Business News

Intertape Polymer Reports Fourth Quarter and Full-Year Results

Monday 30. March 2009 - - Company adversely impacted by economic downturn - Solid financial footing enabled Company to weather fourth quarter storm

Intertape Polymer Group Inc. (TSX:ITP)(NYSE:ITP) (“Intertape” or the “Company”) today released results for the three months and full year ended December 31, 2008. All dollar amounts are US denominated unless otherwise indicated.

“The majority of 2008 reflected the benefits of business model revisions, capital structure improvements, new product introductions, and cost reduction measures undertaken in the past several years. In the first nine months we achieved a $14.7 million ($0.25 per share, both basic and diluted) improvement in earnings despite the fact that the United States economy entered into recession in the fourth quarter of 2007 and resin-based raw materials costs had increased sharply and rapidly during this period,” stated Intertape Chairman Eric E. Baker.

“A number of unprecedented events beyond our control combined to create a very disappointing fourth quarter. These included the failure of several financial institutions, the tightening of restrictions on the ability to access credit, a deepening recession, and specific to our industry, a rapid 60% decrease in resin costs and an inventory destocking throughout the supply chain. These factors resulted in a significant impact on our fourth quarter and full-year results. Nonetheless, we believe that the actions taken in late 2008 and early 2009 to stabilize our financial base, along with additional extensive cost cutting and cash conservation measures that we are implementing enable us to weather the severe recession,” commented Intertape Executive Director, Melbourne F. Yull.

Earnings

The Company incurred a net loss in the fourth quarter of $99.8 million or $1.69 per share, which included a $66.7 million charge for goodwill impairment, compared to a net loss of $0.7 million or $0.01 per share for the corresponding quarter a year ago. In addition to the goodwill charge, the Company’s fourth quarter results were adversely affected by a significant decline in customer demand, a rapid decline in the price of resin-based raw materials and other selected raw materials and an adjustment of the income tax valuation allowance. Adjusted net earnings for the fourth quarter of 2008 were a loss of $16.1 million, versus an adjusted net loss of $0.7 million for the fourth quarter of 2007.

For the full-year 2008, the Company recorded a net loss of $92.8 million or $1.57 per share versus a fiscal 2007 net loss of $8.4 million or $0.19 per share. The decrease is attributable primarily to the decline in fourth quarter results. The Company’s profits for the first nine months of 2008 totaled $7.0 million ($0.12 per share, both basic and diluted), compared to a loss of $7.7 million ($0.19 per share, both basic and diluted) for the first nine months of 2007. For the full year 2008, adjusted net earnings were a loss of $3.1 million, versus an adjusted net loss of $2.2 million for 2007.

Sales

Sales for the fourth quarter were $153.1 million compared to the $191.5 million posted for the fourth quarter a year ago. Unit volumes decreased 22.4% from the fourth quarter of 2007 due to weaker end-user demand as well as inventory destocking by both end-users and the Company’s distributor customer base.

Sales for the full year were $737.2 million compared to $767.3 million in 2007. The year-over-year drop was primarily attributable to the lower fourth quarter 2008 sales. For the first nine months of 2008, sales were essentially flat with the same period in 2007.

Gross profit and gross margin

Gross profit for the fourth quarter was a negative $5.5 million, compared to a gross profit of $28.4 million at a gross margin of 14.9% a year ago. The significant decline in gross profits for the fourth quarter is a result of $17.3 million in lower sales volumes and $16.6 million in gross margin compression. Included in the $16.6 million of gross margin compression is a non-cash charge of $7.7 million reducing inventories on hand at year-end to their net realizable value. Much of the remaining gross margin compression experienced in the fourth quarter related to the sale of inventories on hand at September 30, 2008.

Gross profit and gross margin for 2008 was $78.3 million and 10.6% respectively, compared to $116.3 million and 15.2% for 2007. Through the first nine months of 2008 gross profit was down $4.2 million compared to the same period in 2007 because of slightly lower sales volumes. The remainder of the decrease was due to the drop in the gross profit for the fourth quarter of 2008.

SG&A expenses

Selling, general and administrative expenses (“SG&A”) were $15.9 million (10.4% of sales) for the fourth quarter, compared to $18.7 million (9.8% of sales) a year ago. 2008 SG&A expenses were $68.2 million (9.3% of sales) compared to $71.2 million (9.3% of sales) for 2007. The 2008 reduction in SG&A was primarily the result of lower professional fees paid to third parties.

EBITDA

EBITDA in the fourth quarter was a negative $80.6 million compared to $18.1 million for the same quarter a year ago and for 2008 was a negative $28.2 million versus $66.7 million last year. Adjusted EBITDA in the fourth quarter was $3.1 million compared to $18.1 million for the same quarter a year ago and for 2008 was $55.5 million versus $74.8 million last year. The lower adjusted EBITDA in the fourth quarter of 2008 compared to the fourth quarter of 2007 is the result of lower gross profits.

Segmented Information

Tapes & Films Division

Sales for the Tapes and Films (“T&F”) Division for the fourth quarter were $122.6 million, an 18.8% decrease from sales in the fourth quarter of 2007. The decrease in sales volume was across substantially all product lines and reflected the deep economic downturn that impacted the global economy as a whole and the packaging industry in particular.

2008 sales decreased 2.2% to $592.2 million compared to $605.7 million for 2007. The Division had a sales volume (unit) decrease of 7.9% for 2008 and 2.7% for 2007. The sales volume decline in both 2008 and 2007 was not limited to particular product lines or channels of distribution. Approximately half of the 2008 sales volume decline occurred in the fourth quarter.

Gross profits for the fourth quarter were a negative $2.8 million compared to $24.5 million at a gross margin of 16.2% for the fourth quarter of 2007. Of the total decrease, $13.5 million was the result of lower sales, the balance was attributable to gross margin compression. Additionally, at December 31, 2008, the T&F Division recorded a non-cash charge reducing the carrying value of its on-hand inventories by $1.5 million to reflect net realizable value. The T&F Division recorded an additional non-cash charge of $1.9 million at December 31, 2008, representing the expected loss arising from outstanding raw material purchase commitments that are at above market price levels and that the Division does not expect to be able to recover through selling prices in 2009.

Gross profit and gross margin for 2008 were $67.4 million and 11.4% compared to $99.1 million and 16.4% for the same period a year ago, due to lower sales volumes and the compression of gross margins. Of the total decrease, $4.3 million was incurred in the first nine months of 2008, while the remainder, $27.4 million, in the fourth quarter.

EBITDA for the fourth quarter was a negative $9.0 million compared to $16.9 million for the fourth quarter of 2007. The decline in EBITDA in the fourth quarter of 2008 compared to the fourth quarter of 2007 is the result of a decrease in gross profits. EBITDA was $38.1 million in 2008 and $69.3 million in 2007 respectively. Adjusted EBITDA for the fourth quarter was $4.9 million compared to $16.9 million for the fourth quarter of 2007. Adjusted EBITDA was $52.0 million in 2008 and $69.3 million in 2007 respectively.



Tapes and Films Division EBITDA
Reconciliation to Net Earnings
(in millions of US dollars)
(unaudited)
————————————————————————–
Three months Twelve months
For the periods ended December 31, 2008 2007 2008 2007
————————————————————————–
$ $ $ $
Divisional earnings before
impairment of goodwill and
income taxes (16.5) 8.9 8.7 39.2
Depreciation and
amortization 7.5 8.0 29.4 30.1
————————————————————————–
EBITDA (9.0) 16.9 38.1 69.3
Add back:
Gross profit margin compression 13.9 13.9


————————————————————————–
Adjusted EBITDA 4.9 16.9 52.0 69.3
————————————————————————–
————————————————————————–





Engineered Coated Products Division

Fourth quarter sales for the Engineered Coated Products (“ECP”) Division were $30.5 million, compared to $40.5 million for the fourth quarter of 2007. Sales volumes (units) decreased 24.3% for the fourth quarter of 2008 compared to the fourth quarter of 2007. Selling prices were relatively unchanged in the fourth quarter of 2008 compared to the fourth quarter of 2007, however, did decrease on a sequential basis. The weakening of the Canadian dollar relative to the US dollar during the fourth quarter of 2008 also contributed to the fourth quarter decline in sales. The sales volume decrease for the fourth quarter was across most of the ECP Division’s products and was reflective of the deep global economic downturn that occurred in the fourth quarter.

2008 sales decreased 10.3% to $145.0 million compared to $161.6 million for 2007. The sales volume (units) decrease for 2008 compared to 2007 was 15.8%. The largest market for ECP products is the North American residential construction market, which experienced a slowdown starting in the summer of 2006 and dramatically intensified through 2008. For the first nine months of 2008, the decline in sales of traditional ECP products was mitigated by the introduction of several new residential construction market products that allowed the Company to participate in segments of the residential construction market that it previously had either not participated in or participated only on a small scale. In response to rising raw material costs, the ECP Division instituted substantial selling price increases during the first nine months of 2008. Selling prices declined in the fourth quarter of 2008 on a sequential basis as raw material costs decreased.

Gross profits for the fourth quarter totalled a negative $2.7 million at a gross margin of negative 8.7% compared to $4.0 million at a gross margin of 9.7% for the fourth quarter of 2007. Of the total decrease, $3.9 million was due to lower sales volumes and the remainder to gross margin compression. Additionally, at December 31, 2008, the ECP Division recorded a non-cash charge reducing the carrying value of its on-hand inventories by $3.9 million to reflect net realizable value. The ECP Division recorded an additional non-cash charge of $0.4 million at December 31, 2008, representing the expected loss arising from outstanding raw material purchase commitments that are at above market price levels and that the Division does not expect to be able to recover through selling prices in 2009.

Gross profits and gross margins were $10.9 million at 7.5% and $17.2 million at 10.7%, respectively in 2008 and 2007. The gross profit and gross margin decline for 2008 occurred in the fourth quarter. In the first nine months of 2008, the gross profit and gross margin improved slightly compared to the first nine months of 2007 due to increased selling prices and improved product mix.

EBITDA for the fourth quarter was a negative $3.9 million compared to $2.2 million for the fourth quarter of 2007. EBITDA for 2008 was $3.6 million, compared to $9.7 million for 2007. The decline was attributable to the lower gross profits. Adjusted EBITDA for the fourth quarter was a loss of $1.2 million compared to $2.2 million for the fourth quarter of 2007. Adjusted EBITDA was $6.3 million in 2008 and $9.7 million in 2007 respectively.



ECP Division EBITDA
Reconciliation to Net Earnings
(in millions of US dollars)
(unaudited)
————————————————————————–
Three months Twelve months
For the periods ended December 31, 2008 2007 2008 2007
————————————————————————–
$ $ $ $
Divisional earnings before
impairment of goodwill and
income taxes (5.9) 0.7 (2.8) 4.2
Depreciation and amortization 2.0 1.5 6.4 5.5
————————————————————————–
EBITDA (3.9) 2.2 3.6 9.7
Add back:
Gross profit margin compression 2.7 2.7
————————————————————————–


Adjusted EBITDA (1.2) 2.2 6.3 9.7
————————————————————————–
————————————————————————–





Cash flow from operations

The Company generated cash flows from operating activities in the fourth quarter of 2008 of $12.2 million compared to $16.1 million for the fourth quarter of 2007. The decrease was due to the decline in profitability, offset somewhat by cash generated as a result of working capital changes.

For 2008, cash flows from operating activities were $20.8 million, versus $37.8 million for 2007, because of the decline in profitability.

Liquidity

The Company relies upon the funds generated from operations and funds available to it under its five-year asset-backed loan (“ABL”) to meet working capital requirements and anticipated obligations under its ABL and the Senior Subordinated Notes and to finance capital expenditures for the foreseeable future. As at December 31, 2008, the Company had cash and unused availability under its ABL totalling $50.7 million.

The ABL has a financial covenant, a fixed charge ratio, the target for which is 1.0 to 1.0. The financial covenant becomes effective only when unused availability drops below $25.0 million. While the Company did not meet the ratio at December 31, 2008, it was not in effect as cash and unused availability was in excess of $50.0 million. To date, in the first quarter of 2009, the Company has maintained availability in excess of $25.0 million despite having capital expenditures and a semi-annual interest payment on the Senior Subordinated Notes totalling approximately $11.0 million. In addition, the Company has paid down its outstanding borrowings under the ABL by approximately $12.0 million in the first two months of 2009. It is the Company’s intention to remain above the $25.0 million of unused availability threshold during 2009.

Income taxes

Included in deferred income tax expense for 2008 is $17.2 million of increases to the valuation allowance due to management’s revised assessment of the recoverability of the Company’s future income tax amounts in the current economic environment. Included in deferred income tax expense for 2007 is $2.6 million of increases to the valuation allowance.

Cost reduction efforts

Intertape has taken several measures in response to the challenges presented by the deep economic downturn including the reduction in staff and the elimination of many third party service providers. These cost reduction efforts are expected to save an estimated $7.0 million a year in operating expenses. In mid-January 2009 a temporary compensation reduction was implemented for salaried employees totaling approximately $3.5 million annually. In addition, the Company expects to continue to reduce costs throughout 2009 by approximately $23.0 million as part of its ongoing productivity improvement programs. Not all of the 2009 improvements are expected to contribute to an increase in the Company’s earnings. Some of these cost savings are necessary to offset the increased economic costs of the Company’s manufacturing operations, as well as to remain competitive in the marketplace.

Outlook

“While the general economic outlook remains quite uncertain, higher sales volumes within the Tapes and Films Division and the benefits of the expense reduction initiatives are expected to contribute to a sequential quarterly improvement in the EBITDA of the Company. The most significant improvements expected in the first quarter of 2009 compared to the fourth quarter of 2008 are the absence of the $16.6 million in gross margin compression and the $66.7 million goodwill impairment charge that were recorded in the fourth quarter of 2008. The Company anticipates earning positive EBITDA in the first quarter of 2009,” commented Mr. Yull.

Unit order entry in the T&F Division for the first quarter is currently running at 8-10% above fourth quarter levels. Looking forward to the second and third quarters, the T&F Division is expecting an improvement in sales volumes due to the seasonal nature of some products and the expected benefits of the new product and market initiatives. Seasonal improvement is expected in the ECP Division during the second and third quarters of 2009, along with benefits from new product and market initiatives. The first quarter of the year is traditionally the slowest period for this Division as its two largest market product classes are residential construction and agriculture.

“In addition to the cost cutting and cash conservation measures that we have put in place over the past year, we plan to limit our 2009 capital spending to maintenance items, once certain outstanding commitments are fulfilled, until the outlook becomes clearer,” stated Victor DiTommaso, Chief Financial Officer.

The Company estimates that its maintenance capital expenditures approximate $8.0 million a year.