KP Tissue Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the KP Tissue second quarter 2022 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 the zero for your 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, August 11th, 2022. I would now like to turn the conference over to Mike Baldessara, Director, Investor Relations. Please go ahead.

Thank you, operator. Good morning, ladies and gentlemen. My name is Mike Baldessara. I'm the Director of Investor Relations at KP Tissue Inc. The purpose of this conference call is to review the financial results for the second quarter of 2022. 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 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 Q2 2022 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 ask that during the call to refer to the presentation We've prepared to accompany these discussions, which is also available on the website. We'd also appreciate that during the question and answer period for you to limit your questions to two. Thank you for your collaboration. Ladies and gentlemen, I will 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 second quarter earnings call. We delivered another strong quarter of double-digit revenue growth in Q2 2022, but the depth and breadth, and speed of inflation severely impacted our operating results and lowered profitability. We expect a partial recovery in the third quarter as successive price increases begin catching up with the inflationary curve, productivity gains are realized at our Memphis operations, and extensive cost management initiatives take effect. In the fourth quarter, we anticipate a full recovery based on peak pull prices and reduced freight rates, along with additional pricing adjustments. Consequently, we are highly confident about returning to normalized profit margins in the near term as the fundamentals of our business remain strong. Let's take a look at our financial performance on slide five. Robust revenue growth of 17.1% in the second quarter of 2022 mainly reflects selling price increases during the last 12 months, higher sales volume in the consumer segment and significantly higher sales volume away from home segment as the business continues to recover from the impact of COVID-19. From a geographic perspective, revenue in Canada increased 9.1% year-over-year, while revenue in the U.S. grew 31.9%. In terms of profitability, adjusted EBITDA decreased to $11.8 million in the second quarter of 2022, mainly due to significant inflation on pulp manufacturing costs and freight rates, as well as higher SG&A expenses to support our Bonterra Ultra Luxembourg count launches. These factors were partially offset by higher sales volume and selling price increases. We believe that Q2 2022 represents a trough in terms of adjusted EBITDA, As outlined last quarter, we have adopted a multifaceted strategy to counter inflationary pressure, including price increases across all our segments and regions, cost management initiatives through reductions in working capital and discretionary capital spending, as well as productivity gains. These actions will begin to gain traction in the third quarter and enable us to exit the fourth quarter with a return of stability. Let's take a look at the dramatic rise of pulp on slide six. NBSK and BEK average prices in Canadian dollars increased more than 50% in the second quarter of 2022 from the previous quarter, reaching record levels, while year-over-year prices rose markedly too. NBSK and BEK average prices increased 13% and 21% in Q2 2022 respectively. Based on industry forecasts for 2022, NBSK and BEK prices are expected to remain at elevated levels but with continued volatility. Turning to slide seven, pulp or fiber as a whole and freight expenses are two biggest cost items that were affected by inflationary pressure. Freight rates were up more than 35% in the second quarter of 22 compared to the same period in 21, while natural gas prices soared in excess of 150%. Average packaging costs continued to increase more than 15% year over year and finally labor expenses rose approximately 5% in the second quarter of 2022. The breadth and magnitude of these increases added up to an additional $45 million in expenses year over year in the quarter, with pulp and freight having the largest impact. We do expect inflation levels have peaked as we enter the back half of the year. To counter inflationary pressures, we have taken pricing actions and extensive cost management actions, as demonstrated on slide 8, We have implemented several price increases across our consumer and away from home divisions, both in the U.S. and Canada. We led with selling price increases last year and followed up with several price hikes in the successive quarters to catch up with ever-increasing inflation. We do believe with the implemented and announced pricing that we have caught up to the inflation curve and will deliver normalized margins in the fourth quarter. Altogether, we increased our average prices by 6% to 8% in Q2 22 compared to the same period in 21 and estimate an additional 8% to 10% benefit impact in the second half of the year from announced price increases that were implemented in the second half. Despite all the announced pricing, the lag of industry implementation, which can take 6 to 12 weeks, has created an inflation impact for us in the quarter. In addition to pricing actions, significant cost management plans have been applied through the organization. Capital spending has been reduced. Working capital has been lowered. Productivity has increased. And discretionary SG&A has been cut. In short, we are taking inflation on several fronts to return to profitable growth in the near term. Most of these actions will begin benefiting our profit in Q3. Moving on to our network modernization slide on page nine. Our Tad Sherbrooke facility continues to exceed ramp up plans while phase two of our AI implementation is progressing according to plan. In terms of our Sherbrooke expansion project, the startup for our bathroom tissue line is now expected for Q1 2023 with the hiring and training phase on track. Startup dates for the facial line and paper machine are scheduled for 2023 and 2024. But we're keeping a very close eye on the potential supply chain challenges and inflationary pressure that may come our way. Turning to our Memphis performance on slide 10. Our operations continue to be a drag on our overall business, but they are recovering. We estimate that output in the second quarter increased 12% versus the previous quarter. A key reason for this improvement can be attributed to a stabilized labor situation with our Memphis operations fully staffed and trained in the second quarter. We have also reignited our OpEx program with third-party partners to improve efficiency. In addition, we have made significant investments on equipment maintenance and waste management programs. As a result, we believe that the Memphis Dragon profitability peaked in Q2 2022, and we're anticipating substantial production improvements in Q3 and beyond. The Memphis lower production was offset by other plants in our network. I would also like to briefly comment on the startup of our new facial tissue line in Memphis. It was up and running in July and surpassed our early growth curve. This new facial line represents an investment of approximately $28 million Canadian and will produce both TAD and LDC products, thus enabling us to accelerate growth opportunities Now let's move to ongoing support for our consumer brands on slide 11. Discretionary marketing spending has been reduced for the full year in response to the inflationary pressures. However, remaining investments are mainly focused on in-store and purchase driving activities to mitigate the impact of price increases. Given industry-wide price hikes, it's imperative that we continue to support our brands to maintain consumer awareness and strong sales during this inflationary cycle. As such, we're building strong awareness and trial-driving activities for recently launched Bonterra, our new sustainability product platform. We're also supporting our new and improved Ultralux and White Cloud brands with similar trial-driving activities in both Canada and the U.S. In addition, I'm pleased to report that SpongeTel's Ultra Pro continues to perform well in the marketplace. Finally, on e-commerce, our e-commerce sales were up more than 20% year-over-year in Q2 2022, well ahead of the total category, and this allowed us to capture an additional 600 basis points. The data presented on slide 12 is from Nielsen. It shows market share performance over a 52-week period ended on June 18, 2022. We have seen a slight decline in shares sequentially for our bathroom tissue and paper towel brands to 34% and 23.8% respectively in the second quarter. As for our market-leading facial tissue category, our share climbed to 36.7% from 36.2% in the previous Nielsen report. On slide 13, the recovery in the away-from-home market continued throughout North America during the second quarter. We estimate volume was approximately 30% better in the second quarter of 2022 than Q2 2021. Property management remained one of the end-user segments that is still below pre-pandemic levels. Inflationary pressure on transportation, fiber, and energy was also persistent and away from home in Q2 2022. Multiple price increase over the last 12 months will enable us to catch up the inflationary curve by year end. and help Away From Home deliver a very respectable year. I will now turn the call over to Mark.