KP Tissue Inc.

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.

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?

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.