Intertape Polymer Group Inc.

Greg Yull - President & CEO Jeff Crystal - CFO

Michael Dumais - Scotiabank Ben Holton - RBC Capital Markets Ben Jekic - GMP Securities

Thank you, operator, and good morning everyone. Welcome to Intertape's 2016 second 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.

We are very pleased by our results for the quarter. Our operations performed above our expectations.

We are seeing manufacturing cost reduction initiatives positively impacting the overall performance of our various manufacturing facilities, as well as the benefits from the spread between selling prices and raw material costs. We are also seeing growth from e-commerce fulfillment across our packaging product offerings.

Furthermore the Better Packages and TaraTape acquisitions completed last year are performing very well and in both cases are exceeding our expectations in terms of EBITDA contributions. However, we continue to have ongoing challenges in our woven business, our international customer channel and most recently in the masking tape production ramp-up in the Blythewood facility.

All of this considered, we reported one of highest levels of adjusted EBITDA on our history of $33 million. This equates to approximately $30 million when excluding the impact of the South Carolina flood and related insurance proceeds.

When compared to Q2, 2015 revenue increased by 2.5% to $201.5 million. The increase was due to additional revenue derived from the TaraTape acquisition, a decrease in South Carolina commissioning revenue reduction and increased sales volume partially offset by decrease in average selling price.

Here again we achieved revenue growth despite an estimated $5 million impact of lost sales of masking tape and stencil products from the South Carolina flood. Gross margin increased to 25.7% from 21.6 compared to Q2 2015.Without the estimated positive impact of the South Carolina flood and related insurance proceeds of $3 million, the gross margin was still a very healthy 23.8%.

The increase was driven in large part by manufacturing cost reduction initiatives and the increase in the spread between selling prices and raw material costs. Adjusted net earnings increased $6.2 million to $20.3 million in Q2, 2016 primarily due to an increase in gross profit and the contribution from acquisitions partially offset by higher SG&A.

We expect that adjusted net - we estimate that adjusted net earnings were positively impacted by the South Carolina flood and related insurance proceeds by approximately $2 million. Adjusted EBITDA increased by 21.7% to $33 million and was in line with our guidance.

These solid results were achieved despite a very modest positive contribution from the cost savings at the Blythewood facility. Now on Page 7, in July we renewed our NCIB for 12 month period starting July 14, 2016 under which we can repurchase up to 4 million common shares for cancellation.

Since July 2014, we have repurchased 3.2 million shares representing a total amount of 39.5 million. During the second quarter and as of August 10, 2016 no shares were repurchased under the NCIB and we still intend to be opportunistic in executing any share repurchases over the next 12 months.

Finally the Board of Directors amended the company's dividend policy to increase the annualized dividend by 7.7% from $0.52 to $0.56 per common share. The Board's decision to increase the dividend was based on the company continued strong financial position and positive outlook.

Since the dividend policy was reinstated in August 2012, the company has increased the annual dividend four times and paid out a total of 88.3 million in dividends to our shareholders. Turning to Page 8, capital expenditures year-to-date in 2016 were $23.3 million.

During the year water-activated tapes strengthened and specialty tape projects accounted for 30% of that total amount. To-date these projects are all progressing according to announced timelines and budgets.

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 to $12 million is expected to be used to support maintenance needs. On Page 9 our manufacturing cost reduction totaled $6.2 million year-to-date and we expect total cost reductions for 2016 of between $8 million and $11 million excluding any cost 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 our financials. Jeff?

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 second quarter of 2016.

Gross profit totaled $51.8 million in the second quarter of 2016 an increase of 22.2% from $42.4 million a year ago. Gross margin was 25.7% in the second quarter of 2016 and 21.6% in the second quarter of 2015.

Gross margin increased in the second quarter of 2016 primarily due to South Carolina flood insurance claim settlement proceeds, 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. The South Carolina flood insurance claim proceeds received in the second quarter were $5 million of which $4.5 million was recorded as a reduction in cost of sales and $0.5 million as a reduction of manufacturing closures, restructuring and other related charges.

On a sequential basis, gross margin increased to 25.7% from 21.5% in the first quarter of 2016 primarily due to South Carolina flood insurance claim settlement proceeds and unfavorable product mix variance. SG&A was $26.3 million for the second quarter of 2016 an increase of 18.1% from $22.3 million a year ago primarily due to an increase in variable compensation expense employee-related costs to support business growth initiative and additional SG&A derived from the TaraTape acquisition.

On a sequential basis when compared with the first quarter SG&A increased 12.4% primarily due to an increase in variable and stock-based compensation expense. Adjusted net earnings increased to $20.3 million for the second quarter of 2016 from $14.1 million in the second quarter of 2015.

The $6.2 million increase was primarily due to an increase in gross profit and the acquisitions of Better Packages and TaraTape partially offset by increases in SG&A. For the second quarter of 2016, the effective tax rate was 29.1% versus 28.8% in the second quarter of 2015.

The increase in the effective tax rate compared to 24% in the first quarter of 2016 was mainly due to variations in the geographic mix of earnings between the two periods. Assuming there are no material changes to the company's expected geographic mix of earnings over the remainder of the fiscal year, the company still expects its effective tax rate for the full financial year of 2016 to be between 25 and 30%.

As indicated on Page 13 of the presentation, adjusted EBITDA totaled $33 million for the second quarter of 2016 a 21.7% increase from $27.1 million in the second quarter of 2015 primarily due to an increase in gross profit partially offset by the increase in SG&A. On Page 15 adjusted EBITDA increased sequentially by 37.3% from $24 million in the first quarter of 2016 primarily due to those same drivers.

As you will note on Page 18, cash flows from operations decreased in the second quarter of 2016 by $1.4 million to $24.4 million from $25.7 million in the second quarter of 2015 primarily due to an increase in trade receivables and a decrease in accounts payable partially offset by an increase in gross profit. Sequentially we experienced the large increase in cash flows from operations and free cash flows mainly due to a large seasonal increase in working capital in the first quarter of 2016 and an increase in gross profit in the second quarter of 2016.

Free cash flows decreased in the second quarter of 2016 by $9 million to $10.6 million from $19.6 million in the second quarter of 2015 primarily due to an increase in capital expenditures. Net debt at June 30, 2016 was $154.4 million an increase of $19.2 million compared to December 31, 2015 primarily to fund our working capital requirements, CapEx and dividend payments partially offset by cash flows from operating activities before changes in working capital.

As of June 30, 2016, the company had cash and loan availability under its revolving credit facility of $162 million, this compares with cash and loan availability of $182.3 million as of December 31, 2015. Days inventory increased by 5.9% to 68% in the second quarter of 2016, compared to 64% in the second quarter of 2015.

Inventories increased $10.6 million to $111.2 million as of June 30, 2016 from $100.6 million as of December 31, 2015. The increase was primarily due to an inventory build in anticipation of higher expected sales volume and annual maintenance shutdowns of certain facilities in third quarter of 2016 as well as an increase in raw material purchases.

Day sales outstanding increased to 40 in the second quarter of 2016, compared to 39 in the second quarter of 2015. Trade receivables increased $9.5 million to $88 million as of June 30, 2016 from $78.5 million as of December 31, 2015, primarily due to an increase in the amount of revenue invoiced in the second quarter of 2016 as compared to the fourth quarter of 2015.

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

Thanks, Jeff. On Page 19, we provide an update on the Columbia, South Carolina flood.

The company along with its insurers and advisors continue to assess the damage. We’ve received a total of $10 million in insurance claim settlement proceeds to-date since the fourth quarter of 2015.

We continue to believe that our insurance policies will substantially cover our flood-related losses and we have been filing claims as we work through the cost and supporting documents related to the damage suffered by the company. We’re aiming to resolve most of the insurance claim settlement processed in 2016, but are unable to predict the amount and timing of the total recovery.

On Page 20, is our update on the South Carolina project. The duck tape production is meeting targeted production levels and has contributed a net positive impact of gross profit and adjusted EBITDA in the quarter for the first six months of 2016.

In regards to masking tape production, we’ve been working on optimizing the related production processes since production was transferred in the fourth quarter of 2015. Since that time we’ve made significant improvements towards that objective.

However, since the end of the second quarter of 2016, the company has made significantly less progress than expected on reducing the inefficiencies in masking tape production as well as eliminating certain quality issues related to one of the masking tape products. These masking tape production inefficiencies largely offset the cost saving realized by the duct tape production resulting in only a slightly positive impact to the results realized in the second quarter of 2016.

This was a setback when compared with the first quarter of 2016. Therefore, at this stage, we believe the ramp-up period of masking tape could be extended and possibly generate less cost savings than initially anticipated.

We’re working aggressively on several initiatives that should yield positive results and we’ll provide further updates towards the end of the year. For fiscal 2016, we still expect the cost savings from the South Carolina project to have a significant net positive impact on gross profit and adjusted EBITDA compared to 2015 given the success of the duct tape production and the expected improvements to masking tape production.

As I’ve stated we’ll provide updates as we better understand what this means regarding the full realization of the approximately $13 million of cost savings expected to be realized by the beginning of 2017. Moving on to Page 21, we have our outlook for the remainder of 2016.

Our annual guidance for 2016 is mostly unchanged since our last announcement. We expect gross margin for 2016 to be between 23% and 24%.

Considering year-to-date results and expectations for the second half of the year we’ve raised the bottom end of our gross margin range to 23% from 22%. Adjusted EBITDA is still expected to be between $117 million $123 million, excluding the impact of the South Carolina flood.

In terms of our Q3 2016 results, excluding the impact of the South Carolina flood, we expect revenue, gross margin and adjusted EBITDA in the third quarter of 2016 to be greater than in the third quarter of 2015. In conclusion, we remain optimistic for the remainder of fiscal 2016 and our focus on achieving our long-term goal to significantly grow the company over the next five to seven years.

This completes my presentation. At this point Jeff and I will open up the call to questions.

Operator?

Hi, good morning, guys. Well done in the quarter.

So I am going to jump to Blythewood here, you’ve indicated that you’ve made if I understood this correctly, significant improvements on the masking tape production throughout the quarter in Q2.

No.

No, okay. So to that 0.2 million positive is that equivalent to your exit run rate as well as in terms of profitability?

No so just represents what we had in the quarter, so that represents the positive impact of duct and less the negative impact of masking in the quarter. What we said is that basically since the beginning when moved masking tape there in Q4 of ’15 since then we had made significant improvements, but we haven’t made those improvements at the same rate certainly over the last couple of months and that’s where these inefficiencies are coming from.

So currently exiting the quarter you're near that breakeven point if I understood that correctly?

Yes, exiting the quarter yes.

Okay. Could you maybe break that down to duct tape seems to be achieving the cost savings.

Could you give us a sense if masking tape is at least headed to a neutral or breakeven in the coming quarters just to give us a sense of how that ramps up throughout the year?

Well what I would say is that we feel confident in the plan in place. We believe that we’re going to see improvement as we move through the year.

It’s hard to determine because we’re like I am sure everyone is frustrated with a lack of progress in the last month or two, but we believe that there is a plan in place. We believe there are good people in place executing that plan and at this point we’re not going to give guidance as it relates to how that ramps up through the year.

But again I am confident that at the end of the project, which should be soon, we’ll get a very profitable plan. So very confident in the technology, still confident in the people.

Okay. Fair enough.

So maybe switching over to the lost sales relating to the South Carolina flood, that was a $5 million similar to last quarter. How do you feel in terms of getting that number back to 0 before October?

Well I think you’ve got a couple other things playing in there. You’ve got a currency issue coming out of the U.S.

plant. I think we should make some headway.

We’ve got good progress on time in our stencil production right now. So we should be back in production of that product line within the next week or two.

So we feel confident about that. And I think we should see some ramp-up of that lost sales or minimization of the lost sales as we move into October-November.

Okay. And maybe another question related to that.

Just based on the precedence established in regards to the insurance claims this quarter, do you expect the flood impact to be largely neutral on gross margins, maybe even into 2017 but throughout the time period?

We hope so.

Okay. And maybe I’ll just have one last one last question before I pass it on here.

Now we’ve seen lower resin prices for the last approximately 18 months. That could go lower but just excluding that, how should we look at margins going forward and maybe the incrementals or maybe no more incrementals in terms of an increased spread and price and costs.

Yes, tough to give guidance on that. I think you got to look at our gross margin guidance there, but from a raw material perspective when we think of what we’re going to incur in Q3 compared to Q2, there are some increases going through on polyethylene potentially.

Polypropylene is probably moving a little lower. We’re seeing a little movement up in some hydrocarbons, but net-net there is not a big impact on raw material sequentially in our business.

Okay, perfect. That’s it for me.

Thanks guys.

Thanks and good morning, guys. It looks like you have very solid operations outside of South Carolina and not to detract from that, but I also have a few South Carolina questions.

So I apologize in advance for those. I guess just looking to Blythewood, what has changed since the Investor Day in late June that’s driving the more negative outlook on the masking tape ramp and cost savings?

Is that simply projected progress that didn't happen or was there a step back somewhere?

I think it’s a combination of two. It’s the lack of progress from that day and then we also ran into just after that timeframe.

We ran into some quality issues with one of our products and that had an impact as well. On a go-forward basis, we feel like we have a good recovery plan on the product as it relates to the quality issues, but we’re really just not seeing the reliability and repeatability of the process as it relates to run time.

And we covered it before, but if you don't get your runtime and you don't have your machine running at an optimal level, you create downstream waste and other costs associated with the winding. And so I would say that it’s a lack of progress from that June period to today.

All right. And can you remind us what proportion of I guess the plants revenue is tied to masking tape and then similarly what proportion of that planned $13 million savings, what's expected to come from the masking tape line?

Yes, so the revenue we didn’t disclose, but the cost savings as you know is split pretty much 50-50 between duct tape and masking tape.

And just to be clear I guess, do you expect the masking tape line to still present some sort of cost savings just lower than I initially thought or is there a risk, an outside risk that it could end up being earnings drag versus the process at Columbia?

Well, I think it’s positive, absolutely.

Okay. Thanks.

I'll pass the line here.

Good morning. Some of the questions have been asked already.

I do have two modeling questions, number one, on the gross margin expectations for the full year, does that the 23% to 24% range, does that include the benefit of the insurance payment?

No.

So it's assuming 23.8 in the second quarter?

Second quarter, yeah.

Second quarter that sort of would be without the insurance, yes.

Okay. And my second question is on the SG&A, there were some one-time payments made in the quarter, is that something that you expect to continue or how should we think about SG&A compared to as a percent of your sales?

Yes, so on SG&A as we see, there’s certainly an increase. A good part of that is the variable compensation.

So again when you look at from quarter one to quarter two, quarter two was quite a strong quarter. So we had some additional accruals in relation to that.

But going forward I would say that we would expect these levels to be pretty consistent at this point.

Okay. Thank you.

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

We look forward to speaking with you again following the release of our third quarter results in November. Have a good day.

Thank you.