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spk00: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to KT Tissue fourth 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 Thursday, March 10th, 2022. I will now turn the conference over to Mike Baldessara, Director, Investor Relations. Please go ahead.
spk04: Thank you, Operator, and 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 fourth quarter of 2021 for Kruger Products L.P., 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's 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 today in the call are in Canadian dollars unless otherwise stated. The press releases reporting the Q4 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'd like to ask that during the call you refer to our presentation, we prepare to accompany these discussions, which is also available on our website. We'd also appreciate that during the Q&A period that you limit your questions to two. Thank you for your collaboration, ladies and gentlemen. Now I'll turn the call over to Dino Bianco, our CEO. Dino?
spk02: Thank you, Mike. Good morning, everyone, and thank you for joining us for our fourth quarter full-year 2021 earnings call. The past few years have seen much volatility in tissue with demand swings, pulp escalation, inflation, supply chain challenges, and labor shortages. Despite all these challenges, I am pleased with how Kruger Products has performed and improved our business capabilities. Specifically related to Q4 2021, we delivered strong sales growth, but EBITDA was tempered by significant increase in inflation across many parts of our business. That being said, I am pleased by our performance in the face of volatile market conditions and headwinds in 2021. The first half of 21 was marked by destocking challenges due to the COVID-19 pandemic, while supply chain and inflationary pressure affected our business in the latter part of the year. We did regain sales momentum in the second half of 21 and closed the fourth quarter on a high note with double digit revenue growth and improved adjusted EBITDA. In response to increasing inflation, We took pricing on our Canadian business in July while managing our cash and productivity. We are looking at additional pricing and cost management as we anticipate this inflation will be a headwind for most of 2022. Now let's take a closer look at our numbers on slide five. Our revenue growth of 10.2% in the fourth quarter of 2021 mainly reflects the selling price increase in Consumer Canada and higher sales volume in the consumer segment year over year. These factors were partially offset by an unfavorable foreign exchange impact on our U.S. dollar sales. Canadian revenues increased slightly by 0.4% from the same period last year, while the U.S. improved 27%. This strong performance in the U.S. is driven by strong sales in 2021 in both consumer and AFH and a weaker prior year comparative. Adjusted EBITDA was up 5.8% year-over-year, mainly due to higher sales volume, along with a consumer selling price increase in Canada and lower SG&A expenses. These factors were partially offset by an unfavorable sales mix, inflationary pressure across the board, as well as labor challenges, particularly in our Memphis manufacturing facility. Turning to full-year financial results on slide six, revenue dropped 3.4% in 2021. The decrease can primarily be The decrease can primarily be attributed to a significant sales volume decrease in the first half of the year, driven by an industry-wide pantry deload. These factors were partially offset by selling price increases for consumer Canada and away from home and increasing demand in the second half of the year. In terms of profitability, adjusted EBITDA dropped 22.4% to $153.4 million in 2021, mainly due to the impact of lower sales volume, along with negative inflationary effects. These issues were partially mitigated by the previously mentioned selling price increase and lower SJ&A expenses. Next page, NBSK and BEK average prices in Canadian dollars dropped approximately 5% in the fourth quarter of 21 compared to the prior quarter. But over Q4 of last year, prices rose significantly as shown on slide 7. NBSK and BEK average prices increased 25% and 37% in 2021, respectively. Based on industry forecasts for 2022, NBSK and BEK prices are expected to remain at elevated levels with continued volatility. High inflationary pressure, as shown on slide 8, was a major story in the latter part of 2021, and we anticipate it will remain a reoccurring issue for 2022 for the entire industry. Freight, for example, surged more than 40% year-over-year in the fourth quarter of 2021, while natural gas prices doubled during the same period. Packaging costs, meanwhile, increased more than 15% year-over-year. As you would expect, we are also coping with rising labor costs. Consequently, we are weighing additional options to balance our cost profile with pricing and productivity in 2022. Moving on to our network modernization slides on pages 9 and 10. Year 1 of Tad Sherbrooke proved to be a major success with a ramp-up curve above our expectations for bathroom tissue and paper towels. We also announced the Sherbrooke expansion project early in 2021 and followed up with an incremental investment at the end of the year to double production capacity to 60,000 metric tons by 2024. The project's total value of approximately $350 million will effectively create a flexible tissue hub in Canada, leveraging both TAD and conventional technologies. Turning to our network in Memphis, we now expect a new facial tissue line will be up and running in the latter part of the second quarter. We are investing more than $20 million U.S. in this new facial tissue line that will allow us to produce both TAD and conventional tissue. This new line will provide future growth opportunities in the U.S. market. In terms of our Memphis operations, labor challenges continue to affect productivity in the fourth quarter of 2021. We have deployed a turnaround team to improve operations with a focus on critical asset performance and labor shortages. I'm confident we will begin seeing improvements in the second quarter at our Memphis operations. In the meantime, we're leveraging our other plans within our network, including our new Sherbrooke facility, to offset any production shortfall. Onto operational excellence. We have now rolled out OpEx to all our sites and most of our assets. We are focusing on increasing the depth of knowledge training, and culture around OPEX. Looking ahead, our focus will be on asset reliability and waste reduction in 2022. In addition, based on the initial success of our AI project in Sherbrooke, we plan to move forward with further implementation at other facilities over time. These AI projects will be focused on our supply chain, creating a predictive and prescriptive capability to manage our business. The combination of AI and automation should gradually provide additional benefits for our network. Based on industry benchmarking, AI can provide a potential 10% lift in OEE, 10 to 15% reduction in costs, and a 15 to 20% reduction in maintenance. We haven't carried out a complete assessment of these potential benefits yet, but they will increase our productivity and offset inflationary pressures for the future. With regards to our trademarks, we continue to build the equity of our current brands and new innovations with incremental marketing investment in 2021. Sponge Towels Ultra Pro continued to outperform Objectives and received three Best New Innovation awards by consumers in its first year. It also was a key contributor to our share gains in paper towel. Recently, we also launched a new brand, Fonterra. that provides consumers with a sustainable solution for all their bathroom tissue, facial tissue, and paper towel needs. Bonterra has a bundle of sustainability attributes that will make it a compelling choice for consumers. We also upgraded Purex and Cashmere Ultralux TAD products to deliver our softest and most luxurious bathroom tissue ever. I'll speak more about these innovations on the next slide. I would also like to highlight that strong activation and consumer response our brands enjoyed during the Scotties Tournament of Hearts Tournament, which we have been sponsoring for over 40 years. And 2021 marked the second year of the Kruger Big Assist program with local hockey associations. Finally, Kruger products continue to outpace e-commerce channels by growing more than 80% in 2021 through increased investment and capabilities. Now, moving to our innovations. Bonterra offers consumers a unique, sustainable solution with a bundle of features, including plastic-free packaging, high-quality FSC-certified recycled fiber, carbon-neutral production, as well as partnerships with Four Ocean and One Tree Planted, and is made in Canada. We will support this new brand with a powerful 360-degree marketing program. We're excited about our first foray through Bonterra into paper packaging. Purex and Cashmere Ultralux, meanwhile, represent significant upgrades with proprietary soft-tad technology. Consumer research confirms this new and improved bathroom tissue is superior in terms of softness, thickness, strength, and absorbency. This product will allow us to grow share in the growing ultra-premium bathroom tissue segment. In short, market-driven innovation combined with a strong brand equity and effective go-to-market strategy has delivered sustained share gains for KP Tissue. These new innovations are quickly gaining distribution and speed to shelf with our customers. The data presented on slides 14 and 15 is from Nielsen. It shows solid market share performance over a 52-week period, ending on January 1, 2022. At 34.6% share, our combined Cashmere and Purex brands continue to be market leaders in the bathroom tissue category. During the past year, our share slipped a bit off a high bar which was driven by better product availability compared to our competitors during the pandemic. Our share this year reflects a more normalized environment. During the same period, we achieved significant growth in facial tissue, reporting a 35.7% share or an increase of 4.2 points. This increase, which strengthened our number one position in facial tissue, can be attributed to strong marketing and key support from our key customers. As previously noted, the launch and strong traction of Ultra Pro sponge towels allowed us to post solid share gains in the paper towel category. Since the beginning of 2020, our share has increased by 2.2 points to reach 24%. We consolidate our strong second place through innovations in the introduction of new products, and we are continuing to make further investments in this category. We will continue to invest in 22 to support our Ultra Pro launch. our trial and repeat scores with consumers is very strong on page 16 the market recovery continues across the away from home segment in q4 2021 and benefited from a fast recovery in the u.s we estimate volume remains approximately five percent lower than the pre-covered levels in the same quarter of 2019. it should also be noted our fh segment relied on higher paper outsourcing in Q4 2021 versus the third quarter with a shift of internal paper tissue capacity to meet our strong consumer demand. Finally, we announced the price increase in away from home that became effective on January 1st, but escalating inflationary pressure on raw materials and transportation costs required us to implement incremental pricing, which is effective in Q2 2022 that will gradually improve profitability.
spk01: I will now turn the call over to Mark. Thank you, Dino, and good morning, everyone. Please turn to slide 17 for a summary of our financial performance in Q1 2021. Revenue increased 10.2% to $424.1 million in the fourth quarter of 2021 from $385 million in the fourth quarter of 2020. On a sequential basis, revenue was up 8.4% from $391.4 million. Adjusted EBITDA improved 5.8% to $38.3 million in Q4 2021 from $36.2 million in the same period last year, but decreased 5% sequentially from $40.3 million in Q3 2021. From a margin perspective, adjusted EBITDA amounted to 9% in Q4 2021 compared to 9.4% in Q4 last year, and 10.3% in Q3 2021. In the fourth quarter of 2021, net income totaled $42.3 million compared to a loss of $28.5 million for the same period last year. The net income increase can primarily be attributed to a significant income tax recovery and lower other expense, partially offset by lower adjusted EBITDA, higher interest expense, and other finance costs, as well as higher depreciation and amortization expenses. In the quarterly segmented view on slide 18, consumer revenue increased 9.2% year over year and 9.5% sequentially to $364 million in the fourth quarter of 2021. In the away from home segment, revenue grew 16% year over year and 1.9% sequentially to $60.1 million. Consumer adjusted EBITDA amounted to $43.7 million in the fourth quarter of 2021 compared to $44.2 million in Q4 2020, while adjusted EBITDA margin was 12% and 13.3% for the same periods, respectively. Sequentially, consumer adjusted EBITDA was up by $4.6 million, while margin improved slightly. For the away-from-home segment, adjusted EBITDA amounted to minus $1.7 million in the fourth quarter of 2021 compared to minus $2.4 million in Q4 2020 and $2.2 million in Q3 2021. Corporate and other costs were $3.7 million in Q4 2021 compared to $5.6 million for the same period last year and $1 million for Q3 2021. On slide 19, we review the year-over-year revenue growth for Q4 2021, which amounted to $39.1 million, or 10.2%. This increase can be attributed to higher consumer sales volume in the U.S., selling price increase in consumer Canada, and heightened away-from-home sales volume. These factors were partially offset by a negative foreign exchange impact on U.S. sales. On a geographical basis, revenues in Canada improved 1.1 million or 0.4% year-over-year, while U.S. revenues grew by 38 million or 27%. As Dino previously mentioned, this strong performance in the U.S. should be placed in the context of a pantry deload in Q4 2020 versus growing demand in Q4 2021 coming out of the pandemic. In addition, we expanded at existing customers in the US. On slide 20, we provide further insight into our Q4 2021 adjusted EBITDA, which increased year over year by 2.1 million or 5.8% to 38.3 million. The adjusted EBITDA margin was similar at 9.0% in Q4 compared to 9.4% in Q4 2020. The increase in adjusted EBITDA dollars was primarily driven by higher sales volume, the selling price increase in Consumer Canada, and lower SG&A expenses, and the net favorable impact of foreign exchange fluctuations. These factors were partially offset by unfavorable sales mix, higher pulp prices, and other inflationary cost pressure. Labor challenges at our manufacturing plant in Memphis as well as higher freight rates and warehousing costs. Now let's turn to slide 21, where we compare revenue in Q4 2021 to Q3 2021. Revenue was increased by 32.7 million or 8.4% sequentially. This growth was mainly driven by higher consumer sales volume in both the US and Canada, given AFH sales and FX fluctuations were relatively stable quarter over quarter. In terms of geography, revenue in Canada increased by 11.7 million or 5%, while revenue in the U.S. grew by 21 million or 13.3%. On slide 22, Q4 2021 adjusted EBITDA decreased sequentially by 2 million or 5% from Q3 2021. This was due to several factors affecting costs, higher pulp costs and inflation, increased freight costs, labor challenges in Memphis, increased overhead absorption, higher advertising expenses, and a negative foreign exchange impact. These items were partially offset by the higher sales volume and full benefit of the Consumer Canada pricing increase, which took place partway through Q3 2021. In terms of adjusted EBITDA margin, it was impacted by further inflation, with a margin of 9% in Q4 2021 compared to 10.3% in the previous quarter. Let's turn now to our balance sheet and financial position on slide 23. Our cash position stood at $151 million at the end of Q4 2021, an increase versus $118.6 million at the end of Q3. The $32.4 million cash improvement was mainly due to reduced working capital. Overall, total debt at quarter end stood at $968.9 million, up $14.5 million from the end of Q3. The variation reflects mainly the final debt draw for the Tad Sherbrooke project. Overall, our net debt to last 12 months adjusted EBITDA leverage ratio decreased to 5.3 times in Q4 2021 from 5.5 times in Q3 2021. leverage decreased due to the lower level of net debt from a higher cash position and a slightly higher last 12 months adjusted EBITDA. At quarter end, total liquidity representing cash and cash equivalents and availability from revolving credit agreements was a healthy $263.8 million. In addition, 86.5 million of cash was held for the Tad Sherbrooke and Sherbrooke expansion projects. I will conclude my section by reviewing CapEx on slide 24. Total CapEx amounted to 146.6 million in 2021, including 98 million for Tad Sherbrooke, and the project also had 6.9 million of accrued and unpaid capital spending as of year end. We expect CAPEX to range between $190 to $210 million in 2022, including incremental investments announced for the Sherbrooke expansion project. Thank you for joining us this morning, and I'll now turn the call back to Dino. Thank you, Mark.
spk02: On slide 25, I just want to give you a few words on our sustainable development program. Our commitment to sustainability is a key pillar of our strategic plan and part of the DNA of our organization. We demonstrated this with the recent launch of the Bonterra product family. With Bonterra, the consumer will have a choice at the shelf for a better planet. We plan future sustainability-focused innovations under the Bonterra brand that fulfills the brand promise. I will conclude with slide 26. We continue to deliver top-line driven growth despite a challenging environment. The strong sales momentum helped us absorb escalating costs, but we're weighing additional options to offset our cost profile with pricing and increased cost management. In terms of innovation, we recently launched Bonterra, a new sustainability-focused brand, and we also upgraded our Cashmere and Purex Ultralux products. These launches will be supported by a strong marketing program. We continue to invest in our established brands to build share in Canada while expanding the reach of White Cloud in the U.S. Our investments support our new innovations, our legacy brands, and our corporate properties like Cashmere Collection, NHL, and Scotty's Tournament of Hearts. At our TAD facility in Sherbrooke, we're exceeding our ramp-up curve, and the incremental investments to the Sherbrooke expansion project will create a flexible tissue hub coming on stream over the next three years. Our focus on operational excellence, including our OpEx program and AI investments, will help us improve manufacturing and supply chain performance for the future. The away from home segment is well positioned for recovery and end user markets and will benefit from price increases, strengthening, volume, and operational excellence. And we continue to invest in our organization and culture to drive growth for the future. This will be even more important as we begin to return to office and in-person connections. Now turning our attention to our outlook for Q1 2022. We are seeing consumer behavior and sales increasingly return to pre-COVID levels in both business segments, and we project strong sales growth for the quarter. However, significant cost inflation across the supply chain is projected to continue affecting results in the near term. Our mitigating actions will have a lagged effect compared to the inflation impact. As a result, Q1 2022 adjusted EBITDA is expected to be in the range of $30 to $35 million. Looking ahead to the full year, we intend to leverage our ongoing investments, innovations, and share gains to drive revenue growth while pricing the business and managing costs to offset inflation. We will now be happy to take your questions.
spk00: Thank you. If you'd like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press star one again. We'll pause for just a moment to compile the Q&A roster. And our first question comes from Hamir Patel from CIBC Capital Markets. Please go ahead. Your line is open.
spk05: Hi. Good morning. Dino, given all the inflation you referenced and the lag in inflation in implementing price, uh, realizations, uh, for, for 2022, uh, just based on the pricing initiatives, uh, that you've announced so far, you know, what, or, and, and, you know, might have planned over the near term, what kind of top line growth would you expect, uh, from pricing this year?
spk02: Yeah, I'm not going to give you, we don't usually give you that guidance, Samir, in terms of what our top line growth will be. I would say we'll be strong. We continue to expect to grow share, so we should beat market, both US and Canada and AFH. It'll be driven by not just pricing, it'll be driven by cases, moving cases through. Obviously, we have Sherbrooke on stream. We'll have the new facial line in Memphis for half a year. So I continue to project that we will have strong sales momentum i won't give you a number directly now you have to you'll have to see that as we we report um but uh pricing you know getting back to the inflation question i mean anybody in any industry now is is obviously dealing with in many cases unprecedented situations with not only inflation but but availability and i think our approach has been Pricing is one tool, and obviously we don't use it lightly because it has impacts, could have impacts to our brands, but we're also looking at sales momentum and productivity and cost management to offset. We would never do anything that's going to jeopardize the long term, so these are all things that we can do to tweak, if you will, our cost profile to minimize the impact of inflation.
spk05: Great. Thanks, Dino. That's helpful. And just given the competitive market for private label in the U.S., that there's been some calls by some of your competitors for more consolidation in this space. I was curious to get your thoughts on how you think about potential M&A opportunities for KP to accelerate the growth in the U.S. market.
spk02: Yeah. You know, when you've got a business like Tissue that's so capital-intensive, it has to rely on scale. You've got big suppliers and big customers. And, you know, some of the Tissue, particularly after you get past the top three, are, you know, relatively small compared to big suppliers and big customers. I also support the fact that this industry needs to consolidate how when It happens, I don't know, but I, you know, I believe that there's got to be some, there's got to be a scale play for the mid-tier tissue manufacturing companies. As far as, you know, some of that will be organic growth, of course. You'll see it on our side, that some of it may be M&A or partnerships or other combinations. I think it's all on the table. As far as M&A, Amir said before, we look at everything and talk about nothing, so we continue to keep our eyes open and be actively involved where we can on something that may fit our long-term strategic plans.
spk05: Fair enough. Thanks, Dino. That's all I had. I'll turn it over. Thanks, Amir.
spk00: Our next question comes from Sean Stewart from TD Securities. Please go ahead. Your line is open.
spk06: Thanks. Good morning, everyone. A couple questions. Thanks for all the detail on the Q4 cost inflation bucket. That's useful context. I'm just trying to sort out for your Q1 EBITDA guidance, cost inflation continuing embedded in that guidance. Can you give us a sense? I assume it's freight. gas, a little bit of pulp in Q1, but any one of those cost items that's more detrimental to the near-term outlook for the company?
spk02: Yeah, as you know, this curve, Sean, keeps moving, and we're trying to catch it. We had taken an action last year to kind of equalize, and then the inflation curve is moving on us again across many factors. I would say the biggest issue that we are facing right now and probably for some period of time is freight. The freight dynamics and some of it's structural, some of it may be more situational, but the cost of freight, the escalation of freight, the availability of carriers, the disequilibrium that's happening globally with respect to freight is the piece that for us has been our constant battle. Because not only is it affecting cost, it also affects our ability to service our clients, our customers, and get our product to the consumer. So we have, on something like freight and for fast-moving products like ours that need to get to the shelf quickly, we are approaching this challenge by absolutely making sure we secure the assets and making sure that our product gets to the shelf. that's our first priority. Our second priority is to try to cut that cost as much as we can and certainly longer-term structurally minimize it. But freight's the one right now that we saw it in late Q4. We're seeing it in Q1. I don't think it'll stay at these elevated levels, but it'll continue to be a headwind for this industry and for many industries, of course, going forward. And then you've got, of course, the rising cost of fuel and other dynamics at play.
spk06: That's useful detail. Thanks on that. I also wanted to ask on Sherbrooke, you touched on the ramp up being ahead of schedule. Can you give us any context on benchmarks specifically that you've outpaced relative to expectations? Just a little bit more detail. And following on that, the 2022 CapEx guidance, how much beyond 2022 would you have for any remaining CapEx at Sherbrooke, if any?
spk02: Yeah, I'll let Mark answer the CapEx question in a second. You know, I don't have a specific industry benchmark number that I could say we beat. I could just say, you know, we have lots of people in our organization that have worked at other companies and long careers in tissue. Many of them would say it's the best startup they've ever seen, virtually a vertical startup. So I'll give you that in terms of context. You know, we beat our internal numbers by anywhere from 50% to 75% as it relates to what we were expecting. And it's been necessary. You know, as you saw, our second half sales were very strong. We beat last year on second half sales, which was a pandemic year. And we needed Sherbrooke. And then we've been using Sherbrooke also to support Memphis. So it's been really important in our network and, of course, the launches of of Ultra Lux and Ultra Pro on sponge towels have all come, you know, coming out of Sherbrooke. So that site's done a lot of work, heavy lifting for its first year, and it's responded incredibly, and we expect it to continue to do that in 22. You know, that team there has really stepped up in the leadership and the culture that they're building there. We expect Sherbrooke to be a shining star, not just in year one, but it's going to be a dynasty for us.
spk01: Sean, it's Mark here. Beyond 2022, when we're speaking about CapEx, we typically wouldn't give guidance, but I can give you some general comments about the Sherbrooke expansion project spending $350 million. That runs all the way through 2024, where we have the startup of our paper machine expected in 2024. So we'd have a proportional spend of that $350 million as we start from from groundbreaking in the spring all the way through to the end of 24.
spk06: Thanks, Mark. That's all I have. Thanks very much, guys. Thanks, Sean. Thank you.
spk00: Our next question comes from Zachary Evershed from National Bank Financial. Please go ahead. Your line is open.
spk03: Good morning. This is actually Nathan calling in for Zach. So the first question I have is with office workers starting to head back into the office, If AFH demand is picking up and we're seeing substantial upward pressure on recycled fiber, so what's your view on where pricing settles once SOP generation has a chance to catch up? And can you remind us again of your exposure to various fiber types?
spk02: Good question, Nathan. I would say certainly there has been a shortage driven by more people working from home, and we do believe that there will be some benefit as workers are coming to office. You probably got a bit of an offset to that with the world going much more digital and less paper produced, even whether they're at home or at the office. So we see a continued pressure on assorted office paper costs. We do believe it will continue to keep a – good cost-benefit versus virgin fiber. So our projections are, you know, when we look at pulp, they generally move in the same direction. So we're seeing pulp escalating, we're seeing shorter office waste. I'm not going to give you a prediction of where I think it's going to lay because whatever I tell you will be wrong. And, you know, the market's very volatile. But I do think that the situation will improve with supply. on that side of it. As far as exposure, you know, we don't really talk about exposure to different types. I mean, clearly the biggest pulp types we buy are hardwood, mainly BEK and NBSK, which I talk about in my graphs as being the other one. And then we do buy recycled fiber. As it relates to our fiber supply, we generally source from 10 to 12 different providers in North America primarily. So we have, I think we're well positioned from a supply point of view to ensure stability of supply on pulp. And we have extended some of our pulp coverage in our facilities, physical pulp, just given the supply chain challenges and want to make sure that we can absorb any temporary disruption of the supply chain by having more pulp on site.
spk03: Thanks for the clarity. And another one, can we get an update on your desheeting strategy in light of the inflation headwinds on deck?
spk02: Well, you know, Nathan, I worked in the food business and, you know, Pack size adjustments were always a method for dealing with cost inflation. Consumers hate it. Customers hate it. In fact, I hate it, to be honest with you. So, it is certainly something we consider, and more from a make sure we're in a competitive position. We are not over-sheeted or under-sheeted, because you want to be sure you're competitive to the marketplace. So we look at it more holistically from a marketplace competitive price gap management point of view than we do specifically just to reduce costs. So there may be some of that in our plan, not a lot, and we will do it more from a marketplace view than a we need to cut costs as cut sheets approach.
spk03: Thank you. That's helpful. And if I could sneak in one more question, looking at AFH and consumer dynamics, How does the balance of in-house production settle out after we return to normal, and how does that play out in margins?
spk02: Yeah, our goal was, even in Q4, to be self-sustained, particularly on paper. We are generally on converting, but on paper, through our network, we had strong lift in Q4 consumer business, so we had to go a little more outside than we expected. With Sherbrooke coming on board and then Phoenix coming on board, or sorry, the second plant that we announced at Sherbrooke with the conventional paper machine, our goal is to be self-sufficient on paper in AFH. And that is part of the long-term strategy. It's difficult to make money when you're buying paper on the marketplace. And the fact that we've got significant capacity coming on stream with paper, We should be self-sufficient on paper production. We generally are in converting, except for maybe some unique products. So that'll help the cost base. Then, as I've said, our sales line is improving, not just from AFH. And one thing I do want to highlight, it's not just improving because the market's opening up. It's also improving because our AFH team are getting new business. So we're dealing with new customers or broader business with some existing customers. So it's also not just market related. It's also the fact that we are, if you will, growing share in some of those categories. And of course, they price their business as well. So that'll help with the profitability curve on AFH short term and definitely as a long term model for AFH profitability.
spk03: Thank you. That's very helpful. That's all I had. I'll turn it over.
spk00: Our next question comes from Frederic Tremblay from Desjardins. Please go ahead. Your line is open.
spk08: Thank you. Good morning. Good morning, Frederic. A couple questions on Bonterra, specifically the growth opportunity there. I guess the reason for my question is I'm just wondering how you're seeing it in terms of does this product bring you new growth opportunities, new customers potentially, or is a big portion of those future sales expected to come from, you know, existing customers switching from one of your existing brands to a more sustainable product? Just maybe your thoughts on that.
spk02: Yeah, I think it comes from both. So we, I don't know if, I guess, you know, Frederick, we had the brand EnviroCare, which was our first foray into sustainability, did well for us, and then now we've elevated it and and chose to launch Bonterra, which is really the reincarnation with additional benefits versus EnviroCare. So we think we'll capture all those consumers. But we also think there's lots of consumers out there that are not just the narrow group of real diehard sustainability-focused consumers, but there's also those that just in small ways want to do better for the environment, whether it's how they live their lives or what products they buy. So we think there's a great opportunity there. Some of that may come from our base business, but we expect we will be able to get new consumers from other brands, given the compelling bundle that Bonterra will offer that really nobody else in the marketplace right now offers. So it's both. It's some existing consumers, and then we do believe we'll attract new consumers to the Kruger portfolio.
spk08: Okay, great. And just given the sustainability aspects of the product, are you able to, you know, is this a higher price, higher margin type of product, or is it pretty similar to your existing margin profile?
spk02: It's a positive margin product for us. You know, by the way, every innovation we try to do, we try to make margin accretive, so it's not just Fonterra. You know, we're always looking to launch something in the marketplace that's margin accretive. or at least parity to our existing products. So I'd say Bonterra falls into that. From a pricing point of view, on an average price basis, Bonterra will be similar to our other sponge and cashmere products. What will be different is what we've done with Bonterra is we have less of a regular price and less depth of features so that the bandwidth, if you will, of what consumers will see will not be as wide as other tissue brands out in the marketplace. Right now, tissue tends to be dominated by high regular price and a deep discount price. This one will play more within a tighter range, and the average price should be very similar.
spk08: Okay. And just last question for me on the Memphis startup of the new production line. Just given the current labor challenges that you're seeing at that facility, are you implementing some steps or initiatives to ensure that the startup and the ramp-up of that new line goes smoothly?
spk02: Yes, it's a great question. And what we've done, Frederic, is we've basically provided a dedicated team, mostly from Memphis, but also from resources from across our other sites, a dedicated team to focus on the startup so that it is treated as an isolated project and not part of the ongoing manufacturing turnaround that we're doing as part of the greater facility. So I don't anticipate that we will have any labor challenges as it relates to the startup. There's an experienced team there to make sure it goes successfully.
spk08: Great.
spk05: Thank you.
spk00: Once again, to ask a question, please press star followed by the number one on your telephone keypad. Our next question comes from Paul Quinn from RBC Capital Markets. Please go ahead. Your line is open.
spk07: Yeah, thanks very much. Morning, guys. Just following up on that away-from-home question, when do you expect to be self-sufficient in paper?
spk02: Well, to be honest with Paul, we were expecting to be self-sufficient in paper in Q4, and then consumer sales ended up going stronger. So I think we will get there in 2022. between Sherbrooke continuing to ramp up, and even though maybe we don't use a lot of TAD in AFH, it'll have a collateral benefit across our network to free up some paper. I think we're getting more out of our existing assets through OpEx and turning around Memphis, which is, I noted, a challenge for us on Q4. So I think when those things come into play, we should be self-sufficient in 2022. If we have some crisis or some tight capacity moments, obviously we'll go to the market. But at this point, I would say we're generally going to be self-sufficient on paper in 2022.
spk07: So does that suggest you'll be better than EBITDA break even at some point in 2022 just because of that self-sufficiency?
spk02: Yeah, I would say, you know, last year we, as you know, if you look at the numbers that we reported last year, we lost money. We had a strong Q3 and then a little softer Q4. I would anticipate that AFH should start turning around into a positive space as we look at the full year of 2022. There may be some choppy quarters depending on inflation pricing coming on board. And then, as I said, you know, paper availability. But our approach should be that, you know, AFH, our expectation is AFH will be a positive contributor, neutral to positive contributor on EBITDA during 2022. Okay.
spk07: And then it sounds like you finished your artificial intelligence phase one projects. Can you give us some examples of those and what's expected in phase two as well?
spk02: Yeah, we actually haven't finished our project at Sherbrooke. We finished, I think there's four stages that we're looking at. We finished phase one, starting phase two, good success out of phase one as it relates to OE. A lot of it is around getting the centerlining, centerline predictability. We're moving now to production planning, so we integrate the production plans into that. um also looking at you know things like waste reduction so i'm not going to get into all the specifics other than uh we had a we had a four phase approach at sherbrooke we're through the first phase moving to the second phase uh and now we're starting to talk about where do we go next in terms of what facility uh do we start rolling this out at so it'll it'll be with us over several years as we uh break and speed up with respect to the investment and the returns that we get across the different sites. For me, when we did this, obviously we did it at Sherbrooke because that was the best place where we had the new assets and the technology platform to do it. At some of our other sites, we're going to have to beef up our technology platform and our data capture to be able to bring it on board, so we'll need to do some of that ahead of time before we're able to bring it to our other facilities.
spk07: Okay, and just about everybody's reported Q4 results, and everybody's highlighted freight being a big issue, but most are in the 20-25% range. You know, year over year, you're up 40-45%, and I just can't get my head around what you guys are doing different than somebody else in the space.
spk02: Maybe some of the guys reported earlier, you know, we're trying to give you kind of the latest data. There are some of our lanes that are more expensive, particularly in the southeast. I don't know how to compare this to our competitors. So, you know, our cost that we're giving you is kind of a look at both external metrics and external benchmarks and internal metrics. So I can't comment on why others are giving you the numbers that they're giving you. given you based on our profile and how we ship in the lanes that we have relative to our production facilities, it is in the range that you're seeing on that page.
spk07: Okay, and then just lastly, any interest in NTT technology?
spk02: Are you trying to set me up here, Paul? I apologize for laughing. It just seems an interesting question. Our focus is really on TAD for the ultra-premium and LDC or DCT or whatever terminology others use for the mainstream. We feel between those two technologies, that gives us a lot of flexibility to produce a wide range of quality products. We're really going to stick with what we know. and what we're good at and what has been a proven success for us. How's that?
spk07: Well, that sounds fine. Thanks very much. Okay, thanks, Paul. Thanks, Paul.
spk00: We have no further questions in queue. I'd like to turn the call back over to the presenters for any closing remarks.
spk02: Thank you. I haven't had a laugh with some of the questions like that one because, you know, we always do a list of questions we might get. We didn't have that one on the list, Paul, so... I'm glad I was able to hopefully answer it. Thank you for joining us on this call today. We look forward to speaking with you again following the release of our first quarter results for 2022. We should thank you all and have a great day.
spk00: This concludes today's conference call. Thank you for your participation. You may now disconnect.
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