KP Tissue Inc.

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the KP Tissue third quarter 2023 results conference. 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 Wednesday, November the 8th, 2023. I will now turn the conference over to Mike Baldessara, Director of 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 of the third quarter of 2023 of Kruger Products Inc., which I'll refer to as Kruger Products going forward. With me this morning is Dino Bianco, the Chief Executive Officer of KP Tissue and Kruger Products, and Mark Holbrook, Chief Financial Officer of KP Tissue and Kruger Products. 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 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 2023 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 our website and will also be available on CDAR. Finally, I'd like to ask that during the call to refer to the presentation be 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 very pleased with our financial results in the third quarter of 2023, highlighted by robust sales volume in our consumer segment and improved productivity from our network assets. We also benefited from a seasonally strong quarter, lower pulp and other input costs, as well as pricing carryover from 2022. As a result, we outperformed profitability expectations despite an uncertain economic environment. Looking ahead to the fourth quarter, while pulp and transportation costs have likely bottomed, we continue to see inflation, other input costs, and SG&A expenses. We believe volume will remain strong, and with our previously announced pricing margins should be stable. Now let's take a look at our quarterly numbers on slide six. Revenue increased 10.9% to $473.4 million in the third quarter of 2023, mainly due to higher sales volume and favorable sales mix in our consumer segment, along with selling price increases across all segments and regions in 2022. Revenue is also positively impacted by foreign exchange fluctuations on US dollar sales. Revenue in Canada rose 7.1% year over year in the third quarter, while in the US it grew 16.1% as this market benefited from strong sales growth in both our consumer and AFH segments. In Canada, AFH sales were actually slightly down compared to the third quarter of 2022. as well the U.S. dollar increased almost 5 cents versus the Canadian dollar year-over-year, which positively affected reported revenues in the United States. These factors, among others, contributed to a 135.7% year-over-year increase in adjusted EBITDA to $72.4 million in the third quarter. Mark will provide you with more details in his financial overview. On slide seven, pulp average prices in Canadian dollars decreased double digits in the third quarter of 2023 from the previous quarter, while year-over-year prices dropped more sharply. NBSK and BEK average prices fell 26.2% and 35% year-over-year in Q3 2023. After dropping near the bottom of the price curve, pulp prices are expected to increase, according to industry analysts. Let's move on to our Sherbrooke operations and expansion on slide eight. Our TAD operations continue to perform well, surpassing production expectations on the paper machine and on the converting lines, including the new bathroom tissue converting line. Given supply chain inflation and higher costs, however, we are now anticipating a capital cost increase of $26 million, which would take the project to $378 million for our Sherbrooke expansion. Construction of our new production facility is well underway with our facial tissue line starting up in Q1 2024. This has been moved due to a shortage of electronic chips that has now been resolved, while the paper machine ramp-up is still expected for Q4 2024. I'm also happy to report that employee hiring and onboarding is tracking to plan for the ramp-up of these new assets. Turning to a facial market update on slide nine, as the leading supplier of facial tissue, We intend to fulfill the demand created by the recent announcement of the Kleenex brand exit from the Canadian grocery channel. We are currently exploring opportunities to secure additional long-term capacity in addition to our previously mentioned new Sherbrooke facial line. And we continue to invest to build our Scotty's brand to drive growth through baseline and innovation. In the U.S., our facial line in Memphis, which has been up and running for more than a year, continues to exceed its ramp-up curve. As a result, with the addition of the new facial assets, we believe that we're well positioned to satisfy consumer needs for facial tissue across North America. Flipping to our Memphis operations on slide 10, the focus on reliability is delivering better results for our TAD manufacturing operations. Production volume and the cost structure are progressing well, allowing us to have a better balance of product production across the two sites with Sherbrooke and Memphis. The deployment of digital twin AI tools has proven to be successful on the new facial line, so we will extend this new technology across our TAD operations in Memphis. Finally, we are leveraging learnings from both Sherbrooke and Memphis to create a TAD center of excellence that will bring together best practices for both sites. Now let's pivot to brand support on slide 11. We are maintaining strong second half investments to drive brand share. Several multi-brand activities continued in the third quarter, namely our unapologetically human Love is Messy campaign that included the launch of ethnic versions and a successful Made in Canada promotion. As mentioned earlier, we increased media support of Scotties to build brand awareness in Canada as there will be a gap in tissue demand that needs to be filled. We also maintain investments in our sustainable Bonterra product family, which has a loyal following among environmentally conscious consumers, and we want to build awareness of this brand as we know the product fits the consumer needs. Earlier this month, we celebrated Cashmere's 20th anniversary collection in a fashion show entitled Love Struck to kick off October's Breast Cancer Awareness Month. The award-winning runway show featured original couture from 20 world-class Canadian designers, who were up to the challenge of creating garments with our luxuriously soft cashmere bathroom tissue. A new addition this year was a behind-the-scenes documentary available both on TV and online. Finally, we continued strategic shopper investments behind our White Cloud brand at key accounts in the U.S., including a facial tissue launch at select retailers. Moving to slide 12. The data presented is taken from Nielsen. It shows market share performance over a 52-week period ending September 9th, 2023. The data reflects that Kruger Products is gradually regaining share as pricing has stabilized and promotional activity on trademark brands has increased. More specifically, we've seen strong growth on our sponge towels brand for the 52-week period ending September 9th, 2023, and we expect continued share growth for our bath and facial brands as we move into Q4. Looking at away from home on slide 13, sales volume in the third quarter was stable year over year and sequentially. Although our AFH segment benefited from a seasonally strong quarter, we believe the recovery of this business is now quite sustainable. In fact, Q3 2023 marked the fifth consecutive quarter that have posted positive EBITDA. Going forward, asset performance continues to support additional volume growth. A cautionary note on the AFH business remains the potential impact of any economic slowdown that could occur in the commercial sector.