KP Tissue Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to KP Tissue Third Quarter 2021 Results Conference Call. At this time, all participants are in a lesson-only mode. Following the presentation, we will conduct a question and answer session. Instruction will be provided at that time for you to queue up for questions. If anyone has any difficulties airing 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, November 12th, 2021. I would now like to turn the conference over to Mike Baldessera, Director, Investor Relations. Please go ahead.

Thank you, operator, and good morning, ladies and gentlemen. My name is Mike Baldessera. 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 2021 for Kruger Products LP which I'll refer to as KPLP 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 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 2021 results will publish this morning and will be accessible from our website at kptissueinc.com. Please be aware that our MD&A will be posted on the website and will also be available on CDAR. Finally, I'd 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'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 for our third quarter earnings call. We are pleased with our third quarter results despite a macro environment that is impacted by COVID, inflation pressures, and supply chain disruptions. On the COVID front, we are seeing a near-end normal return to pre-pandemic demand after a first-half inventory deload across the system. We are also seeing recovery in away-from-home markets and pockets of elevated consumer demand in the U.S. On the inflation front, we are beginning to see the impact of escalated costs across our whole business system. This is particularly evident in costs such as sorted office paper, packaging, freight, and energy. On the supply chain disruption side, we have not seen any major impacts to our raw materials at this point, but continue to monitor the situation closely. One area that we have seen some impact on is securing freight carriers, particularly in the southeast United States. This has resulted in increased costs and some delayed deliveries. One last area I will talk about later is the impact of labor shortages. This is an issue across all industries and has had the greatest impact in our Memphis facility. Given this environment, we remain agile and flexible to respond to the changing landscape to ensure we continue to grow and deliver strong performance. We are building contingency plans, including additional pricing and cost reductions, to mitigate any costs. With that context, let's now turn our attention to the numbers on slide 5. Our revenue growth of 6% for the third quarter of 2021 reflects the benefit of our pricing action in our Canadian consumer segment, combined with higher sales volume. In the way from home business, we saw gradual improving commercial end markets and the benefits of a successful execution of a recovery plan. Revenue is also 15.3% on a sequential basis versus Q2. Canadian revenues increased 4.6% from the same period last year, while the U.S. improved 8.3%. We had some negative FX impact on the U.S. sales And in constant currency, the increase was actually 14.4%. This strong performance reflects the faster recovery of our US away from home business and also a relatively weaker quarter last year during the pandemic. Our adjusted EBITDA was down 12.8% compared to the same period last year due to the impact of higher inflationary costs and near record pop prices. With the benefits of the Canadian pricing action, adjusted EBITDA improved sequentially to 40.3 million versus Q2 of 2021. HALP and BEK have remained at near peak levels, and their rise has been quite dramatic over the last year, as you can see on page six. Third quarter NBSK average prices in Canadian dollars increased 29% versus prior year, while BEK average prices rose 42% compared to prior year. For the balance of the year and heading into 2022, we expect NBSK and BEK prices to remain elevated. Also impacting our fiber costs and not reflected on this chart is sorted office paper, which has seen a greater than 100% increase over 2020. In terms of our network on slide seven and eight, The paper machine and converting ramp up at Tad Sherbrooke continues to stay ahead of our startup plan. In fact, it recently hit our substantial completion hurdle as a commercial facility. In June, we announced additional investments of $25 million in Sherbrooke for an artificial intelligence project with $6.7 million to be contributed by both levels of government. This will bring our total investments at that site to over $600 million. This project consists of creating and implementing a digital twin of the entire plant supply chain. The virtual supply chain model will be using real-time data augmented by predictive and prescriptive AI capabilities to improve the plant's overall performance. This should help us serve our customers and consumers more efficiently than ever. It will also raise the capability of our state of the art facility and provide us learnings to roll out AI to other facilities. we have already begun to see strong benefits from the first phase of our AI program at this early stage. As for our Sherbrooke expansion, we are currently finalizing the project scope. Engineering, environmental, and geotechnical studies are progressing well. We are focused on finalizing the scope to ensure this new facility and its assets will meet our future growth needs across all our segments and is synergistic with our existing network. Moving on to the next slide. In Memphis, as indicated before, we are investing more than $20 million in the new facial tissue line that will allow us to produce both TAD and conventional products. This project is progressing well. However, recent supply chain impacts on this equipment may slightly delay our startup. Once operational, this new line combined with the new Sherbrooke facial line will increase our North American capacity and improve our position in this category. Let me move on to the OpEx program. Our waste reduction initiatives are showing positive results in most of our sites. We are also pleased to report that overall equipment efficiency is showing an upward trend. That being said, beginning in late the second quarter of 2021, we began to see labor shortages in our Memphis plant, that have affected productivity and resulted in increased incremental costs in the third quarter. These labor challenges are not unique to us, and we expect this labor issue will persist into the fourth quarter. We are establishing several measures to mitigate its impact. Our ability to support Memphis with our other plants is a testament to the strength of our North American network and continued investment for long-term growth. The goal with all our network investments is to deliver improved product capability, capacity, and cost efficiencies in both conventional and premium tissue segments in North America. Let me move on to slide nine. We continue to focus on building the equity of our brands with increased marketing investments. This in turn has helped drive market share gains. In short, we are extremely pleased by the overall performance of our brands in all categories since 2019. Our unapologetically human campaign employing purpose-driven messaging continues to be recognized worldwide with 17 awards in total. In early October we had our 18th annual cashmere collection fashion show. The collection made of sheets of cashmere bathroom tissue served as the annual kickoff to the October breast cancer month. This year the event was a huge success with an in-person audience. The marketing reach was further extended with the first-ever 30-minute special aired prime time on the CTV network. More recently, the successful launch of Sponge Towels Ultra Pro, based on very strong six-month trial and the addition of new category users, has led to further share momentum in towels. This made-in-Canada ultra-premium product is ahead of our plan on all metrics, including revenue, share, distribution, and trial. Like many other companies, we are seeing strong growth in e-commerce. We have added additional resources to capitalize on the shift, and year-to-date our e-commerce sales have increased over 80% versus the previous year. We also have been working on new on-trend innovations that will be ready for launch in the first quarter of 2022, which I'll speak about at our next earnings call. The data presented on slides 10 and 11 is from Nielsen. It shows solid market share performance over a 52-week period ending on October 9th, 2021. Our stable supply position, our innovation, strong customer partnerships, and continued marketing are all factors that supported our strong overall market share gains. With a combined 35.6 share, our cashmere and purex brands are the leaders in the bathroom tissue category. Looking back since 2019, this represents an increase of 2.4 share points. During the same period, we achieved notable growth in facial tissue, reporting a 35.5 share or an increase of 4 share points. Scotty's has strengthened its position and is a clear number one with many Canadian consumers who consider the brand synonymous with facial tissue. As previously noted, we also posted solid market share gains in the paper towel category. Since the beginning of 2020, our share has increased by 2.6 points to reach 23.2%. This was driven by strong marketing and sales execution across our entire sponge towers lineup, and we will continue to make further investments in this category. On page 12, Away From Home delivered positive adjusted EBITDA as the business is progressing across various areas and benefiting from a faster recovery in the US market. We estimate the volume remains approximately 10% lower than pre-COVID levels compared to the same quarter in 2019. We are also witnessing the benefits in away from home from increased in-house paper production, which translates into lower costs and higher quality. This combined with improved volume, higher asset utilization, and cost reduction initiatives led to strong results for the third quarter. And to offset overall inflation costs, We've also implemented a new price increase in Away From Home that will be effective in January 2022. The benefits will fall through the P&L with contract renewals beginning in Q1 2022. I will now turn the call over to Mark.