Intertape Polymer Group Inc.

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

Sarah Hughes – Cormark Securities Tal Woolley – RBC Capital Markets Justin Wu – GMP Securities

Thank you very much, Operator, and good morning everyone. Welcome to Intertape’s 2013 third 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 $26.8 million and gross margin of 20% for the third quarter of 2013, which is in line with our goal of 20 to 22% for the second half of 2013. The improvement in gross margin year-over-year reflects our continued efforts to reduce manufacturing costs and increase the spread between raw material costs and selling prices.

When compared to the 21.8% gross margin reported in the second quarter of 2013, the decrease was primarily due to an increase in overhead related to planned annual maintenance. In the first three quarters of 2013, the spread between raw material costs and selling prices remained relatively stable.

I’ll come back to our gross margin goal beyond fiscal 2013 later in my presentation. Third quarter revenue increased by just under 1% to $200 million compared to $198 million in 2012, and increased 3.3% sequentially from $193 million for the second quarter of 2013.

Revenue was slightly higher in the third quarter of 2013 compared to the third of 2012 due to an increase of approximately 4% in average selling prices partially offset by a decrease of approximately 3% in sales volume. The decrease in sales volume was primarily due to the progress the company made in reducing sales of low margin products in the second half of 2012, partially offset by growth in our industrial, international and woven businesses.

On a year-to-date basis, sales volume excluding low margin products grew by approximately 2%. As previously communicated, the trimming of low margin products is largely behind us; however, the success of those efforts will continue to impact our year-over-year volume comparison.

The increase in average selling prices was primarily due to higher selling prices of equivalent units and a favorable shift in the mix of products sold. Revenue was higher sequentially primarily due to an increase of approximately 5% in sales volume partially offset by the decrease of approximately 2% in the average selling prices.

As indicated during our last conference call, we believe second quarter 2013 sales volume was negatively impacted by customers pre-buying during the first quarter of 2013 in advance of price increases; consequently, third quarter 2013 sales volume benefited from a lower comparison base in the second quarter of 2013. In addition, we believe that some of the increased demand for film products in the third quarter of 2013 was due to customers pre-buying in response to the announcement of price increases to take effect on orders placed on or after September 30, 2013.

The 2% decrease in average selling prices was mainly due to a less favorable product mix and lower selling prices of equivalent units. During the first nine months of 2013, we’ve launched 29 new products and anticipate 36 for the full year.

Revenue from the sale of new products represented about 18% of total revenue for the quarter, which is similar to the second quarter of 2013. For all of 2012, new products accounted for a little over 15% of total revenue.

As indicated in the past, new products are categorized as new for a period of five years. Considering that we revived our new product introduction program about five years ago right after the financial crisis started, some of the first products we launched will no longer be defined as new in the near future; therefore, the percentage of revenue from new products is expected to begin leveling off.

A sales cycle associated with many of our products creates long-term opportunities that go well beyond a period of five years. Continuing to shift the mix of sales towards high margin products remains a priority for us as we go forward.

One of the means to achieve this is the continual introduction of new products on which we will continue to devote resources, but sales and marketing initiatives are also important to make further progress in this area. Our strong free cash flow allowed us to decrease our total debt by $19.6 million during the quarter, and our debt to trailing 12-month adjusted EBITDA ratio now stands at 1.4.

We will comment in our projected debt leverage estimates next quarter. Finally, we declared a dividend of $0.08 per share payable on December 30, 2013 to shareholders of record at the close of business December 16, 2013.

At this point, I would like to turn the call over to Bernie for a detailed look at the financials.

Thank you, Greg. Gross profit totaled $40 million in the third quarter of 2013, an increase of 14.3% from $35 million a year ago and a decrease of 5.4% from $42.3 million in the second quarter of 2013.

Third quarter gross margin was 20% compared to 17.6% for the prior year and 21.8% for the second quarter of 2013. As compared to the third quarter of 2012, gross profit and gross margin for the third 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.

On a sequential basis, gross profit decreased due to an increase in overhead partially offset by an increase in sales volume. Gross margin also decreased due to the increase in overhead.

SG&A expenses totaled $20.5 million for the third quarter of 2013, $19.3 million for the third quarter of 2012, and $20.2 million for the second quarter of 2013. As a percentage of revenue, SG&A expenses were 10.3% for the third quarter of 2013, 9.7% for the third quarter of 2012, and 10.4% for the second quarter of 2013.

SG&A expenses were $1.3 million higher in the third quarter of 2013 compared to 2012 and $300,000 higher sequentially. The increases in both periods were primarily due to an increase in stock-based compensation related to the impact of the increase in the company’s share price on the expense related to stock appreciation rights.

Adjusted EBITDA was $26.8 million for the third quarter of 2013, $22.3 million for the third quarter of 2012, and $28.3 million for the second quarter of 2013. The $4.5 million adjusted EBITDA increase compared to the third quarter of 2012 was primarily due to higher gross margin.

The sequential decrease of $1.5 million was primarily due to the increase in overhead. Interest expense for the third quarter of 2013 totaled $1.3 million, a 62.3% decrease from $3.3 million for the third quarter of 2012 and a sequential decrease of 31.7% from $1.8 million.

The decreases in both periods are due to a lower average cost of debt and a lower average amount of debt outstanding. The effective tax rate for the first nine months of 2013 was 20.3% compared to approximately negative 2% for the same period last year.

The increase in the effective tax rate was primarily due to income tax expense recorded for stock options exercised, the non-recurrence of an income tax benefit recorded during the first nine months of 2012 for expected AMT tax refunds that resulted from the ability to utilize certain U.S. AMT net operating losses without limitation, and an increase in the percentage of income apportioned to states in which the company is subject to current income tax.

For the full year 2013, the effect of 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 nine months of 2013 totaled $500,000.

The payments made were primarily related to estimated state taxes and were largely offset by refunds of AMT. Cash taxes for all of 2013 are expected to be less than $1.5 million.

As of December 31, 2012, the company had $202.6 million of gross deductible temporary differences in unused tax losses related to several jurisdictions for which no deferred tax assets were recognized on the balance sheet. As of September 30, 2013, evidence required by GAAP was insufficient to recognize deferred tax assets related to this amount.

As of December 31, 2013, we will continue to analyze all evidence, including current historical and cumulative financial results, market and industry conditions, average available tax strategies, the 2014 budget, and longer term financial projections. This analysis may result in the company recording a deferred tax asset of more than $45 million related to a certain portion of the gross deductible temporary differences in unused tax losses.

This would have the effect of increasing deferred tax assets and decreasing income tax expense while having no effect on current or future cash income taxes paid. The subsequent utilization of this asset in future periods would result in increased income tax expense such that the effective tax rate range would be approximately 30 to 40% in future periods.

Adjusted net earnings were $17.5 million for the third quarter of 2013, $11.8 million for the third quarter of 2012, and $18.3 million for the second quarter of 2013. Adjusted net earnings were $5.7 million higher compared to the prior year primarily due to a higher gross profit and lower interest expense.

Sequentially, adjusted net earnings were $800,000 lower primarily due to a decrease in gross profit partially offset by decreases in interest expense and variable compensation expense. Adjusted fully diluted earnings per share was $0.28 per share in the third quarter of 2013, $0.19 per share in the third quarter of 2012, and $0.30 per share in the second quarter of 2013.

Manufacturing facility closure costs for the third quarter of 2013 were about $900,000. Included in that amount were equipment relocation costs related to the initiatives announced in the second quarter of 2012 and accrued workforce retention cost related to the South Carolina project.

We expect to record charges for the South Carolina project of approximately $1 million in the fourth quarter 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 third quarter was 56 days, an increase of four days from the third quarter of 2012 and a decrease of two days from the second quarter of 2013. The company expects days inventory to remain in the mid-50s during the fourth quarter of 2013.

Inventories increased $2.6 million to $94.5 million as of September 30, 2013 from $91.9 million as of December 31, 2012. DSOs decreased by four days to 40 in the third quarter of 2013 compared to last year and remained approximately the same as compared to the second quarter of 2013.

DSOs are expected to remain in the low 40s during the fourth quarter of 2013. Trade receivables increased $11.3 million to $87.1 million as of September 30, 2013 from $75.9 million as of December 31, 2012.

Cash flows from operating activities before changes in working capital items increased in the third quarter of 2013 by $3.8 million to $25 million compared to last year, and decreased $800,000 sequentially. The increases compared to the same period last year was primarily due to higher gross profit.

The decrease sequentially was primarily due to lower gross profit. Free cash flows of $22.5 million allowed us to reduce debt by $19.6 million during the quarter as well as pay a dividend of $4.9 million.

This brought our total debt down to $137.7 million as of September 30. We expect total debt to be the same or slightly lower as of December 31.

On a year-over-year basis, the average cost of debt decreased to about 2.5% at September 30, 2013 from about 6% at September 30, 2012. This decrease was largely the result of the repayment of the senior subordinated notes with the final portion redeemed in August of this year.

As of September 30, 2013, over 90% of our debt was floating, primarily based on 30-day LIBOR rates. At September 30, the company had cash and loan availability under its ABL facility totaling $44.5 million, a decrease of $7 million from June 30.

This decrease was related to the impact of lower inventory on the borrowing base as well as the difference between free cash flows and the reduction in debt combined with the payment of a dividend. Cash and loan availability as of November 12, 2013 was in excess of $45 million.

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 operation in South Carolina, developing and growing sales volume of higher margin products, and reducing variable manufacturing costs.

We made good progress on our South Carolina project during the quarter. We’ve begun modifications of the building to adapt it for our manufacturing processes and expect equipment installation to begin in Q1.

We are on track to begin some operations in Blythewood in mid-2014, at which time we would still have ongoing operations in the existing Columbia facility. This parallel manufacturing plan will result in some redundant cost but will mitigate the risk associated with new technology, including state-of-the-art equipment in our new facility.

These temporary costs are expected to be in the range of approximately $3 million to $7 million, the majority of which is expected in the second half of 2014 with the remainder to occur in the first half of 2015. We expect all of Columbia’s current production lines to be completely transferred to Blythewood during the first half of 2015.

We will continue to provide updates on this project each quarter. The total CAPEX related to the South Carolina project is anticipated to be $43 million to $46 million, which is a refinement from our prior estimate of $40 million to $45 million.

This range includes total expenditures which began in 2012 and are projected to continue through early 2015. With respect to 2013, we expect total company CAPEX to be between $47 million and $52 million.

For the fourth quarter of 2013, CAPEX is expected to be in the $12 million to $18 million range depending on the timing of the delivery of several large pieces of new equipment. Our CAPEX in 2014 is anticipated to be between $25 million to $29 million excluding any new high return projects that may arise.

Manufacturing cost reductions totaled approximately $3 million for the third quarter and $10 million year-to-date. For 2013, manufacturing cost reductions are expected to total approximately $14 million to $15 million, down slightly from the $15 million to $16 million range we previously indicated.

The cost reductions related to the transfer of production from Richmond, Kentucky to Carbondale, Illinois and the consolidation of shrink production in Tremonton, Utah are now expected to total about $3 million in 2013, of which $1.5 million is expected to be realized in the fourth quarter. We estimate annual savings of $6 million to be realized in 2014 and each year thereafter.

Turning to our financial outlook, revenue for the fourth quarter of 2013 is expected to be lower than the third quarter of 2013. The sequential decrease is reflective of normal seasonality.

Our gross margin goal for the fourth quarter and into fiscal year 2014 is between 20% and 22%, assuming stable or improving macroeconomic conditions. The 2014 gross margin goal includes the positive impact of reducing variable manufacturing costs, executing on the previously announced manufacturing rationalization project, and initiatives to shift the mix of sales towards higher margin products, partially offset by the redundant South Carolina costs that I mentioned earlier.

We expect the majority of manufacturing operations in the existing Columbia facility to cease sometime during the first half of 2015. After all start-up inefficiencies in Blythewood are resolved, we estimate gross margin to be between 22% and 24%.

This includes expected annualized cash savings in excess of $13 million. Adjusted EBITDA for the fourth quarter of 2013 is expected to be somewhat lower than the third quarter of 2013 and substantially higher than the fourth quarter of 2012.

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. At this point, Bernie and I would be pleased to answer any questions that you may have.

Operator?

Hi guys. So low margin products, did you do much this year or is the majority impact from what you did in 2012 in terms of getting rid of some low margin products?

Most of those were reduced in the second half of 2012 and they occurred throughout the fourth quarter of 2012, so we’d still expect to see some year-over-year reduction there.

Okay, but as you go into 2014, that should go away?

Well, we would expect that impact to be much less, yes.

Okay. And would you be able to—you talk about in your MD&A in terms of increasing in sales from new products, which is offsetting the low margin products leaving the revenue.

Would you be able to quantify how you’re seeing in terms of percentage growth of those new products at all?

We gave the percentage of new revenue. Other than that, that’s the only disclosures we’re doing on that right now, Sarah.

Greg mentioned that it gets a little bit—that metric could get a little bit stale. We had a huge amount of new products going online over the last five years, and then they’ll fall off being new products when the five-year period ends; however, the higher gross margin products, we’ll continue to sell them even though they’re not classified as new products, so we’d expect that percentage to start leveling off.

Okay. And then CAPEX for 2014 versus your previous guidance, is that all related to timing within the South Carolina facility, or is there anything else in there?

There is some timing there, Sarah. When you take the estimated 2013 plus the ’14 and add them together, our guidance today versus our guidance a little while ago, the range has somewhat moved up a little bit but it’s well within the range for the two years.

It’s dependent on—as I said, it depends on whether the equipment arrives this quarter or next quarter. We have a lot of equipment scheduled to arrive this quarter.

If it does arrive, you’ll see the CAPEX in ’13; if it doesn’t arrive, you’ll see the CAPEX in ’14.

Okay, and on South Carolina, how many quarters do you expect or how long do you expect to be running two facilities? Is it two quarters, or what’s your thought there?

Well, at the end of the day our plan is to run it as few quarters as we possibly can, or as few months as we possibly can. The range between $3 million to $7 million has a fairly good buffer in there that’s well over one quarter.

Okay. That’s it for me.

Thank you.

Hi, good morning. Just wanted to follow up on the question about new product introductions.

Obviously that statistic is going to level out, but that’s not really signaling a change in the new product introduction rate. That should seem to hold steady, I would guess?

No, and it really shouldn’t change the drive towards higher margin products. Just because the date turns five years plus a day, doesn’t mean the margin of those products drops either.

So that’s very important, and it happens to be some of the products that are falling off that five-year cycle do have strong margins, and we don’t expect those margins to change as those products become five years and one day old.

But your efforts to introduce the same number will roughly be the same too, though, I’m guessing is what you’re trying to do as well.

Yes, it depends. It depends on the opportunity, and again, there’s not a pure relationship between the amount of numbers of products introduced and the addressable market or the opportunity.

So I think the numbers should stay within that range, and certainly as more opportunities become available to us, certainly we can resource or ramp that up. I think we have a lot of products in our current portfolio that we can execute within sales and marketing initiatives to grow those product lines.

Okay. Just to make sure, Bernie, I understand the tax issues that you’ll record, if it moves as you discussed earlier in the call, you’d record a fairly significant gain on your taxes in Q4 and then your cash taxes really wouldn’t change that much going through next year, but you would be sort of writing off against that asset.

That’s exactly right, Tal. We would have a more normalized effective tax rate after we would do that, but the act of putting those deferred assets back on the balance sheet doesn’t affect our cash tax projections.

Got it. You did mention that your sort of spread between your raw material costs and your average selling prices this year has been higher.

Where do you see that trending as you look out? Going forward, it sounds like you’re taking some price increases, but is that largely in response to raw material movements?

I’m wondering if you can speak to that.

So the spread on a year-over-year basis is up, and so the spread in the last three quarters has stayed relatively flat. As we continue to execute both on the sale of higher margin products and also become more efficient with the use of our materials in our operations, the push is for that spread to continue as we move forward, and it’s certainly part of our strategy going forward.

From a raw material perspective, we’ve seen polyethylene go up at the end of September and we’ll probably see polypropylene here go up in the first quarter of ’14, and the rest of the raw material streams are relatively stable, and that as you know drives a big part of the change and our ability to hold or improve that number.

So these pricing actions you’re taking now, are they in anticipation of those specific costs that you outlined there in polypropylene, or you anticipate that there might be more going forward?

Yes, so most of the pricing we made reference to in September, we put in a film price increase in our polyethylene products and we expect that there will be a polypropylene increase in the first quarter and that we will have to announce a price increase to offset that polypropylene increase; but that has not been announced as of now.

Okay. Bernie, you’d mentioned in your discussion of the future cost savings – I’m afraid I just missed – you’d mentioned that for each year after, I think, 2014 or after 2013, you were targeting a certain dollar amount of cost reductions?

Or did I mishear that?

Yes, the two cost reductions that are really going to be taking effect in 2014 and beyond are, one, the closure of the Richmond facility and the transfer of shrink from Truro to Tremonton, we expect to get a full-year benefit of that next year of $6 million, about $1.5 million in the fourth quarter. And then once the South Carolina project is completed, we expect over $13 million of cash savings from that once all the start-up issues are behind us.

But we haven’t provided any information related to any other kind of plant-by-plant variable cost reduction plans that we’ll have for 2014 yet. We’ll do that after the next call.

Okay, and then just to make sure I’m understanding the margin progression, we should expect that—it sounds like to me that 22% to 24% target that you’re setting, that is more likely a later 2015 kind of time horizon before you would expect to sort of push through that 22% level?

Yes, so we expect the Columbia facility to be shut down during the first half of 2015 and Blythewood fully up and running at that time, and then we anticipate that there will be some remaining start-up inefficiencies we need to address. Once we get through those, then the full $13 million of savings would be realized and our gross margin expectation, given stability in the spread between raw material costs and selling prices and all of our other cost reduction efforts going on between now and then, we’d expect to be in the 22% to 24% range.

All right. Just lastly, any change in the demand outlook?

You’ve sort of been relatively neutral on that for quite some time. Any change in the picture from what you can tell?

I think from a macro perspective, I think we see—from our demand perspective, we see more of the same. From a competitive landscape perspective, we don’t see much growth out there from our competitors.

We look at some of the key indicators and we look at things such as corrugate sales. Corrugate sales are well below 100 basis points year-over-year growth and a diminished factor GDP, so we see demand staying fairly stable over the past couple quarters in arrears.

And to the best of your ability to see, all competitors are still remaining rational too, it seems like?

Yes, it’s a competitive—I mean, we’re still in a competitive marketplace, definitely, and we’re taking a disciplined approach to it and making sure that we’re pricing our products to the value of our products, and we continue to do that.

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

Good morning. My first question is just a follow-up on the competitive environment.

Are you seeing much in terms of import competition, or has that basically fallen off?

No, we continue to see imports. We see a lot of imports based around polypropylene products, and what we envision going forward there is with what’s going on in the chemical industry and with fracking in North America, we see propylene and polypropylene becoming much more competitive in North America or being the most competitive in the world versus Asia.

So that ebbs and flows, as you know, so there’s periods of time where North America is at advantaged and there is periods of time that Asia is advantaged. Right now, Asia is advantaged on polypropylene.

Okay, but that may be shifting given where gas prices are?

Yes, I mean long-term we should see North America become much more advantaged than it has.

Okay. And just secondly in terms of M&A, obviously it hasn’t been a big priority for you.

I was wondering what you guys are seeing in terms of opportunity, and as time progresses if that’s going to be a strategy for you?

So we commented before that the M&A that we’re predominantly looking at right now is what we would call tuck-ins or bolt-ons, and they would be in core areas that we participate in. We are incredibly focused on our Columbia project and I think the company needs to focus just on those bolt-ons and tuck-ins.

We’ve looked at a few and we’re looking at a few now, and I think as we move forward it’s a viable part of our plans going forward.

Okay, so in terms of the bolt-ons, is that more of a strategy to consolidate or rationalize the market, or are there specific technologies or processes or geographical areas that you’re looking at?

I think it would be a combination of two specific areas right now. One would be a consolidation play, and the other one would be areas that we do not have the technology that the company that we are acquiring has.

Those are the two areas. I think from a geographical perspective, I think primarily we’re focused in North America right now and I don’t think outside of North America we would be interested at this point.

Okay, great. Thank you.

Again Justin, under the context of us executing on the Columbia plant project first.

Understood. Thank you.

Thank you very much for your interest in Intertape, and we’ll look forward to our next update for Q4. Thank you.