post the benefits of our recent acquisitions and capital investments with the plus component coming primarily from e-commerce.

Based on what we saw during the third quarter in our end markets, there are select pockets of weakness in demand, but it is not broad based. While this impacted our organic growth, which Jeff will address in a read-through of volume mix, that impact was modest. We remain confident in the GDP-plus growth trajectory of our business.

Based on our results year-to-date, the remaining time to meet our original outlook and our current view of end-market demand, this morning, we updated our outlook for fiscal 2019 with revenue coming down and adjusted EBITDA moving to the top end of the range.

Revenue in 2019 is now expected to be between $1.150 billion $1.165 billion, which represents 10% growth year-over-year at the midpoint of the range. Adjusted EBITDA for 2019 is now expected to be between $170 million and $174 million, which is at the top end of the original range and the midpoint representing 22% growth year-over-year. We have proactively implemented a series of measures to position us as a world-class low-cost manufacturer that is competitive in the market, independent of the macroeconomic environment.

First, we've spent the past 2 years plus investing in the business in the form of capital and processes. During 2017 and '18, we invested more than $150 million in total CapEx, building 3 new greenfield facilities and making new investments at existing plants. Year-to-date 2019, our CapEx is $39 million, which is in line with the range of $45 million to $55 million we expect for the full year. In our view, these levels are appropriate for ongoing maintenance and selected strategic investments. We also believe that we can maintain our asset base of $15 million to $20 million in CapEx for a 2- to 3-year period on our existing footprint if required.

Second, as some of you heard at our Investor Day in June, we've also invested in our Intertape Performance System, creating a structured culture of continuous improvement. It engages everyone at the plant in the success of the plant. Operating safely and efficiently, driving out waste, improving performance and quality are company-wide initiatives, not top-down ones. The improvements at the plant level as a result of both the CapEx and our Intertape Performance System, and most importantly, the commitment of our dedicated team members are clearly having an impact. Plant performance remained strong in Q3 and remained so into Q4.

Third, last year, we restructured our capital stock with a bond offering to provide greater flexibility and cost certainty moving forward. The bond offering enables us to be offensive if opportunities present themselves in the market to consolidate smaller players or acquire strategic assets that strengthen our product bundle. It also serves as a defensive strategy by providing greater flexibility on our primary covenant related to the second secured credit facility. These proactive initiatives have put us in a great position to be competitive today, tomorrow and in the longer term in our key end markets of tapes, films, protective packaging and woven products. That's what we've accomplished.

So what we focused on today is to drive value in the business. We are at a stage, based on our recent investments and acquisitions, where execution is our primary focus. In our case, successful acquisition -- execution can be broken into 2 key areas: Strengthening our product bundle and operational excellence. Why are we continuously looking to strengthen our product bundle? Let me give you an example. Our e-commerce customers are expanding, both geographically and with new packaging offerings. Our existing bundle led by water-activated tape offers our customers a comprehensive suite of e-commerce fulfillment products from card sealing tapes to shrink film for shipping your own container to protective packaging solutions. The e-commerce market continues to grow at double-digit rates, far exceeding the conventional brick-and-mortar retail market. At the same time, packaging requirements continue to evolve as the largest e-commerce player in the market increases the standards as part of its move to reduce waste, improve sustainability and efficiently meet the consumer's expectation for 1 and 2-day delivery. Packaging has to offer value to the seller, the fulfillment company and to the consumer, whether it be corrugate with tape closure or film and protective solutions. A product that arrives damaged is a major headwind for the profitability of both the seller and the fulfillment company. We believe there are opportunities to expand within our leading e-commerce customers as they expand geographically serving their needs in new regions with water-activated tape and other products within our bundle. We also believe there are opportunities to provide our e-commerce customers with a more sustainable, protective solution that are curbside recyclable, which eliminate waste and still allow products to arrive undamaged.

Ensuring our product bundle provides a broad offering that includes paper and plastics with the attributes of sustainability such as the increasingly important attribute of recyclable material is a critical element of our long-term success. We are working to strengthen our product bundle through both innovation and acquisition with world-class low-cost offerings that provide value to our e-commerce customers.

As it relates to the acquisition market, valuations remain high. We will remain disciplined, and we will not chase targets. But we believe we've proven there are tuck-in acquisitions like better packages in Maiweave and strategic acquisitions like Polyair that can contribute to our margin dollar in an expeditious fashion. We also believe that in a down market, there will be opportunities for stronger players to add scale by consolidating assets.

Another main element of our execution is operational excellence. This can encompass a range of activities including the safety and performance of the plants that I mentioned earlier. But this morning, I'll focus on just 2: Successfully integrating our recent acquisitions and optimizing our recent CapEx investments. Acquiring an asset or putting capital in the ground is only the front end of the process. We are delivering on our integration of Cantech, Polyair and Maiweave. On Cantech, the cost synergies achieved since the acquisition are proceeding in line with our expectations. On Polyair, we are benefiting from both cost synergies as well as increasingly from revenue synergies. The cost aspect started earlier and remains the primary driver of the benefits today, but we are pleased with the improvement on the revenue side since our last call, and we are seeing tangible progress on that front. On Maiweave, the business continues to perform well. We provided an update on our last call, and we were ahead of expectations, and that remains the case.

On the capital projects, the new Indian carton sealing tape facility has now completed the commissioning process. The team is working to optimize the run rate of the facility and build an order book. Based on the improved production rates in North America that we've achieved on the same product lines and the pace at which sales are ramping in Europe, we do not anticipate a material contribution from this facility in 2020.

The Indian wovens product business is performing extremely well. It's producing quality product at a cost that makes our woven manufacturing assets in North America much more valuable. We are working through higher cost inventory sourced from third-party suppliers. It is material that we have now backwards integrated into the Indian business.

During the past 12 months, we made a conscious decision to take share in the North American woven products market despite the need to use higher cost input material in order to benefit from our Indian supply chain on a go-forward basis. The combination of our 2 original woven products plants, the Maiweave acquisition and the Indian assets put us in a great position to improve the margin profile of our woven products business to the legacy IPG standard.

At this point, I'd like to turn the call over to Jeff, who'll provide you additional insight into the financial results. Jeff?

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [3]

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Thank you, Greg. On Page 11 of the presentation, we present an analysis of our revenue for the third quarter. Revenue increased 5% to $293.6 million compared to the same period in 2018. The $14.5 million increase was primarily due to a $19.1 million impact from the Polyair and Maiweave acquisitions. As Greg mentioned earlier, this increase was partially offset by the impact of our volume and mix, which was minus 1.6% or $4.5 million. Price effect increased by 0.2% or $0.60 million, and foreign exchange negatively impacted the top line by minus 0.2% or $0.6 million. The positive drivers within volume and mix in the quarter were water-activated tape and protective packaging. The positive impact from these categories was offset by certain industrial tapes and equipment products, which were lower. While the combined effect of volume and mix with price was negative in the quarter, it is much less pronounced than what we are seeing amongst our peers in the industry in the Q3 reporting period. We continue to see growth in the areas of the business where we've made strategic investments, specifically water-activated tapes and protective packaging. We believe our investments in these product categories will continue to deliver positive momentum.

Turning to Page 12. Gross margin was up 127 basis points to 21.8% in the third quarter compared to the same period in 2018. The improvement is primarily due to the increase in spread between selling prices and combined raw materials and freight costs, which was partially offset by the dilutive impact of the Maiweave acquisition, which we acquired at a lower margin profile than the IPG-based business.

Adjusted EBITDA increased by more than 22% to $46 million in the third quarter compared to the same period in 2018. This improvement was primarily due to, one, the organic growth and gross profit; two, the Polyair and Maiweave acquisitions; and lastly, the favorable impact of operating lease payments totaling $1.8 million that were capitalized in the third quarter of 2019 in accordance with the new lease accounting guidance implemented on January 1, 2019.

The effective tax rate was 25.3% for the third quarter compared to 18.8% in the same period in 2018. This result is in line with our expectations and guidance going forward. The change in the tax rate is primarily due to the elimination of certain tax benefits as a result of the U.S. Tax Cuts and Jobs Act related to intercompany debt and the nonrecurrence of a net federal tax benefit associated with a discretionary pension contribution made in the third quarter of 2018.

Cash flows from operating activities improved by $35.3 million to $48.4 million in the third quarter compared to the same period in 2018. This improvement was primarily the result of a smaller increase in accounts receivable as a result of the timing of revenue invoiced in the third quarter of 2019 as compared to the same period in 2018, the nonrecurrence of a discretionary pension contribution in the third quarter of '18 and an increase in gross profit.

As a reminder, our business normally has a natural seasonality as we build inventory in the first half of the year in advance to both the higher volume third and fourth quarter periods from a retail activity perspective as well as our planned factory maintenance schedule, which occurs primarily at midyear. In the fourth quarter, that build unravels with the seasonal nature of higher retail activity.

Free cash flows improved by $48.8 million to $39 million in the third quarter compared to -- in the same period in 2018. The improvement was primarily due to the decrease in capital expenditures, which Greg referenced earlier as our strategic CapEx program winds down and an increase in cash flows from operating activities. It also includes the favorable impact of operating lease payments totaling $1.8 million that I referenced earlier in accordance with the new lease accounting guidelines.

As Greg referenced earlier, our unsecured note offering in late 2018 enabled us to lower our secured net leverage ratio, which is now 1.7x. The secured net leverage ratio is the most important ratio that is relevant to our covenants. Therefore, we view it as the highest priority. Our total leverage ratio including the unsecured debt decreased to 3.2x, down from 3.5x in the sequential period.

As a reminder, during the quarter, we amended our credit facility to account for the associated impacts of new lease accounting guidance. The amendment increased secured net leverage ratio covenant threshold 20 basis points to 3.7x and decreased the interest coverage ratio covenant threshold of 25 basis points to 2.75x.

As Greg mentioned earlier, our highest priority for capital allocation at this stage is debt repayment. We expect to continue to repay debt in the fourth quarter as the seasonality of the business unwinds and throws off more cash, which would drive down the leverage ratios even further.

Now I'll turn the call back over to Greg for his closing thoughts. Greg?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [4]

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Thanks, Jeff. In closing, we continue to execute on our vision to be a global leader in packaging and protective solutions. We've made significant investments in our asset base during the past 2 years. Today, we are focused on strengthening our product bundling and continuing our pursuit of operational excellence. We believe more runway exists to drive operational efficiencies both across our legacy assets and our recent acquisitions through reduced waste, disciplined adherence to processes and the continued engagement of our dedicated team on performance.

We've taken proactive measures to ensure the business is competitive, independent of the macroeconomic environment, building a world-class low-cost manufacturing base, producing products of value for our end markets. We are executing a strategy to deliver long-term value for our shareholders.

With that, I'll turn the call back to the operator to open up the question-and-answer period. Thank you. Amy?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Michael Doumet of Scotiabank.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [2]

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I was wondering if you could get a little bit more granular on the M&A expense this quarter and this year as well. I mean you incurred about $8.5 million last year, close to $8 million this year, would you -- just out of your EBITDA. Any way you can break that up in terms of what those costs were as it relates to integration of the deals that you've done and maybe expenses related to deals that you're looking for?

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [3]

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Yes. I mean we haven't broken it down. But what I can tell you is like in the quarter, for example, in Q3, we did some significant reorganization activity within the Polyair business to integrate the sales team. So a lot of that cost on the integration side was related to the severance related to termination of certain people within that organization as a result of not needing as many people with a combined organization. So that would be a big item in there, certainly for Q3. But I would say the majority of the costs that you're seeing within the M&A cost, even year-to-date, would be primarily integration versus due diligence and other types of upfront costs.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [4]

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So when you complete the integration of the recent deals, like what's a fair run rate number?

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [5]

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Well, I mean, basically, it all depends, right? Because it all depends on other deals that we're working on. Because once you complete the integration, essentially, that integration portion would be essentially 0. And like I said, the majority of that expense this year is that. So it all depends on our deal activity after that.

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [6]

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Yes. So when I look at -- Michael, when I look at Q3 of this year, there is certainly a big slug there of the reorganization of our go-to-market, especially around our customer-facing group as we integrated Polyair. Certainly, when I think of expenses like that on a go-forward basis on the integration side, they're going to be de minimis with what we have right now in play. I mean because that's a big -- I mean, basically, you had 2 sales forces out there calling on the same customers, right? So certainly, as we move forward, we recognize the need that we don't need to do that. And certainly, we needed to maximize on our bundle of products approach to our customers.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [7]

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Okay. No, that's helpful. And then maybe just changing lines of question here. You lowered the revenue guidance, but you raised the EBITDA guidance. Can you talk about what drove that dynamic? Presumably, you're seeing better margins in certain lines of the business, just talk to that a little bit, please?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [8]

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Yes. So I mean we feel good -- really good about where the business is right now. We feel really good operationally. We're seeing growth in -- and -- as we mentioned in the key areas that we've deployed capital over the past 2, 2.5, 3 years. And the manufacturing, combination of the operational efficiency, the ability to kind of manage that cost price spread as well have led a favorable margin profile of where we are.

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

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Okay. And anything in the quarter as it relates to mix or price costs or plant performance that particularly stood out in the quarter that we shouldn't be sort of looking for it to flow into subsequent quarters?

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [10]

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Well, I mean, I think like what we've seen in the quarter, I mean, certainly, as you know, we lowered our guidance on the revenue side. So we saw some softness in a couple of categories being the industrial taste, which we have talked about before in our equipment business as well. There was some softness as well as some order timing. So we just basically expect those trends to affect our full year and that's why we took down the guidance. But we're not expecting anything necessarily new.

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

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Sure. But anything particularly strong on the margin this quarter that maybe shouldn't repeat itself next quarter?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [12]

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No, not that we see right now.

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Operator [13]

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Your next question comes from the line of Stephen MacLeod of BMO Capital Markets.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [14]

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I just wanted to just circle around a little bit on the organic revenue growth profile. I mean I'm wondering if you just give -- if you could just give a little bit more color around the specific areas where you're seeing some weakness if that weakness has accelerated, what you think it's potentially related to? And then on the flip side, similarly, where you're seeing strength in the organic growth side? And, obviously, the water-activated tapes in protective packaging businesses. But whether you're seeing those growth rates accelerate or change at all from what you've seen previously?

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [15]

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Yes. So I mean the easy one is on the positive side. Certainly, the water-activated tape continues to perform, again, driven by e-commerce, certainly from a seasonal perspective, you're getting into a peak season here at back end of Q3 into Q4. So continue to seeing growth there driven by the e-commerce side of things and the mix of products we have in that channel. And certainly, on the protective packaging side as well, we've actually ended off the quarter very strong there going into Q4, a lot on the system side, we've talked about the Polyair business, and the fact that there's a move from more of the traditional kind of brick-and-mortar products like, for example, bubble, foam, things like that back into systems where you're installed -- having installed equipment at the customer, and you're basically shipping sheets or roll the film where they inflate on site like air pillows and bubble and so forth. So we're certainly seeing some strength there, again, driven by e-commerce, driven by that shift into the systems related products. We've talked about this before, in industrial tapes, certainly seeing a little softness there into some of the international market, again, back in the Masking Tapes. International has certainly been a headwind for us for some period now. And some of those products, I mean, on the top line, you see the impact, but from a bottom line perspective, those are not very profitable products. So not a big impact there, which may actually help our margin in some cases. We're also seeing a little bit of softness in the auto aftermarket channel as well. This is again in Masking Tapes. So certainly seeing that, and we've seen that over the last number of quarters and see that continuing as well. We've talked in the past about this retail product that we had sold through a retail channel that was a large item from a mix perspective that impacted us positively in '18 and in '19 has been somewhat of a drag. So it's been a tough comp looking year-over-year. That was less of an impact although still an impact in the quarter. Year-to-date, that would be a pretty big driver as well that we're seeing there.

And I mentioned earlier, on the equipment side, like we discussed in the call, I mean, there is some softness in that demand through the back end of the year, but that's a lot to do as well with some order timing and setting up a new installation. So I'm not sure that will -- that's something that might be short-lived.

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [16]

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I would say also that the trends over the past 2 quarters have stayed relatively the same. We don't see a big change over the past 2 quarters because a lot of this stuff we called out in Q2 as well.

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [17]

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Yes.

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

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Okay. That's helpful. And then just on Polyair, you mentioned you're seeing some sort of -- beginning to see some more revenue synergies, right? [May not be beginning, but] you certainly highlighted it. Are those new relative to last quarter? And I guess, could you also provide some examples of what you're seeing in terms of revenue synergies that are in addition to the cost side for Polyair?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [19]

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So certainly, in the quarter, we saw some good growth, as Jeff mentioned, in the Polyair business, mostly around our systems business as opposed to kind of the bricks-and-mortars business, as Jeff referred to. A lot of that has to do with access, as we've discussed before, to our distribution base that Polyair did not have access to. And also, more importantly, into end users that we had a relationship with other products that we're able to leverage and have system sales go in. We've seen a very nice growth rate on -- in the paper side, on paper void fill. Certainly, we've seen that drive some very nice growth as we move into the latter part of the year and think that, that'll continue to grow as we move into 2020. So it's a combination, just to answer your question, it's a combination of both access to distribution and also being able to leverage our prior relationship with end users as legacy Intertape with the Polyair product line into those end users specifically.

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

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Okay. Okay, that's great. And then just finally, I just wanted to come back to the M&A cost that you had in the quarter, $3.9 million. So is it fair to understand that once all the acquisitions are fully integrated, that should effectively run down to 0?

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [21]

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Yes. I mean, you'd still have something in there if we're doing any significant due diligence or have some upfront costs, but those are typically not as large as what you're seeing on the integration. So it would be de minimis.

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Operator [22]

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Your next question comes from the line of Zachary Evershed of National Bank Financial.

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Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [23]

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Looking at the negative 1.6% of volume and mix, how much of that was volume? And do you expect that to be recouped in Q4?

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [24]

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Yes, we don't split that out anymore, and that's because it gets very muddy when you start trying to split that out because you could have some -- for example, like when you have increases in volume in, for example, our acrylic carton sealing tape, which is selling at a very low sell price, you could see a nice pop in volume, and that's offset completely by mix, negative mix. So we don't break that out anymore.

In terms of Q4, I mean, we haven't given any guidance, but I think you've got the annual guidance, and we do expect some softness in some of the areas that we've seen, but we also expect in Q4 to see our traditionally higher volume quarter within -- especially the retail side. So we think of e-commerce products going in their water-activated tape, protective packaging, films and so forth. So certainly still expecting to see good growth there, certainly offsetting any weakness in these areas.

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Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [25]

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That's helpful. And in terms of the adjustments for manufacturing facility closures and restructuring, do you see a lot of that remaining for the end of the year?

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [26]

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There'll be some. I mean you'll see some hit Q4, not -- it wouldn't be a large amount though, and that's related to the closure of our Montreal facility, the Cantech plant.

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [27]

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But most of that would be behind.

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [28]

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Yes, most of it is behind us.

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Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [29]

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And then looking forward, would that also trend to a run rate of 0?

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [30]

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Yes, absolutely.

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Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [31]

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Excellent. And then last one for me. In terms of the adjustment downwards on your revenue guidance, how are you feeling about your $1.5 billion revenue target at this point?

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [32]

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At this point, I mean, not different. I mean, again, it's in the short term, we brought down the guidance a little bit. But when we look at that $1.5 billion, we feel the same as we felt before. We still say that we'll need some M&A to get to that point and certainly still believe in the growth that we're seeing in the areas that we've invested. So I would say the same at this point.

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Operator [33]

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Your next question comes from the line of Scott Fromson of CIBC.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [34]

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Wondering if you can provide some detail on the organic growth in e-commerce across product lines, particularly in Polyair and water-activated, please?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [35]

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Well, I think -- we can't disclose exactly what it was. But when we saw in the space, we saw good growth, double-digit growth in that segment on a quarter-over-quarter basis, and we expect to continue to see that kind of growth on a go forward. I'm not going to separate between Polyair and legacy Intertape products. So when I say that, I mean, holistically, all of the products into the channel.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [36]

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Okay, that's great. So -- and how did the company -- or how did the margins compare with company average?

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [37]

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Yes, I mean, in all those product lines it's at or above. It's not dilutive -- it's not dilutive to our margin profile.

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Operator [38]

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Your next question comes from the line of Maggie MacDougall of Cormark.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [39]

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I was wondering if you could just elaborate a bit on what your plans are for the Indian carton sealing tape facility. It's said that in the MD&A, I think, something to the extent that you're looking at ways to, I guess, essentially optimize the investment there because the dynamics have changed. So if you could just comment on that that would be great.

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [40]

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Yes. So -- I mean, basically, when we look at that investment, the big change is just the time factor that it will take us to ramp up. So we're diligently working on getting sales from -- specifically out of Europe. Due to some of the major product productivity initiatives that we've completed here in Virginia, we don't need that capacity in North America as we originally planned. We're also diligently working on new product innovations through that facility to try to utilize those assets to make other products that they're well served to accomplish. So we're ramping that effort up. But again, as I called out in the conference call notes, we expect that to be a slower ramp.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [41]

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Okay. And then just generally, I think on the IR Day presentation, there was progress updates given around your various acquisition, integration and other capital projects that you've been doing. And I'm wondering if we could get a bit of an update on Powerband. It's been a little while since there's been a discussion on that one. So I'm curious where that's at.

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [42]

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Yes, so really no change there. I mean like we discussed with Powerband several times is that we're still seeing somewhat lower than average margins there, again, still due to the competitive dynamics within that product line. So again, we've seen a little bit of easement on the raw material side, so that's helped a little bit. But then on the flip side of that, you had some tariff-related items impact some of those product lines in India, which offset some of that. So more of the same is what we would say.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [43]

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Okay. And then just moving on to the woven -- the woven product line and the investments you've made there. It sounds as though things are ramping nicely. Was the facility able to contribute much to your Q3? Or do you think it's going to be a more significant margin contributor in the upcoming quarters?

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [44]

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Yes. No, it's going really, really nicely there. So yes, there was some contribution in Q3. But again, it's sort of being hit by some of the higher cost raw material that we initially purchased from our third-party supplier that's still working its way through the system and will continue to, but we do expect a more substantial impact in Q4 and even more so into 2020 as we eat through all of that inventory.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [45]

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Okay. And then last question. On the organic growth piece, you mentioned some small pockets of softness in the market. I'm wondering if your thoughts are that those are perhaps more maybe trade-related because of uncertainty that some different businesses may be feeling due to the conditions that we've had over the last year or 2 or if you think it's just something else entirely maybe competitive in nature or otherwise?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [46]

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Well, look, from what we see externally with other people in related fields, I mean, we're seeing kind of the same -- we're actually even more drop-off on the organic side significantly. It's hard for us to articulate whether that's something that is trade-related or not. But certainly, we're seeing it from an industry perspective and actually seeing it more dramatically from some of the people in the same space as we are.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [47]

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Do you think that that may provide you with some consolidation opportunities in some of those product lines?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [48]

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Yes. Look, I think in situation, that's part of why we developed our capital structure the way we did is -- it's good on the offensive side and the defensive side as well. So certainly, that could create opportunities on a go-forward basis.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [49]

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Okay. And just remind me, the seasonality in your working capital, is that inventory related through Q4 or other -- or is it accounts receivable?

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [50]

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Yes, that's mostly inventory related. Certainly, accounts receivable would play into that as well because typically December is a slower month. You typically will collect more and bill less that month. But it's mainly our inventory and then also some of the timing of your payables too because there's several payables that get paid in Q1. So for example, like annual compensation, commissions, things like that, rebates, so there's a bunch of money that goes out in Q1 related to that as well.

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Operator [51]

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Your next question comes from the line of Ben Jekic of GMP Securities.

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Ben Jekic, GMP Securities L.P., Research Division - Director and Special Situations Analyst, Equity Research [52]

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Two quick questions from me. The first one, and I'm sorry if this was repeated, but you mentioned that some of the weakness on the volume side came from certain industrial tapes. So I was wondering if you can -- to the extent that you can indicate where that is coming from. What were the reasons behind it?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [53]

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Yes. So in that area, the biggest area on industrial tapes was within our masking segment. And within our masking segment, there's 2 major drivers there. There's the international business that we've walked away from that drove the negative volume. But as Jeff said, it wasn't high-margin materials. So it actually probably had a positive impact on our margin profile. And then we've basically, in North America, seen a general slowdown in areas where we sell performance Masking Tapes or even midrange Masking Tapes, and that could run the range of kind of transportation-related auto aftermarket related. And certainly, mirrors what we've seen from a macro environment in North America at this point.

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Ben Jekic, GMP Securities L.P., Research Division - Director and Special Situations Analyst, Equity Research [54]

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Okay. Okay, that's helpful. And the second question is on taxes. You're mentioning here that your tax rate, 25% to 35% now, eliminates certain, I guess, tax expenses that you can -- sorry, I'm just trying to read here -- that you can utilize some net operating losses, so you're not able to do that, but is that something in the short term or can we expect that in 2020 and thereafter?

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [55]

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Yes. In 2020, you're going to see more of the same as between the 25% to 30% rate. I mean that's kind of where we think we're going to fall this year when you exclude that onetime tax assessment and into next year, so that should be a pretty normal -- normalized number.

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Ben Jekic, GMP Securities L.P., Research Division - Director and Special Situations Analyst, Equity Research [56]

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So 25% to 30% sort of longer term is still fine? Okay, perfect.

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [57]

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Yes.

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Operator [58]

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

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Neil Linsdell, Industrial Alliance Securities Inc., Research Division - Head of Research and Equity Research Analyst of Consumer Products & Special Situations [59]

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So on the bundling of the products, as you sell any to your distributors, as you made acquisitions, is there any further synergies or further opportunities for more bundling and more penetration? Or are you pretty much maxed out now?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [60]

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No, no, I would say that we're in the early innings of that, especially with the acquisition of Polyair. So I would say that's in the early parts of opportunities.

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Neil Linsdell, Industrial Alliance Securities Inc., Research Division - Head of Research and Equity Research Analyst of Consumer Products & Special Situations [61]

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And with the restructuring that you're doing, that's part of that. Do you have any idea, is this going to be a 12, 24-month project to get fully integrated?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [62]

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Well, I mean, look, I think as we move into 2020, it'll be our first integration of comp plans and things of that nature as it relates to the internal sales group. And also, the definition of roles and responsibilities will be further defined into 2020. I think as it relates to the generation of revenue on a go-forward basis, I think that's a thing that's measured over years, not months. And certainly, we've made some good strides so far this year. I expect that trend to definitely increase and be positive in 2020 and moving forward on a go-forward basis. But that's measured in years, not in months.

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Neil Linsdell, Industrial Alliance Securities Inc., Research Division - Head of Research and Equity Research Analyst of Consumer Products & Special Situations [63]

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Right. Okay, good. And on the acquisition pipeline, companies that you're looking at, any commentary about how the valuations or competition from private equity is affecting any of the conversations you're having?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [64]

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Well, I would say, just like we commented last quarter, I would say we're seeing the same kind of dynamic where the expectations on the sell side and the actual transactions on the sell side are being done at elevated multiples, mostly being sold to private equity companies. And I think from our perspective, I think we've got to take a really prudent disciplined approach to those kind of acquisitions and probably in most cases pass on, we can't chase these kind of acquisitions. So I would say that the environment is very similar to where it has been, but I'll also make the comment that we do believe there's still opportunity to execute on M&A in a very prudent fashion on a go-forward basis for the company to create value for our shareholders.

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Neil Linsdell, Industrial Alliance Securities Inc., Research Division - Head of Research and Equity Research Analyst of Consumer Products & Special Situations [65]

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Okay, fair enough. And just lastly, on the -- specifically on the e-commerce, I'm wondering if there's any opportunity or any timeline that you can give us where you might have to do any kind of expansion of your facilities or addition of product line or production lines?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [66]

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I can't comment on that, but it would be a great thing to do.

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Operator [67]

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Your next question comes from the line of Walter Spracklin of RBC Capital Markets.

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Walter Noel Spracklin, RBC Capital Markets, Research Division - MD & Analyst [68]

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My first question, I guess, is on organic growth. I know it reversed quite significantly. I think Europe almost around 3% growth in second quarter, now kind of in the negative 1.5%-ish in the third quarter. Your guidance is kind of implying flat year-over-year now. So a little bit of a sequential improvement from a negative trend. Is there anything that -- is that just kind of a placeholder we'll see how it goes with the competitive environment? Or do you see -- is there anything that gives you confidence that the kind of shift more toward negative organic growth is going to reverse?

And then a follow-on to that is, is there anything in the pipeline right now that gives you comfort that we will see a movement back to positive organic growth into 2020? To contextualize that question, I mean, most of the industrials that we're covering now are indicating a negative back half, a challenged front half and then hope for a recovery in the back half, which is where I'm inclined to kind of look at your results because it's consistent with that, or is there a reason I shouldn't because of what you're seeing in your pipeline?

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [69]

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Yes. I mean, I would say, I think that we're in line in terms like what you're seeing for the fourth quarter. I mean, certainly, in the fourth quarter, we expect to see the growth coming in from our sort of busiest period on the e-commerce side, on the packaging side. So that -- we expect there will be a good impact there. Going into next year, it's tough to say. I think we're -- like we're saying, we're seeing some pockets of weakness. It's not broad-based in the terms of what we're seeing. So it's tough to say like is that going to be a trend into next year? Or is that something that's going to reverse or stay the same? We don't know. So it's hard to say whether that assumption would be correct what you said there, but we're monitoring it and we're monitoring it closely.

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Walter Noel Spracklin, RBC Capital Markets, Research Division - MD & Analyst [70]

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Okay, fair enough. Back to the M&A cost, obviously, whenever those are excluded from your results, it shines a little bit of a spotlight on them. So you mentioned that they are -- the restructuring costs are expected to go to 0 or close, I guess, you said not a large amount associated with the Montreal facility in the fourth quarter. Are you seeing the same for the fourth quarter for M&A costs as well? Are we expecting to see anything in the fourth quarter? I mean your prior acquisition was over a year ago now. So just looking forward to that number, that restructuring costs coming down to 0 in the fourth quarter or should we revisit?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [71]

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Yes, I'll let Jeff comment on that -- on the 0 number. But when you think of the slugs that went through in Q3. I mean the biggest slug was that reorganization of our sales force, right? Which, at the end of the day, that's not recurring, right? Because you only do it once. So that gets us through some of the major integration costs and expectations that we had with the Polyair acquisition. I mean it's -- we're executing as we thought we would. We thought we would do this integration during 2019 and then have it in place when we start 2020. And then as it relates to specifically around kind of plant closure, restructuring around the asset base, with the Montreal plant, that's the last closure that we've announced, we haven't announced any other closures. So certainly on a trend go forward, I mean, those are 2 major things that will certainly not recur on a go-forward basis. But at the end of the day, we have to get them done, right?

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [72]

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Yes. And I would add to that, I mean, in Q3, I would say that that number would be a heavy number. So we definitely expect that to come down for Q4 given the reorganization and some other activities that happened in the quarter.

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Walter Noel Spracklin, RBC Capital Markets, Research Division - MD & Analyst [73]

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So you expect some more M&A costs in the fourth quarter, just not up at the $3.9 million?

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [74]

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Yes, there'll still be some because, again, we're still going through certain integration activities. I mean, typically, what you see is -- and you could see this going into a little bit into next year. But I mean the majority of it was this year with regards to the Polyair.

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Walter Noel Spracklin, RBC Capital Markets, Research Division - MD & Analyst [75]

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So as we go into next year then, ex those items, your margin came in at 14.9%. If we're not going to have any significant contribution or any exclusions from those items in 2020, is it fair to say that your margin, all else equal should be at least 14.9%, given that, that's where it was ex items in 2019? Or is there any reason why your margin would compress in 2020?

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [76]

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There's no other reason, all things being equal on the raw material side, as we've discussed before. It should be great.

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Walter Noel Spracklin, RBC Capital Markets, Research Division - MD & Analyst [77]

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Okay. And then finally, on CapEx, you mentioned -- you talked a lot about product bundling, and I think you hinted there would be a good thing to spend on. You've been guiding us for CapEx to come down. It has -- to $50 million there in the midpoint for this year. Is this new reflection you're providing that might directionally mean that CapEx on a mid-range would go up for next year? Or was this just kind of saying here is something we're looking at as part of our $50 million envelope for next year?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [78]

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Yes, I would not expect that CapEx number to go up.

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Operator [79]

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Your next question comes from the line of Zachary Evershed of National Bank Financial.

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Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [80]

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Just 1 quick follow-up. You mentioned the new product innovation and the strengthening of the product bundle. Is there anything in particular that you're looking to develop to fill a hole in the product line? And would it be possible to acquire that? Or would it be strictly internal development?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [81]

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Yes. Certainly, when we think of new product development, we certainly look at internal generation of those products and acquiring either a company that has it or intellectual property around that. As we sit here today, we don't have any news in that area, specifically around what products, but certainly, expect to on a go-forward basis.

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Operator [82]

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

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [83]

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Thank you for participating in today's call. We look forward to speaking with you again following the release of our fourth quarter 2019 results in March. Thank you. Have a nice day.

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Operator [84]

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Please note that a replay of this call can be accessed as of 1:00 p.m. Eastern Time today at (800) 585-8367 or (855) 859-2056. This concludes today's conference call. Thank you for participating. You may now disconnect.