Intertape Polymer Group's (ITPOF) CEO Gregory Yull on Q2 2014 Results - Earnings Call Transcript

Aug. 6.14 | About: Intertape Polymer (ITPOF)

Intertape Polymer Group, Inc. (OTCPK:ITPOF) Q2 2014 Results Earnings Conference Call August 6, 2014 10:00 AM ET

Executives

Gregory A.C. Yull - CEO and President

Jeffrey Crystal - CFO

Analysts

Sarah Hughes - Cormark Securities

Justin Wu – GMP Securities

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Intertape Polymer Group’s Second Quarter 2014 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 Jeff Crystal, 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 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, including adjusted EBITDA, adjusted net earnings and adjusted net earnings per share. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available at our website at www.intertapepolymer.com and are included in its filings including the MD&A filed today.

I would like to remind everyone that this conference is being recorded today, Wednesday, August 6, 2014 at 10:00 AM Eastern Time. And I will now turn the call over to Greg Yull. Mr. Yull, please go ahead, sir.

Gregory A.C. Yull

Thank you, operator and good morning everyone. Welcome to Intertape’s 2014 second quarter results conference call. Joining me for the first time is Jeff Crystal, our new CFO who started working with us just over three months ago. 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 call presentation that you can download from the Investor Relations section of our website. I’ll start on page three of our presentation. Overall we’re pleased by the strong financial results for the quarter. First, sales volume increased by approximately 2% over last year and combined with higher average selling prices allowed us to achieve revenue of approximately $203 million, which represents the highest quarterly level in three years.

Second, gross margin reached 21.7%, up over the first quarter gross margin of 21.4 despite the negative impact of $800,000 of duplicate overhead costs related to the South Carolina project. These results were at the high end of our 20% to 22% outlook range that we provided last quarter. Third, adjusted EBITDA of $29.5 million for the quarter was up 4.1% over last year and this also represents a multi-year high third quarter. This adjusted EBITDA level was achieved despite being negatively impacted by the duplicate cash cost of running the two plants in South Carolina of $600,000.

On page four, you’ll see that when compared to last year an increase in average selling prices contributed $6 million to revenue while sales volume had a positive impact of $3.4 million on revenue. The $9.5 million net increase reflects benefits from price increases effective late in the first quarter of 2014 and an increase in units across all of Intertape’s major product categories. When compared to the first quarter of 2014 average selling prices contributed $5 million to revenue and volume had a negative impact of $2 million. We believe that the decrease in volume primarily reflects customers pre-buying during the first quarter of 2014 in advance of price increases effect during the first quarter of 2014.

As shown on page five, revenues from the sale of new products represented about 18% of total revenue for the second quarter which is slightly higher compared to the first quarter of 2014 and relatively flat compared to last year. Page six, provides an update on the South Carolina project. At the last conference call in May I mentioned that we’re managing an important phase of the project. We have encountered unexpected production start-up issues which is not uncommon for a project of this magnitude. These issues are being resolved but have resulted in incremental capital expenditures, higher duplicate overhead costs and minor production volumes.

As a result total CapEx for the South Carolina project is now expected to be between $52 million and $54 million, up from the previous estimate of $44 million to $46 million. The increase primarily relates to additional equipment cost, mostly due to rectifying start-up issues I mentioned and additional headcount dedicated to the project.

Through June CapEx since inspection of the project was approximately $39 million or about 75% of this current total estimated project cost. We remain on track with the original timing of completion of the overall project but because of the minor product delays we expect to incur a higher duplicate cost. We now anticipate the cost will be between $4 million to $7 million up from our previous estimate of between $2 million to $5 million. Despite these setbacks the good news is that tape production started at the new South Carolina facility last week in addition to saturation production and some limited converting. We remain very confident in the use of the technology and the projected annual savings of $13 million starting in the second half of fiscal 2015.

If you refer to page seven, considering the incremental CapEx for the South Carolina project our total CapEx for 2014 is now expected to be between $39 million and $44 million, up from our previous estimate of between $31 million and $35 million. The vast majority relates to the South Carolina project I just discussed and other smaller high return projects at some of our other facilities.

On page eight we present manufacturing cost reductions for the second quarter and the expected range for the full year 2014. Total manufacturing cost reductions for 2014 are now expected to be between $14 million and $16 million down from our prior guidance of $16 million to $20 million. With the focus on the South Carolina project additional resources are being deployed from previously planned cost reduction projects which are now being temporarily delayed. We expect to implement the delayed projects and realize the saving after the South Carolina Project is further along.

Finally, on page nine I want to briefly discuss the two announcements we made on July 7. First, the Board made a decision to increase our annual dividend by 50% from $0.32 to $0.48 per share. This decision was motivated by the Board’s current confidence in our long-term business outlook and strategy. The second announcement relates to the normal course issuer bid program that was put in the place to repurchase up to 2 million shares over a 12 month period. Our intent is to fully execute on this plan but on an opportunistic basis taking into account the stock price and our availability of funds. We believe this program is another way of creating value for our shareholders.

At this point I'll turn the over to Jeff for additional details within the financials.

Jeffrey Crystal

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 2014. Gross profit was $44.1 million in second quarter of 2014, an increase of 4.2% from $42.3 million a year ago primarily due to an increase in the spread between selling prices and higher raw material cost, increased sales volume and net manufacturing cost reductions. This increase was partially offset by approximately $800,000 of duplicate overhead cost incurred to support the South Carolina project.

On a sequential basis gross profit increased 3.2% from $42.7 million, primarily due to net manufacturing cost reductions partially offset by $800,000 of duplicate overhead cost and a decline in sales volume. SG&A was $20.6 million for the second quarter of 2014, an increase of 1.7% from $20.2 million a year ago primarily due to an increase in professional fees partially offset by a net decrease in variable compensation expenses resulting from lower expected annual payment amounts.

On a sequential basis SG&A increased 8.3% from $19 million primarily due to a $2 million increase in stock-based compensation expense mainly relating to stock appreciation rights evaluation partially offset by the non-recurrence of a provision for executive severance.

As indicated on page 11 of the presentation adjusted EBITDA of $29.5 million for the second quarter of 2014 increased 4.1% from $28.3 million in the second quarter of 2013, primarily due to higher gross profits. The 29.5 million adjusted EBITDA was negatively impacted by the $800,000 of duplicate overhead costs that I mentioned earlier.

On page 12, adjusted EBITDA sequentially increased 10.6% from $26.7 million due to higher gross profit and lower SG&A and research expenses. The effective tax rate for the first six months of 2014 was 38.5% compared to 136% last year. The decrease is primarily due to the impact of income tax expense recorded during the first six months of 2013 for stock options exercise and state income taxes assessed on taxable income which excluded certain manufacturing rationalization charges. These decreases were partially offset by an increase from utilization of the U.S. deferred tax assets that were previously de-recognized until the fourth quarter of 2013.

Cash income taxes paid in 2014 are still expected to be less than $5 million. Adjusted net earnings were $14.5 million for the second quarter of 2014, $18.3 million for the second quarter of 2013 and $11.8 million for the first quarter of 2014. Adjusted net earnings were $3.8 million lower compared to the prior year primarily due to higher income tax expense partially offset by an increase in gross profit and a decrease in interest expense. Sequentially adjusted net earnings were $2.7 million higher primarily due to an increase in gross profit.

As you all know on page 14 cash flow from operating activities before changes in working capital items increased in the second quarter of 2014 by $1.3 million to $27 million compared to $25.8 million in the second quarter of 2013. The increase was primarily due to higher gross profit and a decrease in cash contributions to defined benefit plan. Cash flows from working capital items resulted in an $8.9 million use of cash in the second quarter of 2014 and a $6.6 million use of cash in the second quarter of 2013. This $2.2 million increase was primarily due to higher payments made for accounts payable and accrued liabilities, partially offset by a decrease in prepaid expenses related to compensation payments in the first quarter 2014, an increase in local tax refunds received in the second quarter of 2014 and a smaller increase in inventory in the second quarter of 2014.

On pages 14 and 15 of the presentation total debt at June 30, 2014 was a $144.9 million, a decrease of $12.4 million compared to June 30, 2013. Our strong operating cash flows over the 12 months period allowed us to cover a relatively high amount of the CapEx for the South Carolina project as well as the payment of nearly $20 million of dividend over the same 12 month period. Our debt-to-trailing 12 months adjusted EBITDA ratio was 1.4 at June 30, 2014 compared to 1.6 at June 30, 2013.

Our average cost-of-debt decreased to 2.5% at June 30, 2014 from 3.2% at June 30 last year. This decrease was largely a result of the redemption of the 8.5% notes in 2013. At June 30, 2014 the company had cash and loan availability under its ABL facility of $55.7 million. Cash and loan availability as of August 5, 2014, was in excess of $59 million.

Days inventory for the second quarter of 2014 was 61 days, which is an increase of three days from the second quarter of 2013 and an increase of four days from the first quarter of 2014. We expect days inventory for the third quarter of 2014 to decrease to high 50s as inventory is expected to decline due to our annual maintenance shut down. Inventory increased $15.1 million during the first six months of 2014 to $109.4 million from $94.3 million as of December 31, 2013.

The increase was due to third quarter planned annual maintenance shut down mitigation of the effect of transferring production related to the South Carolina project and higher expected sales volume in the third quarter. Day sales outstanding or DSO increased one day to 41 in the second quarter of 2014 compared to last year and decreased one day compared to the first quarter of 2014. Trade receivables increased $12.4 million during the first six months of 2014 to $91 million from $78.5 million as of December 31, 2013 primarily due to an increase in revenue in the second quarter of 2014 compared to the fourth quarter of 2013. DSO is expected to remain in the low 40s during the fourth quarter of 2014.

Before I hand the call over to Greg for the outlook I want to touch on a couple of items related to the third quarter. We anticipate a charge in the third quarter of 2014 related to the settlement of the former Brantford, Ontario manufacturing facility pension plan. Upon closing the plant in 2011 we were required by the statues to fully fund the pension plan and settle the liabilities in plan assets with an annuity insurance contract within a maximum period of five years. The charge arises due to the difference between the discount rate that is being used for accounting purposes and the implied annuity contract rate. We expect the minimal impact on cash flows of the fund used to purchase the annuity contract will come from the plan assets.

However there could be an additional contribution required by the company or a small refund to the company primarily depending on the results of the plan participant election. The charge is expected to decrease third quarter gross profit by approximately $2 million to $2.5 million. The pension charge will not impact adjusted EBITDA as we intend to have this as a discrete add back item given the non-recurring nature of the charge.

As I mentioned earlier, the second quarter had $800,000 of duplicate overhead cost related to the South Carolina project. In the third quarter we expect these costs to be approximately $1.2 million. These costs negatively impact gross profit while only the cash related portion negatively impacts adjusted EBITDA. We’ll continue to discretely report these amounts in our future results.

Greg will now provide further details on the outlook. Greg?

Gregory A.C. Yull

Thank you, Jeff. Turning to the outlook on the page 16 we anticipate revenue growth for the third quarter of 2014 to between 2% and 4% when compared to the third quarter of 2013. Including the impact of the Brantford pension charge and the duplicate overhead cost that Jeff talked about gross margin is expected to be approximately 19%. Adjusted EBITDA for the third quarter of 2014 is expected to be between $27 million to $29 million including the approximate $900,000 cash impact of the duplicate overhead cost to support the South Carolina project.

As Jeff indicated the Brantford pension charge will not impact adjusted EBITDA. As announced this morning we’re pleased to have Mr. Frank Di Tomaso join our Board of Directors. Frank has extensive experience as a Corporate Director and as a Partner with an international public accounting firm.

At this point Jeff and I would be pleased to answer any questions you may have. Operator.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen we will now conduct a question-and-answer period for analysts. (Operator Instructions). Our first question comes from the line of Sarah Hughes with Cormark Securities. Please proceed with your question.

Sarah Hughes - Cormark Securities

Hi guys.

Gregory A.C. Yull

Good morning.

Sarah Hughes - Cormark Securities

Good morning, Greg can you give us a bit more detail on the South Carolina, the production or the issues there and then the reason for the CapEx increase? I just didn’t quite understand that given your explanation and your comments?

Gregory A.C. Yull

So we went through from the last conference call in May and now we’ve gone through some extensive start-ups in the facility. We’ve experienced some failures, some equipment failures and some equipment adjustments that we haven’t made, that’s driving increased CapEx and also we deployed more resources as it relates to people to the project and that’s driving that incremental CapEx.

The really good news is we got into production last week. We feel very confident about the plan, the technology, the timing. We’ve basically taken a step backwards during the quarter but we believe that we’ve rectified a lot of those issues on a go-forward basis.

Sarah Hughes - Cormark Securities

So I guess the equipment failure would that be new equipment you got?

Gregory A.C. Yull

Yeah well I don’t want to say -- definitely we have equipment issues, right. So a combination of some failures and some issues. We had to do some new CapEx expenditures. We had to adjust some equipment and now that’s what drove that number.

Sarah Hughes - Cormark Securities

So if you -- and I know your production and then your production in the facilities is going to be [staged] and if you look forward is all the equipment that you need to go full production in the facility now and has it been fully tested or where are you in that?

Gregory A.C. Yull

Yeah so right now we have about 75% of the capital equipment in place. All the coating, all the adhesive mixing systems are in place. Our saturator is in place up and running. We have limited converting rates now, so that’s probably the biggest thing that we’re waiting for and we’re doing a ramp up and as I discussed at the end of the first quarter saturation will be first, our first commercial pipeline on the coater will be duct tape and that’s planned for the future and then we’ll ramp in to masking tape after that. But mostly equipment is in place right now.

Sarah Hughes - Cormark Securities

And the converting equipment is most of that coming from your existing facility or is some of that new?

Gregory A.C. Yull

It’s a combination. We have a couple of [saviard], splitters and packaging lines coming in and we have some of our equipment from Colombia also making the move to Blythewood.

Sarah Hughes - Cormark Securities

Okay and then in terms of duplicate cost, so are those all cash cost or you still have some non-cash costs in those?

Gregory A.C. Yull

No, they are not all cash costs. Some of those relate to depreciation of equipment. So like we talked about basically you have -- like in our guidance for example we talked about $1.2 million of total duplicate costs that we’re expecting for the third quarter of which $900,000 would be cash cost.

Sarah Hughes - Cormark Securities

Okay, do you have any idea about that I think it’s four to seven, now how much is cash cost now or no?

Gregory A.C. Yull

No, we’d have to -- I would imagine the majority of the cash cost…

Jeffrey Crystal

The majority of the cash I mean you could probably pro-rate it and…

Sarah Hughes - Cormark Securities

Okay the majority.

Gregory A.C. Yull

I don’t know as Jeff said, but a lot of that’s the building depreciation from Q2.

Sarah Hughes - Cormark Securities

Okay, and then in terms of the volume growth that you saw in the second quarter can you go in a little bit more detail of kind of where you saw that and kind of where you think it’s coming from?

Gregory A.C. Yull

Yeah we saw the best performance from the product segment perspective in our industrial tapes group. That’s where we saw, that’s the highest unit growth and revenue growth. We still face a little pressure on our low end card sealing tape and that has impact on units, not a very significant impact on gross profit dollars. So we see little headwind there but our industrial tapes business did very well in the quarter.

Sarah Hughes - Cormark Securities

And you guided for Q3 of 2% to 4% growth. Is that still a continuation of volume growth if you go into the third quarter or what are your seeing now?

Gregory A.C. Yull

Well, right now, we're going to just stick to the revenue guidance and not comment on units just because of the mix of products within our portfolio as you know. It's got a huge impact. So right now as we sit in Q3 our order demand has been good.

Sarah Hughes - Cormark Securities

Great.

Gregory A.C. Yull

We feel confident that we'll reach that guidance point.

Sarah Hughes - Cormark Securities

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

Operator

(Operator Instructions). Our next question comes from Justin Wu with GMP Securities. Please proceed with your question.

Justin Wu – GMP Securities

Good morning.

Gregory A.C. Yull

Good morning.

Justin Wu – GMP Securities

Just my first question is a follow up on from Sarah is on the duplicate cost. When should we assume the peak of the duplicate cost to occur?

Gregory A.C. Yull

I think when you look at Q3, Q4 and the Q1 they are going to be relatively similar. So I'd say in our guidance right now on Q3 is up from Q2 and that's pretty much a pretty steady state until we switch the lights off in the old facility.

Justin Wu – GMP Securities

And secondly just in terms of raw material pricing I guess a number of suppliers in North America have announced force majeure. So I was wondering if you can comment on one, what you are seeing from your suppliers and two, what is the status of your raw material inventory?

Gregory A.C. Yull

Mostly on the resin side we see polypropylene probably going up this month, and then coming down probably a couple months out. Polypropylene in the second quarter did drop and now it's in the midst of going up. Polyethylene is fairly flat. There are a couple of suppliers out there with an increase right now. I'm not sure that they are going to get that increase and from the supply perspective we're in pretty good shape from a supply perspective. All other raw materials give or take a couple ups and a couple downs are relatively flat. So again polypropylene, a little headwind going forward on that product.

Justin Wu – GMP Securities

And have you guys announced any price increases for the third quarter and if in fact your raw material costs do go up what's your confidence that you can push prices up for your products?

Gregory A.C. Yull

We've some increases out right now within our woven product group and right now on the tape side we don't have any increases out at this point.

Justin Wu – GMP Securities

Okay.

Gregory A.C. Yull

And as I said Justin with the polypropylene the movement that we're seeing right now is counter to when we saw a decline in I think it was June, a decline in polypropylene. So the net effect is not dramatic.

Justin Wu – GMP Securities

I guess longer-term there's been a lot of talk with kind of the advent of shale gas and unconventional and it's kind of kept gas prices down, that would be beneficial to PE and PP prices. What are your thoughts on that and when do you anticipate that's starting to benefit raw material costs?

Gregory A.C. Yull

So there is a lot of capacity coming on between 2015, 2018 both on polyethylene side and polypropylene side specifically and we believe that will put us as a North American industry in a more advantageous position that we're in right now. So we expect to start seeing some of that 2015-2016 based on the increased capacity that's coming on stream.

Justin Wu – GMP Securities

And just lastly, in terms of cost reductions, I guess apart from the closure of Colombia and the opening of Blythewood within your other facilities you guys have done a pretty good job in terms of reducing the cost structure. But is there much more that you can do in terms of squeezing additional cost savings out of those facilities?

Gregory A.C. Yull

Yeah I think that never ends, right. So a combination of being productive with our materials, our labor, et cetera and just utilizing technology and deploying it as best we can within our plants. I think there’s more opportunities there and we constantly look at deploying capital towards that. But obviously right now as we discussed our main focus is executing on the Blythewood plant startup and going forward there should be opportunities within some of our facilities to deploy capital and do some high return projects.

Justin Wu – GMP Securities

And in terms of the Blythewood and you talked about $30 million cost savings do you feel that’s kind of a starting point of more or is that substantially what you expect going forward?

Gregory A.C. Yull

Well, at this point, that’s what we expect.

Justin Wu – GMP Securities

Okay, great, thank you.

Gregory A.C. Yull

Thank you Justin.

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.

Gregory A.C. Yull

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

Operator

Please note that a replay of this call can be accessed as of 1 PM today at 1800-585-8367 until September 5, 2014. Thank you. You may now disconnect your lines.

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