Intertape Polymer Group Inc.

Greg Yull - President & CEO Jeff Crystal - CFO

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

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

We'll begin with a brief review of the highlights for the quarter starting on Pages 3 and 4 of our presentation. We reported another solid quarter with adjusted EBITDA of $27.2 million despite the negative impact of the South Carolina flood estimated at $6.9 million for the quarter.

This equates to approximately $34.1 million on excluding the impact of the South Carolina flood. The results for the third quarter were in-line with our guidance and we're very pleased with the performance of our operations as a whole.

From a gross margin profitability perspective, we're seeing manufacturing cost reduction initiatives having positive contribution to the overall performance of our manufacturing facilities combined with the benefits from an increase in the spread between selling prices and raw material costs. Even with a significant negative impact of the South Carolina flood affecting our profitability, we managed to achieve an increase in gross margin to 21.7% from 21.3% last year.

Revenue increased 3% to $206.6 million, primarily due to the non-recurrence of the South Carolina Commission revenue reduction and additional revenue from the TaraTape acquisition, partially offset by decrease in average selling prices including the impact of product mix. Adjusted net earnings increased $7 million to $19.9 million, primarily due to decrease in income tax expense and an increase in gross profit partially offset by the increase in SG&A.

Adjusted EBITDA increased 1.6% to $27.2 million, primarily due to an increase in gross profit partially offset by an increase in SG&A. Outlined on Pages 7 and 8, as expected our third quarter results continue to be impacted by the South Carolina flood.

We estimate the negative impact on revenue to be approximately $9.9 million. This negative impact on revenue was higher than previous quarters due to $3.1 million quality related masking tape product return that were attributed to the significant acceleration of the commercialization of certain masking tape products at our new Blythewood facility.

These product returns were isolating the production at the end of 2015 and in the first half of 2016, and are expected to be non-recurring. A negative impact on gross profit adjusted EBITDA and adjusted net earnings was estimated to be $7 million, $6.9 million and $4.3 million, respectively.

It has been a little over a year since the South Carolina flood occurred resulting in the significant disruption to our business. In response, we had to focus significant time and effort on servicing our customers and restoring our operations, while at the same time expanding considerable resources on the insurance claim process.

We are very pleased to report that the insurance claim process has come to an end and we've reached a settlement with our insurers in October for $30 million covering substantially all of the claim property and business interruption losses. As we've already received $10 million insurance settlement proceeds to-date, this settlement is expected to result in $19.5 million payments to the company and a significant positive impact on net earnings in the fourth quarter.

The Board of Directors declared a quarterly cash dividend of $0.14 per common share payable on December 30, 2016 to shareholders of record at the close of business on December 15, 2016. With the objective of driving incremental operational synergies, we plan to close the Furnace Hills, Pennsylvania facility acquired in last year's TaraTape acquisition by the end of 2017 with production being transferred to our Carbondale, Illinois and Danville, Virginia manufacturing facility.

As a result of the closure, we increased total synergies expected from this transaction to be between $4 million to $6 million of additional adjusted EBITDA from the previous range of between $2 million to $4 million formally. We are very pleased with our TaraTape integration efforts to-date and we believe we've already realized close to $2 million in annualized synergies by the beginning of 2017 which represents more than double the EBITDA of TaraTape when originally purchased approximately one year ago.

On Page 9, on September 16 we completed the acquisition of 74% interest in Powerband in India, that was announced as signed on September 2. This acquisition was completed for purchase price of $43.4 million subject to a post-closing working capital judgment that is expected to reduce the purchase price by approximately $1.4 million.

As mentioned in our original announcement of this transaction, the Desai family will continue to hold 26% of Powerband and will be managing the day to day operations of the business. We're very pleased that we completed this acquisition as it will allow us to become a greater participant in the global market, as well as provide access to a low cost and high growth jurisdiction.

This acquisition is in-line with our strategic growth plans outlined in June of 2016. Integration efforts are underway and proceeding well so far.

In fact, we recently approved a plan to invest approximately $20 million to expand capacity at the Caravan facility, as well as for the construction of an additional capacity at a greenfield facility in India. Our aim is for the greenfield facility to be operational in 2018.

Turning to Page 10, capital expenditures in Q3 2016 and year-to-date was $12.5 million and $35.8 million, respectively. Year-to-date water-activated tapes strengthened and speciality tape projects represented just over 35% of that total amount.

At this point those projects are progressing well and are expected to be on-time and on-budget. For 2016 our CapEx outlook range remains between $55 million to $65 million of which $8 million to $12 million is expected to be used for maintenance needs.

Turning to Page 11, we outlined our manufacturing cost reductions for Q3 2016 and provide a forecast for all of 2016. The total were $2.5 million in the third quarter of 2016, and $8.5 million year-to-date, and we expect total cost reductions for 2016 to be at the upper end of our target range between $8 million and $11 million for the year excluding any cost savings related to the South Carolina project.

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

Thank you, Greg. I would now like to refer you to Page 12 of the presentation where we present a summary of our results for the third quarter of 2016.

Gross profit totalled $44.9 million in the third quarter of 2016, an increase of 4.8% from $42.8 million one year ago. Gross margin was 21.7% in third quarter of 2016 and 21.3% in the third quarter of 2015.

Gross margin increased primarily due to the favourable impact of the company's manufacturing cost reduction programs and an increase in the spread between selling prices and raw material costs. These favourable impacts were partially offset by the negative impact of the South Carolina flood.

On a sequential basis, gross margin decreased from 25.7% in the second quarter of 2016, primarily due to the non-recurrence of the South Carolina flood insurance claims settlement proceeds received in the second quarter of 2016, an increase in the negative impact of the South Carolina flood and higher manufacturing overhead related to planned annual maintenance shutdown of certain manufacturing facilities. SG&A was $27.3 million for the third quarter of 2016, a 52.5% increase from $17.9 million a year ago, primarily due to an increase in stock-based and variable compensation expenses and a provision for the settlement of an outstanding litigation.

This litigation settlement is the primary driver of the 4% increase in SG&A when compared with the second quarter of 2016. As indicated on Page 15 of the presentation, adjusted EBITDA totalled $27.2 million for the third quarter of 2016, a 1.6% increase from $26.8 million in the third quarter 2015, primarily due to an increase in gross profit, partially offset by an increase in SG&A.

The company estimates that it's adjusted EBITDA for the third quarter 2016 was negatively impacted by the South Carolina flood by approximately $6.9 million. On Page 17, adjusted EBITDA decreased sequentially by 17.4% from $33 million in the second quarter of 2016, primarily due to a decrease in gross profit.

Again, a big factor explaining this decrease was the significant impact of the South Carolina flood in the third quarter as compared to the positive impact in the second quarter. Adjusted net earnings increased to $19.9 million for the third quarter of 2016 from $12.9 million in the third quarter of 2016.

The $7 million increase was primarily due to a decrease in income tax expense and increased profit partially offset by an increase in SG&A. The company estimates that it’s adjusted entering for the third quarter of 2016 are negatively impacted by the South Carolina flood by approximately $4.3 million.

For the third quarter of 2016 the effective tax rate was 16.4% versus 28.6% in the third quarter of 2015. The decrease in the effective tax rate is primarily due to a change in the mix of earnings between jurisdictions and the income tax expense incurred during the third quarter of 2015 as a result of a decrease in the estimated future income tax deduction for equity settled share based compensation.

Assuming there are no material changes to the company's expected geographic mix of earnings in the fourth quarter the company still expects its effective tax rate for the full financial year of 2016 to be between 25%-30%. As you will note on page 20, cash flows from operating activities decreased in the third quarter of 2016 by $12.1 million to $21.7 million from $33.8 million in the third quarter of 2015 primarily due to an increase in inventory due to raw material purchases including pre-buy and additional inventory resulting from the Powerband acquisition in September 2016 and an increase in U.S.

federal income taxes paid in the third quarter of 2016. Free cash flow decreased in the third quarter of 2016 by $14million to $9.2 million from $23.2 million in the third quarter of 2015 primarily due to a decrease in cash flow from operating activities.

Net debt as September 30, 2016 $200.5 million an increase of $65.3 million compared to December 31, 2015. A large portion of this increase is due to the Powerband acquisition in September 2016 for $43.4 million dollars.

Our debt trailing twelve months adjusted EBITDA ratio was 1.9 at September 30, 2016 compared 1.5 at December 31, 2015. As of September 30, 2016, the company had cash and loan availability under its revolving credit facility of $116.7 million.

This compares with cash and loan availability of $182.3 million as of December 31, 2015. Days inventory increased by 4.8% to 63 in the third quarter of 2016 compared to 60 in the third quarter of 2015.

Inventory has increased $10.2 million to $110.8 million as of September 30th 2016 from $100.6 million as of the December 31, 2015. The increase was primarily due to an increase in raw material purchases including pre-buy and additional inventory resulting from the Powerband acquisition.

Day sales outstanding increase to 42 in the third quarter of 2016 compared to 41 in the third quarter of 2015. Trade receivables increased $14.9 million to $93.4 million as of September 30, 2016 from $78.5 million as of December 31, 2015 primarily due to an increase in the amount of revenue invoice in the third quarter of 2016 as compared to the fourth quarter of 2015.

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

Thanks, Jeff. From Page 21, we present an update from the impact of the South Carolina project.

Duct tape production has continued to have a net positive impact on gross profit and adjusted EBITDA in the third quarter and year-to-date. However in regards for masking tape production we continue to work towards optimizing the production process.

Reducing inefficiencies as well as eliminating certain quality issues that remain a challenge in one of our masking tape products. Consequently, masking tape production inefficiencies continue to largely offset the cost savings realized by the duct tape production resulting in a positive impact of only $0.5 million for the quarter.

This represents a slight improvement compared to the second quarter but not where we wanted to be at this time. We still expect the cost savings to have a significant incremental net positive impact on gross profit and adjusted EBITDA on 2016 when compared to the negative impact experienced in 2015.

Furthermore, we believe that the annualized run rate of net savings will continue to increase in the fourth quarter of 2016 when compared to the third quarter. However, we no longer expect to achieve approximately $13 million of annualised savings by the beginning of 2017.

While we expect this project to yield a significant amount of savings, it is uncertain if and when we will realize that net saving approaching the estimated $13 million. We believe that future savings will be achieved incrementally overtime as we work through the various issues causing the inefficiencies in the masking tape production process.

At this time we do not expect a material amount of additional capital expenditures will be required to achieve further improvement. Despite the ongoing challenges facing this project we strongly believe that we've made a significant leap in technology capability in terms of production and efficiency capacity and environmental footprint which will benefit our operations and competitive position in the long term.

As such we remain firmly committed to the project. Moving on to Page 22, we have our outlook for the remainder of 2016.

We expect gross margin for 2016 to be between 23%-24% excluding the impact of a South Carolina flood. Adjusted EBITDA is still expected to be in the $117 million and $123 million range, excluding the impact of the South Carolina flood.

As indicated before manufacturing cost reductions for 2016 are expected to be closer to the upper end of the previously announced range of between $8 million to $11 million, and total capital expenditures for 2016 are expected to be between $55 million and $65 million. We still expect the 25% to 35% effective tax rate for 2016 with cash tax is expected to be approximately half of the income tax expense in 2016.

In terms of our fourth quarter 2016 results outlook, excluding the impact of the South Carolina flood we expect revenue, gross margin, and adjusted EBITDA in the fourth quarter of 2016 to be greater than in the fourth quarter of 2015. In conclusion, we are looking forward to 2017 and are excited by the many callus of growth in both, top and bottom-line results that we're currently managing.

We remain firmly focused on execution and on achieving our long-term strategic goals in growth and the creation for future shareholder value. This completes my presentation.

At this point Jeff and I will be open up to call for any questions. Operator?

Good morning. Hi, I want to start on the lost sales related to the South Carolina flood.

Excluding what looked to be a one-time return of products; our lost sales seem to be at a similar level to previous quarters. You made some comments in your MD&A about the acceleration of commercialization of masking tape and stencil products.

So I guess my question is, at this point do you have the manufacturing capability to fulfill the last orders?

So let's start with the easy part of it. On the stencil side which is a portion of the lost sales, we started production again of that approximate lane within the last 30 days, so that should ramp up as we move forward.

We are basically out of capacity or production capabilities for that part of line. On the masking tape, we currently have one product line within the portfolio that we are not commercial on and we will continue to experience going into Q4 and going forward some declines there as we work on commercializing the product.

We're diligently working on that as we sit here today, and expect to have further progress as we move forward.

Okay, thanks, great. I don't know if you can break that $6 million down between stencil and masking tape or which one here is…

It's pretty much half-half.

Okay, thanks for that. And also on the $19.5 million of expected insurance proceeds in Q4; how much of that is expected to flow through EBITDA?

I think year-to-date while actually LTM -- you've missed $9.5 million on EBITDA or related to that. So did you expect that number to flow through EBITDA in Q4?

It's hard to say at this point because what we're waiting for from our insurance company is the final kind of detail of the settlement between our business interruption and our property. So we've agreed on the actual amount that they still have to provide us the detail, which is part of the reason we couldn't even record that in our third quarter.

So we expect once we have those details, we will understand that much better but we certainly expect that a substantial portion of that or a significant portion of that will affect the EBITDA, and hopefully will offset that impact; but again, we don't know at this time.

Okay, fair enough. Just turning to TaraTape, it looks like a great acquisition there.

You raised your synergy guidance to between four and six and I think you commented on an annualized number for 2016 but could you comment on how much you realized in 2016 and the year-over-year impact of the synergies?

Yes, we've gotten close to that annualized figure.

Okay, and just one last question. Turning to the planned investments on the greenfield facility near Powerband; could you comment further on the product line -- the added capacity and whether the ownership structure there is going to be similar to the acquisition?

So the ownership is going to be similar to the acquisition. From a production perspective or product point perspective, I think we'll just leave it that we're installing capacity for tapes and we'll leave it at that for competitive reasons.

But again, we feel very positive that that's going to be a catalyst for us going forward and very happy with the acquisition and the integration to-date in that company.

Okay, perfect. Thanks for the color guys.

Good morning. When we think about the lost revenue and the negative impact on earnings because of the flood related items; looking forward, how many more quarters do you think you'll be calling that kind of stuff out versus having solved for that?

I think at this point, I mean -- we're certainly going to talk about it. I mean as Greg mentioned, we are in the process of completing the production line for the commercialization of the stencil product.

So we would expect to see some sales of that this quarter and ramping up through -- beginning of next year. So that certainly should come down hopefully significantly.

And then on the masking tape side, I think it's more a question at this point of ensuring that we have the commercialized product, that one masking tape product would -- so that's going to certainly depend on where we get to [indiscernible] on that particular product. So we'll probably be talking to about that in that context to some degree.

But at this point I think that from a flood impact perspective which is maybe what you're asking; at this point as we've settled with the insurance company, there will no longer be -- I guess a recoverable amount as a result of the flood and therefore we'll talk about these and other contacts but not necessarily as a flood impact except for the insurance proceeds that we will record in the fourth quarter which certainly we will call out.

Would you also call out flood-related costs in Q4 or because you've lapped the year, does that look different in Q4?

In Q4, I mean -- like as I said, so what we'll continue to have some of these lost sales, the product line that we're talking about that's not been commercialized on Blythewood, is being produced to a limited degree at our Marysville facility, and so we are incurring some additional cost of manufacturing there which is included in the flood impact that you have in Q3. So we'll continue to suffer that and as well as those lost sales as long as we have not commercialized our product in Blythewood.

Okay, that's helpful. Looking at the cost savings from Blythewood, actually the flood related things; you saw that increase quarter-over-quarter, it sounds like that will be the case in Q4.

Should -- when we look at this as steadily increasing over the next several quarters versus at some point seeing a step function higher in those cost savings?

We expect on a go forward basis, every quarter show an incremental improvement. We don't expect huge leap in the quarters and we think it's just a question of moving forward with.

If we have a continuing cost position benefit, we have seen last 45 days some encouraging signs there but we've got a long way to go as you can see by the numbers.

All right. And then thinking about the $20 million CapEx into India; can you give a better sense of the timing on this?

I know you call out the end of 2018 for that Greenfield to be up and running but when we think about the cadence of the span through '17 and '18, can you provide any color there?

Most of it will be in '17.

All right, great, thanks so much. I'll pass on.

All right, thank you.

Good morning. Just to stick on that -- the India greenfield; with all the investments you're putting into India do you have any idea of what the capacity is going to grow to eventually?

No, we can't disclose that.

How about the customers that you're serving -- obviously, these are the customers that Powerband has been serving historically but these are all new names to users?

Most of the ones in North America that they service are customers we've had some kind of relationship with. And the other comment I would make in the existing business right now, in the existing facility right now, we're doing a capacity expansion in that facility right now.

And most of that capacity will go towards servicing existing customers with very similar product lines. They are full right now and we're expecting a real capacity to be put on in that facility in mid-2017.

And then like we've discussed, the greenfield should be operational in 2018.

Okay. And through the expansion of the existing operations, back of the envelope; I'm guessing you're getting better profitability out of these operations and out of your North American operations?

No, I wouldn't say that.

Okay. And what about geographically -- are there any new regions that you're going to get a major toehold in or we could expect to see some significant growth out of this or potentially other acquisitions you've talked about going international?

I mean in this acquisition, I mean this certainly does give us some additional exposure internationally because they do have a good portion of their business that goes outside of North America; so in Europe, Asia, South America, and so forth. So certainly we get some additional exposure there just through the acquisition, there are aggressive plans to grow that business in those jurisdictions, probably Europe being the biggest.

And certainly we've talked about just in general our M&A process and sort of our vision for at and certainly we've talked about Asia which -- clearly, we've done now and we've talked about Europe as well, in addition to North America. So certainly we do expect to be a more global company as we move forward as part of our vision that we've discussed in June.

Okay. And just any kind of targeted comfort levels on leverage ratios?

We're basically are on the same as what we've said. I mean in the past we've said that we'd be comfortable operating between 2 and 2.5 on a normal basis; certainly an acquisition -- a larger acquisition or a series of larger acquisitions could take us higher than that but that would be sort of around where we'd be most comfortable.

Okay, perfect, thanks.

Good morning. I have one question with regards to gross margin but I think it's kind of probably closely correlated to what you said to Ben.

When is gross margin going to be sort of resembling your X -- the flood charges? When is it going to start resembling that 23% to 24% range?

Well, I think in Q4 it will probably -- you'll still certainly have some noise in there because whatever portion of that $19.5 million we end up recording through gross profit will certainly boost that number up significantly. So I suspect Q4 posted gross margin will look on the high side.

Then past that it's hard to say because as we discussed, we believe that we'll be ramping up our sales in the stencil product line, partially this quarter into early next year. So certainly that hopefully normalize at some point early next year.

And then on the masking tape side, that's less certain; but again, I don't know how much that -- I don't think that's a major impact to gross margin per se. So I would hope that a lot of this noise will be gone by early next year, at least the first half of next year.

Okay. And then in terms of the company in India, and their sales model, are they -- I think Greg was mentioning they are dealing with similar customers that you have dealt within the past.

Are they making sales directly to them or through distributors?

While their model -- they sell the same distributors as we currently have in North America. Is that your question or whether they're selling direct?

Both, I guess, yes.

They primarily sell through distribution. So a similar model to ours but they're -- typically a full container seller as opposed to our business model with a lot of techs if you will and a lot of turns on inventory, so you're not doing full containers of single product lines.

Okay, that's it for me. Thank you.

Hi, good morning. Just to start out curious on the timing of the closure of the TaraTape plans?

It will be shut by the end of this year.

Okay. And then secondly on M&A, it sounds like you guys certainly have a lot on your plate going on with Powerband and South Carolina.

Is it fair to say that your focus right now is more on integration operations or is there M&A opportunity still -- you're working the way through the system in the background?

We're still very active in M&A, we're still managing our funnel and we're still very focused on it.

Okay, great. And then just lastly, curious if you could provide any update on the North Carolina water-activated tape expansion?

So we are on-time, on-budget there; we expect to be in production in late Q3, early Q4 in that facility of 2017.

Okay, that's it for me. Thank you.

Thanks for taking the question again. I want to make a general comment, so you have $80 million of planned investment that is expected to come online in 2018; now that's a big number, it's close to 30% of your PP [ph] on your balance sheet.

Meanwhile, consensus growth reflects 4% year-over-year growth in 2018, so I don't expect guidance but could you provide some general comments on sales growth starting in 2018?

Well, like as we say, I mean we certainly expect to get a lift from some of the projects coming online. There is a lot coming online, call it in 2017.

So as you said, I can't give guidance at this point but I would say that we should see something about the average that we've been talking about in the past.

Okay, thanks.

Thank you for participating in today's call. We look forward to speaking with you again following the release of our fourth quarter results in March.

Have a great day. Thank you.