KP Tissue Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to KP Tissue third quarter 2020 results conference call. At this time, all participants are in a listen only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press star followed by zero for operator assistance at any time. Before turning the meeting over to management, I would like to remind everyone that this conference call is being recorded on Thursday, November 5th, 2020. I will now turn the conference over to Mike Baldessara, Director, Investor Relations. Please go ahead.

Thank you, Operator. Good morning, ladies and gentlemen. My name is Mike Baldessara. I'm the Director of Investor Relations at KP Tissue Inc. The purpose of this conference call is to review the financial results for the third quarter of 2020 for Kruger Products LP, which I'll refer to as KP LP going forward. With me this morning is Dino Bianco, our Chief Executive Officer at KP Tissue and Kruger Products LP, and Mark Holbrook, our Chief Financial Officer at KP Tissue and Kruger Products LP. The following discussions and responses to questions contain forward-looking statements concerning the company's activities. Forward-looking statements involve known and unknown risks and uncertainties. which could cause a company's actual results to differ materially from those in the forward-looking statements. Investors are cautioned not to rely on these forward-looking statements. The company does not undertake to update these forward-looking statements, except if required by applicable laws. There is a page at the beginning of the written presentation which contains the usual legal cautions, including as to forward-looking information, which you should be aware of. I'd like to point out that all figures expressed in today's call are in Canadian dollars unless otherwise stated. The press release reporting our Q3 2020 results were published this morning and will be available from our website at kptissueinc.com. Please be aware that our MD&A will be posted on our website and will also be available on CDAR. Finally, I would like to ask that during the call you refer to the presentation we've prepared to accompany these discussions, which is also available on our website. We'd also appreciate that during the Q&A period for you to limit your questions to two. Thank you for your collaboration, ladies and gentlemen. I'll now turn the call over to Dino Bianco, our CEO.

Dino? Thank you, Mike. Good morning, everyone, and thank you for joining us on today's call. I will begin with a brief review of our financial performance for the third quarter of 2020. I am quite pleased with our most recent results, which clearly reflect strong North American sales momentum in our consumer business and underlines the benefits of the investments we have been making in our brands and business for future growth. The one exception is still the away from home segment, which continues to face challenging market conditions, which I'll talk about later. As this pandemic began, we put in place a comprehensive program to keep our people safe and keep our business going. On both fronts, I am very pleased with what we have achieved, and with cases escalating across the world, we have added further safety protocols to protect our people. I want to personally thank the over 2,500 employees across North America for the care and behavior they have exhibited to keep each other safe and to make sure we are getting tissue to our customers. Now for a review of the numbers. Excluding the divested Mexico business, Year-over-year revenue increased $25.7 million, or 7.3%, to $369.1 million. Adjusted EBITDA was up 5.1% to $46.2 million, primarily due to favorable sales impact, product mix, and slightly lower cost of sales. This was partially offset by higher SG&A costs, primarily related to our ramp-up in marketing investments. By geography, Canadian sales increased by 4.7% and U.S. sales grew by 11.5%. Next page, regarding market pulp prices, NBSK and eucalyptus prices in Canadian dollars decreased 2% and 8% year over year. On a sequential basis, the declines were 6.1% and 4% respectively. In U.S. dollars, NBSK prices decreased slightly while eucalyptus prices remained relatively stable when we compare those to Q2. For the remainder of 2020 and into 2021, NBSK and DEK prices in U.S. dollars are projected to increase, but these outlooks remain volatile given market conditions. On COVID-19, In response to the second wave, we further enhanced our safety protocols. The well-being of our employees is paramount. A safe work environment is essential and we are continuing to make adjustments based on health, professional directions and best practices. We have also made significant financial investments to keep our facilities safe. As a result, we have no evidence of site-based virus transmission and no significant impact to our business. Our assets continue to perform very well, driven by our OpEx program and SKU reductions that we made earlier in the year. And finally, the consumer trust in our brands continues to be the underpinning of our success, especially during these periods of uncertainty, and that is being reflected in SHARE, which I'll talk about in a second. Let me give you an update on Tad Sherbrooke. We are less than four months away from the official startup of this site. It has been quite an endeavor to start up a $575 million state-of-the-art facility during COVID. I want to thank our engineering and construction teams and our suppliers and partners for working safely while keeping us on time and on budget. All of our converting lines are now operating and performing well with TAD paper that is being received from our Memphis facility. Considering the very strong demand that is in the market right now, we are trying to increase our startup curve on the converting lines. Startup costs in Q3 were $2.1 million as planned, and more costs will be incurred in Q4. The paper machine remains on track for first quarter 2021 ramp up. We have strong demand from our existing and new customers across North America. This new production facility will help alleviate some of the capacity constraints that we are seeing in the recent quarters. Our clear objective is to enhance our competitive position in the market, particularly in paper towels, and to further support our share momentum. In this category, we foresee sustained positive consumer trends post-COVID. A new chapter in our history is about to start, and the state-of-the-art Tadge Sherbrooke facility will soon become another important vector of growth in the ultra-premium North American segment. Let me turn to our OpEx program. It is tracking effectively to the overall plan and has been rolled out to all our sites and most of our assets. These sites, as I mentioned earlier, performed very well in Q3 and, quite frankly, for the whole year up to the end of Q3. This has been thanks to a large part to the high level of employee engagement, our continued focus on top selling skews translates into better productivity and we have drawn down inventory to meet increased demand. From June to September we were able to rebuild some inventory on bathroom tissue and facial tissue but paper towel supply continues to be tight for us and for the market. Year over year manufacturing costs are lower and we are investing further in enhanced maintenance to drive stronger asset performance and reliability. By year end, we expect to reach the top end of the $15 to $20 million run rate target on cost savings. Our OpEx program was launched almost two years ago, and I'm proud to say that we have reached or exceeded our objectives to drive more capacity, asset reliability, and cost savings. The timing of this OpEx program was perfect, unknown though at the time that we were going to approach 2020 with a COVID demand impact. We will continue to expand this program across our assets and various elements into 2021. The level of engagement of our team has been truly exceptional, driving an enhanced culture of excellence. We are also starting up our TAD Sherbrooke facility as an OpEx ready greenfield. Let me move to our trademarks. We have and continue to focus on investing to build our brands to bring the desired results in the market. Market share gains continued through the quarter supported by strong shipments. As indicated during the last conference call, our marketing investment significantly increased this quarter as we continued to build our brands. While the plan is to invest more in advertising and promotions going forward, the spending Q3 also reflects a catch-up from lower levels in the first half of 2020. Our new unapologetically human media campaign employing purpose-driven messaging is focused on connecting with our consumers. Hopefully, you've had a chance to see our bold new campaign that was recently launched and is receiving significant positive feedback across Canada and beyond. Last month, we conducted a virtual fashion show to showcase our cashmere collection in support of the Canadian Cancer Society, our long-standing beneficiary. I'm delighted to say that the modified event, which was necessitated by the pandemic, was a resounding success. We have also been working with other partners such as the NHL and Scotty's Tournament of Hearts to activate against these events in a COVID world. I've also been talking about ramping up the quality of our products, and I'm very proud to say that our softer, quality-improved cashmere is now in market and in full distribution. This is a perfect example of us investing in the future to reinforce our competitive position and our leadership market position. On our market share, the strong momentum, which began late in 2019, was further accelerated by demand related to COVID-19. The data presented on slides 11 and 12 is from Nielsen for dollar market share and represents a 52-week period which ended October 3, 2020. So it essentially reflects year-to-date up to the end of third quarter. We made good progress in all categories. Specifically in bathroom tissue, our cashmere and purex brands are undisputed market leaders with a combined share of 36.4%. With a market-leading share of 31.7%, our Scotty's brand is the number one, and it's the brand that most consumers select when they need a facial tissue. As discussed before, we see significant growth potential in the paper towel category, and our sponge paper towels continue to represent an excellent opportunity for share growth, as we now stand with a strong number two position at 22%. COVID demand has also given us an opportunity to build distribution and sales of white cloud in the US. We are executing strong marketing investments to build this brand for today and for the future. On AFH, given the ongoing and in fact, in some cases, worsening COVID situation, Market conditions in the away-from-home segment continue to remain challenging as end-user markets such as food service, lodging, and property management were still soft. AFH end markets are on a slow recovery that will be strongly influenced by COVID-19 protocols. We expect gradually quarterly sales improvements. In fact, industry volumes have recovered from lows at the beginning of this pandemic, which were in the 40% to 50% range in Q2. The heightened focus on hand hygiene has kept AFH towel volume strong as customers are switching from air dryers to paper towels. We are confident this will have a sustainable impact on our business for today and the future. Unfortunately, with strong consumer demand, paper capacity was diverted to our consumer products, requiring more outsourcing for AFH. This will continue to be a headwind for this business. One area that we continue to focus on is to retool our AFH assets and products to make the products designed more to be sold in consumer channels. We are seeing some success of this already, particularly in the U.S. market. AFH has taken an aggressive approach at implementing OpEx in their facilities, and this has driven improved productivity. We continue to do the right things in AFH, and performance will be dependent on end market recovery. With that, I will now turn the call over to Mark, who will review our quarterly results.