Intertape Polymer Group Inc.

Gregory Yull - Chief Executive Officer Jeffrey Crystal - Chief Financial Officer

Sarah Hughes - Cormark Securities Justin Wu - GMP Securities Ben Holton - RBC Capital Markets Paul Bilenki - TD Securities Ben Jekic - Industrial Alliance Securities

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

Joining me is Jeff Crystal, our 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 full year and quarterly earnings call presentation that you can download from the Investor Relations section of our website. Let me begin by pointing out that on January 26, we issued a press release and revised our outlook for the fourth quarter of 2014.

The results published this morning are essentially in line with what we reported in that release. For the year as a whole, we are generally pleased with the results.

We made significant progress with the South Carolina project and remain on track with the expected timeline for completion and cost as well as the projected annual savings of at least $13 million starting in the second half of 2015. Revenue increased by 4% compared to 2013 to almost $813 million and free cash flows increased by 31% to $46 million.

We used our free cash flow to increase our total dividend paid by 67% to $24.3 million or $0.40 per share and repurchased nearly 600,000 common shares as part of our normal course issuer bid while still managing to reduce our net debt by $12.4 million. In addition, we entered into a new $300 million revolving credit facility under more favorable terms than the previous facility and we believe we now have ample flexibility to support our growth strategy.

Let me briefly review the highlights for the quarter starting on page 3 of our presentation. We achieved revenue of $200.8 million an increase of 4.8% compared to the same quarter in 2013.

The higher revenue was generated by 5% increase in sales volume due for the most part to volume increases in carton sealing tape and woven products in the agro, environmental and building construction market while average selling prices held steady. Gross margin however, decreased to 18% in the fourth quarter of 2014 from 19.8% in the fourth quarter of 2013.

The decrease was primarily due to an unfavorable product mix variance and the South Carolina duplicate overhead costs partially offset by net manufacturing cost reduction and an increase in the spread between selling prices and higher raw material costs. Our adjusted EBITDA fell by 14% to $20.6 million, where lower gross profit and higher SG&A expenses had a negative impact.

Turning to page 4, you'll see that when compared to the fourth quarter of 2013, an increase in sales volume contributed $9.7 million to revenue while selling prices due to unfavorable shift in product mix during the quarter had a negative impact on revenue of $400,000. When compared to the third quarter of 2014, lower average selling prices resulted in $9.2 million reduction of revenue while higher sales volume had a slightly positive impact of $900,000.

Page 5 provides some history on our success with new product offerings. For 2014 revenue from the sale of new products represented approximately 18% of total revenue which is consistent with 2013.

Our continued objective is to see total revenue from new products reach the 20% level. Page 6 updates the progress we are making on our South Carolina project, which has been a very substantial undertaking for us as there are four major product lines relocating as part of the project.

I'll break the status of the project down for you in terms of the separate product lines. The two main product platforms being transferred by the South Carolina project with new processes and technologies are related to our duct and masking tapes.

These two product lines are expected to generate nearly all of the savings anticipated for this project with the annualized savings of at least $13 million being equally split between them. We're ahead of schedule for the duct tape product line and we expect production to be fully moved to Blythewood in early April.

But we expect some savings in the second quarter from running all duct production in Blythewood it will be a transitional quarter and we do not expect the full cost savings from day one given the size and complexity of this step. The transfer of masking tape product line is also on track to be completed by the end of the second quarter.

The South Carolina project also involves the relocation of two additional product lines, flatback tape and stencil. The production for flatback tape will be moved to our Marysville, Michigan facility later in March and we are on schedule to cease parallel production in the second quarter of this year.

The cost savings associated with this transfer will be minimal. We expect that our stencil operations will remain in the old Columbia facility until the end of 2015.

This decision was made in order to fully focus on duct and masking tapes which are clearly the needle movers in terms of cost savings of this large project. Keeping the stencil operations in Columbia temporarily will require the minimal amount of incremental cost of less than $15,000 per month and so there will be very little cost savings associated with this product line moving to Blythewood.

On pages 7 and 8, we present our expected CapEx for 2015 with a range of $32 million to $37 million. This range is higher than the estimate we provided in our third quarter 2014 outlook due to some additional high return projects that we've identified and intend to start executing on later in the year.

We estimate that our annual maintenance CapEx is generally between $12 million to $15 million. Of the total 2015 budget approximately $5 million relates to the completion of the South Carolina project and a substantial amount will be dedicated to new high return projects.

These projects include technology upgrades to boost efficiency and profitability investments to expand our product offerings as well as additional capacity to produce higher demand and higher margin products. We expect these projects to yield returns in excess of 15% minimum hurdle rate of return.

These upgrades include enhancements to all of our major product categories in tapes, woven and film products. We expect these projects to be completed in stages in 2015 and in 2016.

Turning now to page 9, we outlined our manufacturing cost reductions in 2014 and provide a forecast for fiscal 2015. The total manufacturing cost reductions we've realized in 2014 amounted to $14.1 million and we expect additional cost reductions in 2015 of between $15 million to $18 million.

Of this estimated range we expect the South Carolina project to represent approximately $6.5 million. On page 10 we provide an update on our share repurchase and dividend activities.

Under our current normal course issuer bid program we are able to repurchase up to 2 million common shares in the twelve month period ending July 09, 2015. To-date we have repurchased 597,000 common shares at an average price of CDN$14.35 for a total purchase price of $7.8 million.

As I mentioned on last quarter's conference call, we will continue to monitor the stock price as our intent remains to execute on this plan on an opportunistic basis. We're also pleased that we were able to increase the total dividends we paid in 2014 to $24.3 million or $0.40 per share representing a 67% increase over 2013.

The increase for 2014 was due to a 50% increase in the quarterly dividend payment policy announced in June that went from a total of $0.32 per year to $0.48 per year. The board has now declared a dividend of $0.12 per common share payable on March 31, 2015.

At this point, I'll turn the call over to Jeff, who will provide you with additional insight into the financials. Jeff?

Thank you, Greg. I would now like to refer you to page 11 of the presentation where we present the summary of our results for the fourth quarter of 2014.

Gross profit was $36.2 million in the fourth quarter of 2014, a decrease of 4.5% from $37.9 million a year ago. Gross margin was 18% in the fourth quarter of 2014 and 19.8% in the fourth quarter of 2013.

Gross margin decreased primarily due to an unfavourable product mix variant and approximately $1.6 million of South Carolina duplicate overhead costs partially offset by net manufacturing cost reductions and an increase in the spread between selling prices and higher raw material cost. On the product mix side, there were decreased units of certain higher margin industrial tape products primarily related to a new distribution agreement which had subsequently impacted the timing of volume in the fourth quarter.

This was combined with an increase in units of certain lower margin carton sealing tape products. SG&A was $23.3 million for the fourth quarter of 2014 an increase of 22.6% from $19 million a year ago primarily due to an increase in stock based compensation expenses, professional fees and overall variable compensation expenses resulting from higher revenue.

On a sequential basis, when compared with the third quarter SG&A was stable. As you can see on page 13, adjusted EBITDA of $20.6 million for the fourth quarter of 2014 decreased by 14% from $24 million in the fourth quarter of 2013, primarily due to higher professional fees, higher variable compensation expenses and lower gross profit.

On the following page sequentially adjusted EBITDA decreased 24% from $27.1 million in the third quarter of 2014 primarily due to lower gross profit. The effective tax rate of 15.8% for the fourth quarter of 2014 was lower than the 35% to 38% anticipated range that we announced in our third quarter of 2014 primarily due to two reasons.

First, a reduction in the upfront tax expense incurred in connection with the legal entity reorganization from $2.8 million to $1.8 million resulting from final calculations of income for tax purposes, and second, a variation from the expected mix of earnings between tax jurisdictions. Adjusted net earnings were $11.9 million for the fourth quarter of 2014, a $40.5 million decrease from $52.4 million in the fourth quarter of 2013.

The decrease was primarily due to the $43 million income tax benefit recorded during the year end of December 31, 2013 to recognize the previously derecognized U.S. deferred tax assets.

As you will note on page 16, cash flows from operations increased in the fourth quarter of 2014 by $10.9 million to $33.8 million from $22.9 million in the fourth quarter of 2013 primarily due to a larger decrease in inventory in the fourth quarter of 2014 related to higher sales. Free cash flows increased in the fourth quarter of 2014 by $16.2 million to an inflow of $26.8 million from an inflow of $10.6 million in the fourth quarter of 2013 primarily due to a decrease in inventory and lower capital expenditures.

Free cash flows increased in 2014 by $11 million to an inflow of $46.3 million from an inflow of $35.3 million in 2013 primarily due to lower capital expenditures and an increase in gross profit. Net debt at December 31, 2014 was $114.9 million a decrease of $12.4 million compared to December 31, 2013.

Our debt to trailing 12 months adjusted EBITDA ratio was 1.2 at December 31, 2014 compared to 1.3 for 2013. As we announced in November 2014 we entered into a new $300 million revolving credit facility.

As of December 31, 2014 the company had cash and loan availability under this new revolving credit facility of $206.2 million. This compares with cash and loan availability of $50.3 million for the same period last year under the company's previous asset based loan facility.

Days inventory increased to 58 in the fourth quarter of 2014 from 57 in the fourth quarter of 2013. Inventories increased $2.5 million to $96.8 million as of December 31, 2014 from $94.3 million at the end of 2013 primarily due to lower woven coated product inventory in the fourth quarter of 2013 partially offset by a decrease in raw material purchases in the fourth quarter of 2014.

Days sales outstanding decreased by 1 day from 38 in the fourth quarter of 2013 to 37 in the fourth quarter of 2014. Trade receivables increased $2.7 million to $81.2 million as of December 31, 2014 from $78.5 million at the end of 2013 primarily due to an increase in the amount and timing of the revenue involved in 2014.

Greg will now provide the outlook. Greg?

Thanks Jeff. I'll begin by commenting on several macro level factors affecting short term forecasting of our business making forecasting of our business somewhat more challenging at this time.

We remain close to our customer distributors and end users to out-gauge future demand, market pricing and production levels. We remain focused on our internal capital projects with outcomes that are more within our control.

We continue to believe that in upcoming quarters lower oil prices and in turn lower petroleum based raw material cost will be a positive to the business. However, the sharp downturn and recent volatility have temporarily impacted customer order behavior.

The impact of customer destocking appears to be more significant than initially anticipated and the full benefits of lower raw material costs are expected to gradually phase in over the next few months. From the October peak price points to the current month polyethylene cost and polypropylene costs have decreased significantly and we expect those costs to continue to fall a bit more but start stabilizing going into the second quarter.

In addition, we believe that North America has become more competitive with Asia as it relates to resin prices over the past few months. Globally the stronger U.S.

dollar creates challenges in some of our exports markets, where we compete with local producers with lower domestic currency cost. However, sales to customers in international markets represent only about 10% of our total revenue.

In addition, about 8% of our sales are to customers in Canada. But many aspects of our cost and product pricing abilities lead to a natural hedge to help mitigate a portion of the volatility between the Canadian dollar and the U.S.

dollar. You'll see our outlook for the first quarter of 2015 as well as some estimates for the full fiscal year beginning on page 18.

Due to volatility in customer demand and raw material cost, as well as the operational transition we are going through, we decided not to quantify our quarterly guidance related to revenue and profitability. We will continually evaluate this format of the guidance in future quarters.

We expect that revenue for the first quarter of 2015 will be lower than the first quarter of 2014. The expected decrease is mainly due to the temporary impact on demand from the destocking of inventory by our customers and a decline in average selling price mainly in film products, both due to the recent decline in resin and crude oil prices.

We do however see continued improved demand in the first quarter within our woven product business, but with softness in our international business. We also expect a related negative impact to our profitability in the first quarter of 2015 with gross margin and adjusted EBITDA expected to be lower in the first quarter of 2014.

We've made substantial progress towards the resolution of the manufacturing issues that affected the fourth quarter of 2014 results and do not expect them to significantly impact the results on the first quarter of 2015. Further, it is expected that the first quarter of 2015 results will include cash charges of approximately $1.6 million for the South Carolina duplicate overhead costs.

For the second half of the year we still expect gross margin between 22% and 24% as we begin to realize the savings associated with the completion of the South Carolina project. This guidance did not originally include the potential effects of lower raw material costs and while it is too difficult to estimate the effect on this factor of our profitability in that period, we see opportunity for higher margins should customer demand resume to more normal ordering levels and raw material costs stabilize at the current lower levels.

As announced in the third quarter of 2014, we still expect the effective tax rate for 2015 to be between 30% to 35%, and we expect full utilization of the U.S. net operating losses towards the end of 2015.

While we're dealing with significant variances or variables that impact our business related to input costs, downstream destocking and foreign exchange, we remain optimistic and expect that 2015 will be a strong year as we, our customers and end-users adapt to the recent volatile market conditions and we complete the South Carolina project and continue to execute on our cost reduction program and development of new product offerings. At this point Jeff and I will open up the call to any questions.

Operator?

Good morning.

Good morning Sarah.

So, on the destocking, I'm just wondering if you'd be able to kind of give us an idea as kind of how it trended kind of through Q4 and into early Q1 here, you know, has that alleviated to any degree in Q1 versus what it was doing in Q4?

Yes, it has. My comments would be as follows.

January and February were very slow leading into the end of February and today we’ve seen demand pick up. We believe that, that in our channel checks that there was no share lost in January or February, and that it was truly destocking, but I don’t know if we can recover from that January-February lull, but we’ve seen demand pick up over the past 10 to 12 booking days.

Right. And can you give us a bit more color in terms of destocking in your, like film versus on the tape side of things and how kind of differed between the two?

Yes, much more dramatic in films; on a unit basis in films I would put it somewhere between mid teens to upper teens in unit decline.

Okay, can you give us any indication on tape?

No, as I said the biggest material impact there is films. Tape would be very much lower, low single digit.

Okay, and then on the tape business, just wondering have you - and I guess it’s hard in the near-term because of destocking, but I'm just trying to get a sense of if you’ve seen any kind of increased momentum in that business just due to U.S. economy is better today than it was previously?

And also any increase in momentum in kind of new product development on the tape side of things?

So, on the macro side with the kind of destocking we’re seeing it's hard to get true consumption demand, but when we look at kind of channel checks on [coated] [ph] sales things of that nature, we’ve seen a lot three, four months in [coated] [ph] sales to be much stronger than prior history, still lagging somewhat to GDP, but certainly increasing. So we’ve seen, so it’s hard, but it’s hard to decipher what the destocking, what the pass through consumption is on that side.

On the new products side we’re seeing a lot of traction right now in our ECP business, in our woven business, and we continue to see that as a bright spot for the business going forward, especially around new products.

Okay, do you see some good organic growth in ECP or the woven side of things?

Yes.

Yes, okay, that’s really it from me. Thank you.

Thank you, Sarah.

Yes, good morning.

Good morning, Justin.

Yes, just my first question is on the margin guidance, the 22%, 24%, is that, I believe imply that that’s kind of level you’ll reach sometime in Q3 and Q4 or is that some kind of a run rate when you kind of reach, I guess fuller production in 2016?

Now we expect to reach that in the second half of 2015.

2015, okay. And just in terms of what's happening in both, in product pricing and raw materials, can you give a sense on what you’re seeing in terms of product pricing on some of the woven products, is that basically held in pretty well, films obviously down, but…?

Yes, so films would be the biggest decline obviously from a pricing perspective and we’re pretty much mirroring that for every [percent] [ph] of polyethylene decline and ASP decline. On the woven side it’s almost too early to tell.

It’s a lower or slower churn for us. So to get those lower cost raw materials through the income statement it takes a little longer than what is in our tapes business.

Some of our business there in our lumber wrap areas on indexes, so it’s fixed, but in some of the other areas we should see some benefits in the second half, in the second quarter of this year. I would state that in the ECP business and the tape business our pricing to our customer has never truly reflected the peak October pricing anyway.

So we've got some ground to pick up from Q3 to Q4 on the margin side.

Okay. It sounds like in terms of the spread between product pricing and your raw material costs which have been coming down should start to stabilize as we head into, I guess, Q2 and the back half of the year?

Correct.

And just you’ve kind of alluded to the impact of FX on I guess some of your Asian competitors, can you talk about how intense that input competition has been and in what areas you’re seeing that more pronounced?

Well, I’ll let Jeff touch on the FX, but from our perspective the FX is at this point affecting our demand on our international business. So products that we produce in the U.S.

selling around the world, U.S. dollar denominated and that’s where we’re seeing tough competition around the world with domestic suppliers.

As it relates to competitiveness of Asia and to North America what we've seen is the decline in their advantage in both polypropylene and polyethylene over the last three months, and we believe that will help us at the end of the day.

Thanks guys and good morning.

Good morning Ben.

Just to follow on one of Justin’s questions there, maybe the pricing in the tape market, I know you mentioned film and woven, but have we seen tape prices start to decline at all or are prices being held fairly constant given the raw material moves?

Yes, I mean, we're seeing some declines in the tape pricing, I mean in our plastic tape if you will we’ve seen some declines there. When we think of our spectrum of paper based products, we’re really not seeing dramatic decreases there in raw materials.

In some cases we pass through some price increases actually last month in some of our paper based products. But we have seen some decline in plastic tape and the market for the most part has been fairly disciplined in the pricing perspective.

So, I should assume then the price decline we’ve seen is not a full pass through of raw material price decline?

Correct.

Great. And then just moving to the high return projects beyond South Carolina, you've identified a few here, should the CapEx of these projects fall in ‘15 and ’16, is there kind of a split we should be thinking about between that CapEx spend?

Yeah, I mean we aren’t giving exact split because the timing is still not 100% certain, but there will be some towards the back half of 2015 and some trickling into 2016. So certainly there will be a split between the two years.

And just to confirm the CapEx guidance for 2015 includes the spend on these projects or will they be incremental?

Yes. That would include the spend.

Great and maybe I'm mistaken here, but I feel as the general impression that there is overcapacity in the film market, so could you add some color on kind of your rationale for looking to increase your own capacity in the film side?

Yes, it is a great question. So you know, for us the way we look at this is it’s all based on return right and so all projects stand on their own and they compete with each other.

So we’ve isolated a couple areas within our films business that have high returns and we are happy to invest in those areas. It goes through the same scrutiny as our tape investments or our woven investments and we’re not adding capacity per se in areas that are low margin and don’t surpass that 15% hurdle rate.

Okay, that makes sense.

Yes, and we’re competing and the films business is competing with the tape business and the woven business for capital and their projects have to compete with them.

Now, I can appreciate that. Thanks, all my other questions have been handled here.

Thank you.

Thank you and good morning.

Good morning.

I think most of my questions have been answered here, but if you could just talk a little bit on the acquisition environment, what you're seeing out in the market as far as maybe activity levels and valuations and if you had any sort of meaningful discussions at this point?

Yeah, you know, as we stated in November we have been actively managing our funnel and we have been allocating resources to the M&A front. At this point we've got nothing really new to add to that.

It’s still a strategy that we expect to execute upon, but at the end of the day we've got to find the target and a financial proposition that we can create value for our shareholders and the sellers can create value for their shareholders. So at this point we really don’t have anything else to comment on outside of we are active in managing our funnel.

Okay, and just a follow-on to that, would you be looking mostly at smaller tuck-in acquisitions given it’s a fragmented market or are there some larger ones out there as far as your warehouse?

Yeah, our stated strategy there has been on the bolt-ons in an ideal world of $50 million revenue management teams that will stay in place that can grow the business within our tapes business and our geomembrane business. Those are, that’s our preferred area of concentration.

Perfect, thanks. That’s it from me.

Thank you, Paul.

Good morning. I have two quick questions.

One is, can you quantify how much of your 2015 or 2016 film sales would come from these kind of high return areas?

No, we can’t. Number one, we don’t disclose that or separate that.

Number two, it will be too hard to, I’ll keep that revenue to these projects right now. I don’t think it’s a clean look.

Okay, and my second question is, I think I missed one detail Greg, you were talking about manufacturing cost reductions and you said that South Carolina would account for I think you had mentioned $6.5 million out of was that the $15 million to $18 million overall reductions?

Yes.

Okay. That’s it from me.

Thank you.

Thank you.

Thank you for participating in today’s call. We look forward to speaking to you again following the release of our first quarter results.

Have a great day. Thank you.