Intertape Polymer Group Inc.

Gregory Yull - President & CEO Jeffrey Crystal - CFO

Michael Dumais - Scotiabank Ben Holton - RBC Capital Markets

Thank you, operator, and good morning everyone. Welcome to Intertape's 2016 first 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 our quarterly 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 and 4 of our presentation.

Overall, our results were in line with our guidance announced on the Q4 2015 earnings call. At a high level we continue to benefit from lower raw material cost, especially in our tapes and stencils products lines.

We have been pleased with the performance of our manufacturing plants including the progress that we've been making at our new plant in Blythewood, South Carolina, as well as the integration of our acquisitions. From materials volume perspective, we saw healthy 2.9% volume growth year-over-year which came mainly from certain tapes and stencils.

However, we continue to face headwinds and product mix due to areas such as weakness in international sales due mainly to the strong U.S. dollar as well as the oil and gas industry and associated industries.

Lastly, the negative effect of the South Carolina flood remain a drag on our revenue and earnings. When compared with Q1 2015 revenue increased by 1% to $190.8 million.

The increase was in large part related to the TaraTape and Better Packages acquisitions and increased sales volume, partially offset by decrease in average selling price and the South Carolina commissioning revenue reductions. Gross margin increased to 21.5% from 19.6% when compared to Q1 2015.

This increase was driven in large part by an increase in the spread between selling prices and lower raw material costs. I'm pleased to report the cost savings related to the South Carolina project, net of production ramp up inefficiencies resulted in a $1.3 million net positive impact on gross profit and adjusted EBITDA for the first quarter of 2016.

This was the first quarter this project resulted in a positive contribution to profit and we continue to make improvements to the production process to increase our efficiencies. SG&A increased $5.3 million in Q1 2016, primarily due to increases in stock based compensation expense, variable compensation expense, additional SG&A in 2016 derived from business acquisitions and employee-related cost to support business growth initiatives.

Net earnings decreased $2.2 million to $9.5 million in Q1 2016 primarily due to increases in SG&A and manufacturing facility closure charges related to the South Carolina flood, partially offset by an increase in gross profit and a decrease in income tax expense. Adjusted EBITDA increased 2.1% to $24 million and was in line with our guidance.

As we expected, the South Carolina flood continues to have a negative impact on our Q1 2016 results. We estimate that we lost approximately $5 million of sales as well as reductions in gross profit, net earnings and adjusted EBITDA of approximately $3 million.

The company remained opportunistic under its normal course issuer bid during Q1 with 147,000 shares repurchased at an average price of $15.77 Canadian. Finally, the Board declared a dividend yesterday of $0.13 per share that will be paid on June 30.

Turning to Page 5, capital expenditures in Q1 2016 were $9.5 million, of which $2.2 million were commission related cost for the South Carolina project. 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.

We have been making good progress with the strategic project outlined in our Q4 2015 announcements. Off note, we recently committed the building shelf or shrink film expansion project in Portugal and the project remains on-track to be completed by the end of the first half of 2017.

Turning to Page 6, we outlined our manufacturing costs reductions for Q1 2016 and provided forecast for 2016. The total was $3 million in Q1 2016 and we expect total cost reductions for 2016 of between $8 million to $11 million, excluding any costs savings related to the South Carolina project.

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 7 of the presentation where we present a summary of our results for the first quarter 2016.

Gross profit totaled $41.1 million in the first quarter of 2016, an increase of 11% from $37 million a year ago and a decrease of $4.7 million or 10.3% from the fourth quarter. Gross margin was 21.5% in the first quarter of 2016 and 19.6% in the first quarter of 2015.

Gross margin increased in the first quarter of 2016 primarily due to an increase in the spread between selling prices and lower raw material costs, and a favorable impact of the company's manufacturing cost reduction programs partially offset by an unfavorable product mix, and the impact of the South Carolina flood. On a sequential basis, gross margin decreased to 21.5% in Q1 2016 from 23.4% in Q4 2015, primarily due to unfavorable product mix and the non-recurrence of $2.7 million impairment reversal in the fourth quarter partially offset by the favorable impact of the company's manufacturing cost reduction program and an increase in the spread between selling prices and lower raw material costs.

SG&A was $23.4 million for the first quarter of 2016, an increase of 29% from $18.1 million a year ago, primarily due to increases in stock based compensation expense, variable compensation expense, additional SG&A derived from the Better Packages and TaraTape acquisitions, and employee-related cost to support growth in the business. The increase in stock based compensation expense was primarily due to an increase in stock appreciation right expense in 2016 resulting from a larger decrease in the company share price in the third quarter of 2015, and an increase in PSU awards outstanding in the first quarter of 2016 compared to the first quarter of 2015.

As indicated on Page 10 of the presentation, adjusted EBITDA totaled $0.4 million for the first quarter of 2015, a 2% increase from $23.5 million in the first quarter of 2015, primarily due to an increase in gross profit, additional adjusted EBITDA in 2016 derived from the Better Packages and TaraTape acquisitions, partially offset by an increase in SG&A relating mainly to an increase in variable compensation expense, the business acquisitions and employee-related costs to support business growth initiatives. On Page 12, adjusted EBITDA decreased sequentially by 2.2% from $24.6 million in the fourth quarter of 2015, primarily due to a decrease in gross profit partially offset by a decrease in SG&A, mainly relating to variable compensation expense.

Adjusted net earnings increased to $14 million for the first quarter of 2016 from $12.6 million in the first quarter of 2015. The $1.4 million increase was primarily due to an increase in gross profit, adjusted net earnings derived from the Better Packages and TaraTape acquisitions and a decrease in income tax expense portfolio by an increase in SG&A relating to variable compensation expense, the business acquisitions and employee-related cost to support business growth initiative, and finally an increase in finance costs.

For the first quarter of 2016, the effective tax rate was 24% versus 27.2% in the first quarter of 2015. The decrease in the effective tax rate is primarily due to the a change in the mix of earnings between jurisdictions.

As you will note on Page 13, cash flow from operations decreased in the first quarter of 2016 by $2.2 million to an outflow of $1.3 million from an inflow of $900,000 in the first quarter of 2015, primarily due to a larger increase in working capital in the first quarter of 2016. The increase in working capital was mainly the result of a decrease in accounts payable and a crude liability, primarily due to the timing of payments for inventory and SG&A, the non-recurrence of certain tax refunds within other current assets that occurred in the first quarter of 2015, as well as an increase in trade receivables consistent with the increase in sales during the first quarter of 2016.

The was partially offset by a larger inventory build during 2015 to prepare for the transfer of production related for the South Carolina project. Free cash flow decreased in the first quarter of 2016 by $2.7 million to an outflow of $10.8 million from an outflow of $8.1 million in the first of 2015, primarily due to larger increase in working capital and an increase in capital expenditures.

Net debt at March 31, 2016 was $156.6 million, an increase of $21.4 million compared to December 31, 2015, primarily to fund our seasonal working capital requirements, CapEx and the dividend payment partially offset by cash flow from operating activities before changes in working capital. As of March 31, 2016, the company had cash and loan availability under its revolving credit facility of $161.2 million, this compared with cash and loan availability of $182.3 million as of December 31, 2015.

Days' inventory increased by 65 in the first quarter of 2016 compared to 61 in the first quarter of 2015. Inventories increased $11.9 million to $112.5 million as of March 2016 from $100.6 million as of December 31, 2015.

The increase was primarily due to a seasonal planned inventory build, as well as increase in raw material prebuy purchases in the first quarter of 2016. Day's sales outstanding was stable at 41 in the first quarter of 2016 compared to the fourth quarter of 2015.

Trade receivables increased $7.3 million to $85.8 million as of March 31, 2016 from $78.5 million as of December 31, 2015, primarily due to an increase in the amount of revenue invoiced later in the first quarter of 2015 compared to later in the fourth quarter of 2015. Greg will now provide further details on the Columbia facilities at South Carolina project and our outlook.

Greg?

Thanks, Jeff. On Page 14, we provide an update on the Columbia, South Carolina flood.

To review the situation briefly, in Q1 2016, we reported a $1.5 million of manufacturing facility closures, restructuring and other related charges related to the Columbia facility for a total $8 million since the incidence. Partially offsetting the charges were $5 million in initial insurance settlement claim proceeds reported in Q4 2015.

We estimate that our results for the first quarter of 2016 were negatively impacted by the flood closure of its facility by approximately $5 million of lost sales of masking tape and stencil products, as well as reductions in gross profits, net earnings and adjusted EBITDA of approximately $3 million. As I've mentioned on previous calls, I believe our team has done a great job ensuring the supply of our products and majority of our customers.

We continue to work hard on the masking tape production process at our Blythewood facility and to replace our lost stencil production line. We hope these advance into results in us recapturing a good part, if not all of the business we believe we have lost in the near term.

Lastly, our team continues to work on compiling and filing of our property and business interruptions insurance claims. We are aiming to resolve most of the insurance claims in 2016 but there could be some carry over into 2017.

On Page 15, we present an update on the South Carolina project. We are very pleased to announce that we have completed the full transfer of masking tape production for the Blythewood facility in April of 2016 which is in line with our guidance of the transfer completed by the end of Q2 2016.

As previously announced, we were able to transfer certain masking tape products of Blythewood in Q4 2015 but the April transfer represented the transfer of the remaining Columbia masking tape products from our facility in Marysville, Michigan. At this point we are able to satisfy the volume requirements for our customers from the Blythewood facility and we continue to focus on the ramp up in production and the minimization of production inefficiencies.

In the first quarter of 2016, we reported a $4.3 million South Carolina commissioning revenue reduction attributed to masking tape commissioning efforts which was a drag on our revenues as compared to year-over-year and sequentially. As of March 31, 2016, capital expenditures for the South Carolina projects since inception totaled $59.1 million and were $2.2 million for Q1 of 2016.

Total capital expenditures for this project from inception to completion are still expected to be approximately $60 million. The company's expectations to costs savings from the South Carolina projects remains unchanged as management expects that all ramp up inefficiencies will be resolved by the beginning of 2017 thereby resulting in the expected annual savings of approximately $13 million.

Moving on to Page 16, we have our outlook for the remainder of 2016. Our annual guidance for 2016 remains unchanged from our last announcement.

We reiterate that the company expects gross margins for 2016 to be between 22% and 24% and reach to upper end of this range by the fourth quarter. Adjusted EBITDA is still expected to be in the $117 million to $123 million range excluding the impact of the South Carolina floods.

As mentioned before, manufacturing cost reductions for 2016 are expected to be between $8 million and $11 million excluding any costs 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 expected 25% to 30% effective tax rate for 2016 with cash taxes expected to be approximately half of the income tax expense in 2016. In terms of our Q2 2016 results, excluding the potentially impact of South Carolina commissioning accounting adjustments, we expect revenue, gross margin and adjusted EBITDA in the second quarter of 2016 to be greater than in the second quarter of 2015.

Finally as I mentioned in the last call, from a capital allocation perspective, we expect capital expenditures and M&A to represent more significant components over the next several years. We believe there are and will be significant opportunities to invest in our operations to improve productivity, increase capacity and manufacturing products.

We are pleased with the integration process of the acquisitions that were completed in 2015 and expect synergies to have a full impact by the end of 2017. Going forward we intend to continue our pursuit of other strategic opportunities.

This completes my presentation. At this point, Jeff and I will be open -- we will open up the call to any questions.

Operator?

Good morning guys. Just wondering if you can talk about the cost reductions of $8 million to $11 million.

What sorts of things would cause you to come in I guess at either end of that Spectrum? And should we expect sort of a straight line effect for the rest of the year by quarter?

I mean basically I wouldn't say straight line necessarily because it depends on the scheduling of those different projects. Some of that $8 million to $11 million is tied in with some of the CapEx, some it is just tied into literally efficiencies, so profits improvement, raw material reductions and so forth.

But I would say is in terms of getting from the low to the high end of that, it really depends on how much we're able to execute during the year. Typically, we've had a lot of success from the projects that we have executed on, and so sometime it's just a lag at the end of the year, sometimes there is a backlog of things that's hanging with what happening in the plant that prevent us from executing on all of them.

Typically when we don't, we have that carried over into the subsequent years. So they are not loss, but potentially delayed a little bit.

And something's that we drive into the upper end of that, if volume was higher than expected, volume plays a key role in GMIs on the cost saving initiatives? So volume was higher and subsequently volume was lower, it would have an impact on the range?

Okay, that's good. And how should we think about I guess additional costs savings related to South Carolina?

I mean for now the target for $13 million and we're reconfirming that so we just don't leave it at the $13 million at this point. I think when you look at that facility longer term, there is open capacity in that facility and that the capitals are even deployed.

So certainly that facility could handle more volume going through to drive savings on the existing business as well.

And I guess that effectively starts pretty early in 2017 and ramps up pretty quick, that run rate is savings?

Yes, should be in the beginning of that that will be the beginning of 2017.

Yes, we expect that run rate at that point.

Got it, okay. Thanks.

Hi, good morning guys. Just a clarification, excluding the impact of the South Carolina flood, the adjusted EBITDA would have been $27 million in the quarter and that is an apples-to-apples comparison to your full year EBITDA guidance of $117 to $123.

Is that correct?

That's correct. Okay.

And did those, did that $27 million, did that meet your expectations for the quarter?

Yes, I mean it did meet our expectations in some of the variable comp on the SG&A side. So we feel like our business is performing well, the plants performed relatively well.

Certainly we would have liked to see that a bigger number than the $27 million but we feel good about the balance of the year and the way the business is performing right now.

Okay, fair enough. And maybe just a cold question here but did you get a sense for how many more quarters or maybe the magnitude of the impact of the floods going forward, maybe Q2, Q3 or whatever you could sort of see and tell us right now?

Yes, what we can say is we certainly see that coming down, certainly as we regain revenues, that's going to help our topline, help our bottom line. And we're obviously working on through the clean-up which is coming towards the end and so that should come down.

That will be there potentially next quarter Q2, Q3, just as I indicated in the past; our business interruption insurance runs out as of October 4, 2016 which is 12 months after the last state. So in Q4 of 2016, if there is any remaining impact that would actually hit out P&L and would not be recovered.

But we should also see inflows of the actual claims between now and the end of -- I would say sometime in 2017-2018 so when you think of the financials, you should see some of that start hitting the financials of the company which would reverse somewhat that negative effect. Plus we get the revenue back that we've lost; we should see an impact going forward.

Okay. So $3 million last quarter, $3 million this quarter presumably coming down for the next -- that full amount comes back in -- some times at the end of the year, is that correct?

Well we're filing our claims by quarter, so we've already filed our claim for Q4. So that was done recently, so we're working through that with our insurance company and we're just going to follow that by quarter, so we're working now on solving our Q1 claims.

So I would expect that once we get that Q4 claims filed, that's certainly going to simplify things since we have a process, we have the documentation in line and understand what's required. So I would expect to see that start flowing through in the next quarter I would think that recent recovery there and certainly thereafter.

Okay, perfect. And on the revenues, your revenues were down $5 million due to the flood and another $4.3 million due to the commissioning.

Did you sort of have a sense for those -- how those should foresee for the remainder of the year? And maybe eventually should we see guidance falling through the P&Ls volume and price mix growth presumably 2017?

On the unusual items, I'll comment on that first. So on the commissioning side, I mean we're certainly hoping that we can get out of commissioning with regards from asking pace.

So that's really going to depend on how the ramp up is going. I mean right now we're very pleased with what we see.

We re-evaluate that every quarter, so I can't really tell you -- that's we rooted that from our guidance for Q2. At that point we're unsure of whether Q2 will be considered commissioning or not, so that will remain uncertain due to that impact.

So from the perspective of the flood, as we discussed, I mean, we expect to see that come down as we regain business. It did come down from Q4 to Q1, so from $9 million to $5 million.

And then on the price mix, there -- that certainly -- I'd say on the price side, we did experience some of the work cost raw materials rolling through. Prices are held pretty well, so we're not giving up all of that certainly.

So I would expect there to continue to see a more stable environment. And so on this standpoint, we did see some deterioration in the quarter and that again relates to some of the same things we've been discussing.

So I mean that -- and that's probably the biggest variable that we face that's a little less certain. But as we start having comps compared to last year, where we did experience more significant mix deterioration as a result of the strong U.S.

dollar affecting our international business and then you have the oil and gas crash which impacted a lot of our products. So certainly I would expect to see that less significant year-over-year than we saw last year.

And the other thing I would add to that as well as when you think of revenue, when you think of what's happened with input cost, we see now on year-over-year perspective, Q1 to Q1, we've seen a pretty substantial drop in pricing. While we've done well in the business, profitability compared to last year, we have given up some top lines just because of the pressure on the input cost.

Take pricing as relatively flat, can give and take from there. And we're seeing some pricing pressures year-over-year in ECP, our woven products group, that's primarily polyethylene, polypropylene in the business, so that's to be expected.

Okay, perfect. Thanks guys, I'd get back in queue.

Good morning, guys. A quick question on duck tape.

Would you say that production is now up and running at levels that we're initially planned at the outset of the project?

Yes, pretty close. Where we are experiencing the only -- we are experiencing some volume declines in that business just because of the currency exposure overseas.

When you take a look at the $1.3 million for the quarter, positive effect of the plant coming from that.

Okay, great. And what am asking, understanding it kind of just fully transferred over in April.

What inning would you say you're kind of now in with respect to the ramp up?

I don't about innings; I would definitely say that we're pleased and confident with our guidance. We continue to make headway in that area though I will give you a little -- so we have days and shifts where we're perfect, and the gap between or the range between bad days and good days are getting narrow slowly and the masking tape but we're still developing a process there, we still need more robustness and higher uptime.

However, we are making good progress and we do feel good about attaining that guidance obviously.

So is it the uptime that's currently the main issue or way the store speed or anything like that?

Yes, it's time and if you're not up, if the line is not up, it tends to be producing waste so it kind of trickles down from -- I mean it starts with uptime and every time you're down, you tend to create more waste. So certainly from an up time perspective, that the number one goal.

And I think everything else slows after that. Lower waste numbers, things of that nature.

Great, that's helpful. And one point clarification on your guidance.

Does the gross margin guidance of 22% to 24% exclude the impact of flood related cost, like the adjusted EBITDA guidance does, it doesn't have that footnote on it?

Yes, it would exclude it. I mean we probably should have a footnote there because at the end of the day as we discussed, there is a lot of uncertainty as to how the flood will impact our P&L this year, given the timing of the insurance.

In a perfect world, I'd be accruing the insurance at the same time we're losing the money. So you basically see something getting flat.

At this point any of the guidance that we're giving relative to the year certainly cannot include the impact for the flood.

Okay, as I thought, just wanted to be sure there. Thanks so much.

I'll jump back in the line here.

Good morning. I have two questions, the first one is when you talked about recovery of sales, is that the way to -- is the right way to understand that that temporarily some of your customers have moved to different supplier and now you're sort of starting to regain that business?

And can you elaborate a little bit more how that process is going?

Yes, so that's exactly the way it works. A lot of these customers are around the world.

So they are out of North America primarily, and so you're dealing with a fairly long supply chain and feedback as it relates to product performance and quality. So that's a timing issue that we're working through as it relates to getting them product, getting it approved and subsequently selling orders.

So we're -- it's going well, we expect to get our business back and certainly guarantee it but we certainly see and make some headway during the first quarter in getting that business back. And then on the central side, which is an area that we're -- we're out of production and we're sourcing material from the outside in that area, our production line should be up in latter part of Q3 and we should be back in production during that period and start regaining business at that point.

And to think about those volumes, those are in theory pretty much correlated to the flood, had there not been any flood you probably wouldn't have seen such a decline there?

Absolutely.

Okay, thank you. And my second question is, just in terms of the insurance payments, when we see the flow of these money, how would that be accounted for on the P&L?

It really depends what it's for. So what I would tell you is on the property side, it's quite clear.

It only the property claims that we're making will certainly slow through our plant closure line below the gross profit and EBITDA. So anything related to the building equipment losses and so forth.

So that will not flow through your EBITDA number. And anything else through business interruptions, so there basically we have to determine as part of the claim that it relates to items that were slowing through our plant closure line or does it relate to items that were slowing through our gross profits.

And certainly we can allocate those insurance proceeds depending on where those things actually sell. So you will see them flowing through both sides of those items when it comes to the business interruptions.

Okay, thank you.

Thank you. Let me thank you participating in today's call.

On April 29 we issued a press release to announce that we will hold an Investor Day at our Blythewood facility on June 21. We look forward to speaking with you again during our annual meeting on June 9, and then again following the release of our second quarter results in August.

Thank you. And have a good day.