Intertape Polymer Group Inc.

Greg Yull - Chief Executive Officer Jeff Crystal - Chief Financial Officer

Sarah Hughes - Cormark Securities Ben Holton - RBC Capital Markets Damir Gunja - TD Securities

Thank you, operator and good morning everyone. Welcome to Intertape’s 2014 third quarter results conference call.

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

During the call, we will make reference to our quarterly earnings call presentation that you can download from the Investor Relations section of our website. I’ll start on page three of our presentation.

Overall we are pleased by the strong financial results for the quarter. First, we achieved revenue of approximately $209 million, which represents the highest quarterly level in three years since we began our efforts to reduce the sale of low margin products.

Revenue in the third quarter of 2014 was 4.6% higher than the third quarter of 2013 and exceeded the 2% to 4% estimated increase that we provided in the last quarter’s outlook. Second, gross margin reached 19.4%, which was in line with the gross margin outlook previously provided of approximately 19% for the quarter.

As we mentioned last quarter, gross margin includes the negative impact of the $1.3 million non-cash Brantford Pension Charge and $1.1 million of South Carolina Duplicate Overhead Costs. Third, we reached our target for adjusted EBITDA with $27.1 million for the quarter, which was up slightly from last year and included $900,000 of cash charges for South Carolina Duplicate Overhead Costs.

We’re pleased with our progress on the South Carolina project and have partially or completely transferred the various parts of tape manufacturing process to the new Blythewood facility. We’re on track to complete the overall project in the first half of 2015.

And our decision to incur the duplicate overhead costs has made the transition seamless to our customers and also mitigate the operational risk associated with this large scale project. And finally, on October 30th, we completed a reorganization of the capital structure of several of our legal entities in order to more effectively manage our intercompany debt.

This reorganization is also expected to generate ongoing annual income tax savings of approximately $7 million. On page 4, you will see that when compared to last year, an increase in average selling price contributed $8.9 million to revenue out of the $9.3 million of total revenue growth.

The increase in average selling price is primarily due to a favorable product mix across the major product categories and higher prices to manage the spread between selling prices and higher raw material costs. When compared to the second quarter of 2014, volume had a positive impact of $7.6 million due to increased demand in all major product categories primarily due to normal seasonality.

As shown on page 5, revenue from the sale of new products represented approximately 19% of total revenue for the third quarter, which is slightly higher compared to the first and second quarter of 2014, as well as compared to last year. The short to medium-term goal remains to reach approximately 20% of total revenue from new products.

Page 6 provides an update on the South Carolina project. We made significant progress during the third quarter and we remain confident that the projected annual savings of at least $13 million starting in the second half of fiscal 2015 will be achieved.

The expected CapEx and duplicate overhead costs remain unchanged from the numbers provided to you last quarter. At this stage, not only have we resolved the startup issues and delays mentioned last quarter, but several portion of the tape production process have been transferred to the Blythewood facility.

Our tape production process is currently split between the old facility and the new Blythewood facility and we will continue to transfer stages of the manufacturing process as we reach our quality and manufacturing yield goal targets during testing. All saturation activities have been transferred to the new facility and we estimate that 75% of duct and masking tape converting has been transferred as well.

Completing these milestones keep us on track with the originally indicated timing of completion for the overall project in the first half of 2015. If you refer to page 7, total expected CapEx for fiscal 2014 is unchanged from between $39 million and $44 million.

At this time, we anticipate a CapEx program of approximately $30 million for fiscal 2015 excluding any new high return projects identified in that period. On page 8, we present $11 million in manufacturing cost reductions that we’ve achieved year-to-date.

The expected range for fiscal 2014 remains unchanged from the previous quarter at $14 million to $16 million. Also during the quarter, as you can see on page 9, we began to execute on the normal course issuer bid program by repurchasing 588,000 shares for a total purchase price of $7.7 million.

We will continue to monitor the stock price as our intent is to fully execute on this plan, but on an opportunistic basis. Finally, we declared a dividend of $0.12 per share payable on December 31, 2014 to shareholders of record at the close of business December 15, 2014.

At this point, I will turn the call over to Jeff for additional details within the financials.

Thank you, Greg. I would now like to refer you to page 10 of the presentation where we present a summary of our results for the third quarter of 2014.

Gross profit was $40.7 million in third quarter of 2014, an increase of 1.7% from $40 million a year ago, primarily due to a favorable product mix variance and an increase in the spread between selling prices and higher raw material costs. This increase was partially offset by the non-cash Brantford Pension Charge of $1.3 million and approximately $1.1 million of South Carolina Duplicate Overhead Costs.

On a sequential basis, gross profit decreased 7.7% from $44.1 million, primarily due to net manufacturing cost increases and a non-cash Brantford Pension Charge partially offset by an increase in sales volume. The increase in net manufacturing cost was primarily related to the planned annual maintenance across the major manufacturing facilities.

As I mentioned on the last call, we indicated the Brantford pension charge would be between $2 million to $2.5 million. We settled the majority of our obligation and incurred a non-cash charge of $1.3 million in the third quarter.

We expect to settle the remainder of the obligation in the fourth quarter and to incur an additional charge of up to $700,000 but with minimal impact on cash flows. The Brantford pension charge has no impact on adjusted EBITDA.

SG&A was $23.2 million for the third quarter of 2014, an increase of 12.7% from $20.5 million a year ago, primarily due to an increase in stock-based compensation expense mainly related to stock appreciation rights valuation and professional fees. On a sequential basis, SG&A increased 12.6% from $20.6 million, primarily due to an increase in stock-based compensation expense.

As you can see on page 11, adjusted EBITDA of $27.1 million for the third quarter of 2014, increased by 1.4% from $26.8 million in the third quarter of 2013, primarily due to higher gross profit, partially offset by higher professional fees. On the following page, sequentially adjusted EBITDA decreased 7.9% from $29.5 million, primarily due to lower gross profit.

As I mentioned, the large portion of this decrease is due to increased manufacturing cost related to the third quarter planed annual maintenance across our major manufacturing facilities. The effective tax rate for the third quarter of 2014 was 53.3% compared to 6.1% last year.

The increase in the effective tax rate is primarily due to the utilization of U.S. deferred tax assets that were previously de-recognized until the fourth quarter of 2013 and $2.5 million upfront income tax expense relating to the Legal Entity Reorganization.

As Greg mentioned previously, we reorganized the capital structure of several other legal entities to more efficiently manage intercompany debt from which we expect to generate ongoing annual income tax savings of approximately $7 million beginning at the end of October 2014. Given our business structure, we generate significant cash in the U.S.

and generate significant intercompany debt when we use that cash to fund our on-domestic operations. Therefore, we implemented 2014 Legal Entity Reorganization to create a financing entity in Luxembourg to better facilitate repatriation and redeployment of cash throughout our global structure.

As a result, the tax rate for 2015 is expected to be between 30% to 35% and we expect full utilization of the U.S. net operating losses towards the end of 2015.

The expected tax rate for the fourth quarter of 2014 is between 35% to 38% as the structure will not be an effect for the full quarter. Finally cash income taxes paid in 2014 are still expected to be less than $5 million.

Adjusted net earnings were $14.3 million for the third quarter of 2014, $7.5 million for the third quarter of 2013 and $14.5 million for the second quarter of 2014. Adjusted net earnings were $3.2 million lower compared to the prior year, primarily due to the higher income tax expense.

Sequentially, adjusted net earnings were $200,000 million lower primarily due to a decrease in gross profit. As you will note on page 14, cash flows from operations in the third quarter of 2014 decreased to $30.1 million from $33 million in the prior year, an increase from $18.2 million in the second quarter of 2014.

The decrease compared to the third quarter of 2013 was primarily due to a larger decrease in inventory in the third quarter of 2013 and increase in cash income taxes paid and a larger increase in trade receivables due to higher revenue in the third quarter of 2014. The decrease was partially offset by lower payments made for accounts payable and accrued liabilities.

The increase compared to the second quarter of 2014 was primarily due to lower payments made for accounts payable and accrued liabilities partially offset by an increase in trade receivables due to higher revenue in the third quarter of 2014. Total debt at September 30, 2014 was $141.3 million, a decrease of $3.6 million compared to June 30, 2014.

Our debt to trailing 12 months adjusted EBITDA ratio was 1.3 at September 30, 2014 compared to 1.4 for the same period last year. At September 30, 2014, the company had cash and loan availability under its ABL facility of $60.3 million.

Cash and loan availability as of the November 4, 2014, was in excess of $59 million. Days inventory for the third quarter of 2014 was 60 days, which is an increase of four days from the third quarter of 2013 and a decrease of one day from the second quarter of 2014.

Inventories increased $14.6 million to $108.9 million at September 30, 2014 from $94.3 million as of December 31, 2013 primarily due to a larger inventory build plan to mitigate the effects of the transfer of production related to the South Carolina project and an increase in raw material pre-buys and raw material costs. The company expects inventories to decrease during the fourth quarter of 2014 primarily due to normal seasonality.

Days sales outstanding increased one day to 41 in the third quarter of 2014 compared to last year and remains unchanged compared to the second quarter of 2014. Trade receivables increased $14.8 million to $93.4 million as of September 30, 2014 from $78.5 million as of December 31, 2013 primarily due to an increase in revenue in the third quarter of 2014 compared to the fourth quarter of 2013.

Greg will now provide the outlook. Greg?

Thank you, Jeff. Turning to the outlook on page 16, we anticipate revenue growth for the fourth quarter of 2014 to be between 3% and 6% when compared to the fourth quarter of 2013.

Including the impact of the Brantford pension charge and the South Carolina duplicate overhead cost, gross margin is expected to be approximately 19% for the fourth quarter. Adjusted EBITDA for the fourth quarter of 2014 is expected to be between $24 million to $26 million including cash charges of approximately $900,000 for duplicate overhead cost to support the South Carolina project.

As Jeff indicated, the Brantford pension charge will not impact adjusted EBITDA. Finally, on the raw material cost side, polyethylene and polypropylene prices peaked in October 2014, up approximately 4% and 11% respectively from the end of the second quarter of 2014.

The recent significant drop in crude oil pricing is expected to drive these prices back to the second quarter levels by the end of the fourth quarter, a trend expected to continue into the first quarter of 2015. At this point, Jeff and I will be pleased to answer any questions that you may have.

Operator?

Good morning.

Good morning Sarah.

Good morning.

Good morning. If we touch down the gross margin line, is there -- I’m just looking at 2014 and 2013 gross margin sequentially from Q2.

Do we have some seasonality here that Q2 was stronger than Q3 or is it just kind of helping landed these past years?

Back in ‘13?

Well, ‘13 and this year. Like I said, it look sequentially like Q2 to Q3 gross margins are down both years, I’m just trying to understand is it seasonality thing?

Yes. The big driver there is the maintenance cost.

Okay.

For the plant shutdown.

In Q3?

Yes.

Okay.

And then we’ve seen at the last most of our maintenance cost has been or the shutdown has been in Q3 last two years. So, you’ve seen that two quarters, two years in a row.

Okay. And we should probably expect that trend as we go forward here?

Correct.

In future years, okay.

Yes.

And then on the volume side of things flat this quarter, year-over-year. Just kind of trying to kind of dig into that a little bit, have you done any more pruning of low margin stuff or is that pretty much behind us and if you can just give me a better detail on that?

Well, I think it’s behind us. However, we’re still under pressure in certain areas.

We’re under pressure and low-end carton sealing tape and with what we’ve seen in polypropylene over the past four, five months that’s put more pressure on that low-end carton sealing tape. So, when we think of unit sales that’s where we’re going backwards if you will.

And that business is opportunistic. It’s all dependent on where we are on the cost perspective.

I would also show out that on a year-to-date basis when you look at box sales, box sales are only up 40 basis points on a year-over-year comparison for the full year now. September showed some life, September was up 1.5% on a month-to-month basis same date.

But I would say that from a box sales perspective, which drives a lot of our units, we’re not seeing macro growth.

Okay. And then that pressure you’re seeing on low-end carton sealing tape now that could potentially reverse if polypropylene pricing comes off alongside oil?

Yes. We see polypropylene begin to come down over the next two, three months.

One of the big questions is what does that do with North America versus Asia and that’s unknown at this point. Certainly it will make us -- it should make us more competitive though.

Okay. Now have you seen your polyethylene and polypropylene pricing come down here, has it started to come down?

No.

No. Okay.

Okay. And then just lastly for me on the CapEx, your guidance 2015, $30 million, is there much for South Carolina in that number?

(Inaudible).

I think that’s $7 million last versus…

Yes. I think that’s -- I don’t have the exact number, Sarah, but I think South Carolina is not…

It’s not large in our number.

A couple of million dollars.

A couple of million, yes.

Okay. Because I guess thinking where your kind of maintenance CapEx has been historically, I thought we would have maybe seen a little bit larger step down on CapEx next year.

Is there anything -- do you have any larger projects in there in 2015?

Yes, there a couple of larger projects. There is a couple of growth projects in 2015 to get us into new product categories.

So, we’re seeing some of that. And I would say that bridging between probably what your expectations were and what the number is right now that gap would be around some high return projects, namely in the growth area.

Okay. That’s it for me.

Thank you.

Thank you.

Thanks for taking my question guys.

Good morning Ben.

The clarification on 2015 taxes is very helpful. Just wondering if you could provide also the color on what cash taxes look like next year.

Is it fair to assume that the remaining NOLs will still provide somewhat of a cash tax shield through ‘15?

Yes, so we’re expecting that to give us a shield through ‘15. So I would say that cash taxes will look quite similar.

I mean you’ll see that we had a bump in our cash taxes in this quarter as a result of some of the upfront expenses we incurred, but which won’t be there next year but certainly they will be comparable to this year, if you need that.

Okay, helpful. And then looking past 2015 is that 30% to 35% rate still applicable or should we be expecting further changes as the deferred tax assets get cleaned out and as NOLs are used?

It should be applicable but one qualification I would make is that it’s all dependent on the geographic distribution of the income because the savings that we’re realizing is essentially more or less a fixed amount. So, as your income grows in whichever jurisdiction that could affect the effective tax rate.

So, assuming that basically our distribution of income is what it is today.

No, understand. That’s fair.

Final question, we’ll continue to see some M&A activity in the packaging and labeling market. Can you give us a little color on what you are seeing?

Are there sort of ample acquisition candidate scenarios that you’re interested in, are price expectations realistic et cetera?

The color that I’ll give you on that is that you know we’re interested in certain spaces as it relates to product lines, there are assets out there. There have been a couple of transactions that have come through recently that were sold at a pretty significant multiple.

We continue to execute on our bolt-on strategy there. And as you know, M&A activity is very uncertain as it relates to closing a deal.

So, hopefully we’ll be able to report back once we get some strategic M&A is done, but there are assets out there on the market right now.

Yes. That’s helpful.

That’s it for me. Thanks guys.

Thank you.

Thanks. Good morning.

Good morning.

Good morning.

I guess most items here have been covered off, just wondering if you could maybe give us a little bit more color on the impact of the higher raw materials in the quarter. Are you able to give us even a rough range of the headwind there?

With what’s happening in resin we do have some offsets in some other areas within our raw material spectrum. We believe it’s temporary in nature on the polyethylene side.

The headwind is there approximately $0.03 a pound. We’ve got increases in place namely in our stretch business to cover that.

And on the polypropylene side with it going up quickly and coming down or the peers to be coming down relatively quickly, we’ll be able to whether that’s going -- we did a fair amount of pre-buying at the end of September. We purchased approximately $4 million of resin.

That would be what I would call are the ordinary inventory position to cover us through that timeframe. But we’ve got some gives and takes in that whole portfolio.

Okay. That’s helpful.

Thanks.

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