Intertape Polymer Group Inc.

Greg Yull - President and CEO Jeff Crystal - CFO

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

Thank you, operator and good morning, everyone. Welcome to Intertape's 2016 fourth quarter and full year 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 earnings presentation that you can download from the Investor Relations section of our website. We are pleased by our results and what we've accomplished in 2016.

Revenue for the year increased by 3.4% and gross margins finished up at a all-time high 23.7%. Adjusted EBITDA increased 17.2% to $119.5 million and capital expenditures reached a record high of $50 million and for the first time consisted primarily of strategic growth projects to be completed mostly in late 2017 and 2018.

Furthermore, we believe the Powerband, our third and largest acquisition since we resumed our M&A program represents an important step towards building a larger global presence. This acquisition achieves a goal of establishing our Company in a low-cost high-growth jurisdiction and strengthen our competitiveness in a product line that is important to our product bundle.

The results we achieved in 2016 were despite the negative impact of the South Carolina flood. We estimate that we lost over 25 million sales of both masking tape and stencil products in 2016.

Offsetting the negative impact of the flood, was the settlement of our insurance claim for $30 million of which the balance of $19.9 million was received in the fourth quarter. As expected, the settlement covered most of our property and business interruption losses.

However, we expect that the negative impact of lost sales volume will persist as a headwind through 2017 as we must restore production capabilities in Blythewood South Carolina in relation to a certain masking tape product and must win back the stencil sales from our prior customers. We believe we will recapture at least a portion of those sales volumes incrementally as we progress through the year.

Regarding our new Blythewood South Carolina facility, while we clearly haven't achieved all the original objectives at this time, we continue to deliver on making progress by successfully completing most of the commercialization of our stencil products on our new production line, as well as improving the net savings sequentially from $0.5 million in the third quarter to $1 million in the fourth quarter. We remain committed to this project and expect that these incremental improvements will continue.

Even with over 90 million of investments and the acquisition of Powerband and capital expenditures, we finished the year with a strong balance sheet and a leverage ratio of 1.5 times which is comparable to 2015. We continue to feel confident that we can deploy a significant amount of capital in the high return investments while keeping our leverage at a healthy level.

Turning to Page 3 and 4 of our presentation, results for the fourth quarter were in line with our guidance, and we're very pleased with the performance of our operations as a whole. Revenue increased by 7.3% to $209.9 million when compared to the fourth quarter of 2015.

The increase in revenue was primarily due to an increase in sales volume and additional revenue from the Powerband and TaraTape acquisition, which was partially offset by decrease in average selling price including the impact of product mix. Gross margin in the fourth quarter increased to 25.6% from 23.4%.

The increase is primarily due to insurance proceeds related to South Carolina flood and the favorable impact of manufacturing cost reduction programs. These favorable items were partially offset by the non-recurrence of the reversal of the 2010 impairment for manufacturing equipment of 2.7 million recorded in the fourth quarter of 2015.

We estimate that the South Carolina flood had a net positive impact of approximately $6 million on a gross profit in the fourth quarter of 2016 compared to a negative impact of $2.9 million in the same quarter last year. Adjusted EBITDA in the fourth quarter increased 43.6% to $35.3 million which was mainly due to increased gross profit related to the insurance proceeds.

Finally cash flow from operating activities increased by $23.1 million to $65 million and free cash flows increased by $17.5 million to $50.8 million. On Pages 5 and 6 of the presentations, we provide a brief review of the highlights of a full-year 2016 results.

Revenues increased 3.4% to reach $808.8 million excluding the negative impact from the South Carolina flood of approximately $25.5 million in 2016 and $8.6 million in 2015 revenues could have increased by 5.5%. Adjusted EBITDA for 2016 was $119.5 million which was in line with our guidance.

As a result of the insurance claim settlement proceeds, the South Carolina flood had only a slight negative impact of approximately $900,000 Insurance proceeds if not received adjusted EBITDA would have been negatively impacted by over $13 million in 2016. Cash flows from operating activities improved to $108.1 million from $102.3 million in 2015 while free cash flow declined to $58.2 million from $68 million last year primarily due to an increase in capital expenditures.

Turning to Page 8 and 9, capital expenditures in 2016 were $50 million up from $34.3 million in 2015. This is a little less than our guidance of $55 million to $65 million primarily due to the timing of capital expenditures on the North Carolina tape project.

Of the total spend in 2016, approximately 44% was related to three initiatives, the Midland North Carolina Plant, the Portuguese Shrink Film Project and the Specialty Tape Project. To-date we have been pleased with the progress on our larger net initiatives and expect to deliver them on time and within budgetary expectations.

For 2017, we expect capital expenditures of $75 million to $85 million representing a significant increase over 2016. As we've previously stated, we believe that we have a lot of opportunities to continue to invest in our capital asset base and as a result we expect our spend level to remain elevated for several years.

In 2017 our Greenfield projects in North Carolina and in India are expected to represent our largest capital expenditure projects with estimated investment of $26 million to $31 million and $10 million to $14 million respectively. Turning to Page 10, total manufacturing cost reductions were $11.6 million in 2016 which was slightly higher than our guidance range for the year.

For 2017, we anticipate manufacturing cost reductions between $10 million to $12 million. This range includes cost savings derived from the South Carolina project previously excluded and the incremental cost saving synergies from the TaraTape facility closure.

Going to Page 11, dividend paid in 2016 reached $31.4 million or $0.54 per common share representing an annual increase of 5.6%. On March 31, 2017 we will pay a quarterly dividend of $0.14 per common share payable to shareholders of record on March 21, 2017.

On the acquisition front, we are very pleased with the integration progress to-date. Operational synergies and profit contribution derived from the Better Pack and TaraTape acquisitions.

The closing of TaraTape's Pennsylvania facility announced in November 2016 proceeded as planned including leveraging capacity in Carbondale Illinois, and Danville Virginia manufacturing facilities, and has increased our estimated total annual synergies to between $4 million to $6 million by the end of 2017 from between $2 million and $4 million as initially expected. At this point, I'll turn the call over to Jeff who will provide you with additional insight into the financials.

Jeff?

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

Revenue totaled $209.9 million for the fourth quarter of 2016, a $14.2 million or 7.3% increase from $195.7 million in 2015 primarily due to an increase in sales volume of approximately 4.5% or $9.8 million due to an increase in demand of certain tape and woven products. We believe that the increased sales volume was primarily due to growth in the current sealing tape category, an increase in masking tape sales due to the non-recurrence of the South Carolina flood and growth in the building and construction markets.

We also generated $8.7 million in additional revenue from the Powerband and TaraTape acquisition. Powerband on its own contributed $7.6 million in the quarter.

The overall revenue increases were partially offset by a decrease in average selling price including the impact of product mix of approximately 2.2% or $4.3 million primarily due to an unfavorable product mix in tape and woven products. Revenue for the fourth quarter of 2016 also increased sequentially by $3.4 million or 1.6% from $206.6 million in the third quarter of 2016.

The increase was primarily due to the Powerband acquisition and an increase in sales volume of approximately 0.7% or $1.5 million primarily due to increased demand for certain tape products. This was partially offset by a decrease in average selling price including the impact of product mix of approximately 2.8% or $5.7 million due to an unfavorable product mix variance primarily within the tape products.

Turning to Page 14, gross profit totaled $53.7 million for the fourth quarter of 2016, an increase of 17.3% from $45.8 million a year ago. Gross margin was 25.6% in the fourth quarter of 2016 and $23.4% in 2015.

Gross margin increased primarily due to insurance proceeds related to the South Carolina flood and the favorable impact of the manufacturing cost reduction programs. These favorable items were partially offset by the non-recurrence of the reversal of 2010 impairment for manufacturing equipment of $2.7 million.

On a sequential basis gross margin increased from 21.7% in the third quarter primarily due to insurance proceeds in a reduction in the unfavorable impact of the South Carolina flood partially offset by an unfavorable product mix. SG&A was essentially flat at $25.6 million for the fourth quarter of 2016 compared to $25.8 million last year.

However the decrease in variable and share-based compensation expenses and litigation related professional fees were partially offset by the increase in employee related costs to support growth initiatives and additional SG&A resulting from Powerband. On a sequential basis, SG&A decreased $1.8 million from $27.3 million in the third quarter.

The decrease was primarily due to the provision for the litigation settlements recorded in the third quarter and a decrease in share-based compensation expense partially offset by additional SG&A resulting from Powerband. Adjusted net earnings totaled $18 million for the fourth quarter of 2016, a $1.3 million increase from $16.7 million in 2015.

The increase was primarily due to an increase in gross profit partially offset by an increase in income tax expense. We estimate that adjusted net earnings for the fourth quarter of 2016 were positively impacted by approximately $3.7 million due to the insurance proceeds exceeding the negative adjusted net earnings impact of the South Carolina flood.

For the fourth quarter of 2016, the effective tax rate was 31% compared to negative 34% in 2015 primarily due to the non-recurrence of the tax benefit recorded in the fourth quarter of 2015 to recognized previously derecognized Canadian deferred tax assets. As indicated on Page 17 of the presentation, adjusted EBITDA totaled $35.3 million for the fourth quarter of 2015, a 43.6% increase from $24.6 million in 2015.

The increase was primarily due to an increase in gross profit mainly due to the insurance proceeds. As you will note on Pages 22 and 23, the Company had cash and loan availability under its revolving credit facility of $158.2 million as of year-end 2016 compared to $182.3 million in 2015.

Cash flows from operations increased in the fourth quarter of 2016 by $23.1 million to $65 million. Free cash flow increased in the fourth quarter of 2016 by $17.5 million to $50.8 million.

Both increases were primarily due to higher operating profit and accounts payable and accrued liabilities. Net debt as of year-end 2016 was $158.9 million an increase of $23.7 million compared to year-end 2015.

We ended the year with a leverage ratio of 1.5 unchanged from last year's level. Days sales outstanding increased to 39 in the fourth quarter of 2016 from 37 last year.

Trade receivables increased 11.6 million to 90.1 million as of year-end 2016 from 78.5 million in 2015 primarily due to an increase in the amount of revenue invoiced in the fourth quarter of 2016 compared to the same period in 2015. Days inventory increased to 63 in the fourth quarter of 2016 compared to 61 in 2015.

Inventories increased $2.9 million to $103.5 million as of year-end 2016 from $100.6 million in 2015 primarily due to an increase in production to match sales volume growth, as well as additional inventory resulting from Powerband. Greg will now provide you further details on our outlook.

Greg?

Thanks Jeff. Moving on to Page 25, we have our outlook for 2017.

We expect gross margins for 2017 to be between 23% and 24%. Adjusted EBITDA is expected to be between $127 million and $137 million.

As I mentioned previously, manufacturing cost reductions for 2017 are expected to be between $10 million and $12 million and total capital expenditures for 2017 are expected to be between $75 million and $85 million. We also expect a 25% to 30% effective tax rate for 2017.

Cash taxes paid in 2017 are expected to be approximately half of the 2017 income tax expense. This excludes the potential impact of significant tax form legislation and changes in the mix of earnings between jurisdictions.

In regards to our Q1 2017 results, revenue gross margin and adjusted EBITDA are expected to be greater than in Q1 of 2016. As previously indicated, our goal is to reach approximately $1.5 million in revenue with at least 15% adjusted EBITDA margins in the next 5 to 7 years.

In view of these goals and existing opportunities, the main focus of our current capital allocation strategy remains on maximizing shareholder value by investing in our business through acquisitions and capital expenditures. We are very proud of the achievements of our team in 2016 and look forward to realizing the completion of several key projects in 2017.

This completes my presentation. And at this point Jeff and I are open to any questions.

Operator?

Yes, hi. Good morning, gentlemen, nice quarter.

I’m going to start on the adjusted EBITDA 2017 guidance. The range looks a little wider compared to last year, could you highlights some of the larger items that would get you maybe at the lower end and the upper end of that guidance and maybe what you're underlying assumptions are today?

Yes, so you're correct we went a little wider this year on the guidance. We just felt that there were some moving parts that we're dealing with this year that you know where maybe a little less last year.

So when we think about for example the impact - the continuing impact of the flood, so as we discussed I mean we had $6 million net positive impact in Q4 but that is net of about $8 million or little more than $8 million of insurance proceeds. So in fact u Q4 we suffered still close to $2 million of negative impact and that's rolling into this year and certainly we expect that to improve incrementally quarter-by-quarter but there's certainly some risk there.

So it's really a question of how quickly can we regain the sales on the stencil side because certainly the commercialization has gone very well on the - underlying in Blythewood and then the question is when can we get the masking tape product that we currently can't produce in Blythewood back online and can we regain the sales there. So I think that's going to play into - kind of where we end up somewhere in that range.

Another factor as well and we think the recent increases in raw materials and some of our key raw material in polypropylene, polyethylene, we've also seen some increases - significant increases in Asia in Blythewood which goes into our [indiscernible] that we may get at our Powerband plan and that was due to just literally a couple of plants, the one plant fire, plant explosion so there is events such as that and certainly those factors will play to the numbers this year and again they will obviously try to pass on those cost increases to customers but again as we've discussed in the past, there's no certainty that we will be able to pass on all those increases. And lastly you have the start-up of a couple of projects, so you have the Midland North Carolina plant starting at in Q4, so of course right now we feel quite optimistic about that but certainly with plant start-ups there could be different delays and efficiencies at the beginning depending on how that plays out.

We also have our Portuguese Shrink Film line starting at earlier this year and truly there's some - start-up, could be some start-up issues there as well. So you basically have a few of these moving parts here that could, if you hit on our cylinders you’re hitting more towards the upper end, you don't do as well as you think, you are hitting towards the lower end of that.

That's really helpful thanks. Jeff could you remind us of may be the progress if stencils are up in running 100% masking tape, I'm not sure your timeline is for commercialization and may be what your expectations are for how you recapture that $25 million loss sales in 2016.

So, I think on the stencil side I think we're on the road to regaining them and then we have to go back to customers where we lost the business. We had a commercial product that works.

We have a production process that works. So that's just a question of time and we’ve seen that ramp up through the year and I think you will see a much higher exit rate 2017 then an entry rate in 2017.

I don't think in the stencil category I don’t think will be back to 100% at the end of this year but we will be well on our way on the masking tape side. It’s certainly less uncertain as we sit here today.

We have products in test, have been tested right now commercially and so we are not commercial at this point. The expectation again is to get commercial as soon as we can and then we can start chipping away and getting those sales back.

It's a slow process and certainly when I compare the two product lines we are much further behind in the masking side then we are on the stencil side.

Okay, thanks great. And just a comment, the loss EBITDA that has mostly to do with the stencil tape rather than the masking tapped, is that correct?

It’s both.

Okay. And just may be one last one, couple of projects starting in the back half of the year 2018 should we think of any potential risks or start up cost for any of these facilities in 2017 and may be you can highlight some of the bigger ones and highlight sort of - should set our expectations for the back half.

Yes, so I mean when we think the start-up sales Midland, we think the start ups in India, the comfort level there is the technology, technology that we're currently utilizing right. There is no lead of into new technology certainly its updated equipment and certainly it has better control systems and drive systems and things of that nature but the fundamental technology being utilized to manufacture tap is the same.

So certainly from our perspective with our team it give us a lot of comfort from the risk perspective and when we plan these projects we are building in inefficiencies as we move through from start-up in the commercialization and so there always risk right, I mean in the Midland situation one of our biggest risk right now is weather, frankly to make sure that we're on time from a construction perspective. We have teams onsite in India constantly working on that project.

We have operational people that are over there now that will be in charge of the start-up in that facility, so they’re familiarizing themselves with the people, with the management, with the culture and so we are being very diligent in moving forward but with any plan start up they are obviously risks but certainly again technologies are same in the U.S.

Okay, perfect. That's it from me.

Thanks guys.

Good morning guys. So looking at gross margins in the quarter and trying to adjust them for everything including flood cost and trends offset and the lost revenue, it looks like they would have come in below recent quarters and be down a little bit year-on-year.

Is that due to the full quarter of Powerband being included in that or is there something else pricing margins in the quarter.

Well, that's definitely one of them. So certainly as you have the impact of the Powerband which has a - certainly a lower gross margin but a good EBITDA margin considering they don’t have a lot of SG&A but then you definitely had some mix in the tape category in particular, it’s a quarter where you see certain tapes pick up in volume that are - I would say little below our average ASP.

So you'd see that happen there as well.

So was that mix a quarterly phenomenon? How are you looking at Q1, you're kind of past that mix issue?

That specific mix issue may be yes, but it doesn’t mean there couldn’t be others.

Sure. And thinking about your capacity expansion projects, do you have a sense of time?

I’m sure it's different for each one. But in general, how long you expect these to take to ramp up to kind of that target capacity utilization level once they are completed?

Capability wise or order wise?

Order wise in the sense of - will there be a drag of a facility that's running hot, you know, 25% or 50% utilization as you build orders or have you contemplated that and scaling towards that ramp rather than billing it all at once.

Well I think we certainly have phased in models in both the Midland North Carolina facility and the India facility as it relates to adding more capacity. But when we think of the actual coding capacity that we are putting on, every incremental quarter we put on, it takes a while to fill that up.

So certainly that capacity utilization will be a low desired rate until we fill that one up and take the next safe approach. I would say the Indian plant will probably take a little longer to fill up than the North Carolina plant.

So, are you talking quarters or years of time to fill up?

Midland would be certainly like we are saying that's quite because you have a product there that's servicing a very high growth channel - with e-commerce channel and then you have the India side, I mean, that’s in the acrylic carton sealing tape. So there you are servicing obviously North American international.

You wouldn’t see the same growth rates there as you’d see obviously on the Midland side. But it’s tough to say like when it would be full, but certainly I think when you're talking about Midland, one thing we have consciously done there is, we’re building out capacity now but we are building that building to how additional capacity should we need it both in terms of additional lines or breaking a wall basically and building it out even further.

So the initial capacity we put in it's probably I'd say quarters but could be year too. Something like that.

Okay. And then maybe just thinking back about South Carolina, do you have an updated view as to kind of a new targeted level of annualized savings that you can eventually get from Blythewood?

No. I mean, at that point, like we said, we are just sticking to saying that we're going to incrementally improve each quarter.

We feel optimistic, we feel good that we are putting different processes, making improvements in the process. And we feel good that we will continue to improve but it’s just tough to say at this point where it’s going to all end up.

So with that, it’s currently the prior or I guess original $13 million expectation off the table, and you just hope to progress, call it from the $4 million run rate you did in Q4.

I don't know if we ever hit the $13 million, I mean I’m not saying it’s impossible, but certainly right now, I wouldn't set the expectation in mind.

Okay. Thanks, I’ll pass the line.

Good morning. I have one question, and it's probably been said more or less.

But I just want to make sure that my timing is right. So with regards to the new facilities, Midland, India, Portugal, when is each one going to be open and kind of starting to contribute?

So Midland should be opened in Q4 of this year.

Portugal will be by middle of this year, and the - sorry the last one was the, India, that would be in - call it mid-2018.

Okay. And then for the gross margin in 2017, is there - what scenario would you foresee to potentially approach 24 or above like in the most kind of blue sky scenario?

Well I think when you think about certainly our ability to pass on any raw material increases that all certainly play into it. Again in terms of mix, mix is always difficult to predict because we do have some good products that don’t always necessarily give you a good impact on mix because you might have a product that is above your average gross margin that is growing very well but your products that are well above your average gross margin are not growing it fast.

So you tend to see a little deterioration in the mix there. So that plays into it significantly and then obviously like we said to some degree the flood impacts will play into that and the project start-ups.

Okay. And then one more question is on the woven coated fabrics I think and there was probably tied to the oil industry's performance, this product line has seen soft performance in 2016 but it looks like it has been perking up in the fourth quarter, what was the trend there?

Well it has performed okay but we are still seeing the same pressure, I mean it is still we are certainly feel that this is not a fire out there in terms of the situation but we feel that certainly the cost structure that we have in place today is not one that enables us to compete in all those product lines very effectively and so we are still addressing that issue internally and planning what we are going to going forward.

Okay, okay. I will go into the queue.

Thank you.

Hi, there good morning. You mentioned one of the swing factors in terms of the year 2017 EBTIDA level was the industries going - pass on higher raw material costs.

When I look at resin prices in particular they kind of spiked up this year curious if you could provide an commentary on the industries were - to move on this so far this year.

Yes, I’m going to stay away from that all I can say is we're experiencing right now, we’re seeing in polyethylene, we are seeing plus $0.05 February, we're seeing plus $0.06 March and we’re pushing as much as we can through from a pricing perspective there, most of that product goes into our films area. And then in Asia we're seeing a big jump in Blythewood as Jeff mentioned earlier.

We’ve seen the price of that on a metric ton double over the last four months very quickly and that's been difficult to pass on not quickly. And then on the polypropylene side, we’ve seen an increase of approximately $0.18 to $0.20 past three months so that's moved quite a bit that's more figures into our tape products and our ECP products.

Obviously we are pushing as hard as we can to get price increases. In some areas we’re seeing a lot of support, in other areas we're yet to see support but that’s in the early stages of playing out at this point.

It's also keynote that the expectations right now from the industry experts are for both polypropylene and polyethylene to come down sometime mid 2017. Certainly we can't rely on that because it’s end up in a different place and what the experts have predicted before.

But certainly it spiked up quite a bit over the last 45 to 60 days.

Okay, that's helpful. Thank you.

That's it for me.

Thank you 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.