Q3 2019 Earnings Call
Welcome to the Interstate polymers Group Q3 earnings conference call and webcast.
During the call.
All participants will be in listen only mode.
Afterwards, we will conduct a question and answer session.
In order to maximize the efficiency at this event. The question period will be open to financial professionals only.
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Your speakers for today are great deals CEO , Jeff Crystal CFO .
I would like to caution all participants said in response to your questions and in our prepared remarks today, we will be making forward looking statements, which reflects 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 it situation may change in the future.
You are there for 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.
And extensive list of these risks and uncertainties identified and the company's annual report on form 20-F for the year ended December 30, Onest 2018, and subsequent statements in factors contained in the company's filings with the Canadian Securities regulators and the U.S. Securities Exchange Commission.
During this call. We may also be referring to certain non-GAAP financial measures as defined under the FCC 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 Dot I tape Dot com and are included in its filings included the M D and E file today.
Please also note that variance ratio one percentage changes referred to during this call based on rounded numbers at all dollar amounts are in U.S. unless otherwise noted.
I would like to remind everyone that this conference is being recorded today November 11th 2019 at 10 o'clock Eastern time.
And now I will turn the call over to Greg you'll Mr. Yen. Please go ahead Sir.
Thank you and good morning, everyone welcome to IP G.'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 Ypg I'd like to thank all those with the gave the ultimate sacrifice as well as all our veterans that observe and continue to serve on this veterans day and Remembrance day.
During the call we will make reference to our earnings presentation that you can download from the Investor Relations section of our website.
It wasn't 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 a topline perspective, the growth was driven by our acquisitions as well as strong performance within water actually tapes and protective packaging due to increased demand.
We described the business as a GDP plus growth profile post the benefits of our recent acquisitions and capital investment.
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 with Jeff will address in a read through 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 a range.
Revenue in 2019 is now expected to be between 1 billion 150 milk million to 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 proactive we implemented a series of measures to position us as a world class low cost manufacturer that is competitive in the market independent of the macro economic environment.
First we spent the past two years plus investing in the business in the form of capital and processing.
During 2017, and 18, we invested more than $150 million total Capex building, three new greenfield facilities, and making new investments at existing plants.
Year to date 2019, our Capex is 39 million, which is in line with a range of 45 to 55 million, we expect for the full year.
In our view these levels are appropriate for ongoing maintenance and select strategic investment.
We also believe that we can maintain our asset base at 15 to 20 million in Capex for two to three year period on our existing footprint if required.
Second, but some of you heard at our Investor Day in June we've also invested in our Enertec 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 at waste improving performance and quality our company wide initiatives not top down one.
The improvements at the plant level as a result of both the Capex and our entertained performance system and most importantly, the commitment of our dedicated team members are clearly having an impact plant performance remained strong in Q3 and remain so into Q4.
Third last year, we restructured our capital stock with a broad 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 will require 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 Tate films protective packaging and woven products.
That's what we've accomplished so when we focused on today to drive value in the business.
We are at a stage based on our recent investments and acquisitions were execution is our primary focus.
In our case successful acquisition execution can be broken into two 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 offer offerings.
Our existing bundle led by water acted tape offers our customers a comprehensive suite of e-commerce fulfillment products from current ceiling tape to shrink film for shipped ship in your own container to protective packaging solutions. The ecommerce 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 ecommerce player in the market increases the standards as part of its moved to reduce waste improves sustainability and efficiently meet the can the consumers expectation for one and two day delivered.
Packaging has to offer value to the seller the fulfillment company answer the consumer whether it be corrugate with tape closure or film and protective solutions.
The product that arrives damage is a major headwind for the profitability of both the seller and the fulfillment.
We believe there are opportunities to expand within our leading ecommerce customers as they expand geographically serving their needs in new regions with water acted tape and other products within our bundle.
We also believe there are opportunities to provide our ecommerce customers with a more sustainable protective solutions that are curbside, recyclable, which eliminate waste and still allow products to arrive on damaged.
Ensuring our product bundle provides a broad offering that includes paper and plastic 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 bundled through both innovation and acquisition with World class low cost.
The 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 my Weve and strategic acquisitions like Paul year 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, there's going to encompass a range of activities, including the safety performance of the plant that I mentioned earlier, but this morning ill focus on just to 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 Camtek poll year, and my Weve on Camtek the cost synergies achieved since the acquisition are proceeding proceeding in line with our expectations.
On policy or 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're seeing tangible progress on that front.
On my Weve 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 Curt feeling tape facility has now completed the commissioning process. The team is working to optimize the run rate of the facility and build and order book based on the improved production rates in North America that we had we've achieved on the same product lines and the pace at which sales are ramping in Europe , we do not.
I 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're working through higher cost inventory sourced from third party suppliers. It isn't 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 materials in order to benefit from our Indian supply chain on a go forward basis.
The combination of our two original woven products plan, the my Weve acquisition and the Indian assets put us in a great position to improve the margin profile of our woven products business to the legacy IP GE standard.
This point I'd like to turn the call over to Jeff who will provide you additional insight into the financial results. Jeff. 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 dollar impact from the Paul the air and my Weve acquisitions.
As Greg mentioned earlier this increase was partially offset by the impact or a volume and mix, which was minus 1.6% or 4.5 million.
Price effect increased by <unk>, 0.2% or point 6 million and foreign exchange negatively impacted the topline by minus 0.2% or point 6 million.
The positive drivers within volume and mix in the quarter water activated tape and protective packaging.
The positive impact from these categories was offset by certainly industrial tapes and equipment products, which were lower.
While the combined effect of volume and mix with price was negative in the quarter is much less pronounced in what we're 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 have made strategic investments specifically water activated tapes and protective packaging.
We believe our investments in these product categories will will continue to deliver positive momentum.
Turning to page 12, gross margin was up 127 basis points to 21.8% and third quarter compared to the same period in 2018.
The improvement is primarily due to the increase in spread between selling prices and combine raw materials and freight costs, which was partially offset by the dilutive impact of the my Weve acquisition, which we acquired at a lower more margin profile than the IP 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 in gross profit to the policy or in my Weve acquisitions, and lastly, the favorable impact of operating lease payments totaling $1.8 million our capitalized in the third quarter 2019 in accordance with a new lease accounting guidance implemented on January Onest 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 non recurrence 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 and accounts receivable as the result of the timing of revenue invoice and the third quarter of 2019 as compared to the same period and in 2018.
The non the nonrecurrence of a discretionary pension contribution in the third quarter 18, and an increase in gross profit.
As a result as a reminder, our business normally has a natural seasonality as we build inventory in the first top of the year in advance of both the higher volume third and fourth quarter periods from a retail activity perspective, as well as our plan factory maintenance schedule, which occurred primarily at mid year.
In the fourth quarter that build unraveled 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 the 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 at 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 1.7 times.
The secured debt leverage ratio was 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 3.2 times down from 3.5 times in the sequential period.
As a reminder, during the quarter, we amended our credit facility to account for the associated impact of new lease accounting guidance.
The amendment increased the secured debt leverage ratio covenant threshold 20 basis points, the 3.7 times and decrease the interest coverage ratio covenant threshold 25 basis points to 2.75 times.
As Greg mentioned earlier, our highest priority for capital allocation at this stage as 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 Reg.
Thanks, Jeff in closing, we continue to execute on our vision to be a global leader and packaging and protective solutions. We've made significant investments in our asset base during the past two 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 reduced waste discipline 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 macro environment economic environment building, a world class low cost manufacturing base provide 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.
Ladies and gentlemen, we will now conducts the question and answer period for analysts.
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One moment please for the first question.
Your first question comes from the line of Michael Kim of Scotiabank.
Please proceed with your question.
Hi, good morning, guys.
Good morning.
I was wondering if you get a little bit more granular on.
M&A expense.
This quarter this year as well I mean, you've heard about $8.5 million last year us close to 8 million. This year, which you just out of your EBITDA anyway, 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.
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 six some significant reorganization activity within the policy air business to integrate these sales team. So a lot of that cost on the integration side was related to the severance related to the termination of certain people within.
In that organization as a result of not meeting 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 cost that you are seeing.
Within the M&A costs, even year to date would be primarily integration versus due diligence and other types of upfront costs.
So when you complete the integration of the recent deals like whats So fair run rate number.
Well I mean, basically it all depends right because it all depends on other deals are working on because once you complete the integration essentially that aggression integration portion would be essentially zero. Unlike us.
The majority of that expenses. This year is that so it all depends on our deal activity after that.
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 Paul year.
Certainly one I think of expenses like that on a go forward basis on the integration side. They are going to be diminimus with what we have right now in play I mean, because that's a big basically you had to sales forces out there calling on the same customers right. So 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 or bundled products approach to our customers.
Okay No. That's that's helpful.
And then maybe just changing outlines a question here you lowered the revenue guidance, but you raised the EBITDA guidance can you can you talk about what drove that dynamic, presumably you're seeing better margins and certain lines. The business just talked about a little bit. Please.
Yes, So let me and we feel we feel good it really good about where the businesses 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 two two and a half three years.
And.
The the manufacturing combination of the operational efficiency, the ability to kind of manage that that cost price spread as well.
Led to a favorable margin profile of where we are.
Okay and anything in the quarter as it relates to mix or price costs or.
Performance.
Particularly stood out in the quarter that we shouldn't be sort of looking forward to flow into subsequent quarters.
Well I mean, I think like what we've seen in the quarter I mean, certainly.
We lowered our guidance on the revenue side. So we saw some softness in a couple of categories being the industrial tapes, which we have talked about before.
In our equipment businesses, while there was some some softness as well as some order timing.
So we just basically expect.
Those trends.
Affect our full year and Thats, why we took down the guidance, but we're not expecting anything nothing new.
Sure, but anything particularly strong on the margin this quarter that maybe should repeat itself next quarter.
No not that we see right now okay perfect. Thanks, guys.
Thank you.
Your next question comes from the line of Stephen Macleod SBM all capital markets. Please.
Please proceed with your question.
Thank you good morning.
Morning.
I just wanted to just circle around a little bit on the organic revenue growth profile.
I Wonder if you just skip.
You could just give a little more color around.
Specific areas, where you're seeing some weakness.
Weakness has accelerated what you think it's potentially related to and then on the flip side, Similarly, where you're seeing strength on the organic growth side, obviously, the water activated tapes and protective packaging businesses, but whether you're seeing those growth rates accelerate or change at all from what you've seen previously.
Yes, so I mean.
The one is on the positive side, though certainly in the water activated tape.
Continues to perform.
Again, driven by E Commerce, certainly from a seasonal perspective.
You are getting into peak season here, you know back back end of Q3 into Q4.
Continue to seeing growth there driven by the ecommerce side of things and the mix of products, we have in that channel and certainly on the protective packaging side as well. We've we've actually ended off the quarter very strong they're going into Q4, you know a lot on the systems side, we've talked about the poly air business and the fact that there.
As a move from more than traditional kind of brick and mortar products like for example bubble.
Fall and things like that back in two systems, where your install having installed equipment that the customer and you're basically shipping.
She to or rolls of film, where they inflate on site like air Poles, and bubble and so forth overseas 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 and industrial tapes, certainly seeing a little softness there.
You know in some of the international market again back in the masking tape International it's certainly been a headwind for us for for some period now and some of those products I mean on the topline you see the impact but up from a bottom line perspective, those are not very profitable product, so and 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 tape.
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 had sold through a retail channel that was a large large item from a mix perspective that impacted us positively in 18, and 19 has been somewhat of a drag so it's been a tough comp.
Looking year over year that with less of an impact although still an impact in the quarter year to date that would be a pretty big driver as well on that we're seeing there and you know I mentioned earlier on the equipment side that we discussed in the call I mean, there there are some softness in that demand.
Through the back end of year, but that's a lot to do as well with some order timing and setting up a new installations. So I'm not sure that will that's something that might be short lived so.
So I would say also that the the trend over the past two quarters of stayed relatively the same.
And we don't see a big change.
Over the past few quarters, because a lot of this stuff we called out in Q2 as well.
Yes.
Okay.
So that's helpful.
And then just on polio you mentioned you mentioned, you're seeing some sort of beginning to see some more revenue synergies beginning recently highlighted it.
Those are those new relative took 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 player.
So.
Certainly certainly in the quarter, we saw some good growth as Jeff mentioned in the policy or business, mostly around our systems business as opposed to kind of the bricks and mortars business.
As Jeff referred to lot of that has to do with access as we've discussed before to our distribution base that policy or did not have access to and also more importantly into end users that we had a relationship with other products that were 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, Phil certainly we've seen that drives some 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 with the combination just to answer your questions combination of both access a distribution.
And also being able to leverage our prior relationship with end users as legacy entertained with the Paul year product line into those end user specifically.
Okay. Okay Thats, great and then just just finally, just wanted to come back to the M&A costs quarter for point.
So is it fair does is it fair to understand that.
Once all the acquisitions are fully integrated that should effectively run down to zero.
Yeah, I think 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 integration. So it would be de minimis.
Okay. That's great. Thank you.
Thank you.
Your next question comes from the line of Zachary first National Bank Financial. Please proceed with your question.
Good morning, everyone congrats on the quarter.
Thank you next morning.
Looking at the negative 1.6% of volume and mix.
App how much of that was.
Paul you and do you expect that to be recouped in Q4.
Yeah, we don't split that out anymore.
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 and for example, our acrylic carton feeling tape, which is selling at a very low sell price you can see a nice pop in volume and thats 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 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 within especially the retail side. So we think of e-commerce .
Product going in their water activated tape protective packaging some films and so forth.
So certainly still expecting to see good growth. There you know certainly offsetting any any weakness in these areas.
That's helpful. Thanks.
And in terms of the adjustments for manufacturing facility closures in restructuring do you see a lot of that remaining for the end of the year.
There'll be some I mean, you'll see some hit Q4 or not I wouldn't be a large amount, though and that is related to the closure of our Montreal facility. The camtek plant.
But most of that would be behind yet most of it's behind us.
And then looking forward would that also trend to a run rate of zero.
Absolutely.
And then last one for me in terms of the adjustment downwards on your revenue guidance. How are you feeling about or 1.5 billion revenue target at this point.
At this point and I mean, not different I mean, you know it 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 and that we're seeing in the areas that we've invested so I would say the same at this point.
Thank you very much I'll turn it over.
Thank you.
Your next question comes from the line of Scott from some of the ITC. Please proceed with your question.
Thank you and good morning.
One morning provides.
So on the organic growth and ecommerce across product lines, particularly in polyethylene.
And water activated please.
Well I think.
We can't disclose exactly where was that when we saw in the space we saw good growth.
Double digit growth in that segment on a quarter over quarter basis, we expect to continue see that kind of growth on a go forward I'm not going to separate between Paul year.
And legacy Interstate product, so when I say that I mean, holistically all the products into the into the channel.
Okay, great. So how does the company or how did the margins compare with the company average.
Yeah, I mean, not all those product lines is at or above.
Great. Thank not double its not dilutive hardware, it's not dilutive to our margin profile.
Okay. Thanks.
Thank you.
Your next question comes from the line of making Mcdougall of Cormark. Please proceed with your question.
Morning.
Good morning.
I was wondering if you could just elaborate a bit on what your plans are for the Indian curtain ceiling tapes facility.
I said that in the Indiana, I think something to the extent that you're looking at least.
Yes, essentially optimize the investment there.
The dynamics have changed if you just comment on that.
Great.
Yes, So let me basically when we look at that investment.
A big changes just the time factor that it will take us to ramp up.
So we're diligently working on on getting sales from specifically out of Europe due to some of the major product.
Productivity initiatives that Weve completed here in Virginia, we don't need that capacity.
In North America as we originally plan. We're also diligently working on new product innovation through that facility to try utilize those assets to make other products.
That theyre well serve to to accomplish so we're we're wrapping that effort up but again as I called out in the conference call nodes.
We expect that to be a slower ramp.
Okay.
And then just generally I think on the IR day presentation. There is.
No progress updates given around your various acquisition integration and other capital projects that you're even doing and Im wondering if we could get a bit of an update on power band in a little while since there's been a discussion on that line.
Areas where that.
Yeah, So really no change there I mean, you know like we discuss the power of on it several times is that.
We were 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 a little bit of easement on the raw materials side. So that's helped a little bit but then on the flip side of that you had some tariff related items of impact some of those product lines in India, which offset some of that so more of the same as what we would say.
Okay, and then just moving on to the woven.
Moving product line in the investments you've made there.
Sounds as though things are ramping nicely.
What is the the facility able to contribute much to your Q3 or do you think it's going to be and a more significant margin contributor.
The upcoming quarters.
Yeah, I know, it's going really really nicely. There. So yes. There was some contribution in Q3, but again, it's we're it's sort of being a hit by some of the higher costs raw material that we initially purchase from our third party supplier that still working its way through the system and we'll continue to but we do expect a more substantial impact in Q4 and even more so.
In Twoq into 2020, as we eat through all of that inventory.
Okay, and then last question.
On the organic growth piece you mentioned some.
Small pockets of softness in the market.
Wondering.
If your thoughts or that those are perhaps more.
Maybe trade related and because of uncertainty that some different.
Is this is maybe feeling due to the due to the conditions that we've had over the last year too.
Or if you think it's just something else entirely may be competitive in nature or otherwise.
Well look from what we see externally with other people in related fields, and we were 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 thats something that is trade related or not.
But certainly we're seeing it from an industry perspective.
And actually seeing a more dramatically from from some of the people in the same spaces. We are.
Yes.
Do you think it that may provide you with some consolidation opportunities and some of those product lines.
Yeah, I mean, not really hurt.
Yeah look I think I think in situation and Thats part of why we why we develop their capital structure. The way. We did is it's good on the often so side and the defensive side as well so certainly that could create opportunities on a go forward basis.
Okay, and just remind me and the seasonality in your working capital is that inventory related to Q4 other.
Accounts receivable.
Yeah, that's that's mostly inventory related certainly accounts receivable would play into that as well because typically December as a slower month. So you typically will collect more and bill last that month, but it's mainly mainly or inventory and then also some of the timing of your payables to because there is several payables that get paid in Q.
One so for example, like annual compensation commissions things like bad rebates.
So there's a bunch of money that goes out in Q1 related to that as well.
Okay. Thanks, very much guys.
Thank you.
Your next question comes from the line has been Jackie.
GMP Securities. Please proceed with your question.
Good morning, two quick questions from me the first one and I'm sorry, if this was repeated but you mentioned that somewhat the weakness.
On the volume side came from certain industrial tapes. So I was wondering if you can too with the expenditure can indicates where it where where that just coming from would look for the reasons behind it.
Yes, so in that area the biggest that area on industrial tapes was within our masking segment and within our masking segment Theres two major drivers there there is there's the.
International business that we've walked away from that drove some negative volume, but as Jeff said it wasn't high margin materials. So would actually probably had a positive impact on our margin profile and then we've basically in North America has seen a general slowdown in areas, where we sell performance masking tapes or even mid range masking tape and that could run the ROI.
Range of kind of transportation related.
Auto aftermarket related and certainly age mirrors, what we've seen from a from a macro environment in North America at this point.
Okay.
Okay. That's helpful. Thank you and the second question is on taxes.
You are mentioning cure that sure text or 25 to 35 no.
Oh eliminates certain certain Oh, I guess techs expenses that you can.
Sorry, I'm just trying to read here.
Did you can you do I assume that's that's operating losses, so you're not not able to do that but is that something in the short term or can we can we expect that a in 2020 and thereafter.
Yeah, I know in 2020, you're going to see more of the same between the 25% to 30% rate I mean, that's kind of where we think we're going to fall you know this year when you exclude that onetime tax assessment and into next year. So.
That should be a pretty normal normalized number.
So 25 to 30 sort of longer term is still fine okay perfect yeah.
Thank you. Thank you very much you.
Your next question comes from the line of Merrill Lynch down of Industrial Alliance Securities. Please proceed with your question.
Hi, good morning, guys.
So on the the bundling the products as you as you sell only tier distributors as you've made acquisitions is there any further synergies it further opportunities for more bundling and more penetration are you pretty much maxed out now.
No I would say that were in the early innings of that especially with the acquisition of polyester. So I would say that that's an early part of.
Opportunities.
And with that we use restructuring that you're doing that's part of that do you have any idea is this going to be a 12 24 months project to get fully integrated.
Well I mean, Luckily I think as we move into 2020, it will 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 thats a a thing that's measured over years not months.
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 but that's measured in years and years not months.
Okay. Good.
And on the acquisition pipeline companies that you're looking at any commentary about how the the valuations are competition from private equity is affecting.
Any of the conversations you're having.
Well I would say I would say just like we commented last quarter I would say, we're seeing the same same kind of dynamic were.
The expectations on the sell side in the actual transactions on the sell side are being done that elevated multiples.
Mostly being sold the 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 pop up and we can't Chase. These kind of acquisition. So I would say that the environment very similar to where it has been but I will 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.
You for our shareholders.
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 additional product line.
Production lines.
Can't comment on that but it would be a great thing to do.
[laughter].
Okay fair enough.
Yeah.
Thank you.
Your next question comes from the line of Walter Spracklin of RBC Capital markets. Please proceed with your question, yes, thanks very much good morning, everyone.
Hi.
My first question I guess is on organic growth and I know it reversed quite significant I think Europe , almost 3% growth in second quarter now cut it in the negative one and half percentish 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.
Or anything that you know is that just kind of a place holder, 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 towards 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.
Moving back to positive organic growth into 2020 .
To contextualize that question I mean, most of the industrials that we're covering now or are indicating a negative back half a challenged front half and then hold for a recovering in the back half, which is where I'm inclined to kind of what can you 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.
Yeah, I mean, I I would say any you know I think I think the Delaware you were in line in terms of like what you're saying for 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 that will be a good impact there.
Going into next year is tough to say I think were like we're saying, we're seeing some pockets of weakness a stock broad based in 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.
You know, we're monitoring of or we're monitoring it closely.
Okay fair enough.
Back to the M&A costs, obviously whenever those are excluded from your results. It it shines a little bit of a spotlight on them. So you mentioned that they are.
The restructuring costs are expected to go to zero or close you hurt I guess, you said not a larger melt.
So she with the material facility in the fourth quarter are you seeing the same for the.
The fourth quarter for M&A costs, as well or we are we expecting to see anything in the fourth quarter I mean.
Yeah.
Your prior acquisition was over a year ago now so just looking forward to that number that restructuring costs coming down to zero in the fourth quarter or should we should we revisit.
Well I'll, let Jeff comment on that on the zero number, but when you think of the slugs that went through in Q3, I mean, the biggest slug was that reorganization of our Salesforce right, which you know what the end of the day, that's not recurring right because you only do at once so that gets us through some of the major integration.
<unk> costs and expectations that we had with Apollo Your acquisition I mean, it's we're executing as we thought we would we thought we would do this integration.
During 2019.
Then having 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 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 those are two major things that will certainly not recur on a go forward basis, but at the end. The day, we had to getting done right, yeah, and I would add to that I mean in Q3, I would say that that number would be a heavy none.
So we definitely expect that to come down for Q4, given the reorganization and some other activities that happened in the quarter.
So you expect.
Some more M&A costs in the fourth quarter, just not up at the 3.9 million.
Yeah, there will still be psalm because again, we're still going through in certain integration activities. I mean, typically what you see as you can see this going into a little bit into next year, but I mean, the majority of it was this year with regards to the policy or so as we go into next year, then X X those items, you're merge and came in at 14.9% if we're not.
Going to have any significant contribution or any exclusions for those items. In 2020 is it fair to say that you are merging you 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 merger would compress in 2020.
No. There's no other reason all all things being equal on the raw materials side as we've discussed before.
Great Okay.
Okay, and then finally on Capex, you mentioned that you talked a lot about product bundling and I think you hinted there'd be a good thing to spend on.
We youve been guiding us for four four for Capex to come down it has to 50 million there in the midpoint for this year.
Is this new co is this new reflection, you're providing that might directionally mean that capex sort of 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.
Yeah, I would not expect that Capex number to go up.
Okay perfect. That's all my question. Thank you.
Thank you.
Your next question comes from the line of Zachary ever Shadow of National Bank Financial. Please proceed with your question.
Hi, guys. Just one one quick follow up you mentioned, the new product innovation in 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.
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.
Sit here today, we don't have any news in that area, specifically around what products, but but certainly expect to on a go forward basis.
Okay. Thank you.
Thank you.
[noise] mystery all there are no further questions at this time I will turn the call back to you. Please continue with your presentation or closing remark.
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