Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Greg Yull - Chief Executive Officer

Michael Jay - Interim Chief Financial Officer

Analysts

Sarah Hughes - Cormark Securities

Intertape Polymer Group Inc. (OTCQB:ITPOF) Q4 2013 Earnings Conference Call March 12, 2014 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Intertape Polymer Group’s Annual Fourth Quarter 2013 Results Shareholders Conference Call. During the call, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. In order to maximize the efficiency of this event, the question period will be open to financial professionals only. (Operator Instructions)

Your speakers for today are Greg Yull, CEO; and Michael Jay, Interim CFO. I would like to caution all participants that in response to your questions and in our prepared remarks today, we will be making forward-looking statements which reflect management’s beliefs and assumptions regarding future events based on information available today. The company undertakes no duty to update this information, including its earnings outlook, even though its situation may change in the future. You are therefore cautioned to not place undue reliance on these forward-looking statements as they are not a guarantee of future performance and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expected. I encourage you to review the discussion of the risk factors and uncertainties contained in the company’s Securities filings in Canada and with the Securities and Exchange Commission.

During this call, we will also be referring to certain non-GAAP financial measures as defined under the SEC rules. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available on the company’s website and are included in its filings. I would like to remind everyone that this conference is being recorded today, Wednesday, March 12, 2014 at 10:00 AM Eastern Time.

And I will now turn the call over to Greg Yull. Mr. Yull, please go ahead.

Greg Yull - Chief Executive Officer

Thank you, operator and good morning everyone. Welcome to Intertape’s 2013 fourth quarter and annual results conference call. Joining me is Michael Jay, our Interim CFO. After our comments, Michael and I will be happy to answer any questions you may have.

Firstly, I want to take a look – take a few moments and look back on 2013. Despite another year of only moderate economic recovery in North America, we achieved adjusted EBITDA of $103 million for 2013, which marks the third year of significant improvement in our profitability. Our success and higher profitability in the past few years reflect our strategic business decision to improve product mix by reducing sales of low-margin products and focusing on efforts on higher margin products. In addition, we executed on our manufacturing rationalization projects and variable manufacturing cost reduction initiatives.

As a result, our gross margin for 2013 improved to 20.3% from 17.7% last year and 14.3% in 2011. Revenue for 2013 was essentially flat at $781 million when compared with last year. Average selling prices increased modestly while sales volume declined by 3% reflecting the reduction in sales of lower margin products. Our operating cash flows for 2013 allowed us to commit significant capital investments of $46.8 million fully redeem the remaining $38.7 million of 8.5% Notes and pay $14.5 million in shareholder dividends.

For the fourth quarter, we were just – we reported adjusted EBITDA of $24 million and gross margin of 19.8%. Gross margin was slightly below our expected 20% to 22% range as we encountered some unplanned manufacturing inefficiencies that we believe are largely behind us now. At this time, we anticipate limited impact on the 2014 first quarter results. Fourth quarter revenue increased by 1.2% to $191 million compared to $189 million in 2012 due to a 5% increase in selling prices partially offset by a 4% sales volume decrease primarily in low-margin tape categories. This volume decrease primarily related to two notable instances, where the company made the decision not to sell low-margin tape due to price. This decision led to a loss of sales to an international tape convertor and an opportunistic North American buyer. This reduction in sales of lower margin products was partially offset by growth in sales of higher margin tape products which led to an overall gross profit and gross margin improvement.

First quarter revenue decreased 4.2% sequentially from $200 million for the third quarter of 2013. The sequential decline reflects normal seasonality. For 2013 CapEx was $47 million, of that amount $22 million was directly related to our South Carolina Project. Fourth quarter CapEx was $12 million, which was at the low end of our expected range of $12 million to $18 million due to certain equipment delivered in the first quarter rather than the fourth quarter. As such we expect CapEx for 2014 to be between $31 million to $35 million, up from our prior estimate of $25 million to $29 million. It is important to note that our CapEx program over 2013 and 2014 should remain on track, but towards the higher end of our expected range due to certain facility infrastructure and equipment related costs for the South Carolina Project.

We are progressing on target with the key milestones for the South Carolina Project. We recently started installing new equipment in the Blythewood facility. Some production is expected to begin in the second quarter of 2014 and gradually ramp up afterwards. We continue to focus a significant amount of time and resources on executing this project which remains on target for completion in the first half of 2015. In addition, we are in the process of relocating our Langley, British Columbia manufacturing facility to a nearby lower cost facility due to the expiration of the current location lease.

We expect charges of $1.3 million in the first half of 2014 primarily related to equipment relocation cost. Manufacturing cost reductions were approximately $14 million in 2013 and $4 million in the fourth quarter. The 2013 total reflects slower than anticipated benefits from the Richmond plant closure and the shrink film consolidation project. For 2013, these projects generated manufacturing cost reductions of approximately $3 million. As previously indicated the savings from these projects are still expected to be $6 million on an annualized basis going forward. Manufacturing cost reductions are expected to total $16 million to $20 million in 2014 which includes an incremental $3 million as compared to 2013 for expected savings related to the Richmond plant closure and the shrink film consolidation.

Revenue from the sale of new products represented about 18% of total revenue for 2013 and going forward we expect that new product development will remain a significant part of our plants for improving product mix. As indicated in our last conference call, we expect the percentage of revenue from new products to begin leveling off reflecting a more aggressive product introduction cycle that started five years ago. Beyond 2014 our short to medium-term goal will be to achieve approximately 20% to 22% of total revenue from new products. Raw materials comprised approximately two-thirds of our cost of sales. There is much volatility in the prices of our raw materials such as polyethylene and polypropylene. In the last 90 days we have seen increases in such costs and therefore we have announced and implemented price increases to cover these costs.

Total debt at year end was $130 million, a decrease of $22 million from 2012. Our year end debt to trailing 12 months adjusted EBITDA ratio was 1.3 compared to 1.8 at 2012 year end. We are making significant seasonal investments in working capital in the first quarter of 2014. In the coming months we expect to continue to maintain our focus on our facility modernization and relocation projects including the South Carolina Project, our largest single facility improvement in many years as well as the Langley relocation. Finally, we declared a dividend of $0.08 per share payable on March 31, 2014 to shareholders of record at the close of business March 19, 2014.

At this point I will turn the call over to Michael for a detailed look at the financials.

Michael Jay - Interim Chief Financial Officer

Thank you, Greg. Fourth quarter revenue increased by 1.2% to $191.5 million compared to $189.3 million in 2012 and decreased 4.2% sequentially from $199.9 million. Revenue was higher in the fourth quarter of 2013 compared to 2012 due to an increase of approximately 5% in average selling prices partially offset by a decrease of approximately 4% in sales volumes. The increase in average selling prices was primarily due to higher prices of equivalent units and the favorable shift in the mix of products sold. The decrease in sales volume was primarily due to our progress made in reducing sales of lower margin products and a net decline in carton sealing tapes. Revenue was lower sequentially primarily due to a decrease of approximately 4% in sales volume, while average selling prices remained about the same. The sequential decrease in sales volume is reflective of normal seasonality.

Gross profit was $37.9 million in the fourth quarter of 2013, an increase of 7.7% from $35.2 million a year go primarily due to an improved product mix and a slight increase in the spread between selling prices and raw material costs partially offset by lower sales volume. On a sequential basis, gross profit decreased 5.1% from $40 million due to lower sales volume. Fourth quarter gross margin was 19.8% compared to 18.6% for the prior year and 20% for the third quarter of 2013. Compared to last year, gross margin increased due to an improved product mix and a slight increase in the spread between selling prices and raw material costs. Sequentially, gross margin declined slightly primarily due to the unplanned manufacturing inefficiencies like Greg mentioned.

SG&A was $19 million for the fourth quarter of 2013, $20.8 million for the fourth quarter of 2012, and $20.5 million for the third quarter of 2013. As a percentage of revenue, SG&A was 9.9% for the fourth quarter of 2013, 11% for the fourth quarter of 2012, and 10.3% for the third quarter of 2013. SG&A was $1.9 million lower in the fourth quarter of 2013 compared to 2012 and $1.6 million lower sequentially. As compared to last year, the decrease was primarily due to lower expense related to stock appreciation rights and variable compensation. Sequentially, SG&A decreased primarily due to lower stock appreciation rights expense.

Adjusted EBITDA was $24 million for the fourth quarter of 2013, a 12.3% increase from $21.4 million for 2012. Sequentially, adjusted EBITDA decreased 10.4% from $26.8 million. Both changes in adjusted EBITDA were primarily due to changes in gross profit. Interest expense for the fourth quarter of 2013 was $800,000, a 73% decrease from $3.1 million for 2012 primarily due to the redemption of the remaining $38.7 million of 8.5% Notes during 2013.

During the fourth quarter of 2013, the company recognized $47.8 million of its previously derecognized U.S. deferred tax assets. Of this $47.8 million, $43 million impacted net earnings while the remaining impacted shareholders’ equity. This increase in net earnings of $43 million was partially offset by the fee recognition of $4.6 million of deferred tax assets in the Canadian jurisdiction resulting in a net positive impact to earnings of $38.4 million. The recognition of the deferred tax assets has no effect on cash taxes.

Cash income taxes paid in 2014 are expected to be less than $5 million and the effective income tax rate is expected to be approximately 40%. Adjusted net earnings were $52.5 million or $0.84 per share for the fourth quarter of 2013, which includes a $0.62 per share impact due to the recognition of previously derecognized deferred tax assets. Adjusted net earnings for the fourth quarter of 2012 were $10 million or $0.16 per share.

Cash flows from operating activities before changes in working capital items increased in the fourth quarter of 2013 by $1.6 million to $21 million compared to $19.4 million in 2012 primarily due to an increase in adjusted EBITDA partially offset by income taxes paid. Cash flows from working capital items were $1.9 million source of cash in the fourth quarter of 2013 and a $12.4 million source of cash last year. This $10.5 million decrease was primarily due to a larger portion of revenue invoiced and collected during the fourth quarter of 2012 as compared to 2013. The average cost of debt decreased to 2.6% at December 31, 2013 from 4.1% last year. This decrease was largely a result of the redemption of the 8.5% notes.

As of December 31, 2013, $105.1 million of our remaining debt was floating primarily based on 30-day LIBOR rates. At December 31, the company had cash and loan availability under its ABL facility of $50.3 million. Cash and loan availability as of March 11, 2014, was in excess of $57 million, which does not reflect the full effect of the working capital investment expected through the end of the quarter or the payment of the dividend.

Greg will now provide the outlook. Greg?

Greg Yull - Chief Executive Officer

Thank you, Michael. For 2014 we expect moderate revenue growth similar to the forecasted North American economic growth where we anticipate continuing to improve product mix. We expect to continue to focus on executing the South Carolina Project and our variable manufacturing cost reduction programs. Our gross margin expectation for 2014 is in the range of 20% to 22%. After the South Carolina Project has been completed and startup inefficiencies have been resolved, we expect overall gross margin to be between 22% and 24%.

For the first quarter of 2014, we expect revenue to be greater than that of the fourth quarter of ‘13, which is reflective of normal seasonality and to be approximately the same or slightly higher than the first quarter of 2013. We expect gross margin in the range of 20% to 22% in the first quarter of 2014 and adjusted EBITDA to be slightly higher compared to both the fourth quarter of 2013 and the first quarter of 2013. With regards to our CFO search the process is progressing well and we are confident to have someone in place in the next few months. In addition to what we’ve just discussed, we have additional details of our formal outlook in the MD&A filed this morning.

At this point, Michael and I would be pleased to answer any questions that you may have. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Sarah Hughes with Cormark Securities. Your line is open.

Sarah Hughes - Cormark Securities

Hi guys.

Greg Yull

Good morning, Sarah.

Sarah Hughes - Cormark Securities

Good morning. So on the – impact on the volume from the competition in loan margin stuff, is that going to be done in Q4, did you see ongoing impact from that in Q1 in terms of some competitor entering the market?

Greg Yull

So you are making reference to the two accounts that we walked away from?

Sarah Hughes - Cormark Securities

Yes.

Greg Yull

So I think that when I look at comps of 2013, I think you might see some of that still in Q1 of ‘13 with those accounts and then I think they go away.

Sarah Hughes - Cormark Securities

Alright. And if the person that was – like is this in terms of I just trying to get a sense of this competitor, is it a decent size competitor of yours or is it someone who come in and out of the market or I am just trying to get a sense of any risk on additional…

Greg Yull

I think it’s – what they start with those accounts have very low-single digit gross margins. And I think its business that is like I said it’s opportunistic. We believe that one piece of business was taken by a fairly significant player out of Asia. This stuff is going internationally. And then the other one was taken by a smaller competitor here in North America.

Sarah Hughes - Cormark Securities

Okay.

Greg Yull

But again when we look at the profile of those two accounts, they have always been opportunistic accounts. And they have always been single-digit gross margins. And we have gone through this before where we have lost the business and we gained the business.

Sarah Hughes - Cormark Securities

Okay. And obviously as you commented volatile resin prices, have you had any change in your ability to move pricing now versus previous times in the volatile resin markets, is there any differences in this market versus previous?

Greg Yull

I think it’s a fairly similar. One thing that’s different this year into late Q4 of ‘13 and into Q1 of ‘14 is that polypropylene didn’t move as much this year as it did last year. So the increased costs this year and late last year are not as large or as significant as they were the year before.

Sarah Hughes - Cormark Securities

Right.

Greg Yull

We see a competitive – I mean like always it’s a competitive space and we have seen a fair amount of competition in our stretch business over the past six months. But we are still in a situation that the marketplace is fairly disciplined.

Sarah Hughes - Cormark Securities

Okay. And then in terms of you talked about some unplanned manufacturing inefficiencies impacting the margin is – I am just trying to get a sense of trying to quantify that. If I look at margins in Q3 versus Q4 is that most of the difference that due to the unplanned efficiencies can I look at it that way?

Greg Yull

Yes, we think of it that’s certainly appropriate way to look at it. We look at it a little differently because we gave guidance of 20% to 22% and the reason why we are at 19.8% is primarily in that area driven by those inefficiencies.

Sarah Hughes - Cormark Securities

Okay. And then lastly just your interest expense in the quarter was there any – it was just a bit lower than I was expecting, was there any like year end adjustments at all or is that a kind of clean rate, clean number there?

Michael Jay

That was a clean rate for the fourth quarter.

Sarah Hughes - Cormark Securities

Yes, okay that’s it for me. Thank you.

Greg Yull

Thank you, Sarah.

Operator

(Operator Instructions) Mr. Yull, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Greg Yull - Chief Executive Officer

Thank you, Simon. If there are no more – no further questions I would like to thank all of our employees for their dedication and great work in 2013 and thank you for everyone on the call for participating. Thank you very much.

Operator

Ladies and gentlemen, please note that a replay of this call can be accessed as of noon today at 1-800-585-8367 and entering the conference ID 63095699. This replay will be available until midnight on April 11, 2014. Thank you. You may now disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Intertape Polymer Group's CEO Discusses Q4 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts