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Article by DailyStocks_admin    (06-20-08 06:32 AM)

AEP Industries Inc. CEO BRENDAN J BARBA bought 11000 shares on 6-16-2008 at $19.53

BUSINESS OVERVIEW

General

AEP Industries Inc., founded in 1970 and incorporated in Delaware in 1985, is a leading manufacturer of plastic packaging films in North America. We manufacture and market an extensive and diverse line of polyethylene, polyvinyl chloride and polypropylene flexible packaging products, with consumer, industrial and agricultural applications. Our plastic packaging films are used in the packaging, transportation, beverage, food, automotive, pharmaceutical, chemical, electronics, construction, agriculture and textile industries.

We manufacture plastic films, principally from resins blended with other raw materials, which we either sell or further process by metallizing, printing, laminating, slitting or converting. Our processing technologies enable us to create a variety of value-added products according to the specifications of our customers. Our principal manufacturing operations are located in the United States and Canada, and we also have operations in the Netherlands (which we refer to as our European flexibles division).

We manufacture both industrial grade products, which are manufactured to general industry specifications, and specialty products, which are manufactured under more exacting standards to assure certain required chemical and physical properties. Specialty products generally sell at higher margins than industrial grade products.

Fiscal 2007 Developments

See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of business developments in the year ended October 31, 2007.

Products

We are a leading manufacturer of plastic packaging films in North America. We manufacture and market an extensive and diverse line of polyethylene, polyvinyl chloride and polypropylene flexible packaging products, with consumer, industrial and agricultural applications. Flexible packaging and film products are thin, ductile bags, sacks, labels and films used for food and non-food consumer, agricultural and industrial items. The flexible packaging and film products manufactured by us are used in a variety of industries, including the packaging, transportation, beverage, food, automotive, pharmaceutical, chemical, electronics, construction, agricultural and textile industries.

We conduct our operations in two geographical regions, North America and Europe. Selected financial data for our geographical regions is available in Note 14, Segment Information, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, in this Annual Report on Form 10-K.

North American Operations

Our North American operations consist of our U.S. and Canadian operations and represented 85%, 87% and 86% of consolidated net sales for the fiscal years ended October 31, 2007 ("fiscal 2007"), 2006 ("fiscal 2006") and 2005 ("fiscal 2005"), respectively.

Custom Films

We believe that the strength of our custom film operations lies in our variety of product applications, high quality control standards, well-trained and knowledgeable sales force and commitment to customer service. Most of the custom films manufactured by us, which may be as many as 20,000 separate and distinct products in any given year, are custom designed to meet the specific needs of our customers.

We manufacture a broad range of custom films, generally for industrial applications, including sheeting, tubing and bags. Bags are drum, box, carton and pail liners that are usually cut, rolled or perforated. These bags can also be used to package specialty items such as furniture and mattresses. We also manufacture films to protect items stored outdoors or in transit, such as boats and cars, and a wide array of shrink films, barrier films and overwrap films.

We also manufacture a full range of co-extruded films, and custom designed monolayer films designed specifically to service the flexible packaging market. These films are capable of being printed and laminated by third party flexible packaging converters and are used in the food, pharmaceutical, medical businesses and in a variety of other flexible packaging end users.

The custom films market is comprised of a large number of smaller manufacturers who together constitute approximately two-thirds of all sales, with the remainder of the market represented by a few large manufacturers. Our research and development team continually improves applications and creates new custom film products, which has helped establish us as one of the largest producers in this fragmented market. We believe we can expand our share of the custom films market through our ability to offer a broad range of industrial as well as other packaging films (including stretch wrap), thereby offering our customers one-stop shopping.

Stretch Wrap

We manufacture a family of high performance stretch wrap for wrapping and securing palletized products for shipping. We also market a wide variety of stretch wrap designed for commodity and specialty uses. In fiscal 2007, 2006 and 2005, we sold approximately 82%, 82% and 80%, respectively, of our stretch wrap through distributors. The remainder of our output is sold directly to customers on a national account basis. Since the industry is still experiencing overcapacity in the marketplace, we have consolidated our distribution activities, reformulated certain stretch products and made efficiency enhancing investments to help us realize some cost reductions.

Resinite (polyvinyl chloride)

We manufacture polyvinyl chloride, or PVC, food wrap for the supermarket, consumer, institutional and industrial markets, offering a broad range of products with approximately 65 different formulations. These stretch and shrink PVC films are used for packaging of fresh red meats, poultry, fish, fruits, vegetables and bakery products. We also provide PVC films for windowing, blister packaging and aseptic shrink bundling film in the industrial marketplace.

Our Resinite facility also manufactures dispenser ( ZipSafe® cutter) boxes containing polyvinyl chloride food wrap for sale to consumers and institutions, including restaurants, schools, hospitals and penitentiaries. Our most popular institutional polyvinyl chloride food wrap is marketed under several private labels and under our own Seal Wrap® name. A substantial portion of the sales of this product is to large paper and food distributors, with the rest sold directly to supermarket chains.

Printed and Converted Films

Our printed and converted films provide printed rollstock to the food and beverage industries and other manufacturing and distributing companies. We also "convert" printed rollstock to bags and pouches for use by bakeries, fresh or frozen food processor, manufacturers or other dry goods processors.

Other Products and Specialty Films

We manufacture unplasticized polyvinyl chloride ("UPVC") film for use in battery labels and credit card laminates. The characteristics of this product are similar to cellophane and can be used as a low cost substitute.

European Operations

Our continuing European operations represented 15%, 13% and 14% of consolidated net sales for the fiscal years ended October 31, 2007, 2006 and 2005.

European Flexibles

Our European flexibles division in the Netherlands manufactures custom films and converted films used in the food processing and pharmaceutical industries, including freezer film and processed cheese innerwrap. Our European flexibles division also manufactures and sells stretch film for wrapping and securing pallet loads.

We are currently exploring strategic alternatives for our subsidiary in the Netherlands. There can be no assurance that the exploration of strategic alternatives will result in a consummated transaction.

Discontinued Operations

During the fourth quarter of fiscal 2007, we completed the sale of our land and building located in Sydney, Australia which commencing May 2, 2006 was being leased to the Australian buyer. See Note 19 in Item 8 for additional information. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), we concluded that our Australian land and building constituted an asset group, as defined by SFAS No. 144, and as such, is required to be reported as part of discontinued operations. As a result, the financial statements as of October 31, 2006 and for fiscal years ended October 31, 2006 and 2005 have been restated to reflect the Australian land and building as discontinued operations and are included as such in this report.

During the fourth quarter of fiscal 2006, we decided to liquidate our UK operations, a sales and distribution facility for our former European PVC operations. Completion of the liquidation of the UK is dependent on scheduling done by the UK pension regulators and therefore we are unable to determine when the liquidation will be completed.

We are in the final stages of liquidating our Spanish and Italian companies and expect the respective liquidations to be completed in early fiscal 2008.

Manufacturing

We currently conduct our manufacturing operations in the United States, Canada and the Netherlands. We manufacture both industrial grade products, which are manufactured to industry specifications or for distribution from inventory, and specialty products, which are manufactured under more exacting standards to assure that their chemical and physical properties meet the particular requirements of the customer or the specialized application appropriate to its intended market. Specialty products generally sell at higher margins than industrial grade products.

We manufacture our film at several large, geographically dispersed, integrated extrusion facilities throughout North America and one facility in the Netherlands, which also have the ability to produce other products. The size and location of those facilities, as well as their capacity to manufacture multiple types of flexible packaging products and to re-orient equipment as market conditions warrant, enable us to achieve savings and minimize overhead and transportation costs.

See Item 2, "Properties" for a discussion of product lines manufactured at each facility.

Production

In the film manufacturing process, resins with various properties are blended with chemicals and other additives to achieve a wide range of specified product characteristics, such as color, clarity, tensile strength, toughness, thickness, shrinkability, surface friction, transparency, sealability and permeability. The gauges of our products range from less than one mil (.001 inches) to more than 10 mils (.01 inches). Our extrusion equipment can produce printed products and film up to 40 feet wide. The blending of various kinds of resin combined with chemical and color additives is computer controlled to avoid waste and to maximize product consistency. The blended mixture is melted by a combination of applied heat and friction under pressure and is then mechanically mixed. The mixture is then forced through a die, at which point it is expanded into a flat sheet or a vertical tubular column of film and cooled. Several mixtures can be forced through separate layers of a co-extrusion die to produce a multi-layered film (co-extrusion), each layer having specific and distinct characteristics. The cooled film can then be shipped to a customer or can be further processed and then shipped. Generally, our manufacturing plants operate 24 hours a day, seven days a week.

We regularly upgrade or replace older equipment in order to keep abreast of technological advances and to maximize production efficiencies by reducing labor costs, waste and production time. During the past five fiscal years, we made significant capital improvements, including the purchase and lease of new state-of-the-art extrusion equipment and the upgrading of older equipment. Further, we have shifted production among our plants, closed facilities and consolidated operations to improve efficiencies and lower expenses. We will continue to upgrade or replace equipment, as we deem appropriate, to increase production capacity, improve our efficiencies and quality and expand our product mix. During fiscal 2007, we continued to expand our North American operations, including completion of a 50,000 square foot expansion in our Pennsylvania plant. Certain installation projects that began in fiscal 2007 will be finalized in fiscal 2008, including a new PVC line in our Georgia plant, a new specialty line in our North Carolina plant, two new co-extruded film lines, and a new 10-color print press in our Kentucky plant.

Backlog

Our total backlog at October 31, 2007 was approximately $49.6 million, compared with approximately $34.7 million at October 31, 2006. We do not consider any specific month's backlog to be a significant indicator of sales trends due to the various factors that influence backlog.

Quality Control

We believe that maintaining the highest standards of quality in all aspects of our manufacturing operations plays an important part in our ability to maintain our competitive position. To that end, we have adopted strict quality control systems and procedures designed to test the mechanical properties of our products, such as strength, puncture resistance, elasticity, abrasion characteristics and sealability, which we regularly review and modify as appropriate.

Raw Materials

We manufacture film products primarily from polyethylene, polypropylene and polyvinyl chloride resins, all of which are available from a number of domestic and foreign suppliers. We select our suppliers based on the price, quality and characteristics of the resins they produce. Most of our purchases of resin in fiscal 2007 were from eight major international resin suppliers. Our top three suppliers of resin during fiscal 2007 supplied us with 30%, 24% and 21%, respectively, of our worldwide resin requirements. Although the plastics industry has from time to time experienced shortages of resin supply, including as recently as the 2005 hurricane season, we believe that we have adequate sources available to meet our supply needs.

The resins used by us are produced from petroleum and natural gas. Instability in the world markets for petroleum and natural gas could adversely affect the prices of our raw materials and their general availability, and this could have an adverse effect on our profitability if the increased costs cannot be passed on to customers. See Item 1A, "Risk Factors."

The cost of resin, which varies by product line, averaged 73% of the cost of sales during fiscal 2007. Resin pricing decreased during fiscal 2007 as compared to average pricing during fiscal 2006 by 14% in North America and increased by 3% in Europe. However, resin suppliers have been steadily increasing their prices since March 2007. Our ability to maintain profitability is heavily dependent upon our ability to pass through to our customers the full amount of any increase in raw material costs.

Marketing and Sales

We believe that our ability to continue to provide superior customer service will be critical to our success. Even in those markets where our products are considered commodities and price is the single most important factor, we believe that our sales and marketing capabilities and our ability to timely deliver products can be a competitive advantage. To that end, we have established good relations with our suppliers and have long-standing relationships with most of our customers, which we attribute to our ability to consistently manufacture high-quality products and provide timely delivery and superior customer service. We serve approximately 4,000 customers worldwide, none of which individually accounted for more than 5% of our net sales in 2007.

We believe that our research and development efforts, our high-efficiency equipment, which is automated and microprocessor-controlled , and the technical training given to our sales personnel enhance our ability to expand our sales in all of our product lines. An important component of our marketing philosophy is the ability of our sales personnel to provide technical assistance to customers. Our sales force regularly consults with customers with respect to performance of our products and the customer's particular needs and then communicates with appropriate research and development staff regarding these matters. In conjunction with the research and development staff, sales personnel are often able to recommend a product or suggest a resin blend to produce the product with the characteristics and properties which best suit the customer's requirements. Because we have expanded and continue to expand our product lines, sales personnel are able to offer a broad line of products to our customers.

We generally sell either directly to customers who are end-users of our products or to distributors for resale to end-users. In fiscal 2007, 2006 and 2005 approximately 60%, 62%, and 62%, respectively, of our worldwide sales were directly to distributors with the balance representing sales to end-users.

Distribution

We believe that the timely delivery of our products to customers is a critical factor in out ability to maintain our market position. In North America, all of our deliveries are by dedicated service haulers, contact carriers and common carriers, while we continue to maintain online control through a web based "On Demand" Transportation Management System (TMS) software. The TMS system provides detailed reports, tracking of every shipment to customer delivery and carrier management. This enables us to better control the distribution process and ensure priority handling and direct transportation of products to our customers, thus improving the speed, reliability and efficiency of delivery.

Because of the geographic dispersion of our plants, we are able to deliver most of our products within a 500 mile radius of our plants. This enables us to reduce our use of warehouse space to store products. However, we also ship products great distances when necessary and export from the United States and Canada.

Internationally, we use common and contract carriers to deliver most of our products, both in the country of origin and for export.

CEO BACKGROUND

J. Brendan Barba is one of our founders and has been our President and Chief Executive Officer and a director since our inception in January 1970. In 1985, Mr. Barba assumed the additional title of Chairman of the Board of Directors.

Paul M. Feeney has been our Executive Vice President, Finance and Chief Financial Officer and a director since December 1988. From 1980 to 1988, Mr. Feeney was Vice President and Treasurer of Witco Corporation.

John J. Powers has been our Executive Vice President, Sales and Marketing since March 1996. Prior thereto, he was Vice President-Custom Film Division since 1993 and held various sales positions with us since 1989.

David J. Cron has been our Executive Vice President, Manufacturing since July 1997. Prior thereto, he was Vice President, Manufacturing, a plant manager and held various other positions with us since 1976.

Paul C. Vegliante has been our Executive Vice President, Operations since December 1999. Prior thereto, he was our Vice President, Operations since June 1997 and held various other positions with us since 1994.

Lawrence R. Noll has been our Vice President, Tax and Administration since April 2007. Prior thereto, he was our Vice President and Controller since 1996, a director since February 2005 and our corporate Secretary from April 2005 to April 2007. Previously, he served as Vice President, Finance since 1993 and was our corporate Secretary from 1993 to 1998. He served also as a director from 1993 to 2004. He was employed as our Controller from 1980 to 1993.

James B. Rafferty has been our Vice President and Treasurer since November 1996 and Secretary since April 2007. Prior thereto, he was our Assistant Treasurer since July 1996. From 1989 to 1995, Mr. Rafferty was Director of Treasury Operations at Borden, Inc.

Linda N. Guerrera has been our Vice President and Controller since April 2007. Prior thereto, she was our Director of Financial Reporting from September 2006 to April 2007 and our Assistant Controller—International Operations from October 1996 to September 2006. Prior to joining the Company, Ms. Guerrera was a manager at Arthur Andersen LLP in New York City.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

AEP Industries Inc. is a leading manufacturer of plastic packaging films. We manufacture and market an extensive and diverse line of polyethylene, polyvinyl chloride and polypropylene flexible packaging products, with consumer, industrial and agricultural applications. Our plastic packaging films are used in the packaging, transportation, beverage, food, automotive, pharmaceutical, chemical, electronics, construction, agriculture and textile industries.

We manufacture plastic films, principally from resins blended with other raw materials, which we either sell or further process by metallizing, printing, laminating, slitting or converting. Our processing technologies enable us to create a variety of value-added products according to the specifications of our customers. Our principal manufacturing operations are located in the United States and Canada, and we also have operations in the Netherlands (which we refer to as our European flexibles division).

The primary raw materials used in the manufacture of our products are polyethylene, polypropylene and polyvinyl chloride resins. The market for these resins has been volatile, resulting in record price increases and supply shortages. The long-term prices of these materials are primarily a function of the price of petroleum and natural gas. Since resin costs fluctuate, selling prices are generally determined as a "spread" over resin costs, usually expressed as cents per pound. Consequently, we review and manage our operating revenues and expenses on a per pound basis. The historical increases and decreases in resin costs have generally been reflected over a period of time in the sales prices of the products on a penny-for-penny basis. Assuming a constant volume of sales, an increase in resin costs would, therefore, result in increased sales revenues but lower gross profit as a percentage of sales or gross profit margin, while a decrease in resin costs would result in lower sales revenues with higher gross profit margins. Further, the gap between the time at which an order is taken, resin is purchased, production occurs and shipment is made, has an impact on our financial results and our working capital needs. In a period of rising resin prices, this impact is generally negative to operating results and in periods of declining resin prices, the impact is generally positive to operating results.

Market Conditions

Resin suppliers have been steadily increasing resin prices since March 2007. The increases are primarily driven by rising oil prices and a strong export demand as the U.S. dollar weakens, with the U.S. market remaining relatively flat. Although resin prices have been rising since March 2007, average prices during fiscal 2007 relative to fiscal 2006 decreased by 14% in North America and increased 3% in Europe. We anticipate that worldwide resin prices will continue to rise in early fiscal 2008.

We believe that the marketplace in which we sell our products was much more competitive in fiscal 2007 than in fiscal 2006. Sales price increases were met with more resistance than we customarily experience and such increases took longer to implement. In certain situations, we delayed price increases in order to remain competitive. There can be no assurance that we will be able to pass on resin price increases on a penny-for-penny basis in the future, if such prices continue to increase.

Fiscal 2007 Developments

We continue to implement our strategic plan to maintain the strength of our company by continuing to invest in our ourselves. During fiscal 2007, we have:

•
repurchased a total of 1,129,100 shares of our common stock for an aggregate purchase price of $49.0 million, utilizing cash on hand coupled with borrowings under our Credit Facility;

•
completed the sale of our land and building located in Sydney, Australia for $7.8 million;

•
incurred approximately $15.6 million of capital expenditures during fiscal 2007 related primarily to a new 10-color print press installed in our Kentucky plant with production expected to commence in March 2008, a 50,000 square foot expansion of our Pennsylvania plant, two co-extruded lines with a combined capacity of twenty million pounds, a new PVC line in our Georgia plant with production expected to commence in January 2008, and a new specialty line installed in our North Carolina plant with production expected to commence in February 2008.

Our gross profit may not be comparable to that of other companies, since some companies include all the costs related to their distribution network in costs of sales and others, like us, include costs related to the shipping and handling of products to customers in delivery expenses, which is not a component of our cost of sales.

Unless otherwise noted, the following discussion regarding results of operations relates only to results from continuing operations.

Results of Operations—Fiscal 2007 Compared to Fiscal 2006

The following table presents selected financial data for fiscal 2007 and 2006 (dollars per lb. sold is calculated by dividing the applicable consolidated statement of operations category by pounds sold in the period)

Consolidated

Net sales for fiscal 2007 decreased $16.1 million, or 2.0%, to $786.0 million compared with $802.1 million for fiscal 2006. The decrease in net sales was the result of an 8% decrease in average selling prices resulting primarily from a decrease in resin prices (during fiscal 2007 as compared to fiscal 2006), partially mitigated by a sales volume increase of 5% combined with the positive impact of foreign exchange of $11.8 million, primarily reflecting the impact of the strengthened European and Canadian currencies.

Gross profit for fiscal 2007 decreased $10.3 million, or 6.4%, to $151.4 million as compared to $161.7 million in fiscal 2006. The decrease in gross profit was largely due to a $7.9 million increase in the LIFO reserve in the current fiscal year as compared to a $11.6 million decrease in the LIFO reserve in the prior year, combined with lagging selling price increases over recently rising resin prices, partially offset by the positive effect of a 5% sales volume increase. The effect of foreign exchange on gross profit for fiscal 2007 was a positive $1.4 million.

North America

Net sales in North America decreased $30.9 million to $666.3 million for fiscal 2007, from $697.2 million in the prior fiscal year. The decrease was primarily due to a 10% decrease in average selling prices, attributable to lower resin costs during the comparable periods, partially mitigated by a 6% increase in sales volume resulting from increased customer demand. Fiscal 2007 also included $2.1 million of positive impact of foreign exchange relating to our Canadian operations.

Gross profit in North America decreased $12.1 million, or 8.0%, to $139.1 million for fiscal 2007, primarily due to the above noted $19.5 million cumulative impact on gross profit related to the LIFO reserve and a decrease in material margins, resulting from lagging sell price increases, partially mitigated by an increase in sales volume. The effect of foreign exchange on the North American gross profit for fiscal 2007 was a positive $0.4 million.

Europe

Net sales in Europe for 2007 increased $14.8 million to $119.7 million from $104.9 million for fiscal 2006. This increase includes the positive impact of foreign exchange of $9.7 million, a 2% increase in sales volume and a 2% increase in per pound average selling prices. Increases in selling prices were primarily due to a favorable change in product mix with greater sales in the custom films business.

Gross profit in Europe increased $1.8 million, or 17%, to $12.3 million for fiscal 2007 compared to fiscal 2006. This increase is primarily due to the favorable shift in product mix to higher-margined custom films and improved manufacturing efficiencies. The effect of foreign exchange on the European gross profit for fiscal 2007 was a positive $1.0 million.

Consolidated Operating Expenses

Operating expenses for fiscal 2007 increased $1.3 million to $94.5 million, or 1.4%, as compared to $93.2 million in the prior fiscal year. The effect of foreign exchange increased reported total operating expenses by $1.0 million. The remaining increase is primarily due to an increase in delivery and selling expenses resulting from higher volumes sold, an increase in compensation costs recorded in accordance with SFAS No. 123R, "Share-Based Payment" ("SFAS No. 123R") for our stock options and performance units, and advisory costs incurred as a result of our exploration of strategic alternatives related to our subsidiary in the Netherlands. These increases were partially mitigated by a decrease in audit and consulting fees associated with compliance with the Sarbanes-Oxley Act of 2002 and a decrease in bonuses earned in fiscal 2007.

Consolidated Other Operating Income (Expense)

Other operating expense for fiscal 2007 was $33,000 and represented net losses on sales of fixed assets as compared to $1.3 million in income during the prior period, which primarily was the result of the gain on sale of our FIAP land and building in January 2006 producing a gain, after costs to sell, of $1.4 million.

Consolidated Interest Expense

Interest expense of $16.5 million for fiscal 2007 remained relatively flat in comparison to the prior period. Interest expense on our Credit Facility increased $0.3 million during fiscal 2007 as compared to the prior fiscal year resulting from higher average borrowings, partially offset by lower average interest rates during fiscal 2007. Interest expense in our foreign locations decreased $0.3 million primarily due to reduced borrowings, partially offset by higher average interest rates during fiscal 2007 as compared to the prior fiscal year.

Consolidated Other, net

Other, net for fiscal 2007 amounted to $0.7 million in income as compared to $7.7 million in expense for the prior fiscal year. During the prior fiscal year, we charged operations $8.0 million for the accumulated foreign currency translation losses of FIAP in accordance with SFAS No. 52, "Foreign Currency Translation" ("SFAS No. 52"). The remaining changes are primarily attributable to $0.3 million in interest income on tax refunds in our New Zealand subsidiary in fiscal 2007, coupled with a $0.2 million increase in foreign currency gains in the current year as compared to the prior year resulting from an increase in the number of hedge contracts settled in each period, the changes in foreign exchange rates, and an increase in unrealized gains on foreign currency denominated payables and receivables.

Consolidated Income Tax Provision

The provision for income taxes for fiscal 2007 was $15.2 million on income from continuing operations before the provision for income taxes of $41.2 million. The difference between the effective tax rate and the U.S. statutory tax rate of 35 percent primarily relates to the following: (i) $1.7 million provision for state taxes in the United States (+4.2%), no federal tax benefit was recognized in fiscal 2007 as the Company is not in a state tax paying position; and (ii) a $1.1 million benefit for the utilization of net operating losses of the foreign operations (-2.7%).

The provision for income taxes for fiscal 2006 was $8.4 million on income from continuing operations before the provision for income taxes of $45.7 million. The difference between our effective tax rate and the U.S. statutory tax rate of 35 percent primarily relates to the following: (i) a benefit of $7.0 million related to the write-off of intercompany loans and investment due to the liquidation of FIAP; (ii) the release of approximately $1.8 million of excess taxes payable resulting primarily from a tax refund received in the U.S. during fiscal 2006; (iii) a $1.0 million benefit resulting from a tax refund to be received in fiscal 2007 by our New Zealand operations relating to excess non-resident withholding tax payments made on cash repatriations to the United States; and (iv) a $1.1 million release of foreign tax credit valuation allowance. Due to the net operating loss carryforward for fiscal 2006, our provision for state taxes is $0.1 million, which represents the Alternative Minimum Assessment due to the State of New Jersey. Additionally, no tax benefit has been recognized for the $8.0 million write-off of accumulated foreign currency translation adjustments related to FIAP which is included in other income (expense) of continuing operations for fiscal 2006.

Results of Discontinued Operations—Fiscal 2007 Compared to Fiscal 2006

During the fourth quarter of fiscal 2007, we completed the sale of our land and building located in Sydney, Australia. In accordance with SFAS No. 144 we concluded that our Australian land and building constituted an asset group, as defined by SFAS No. 144, and as such, requires discontinued operations reporting treatment. As a result, the financial statements at and for fiscal 2006 have been restated to reflect the Australian operations as discontinued operations and are included as such in the discussion below. The financial statements at and for fiscal 2006 also include as discontinued operations the operations of AEP Bordex BV and AEP Belgium SA, subsidiaries that were a part of our fiscal 2005 plan to dispose of certain foreign subsidiaries and were sold in fiscal 2006, and our UK and Spanish operations.

Pre-tax income from discontinued operations for fiscal 2007 primarily relates to the results of our Australian operations, including $2.5 million income from the reclassification of Australia's accumulated foreign currency translation gains in accordance with SFAS No. 52, $0.6 million of rental income received during fiscal 2007 from our land and building in Sydney, Australia, and $0.3 million of foreign currency gains. Also included in the pre-tax income for fiscal 2007 is a $0.3 million reversal of provisions established at the time of sale of certain assets and liabilities of our New Zealand operation in May 2005 relating to non-collection of trade receivables (used as basis of cash advance to us by the buyers of the New Zealand operation) and clean-up of leased properties. The fiscal 2007 pre-tax income from discontinued operations also includes interest income earned and expenses paid by our Spanish operation and expenses incurred by our UK operations during the period. The gain from disposition in fiscal 2007 of $0.5 million includes a $0.4 million gain on the sale of our land and building in Sydney, Australia and $29,000 final settlement on closing balance sheet adjustments related to our Bordex operation sold in July 2006. No tax provision has been recognized for the $2.5 million reclassification of Australia's accumulated foreign currency translation gains into income for fiscal 2007.

Net sales, gross profit and pre-tax loss from discontinued operations for fiscal 2006 include the results of our Belgium and Bordex operations, which were sold in February 2006 and July 2006, respectively. Also included in the pre-tax income (loss) from discontinued operations for fiscal 2006 are the results of our Australian land and building, which primarily include $1.1 million of rental income from our land and building in Sydney, Australia and a $0.5 million refund of excess payroll withholding tax payments made in Australia.

During the fourth quarter of fiscal 2006, we initiated steps to liquidate our UK operations and as a result, evaluated the carrying value of the net assets of the UK operations and determined that the book value of the UK exceeded its fair value. As a result, we recorded a $2.2 million impairment charge taken against the assets of the UK company and recorded a $2.4 million liability related to funding of the UK's defined contribution plan. The total loss of $4.6 million was recorded during the fourth quarter of fiscal 2006 and is included in the pre-tax loss from discontinued operations.

The income tax benefit of the discontinued operations for fiscal 2006 of $28.2 million includes a $9.9 million income tax benefit related to a $25.8 million worthless stock deduction associated with our Belgium operation, a $9.5 million income tax benefit related to a $24.9 million worthless stock deduction associated with our Australian operation, and a $8.8 million income tax benefit related to a $23.0 million worthless stock deduction associated with our Spanish operation. These worthless stock deductions have been taken on our U.S. federal income tax return.

Included in the gain from disposition from discontinued operations in the consolidated statements of operations during fiscal 2006 is $0.6 million of income primarily related to the settlement with certain suppliers in full and final settlement of balances existing at the time our Spanish subsidiary filed for liquidation.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Net sales

Net sales increased $22.9 million, or 14%, in the second quarter of fiscal 2008 to $181.2 million compared with $158.3 million in the second quarter of fiscal 2007. The increase is primarily the result of a 15% increase in average selling prices, driven by higher resin costs in the current period in comparison to the same period of the prior year, partially offset by a 2% decrease in sales volume. The effect of foreign exchange on net sales in the 2008 period was a positive $2.1 million, reflecting the impact of the strengthened Canadian currency.

Gross profit

Gross profit for the second quarter of fiscal 2008 decreased $10.6 million to $22.3 million as compared to $32.9 million in the same quarter of the prior year. The decrease in gross profit for the second quarter of fiscal 2008 was largely due to a $6.3 million LIFO benefit recorded in the second quarter of the prior year combined with current quarter margin erosion resulting from difficult economic and competitive conditions and higher utility costs in our plants. The effect of foreign exchange on gross profit in the 2008 period was a net positive $0.3 million.

Operating Expenses

Operating expenses for the three months ended April 30, 2008 increased $2.3 million, or 11%, to $23.1 million from the comparable period in the prior fiscal year. Fiscal 2008 includes $0.2 million unfavorable effect of foreign exchange increasing reported total operating expenses. Included in general and administrative expenses for the quarter ended April 30, 2008 is a payment of approximately $1.6 million, excluding professional fees, related to a commercial dispute. The remaining increase in operating expenses is primarily due to an increase in delivery expenses resulting from higher fuel costs and an increase in bad debt expense resulting from a customer's bankruptcy, partially mitigated by a decrease in our accrual for bonuses and a decrease in compensation costs recorded in accordance with SFAS 123R for our stock options and performance units.

Other Operating Income

Other operating income for the three months ended April 30, 2008 was $0.4 million in expense and represented net losses on sales of fixed assets during the period as compared to $4,000 in income for the same period in the prior fiscal year.

Interest Expense

Interest expense for the three months ended April 30, 2008 increased $0.4 million to $4.1 million from $3.7 million in the prior period, resulting primarily from higher average borrowings on our Credit Facility during the three months ended April 30, 2008 as compared to the same period in the prior fiscal year, partially offset by lower interest rates on Credit Facility borrowings.

Other, net

Other, net for the three months ended April 30, 2008 remained relatively flat as compared to the same period in the prior year. There was an increase in foreign currency exchange gains in the current period as compared to the prior period resulting from the change in foreign exchange rates and an increase in unrealized gains on foreign currency denominated payables and receivables offset by a decrease in interest income.

Income Tax Provision

The benefit for income taxes for the three months ended April 30, 2008 was $1.9 million on loss from continuing operations before the benefit for income taxes of $5.2 million. The difference between the effective tax rate of 36.7 percent and the U.S. statutory tax rate of 35.0 percent primarily relates to the provision for income taxes on intercompany income received by the U.S. company from discontinued operations, true-up of prior year's estimates, benefit for state taxes in the United States, and utilization of net operating losses of foreign operations.

Included in the provision for income taxes from discontinued operations for the three months ended April 30, 2008 is $2.8 million provision related to the realized foreign currency gains resulting from the repayment of all the intercompany loans received by the U.S. company from the Netherlands. The provision will reduce the net operating loss carryforwards of the U.S. company and is reflected in the deferred income taxes current asset on the consolidated balance sheet at April 30, 2008.

The sale of AEP Netherlands resulted in a taxable loss in which we provided a full valuation allowance against the deferred tax asset attributable to the generated U.S. capital loss carryforward. We determined that it is more likely than not that this carryforward will not be utilized.

The provision for income taxes for the three months ended April 30, 2007 was $3.4 million on income from continuing operations before the provision for income taxes of $8.5 million. The difference between the effective tax rate of 39.7 percent and the U.S. statutory tax rate of 35 percent primarily relates to the provision for state taxes in the United States, net of federal benefit, true-up of prior year's estimated tax refunds, utilization of net operating losses of foreign operations, and the provision for income taxes on intercompany income received by the U.S. company from discontinued operations.

CONF CALL

Nick Lamplough

Thanks Natasha. Before we get started I would like to remark briefly about forward-looking statements. [Inaudible] mentioned during the conference call, statements made by the management of AEP Industries are forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve known and unknown risks and uncertainties which may cause the company’s actual results in future periods to differ materially from forecasted results.

Those risks included but are not limited to, risks associated with pricing, volume and conditions of the markets. Those and other risks are described in the company’s filings with the SEC over the last 12 months, copies of which are available from the SEC or may be obtained from the company.

Today’s format will be as follows. Brendan Barba, Chairman, President and CEO will discuss operations and then Paul Feeney, Executive Vice President Finance and CFO will discuss the financial results. After the prepared remarks, Brendan and Paul will be available for questions. So without further delay, I would like to turn the call over to Mr. Barba. Brendan.

Brendan Barba

Thank you. Good morning everyone, welcome to our second quarter conference call. I’m sure everyone has had a chance to review our release and it’s obvious that our results were poor for the quarter. Volumes for the quarter year to date compared to last year only increased 2% which is obviously not good.

But to give you an idea of where that stands versus what I would have to call our industry, although I don’t have individual information on all the companies in the film industry, that’s impossible, we’re using resin numbers published by the resin suppliers which would show low density polyethylene sales down minus 5%, and I believe these numbers are through May, and for linear low density minus 7.5%.

So you can see that volumes are an issue for everybody in the polyethylene business. Margins were under huge pressure primarily driven by continuous and ongoing resin price increases. We’ve actually never seen anything like what’s going on right now and that’s obviously driven by oil prices increasing dramatically and natural gas following.

Year to date through June, our resin prices are up with a $0.05 increase in June, a little under $0.40 a pound. Let’s say $0.38 to $0.39 per pound depending on the resins that we buy and as of July 1, a $0.07 increase on the table. In dollar terms, to give you an idea of the significance of what we’ve been faced with in passing on these increases, not counting July which would add $40 million to our cost to pass along, year to date through June, our resin costs are up $[2]50 million for the year.

So I don’t have to outline that to you as to what a major challenge that is to get those prices up. There’s always a time lag and that’s also part of the negative numbers that you’re looking at, it just takes us a certain amount of time to get our prices up and when they come as hard and as fast as they have been, we basically operate from a position of being behind pretty much all the time.

We’re seeing other costs have accelerated at unprecedented rates so our fuel surcharges driven by oil prices obviously are up now in excess of 40%, another staggering number. Of course freight is a huge cost to us and our electric bills have been, some of them have gone up more than one-third in a relatively short period of time.

So those are the difficulties that we’re facing as far as costs are concerned in pushing these costs through has been our challenge. This has had a devastating effect on the film industry and I’d like to just review with you some things that are going on right now and I think it’ll put in perspective what’s going on.

I think a couple of weeks ago a company called Hilex Plastics which is a $500 million film company declared Chapter 11. Atlantis Plastics, that’s been in the business since certainly in the stretch business before AEP, is in an auction process. A local company, Apollo shut its doors sometime I think last month and a company called Polymer out in Ohio which was a value added co-extrusion business has basically got out of the extrusion business and has their equipment up for sale.

And even the companies that are in really very good margin businesses like a Sealed Air just announced a 52% reduction in earnings for the quarter. So that’ll maybe put things in perspective. We’re not trying to make any excuses but those are the conditions that we’re operating against and it’s obviously very, very challenging.

Having said all that, we are still in the process of increasing our capacity and of course you could question whether or not that’s a good thing to happen for us right now. But keep in mind that most of this machinery is ordered a year prior to today’s events. So we have about 30 million pounds coming on stream in stretch film, most of it in cast but about maybe 20% of that, 15% of that will be in a specialty film stretch film that we have developed a new product for.

So we’re excited about that product, selling out the cast stretch line of course will be a big challenge for us. Before I move on, that machine is not really coming on stream until November of 08 which actually starts our new fiscal year.

We have a couple of co-ex lines on order increasing co-ex capacity by about 20 million pounds. Those will come on towards the end of the summer, August, September. We are adding 8 million pounds of capacity in our can liner business that’s coming on in July or August.

We have, we spent about $1.5 million in our PVC business to increase capacity in our specialty films businesses which are basically sold out and we needed the added capacity. Good margins and we’re optimistic that we will utilize those machines at a 90% plus rate. And overall our cap ex for the year, 2008 is going to be in the $15-$17 million range.

We really have nothing on order now other than what I’ve just announced to you. So we don’t think we need any more capacity, we obviously need to increase sales and that’s our challenge.

On a positive note, we finally sold our business in Holland and that is a combination of cash, debt reduction and pension liabilities and the economic value to the company is somewhere around $50 million. Paul will have a little bit better breakdown to give to you when he speaks.

Current volumes are improving and our margins are also improving but that doesn’t mean we’re still not going to be faced with challenges to get these next two price increases in place. We’re not sure that the second price increase will stick the $0.07 but it looks like the $0.05 is going to go through. We’re really in the process of evaluating the $0.07.

The company now is in a strong position financially and we have been actively looking at a number of acquisitions. We don’t have anything that, any announcements that we’re making. But we see opportunities out there now and we expect more to be coming in the future months as the industry is under huge pressure and we’ll call it a survival period for the polyethylene business.

That completes my portion of the program. I’ll turn it over to Paul.

Paul Feeney

Good morning ladies and gentlemen. I’d like to give a little bit of color on some of the things that Brendan has just spoken about. Year to date our volume is up 2%. And we had previously indicated to the markets that we were looking at a 3-5% increase for the year.

And I can tell you right now, looking at our current run rates, that’s just about where we’re going to be, between 3-5% volume increases. And that is despite the fall off in volume that Brendan has spoken about in the industry as a whole. Needless to say, we are the beneficiary of some of these activities that Brendan was talking about involving other companies possibly going into bankruptcy.

You are all aware of the competitive pressures that are on our gross margins. Consumers are constrained in the United States. The cost of gasoline is up, construction is on its back and the real estate industry is causing problems for people. Nevertheless, as we look at our business right now, it looks like there’s going to be an improvement and it could be a significant improvement in material margins for the rest of the year.

Inflationary pressures on the business continue and those include gasoline and I’m outside of the area of resin now but operating costs and the type of things that Brendan has spoken about.

Again, we believe these activities and the need to cope with these inflationary driven increases is not only present throughout the rest of our industry but I believe that most of the US economy is trying to catch up with that.

One of the issues that we’re not happy with is there has been an increase of somewhere around $2.3 million in our other costs. We’ve always prided ourselves as keeping good control of the other cost category of our P&L statement. And we have this increase right now and some of that is driven by again the inflationary pressures that we talked about.

But there was also a dispute arising between our company and one of our business partners in 2006. And it continued really throughout 2007 and into 2008. While this was going on, we hired some people, we paid closed to $250,000 to sort out all of the elements to this problem. And while we entered into the problem thinking that we were 100% right, it turned out that we were not quite as right as we thought we were.

I think the counter party felt the same way. He probably spent close to $250,000 also in assessing his own situation. And what has happened here is we’ve just decided to settle it between ourselves and that’s what we’ve done. The cost associated with that settlement is close to $1.6 million.

Needless to say, the legal cost that we’ve incurred has been written off as incurred since 2006. So there were legal expenses associated with this in 07 and 08. Again, the Holland transaction, the total value of the transaction was a little bit north of $50 million. There’s an excellent summary of the transaction on page 17 and 18 of our 10-Q which is out, everybody has a chance to look at that.

And it really ended up in discontinued operations and net profit or gross profit of about $10.7 million. All of that though I think people have to realize is that the majority of that $10.7 million is actual cash return to the company. I mean that’s, it doesn’t go with the discontinued operations, it stays with the parent company as does the tax liability.

So while this is presented in discontinued operations, it’s really our cash. And so it’s our profit. I think since this transaction was announced, we basically explained all of the elements to everybody concerned. However, rather than go through the entire thing right now if there’s any questions I will answer them in the Q&A period.

And I think there’s one other thing that you all might want to pay attention to and that would be in our 10-Q we did announce that the Board has approved a buyback program up to $8 million. At the present time under our indentures, the maximum we can go up to is $7.4 million.

Nevertheless, that’s where we are right now. So we’ve cancelled the old buyback program and we have a new one out there. It’s for the top side at $8 million. And that’s kind of where we are. Where the stock is at the present time, we would expect that we would be buying back, we may do that personally and certainly with the company. We might be buying back as soon as the law allows us to do that.

Back to gross margins a little bit, one of the things that we had said very proudly over the past number of quarters is that gross profit per pound we’ve been running in the area of $0.22-$0.23, now that we have sold Holland that has moved up to on a consolidated basis somewhere in the area of a consistent $0.23-$0.24 a pound.

But then again, in this somewhat very, very difficult second quarter it went down to $0.14 a pound and understand we are talking about adjusting for the life of reserve numbers here. Okay. I know that many of you track our volume number very carefully so let me give you the restated volume numbers for first and second quarter of 07 and 08

First quarter 07, 149,769,000; second quarter 07 163,554,000; first quarter of 08 157,462,000; and the second quarter 08, 160,775,000. Okay, that’s that, are there any questions?

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