Intertape Polymer Group Inc.

Greg Yull – CEO Bernie Pitz – CFO

Sarah Hughes – Cormark Securities Elaine Lae – RBC Capital Markets Dan Khoshaba – KSA Capital Management

Thank you very much, operator, and good morning, everyone. Welcome to Intertape's 2013 First Quarter Results Conference Call.

Joining me is Bernie Pitz our CFO. After our comments, Bernie and I will be pleased to answer any questions you may have.

I'm very pleased to report adjusted EBITDA of $24 million and gross margin of 19.5% for the first quarter of 2013, our best performance in many years. Our focus of the past few years on margin improvement to manufacturing cost reduction and product mix changes have allowed us to significantly improve our gross margin.

This was achieved in the context of a more favorable pricing environment in the industry over the past two years, as well as successful efforts to enter pricing to our product value through our pricing optimization process. Revenue for the first quarter was $196.7 million, a 1.1% decrease from the first quarter of 2012.

Due to an unfavorable shift in the mix of products sold, partially offset by an increase in selling prices and a slight increase in sales volume. We've seen healthy growth in sales volume in two of our key businesses -- tape products sold through our industrial channel and woven products used in building and construction.

The combination of these two increases had a positive impact of approximately 4% on total Company sales volume. Largely offsetting this increase was a reduction in sales volume of our low-margin business across all product lines and channels.

Examples of the low-margin business that we trimmed include woven polypropylene bags used to cover cotton bales and tape sold through discount retail chains. As we indicated during our last conference call, we made significant process in trimming low-margin business in the second half of 2012.

At this point, most of that is behind us. But the success of those efforts will continue to impact our year-over-year volume comparisons in the second quarter and to a lesser extent in the third quarter.

Going forward, we will continue to focus our attention to increasing our sales volume of higher-margin products. In regards to our new product initiatives, revenue from the sale of new products for the quarter was more than 16% of total revenue, compared to more than 12% in the first quarter of 2012, and 15% for all of 2012.

As we discussed on our last call, the first quarter included a charge related to the announced relocation and modernization of our Columbia South Carolina operations. We plan to close on the purchase of the new facility in nearby Blythewood in June.

The new facility and the required improvements will represent total investments of $14.5 million to $16 million. This is about $2 million higher than our original estimate due to some additional improvements we plan to make to the building.

I want to provide a quick update on the initiatives we announced in June 2012 concerning four of our facilities. Reduction ceased in Richmond, Kentucky in the fourth quarter of 2012, any the business was transferred to other existing facilities, primarily Carbondale, Illinois, and production of shrink film in tour Nova Scotia ceased in the first quarter of 2013 and the business was transferred to our facility in Tremont in Utah.

Due to these initiatives, we expect a positive contribution to adjusted EBITDA of $5 million in 2013, and approximately $6 million in the following years. Finally, regarding our debt structure, we announced this morning the planned redemption of another $20 million in notes.

This will further reduce our average cost of debt and we expect to redeem the remaining $18.7 million in the second half of 2013. At this point, I will turn the call over to Bernie for a detailed look at the financials.

Thank you, Greg. First quarter revenue decreased 1.1% to $196.7 million, compared to $198.9 million in 2012, and increased 3.9%, sequentially, from $189.3 million in the fourth quarter of 2012.

Revenue was lower in the first quarter of 2013, compared to the first quarter of 2012, due to a decrease in average selling prices partially offset by a slight increase in sales volume. The decrease of approximately 1% in average selling prices was primarily due to a shift in the mix of products sold partially offset by an increase in selling prices.

Revenue was higher in the first quarter of 2013, compared to the fourth quarter of 2012, primarily due to an increase of approximately 3% in average selling prices, as well as an increase of approximately 1% in sales volume. The increase in average selling prices was mainly due to a shift in the products sold and to a lesser extent higher selling prices.

Gross profit totaled $38.3 million in the first quarter of 2013, an increase of 18.2% from $32.4 million a year ago and an increase of 8.7% from $35.2 million in the fourth quarter of 2012. First quarter gross margin was 19.5, compared to 16.3% for the prior year, and 18.6% for the fourth quarter of 2012.

As compared to the first quarter of 2012, gross profit and gross margin for the first quarter of 2013 increased primarily due to an improvement in the spread between selling prices and raw materials cost, as well as the impact of manufacturing cost reductions. On a sequential basis, gross profit increased due to manufacturing cost reduction and improved product mix.

SG&A expenses totaled $23 million for the first quarter of 2013 and $18.4 million for the first quarter of 2012, and $20.8 million for the fourth quarter of 2012. As a percentage of revenue, SG&A expenses were 11.7%, 9.2%, an 11% for the first quarter of 2013, the first quarter of 2012, and the fourth quarter of 2012 respectively.

SG&A expenses were $4.6 million higher in the first quarter of 2013 compared to 2012, primarily due to a $1.7 million increase in stock -based compensation related to the impact of an increase in the Company share price on the expense related to stock appreciation rights. A provision with respect to the resolution of a contingent liability and higher variable compensation expense related to higher adjusted EBITDA.

On a sequential basis, SG&A expenses increased $2.1 million primarily due to a provision with respect to a resolution of contingent liability and a $900,000 increase in stock-based compensation expense related to stock appreciation rights. Adjusted EBITDA was $24 million for the first quarter of 2013, $20.2 million for the first quarter of 2012, and $21.4 million for the fourth quarter of 2012.

The $3.7 million adjusted EBITDA increase, compared to the first quarter of 2012 and the $2.6 million increase, sequentially, are primarily due to higher gross profit. Interest expense for the first quarter of -- 2013 totaled $1.8 million, a 47.7% decrease from $3.4 million for the first quarter of 2012.

The decrease is primarily due to lower average amount of debt outstanding, lower average cost of debt due to the redemption of $80 million of senior subordinated notes in 2012 and new lower cost financing obtained from in equipment finance agreement and a real estate loan. On a sequential basis, interest expense decreased over 44% from $3.1 million primarily due to lower average cost of debt resulting from the redemption of $55 million of senior subordinated notes in December, 2012.

The effective tax rate for the first quarter of 2013 was approximately negative 2.9%, compared to approximately 5.3% last year and 8.1% for the fourth quarter of 2012. The decrease in effective tax rate over the first quarter of 2012 is primarily due to tax expense recorded on losses before income taxes in the first quarter of 2013 for stock options exercised and state income taxes combined with the benefit received from the ability to utilize certain US alternative minimum tax net operating losses without limitation.

The decrease in effective tax rate on a sequential basis from the fourth quarter of 2012 is primarily due to tax expense recorded on losses before income taxes in the first quarter of 2013 for stock options exercised and state income taxes. For the full year 2013, the effective accounting tax rate may vary significantly from historical rates, due to the accounting for tax assets in conjunction with the impact of restructuring charges and other adjustments.

Cash taxes in the first quarter of 2013 were net refund of $500,000, primarily due to refund AMT taxes commensurate with our application approval to use certain US AMT net operating losses without limitation. Cash taxes for all of 2013 are expected to be less than $2 million.

Adjusted net earnings were $15 million for the first quarter 2013, $8.4 million for the first quarter of 2012, and $10 million for the fourth quarter of 2012. Adjusted net earnings were higher compared to both periods primarily due to higher gross profit and lower interest cost.

Adjusted fully diluted earnings per share was $0.24 per share in the first quarter of 2013, $0.14 per share in the first quarter of 2012, and $0.16 per share in the fourth quarter of 2012. Manufacturing facility closure costs for the first quarter 2013 were $27.2 million, primarily due to the announced relocation and modernization of the Columbia, South Carolina operations.

Of the $26 million charge related to South Carolina, $23.5 million relates primarily to non-cash impairment of property plant equipment, with remaining cash charge of $2.5 million related to environmental remediation to occur upon closure of the existing manufacturing site, which is expected in 2015. Related to the Columbia initiative, we expect to record a charge of approximately $1 million to $2 million in the remainder of 2013 and $5 million to $7 million after 2013.

Total charges expected to be recorded over the life of this product are on track to be between $32 million to $35 million. Moving on to the balance sheet, within the first quarter of 2013 total debt decreased by $1.5 million to $149.8 million, primarily due to decreases in ABL borrowings.

On a year-over-year basis, the average cost of debt decreased to about 4% at March 31, 2013 from about 6% at March 31, 2012. In June, 2013 we expect to regain $20 million of the senior subordinated notes and the remaining balance during the second half of 2013.

We expect to fund these efforts with free cash flows combined with funds available under our ABL facility. The availability under the ABL will be higher than it would have been, as result of the real estate loan obtained last year on existing properties, capital expenditures funded under the equivalent finance agreement and a loan; we plan on obtaining for the new Blythewood property.

The Company had cash and loan availability under its ABL facility totaling $69.7 million at March 31, 2013, an excess of $61 million as of May 14, 2013. Days inventory for the first quarter was 53 days, which is an increase of two days from the first quarter of 2012.

And a decrease of one day from the fourth quarter 2012. The Company expects days inventory to remain in the mid-50s during the second quarter of 2013.

Inventories decreased $2.2 million to $94.1 million, as of March 31, 2013 from $91.9 million as of December 31, 2012. DSOs decreased by three days to 40 in the first quarter of 2013, compared to last year, an increase by three days, compared to the fourth quarter of 2012.

DSOs are expected to be in the mid-40s in the second quarter of 2013. Trade receivables increased $11.8 million to $87.6 million as of March 31, 2013 from $75.9 million as of December 31, 2012.

Moving onto cash flows. The Company generated cash flows from operating activities before changes in working capital items for the first quarter of 2013 of $19.1 million, compared to $20.1 million last year and $19.4 million in the fourth quarter of 2012.

The decrease in cash flows, compared to both periods was primarily due to an increase in cash cost associated with manufacturing facility closures restructuring and other related charges partially offset by higher gross margin. Greg will now provide the outlook.

Greg?

Thank you, Bernie. Going forward, we will continue to execute on our strategic initiatives -- modernizing and relocating our manufacturing operations in Carolina, selling higher-margin products, reducing variable manufacturing cost, introducing and expanding the market penetration of our new products and further optimization -- optimizing our capital structure.

For the quarter, manufacturing cost reduction totaled approximately $3 million. For 2013, we continue to expect manufacturing cost reductions to total between $16 million to $20 million, which include approximately $5 million of expected savings related to the closure of Richmond and the consolidation of shrink from Truro to Tremonton.

Revenue for the second quarter of 2013 is expected to be slightly lower in the second quarter of 2012, which reflects our progress in reducing sales of low-margin products, particularly in the second half of 2012. We expect the growth of our main tape sales volumes through the industrial channel to largely offset the decrease in a sales volume of low-margin business across all product lines and channels.

Assuming stable or improving macroeconomic conditions, quarterly gross margin for the second quarter of 2013 is anticipated to be slightly higher than the first quarter of 2013 and remain near the upper end of the 18% to 20% expected range for the year. We expect adjusted EBITDA for the second quarter of 2013 to be slightly higher than the first quarter of 2013.

On the CapEx front, the range for 2013 has increased when compared to numbers we provided with the year-end results. The CapEx range is increasing from $33 million to $39 million to between $48 million to $54 million.

The increase in the CapEx range is primarily due to the planned purchase of our new facility in Blythewood, South Carolina and related facility improvements. For the second quarter of 2013, CapEx is expected to be in the $19 million to $22 million range.

Finally the CapEx range for 2014 also increased from $17 million to $21 million that we discussed at year-end to $21 million to $26 million, due to our decision to reschedule some of the South Carolina CapEx. The rescheduling of CapEx is not expected to impact the timeline for the South Carolina project.

In addition to what I've just discussed, we have all the details of our former outlook in the MD&A and press release issued and filed this morning. Bernie and I would be pleased now to answer any questions you may have.

Hi, guys.

Good morning.

Greg, just on the ongoing pruning of the lower margin products.

Yes?

I'm just thinking back -- I think last year -- I don't remember what quarter you indicated that a lot of that was behind you and, therefore, we wouldn't see tougher comps going forward. Are you seeing more opportunity to do that?

Or...

I think to start with it -- I think things change as we move along. So, when we take a look at kind of input cost that we're dealing with in Q4 and Q1, I think if you can't get pricing, they may become business that you cannot sustain going forward.

And I think as we evolve as a company, I think also our expectations and our definition of low-margin changes to a degree of welfare.

Okay, okay. So, we'll see that evolve as we go forward?

Yes.

Okay. And then, I read in your statements in terms of closing of the Mexican facility, I think you closed in Q4 or Q1, what -- should we see any cost savings from that?

Or what's the impact from that?

Hi, Sarah. This is Bernie.

Hi.

It's relatively minor. It was a business that we see a small amount of savings but not significant.

Okay. And then the $5 million in savings you're expecting from the closure of Kentucky last year, how much of that would have been realized in Q1?

That's approximately $1 million.

So, you saw $1 million in Q1 all ready?

Yes.

Okay. And lastly, Greg, you have your -- you had your target gross margin target 18% to 20% for a while now and we're getting close to the top end of that of the last few quarters.

I guess what would cause you to look at that and tend to increase that going forward? Is there any -- is it -- do we have to wait to see Columbia go forward?

Or kind of what's your thought on that?

Well, I think based on the outlook, we're looking at a slight improvement right now on Q2 with gross margins so depending on the Q2 results, or Q3 we might move and hopefully we are in that situation where we move that range. I mean, obviously, it's our hope we do that before Columbia is closed and the new facility is open.

That's our hope but our guidance right now is we're going to stay in the upper end of that range for this year and the next opportunity for us to revisit that at the end of Q2.

That's great. That's it for me.

Thank you.

Thank you.

Thank you. Good morning.

Good morning, Elaine.

My first question was on the SG&A. And I realized now some of that obviously the SBC and also this provision, $1.3 million, if we could just get more details on this contingent liability.

Yes, the terms of that -- the resolution of that contingent liability are confidential, so we really can't go into any detail on that, Elaine, other than that amount was booked in the first quarter.

Okay. But this is -- I mean you anticipate any further provisions for this related matter?

Not for that matter. No.

It's a closed matter.

Okay. So, it's really nonrecurring.

Correct.

Would you say -- for the SG&A for the year, if we can get guidance on that, just what you see the trend is for the year going forward?

You know we don't provide forward-looking estimates on SG&A, but if you take out some of the items that are unusual over the past four quarters, you can kind of see a fairly stable trend.

Okay. And Q1 obviously is always lower.

They're lower in free cash flow. Where do you expect free cash flow to track for the year as well, if you expect it to be positive for 2013 given, obviously, some significant CapEx?

Yes, so in the first quarter we typically make the payments related to items that were accrued in the prior year. And I would expect to see that the cash flows from operations would track fairly close to the changes in adjusted EBITDA, with the one exception being the cash outflows related to manufacturing projects that we've disclosed.

Okay.

And then, in terms of free cash flows after CapEx, again, we have provided some estimates there on what the CapEx would be.

Okay. And the other thing I wanted to talk about too is just you, obviously, have room to draw on the line on the ABL and, obviously, shift some of the debt to lower interest rates.

I guess the question looking at is on the ABL, I realize you do have -- do you have state to dip under the $25 million of availability threshold, where the fixed charge ratio might kick in sometime in 2013?

No, we have no plans to dip below there.

Okay. So, that's -- so, you will be rearranging such that the ABL will be above the $25 million?

That's our plan.

Okay, great. And on the resin prices, I think I probably ask this every quarter, what you're seeing into Q2 and just that spread that you've talked about, obviously, with the margin guidance higher in Q2, can you anticipate that's more from the spread improvement in spread or more from the cost -- on the cost side?

I think I will give you a little look from a cost perspective. You know when we look at Q2 right now, overall, we foresee a fairly flat on average cost base, compared to Q1.

We have seen a big drop in poly propylene. We saw polyethylene increase a little bit; paper or pulp moving a little bit, and we have seen some other input cost drop a bit.

I think the combination on the margin side is, year-over-year, an increase in the spread between raw materials and sell price and also just a lower manufacturing cost base as well, Elaine.

Okay. So, the -- both of them moving in favor?

Yes.

Okay, great. That is it for me for now.

Thank you.

Thank you, Elaine.

Hey, good morning, Dan.

Nice quarter.

Thank you.

How much of your increased SG&A in the quarter is going to -- is not be there for the second quarter? This kind of one-time in nature maybe related to the stock comp station program?

Well, the increase in the stock comps is directly related to the price of the shares, so whichever way the share price go will influence the expense related to the stock appreciation rights, so that's more of a market issue. The contingent liability is not going to be in there and that was $1.3 million.

Okay.

And then, the higher variable compensation expense we began that accrual a little bit earlier this year. So compared to Q1, I would expect to see that as fairly stable.

Right, right.

And it would be a bit lower than Q2 of last year.

Okay. Now that stock compensation expense is that a non-cash expense?

Well those are -- it relates to the stock appreciation rights.

Yes.

So, at sometime in the future, those will be settled in cash.

That's right. But for the period -- it's typically not for the period correct?

That's correct. The expenses separate from the cash outflow.

Okay. And then, just one question.

You're moving around some production and you mentioned in the press release or on the call about moving some -- production around. Is -- as a result of these changes, is your production of film largely now in one location?

Our production of shrink film...

Yes.

In North America is in one location now. We have a shrink film operation in Portugal as well.

That is a standalone shrink facility. So, in North America, we've gone from two shrink film plans to one shrink film plant.

Okay, okay. And in that plant, where you're producing all of your shrink film, you're producing other as well?

It's roughly how much of your production in that plant is shrink film versus other non-related products?

Yes. So, the only other product that we produced in that facility, Dan, is stretch film.

Okay.

This is the Tremont in Utah facility. Predominately it is a shrink film facility though.

So...

Okay. So, that plant is really a extrusion operation centered on shrink and stretch?

Right. So, our goal there specifically around films, a little more specifically around shrink film, is to have a center of excellence there for shrink film.

Yes. That's a good idea.

But that's relatively new, right, because a few years ago you had shrink and stretch in some different locations and kind of spread out a little bit.

Correct.

Okay. Well, good.

That's all I have. Great job, guys, on the quarter.

Thanks, Dan.

Thank you, operator. If there are no further questions, thank you for participating in today's call.

Please note we'll be hosting our annual shareholders meeting in Toronto on June 5th at 10 a.m. at the St.

Andrews club. We look forward to seeing some of you there.

Thank you.