KP Tissue Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to KP Tissue first quarter 2021 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 Friday, May 7, 2021. I will now turn the conference over to Mike Baldessara, Director, Investor Relations. Please go ahead.

Thank you, Operator, and good morning, ladies and gentlemen. My name is Mike Baldessare. I'm the Director of Investor Relations at KP Tissue, Inc. The purpose of the conference call is to review the financial results for the first quarter of 2021 for Kruger Products LP, which I'll refer to as KP LP going forward. With me this morning is Dino Bianco, the Chief Executive Officer of KP Tissue and Kruger Products LP, and Mark Holbrook, the Chief Financial Officer of 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 the 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 the 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 Q1 2021 results were published this morning and will be accessible 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 ask that you during the call to refer to the presentation we have prepared to accompany these discussions, which is also available on our website. We would 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?

Thanks, Mike, and good morning to all. I'd like to thank you for joining us today for our first quarter earnings call. After a year of incredible tissue demand, our Q1 results reflect the impact of significant inventory destocking across the North American consumer tissue category. While we are still moving through the volatility uncertainty driven by COVID, the magnitude and speed of the destocking was unexpected during the quarter. This destocking impact on our sales was the largest single driver of our EBITDA performance for the quarter. We began seeing the impact of the destocking of both consumer and retailer inventories in January with gradual improvement as we moved through the quarter. Our analysis indicates this one-time volume impact has substantially moved its way through the supply chain as we begin to see a recovery in sales velocity as we exit Q1. The drivers of the destocking were threefold. First, consumers' confidence in the tissue supply chain enabled them to reduce their at-home inventory. Second, heavy retailer inventory exiting 2020 given COVID uncertainty, and the third area is reduced shopper trips, particularly in Canada as lockdowns became more severe. On our AFH business, continued to show softness as end-user markets remained depressed. However, we did see improving trends in our US AFH sales as hospitality and food service channels began opening up. Despite these unique challenges in Q1 and the impact to sales, our EBITDA improved versus Q4 2020, and we will speak about those drivers shortly. In addition to the marketplace impacts described earlier, we are also lapping a very strong Q1 2020 as the surge in tissue sales driven by panic buying in March of last year drove strong prior year results. Let's now turn to the numbers on slide five. Q1 2021 revenues declined 17.3%, while adjusted EBITDA in the quarter declined 26.5% versus prior year. Specifically, revenue came in at $310.4 million, while adjusted EBITDA was $37.5 million. Revenue declined in both Canada and the US at minus 15.4% and minus 20.2% respectively. EBITDA was not only affected by lower sales volume, but by higher pulp prices and increased freight and warehousing costs. This was partly offset by lower SG&A expenses. On slide six, in addition to the Q1 volume impact, the tissue industry is seeing significant pulp cost escalation in both dollar magnitude and speed of increase. These costs will begin to hit our P&L in Q2 and are part of cost inflation headwinds across many cost inputs facing most companies. Specifically on pulp, first quarter NBSK average prices in Canadian dollars increased 11.5%, while BEK average prices rose 13.8% compared to Q4 of last year. Average NBSK prices in US dollars were up 14.3% and average BEK prices rose by 16.7% quarter over quarter. As indicated during our Q4 call, we expected NBSK and BEK prices to continue to increase and remain elevated for the balance of 2021. To counter these significant common to industry cost increases, we announced the price increase in our Canadian consumer business that will take effect in early July of this year. We also announced the price increase for our away-from-home business, which will take effect as contracts come up for renewal. Moving to the impact of COVID-19. As the health and well-being of our employees is paramount, we continue to make significant investments to keep our facilities safe. As a result, we see no evidence of inter-site virus transmission and have not had any major business disruptions in our network. With Tad Sherbrooke and strong legacy asset performance, we are in a strong inventory position to supply the market, including reintroducing some SKUs that were temporarily halted last year. As things stand now, we expect consumer demand to start stabilizing in the current quarter with a return to normal buying patterns. While U.S. market conditions for the AFH segment are gradually improving, the Canadian market will remain challenged as significant COVID-19 restrictions are still present. As we continue to manage the pandemic's impact, we are also preparing for a post-pandemic recovery. We want to continue to carry forward some of the learnings brought to our business by the pandemic, such as permanently eliminating slow-moving SKUs, building our e-commerce muscle, and building on new distribution opportunities. Consumer trust in our brands is also a key differentiator, and in this period of uncertainty, this is one of the factors leading to our strong market share performance. The past few quarters have showcased the high level of trust in our brands. I'm exceedingly proud of our leadership position in Canada, and I will discuss this further in a few slides. In terms of our network, Tad Sherbrooke is ramping up faster than expected. Our paper machine and converting lines continue to track above anticipated startup curves. It was quite an incredible accomplishment by our team to start up this facility on time and on budget during a pandemic. One of the first products commercialized from this facility is our new Sponge Towels Ultra Pro, which is on the shelf at most accounts in Canada. With the Tad Sherbrooke Ultra Premium capability, we now have a product that provides consumers industry-leading quality that is made right here in Canada. The launch of Ultra Pro provides timely support to our sheer momentum in the category and is a welcome addition to our Sponge Towels lineup. Regarding our Sherbrooke expansion, we are in the process of finalizing the project's scope. Engineering, environmental, and geotechnical studies are underway, and we're in the final stages of completing the project's financing. As a reminder, this expansion combined with Tad Sherbrooke will create a tissue hub capable of flexible, high-quality tissue production across all segments. I hope to share more in the coming months as this project comes to life. We also expect our previous OpEx investments in enhanced maintenance to drive stronger performance in our legacy assets. This year's focus has been expanded to include more assets and a special focus on waste reduction. We're also gratified to see sustainable benefits from a higher level of employee engagement, empowerment, and positive cultural shift driving long-term operational excellence. From a long-term standpoint, we continue to make the investments needed to modernize our North American network, increase capacity, and benefit from greater product flexibility in both conventional and premium products. As part of this strategy, we also invested in a state-of-the-art facial tissue line in our Memphis facility, which will come on stream in 2022. On to our trademarks. We continue to focus on investing and building our brands. During this pandemic, we have increased our marketing investment, changed our marketing tactics, and refined our consumer messaging to be more relevant to consumers while giving back to those in need. As we look to 2021, we will continue to increase our investment and strengthen our bonds with existing and new consumers. The quarter saw full distribution of our quality-improved cashmere supported by a strong advertising campaign. As well, our new Unleash the Scotties campaign is gaining strong consumer traction as we continue to move towards bolder, more distinctive marketing campaigns. What's more, our close NHL partnership continues with the activation of our Find the Cup to Win Stanley Cup Playoffs promotion. And finally, as mentioned earlier, we are very pleased with the launch of the new Sponge Towels Ultra Pro paper towels, which is hitting stores across Canada as we speak with strong early results. The data presented in slides 10 and 11 is from Nielsen. It shows dollar market share and represents a 52-week period ended March 27, 2021. Once again, thanks to an improved supply position, strong customer partnerships, and continuing marketing support, we delivered strong market share growth in all categories. Our cashmere and Purex brands are bathroom tissue market leaders, closing 2020 with a combined share of 36.9%, and posting further gains in Q1 with 37.1%. We achieved similar growth in facial tissue with a share of 33% this quarter compared to 30.9% for the corresponding quarter last year. And our Scotties is a clear number one with many Canadian consumers considering the brand to be synonymous with facial tissue. In addition, we've made appreciable share gains in the paper towel category where our share grew from 20.5% last year to 22.2% this quarter. We're excited about our growth prospects in 2021 and beyond in this category. Finally, we continue to see opportunities to further expand our distribution and sales of White Cloud in the US. We are working to build the brand at focused retailers as a better value, high quality product versus the leading brands. In our AFH segment, success going forward depends on end market recovery. There was a modest increase in March volumes, but first quarter volume was approximately 25% below pre-pandemic levels. Ongoing COVID-19 restrictions in Canada are negatively impacting our AFH volume. The good news is that there are encouraging trends in the US as it lessens restrictions and continues to make meaningful progress in the number of people vaccinated. As indicated earlier, we announced price increases which will progressively take effect as contracts come up for renewal. And the benefits of our OpEx program have allowed us to achieve significant progress over the past two years and our operations are now performing well. Our AFH operations network is recovery ready as we anticipate growth in the upcoming quarters tied to end market recovery. With that, I will now turn the call over to Mark who will review our quarterly results.

Thank you, Dino, and good morning, everyone. Please turn to slide 13 for a summary of our financial performance for Q1 2021. Revenue was down 17.3% to $310.4 million in the first quarter, compared to $375.1 million for the same period last year. Adjusted EBITDA decreased 26.5% to $37.5 million from $51 million in Q1 of last year. but increased sequentially by 1.3 million or 3.5% from 36.2 million in Q4 of 2020. From a margin perspective, adjusted EBITDA decreased to 12.1% from 13.6% in Q1 last year, while it increased from the 9.4% posted in Q4 2020. In the first quarter of 2021, net income amounted to $6.8 million compared to $8.4 million last year. The $1.6 million decrease was primarily due to lower adjusted EBITDA and higher interest and depreciation expense, which were partially offset by an increase in other income, primarily related to a foreign exchange gain on U.S. dollar denominated debt, and no consulting costs related to operational transformation initiatives in Q1 of this year compared to Q1 last year. In the quarterly segmented view on slide 14, consumer revenue decreased 13.3% year over year to $271.4 million. It also declined on a sequential basis by 18.6% compared to a strong Q4 2020. In the away from home segment, revenue declined 37% to $39 million. On a sequential basis, AFH revenue decreased 24.6% over Q4. Consumer segment adjusted EBITDA decreased by 10.2 million to 44.1 million, and adjusted EBITDA margin decreased from 17.3% to 16.2%. For the AFH segment, Adjusted EBITDA decreased by 3.8 million to a loss of 4.8 million, and adjusted EBITDA margin stood at negative 12.3% versus negative 1.7% for the previous quarter. Corporate and other costs were a loss of 1.8 million in Q1 2021 compared to a loss of 2.3 million for the prior year. On slide 15, we reviewed Q1 2021 revenue over Q1 2020, which was down by 64.7 million or 17.3%. The decline was primarily attributable to significant sales volume decreases in both Canada and the U.S., resulting first from the comparison to last year's high COVID-19 buying activity in Q1 across all business segments, Second, from destocking of tissue inventories in Q1 of this year by retailers and consumers. And third, from the unfavorable impact of COVID-19-related restrictions on the AFH segment. Revenues also declined to the unfavorable impact of FX on U.S. sales. By geography, Canadian revenues decreased by 35.5 million or 15.4%, And in the U.S., revenues decreased by $29.2 million or 20.2%. On slide 16, we provide further insight into our Q1 2020 adjusted EBITDA, which decreased year-over-year by $13.5 million or 26.5% to $37.5 million. Gross margin for the quarter decreased slightly from 16.2% to 15.2%. The decrease in adjusted EBITDA was primarily driven by lower sales volume, net of overhead absorption, also by the unfavorable impact of higher pulp prices and outsourcing costs, as well as higher freight rates and warehousing costs. These factors were partially offset by lower SG&A expenses. For a sequential perspective, let's turn to slide 17, where we compare Q1 2021 to Q4 2020 revenue. Quarter-over-quarter revenues decreased by 74.6 million, or 19.4%. The decrease was primarily due to lower consumer sales volume due to the retailer and consumer destocking. Relative to the high Q4 demand that we saw from wave two of COVID, Also, AFH sales were lower, which reflect a new wave of COVID restrictions in Canada, and there was a negative impact from lower FX on US dollar sales. By geography, revenue in Canada decreased by 49.5 million or 20.3%, while revenue in the US decreased by 25.1 million or 17.8%. On slide 18, Q1 2021 adjusted EBITDA increased sequentially by 1.3 million or 3.5% compared to Q4 of 2020, and gross margin rose from 13.7% to 15.2%. The increase in adjusted EBITDA was primarily due to a decrease in SG&A spending, and that's related to lower seasonal advertising. We also paid a bonus to our hourly workers in Q4 2020, which was one time. And with the successful ramp-up of production, Tad Sherbrooke had a modest positive contribution this quarter compared to a negative contribution related to startup costs in Q4 of 2020. These factors were partially offset by significantly lower sales volume in both business segments, net of overhead absorption, and also by higher pulp prices and increased freight rates. I'll now turn to our balance sheet and financial position on slide 19. Our cash position was $57.6 million at the end of Q1 2021, a decrease of $71.1 million from our $128.7 million position at the end of Q4. The cash position includes $22.4 million in the Tadge Sherbrooke entity at the end of Q1. At quarter end, total liquidity representing cash and cash equivalents and availability under the revolving credit agreements was a healthy $225.2 million. Overall net debt at quarter end stood at $795.2 million, up from $624.7 million at the end of Q4. Net debt increased due to higher working capital requirements, particularly higher inventory and heavier seasonal payments typical in Q1, and due to the debt financing used for the investment in Tad Sherbrooke. Our net debt to trailing 12-month adjusted EBITDA ratio increased to 4.3 times. Subsequent to the quarter end on April 8th, we issued $135 million of senior unsecured notes due in 2029, with the proceeds being used to pay down the revolving debt and for other corporate purposes. In conjunction with the issuance of the notes, the limit on the senior credit facility was reduced from $250 million to $200 million. Overall, this resulted in an increase in liquidity of $82 million after fees. I will conclude my section by reviewing the CAPEX on slide 20. Q1 CAPEX totaled $54.7 million, including $51.1 million for Tad Sherbrooke. At quarter end, accrued and unpaid capital spending on the new facility stood at $25.2 million. Looking at the full year 2021, our anticipated CAPEX range has not changed from what we have previously provided. We expect TADS Sherbrooke CapEx to total approximately $115 million once all project payments are completed. Remaining CapEx, including the new Sherbrooke expansion project, is expected to be in the $45 million to $65 million range. That puts total CapEx for 2021 in the range of $160 million to $180 million. Thank you for joining us this morning, and I'll now turn the call back over to Dino.

Thank you, Mark. Turning to slide 21, we recently announced the launch of our Reimagine 2030 sustainability platform. This program sets long-term ambitious goals that will make Kruger Products a leader in sustainability and transform our culture as we focus on being better environmental stewards in everything that we do. Last week, we also announced that we became a signatory of the Canada Plastics Pack, or CPP, making us the first tissue company to do so. The CPP is an initiative that brings together Canadian partners united behind the vision of creating a circular economy that keeps plastic waste in the economy and out of the environment. One of the targets of Reimagine 2030 is to reduce virgin plastic in our trademark packaging by 50%. As a Canadian leader, we have a responsibility and a duty to be part of the solution for upcoming generations. In conclusion, our focus remains on investing in our brand and innovation to build market share leadership in Canada while expanding the White Cloud brand in the US. In order to offset unprecedented increases in pulp prices, we have taken pricing action in both Canada Consumer and AFH and expect to see benefits starting in the third quarter to offset some of the pulp increases. Furthermore, with the TAD facility in Sherbrooke exceeding the ramp-up curve, we're well positioned to support the launch of the new Sponge Towels Ultra Pro, an ultra-premium paper towel made in Canada. The OpEx program, combined with the announced Sherbrooke expansion, will increase capacity and optimize the cost structure for the future. Meanwhile, the AFH segment is preparing for recovery in the end user markets. Reimagine 2030, our new sustainability commitment is designed to spearhead transformative growth and sustainable innovation. And finally, we're developing our organizational capability and culture to ensure our organization is future ready. Regarding our outlook, with the continued volatility of the COVID-19 recovery, the impact on sales in AFH and consumer, and significantly higher pulp prices, Q2 2021 adjusted EBITDA is expected to be in line with Q1 2021 results. We do expect that more favorable market conditions combined with pricing actions will translate into improved performance in the second half of the year. I'd like to thank our many employees for their unrelenting dedication during these unprecedented and challenging times. Kruger Products has played an important role since the onset of the pandemic, securing much needed tissue products for consumers who know they can count on us for their tissue supply and quality. Our outstanding employees are the ones whose daily efforts make this happen and provide us with the confidence that we enjoy. To each one of them, I want to convey my utmost gratitude and thanks. We will now be happy to take your questions.

Ladies and gentlemen, we are now open for your questions. To ask a question, simply press star, then the number 1 on your telephone keypad. To withdraw yourself from the queue, please press star 1 again. We will now take our first question. Your first question comes from the line of Paul Quinn of RBC.

Yeah, thanks very much. Morning, guys. Morning. Morning, Paul. The first question would be on the inventory of the stocking that you saw. Most of your peers that have reported earlier sort of described this as something that happened in March to them, where you've sort of described that as something that happened earlier in the quarter and you've seen gradual improvement. Is that changed by geography, and do you think we're through that now?

Yeah, Paul. Obviously, anybody in tissue in North America has talked about it. We saw it starting in January. It's interesting that sometimes the pandemic impacts happen a little earlier in Canada than they do in the U.S. So we started to see it in January. In fact, when we did our Q4 earnings call, you remember I highlighted that, you know, given the inventory changes, that could be happening in Q1 as we started to see that in January and February before we did our call. I would say that the degree and the magnitude of the inventory destocking caught us by surprise. We knew there was going to be some of that during the year. We had it more prolonged and didn't have it as deep. And, of course, it's imperfect data. You don't get exact data on how many packages consumers have at home. The good news is we started to see improvement as we exited the quarter. Each month got sequentially better than the last month. I do think we're primarily through it. We're seeing positivity as we look at the upcoming quarter in terms of velocity starting to improve across the business. So I do view this as a one-time adjustment. I don't think it changes the fundamentals of this category and the strength of this category. And it is part of the COVID volatility. Last year, the volatility was upside. This quarter, the volatility was downward.

Okay, thanks for that. And then I'm just trying to understand how to offset this rise in pulp costs. I mean, you've announced a price increase. Some others have. I've seen some branded guys that look like they've increased their marketing budget and are going for market share and not increasing prices. So just wondering, the price increase, if you get it, does that fully offset the anticipated cost increase that you're going to see in pulp?

Well, so just to clarify, we did announce a price increase. I do want to clarify that, and we are moving forward with that price increase to be effective in early July in our Canadian consumer business. We have pegged that price increase to not just cover pulp, but as I mentioned, there's increased costs in freight, packaging, energy, I mean, you know, we're in an inflationary period across many other factors, pulp clearly being the largest part of that. We are in the area of covering the pulp. If the pull increase goes through, the pulp market continues to change. In fact, it's escalated since we announced our price increase. So we're watching that very carefully. But I think the number that we announced and where pulp looks like it's going to settle is probably in equilibrium. And we're working through with our customers now, working through with them obviously the rationale for the increase, which I think they absolutely understand. And as you mentioned, some other tissue players have decided not to announce, and clearly they must be feeling the impact of the pulp increases on their PNL. They will choose to go their own way. So, we're watching the market closely. We want to always make sure we're competitive. We're watching for what may be desheeting or taking pulp out of the product, if you will. So, we're watching for that. It's not a method that we prefer to use. Consumers generally aren't happy as you reduce the size of their products, but that may be a tactic that gets used, and we'll continue to watch to make sure our pricing is competitive, our sizing is competitive in the marketplace. and that we continue to support our customers through this.

All right. Thanks. That's all I had. Great job on Schuber. Thank you, Paul.

Your next question comes from the line of Hamir Patel of CIBC Capital Markets.

Hi. Good morning. Do you know if you – comments on, you know, at least in the Canadian context, we've seen sort of mixed pricing announcements in the U.S., but in the Canadian market, have all the major players announced price hikes?

Well, Amir, you know, it's not – it's never – we choose to do a public announcement as a public company, obviously, so ours is very clear and transparent. in the marketplace. We don't get that from others. Generally, you know, as part of the negotiation with customers, they choose to tell us, you know, how the category is moving. But we don't have official confirmation other than we feel comfortable that, you know, this cost impact is affecting everybody. And we're likely going to see pricing some way somehow and at some level by most of the players in Canada.

Great. Thanks. You know, that's, that's helpful. And then just turning to your new sponge towels offering, you know, do you think that that puts you on a path to get to market share leadership in, in towels over time in Canada?

Yeah. I mean, I don't want to announce it. I don't want to define it as an end point. I think that, you know, with being market share leader, I think we'll do all the right things, not just with the ultra pro, which we're very proud of, you know, and it's, Interesting, I had my board meeting yesterday, and one of the questions was, why aren't you talking more about the incredible performance of Sherbrooke? And absolutely, Sherbrooke has been quite a story. At any point, as you guys know, any time you can come in on time and on budget with a major startup is amazing. And to do it with half the construction phase being during pandemic is spectacular. And I don't want to diminish it. You know, it's still early, and maybe in the quarter two results, I'll beat our chest a little more around incredible work around Sherbrooke. But that site, the quality of the product that's coming out of that site is spectacular. And we see it through the new UltraPro towel that we've launched, you know, the product design that was done by our product development group, and the capability of that facility to deliver against that quality spec. We tested it with consumers. We know we got a winning product. And it's part of our lineup. So we'll continue to have our other sponge towels brands. So we've now segmented the lineup to be an ultra premium, kind of a premium offering, and more of an entry offering as well for the marketplace. So we think we're well positioned with a strong brand, strong segmentation, a fair value versus the market. And quite frankly, for Canada, made in Canada positioning, that product is made right here by Canadians for Canadians. So that's also a differentiator for us.

Thanks, you know, that's helpful. And I just want to ask about that announcement recently about plastic reduction. How do you see, you know, where do you see that trend going? I know in Europe, we're starting to see some more experimentation with actually selling tissue sort of packaged more in corrugated material. And obviously you got, you know, your sister company producing that. So do you think it's recycled plastic is where you're heading or are you looking at other, other options?

We're looking at a couple of options, obviously paper, you'll see paper packaging in Europe. So we're looking at that in this area keeps evolving. So, you know, We are aggressively working on this. To be frank with you, it got delayed because of COVID. We focused COVID on the bread and butter of our business, which is the existing SKUs. So we kind of put this a little bit on the back burner as we were focusing on getting product out for COVID. So we're re-energizing that now, working with various suppliers to eliminate single-use plastic in our product. We don't use a lot of it in general. We're not a big user of plastic. But we do contribute to single-use plastic in the environment, so we want to make sure that we're doing the right thing by eliminating that. The question with all the different versions that come along is, you know, does it look good on shelf? Does it survive the network, the supply chain, et cetera? So those are all the work that we're doing now. There's a cost structure there that's a fair cost structure for what we need on our product. So more to come on that, Amir. I'm excited by it. And packaging will only be one component of what we're looking at as far as, you know, launching new products into the future that are sustainability-driven at the core.

Great. Thanks, Dino. That's all I have.

Your next question comes from the line of Zachary Ebershed of National Bank Financial.

Morning. Thanks for taking my question. You mentioned that the price increase will just about cover the ramp up in pulp if it settles where you think it will. What level is that where you think it's going to settle out?

Yeah, I'm not going to quote a number for you, Zachary. Sorry. I mean, we're using, obviously, you know, there's different indicators in the marketplace in terms of price points. There's receipt, there's pick, there's purchase price, there's China market, suffice to say that when we announced the pricing in April, so we announced it April 5th, we were probably spending a couple of weeks getting it ready. So if you look at the pulp prices that were in play around that time is kind of what we use to determine our pricing. And as you know, since that time they've gone up. So, you know, are they going to stay up? Are they going to sell down a little bit? very crazy world as it relates to just economies in general, but particularly anything that's going on with lumber and pulp, as you know. So, you know, we'll watch it accordingly. If it goes up, we may need to modify. If it goes down, we may need to modify. We're going to stay very flexible and agile with this to make sure we're balancing the need to cover costs and the competitiveness of our products.

Appreciate that. Thanks. And then you get some benefits from a stronger Canadian dollar on some input purchasing, but a headwind, of course, on the translation of U.S. revenues. So if the Canadian dollar keeps strengthening and moves towards, say, 1.2 or 1.15, how much of an impact does that have on your EBITDA and bottom line?

Zachary, it's Mark here. We would say on a net basis, if you take the total company, there's about $700,000 impact for each cent of FX movement. So in that case, it would be favorable for us as the Canadian dollar strengthens, as you described.

That's great. Thanks very much. I'll turn it over. Thank you.

Again, as a reminder, to ask a question, please press star one on your telephone keypad. Your next question comes from Kasia Kopipak of TD Security.

Hi, good morning. It's Kasia from TD.

Good morning. Good morning, Kasia.

Good morning. Would you be able to provide some context on how to cultivate on spot versus list?

Sorry, Kasia, cut out. Can you just repeat your question?

Yeah, no problem. I was just wondering if you could provide some context around how much pulp you buy on spot versus list.

Yeah, I'm not going to give you that, Kasia. Sorry. What I will say is we have long-term one- to two-year contracts with pulp suppliers. We probably use about 10 different suppliers. And in those contracts, as part of those contracts, we have flexibility to buy a certain amount on spot And we will then just arbitrage the market to determine when we do that. So, there's always a portion of our purchases that are at spot. It's contractually permitted and creates the right balance between securing supply and taking advantage of market arbitrage between contract and spot.

Okay, fair enough. Now, as you guys reduced your SKUs last year, your cost base has benefited, and you've indicated that you're looking to expand some of those SKUs going forward. Any color that you can provide around how that might impact your costs in the coming quarters?

You know, the crisis enabled us to do what we probably should have done many years ago. It forced a real-time experiment on reducing slower-moving SKUs. It's always hard to remove a SKU. There's always a customer that wants it or a region that wants it. And nobody wants to give up sales. But we were forced to do so, as many companies did, to ensure that we could run our lines as efficiently as possible. So the numbers I quoted, without talking about SKUs, the number I quoted last year was if you use 100 index as pre-COVID, during the heat of COVID, which we're still in, but during most of last year, if you will, We went to a 50% index. And basically what we eliminated were the slower moving SKUs and focused just on the main SKUs. And then if you think about an index of where we're going to come back to, we're going to be at a 75 index. So 25% will be totally eliminated. SKUs, as I said, probably should have been eliminated anyways. Less relevance, particularly now as we're launching some new products. There may need to be less of a need. Those are sizes. Those are maybe some sub-brands, et cetera, that we're eliminating. And those, quite frankly, not every SKU is the same cost impact. There's some SKUs that are really difficult to make, slower runs, more complexity, higher changeover. And some SKUs are flow-through and, in fact, don't cost you anymore or save you anymore by cutting them. So I have confidence that the ones that we cut – that are the more problematic ones and the slower ones, will be the ones that we will permanently cut, and therefore we should continue to see the benefit in our supply chain.

Thanks a lot, Dino. I appreciate the extra context. And just turning to away from home, you mentioned that you're seeing some encouraging signs in the U.S., the Canada still being undermined by the third wave. Just trying to gauge a sense of how much that could impact results in the away-from-home segment in the coming quarters on a net basis. Maybe if you could speak to how you expect that to trend relative to Q1 results.

Yeah, I mean, I won't give you guidance on it, but we do expect to see it improve as the year moves. It's been very encouraging to see how quickly the U.S. market has recovered, so maybe that is – an analog for how the Canadian market will recover in the away-from-home segment, particularly food service and hospitality. I do believe, we believe as an organization, that what will benefit on AFH is almost the contrary of what happened with consumer, is that you'll get some pipeline fill. You'll get pipeline fill at the end customer, so the restaurant itself, let's say, and you'll get some pipeline fill at the distributor, So you'll get an inventory replenishment through the network to get us back to normal inventory levels. So we'll probably see a bit of that, and then of course we'll see improved consumption as consumers are using tissue more out of home. For Canada, when we came into the year, we projected that to start happening in the second half, so July onwards. Despite the increased shutdowns that have happened over the last couple of months, we still believe that that is the right timing for the recovery. U.S. was recovering a little quicker, but unfortunately we're smaller there, so our benefit is consistent with our size, but obviously we're a smaller player in the U.S. market.

Can you just remind me how much the U.S. represents of the whole AFH segment, Mario? Do you know where that is?

Well, I can't be reminding you because we never told you. We included our U.S. results. As a segment, we report consumer and AFH, as you know, and then we report U.S. and Canada, which includes U.S. consumer and U.S. AFH, and Canada consumer and AFH. The reality is we're a smaller player in the U.S., which in many ways is a bit of a different model for us. We're more nimble. We're more opportunistic. We can decide what channels, what customers, what formats to go into. Whereas in Canada, you know, we've got a very strong presence and a very disciplined approach to how we go to market.

Okay, thanks for that, Dino. That's all I have. Thanks, Kasia.

Your next question is a follow-up question from Hamir Patel of CIBC Capital Markets.

I just want to ask, given how fast or successful the Sherbrooke ramp-up and sale process has been, do you start to think about a potential TAD3 or at least start to do the engineering work? Where are you at with thinking about that future growth? Any thoughts about when you're going to need additional capacity?

That's a great question. We're always thinking about the future. So, you know, TAD2, TAD3 have been, and even TAD4 are on the horizon in our strat plan. You know, obviously we wanted to make sure we got TAD2 started up and got any learnings from that. That gives us a bit of confidence and wind in our sails as it relates to our ability to start up a site. And every site we expect to get better. You know, Memphis was our first TAD startup. We had a lot of learning. TAD, too, utilized that learning and some of the same people to start that up. And then, of course, now we're looking at where the future could go. And it isn't just a TAD story. You know, with Sherbrooke expansion, we're also looking at modernizing our assets as well and capability, not just in TAD. Most of the market continues to be LDC and will likely be LDC with complement of TAD for more of the premium products. So the answer is yes. You know, we're looking at it. I don't think there's any company that's not looking at what their next five-year horizon is or where they need capacity. So we're looking at it, and it's a long process, as you know, doing the business work, then understanding the financing, and then the engineering and the construction. So it's usually a multi-year project from start to finish when you think of it that broadly. So we're starting that process. As soon as we've got anything to let you know, we'll let you know. And just rest assured that we're managing our business not just for today. You know, we're looking at five to ten years of where we need to be as a North American tissue supplier.

Makes sense. And, you know, just with White Cloud, you know, can you maybe – I don't know if you have any data points you could share about your distribution – how much distribution you've achieved in the U.S., any recent developments on that front, and just in general, I was also curious what the sort of percent of your business is happening through e-commerce today.

Yeah, so two separate questions. As I've said, Ymir, you know, You and I have talked about White Cloud in terms of what we can do with it within our portfolio, and we do believe it is a strong brand. We know it. We've tested it. It has a lot of latent equity with consumers. They know the brand, and it is part of our future growth. As far as what happened last year, the pandemic opened the door for White Cloud. There were customers that maybe weren't ready to take it, But during COVID and wanting to get tissue, they brought it in. So that opened the door for us. And our U.S. team knows that that door opened, and it's our job now to keep it open and continue to build it at those accounts so it doesn't, you know, just disappear. So we are continuing to work. Our approach with White Cloud is a few accounts where we can build it deep versus trying to spread ourselves too thin across every account. We just don't have the resources to do it that way. So we're going to be more either regional or customer focused. We have some pretty good customers that have supported us from before COVID and through COVID. You can find White Cloud at Southeast Grocers in the U.S., which is a more Florida-based Winn-Dixie brand, for instance, in Florida. Home Depot. Amazon, ShopRite, many others. You know, you'll see some of it at BJ's, Albertson's, et cetera. So the distribution has increased. I don't know if we'll keep all those distribution points, but we want to make sure that the ones that we got we will build on and create a success so that we can continue to roll it out at other customers. And that's not just a customer strategy. It's a consumer strategy. We want to support it from a consumer front as well. to make sure we're building affinity with consumers. As far as e-comm, I mean, again, imperfect data, but I think you can see in most regards, particularly in our category, e-comm would have doubled last year as a percentage of total tissue. Sometimes there's so many different numbers of how e-commerce is measured, but the measure I really look at is how much of tissue goes through e-commerce. We think it's probably 4% to 5%, in perfect measure because not all the e-com players report out. Some of it's qualitative, whereas it was probably in the two, two and a half range pre-COVID. And our goal is to be equal or better than our bricks and mortar position with our brands in e-commerce in Canada. That not only includes supply, it includes the marketing, the social media, the path to purchase, that we undertake so that our brands are prominent on e-commerce shopping sites, whether they be a bricks and mortar extension or pure e-commerce players.

Is margins comparable on the e-commerce channel as the regular distribution?

They are. We're neutral as it relates to where the product is sold, Amir. So quite frankly, When you say margins, the only reason I'm hesitating is because we're actually investing more there. So as a margin play, yes, but relative to the size of the business, we're putting more dollars against that channel. So on a total contribution basis, it's less because we're making a conscious decision to invest. But as it relates to product profit, that's similar to bricks and mortar. And the other thing we've done is we've staffed up our e-commerce capability. And I hope they're listening because we've added two incredibly bright people who have such a passion and knowledge in this area that they make my head spin in terms of how much they know and how we can succeed here. So we've added that in our organization in the last year, really, to make sure we play a leadership role here.

Great. Thanks, Dino. That's all I have.

Thanks, Amir.

At this time, there are no further questions. I will now turn the floor back over to management for any additional or closing remarks.

All right. Thank you. Thank you for joining us on this call today. We look forward to speaking with you again following the release of our second quarter. I wish you all a pleasant weekend and a very happy Mother's Day to all the moms on the call. Stay safe, stay healthy, and we'll talk to you soon. Thank you.

Thank you for joining today's event. We are now concluded. You may now disconnect.