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Edited Transcript of ITP.TO earnings conference call or presentation 8-Aug-19 2:00pm GMT

Q2 2019 Intertape Polymer Group Inc Earnings Call

SAINT-LAURENT Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Intertape Polymer Group Inc earnings conference call or presentation Thursday, August 8, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gregory A. C. Yull

Intertape Polymer Group Inc. - CEO, President & Non-Independent Director

* Jeffrey Crystal

Intertape Polymer Group Inc. - CFO

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Conference Call Participants

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* Ben Jekic

GMP Securities L.P., Research Division - Director and Special Situations Analyst, Equity Research

* Damir Gunja

TD Securities Equity Research - Director

* Maggie Anne MacDougall

Cormark Securities Inc., Research Division - Director of of Institutional Equity Research

* Michael Doumet

Scotiabank Global Banking and Markets, Research Division - Analyst

* Neil Linsdell

Industrial Alliance Securities Inc., Research Division - Head of Research and Equity Research Analyst of Consumer Products & Special Situations

* Scott Douglas Fromson

CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst

* Stephen MacLeod

BMO Capital Markets Equity Research - Analyst

* Zachary Evershed

National Bank Financial, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to Intertape Polymer Group's Second Quarter 2019 Conference Call and Webcast. (Operator Instructions) Your speakers for today are Greg Yull and Jeff Crystal.

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 brief -- 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 if situation may change in the future.

You are therefore cautioned not to 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. An extensive list of these risks and uncertainties are identified in the company's Annual Report on Form 20-F for the year ended December 31, 2018, and subsequent statements and factors contained in the company's filings with the Canadian Securities Regulators and the U.S. 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 EBITDA margin, adjusted net earnings, adjusted earnings per share, secured net leverage ratio, total leverage ratio and free cash flows. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available at our website at www.itape.com and are included in its filings, including the MD&A filed today. Please also note that variance ratio and percentage changes referred to during this call are based on unrounded numbers, and all dollar amounts are in U.S. dollars unless otherwise noted. I would like to remind everyone that this conference is being recorded today, August 8, 2019, at 10 a.m. Eastern Time.

I will now turn the call over to Greg Yull. Mr. Yull, please begin, sir.

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [2]

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Thank you, operator, and good morning, everyone. Welcome to IPG's 2019 Second Quarter 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.

It was another strong quarter, revenue was up nearly 19%. Adjusted EBITDA increased nearly 28% to $44.2 million and our adjusted EBITDA margin reached 14.9%. We generated these results primarily due to the operating performance of our world-class low-cost asset base, disciplined management of the spread between selling prices and raw material input costs and margin and operational improvements within our recent acquisitions as we work to integrate them into the business and move them closer to IPG's historical margin standard, and we believe there is more runway ahead of us on that front.

We are seeing growth in the areas where we have recently invested, specifically, films, water-activated and other carbon sealing tapes and woven products. Our focus remains unchanged. Strengthening our unique product bundle and efficiently operating our world-class low-cost asset base in order to deliver quality, value and service to our customers. That's what we deliver.

Now how does that relate to growth? We defined 3 priorities for the business. First is our e-commerce strategy. Our primary product category in e-commerce is water-activated tape. On a macro level, recent report show consumption for corrugate for containerboard is under pressure and that production levels for containerboard are down. Despite these pressures, we continue to experience strong demand within the e-commerce market for water-activated tape and more broadly across the market for carton sealing tapes. Based on those results, we believe, we continue to grow our share within the overall carton sealing tapes market.

Leading e-commerce retailers continue to pursue initiatives to reduce their expenditures on packaging, including right-size boxes and shipping your own container programs and replacing boxes with mailers in certain situations. The breadth of our product bundle and our existing relationships with e-commerce retailers provide a great opportunity for us to take advantage of these changes.

On the packaging front, we have built out our water-activated tape capacity with the second line at the Midland facility. We offer quality and value products in the acrylic and hot mill categories for pressure sensitive cart sealing tapes. Our Polyair acquisition strengthened our product bundle with protective packaging solutions including mailers, bubble cushion, air pillows and we recently added paper void fill.

We've also invested in our stretch film capacity for packaging and our shrink film meets the requirements for the Ship in Own Container programs. Our bundle provides a wide range of complementary products for e-commerce retailers, short of the corrugate itself. A significant priority of ours is to track our e-commerce customers as they grow domestically and international with our unique product bundle. Another major priority is the efficient start up and run rate optimization of our greenfield investments we made through our CapEx program in 2017 and 2018. We are tracking on budget to deploy $45 million to $55 million in capital expenditures this year, down from the $80 million we averaged in the preceding 2 years.

Our new woven facility in India was commissioned earlier this year. Our base loading case for this facility includes selling into our legacy North American woven customer base and the recently acquired Maiweave business as well as producing lower cost, less complex product lines that were previously being sourced primarily from high cost Asian suppliers.

We are on plan with our Indian woven production. And as we mentioned on our first quarter call, the facility did not make any material contribution to our results during the second quarter. This effect was expected and is primarily a function of long supply chains, with 60 days of production out of India on the water at any one time, plus the time to sell that product in North America. In addition, we continue to work through the high cost material from our Chinese supplier. Note that, as planned, we buffered our inventory with this third-party material supply in order to ensure that we did not run into any quality or service issues with our customers, while we started up operations in our new woven production facility.

We expect to see EBITDA contribution from this new facility in our third quarter with even more in the fourth quarter as we work through the higher cost inventory and transition to the lower cost material from our Indian facility.

We have 2 profit centers within this business related to our woven products from India. 55% of the profit in the partnership in India itself, plus a 100% of the savings realized from backwards integrating into the cost competitive supplier versus higher cost third-party suppliers from Asia. Our second major investment in India was in the carton sealing tapes category, that facility is now producing commercial tapes and we are in the process of building our order book for its production.

However, this is an interesting case study and it's a 2 sided coin. Our Indian tapes facility is performing to plan at present, but this scheduled production ramp has been more gradual than our woven facility as we enter the second half of 2019 and then growing into 2020. The slower growth plan was due to the longer than anticipated time to commissioning all manufacturing activities, less base loading opportunity and a gradual ramping up of the sales from the European market. However, the pricing spread on our primary raw material polypropylene between the Asian market and the North American market has narrowed more recently. Historically, Asian polypropylene prices are typically more competitive due to the different type of feedstock being used in the energy industry in Asia versus North America.

At the current polypropylene pricing levels, the contribution to North American sales volume we originally expected from the Indian carton sealing tapes facility will be challenging to deliver. But the other side of the coin is highly favorable. Our Danville, Virginia plant that produces the same carton sealing tape is performing well above our expectation, both because of significant improvements in plant efficiency and as well as the previously mentioned advantage to no arbitrage opportunity on Asian polypropylene, which means, there is less opportunity for base loading the Indian plant. Production in this category from our Danville facility is well ahead of plan in the first half of 2019 and we expect that trend to continue.

We've invested capital for carton sealing tapes in India and we want to ensure that investment is a success, but the incremental contribution delivered in this category from North American positions us further ahead than if India perform to plan and North American production return to its earlier level. Assuming polypropylene prices in Asia remain in line with North American prices in the near term, this could minimize the contribution of the Indian facility in 2020 on a standalone basis.

But as I mentioned, there should be more than offset by the benefit realized in our North American operation.

So in summary, the priority is to strive to effectively baseload our greenfield facilities and optimize the run rates, including the Indiana facilities and the second line at our Midland, North Carolina facility. Our final priority for growth is completing the integration of our recent acquisitions and delivering on our cost and revenue synergy targets in each case.

Let's start with Cantech. Our cost savings program is tracking on target with the closure of Johnson City, Tennessee last year and the Montreal, Quebec facility announced earlier this year. We estimated a run rate of total annual synergies of between $3.5 million to $6 million by the end of 2019 from Cantech and we remain confident in that target. As part of the closure, we reported noncash impairments of inventory, property and equipment related to both facilities of $2.3 million and cash costs of $1.1 million for termination benefits related to the Montreal closure. The changes -- the charges were primarily booked in the second quarter and we expect additional cash charges of approximately $1.4 million in the remainder of 2019.

Moving to Polyair. We are targeting revenue and cost synergies the combined to deliver adjusted EBITDA of between $20 million to $22 million in 2021 from a base of $13 million in 2018. Halfway through the year, Polyair is ahead of its 2018 results and we are confident in meeting our plan. We are seeing the impact from the leading e-commerce retailer initiatives to right-size boxes on certain product categories like air pillows. But we are also uncovering additional opportunities to reduce or eliminate costs that we previously did not anticipate.

As part of our strategy, we've integrated the leadership of the Polyair sales force within IPG. This change is meant to ensure the team is better position with the technical expertise on specific product lines to effectively market and serve our existing customers as well as new prospects. A second part of the Polyair of our Polyair integration strategy is backward integrating raw material inputs. We believe additional opportunities exist that deliver material savings on annualized basis that will support our cost synergy targets, as we have already seen strong progress in this area.

Finally, as I mentioned earlier, protective packaging solutions are an important element of our product bundle for e-commerce retailers. We believe opportunities exist for us to use our existing relationships with retailers to provide them with a broader bundle. This includes protective packaging solutions, which as a standalone entity of insignificant scale Polyair could not do as effectively as we can. We are seeing early progress on revenue synergies. But we have lots of runway ahead of us, based on where Polyair started.

Moving on to Maiweave. We are seeing great results. We have already achieved adjusted EBITDA contribution from the business in the first 6 months of 2019, that is in line with what the business delivered in all of 2018. This result is primarily due to operational improvements at the plant level as well as both revenue and other cost synergies and we've achieved these results without a significant benefit of lower cost raw materials from backwards integrating into our Indian woven facility. Maiweave is a great example of an acquisition, that fits within our portfolio and can benefit from our scale.

3 years ago, we established ambitions -- ambitious targets of $1.5 billion in revenue, $225 million in adjusted EBITDA and 15% adjusted EBITDA margin by 2022. As we close in on that timeframe, you can see the progress we are making on adjusted EBITDA margin, nearing the 15% level in the second quarter. No journey is a straight line, but we are seeing an improvement in this area and we are confident in our ability to deliver on our margin target.

Based on our current run rate, the revenue and adjusted EBITDA targets would require 2 or 3 bolt-on acquisitions depending on their scale and timing. But let me be clear, we will not transact to reach arbitrary targets, based on the acquisition values, we continue to see in the market, private equity investors are bidding up assets to levels, where public companies that trade within the peer group range cannot compete.

With this in mind, we will continue to pursue opportunities that are a strategic fit and accretive to earnings. We are frequently asked by investors, what we are seeing on the demand side of the market and how effectively we are positioned for an economic downturn. While we have benefited from a year-over-year -- while we benefited from a year-over-year softening in our primary raw material input costs. Recent independent reports suggests they should remain relatively flat through the end of 2019.

But here's what I know, our results this morning speak for themselves. We're seeing organic growth at a range above our peer group and we are better positioned as a company than ever before to face whatever future headwind or conversely be optimistic and take advantage of potential tailwinds, that we may encounter. We've established clear priorities and in my view, it's a matter of executing. We are focused on blocking and tackling to deliver returns to shareholders.

Based on our improving results, sustainable cash flow generation and our outlook, the Board of Directors declared an increase of 5.4% to the third quarter dividend, the new annualized dividend is $0.59 per common share. Given we have completed our 2-year CapEx program, the investments and the new greenfield facilities are starting up and working towards our optimal run rates. As we generate increased free cash flow from these investments and our acquisitions, our first priority forward is debt repayment. However, we felt the dividend increase at this state was appropriate given our ability to also make debt payments with our improved cash flow.

I'm excited for the next phase of growth. I'd like to take a moment to mention the high level of dedication and commitment of our 35,000 person workforce and how important their work is to us meeting our targets. Our improved plant performance, the efficiency of our back offices and the results of our sales and customer service teams is because of their hard work.

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

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [3]

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Thank you, Greg. On Slide 9 of the presentation, we present an analysis of our revenue for the second quarter. Revenue increased almost 19% to $295.6 million compared to the same period in 2018. $46.5 million increase was primarily due to a $40.8 million impact from the Polyair, Maiweave and Airtrax acquisitions. Volume and mix changes resulted in revenue increasing by 2.4% or $6 million. Price effect increased 0.5% or $1.1 million and foreign exchange negatively impact the top line by minus 0.6% or $1.5 million.

Overall, after we see the impact of our recent acquisitions and CapEx investments, we describe our growth outlook as a GDP-plus story. With 2.4% volume mix growth in the quarter, that is a touch behind our expectations, but it is clearly higher growth and we are seeing among our peers in the industry based on the Q2 reporting season. The great news is that we are seeing strong growth in the areas of the business where we have made strategic investments specifically films and carton sealing tapes including water-activated tapes.

We believe our investments in these product categories will continue to deliver positive momentum. At the same time, we continue to see weakness in our retail product line which I mentioned on our first quarter call as well as certain industrial tapes. In both instances, the product categories driving growth and a select underperforming categories, we expect the same general trends to continue through the end of the year, it's the benefit and the curse of a highly diversified product portfolio, you don't always derive all the benefit from the high growth, but you also offset the underperformers.

Turning to Slide 10. Gross margin was unchanged in the second quarter at 21.9% compared to the same period in 2018. Gross margin was unchanged, primarily because the increase in spread between selling prices and combined raw materials and freight costs was offset by the dilutive impact of the Polyair, Airtrax and Maiweave acquisitions, which we acquired at lower margin profiles than the IPG based business.

Adjusted EBITDA increased by nearly 28% to $44.2 million in the second quarter compared to the same period in 2018. The improvement was primarily due to the Polyair and Maiweave acquisitions, organic growth in gross profit and the favorable impact of operating lease payments totaling $1.8 million that were capitalized in the second quarter of 2019 in accordance with new lease accounting guidance implemented on January 1, 2019. The effective tax rate was 46.2% for the second quarter compared to 19.6% in the same period in 2018. The change is primarily due to a proposed state tax assessment and the related interest expense recorded in the second quarter of 2019, totaling $2.3 million as a result of the denial of the utilization of certain net operating losses generated in the tax years from 2000 through 2006.

The change also includes the elimination of certain tax benefits as a result of the U.S. Tax Cuts and Jobs Act related to intercompany debt, excluding the proposed state tax assessment, our effective tax rate would have been 28.7%, which is in line with our expectations and guidance going forward.

Cash flows from operating activities improved by $4.2 million to $31.9 million in the second quarter compared to the same period in 2018. The improvement was primarily the result of higher gross profit partially offset by an increase in income taxes paid. As a reminder, our business has a natural seasonality as we build inventory in the first half of the year in advance of both the higher volume, third and fourth quarter periods from a retail activity perspective as well as our planned factory maintenance schedule, which occurs primarily at mid-year. In the fourth quarter that build unravels with the seasonal nature of higher retail activity.

Free cash flow improved by $9.1 million to $20.5 million in the second quarter compared to the same period in 2018. The improvement was primarily due to the decrease in capital expenditures, which Greg referenced earlier as our strategic CapEx program winds down, and an increase in cash flows from operating activities. Also included in free cash flow was a favorable impact of operating lease payments totaling $1.8 million that I referenced earlier. In accordance with new lease accounting guidance implemented on January 1, 2019.

Our unsecured senior note offering in late 2018 enabled us to lower our secured net leverage ratio, which remained at 1.9x from the sequential period. The secure net leverage ratio is an important ratio that is relevant to our covenants. Therefore, we view it as a highest priority. In July, we amended our credit facility to among other things revised the secured net leverage ratio and interest coverage ratio covenant threshold to account for the associated impact of new lease accounting guidance implemented on January 1, 2019, requiring operating leases to be accounted for as debt with corresponding interest payments. The amendment increased the secured net leverage ratio covenants threshold 20 basis points to 3.7x and decreased the interest coverage ratio covenant threshold 25 basis points to 2.75x. Our total leverage ratio, including the unsecured debt is 3.5x, also unchanged from the sequential period.

Given the normal seasonality of working capital within the business that I just referenced, we expect the leverage ratio to move lower in the second half of the year as the working capital naturally unwinds. As Greg mentioned earlier, our highest priority for capital allocation at this stage remains debt repayment. We expect to see a significant year-over-year reduction in capital expenditures in 2019 to a range of approximately $45 million to $55 million.

As you can see on Slide 12, we expect this to significantly improve our ability to generate free cash flow compared to 2017 and 2018, and we intend to prioritize a portion of that cash towards the repayment of debt, which would further lower our leverage ratio. The company had cash and loan availability of $342.4 million as of June 30, 2019, compared to $393.9 million as of December 31, 2018. The decrease in cash and loan availability is mainly due to additional borrowings to support the company's seasonal working capital increase.

Greg will now provide the company's outlook. Greg?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [4]

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Thanks, Jeff. With this morning's earning report, we are reconfirming our outlook for 2019 revenue and adjusted EBITDA. Based on our second quarter results, we remain on track to achieve our targeted 2019 revenue, which we believe will be between $1.18 billion and $1.22 billion, representing growth of 14% at the midpoint of the range. We are also on track to achieve our targeted 2019 adjusted EBITDA, which we believe will be between $164 million and $174 million.

In closing, we continue to execute on our vision to be a global leader in packaging and protective solutions. We are investing in our world-class low-cost asset base and driving efficiencies in our business. We have strengthened our unique product bundle and improved our competitive position. We are executing a strategy to deliver long-term value for our shareholders.

On that note, during the second quarter, we issued our first ever sustainability report. If you haven't had a chance to review it, I encourage you to access it from our website. It highlights how we've approached sustainability as a normal course of operating our business. It's a record that we are proud of managing our environmental footprint is sound business in and of itself, but it also positions us to exceed our customers' expectations as they choose to make more sustainable choices in their supply chain. You should expect us to communicate more on this topic as we continue to develop our sustainability strategy.

With that, I will turn the call back to the operator to open up the question-and-answer period. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Ben Jekic from JMP Securities (sic) [GMP Securities].

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Ben Jekic, GMP Securities L.P., Research Division - Director and Special Situations Analyst, Equity Research [2]

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I just had a first question model related gross margin year-over-year unchanged despite the dilutive impact of acquisitions. Can you sort of at least qualitatively suggest what do you expect into the second half of the year and into 2020 and sort of how do costs depend on that? Just elaborate a little bit more.

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [3]

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Yes. So Ben, we haven't given any guidance on the gross margin, in particular. At this point, I mean certainly, as we've discussed, some big reasons why we've seen gross margin do well despite the dilutive impact of the acquisitions that have been due to the strong maintenance in our spread. So that's been a question of lower raw materials, making sure that we're disciplined on price and then you have the operational performance of our plants. So it's certainly been strong.

So certainly if that continues, I would expect the trend to continue. We have also discussed the fact that we are still in the process of taking out costs and increasing efficiency in our acquisitions. So as we move towards the end of the year, this year, we have the target for our Cantech synergies. So certainly we expect that to improve as we move through the year and the same thing in India, where we have our woven facility, we've basically had no benefit of the woven facility generating lower cost inputs into our North American business in the first half of the year. So we would expect to see incremental savings as a result of that new greenfield facility in the second half.

So what I would say is, all else being equal, we should see some tailwinds going into the second half, but again, a lot of that depends on the markets, overall, in terms of dull price and cost of sales.

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Ben Jekic, GMP Securities L.P., Research Division - Director and Special Situations Analyst, Equity Research [4]

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Okay. Great. And then the second question is if you can just remind us, you're indicating here that the secured net leverage ratio of 1.9 and 3.5 is total leverage ratio. Can you just clarify quickly what is on the secured side? And how did that change with the covenant adjustments that you did in July?

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [5]

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Yes. So on the secured side, basically that includes all our secured debt. So essentially the biggest item I would exclude would be our unsecured notes, the bonds that we issued last year, so that's the big difference between the 2. And in terms of the lease accounting, so the reason we had to make changes that because with the new lease accounting essentially with adding debt onto our balance sheet, which we had to make sure was incorporated into those leverage covenant. So that just resulted in that 2025 basis point change you saw in those 2 covenants. So just account for the new accounting under International Financial Reporting Standards. So really there should be no impact on our covenants related to those -- that new lease accounting.

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Operator [6]

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Our next question comes from Maggie MacDougall from Cormark.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [7]

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So just wanted to circle around the Polyair integration, you discussed a bit in your prepared comments about efforts that are underway to get to your 2021 EBITDA goal of $20 million to $22 million and that's a pretty big increase over the $13 million in 2018. So I'm wondering where we're at today, in terms of what synergies you've actually gotten to-date? And then how you expect the cadence to go to get to year-end goal in a couple of years’ time?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [8]

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So I think on cost side, just to start with that. I mean, we've made some good headway there simply on the raw material purchasing side. As we've mentioned in prior calls, we have also backwards integrated some film production where Polyair was sourcing that film from an outside vendor. We brought that production in-house and that should affect our P&L on a go forward basis as we move into the second half of this year. So on the cost side, it's been very good. We've been implementing our Intertape performance system at the operational level in our plants and driving those results and those cadences and metrics throughout the plant, and that takes a while, but certainly we've seen progress in the plants on an operational standpoint.

On the top line, we've seen some cases in the Polyair business go backwards. We called out specifically in the air pillow side that has gone backwards from a top line perspective as e-commerce retailers have focused a lot on right-sizing, packaging and boxes, and I think that's just an industry phenomena. We've had good success on the cross selling side, both at the distribution level. I feel really good about our access to distribution and what Intertape has been able to bring to the Polyair portfolio as it relates to the Intertape legacy distribution base. And also on top of that from a bundle of products, in my conference call, I made the -- or notes I made referenced to the fact that, that we've been successful in getting those product lines and leveraging them within our relationships with e-commerce. So certainly feel good about it. Certainly, there is some headwinds on the top line, mainly around that air pillows. But I think we found other opportunities to make up for that. And certainly that guide on $20 million to $22 million of EBITDA, we feel confident about on a go-forward basis.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [9]

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Okay. Are you able to share what you've achieved in terms of the dollar run rate synergies, so far?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [10]

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No.

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Maggie Anne MacDougall, Cormark Securities Inc., Research Division - Director of of Institutional Equity Research [11]

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Okay. And then with regards to the comments you made around the current sealing tape facility in India where polypropylene spreads between Asia and North America have narrowed. Can you just extrapolate a bit on that? What's the history between that spread relationship? The reason for that, is it just global commodity prices in the energy market or is it something different regarding to the parts supply? And then with all of that in mind, do you still view it as possible for that facility to meet your 15% return on invested capital hurdle in a reasonable amount of time?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [12]

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Yes. So to start with on the polypropylene side, over the past 10, 15, 20 years as North American production -- energy production has reached further into natural gas, the arbitrage on polypropylene in North America has been significant to Asia due to the fact that propylene come with a lot from the utilization of NAFTA. So that has evolved over the past 10 to 20 years. We have seen periods of time like isolate periods of time where the arbitrage will get down to a narrow range, which is kind of where we are now. We do believe historically or on a go forward basis that, that arbitrage will increase from Asian perspective to North American. So we still believe that having assets in Asia producing products based on polypropylene is a long-term strategic advantage and still see a tremendous benefit within our woven products plants making polypropylene products there, currently. As it relates to the 15% hurdle rate with that facility, at this point, I don't think we will hit that 15% and we'll update you on a go-forward basis. But I think it's important to realize that when we think of the production increases that we've had in North America and the cash flow generation out of the superior performance out of our assets, I think when we look at it as a whole, we are meeting or exceeding our cash flow objectives on a consolidated basis in those 2 facilities.

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Operator [13]

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Our next question comes from Michael Doumet from Scotiabank.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [14]

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Can you frame your current price cost spread versus the historical performance price positive in the quarter? I know paper prices were up presumably the overall input costs were down. So I guess the question is, is this increased price cost spread reflecting catch up versus last year? And maybe if you can tie up any sort of a conversation around the competitive dynamics and what's facilitating your spread recapture?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [15]

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Yes, I mean, there's certainly an element of catch up in the sense that as you know last year in 2018, we were facing a rising raw material environment then we had multiple price increases throughout the year with some towards the beginning of the year, I believe we had one sort of midway through the year. So there is an element of those prices somewhat holding from last year into this year. So yes, on that question, I can't quantify that for you, but there is some piece of that. And in terms of why it's holding? I mean, basically, again, it's a question of the competitive environment, and it's a question of what's happening currently with raw materials because we've seen, we've seen some level of -- some small amounts of volatility, we've seen some upward pressure again very small in polyethylene, which has helped, it's helped in a sense kind of hold those prices with the customers. But of course, at the end of the day, it all depends on what your competitors are doing. So again, as we mentioned in the past, there's a lot of consolidation in the industry with a lot of public large competitors, especially in areas, which are more price sensitive like in films, you certainly see a lot more discipline there and a lot more -- I guess effort in order to maintain that spread.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [16]

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Okay. That's helpful, Jeff. And just turning to the woven business, presumably, you're going to get a sizable margin bump from the lower cost production facility in India versus reselling third-party vendor materials. Could you give us a sense for how much of the production as a percentage of your woven business will be coming from the new facility. I just want to try to get a sense for the magnitude of the potential margin pickup in the second half?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [17]

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Yes, we've always said, I mean it's definitely a material percentage of that woven business, but it's certainly not far from all of it. So I mean, you can't look at the whole thing and expect a margin pickup on the whole thing, but I would tell you that it's a significant percentage. But again you're going to see that ramp up through Q3, because we are still working through some higher cost material and then you'll certainly see a lot more impact of that towards the end of Q3 into Q4.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [18]

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Are you comfortable putting a percentage to it. Just in terms, I mean is that 50% of the production of the woven business plus or minus or...

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [19]

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I would go a little minus on that. But it's material.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [20]

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Yes. No, that's helpful. And on inventories, the days inventory were up 20%, a large part of that I think it was explained just there is inventory build as it relates to the ramp up and some of the planned transition. So presumably, this is just a temporary dynamic. Could you give us a sense for when inventory levels should normalize in your view?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [21]

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Yes, so I mean, definitely you touched on a couple of the big reasons. So that's certainly accurate. And as we've said in the past or as I have even said in the call is that typical working capital build is in the first half of the year. So it's somewhat natural as well. But then you do have the added impact of these plant closures. The Indian -- if the Indian supply chain changes and so forth, so I mean there is no question, there's an impact there. And I would expect that to -- on arrival, as we get through somewhat up in Q3, but I'd say the biggest unraveling you're going to see is in Q4 of that. So I would expect that to get more in line.

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Michael Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [22]

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And maybe just one more. I'd like to get your thoughts on the dividend increase. Now it's good to see the dividend increase based on a more favorable outlook. And the investment cycle is pretty much wrapped up and this business should become a solid free cash flow generator. I get that. And look, maybe I might be out of consensus here, but I just wanted to get your view on the buyback, and whether the dividend increase here preclude you from doing that. Your 22 targets are quite sizable as you said, I think you only need a couple of tuck-ins to get there. That implies a pretty decent organic growth levels from here. So why not invest more in your business and get more aggressive on the buyback?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [23]

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Okay. I think like any company any Board of Directors, who are trying to find a balance between dividends, investing in the business and look at -- we feel really good about the prospects of the business, we feel very good about the free cash flow generation of the business, it's not a huge magnitude of dollars when you think it will hit the dollar impact, but we look at it and say, we're trying to strike that balance between all of those initiatives. Our balance sheet is in very good shape with the secured leverage less than 2. I think we feel really confident, better on a go-forward basis.

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Operator [24]

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Our next question comes from the line of Stephen MacLeod from BMO Capital Markets.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [25]

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Just wanted to circle around here, just on the organic growth performance in the quarter and the expectation. Can you just talk a little bit about -- you mentioned, I think, Jeff, in your prepared remarks around the GDP type growth outlook, were you characterizing the organic growth for the entire business of that or was that for a specific piece of the business?

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [26]

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No, that's the entire business. Like we've said in the past, you basically have pockets growing at higher than that. Certainly, when we think of our product line going into e-commerce, we're seeing higher growth there. We're also seeing higher growth in product lines where we've been making investments. So we're certainly seeing well above GDP growth in those areas as well.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [27]

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Yes. Okay. Great. And then the other thing I noticed in the quarter is SG&A sort of ticked a little bit higher, particularly as a percent of sales, is that a year-over-year phenomenon related to last year being relatively low? Or how do you see that evolving through the balance of the year?

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [28]

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Yes, you certainly have some share-based comp playing into that -- bring up my numbers here, but basically that sort of wreaked some havoc with our SG&A, I certainly have a piece of it.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [29]

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Okay. Okay, that's great. And then just finally, Greg, you talked a little bit about the air pillow headwind that you're seeing on the e-commerce side. Can you just talk a little bit about -- is that phenomenon relatively new or is that something that's been around for a while and maybe it's just accelerated more recently. Just wondering if you could give some historical color and context around that?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [30]

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Yes. So we've seen a lot of movement there within the last 6 to kind of 9 months that kind of timeframe. So that's -- that is relatively new. And we believe at least on the air pillow side that the worst is behind us, so to speak. But again there's a lot of focus on making sure from a packaging perspective that the packages right size for the product and we're being very efficient or our customers are being very efficient in the packaging requirements that you utilize. So we believe that that's something that's fairly recent last 6 to 9 months.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [31]

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Okay. And then can you talk a little bit about some of the rightsizing that's being done on the e-commerce side in terms of packaging?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [32]

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Well, when you think of just on the corrugate side specific e-commerce customers have added, what they call box suites and the box suites include more box opportunities to again right-size those boxes, that's been an initiative within the industry for the past, I would say 18 months. A lot of that driven by dimensional weight costing on shipping, but certainly packaging playing a role in that as well. So that has been an active measure going on for the past 12 to 18 months, specifically around dim weight costing for shipping.

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Operator [33]

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Our next question comes from Neil Linsdell from Industrial Alliance Securities.

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Neil Linsdell, Industrial Alliance Securities Inc., Research Division - Head of Research and Equity Research Analyst of Consumer Products & Special Situations [34]

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On the subject of acquisitions, you were talking about valuations being driven up by the more private equity guys going out there and this is not a new problem, you've mentioned this before. Would you say the situation is worse or better, the same as say last year at this time?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [35]

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Same.

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [36]

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That's the same. Yes.

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Neil Linsdell, Industrial Alliance Securities Inc., Research Division - Head of Research and Equity Research Analyst of Consumer Products & Special Situations [37]

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Okay. Are you seeing any difference so in the acquisitions that you might be looking at based on the size of the acquisition or the geography, if you're looking at anything say outside North America?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [38]

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Well, I wouldn't say that has changed. I've said it before that, that I still believe even with those high valuations, I still believe there's opportunities for us to execute on acquisitions that drive significant shareholder value. I mean if you take a look at the Maiweave acquisition that we did at the latter part of last year. I mean certainly that's performing very well. I think there is opportunities of that magnitude out there. Primarily, we're focused still in North America from a geographical perspective. So that really hasn't changed over the past year.

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Neil Linsdell, Industrial Alliance Securities Inc., Research Division - Head of Research and Equity Research Analyst of Consumer Products & Special Situations [39]

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Okay. Fair enough. And on your 2020 targets, the 15% EBITDA margin that we've talked about. If you're looking at -- I'm trying to figure out if you don't do the acquisition. So you don't hit the revenue targets, would you still expect to be able to -- would you be able to beat that EBITDA margin number, but on a lower revenue, if you don't have to take on any acquisitions that you might have to get some synergies out of, so that would be considered of them?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [40]

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I'm not going to say conservative, but yes, we can beat that.

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Neil Linsdell, Industrial Alliance Securities Inc., Research Division - Head of Research and Equity Research Analyst of Consumer Products & Special Situations [41]

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Okay. And then on the bundling of products that you have been doing, it looks like you made a lot of progress, you gain, there was some benefits. Do you basically have everything bundled that you need to at this point? Or do you think there's still some more progress you can make on that?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [42]

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Well, I think from a customer facing perspective, there's a lot of work going on, as I mentioned as we integrate the Polyair sales force into the Intertape sales force both at end user level and distribution. So certainly there is a lot of leverage that can happen or that will happen on a go-forward basis there. As it relates to product lines, but I'm not sure if you're referring to kind of the customer-facing on the product line side, but on the product line side, I do feel like we have a pretty wide product offering. Certainly, there is some areas there that we would be interested in, but a lot of that would be around consolidation of the product lines that we're currently selling into the channel.

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Operator [43]

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Our next question comes from Scott Fromson from CIBC.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [44]

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I've got a few questions on the 1.8% organic growth rate in the first half. First, do you have a same-store sales growth figure that includes the 2018 acquisitions?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [45]

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No, no, we don't disclose that.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [46]

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Okay. And second, can you break it down between e-commerce and more traditional products?

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [47]

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No, we won't break that down with numbers, but like I said, in e-commerce, certainly, you would see a higher growth in that. No question about it. It's a water-activated tape. So we've got our film products going to e-commerce, you've got machines and so forth. So you would see a higher growth rate in those areas.

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [48]

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And also I just want to comment that, that for us to get a clean shot of a clean number going into e-commerce, it's hard to do while many of our relationships are direct, some are not. And we don't have visibility of actually what ends up at e-commerce specifically when it goes through our distribution base.

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Scott Douglas Fromson, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Research Analyst [49]

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Right. So I suppose you don't have a percentage of e-commerce sales then?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [50]

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We don't disclose that.

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Operator [51]

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(Operator Instructions) Our next question comes from Zachary Evershed from National Bank Financial.

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Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [52]

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So just coming back to the polypropylene spread between North America and Asia, the difference in delivered cost between the rest of the network and the new Indian facilities, if that spread is completely gone, is there still a cost benefit to the new facilities?

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [53]

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Yes. So when we talk about on the tape side, this is the issue, right. So there isn't necessarily an advantage and that's why Greg was referring to earlier that, in fact, what's happened as this advantaged our Danville, Virginia, our U.S. operations. So with the lower polypropylene or the -- with the lack of arbitrage between the 2 geographies, we are actually producing it basically at the same cost in the U.S. as we could on a landed basis from India. So there -- we're actually at batches making it here, which like you mentioned is actually generating more cash flow than we would have generated over there. So it's pretty -- it's almost a good new story from a certain perspective on a consolidated basis. On the woven side, it's certainly there is a landed cost. But again, the costs are so high here to produce that. And a lot of that had been off shored anyway as a result of that, so it's just was not economical to make that in North America and have been sourced from Asian supplier, which again was at a high cost. So really with there what you're talking about is the difference between the third-party costs from that Asian -- to those Asian suppliers versus what we can do to make it ourselves. So again, there's a huge savings or delta between the 2.

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [54]

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Yes. And on the woven plant, I mean our business case is completely intact at this point even with the arbitrage, where lack of arbitrage polypropylene.

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Zachary Evershed, National Bank Financial, Inc., Research Division - Analyst [55]

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That's really helpful. Last one, you mentioned the pockets of higher growth products, the e-commerce, for example. Can you give us an example of a lower growth pocket that acts as an offset and gets the entire business to the GDP plus level?

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [56]

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Yes. So we called out a couple in our disclosures. So one of them what I mentioned last quarter, which is somewhat fleeting. But we did have some significant volumes related to a retail product in our volumes last year, which we've seen drop off this year. So that's been somewhat of a headwind and that's somewhat expected because it's the type of product which we expected to see high growth and then sort of a curve downwards once the demand level is stabilized. And then we have also seen our industrial tapes, we've seen some air pockets like in masking tape for example, some softness there are related to some auto aftermarkets and macroeconomic events. So again, we are seeing some slower growth in some of those areas that's offsetting some of the high growth areas.

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Operator [57]

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Our next question comes from Damir Gunja from TD Securities.

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Damir Gunja, TD Securities Equity Research - Director [58]

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Just back on the water-activated tapes, I guess, despite the decline in containerboard that you referenced, you're making good gains in that -- on that product line. Do you have a sense of how much more switching there is to be had to order activity or sort of what inning we're in or any sort of market color you could give there?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [59]

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Yes, I think in North America, certainly a lot of that has happened. I mean there are some pockets of opportunity there, but when we think internationally, we see some bigger opportunities in relation to actually switching from, let's say, plastic carton sealing tapes to water-activated. So we've been working with of course some large international customers on that and have been making some headway in regards to servicing them around the world and that is for the most part, replacing other types of closure methods.

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Damir Gunja, TD Securities Equity Research - Director [60]

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And those markets on a combined basis, would be -- how would they compare in size to the North American market?

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [61]

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Not comparable at this point.

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Jeffrey Crystal, Intertape Polymer Group Inc. - CFO [62]

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Yes.

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [63]

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I mean nothing like the U.S. market.

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Operator [64]

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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.

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Gregory A. C. Yull, Intertape Polymer Group Inc. - CEO, President & Non-Independent Director [65]

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Thank you for participating in today's call, and we look forward to speaking with you again following the release of our third quarter 2019 results in November. Thank you.

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Operator [66]

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Please note that a replay of this call can be accessed as of 1:00 p.m. today Eastern Time at (855) 859-2056 and entering passcode 6465778.