KP Tissue Inc.

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to KPTSU first quarter 2024 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, and instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press the 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 Tuesday, May 14, 2024. I will now turn the conference over to Mike Baldessara, Director of 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 the conference call is to review the financial results of the first quarter of 2024 for 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 Michael Keyes, the Chief Financial Officer of KP Tissue and Kruger Products. Before I turn the call over to my colleagues, I'd like to highlight that 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 actual company's 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 in today's call are in Canadian dollars unless otherwise stated. The press release reporting our Q1 2024 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 would ask that during the call to refer to the presentation, we have prepared to accompany 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? Good morning. Thank you, Mike. I'd also like to take the opportunity to welcome Michael Keyes to his first official analyst call as our new CFO. So please go easy on him for this call. Why don't we get started? Good morning. As I said, thank you for joining us. This is our first quarter earnings call for fiscal 2024. We delivered very strong results in the first quarter, highlighted by increased sales volume and improved adjusted EBITDA. In our consumer segment, we continue to build on our leadership position in facial tissue following the grocery exit of Kleenex in Canada through incremental marketing, added manufacturing capacity, and product innovation. We also invested in brand support to drive awareness and share gains in our bathroom tissue and paper towel categories. Our away-from-home business continued its strong performance in the first quarter with robust growth and profitability both year-over-year and sequentially combined with solid sales growth. Looking ahead to the remainder of 2024, we will continue to take a multifaceted approach to drive profitable growth. Given anticipated headwinds in commodity markets, we are preparing an action plan to mitigate escalating pulp prices. Now let's take a look at our quarterly numbers on slide 6. Revenue growth of 6.3% in the first quarter of 2024 can mainly be attributed to higher sales volume and favorable sales mix, partially offset by lower selling prices year over year. Canadian revenues increased 2.1% in the first quarter, while the U.S. improved 12.1%, The growth in the U.S. is mainly driven by new business growth. Adjusted EBITDA was up 34.3% year-over-year to $67.1 million in the first quarter. It's mainly driven by higher sales volume, improved sales mix, and lower pulp prices, along with improved freight costs. These factors were partially offset by several items, including reduced selling prices. Michael will provide you with more details on these drivers in the financial review. On slide 7, pulp average prices in Canadian dollars climbed as high as 12.5% in the first quarter of 2024 from the previous quarter, while year-over-year average prices for both NBSK and BK were down 14.2% and 19.2% versus Q1 of last year. Due to various global factors, we witnessed significant increases in pulp prices on a sequential basis in Q1 2024. And based on industry forecasts, pulp prices are expected to escalate over the course of the year. Let's move on to our operations on slide 8, which combines both our Sherbrooke and Memphis manufacturing facilities. Our new facial tissue line in Sherbrooke, which launched in early February of this year, is meeting startup expectations and already producing high-quality, saleable products. Construction of our paper machine is progressing well with the start-up scheduled for Q4 of 2024, and this extra capacity from these assets will help us meet heightened demand for our products in North America. At Memphis, our TAD paper machine production continues to improve on a year-over-year basis, and we are encouraged by the progress at that site. Converting production in Memphis is also recovering with investments in operations, along with hirings in maintenance and technical leadership, which are delivering better results. All our other facilities are generally operating at plan. Turn to our facial market update on slide nine. Following the grocery exit of the Kleenex brand in Canada, we have observed a large-scale reset of retail shelves across grocery stores in Canada. As the leader in the facial tissue category in the country, Scotty has continued to gain its fair share of the market with a 52-week share reaching 40.3% at the end of the first quarter. As mentioned in last quarter's conference call, we added a new converting line at our Gatineau facility in February to help meet growing customer demand. The new line in Gatineau is now running at full capacity to supplement the output from the recently deployed facial line in Sherbrooke. Finally, our innovation pipeline for Scotty's is strong, driven by the introduction of different sizes, formats, and quality types, and is also helping us to grow share in this product category for today and for the future. We have also increased our investments to support our market-leading Scotty's brand. Now let's move on to brand support on slide 10. We continue to reinforce our brands in the first quarter to drive awareness and share gains in a highly competitive environment. One area where we made additional investments involved our Bonterra brand, which is our sustainable brand for environmentally conscious consumers. We introduced this product family in 2022 to offer consumers a viable option at the shelf for building a better planet. In Q1 2024, we made a concerted effort and push the targeted media to support this brand with incremental customer listings. Turning to slide 11. The data presented is taken from Nielsen. It shows market share performance over a 52-week period ending March 23, 2024. After some share lost a private label in the recent period of high inflation, we are recovering on share across all three categories. Not surprisingly, facial tissue delivered the highest share gains of 4.7 percentage points from the previous period, followed by paper towels at 0.7% and bathroom tissue at 0.6%. Market share at 40.3% for facial tissue and 24.6% for paper towels reached the highest level in the last four years for Kruger products. And on back tissue share, we continue to move in the right direction in this very competitive category. Looking at the away from home segment on slide 12, its sustained recovery continued in the first quarter with robust adjusted EBITDA results above Q1 2023 and Q4 2023. Sales volume in the first quarter increased year over year, but was down sequentially due to seasonality. Of note, our enhanced portfolio management delivered a higher mix of premium versus value products, which enhanced our profitability. Going forward, asset performance in AFH continues to progress and meet the growth in demand. The sales outlook for this segment remains strong despite ongoing concerns of an economic slowdown. I will now turn the call over to Michael.

Thank you, Dino, and good morning, everyone. Please turn to slide 13 for a summary of our financial performance for the first quarter of 2024. As Dino mentioned, we delivered an adjusted EBITDA of $67.1 million on sales of $479.4 million in the quarter, a strong improvement over the same period last year in our second-best quarter on record. Likewise, net income, which totaled $9 million in the first quarter, significantly improved over a net loss of $49.3 million in Q1 2023. The year-over-year increase can be explained by several factors, a decrease in tax expense of $52.3 million and an increase in adjusted EBITDA of $17.1 million playing major parts in the change, along with lower restructuring costs, These factors were all partially offset by a higher foreign exchange loss. In the quarterly segmented view on slide 14, revenue from our consumer segment grew with stronger volumes and were partially offset by lower selling prices. Overall, the increase was a 7.4% year over year, bringing our total revenue to $404.3 million in the first quarter of 2024. Sequentially, revenue increased 0.9% from Q4 2023. In our away from home segment, revenue improved 0.9% year over year to $75.1 million, but declined 7.7% sequentially from a seasonally stronger Q4. For our consumer adjusted EBITDA in the first quarter, total $62.7 million compared to $51.3 million in Q1 2023. with an adjusted margin of 15.5% compared to 13.6% for the same period last year. On a sequential basis, consumer EBITDA was up 2.9 million, or 4.7% from Q4 2023. For our AFH business, the adjusted EBITDA amounted to 7.8 million in the first quarter, a significant increase over the same period last year, with a strong margin of 10.3%. And sequentially, AFH EBITDA was up $2.1 million from Q4 2023. If we now move to slide 15, we review year-over-year revenue growth for Q1, which improved $28.4 million, or 6.3%. The growth was driven by a higher sales volume and a favorable sales mix, and partially offset by lower selling prices. On a geographical basis, revenue in Canada rose $5.4 million, or 2.1% year-over-year, while U.S. revenue grew by $23 million, or 12.1%. Now on slide 16, we provide additional details on their year-over-year profitability for the first quarter. Adjusted EBITDA increased by $17.1 million to $67.1 million, representing a margin of 14% compared to 11.1% in the same period last year. Multiple factors contributed to generating this strong EBITDA in the first quarter, Those include the higher sales volume, lower bulk prices, and improved freight costs. And these were partially offset by lower selling prices, higher maintenance spending, along with some startup costs related to our Sherbrooke expansion. We also had increased investment in advertising and SG&A expenses, and lastly, increase in warehousing expenses. Now, if we turn to slide 17, where we compare Q1 revenues sequentially to Q4 2023, revenue decreased by 2.9 million, or 0.6%, mainly due to sales volume in our AFA segment, which was partially offset by higher volume in the U.S. consumer business. Geographically, revenue in Canada was down by 8.7 million, or 3.2%, while revenue in the U.S. rose by 5.8 million, or 2.8%. On slide 18, Adjusted EBITDA in the first quarter increased sequentially by $5.9 million, or 9.6%, and this came from an improved sales mix, lower freight costs, and a reduction in SG&A expenses, which included advertising. These items were partially offset by higher warehousing costs and a slight increase in our pulp costs. Adjusted EBITDA margin of 14% was up 1.3 points from 12.7% in Q4. Now turning to our balance sheet and financial position on slide 19, our cash position stood at $117.1 million at the end of the first quarter, a decrease of $18.6 million from Q4. The sequential decrease in cash is mainly explained by our working capital increase, which was partially offset by a stronger EBITDA. And then year over year, our cash balance still showed an increase of $80.2 million. Total long-term debt at quarter end stood at $1.1 billion, up $71 million from the end of the previous quarter, and our net debt increased by $95.5 million sequentially to $1.03 billion. The increase can mainly be attributed to the spending related to Sherbrooke expansion and utilization of cash and revolver to support the higher working capital level in Q1. As a result, our net debt to last 12 months EBITDA ratio increased slightly to 4.0 times in the first quarter from 3.9 times in Q4 2023, and this was still half of our Q1 2023 ratio of 8 times. On a year-over-year basis, leverage improved on the strength of lower net debt and higher adjusted EBITDA in the last 12 months. At quarter end, total liquidity increased to $409 million, the change sequentially coming from the increase by $125 million of our revolving credit facility dated March 22nd, 2024. In addition, $20.7 million of cash was held for the Sherbrooke expansion. I will now conclude my section by reviewing capital expenditures on slide 20. Total capex in Q1 was $50.1 million, which included $46 million for the Sherbrooke expansion. For fiscal 2024, we still expect our total capital spend to range between $200 and $220 million, and this range does include $45 to $55 million of regular or maintenance capex. Total capital cost estimate for Sherbrooke expansion remains at $378 million, with a significant portion of that spending to come during 2024. Thank you for joining us this morning, and I'll now turn the call back to Dean.

Thank you, Michael. Please turn to slide 21 for updated information on our sustainability commitments. Kruger Products' Sustainable Development Plan, which is entitled Reimagine 2030, has been designed with the firm conviction that we can grow our business while having a positive impact on the planet. In our most recent report, Kruger Products has made significant progress in a number of areas, including a 26% reduction in GHG emissions, a 31% decrease in water consumption, a 79% improvement in employee health and safety, and 100% use of third-party certified fibers in the manufacturing of our products. I also want to note that target percentages for 2030 have been recast from 25% to 35% for GHG reductions and from 50% to 35% for water decreases to better align with industry peers. Baseline years for GHG and water targets have also been updated from originally 2009 to now 2015. These will be reflected in our upcoming 2023 report planned for release in June. Please turn to slide 22 for my closing comments. As noted, we delivered strong financial performance in the first quarter while positioning ourselves for anticipated headwinds in commodity costs. Looking ahead to the remainder of 2024, we're preparing an action plan to mitigate escalating pulp prices. We will continue investing in our brands to drive long-term growth. We will increase capacity to meet strong demand through our Sherbrooke expansion and our new facial lines. Our away-from-home segment will continue to maintain its upward trajectory, delivering against a sustainable profit model. Our leverage ratio is expected to remain within its current range based on the final year of spending in Sherbrooke in 2024. And finally, we will keep investing in our organization and culture to drive current and future growth. Now let's turn our attention to the outlook for the second quarter of 2024. We expect adjusted EBITDA to be in a similar range of Q1 2024, despite anticipated increase in pulp prices. We will now be happy to take your questions.

Thank you. And ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, simply press the star followed by the number one on your cell phone keypad. If you would like to withdraw your question, please press the star followed by the number two. And just a reminder to please limit yourself from asking two questions. One moment, please, for your first question. Your first question comes from the line of Hamir Patel from CIBC Capital Markets. Please go ahead.

Good morning. You referenced an action plan to deal with the escalating pulp prices. Have you actually already announced any price increases or taken any desheathings since the end of Q1?

So to answer that question, we have some of our business that's under contract, Amir, and those will naturally update based on the conditions of their contract. So those will have reflected changes in pall prices. And for those businesses that are not under contract, we have not announced any pricing at this point. Obviously, we're looking at all options. It's a substantial hit for anybody in the tissue business with the speed and magnitude of the escalation in pulp. So we're going to look multifaceted, including potentially desheeting, productivity, as you mentioned, maybe product mix, pricing is in there to look at. So we're going to look at everything.

And, Dean, when you referenced some that were under contract, is that more of a more recent phenomenon where you have some maybe pulp benchmark price indices in those contracts? Or is this maybe just like parent roles?

No, we've had it ongoing, particularly in our U.S. business. We're more of a private label supplier, and it's pretty common in the industry. We have, you know, based on what happened in 2022 with the incredible inflation, I think we've made them a little more robust, and we've added a few more customers. So we stay closer, both for us and the customer, quite frankly, stay closer to the cost curve than maybe we were in previous years.

Okay, no, that's helpful. And then, I mean, as part of that mitigation, would you expect some fiber shifts to occur too, you know, maybe leaning more recycled? Any thoughts there?

Yeah, we do that anyways, Amir. But obviously, you know, with what you're seeing with softwood and hardwood arbitrage, we're always looking at that. And of course, We have a recycled fiber capability. So where that works in terms of continuing to deliver the product quality that we need to deliver, we will look at that as well. So that is part of the equation as we look at different options to try to mitigate this significant cost impact that's coming into the tissue category.

Fair enough. And, Deirdre, just the last question I had was on AFH double-digit EBITDA margins. Should we assume that that's sustainable going forward, or is there something quite unique in Q1?

Yeah, it's a good question. I mean, I think in previous calls I had said they should be in a 5 to 10 range. Obviously, they got there a little quicker. You know, at this point, I still think they should be in low double digits, so the 10 range is probably a good one. They're doing it the right way. They're doing it through increased volume. They're doing it through portfolio management, operational excellence, growing with existing customers and getting new customers. You know, the last piece that's still to come, and I think I've mentioned this in the past as well, is with our new paper machine starting up in Q4, we will be more independent or dependent on internal paper. which will help AFH because they have been buying paper in the market. So that should help us with a cost structure on paper for AFH. So that, you know, it will be a headwind. So at this point, I'm still going to say that the range is probably in that 10 range for them. And we'll see if I update that once we see the new paper machine come on board.

Great. Thank you. That's all I had. I'll turn it over.

Thank you. Your next question comes from the line of Zachary Evershed from National Bank Financial. Please go ahead.

Thank you. Good morning, everyone. Congrats on the quarter.

Good morning. Thank you.

So some very impressive gains in facial tissue market share, of course. Do you think there's more to come, or has the market reached a balance again without addressing the lagging nature of the Nielsen stats?

Yeah, so I was going to say that obviously we're reporting 52 weeks, so the more current weeks are probably a little more indicative, as this still captures a lot of last year. Our goal, as we heard about this opportunity, was to make sure that we captured at least our fair share, and we took a fully integrated approach. As I said, we got new capital and new capacity quickly. We increased our marketing spend. We worked with our customers to reset shelving, and we improved our innovation pipeline. So my perspective is we'll probably be in this range. This market will probably settle out where it is right now with respect to where you're seeing our share and our branded competitor share and private label. I think it's going to probably be in that range ongoing. So, you know, it's a competitive category. It will continue to be a competitive category even with Kleenex gone from that category. So you may see in any given period movement with one competitor versus the other, but I think long-term we're in a stable place with respect to share expectations.

That's good, Collier. Thanks. And then how are negotiations developing at Crabtree?

Yes. I mean, obviously, we've been at this with the union. That's a great facility for us. We've had a long-term relationship, a positive relationship with the union there. That's an important site. We have been negotiating in good faith for quite an extended period of time, have gone through a lot of items, have been closed. We're now working on a few projects. of additional items with the union. You know, we're both negotiating in good faith. My hope, and I'm sure the union's hope, is that we reach a position that is in the best interest of both the company and the union. And, you know, we expect to continue to operate that facility in a long-term basis, you know, once we get through this negotiation process.

Thank you for that. And it looks like the work interruptions have been pretty minor so far. Any impact to call out in the quarter or in Q2?

No, they've been pretty minor. I mean, you know, the union has chosen to do some work stoppages, which, you know, can be normal in negotiation process. I would say that there has not been any major impact. Obviously, we have a broad network with many other facilities as well that are that also produce products so that we have some contingencies at other sites if these work stoppages become longer. But hopefully we will get to that and we'll move in a positive direction shortly.

Thank you very much. I'll turn it over.

Thank you. And once again, if you would like to ask a question, simply press the star followed by the number one on your telephone keypad. Your next question comes from the line of Kasia Kopitek from TD Callman. Your line is open.

Hi. Good morning, everyone. Mix was mentioned as a factor that supported results this quarter. Can you give a bit more detail there? And maybe if you can also mention how much extra EBITDA margin the Better Mix supported and how sustainable that is going forward?

Hey, Kasia, good morning. I missed the first part of your question. It wasn't clear. Could you repeat it, please?

Yeah, no problem. I noticed you mentioned that mix was a factor this quarter, supporting strong results this quarter, and I was just hoping you could go into a little bit more detail around the details of what that meant and maybe how much extra EBITDA margin the better mix supported this quarter.

Yeah, so the mix came in AFH. I mentioned that where we moved more premium products. That category or that business has lots of segmentation from value all the way up to premium. So it's been a conscious effort. We've been trying to play more in the premiums, more aligned to our assets and what we can produce. So that's helped because that's usually a better margin structure. We also had, you know, you see the share gains in our trademark. So that is, you know, that is also good margin business for us, and that's helped us with the mix on the consumer side. And then, you know, as we've been ramping up our Tad Sherbrooke facility, that is an ultra-premium product that's produced there, TAD, or through air drying, that we've been producing there. So that's also helping us with the mix across our consumer business. As far as quoting a percentage, I'm not going to do that, but I would say that, you know, you see it on multi-fronts in terms of how that mix plays out across the businesses and product segments.

Okay, thanks, Dino. Maybe I'll try again from another front. So not necessarily an absolute percentage, but if you're looking at the swing between your low-value and your higher-value products, in terms of EBITDA margin impact, is it a couple percentage points? Just thinking about it, I'm just trying to think about the range, that's all.

Yeah, I don't think it's that easy, Kasia, to be honest with you. You know, it depends on the segment. It depends on the country we're selling in. It depends if it's private label versus branded. There's a lot of factors at play.

So I'm trying to think how I can answer your question without giving you – Yeah, I guess what I'm trying to get at, you know, is just trying to figure out, you know, what kind of swings quarter-to-quarter mix changes can – can play and how sustainable that is. That's all.

I would say it is not a material impact. In other words, when you see the numbers, let's look at our U.S. consumer business growth. Most of that was volume-based. It wasn't mixed. I'm struggling to give you an exact number, but it is small. It would be a couple of points, if anything. It's not 10 points. It's not that dramatic. Maybe from our lowest product to our highest it could be that big, but obviously the mix doesn't move that way on the portfolio. Right. So I'd say a couple points, Tasha.

That's helpful. It sounds like a lot of the margin gains are coming from sustainable efforts on your guys' front from, like you said, operational excellence and cost management and things like that then, so that's good. Yeah. Okay, so going back to Hamir's question where he asked about contract resets, you had mentioned that some portion of your business is in contracts that have a reset mechanism. What percentage of your business is in that?

In the U.S., it's between 40% and 50% of our business. And our away from home, it's about 20% to 25%. And then in our Canada consumer, we don't work that way. In Canada consumer, it's market pricing because of the branded business. So I think that's a good range for you to think about.

Okay. And the reset mechanism that applies to the contracts that are in place, is that just a straight cost pass-through? So if your costs increase $10 per ton, you get that straight through to your pricing, or is there some other mechanism? How does that work exactly?

Yeah, they're all a little different. They're generally based on RISI. So pulp is a big driver. And, you know, with factors like freight and freight costs and energy, some contracts build those in. So some have a bigger basket, some have a smaller basket, which could help or hurt you at any point in time, depending on what's going on. But pulp is a big driver on those, and it's based on RISI pricing.

Right. Okay. And then for the Canadian consumer business, there's no mechanism there, but if you were to announce a price hike, just remind me, how long would that take to flow through to your actual results?

Yeah, let's say three months. So, you know, when we're buying pulp today, it'll show up on our P&L. It'll bleed through, but generally it'll hit in three months. And generally the time from when you announce to when it's effective in the marketplace is about three months. So they They do work together. There is always a lag because in this category, you're pricing for actual costs, not future costs. So if pulp continues to go up, you may miss that curve a bit and have to readjust, likewise on the way down. But I would say the general perspective is that it's a three-month lag on the business.

Okay, great. Thank you. I appreciate all that detail. That's all I had.

Thank you, Kasia.

And I'm showing no further questions at this time. I would like to turn it back to Dino Bianco, CEO, for closing remarks.

Great. Thank you. Thank you for joining us on the call today. We look forward to speaking with you again following the release of our second quarter results in August. Have a great day. Thank you.

Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.