Intertape Polymer Group Inc.

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

Michael Dumais - Scotiabank Ben Holton - RBC Capital Markets

Thank you, operator, and good morning everyone. Welcome to Intertape’s 2015 fourth quarter and full year results conference call.

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

During the call, we will make reference to our earnings presentation that you can download from the Investor Relations section of our website. I will begin with a brief review of the highlights for the quarter, starting on page 3 of our presentation.

When compared with Q4 2014, revenue decreased by 2.5% to $295.7 million. The decrease was in large part related to an estimate of lost sales of approximately $9 million resulting from the South Carolina flood.

Gross margin increased to 23.4% from 18% when compared to Q4 2014. The increase was due to an increase in the spread between selling prices and lower raw material costs and a significant improvement in our manufacturing performance, partially offset by an estimate of approximately $3 million of lost gross profit and additional costs related to the South Carolina flood.

As you may recall, we had experienced some isolated manufacturing issues in Q4 2014, whereas not only did we not experience those same issues in Q4 2015, our plant generally ran even better than expected in the quarter. Adjusted EBITDA increased by 19.1% to $24.6 million and was in line with our Q3 guidance.

On page 4 of the presentation, we provide a brief review of the highlights for our full year 2015. For the year as a whole, revenue decreased by 3.8% to $781.9 million, mainly due to a decrease in average selling price, including a significant impact of an unfavorable product mix.

The decrease in average selling prices overall mainly driven by lower petroleum based raw material costs experienced in 2015. Examples of significant factors causing the unfavorable product mix were increases in sales of lower-priced carton sealing tapes and reduction in volumes of higher-priced tape and woven products that were being sold into the oil and gas industry.

Despite the decrease in revenue and a slight decrease in adjusted EBITDA, we were able to increase our cash flows from operating activities to $102.3 million from $86.9 million in 2014 and increased our free cash flow to $68 million from $46.3 million last year. Turning to page 5, CapEx in 2015 was $34.3 million, of which $7.9 million was related to the South Carolina project, bringing the total South Carolina project CapEx to $56.8 million since inception.

We expect total CapEx related to this project to reach $60 million, with the increase being driven by additional commissioning costs for the masking tape production transfer. For 2016, in line with our previous guidance, we expect CapEx to be in the range of $55 million to $65 million, of which $8 million and $12 million is expected to be used to support maintenance needs.

Turning to page 6, over the past few years, water-activated tapes has represented an area of growth for the company. We currently produce water-activated tapes at our manufacturing facility in Menasha, Wisconsin and we’ll construct a new facility in Cabarrus County, North Carolina using existing technology in order to optimize service levels to our customers and supply chain logistics at both plants.

Total project CapEx is estimated at approximately $44 million to $49 million, of which $4.2 million was spent in 2015 and is applied to project and approximately $31 million to $36 million will be spent in 2016. Additional CapEx to be spent in 2016 includes the previously announced and ongoing capacity expansion in our Portugal shrink film operation for $5 million and a new product offering expansion project related to specialty tape for $4 million.

We believe these CapEx initiatives are in line with our strategy to leverage world-class assets with a minimal environmental footprint to produce high quality products in growing areas of our product portfolio and are expected to yield an after-tax internal rate of return greater than 15%. Turning to page 7, total manufacturing cost reductions were $11 million in 2015 and we expect further cost reductions for 2016 of between $8 million to $11 million, excluding any cost savings related to the South Carolina project.

Now on page 8, we acquired TaraTape in November for a purchase price of $11 million and expect the 2016 contribution to be approximately $20 million in revenue, with an EBITDA margin of slightly below 10% without synergies. However, we expect to realize synergies in 2016 and reach a total of between $2 million to $4 million in synergies by the end of 2017.

We also acquired Better Packages in April for a purchase price of $15.9 million. Annualized revenues for this acquisition are expected to be approximately $18 million with an EBITDA margin of over 15% in 2016.

We believe that these acquisitions are an indication of our commitment to create further value for our shareholders through M&A and we continue to work through an active M&A pipeline. As we have stated in the past, our capital deployment strategy is intended to maximize shareholder value through a balanced approach between investing in organic and inorganic cost savings and growth initiatives, as well as returning capital to our shareholders.

As such, we’ve deployed significant amount of capital through our NCIB and dividend policy. In 2015, we purchased approximately 2.5 million shares for a total purchase price of $30 million.

As of March 9, 2016, we repurchased approximately 147,000 shares in 2016 for a total purchase price of $1.7 million. As previously indicated, we intend to be opportunistic in executing any share repurchase under our NCIB.

In addition, we paid a total of almost $30 million in dividend in 2015, a 23% increase compared to the prior year. Since reinstating our dividend policy in August 2012, we have paid a total of $73 million.

On March 31, 2016, we will pay a quarterly dividend of $0.13 per share to shareholders of record on March 21, 2016. At this point, I’ll turn the call over to Jeff who will provide you with additional insights into the financials.

Jeff?

Thank you, Greg. I would now like to refer you to page 9 of the presentation.

Revenue totaled $195.7 million for the fourth quarter of 2015, a $5.1 million or a 2.5% decrease from $200.8 million for the same period in 2014. The decrease was due to a decrease in average selling price, including the impact of unfavorable product mix, both of which were in large part related to an estimated $9 million of lost sales resulting from the South Carolina flood.

An unfavorable foreign exchange impact of $2.8 million added to the reduction in revenue. The decrease in revenue was partially offset by additional revenue of $8.6 million from the Better Packages and TaraTape acquisitions.

Revenue in the fourth quarter of 2015 also decreased sequentially by $5 million or 2.5% from $200.6 million in the third quarter of 2015. The change was primarily due to a decrease in sales volume and average selling price, including the impact of unfavorable product mix, where again both of which were impacted by lost sales resulting from the South Carolina flood.

These unfavorable impacts were partially offset by a decrease in the South Carolina commissioning revenue reduction and additional revenue from the TaraTape and Better Packages acquisitions. Turning to page 10, gross profit totaled $45.8 million in the fourth quarter of 2015, an increase of 26.4% from $36.2 million a year ago.

Gross margin was 23.4% in the fourth quarter of 2015 and 18% in the fourth quarter of 2014. Gross margin increased in the fourth quarter of 2015 primarily due to an increase in spread between selling prices and lower raw material costs, a significant improvement in manufacturing performance, the reversal of a 2010 impairment for manufacturing equipment of $2.7 million, and the favorable impact of the company’s manufacturing cost reduction programs.

These favorable impacts were partially offset by an unfavorable product mix, the decision to change manufacturing locations of certain products to meet customers’ demand and the impact of the South Carolina flood. On a sequential basis, gross margin increased from 21.3% in the third quarter of 2015, primarily due to an increase in manufacturing efficiency, including the operational improvements realized in the Blythewood, South Carolina facility, the reversal of 2010 impairment for manufacturing equipment of $2.7 million and an increase in the spread between selling prices and raw material costs, all of that partially offset by an unfavorable product mix and the impact of the South Carolina flood.

SG&A was $25.8 million for the fourth quarter of 2015, an increase of 10.8% from $23.3 million a year ago, primarily due to the full-year impact of certain variable compensation expenses within the fourth quarter of 2015 and the Better Packages and TaraTape acquisitions. On a sequential basis when compared with the third quarter, SG&A increased 43.7%, primarily due to the full-year impact of certain variable compensation expenses and an increase in stock based compensation, mainly related to an increase in SAR expense in the fourth quarter of 2015, partially offset by the gain on disposal of the company’s former executive headquarters in Bradenton, Florida recognized in the third quarter of 2015.

As indicated on page 13 of the presentation, adjusted EBITDA totaled $24.6 million for the fourth quarter of 2015, a 19.1% increase from $20.6 million in the fourth quarter of 2014, primarily due to an increase in gross profit, partially offset by the previously mentioned increase in variable compensation expense. On page 15, adjusted EBITDA decreased sequentially by 8.4% from $26.8 million in the third quarter of 2015, primarily due to the increase in variable compensation expense, partially offset by an increase in gross profit.

Adjusted net earnings increased to $18.9 million for the fourth quarter of 2015 from $11.9 million in the fourth quarter of 2014. The $7 million increase was primarily due to the recognition of previously derecognized Canadian deferred tax assets and an increase in gross profit, partially offset by the increase in variable compensation expense.

The recognition of the previously derecognized Canadian deferred tax assets was required as a result of the increase in the likelihood that our Canadian operating entity will generate taxable income in future years. For the fourth quarter of 2015, the effective tax rate was negative 34%, primarily due to the recognition of the previously derecognized Canadian deferred tax assets.

It should be noted that the recognition of these deferred tax assets will have no impact on the effective tax rate in future periods. As you will note on page 18, the company had cash and loan availability under its revolving credit facility of $182.3 million as of December 31, 2015, compared to $214.6 million as of December 31, 2014.

Cash flows from operations increased in the fourth quarter of 2015 by $8.1 million to $41.9 million from $33.8 million in the fourth quarter of 2014, primarily due to an increase in gross profit. Free cash flow increased in the fourth quarter of 2015 by $6.5 million to $33.3 million from $26.8 million in the fourth quarter of 2014, also primarily due to an increase in gross profit.

Net debt at December 31, 2015 was $135.2 million, an increase of $20.3 million compared to December 31, 2014. Our debt to trailing 12 month adjusted EBITDA ratio was 1.5 at December 31, 2015 compared to 1.2 at December 31, 2014.

Days sales outstanding was stable at 37 in the fourth quarter of 2015 compared to the fourth quarter of 2014. Trade receivables decreased $2.7 million to $78.5 million as of December 31, 2015 from $81.2 million as of December 31, 2014, primarily due to a decrease in the amount of revenue invoiced in the fourth quarter of 2015, partially offset by the additional revenue from the Better Packages and TaraTape acquisitions.

Days’ inventory increased by 6.1% to 61 in the fourth quarter of 2015 compared to 58 in the fourth quarter of 2014. Inventories increased $3.8 million to $100.6 million as of December 31, 2015 from $96.8 million as of December 31, 2014, primarily due to the Better Packages and TaraTape acquisitions.

Greg will now provide further details on the South Carolina flood, the South Carolina project and our outlook. Greg?

Thanks, Jeff. On page 19, we review the South Carolina flood.

As previously announced, our Columbia facility was damaged by significant rainfall and subsequent severe flooding on October 4, 2015. The decision was made to shutdown the facility permanently.

As many of you know, the planned shutdown of this facility was moved ahead by 8 to 9 months as we originally planning to shut down by the end of Q2 2016. The acceleration of the Columbia shutdown required a lot of coordination to first ensure that our customers were being served to the best of our ability and second, to ensure that we initiated efforts to accelerate the start-up of our masking tape production line in the Blythewood facility.

We’re very pleased with our team’s efforts in addressing these objectives and feel that we have achieved a lot of success and minimize significant risk in both initiatives. However, despite this initial success, there are still challenges ahead in the accelerated ramp up of current masking tape production in Blythewood.

The upcoming move of certain masking tape production temporarily moved to our Marysville, Michigan facility and the efforts to recover sales volume that was lost as a result of the flood. As such, we are sticking with our last guidance on the realization of the full South Carolina project savings of approximately $13 million by the beginning of 2017.

In the fourth quarter of 2015, we recorded a $6.5 million charge for manufacturing facility closures, restructuring and other related charge, primarily related to damage to real and personal property, subsequent cleanup and idle facility costs, partially setting the charges were $5 million in initial insurance settlement claim proceeds received in 2015. In addition to the flood-related cost recorded in manufacturing facility closures, restructuring and other related charges, our sales, gross profit and adjusted EBITDA in the fourth quarter were negatively impacted by the flood.

We estimate that we lost $9 million of sales of masking tapes and stencil products and that the gross profit on these lost sales plus incremental operating costs associated with alternative manufacturing sources had an estimated $3 million negative impact on both gross profit and adjusted EBITDA in the quarter. The company believes it has sufficient property and business interruption insurance coverage and expects the losses will substantially be covered by those insurance policies, with the latter covered until anniversary date of the flood in October 2016.

On page 20, we now present an update on the South Carolina project. As expected, the Blythewood, South Carolina facility duct tape production efficiently continued to improve throughout the fourth quarter of 2015 and is currently close to reaching targeted performance levels.

The remaining inefficiencies are not very significant from a dollar impact perspective. So we are now realizing the majority of the savings related to the duct tape production line.

We continue to work through the remaining improvements and believe that the remaining inefficiencies should be eliminated in the short term. In the fourth quarter of 2015, we began limited production and sales of masking tape from the Blythewood facility and the full transfer of masking tape production still expected to be completed in the first half of 2016.

We now consider that the commercialization of the masking tape products being produced in the Blythewood facility is complete and therefore we must continue to focus on the ramp up in production efficiencies as well as the transfer of certain masking tape production from the Marysville, Michigan facility. The impact of the South Carolina project including both production ramp up inefficiencies net of cost savings and including duplicate overhead costs resulted in a net negative impact of less than $100,000 and $6.2 million on gross profit and adjusted EBITDA for the fourth quarter and the year, respectively.

This was in line with management’s expectations of manufacturing inefficiencies on duct tape production in Blythewood would improve in the second half of 2015, but still end of year offsetting cost savings realized. As I previously stated, the company’s expectation of cost savings from the South Carolina project remain unchanged as management still expect that all ramp up inefficiencies will be resolved by the end of 2016, thereby resulting in the expected $13 million annual cost savings being realized by the beginning of 2017.

We also reiterate that we expect the South Carolina project is expected to have a net positive impact on both gross profit and adjusted EBITDA in 2016, which will represent a significant improvement to our results when compared to the net negative impact it had in 2015. In order to provide our stakeholders with more insights into what we have accomplished on this project, we are planning to hold an Investor Day at our new Blythewood facility on June 20 and June 21.

We still need to work on logistical details and we will keep you posted. Moving on to page 20, we have our outlook for 2016.

The company expects gross margin for 2016 to be between 22% and 24% and to reach the upper end of this range by the fourth quarter. Adjusted EBITDA is expected to be between $117 million to $123 million, excluding the impact of the South Carolina flood.

While South Carolina flood costs and lost sales are expected to be substantially offset by insurance proceeds, the timing of the recovery of the insurance proceeds is uncertain. As mentioned before, manufacturing cost reductions for 2016 are expected to be between $8 million to $11 million, excluding any cost savings related to the South Carolina project.

And total capital expenditures for 2016 are expected to be between $55 million and $65 million. We still expect a 25% to 30% effective tax rate for 2016.

Cash taxes paid in 2016 are expected to be approximately half of the 2016 income tax expense. In regards to our Q1 2016 results, revenue in the first quarter is expected to be similar to the first quarter of 2015.

Gross margin and adjusted EBITDA are expected to be greater than the first quarter of 2015. In conclusion, we’re very happy with the performance of our business in the fourth quarter of 2015, despite the headwinds caused by the South Carolina flood and we look forward to 2016.

We remain committed to increasing value for our shareholders through our organic and inorganic activities. It is because of this commitment that we have been investing in new resources and processes to support the various projects that are ongoing and planned.

In the past year, we have brought significant talent into the company and have a wealth of experience in the successful execution of large scale CapEx projects as well as M&A integration. We’re very confident that with the team we have we will execute successfully on these initiatives.

This completes my presentation. At this point, Jeff and I are open to any questions.

Operator?

So just looking at your gross margins for Q4, if you adjust for the South Carolina flooding as well as the impairment reversal, we get gross margins close to 23.5%. Given the expected results for South Carolina project are expected to improve, how should we reconcile that 23.5% with your guidance of 22% to 24%?

Certainly we had a good quarter on the gross margin side. Obviously, with our gross margin, some of the variables that we deal with there, obviously the product mix side can have substantial impact on that.

We certainly saw, despite the year-over-year some deterioration overall, it was a good quarter. So I’d say that there is certainly some element of that.

Basically, as we said, in that quarter, the other thing we saw a significant improvement in our performance of our plant. So not only did we perform at the levels that expected versus in Q4 of 2014, we performed below the levels that we expected, we exceeded those expectations in fact in the quarter.

So certainly you have that impact. And then also the other thing is as we’ve discussed, I mean, certainly we have been improving on the duct tape line in the Blythewood facility, but there will still be some inefficiencies we may end up having roll through our P&L in the first half or even into the second half of 2016 related to the masking tape production.

So there is a few variables at play that could certainly play into that normalization of that number going forward.

And I missed on those comments, just for the masking tape in particular, could you provide the timelines again in terms of reaching full production and how those inefficiencies play out through the year?

So we expect to have all masking tape moved to Blythewood at the end of the first half of 2016. We expect all production inefficiencies to be resolved at the end of 2016.

So we expect to be on our run rate in the beginning of 2017 for the $13 million annualized savings. So that gives you [indiscernible] of where we expect to be.

For the SG&A, if you exclude the $2.3 million variable comp, it still seems a little high at $23.5 million. Anything else in that number and what would be a fair run rate going forward into 2016?

I know you made a couple of acquisitions, so I’m just trying to put the whole thing together.

I mean, you certainly got the acquisitions rolling in there, you have two months of TaraTape that rolled into there, you have the full quarter of Better Packages for that, you could certainly assume is the run rate level. As we said, the other things impacting SG&A, you had an impact on the stock based comp hitting there and as we’ve explained in the past, we have some variability there that’s unpredictable given that the [stock based depreciation rights] are mark to market essentially every quarter.

So the time when our stock price goes, you will see some variability there. We also discussed, I believe in our MD&A, we talked about some additional resources and we mentioned here at the end regarding resources we brought in to support the growth in the project for the business.

So there was some impact of that in the quarter, although smaller than those other items that I mentioned. So certainly, I mean, the fourth quarter was impacted significantly with the variable comp expense hitting full year effect hitting in the quarter.

So to run rate, I mean, the best thing is to sort of look at the full year, although you probably got adding a little bit for the acquisitions at the end of the year.

It looks like you’re planning to invest in excess of $65 million over the course of the next two years on growth projects. So on the cost side, you typically provided us with annual amounts of manufacturing cost reductions and it helps sort of set our numbers.

Given the increased amount of capital allocated towards growth, how should we think of growth going forward? Starting in 2017, how does that top line at least change directionally?

I think with some of the initiatives on the growth side, leaving a stable ASP environment, those projects are going to be obviously above a normalized GDP level. All I would say on that just from leaving aside the revenue part, but just the margin pick up, all of those projects are going to be north of 15% after-tax.

But it’s hard to profile the amount of moving parts within all the variance what the revenue growth would be.

Maybe just moving back to Blythewood here for a minute, is it reasonable to assume that we should shift from net operational inefficiencies to a net positive position in Q1 or will the efficiencies move higher as masking tape ramps and still result in a net negative position there?

At this point certainly we are going to see inefficiencies on the masking tape side and we haven’t given guidance on the first quarter with regard to how that’s going to look, but like we said, we are close to reaching the targeted level of savings on the duct side, which as we said in the past is somewhere near half of the savings that we’ve announced for the whole project. So if you just run rate that and then take off some inefficiencies we should be positive, certainly it should be positive.

Sticking with Q1, I guess, thinking about revenue there, obviously not any growth year-on-year, is that due to customer destocking in Q1 again as we’ve seen polyethylene prices come off or is that more of a ramp up of commissioning costs related to masking tape?

Just as it relates to our order of input rates compared to last year, we are fairly flat to up in units. We are seeing some decline from a year over year basis of selling price reductions, but we really haven’t seen – nowhere near the magnitude and really we didn’t even notice the de-inventorying if you will during the quarter so far.

So it’s been fairly smooth and steady as it relates to demand picture, especially related to those plastic products were even though you see a drop in polyethylene, polyethylene probably going to drop even further here, but it’s been fairly stable.

And the other thing, Ben, you mentioned that commissioning, so yes, in our numbers for Q1, we are expecting to see some commissioning entries related to the masking tape line, but certainly will have a reduction in revenue related to that, which you did not have in Q1 of 2015.

And that presumably offsets the additions year-on-year from M&A?

I’m not sure with the exact amount, we haven’t disclosed the amount, but it will definitely offset some of it, if not all.

Looking at water-activated tape expansion, are you expecting this added capacity to be filled through market growth or market share gains, I’m sure it’s probably somewhere in between there, but what gives you the confidence that you will indeed be able to gain share and fill that plant, as I imagine the incumbents won’t want to just give that volume to you?

We’ve seen a pretty significant growth in that area over the past five years, were driven by a number of things, certainly e-commerce, certainly recycled content and boxes, we’ve seen growth in that area. And we believe that we will fill that plant through growth, not through share gain.

And the only thing I would say on share gain is the share gain might just be share gain of water-activated tape versus pressure sensitive tape.

And a shift of customer usage there?

Yes. And I think it’s also really important to state that when we look at that plant, we analyzed building new capacity and putting it in our existing plant in Wisconsin.

That facility is pretty much landlocked and full, and our evaluation of putting capacity there was too risky as it relates to potential interruption to existing production. And then it’s a technology that we are utilizing in our North Carolina facility is a technology that we’ve been utilizing in the company for the past 50 years.

So definitely a lower risk implementation there?

Yes.

I have one quick question with regards to the commissioning costs around the masking tape production, can you elaborate a little bit more about that and how that’s going to evolve through 2016 [indiscernible] to the story?

So the way it basically works is two-fold. So one is there is certain amount of inefficiencies related to the commissioning of the line for the masking tape product that we can capitalize.

So those will end up, that’s why we’ve announced that the total CapEx for the project will be going up. So we’re required to capitalize a certain portion of that.

And then on top of that, as a result of us deeming the process to be commissioning, any sales that we have related to that line or to that commissioning process, we actually have to back out of our reported revenue and we actually have to back out also the associated cost of sales. So essentially backing out the gross profit related to those sales coming out of the commissioning process and that all gets offset against the capital expenditures capitalized for the project.

The only thing to note is that the gross profit that typically gets backed out is not very significant, given that the margin profile of sales that are produced out of the commissioning process tend to be very low, given that it’s an initiation process. So in fact, it really doesn’t impact your gross profit dollars very much, but you do see sometimes a larger impact on the sales line.

So for example, like you saw in our revenue bridge on the ninth slide there for the year, we had $11 million top line reduction due to the duct tape commissioning revenue that was backed out. But really from a gross profit perspective, that was very small.

Is that clear?

Absolutely, yes.

Thank you. I’d like to thank everyone for participating in today’s call.

We look forward to speaking with you again following the release of our first quarter results in May. Have a great day.

Thank you.