Intertape Polymer Group Inc.

Greg Yull - Chief Executive Officer Bernie Pitz - Chief Financial Officer

Sarah Hughes - Cormark Securities Tal Woolley - RBC Capital Markets

Thank you very much operator and good morning everyone. Welcome to Intertape’s 2013, second quarter results conference call.

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

I’m very pleased to report adjusted EBITDA of $28.3 million and gross margin of 21.8% for the second quarter of 2013, which exceeded our expectations for the quarter and surpassed the goal of 18% to 20% that we had communicated as our mid-term goal. I will come back to that later.

The improvement in gross margin reflects our continued efforts to reduce manufacturing costs and to improve our product mix, by both increasing sales of higher margin products and reducing sales of lower margin products. We continue to benefit from a more favorable pricing environment in the industry, resulting in an improvement in the spread between selling prices and raw material costs compared to last year.

The spread remains stable from the first to the second quarter of 2013. Second quarter revenue decreased 2.2% to $193.5 million, compared to a $197.8 million in 2012, and decreased 1.6% sequentially from $196.7 million for the first quarter of 2013.

Revenue was lower in the second quarter of 2013 compared to the second quarter of 2012, due to a decrease of approximately 4% in sales volume, partial offset by an increase of approximately 2% in average selling prices. The decrease in sales volume was primary due to a progress the company made in reducing sales of low-margin products in the second half of 2012.

One example of the low margin business that we trend is tool printing for woven fabrics. Another example is tape sold through discount retail chains.

The increase in average selling prices was primary due to higher selling prices and a shift in the mix of products solid. Revenue was lower sequentially, primarily due to a decrease of approximately 5% in sales volume, partially offset by an increase of approximately 4% in average selling prices.

We believe that a portion of the decrease in sales volume was primarily due to customers pre-buying during the first quarter of 2013, in advance of price increases effective late in the first quarter of 2013. The increase in selling prices, including the impact of product mix, was due both to higher selling prices of equivalent units, as well as a shift in the mix of products sold to higher price items.

During the first half of 2013 we launched 12 new products, one of which includes the expansion of our core grip product line, designed for optimal closure of highly recycled corrugate boxes, including a 100% recycle boxes. This is a higher margin product line that we’re excited about its growth potential.

Going forward we will continue to focus on increasing sales of new products. Revenue from the sale of new products represented more than 18% of total revenue for the quarter.

This compares to more than 16% in the first quarter of 2013 and more than 15% for all 2012. We still expect to introduce a similar number of new products in 2013 as compared to last year.

Manufacturing cost reductions total approximately $3 million for the quarter and $7 million year-to-date. The teams at each of our manufacturing facilities have a number of cost reduction projects that they have developed and are implementing.

One example of a cost reduction project that was completed in the second quarter was the instillation of robotics in the converting department of one of our tape manufacturing facilities. This equipment has allowed us to improve both, quality and productivity.

Our increased profitability has allowed us to decrease our total debt by $31.2 million from a year ago, and to improve the debt to trailing 12 months adjusted EBITDA ratio from 2.5 to 1.6. In June we redeemed 20 million of our senior subordinated notes and we are going to redeem the remaining 18.7 million of notes in August.

Over the last 12 months we have redeemed the total of $100 million of notes. These redemptions have lowered our average coast of debt by approximately 50% from about 6% as of June 2012 to about 3% as of June 2013.

As of June 2013, over 80% of debt is floating, primarily based on 30 days LIBOR rates. Finally, in light of the company’s continued financial improvements and positive outlook, we increase the frequency of the dividend payment from semi-annual to quarterly.

The dividend declaration of $0.08 per share, effectively doubles the previous annualized amount. At this point I will turn the call over to Bernie for a detailed look at the financials.

Thank you Greg. Gross profit totaled $42.3 million in the second quarter of 2013, an increase of 17% from $36.1 million a year ago and an increase of 10.3% from $38.3 million in the first quarter of 2013.

Second quarter gross margin was 21.8%, compared to 18.3% for the prior year, and 19.5% for the first quarter of 2013. As compared to the second quarter of 2012, gross profit and gross margin for the second quarter of 2013 increased primarily due to the impact of manufacturing cost reductions and improvement in the spread between selling prices and raw material costs and improved product mix.

On a sequential basis, gross profit increased due to cost reductions within manufacturing overhead. SG&A expenses totaled $20.2 million for the second quarter of 2013, $20.7 million for the second quarter of 2012, and $23 million for the first quarter of 2013.

As a percentage of revenue, SG&A expenses were 10.4% for the second quarter of 2013, 10.4% for the second quarter of 2012 and 11.7% for the first quarter of 2013. SG&A expenses were $400,000 lower in the second quarter of 2013 compared to 2012, primarily due to the timing of certain variable compensation expense.

This decrease was partially offset by an increase in stock appreciation rights, the expense related to the impact of an increase in the company share price. On a sequential basis, SG&A expenses decreased $2.8 million, primarily due to the non-recurrence of provision, with respect to the resolution of a contingent liability recorded in the first quarter of 2013, and a decrease in stock based compensation expense, related to stock appreciation rights.

Adjusted EBITDA was $28.3 million for the second quarter of 2013, $21.7 million for the second quarter of 2012 and $24 million for the first quarter of 2013. The $6.6 million adjusted EBITDA increase compared to the second quarter of 2012 and the $4.3 million increase sequentially, are primarily due to higher gross margin.

Interest expense for the second quarter of 2013 totaled $1.8 million, a 45.5% decrease from $3.4 million for the second quarter of 2012. The decrease is primarily due to a lower average amount of debt outstanding and lower average cost of debt, which was driven by the redemption of $80 million of notes in the second quarter of 2012 and lower cost financing obtained from equipment finance agreement in a real estate loan.

On a sequential basis, interest expense increased $100,000, primarily due to the write off of debt issuance cost, in connection with the redemption of $20 million of notes in Jan 2013. The effective tax rate for the first six months of 2013 was 136.4% compared to approximately negative 1.7% for the same period last year.

The increase in effective tax rate is primarily due to income tax expense recorded for stock options exercised and an increase in 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 paid net of refunds received during the first six months of 2013 totaled $70,000. The payments made were primarily related to estimated state taxes and were largely offset by refunds with the AMT taxes received, commensurate with our application and approval to use certain U.S.

AMT net operating losses without limitation. Cash taxes for all of 2013 are expected to be less than $2 million.

Adjusted net earnings were $18.3 million for the second quarter of 2013, $9.4 million for the second quarter of 2012, and $15 million for the first quarter of 2013. Adjusted net earnings were higher compared to both periods, primarily due to higher gross profit.

Adjusted fully diluted earnings per share was $0.30 per share in the second quarter of 2013, $0.15 per share in the second quarter of 2012, and $0.24 per share in the first quarter of 2013. Manufacturing facility closure costs for the second quarter of 2013 were $900,000, primarily due to equipment relocation related to the initiatives announced in the second quarter of 2012 and approved work force retention cost related to the South Carolina project.

We expect to report charges for the South Carolina project 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 project are on track to be between $32 million and $35 million.

Moving on to the balance sheet and cash flows, days inventory for the second quarter was 58 days, an increase of four days from the second quarter of 2012 and an increase of five days from the first quarter of 2013. The increase was primarily due to the uncertainty in the economy and our decision to mitigate the risk of not being able to satisfy a sudden upturn in demand.

The company expects days inventory to remain in the upper 50’s during the third quarter of 2013. Inventories increased $8.2 million to $100.1 million as of June 30, 2013 from $91.9 million as of December 31, 2012.

DSOs decreased by two days to 40 in the second quarter of 2013 compared to last year and remained approximately the same as compared to the first quarter of 2013. DSOs are expected to remain in the low-40s during the third quarter of 2013.

Trade receivables increased $9.3 million to $85.1 million as of June 30, 2013 from $75.9 million as of December 31, 2012. Cash flows from operating activities before changes in working capital items were very strong for the second quarter of 2013 coming in at $25.8 million, compared to $18 million last year and $19.1 million in the first quarter of 2013.

The increase in cash flows compared to both periods was primarily due to higher gross margin and the increase in working capital consumed was $6.6 million. As expected, total debt increased during this quarter, primarily due to an increase in CapEx and the payment of a dividend.

The increase was $7.5 million during the quarter and brought total debt to $157.3 million as of June 30. CapEx during the quarter was $18.2 million, including $11.3 million for the purchase of real estate related to the South Carolina project.

The company had cash and loan availability under its ABL facility totaling $51.6 million at June 30, 2013, an excess of $59 million as of August 13, 2013. Greg will now provide the outlook.

Greg.

Thank you Bernie. Going forward we will continue to execute on our strategic priorities, which include modernizing and relocating our manufacturing operations to South Carolina, growing sales volume of higher-margin products, reducing variable manufacturing cost and introducing new products.

For 2013 manufacturing cost reductions are expect to total approximately $15 million to $16 million. This range includes approximately $3 million to $4 million related to the transfer to production from Richmond, Kentucky to Carbondale, Illinois and a consolidation of shrink production to Tremont in Utah.

The $1 million to $2 million decrease in the current year projected savings related to these transfers is due to challenges encountered in the relocation of the major equipment. However, we are still expecting a full year savings of $6 million starting in 2014.

We made good progress on our South Carolina projects during the quarter, the June purchase of the real estate in Blythewood marked a major project milestone. The next major milestone for this project is the modification of the building to adapt it to the manufacturing of tape and we expect it will be completed by the end of this year.

We will continue to provide updates on this project each quarter. On to our financial outlook, revenue for the third quarter of 2013 was expected to be slightly higher than the second quarter of 2013.

The sequential increase is expected to include the growth in sales volume with above average growth in products sold through the industrial channel. We are raising our growth margin goal from the previous 18% to 29% range to 20% to 22% for the third and fourth quarter of 2013, assuming stable or improving macro economic conditions.

However when compared with the second quarter of 2013, we anticipate that the third quarter results will include higher manufacturing overheard, primarily related to the planned annual manufacturing maintenance. Following the release of third quarter results, we will provide an update on our long-term gross margin target.

Adjusted EBITDA for the third quarter of 2013 is expected to be slightly lower than the second quarter of 2013. On the CapEx front, the total range for 2013 remains between $48 million and $54 million.

For the third quarter of 2013, CapEx is expected to be in the $12 million to $15 million range. Finally, the CapEx range in 2014 is expected to be between $21 million and $25 million.

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

Operator.

Okay.

Good morning.

Good morning. So on the gross margin improvement that we saw, I guess sequentially, can you talk a little bit about where the biggest surprise came for you in terms of, be it the jump up cost.

Sure. We had a couple of things in manufacturing overhead that came in a bit more favorable than we expected and we expect manufacturing overheard sequentially to go up a little bit from Q2 to Q3.

Okay, and then on the new product introduction, I think when we talked about this last call or may be a call before that, you had indicated this year you may not see as many new product introduction as previous as you were focusing on increasing the traction of the products that you introduced over the past few years. But has that changed, because just based on your comments today, are you looking to now introduce more products than initially expected?

I think where we are right now, is we’re lining up to be equivalent on the launch side to prior year and part of that is some line extension that we spoke to. For example, that Corru-Grip carton sealing tape item that we discussed.

That was not in our plans, but we broadened that product offering, so you’re seeing some product line expansion that are increasing that number up Sarah.

Okay, and then on the new product, you’ve always talked about how it takes time to gain traction and get right through the customer base in terms of when your tracing new products. I’m just wondering, the new products that you’ve introduced over the last five years, like where are you in terms of getting those products and pushing them through into your customer base, in terms of (inaudible) or in this inning or I’m just trying to get a sense of how sales would be.

Well, I still fell like we’re early in the game there. I think as everyone knows with new product introductions there is failures with successes and I think we are still early in that.

I mean one thing that with our new products and we’ve said this before, is that not necessarily all new products are higher margin. Some of them are defensive in nature or evolve through a product line cycle, but I would say that in the guides of long term, we are early in that process.

And then on the low margin, getting rid of the low margin stuff, so when did you do most of that in the second half of last year; was it in Q3 or Q4? I’m just trying to get a sense of when we’ll see that bigger year-over-year…

There is a large percent that came down in Q3 and then some further successes we had in Q4.

Okay, and did you do anything in addition in the first half of 2013, like other product lines or was it put on the way just as what you did in the back half of 2012.

It is pretty small compared to what we did in the third and fourth quarter of 2012.

Okay. That’s it from me.

Thank you.

Thank you.

Thank you.

Hi, good morning.

Good morning.

Just wondering if you could speak to pricing environment right now. You having said, I presume some pricing, you said there was some pre-buying.

Any pushback from customers in terms of demand right now or is…?

Well, per say from an industry perspective, not necessary a passing on in price increases right now. So we don’t have industry wide price increases that we’re putting in to place right now.

Our raw material supply is fairly stable at it relates to cost right now. I think the market as a whole, I know we have become much more disciplined in the way we price our product and we find that that pricing environment has been relatively stable for the last, probably four or five quarters.

Okay, and you had mentioned in your MD&A that you are planning to carry a little bit more inventory incase demand ticks up. Is that based on the feedback you’re getting from your distributors.

When we started in Q2, I think the context of that inventory build was driven by the fact that in Q2 we were projecting in the beginning itself to be a little higher on the revenue side and I think we build according, and certainly we did not want to be caught short coming into Q3, where we have a fair amount of plant annual shutdowns. So I think that’s what drove the inventory build, and I think as we move forward, I think you’ll see that inventory number and your guidance on days and inventory would be about the same range.

Correct Greg?

Yes.

And in terms of what your distributors are telling you about demand right now that’s out there. I think people are thinking with your housing recovering its more upbeat.

Is that the sense you’re getting from your customers right now or is it still business as usual kind of thing.

We hear quite a bit of feedback from our customers that it’s a lot of the same. Its flat and it’s the same.

You are not seeing any missing pockets of growth in specific industries, but for the most part on a macro basis it’s a lot of the same, a lot of flap.

Okay, and then just as a step-up in CapEx this year, how should we be thinking about the movement in depreciation expense going forward? Bernie maybe you want to answer that?

Sure. A lot of those items that we are purchasing this year and in to the early parts of next year are going to be for assets that aren’t placed into service into 2015, when the South Carolina project is done.

So generally speaking, not a large increase in depreciation until after that project comes online.

Okay, and you had flagged Bill 348 (ph) in the MD&A as well as, just in terms of tax issues. Can you just outline sort of what the potential risks or opportunities are there with that Bill.

No. We are going through an extensive analysis of inter company balances and so forth.

At this time it’s very difficult to tell, but we don’t expect anything that’s material to come of it. But there’s still a lot of work to be done.

Okay, that’s great. Thanks very much gentlemen.

Thank you.

Thank you.

Thank you Tina. As there are no further questions, I want to thank you for participating in today’s call and look forward to our next call after Q3.

Thank you.