KP Tissue Inc.

Good morning and welcome to KP Teacher's first quarter 2025 results conference call. Today's call is being recorded for replay. All participants are currently in a listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at the time for you to queue up for questions. If at any time during the call you experience any difficulties please press star followed by zero for operator assistance. I will now turn the call over to Doris Kermick, Director of Investor Relations. You may begin your conference.

Thank you, Operator. Good morning, everyone, and thank you for joining us to review Kruger Products' first quarter 2025 financial results. With me this morning is Dino Bianco, the CEO of KP Tissue and Kruger Products. and Michael Keyes, the CFO of KP Tissue and Cougar Products. Today's discussion will include certain forward-looking statements. Actual results could differ materially from these forward-looking statements due to known and unknown risks and uncertainties. A list of risk factors can be found in our public filings. In addition, today's discussion will include certain non-GAAP financial measures. The reconciliation of these non-GAAP financial measures to the most comparable GAAP measure can be found in our MD&A. The press release reporting our Q1 2025 results is published this morning and will be available on our website at kptissuing.com. The financial statements and MD&As will also be posted on our website and on CDAR Plus. The investor presentation to accompany today's discussion can be found in the investor relations section of our website. I will now turn the call over to our CEO, Dino Bianco. Dino?

Thank you, Doris. Good morning, everyone, and thank you for joining us for our first quarter earnings call for fiscal 2025. We are pleased with our strong first quarter results, especially considering the uncertain and volatile economic environment. Adjusted EBITDA reached $75.8 million in the quarter on revenue that increased double digits year over year. Revenue for the consumer segment was mainly driven by higher sales volume in Canada and the U.S. and improved pricing. Our away-from-home business, which has been rebranded Kruger Pro, also generated higher sales volume in the same period last year, although profitability was unfavorably impacted by the purchase of external paper. We expect that our newly deployed LDC paper machine in Sherbrooke will essentially meet all in-house paper requirements beginning in the second quarter of 2025. In fact, the new LDC paper machine and facial tissue converting line which are all part of the Sherbrooke expansion project, have exceeded startup expectations. And given the changing tariff announcements affecting North America and the world, the impact to our business in the first quarter was not significant. We will continue to closely monitor the impact of potential tariffs and have developed contingency plans to mitigate any potential financial risk. Now let's take a look at our quarterly numbers on slide six. Revenue growth of nearly 14% in the first quarter of 2025, was spurred by pre-shipped volume into the U.S. ahead of tariffs, favorable selling prices across both consumer and AFH segments, and a positive foreign exchange impact on U.S. dollar sales. Revenue in Canada increased 7.6% in the first quarter, while U.S. sales continued a strong upward trend with growth of 21.7% year over year. In terms of profitability, Adjusted EBITDA grew nearly 13% year-over-year to $75.8 million in the first quarter. The year-over-year improvement can be attributed to higher sales volume, increased selling price, and lower manufacturing overhead costs. These factors were partially offset by a number of items, including higher pulp prices and greater freight costs, including the impact of tariffs. Michael will provide you with more details in his financial review. On slide seven, pulp average prices in Canadian dollars increased single digits in the first quarter of 2025 from the previous quarter, while year-over-year average prices for NBSK and BEK were up 29.5% and 10.5% respectively versus Q1 2024. To summarize this chart, market pulp prices increased significantly in the first quarter and industry analysts expect volatility in 2025 due to the uncertain trade environment. Let's move on to our operations on slide eight. Production rates exceeded our forecast in Q1 2025, which has been critical as North American demand for tissue continues to be very strong. As previously mentioned, our new LDC paper machine in Sherbrooke and facial tissue line are surpassing startup expectations, while TAD paper machine and converting output remains ahead of last year. For the rest of 2025, anticipate production to further increase as new assets reach their maturity curve. Let's turn to brand support on slide 9. We continued our Made in Canada positioning across all trademark brands in the first quarter of 2025. This has become even more important for consumers during these times. Our Made in Canada positioning has always been at the core of our Canadian brands, as all our brands sold in Canada are Made in Canada. During the first quarter, we also made investments behind brand-specific campaigns for Bonterra, Scotties, and sponge towels, both on TV and digital platforms to drive top-of-mind awareness. In addition, we joined forces with Volkswagen to celebrate Earth Month in April by launching our Bonterra Driving Good Together contest. Canadian shoppers had an opportunity to win the all-electric ID Buzz microbus through the purchase of Bonterra products, our sustainability-focused line. The campaign demonstrated that making environmentally conscious decisions to protect the planet can be simple and rewarding. Shifting to hockey-related campaigns, I would like to highlight that we recently completed the fifth year of our Kruger Big Assist program by committing $200,000 to five minor hockey associations across Canada. And I want to congratulate the Ontario-based North Halton Girls Hockey Association with a grand prize winner in 2025. The Cougar Big Assist program helps provide financial assistance to Canadian hockey families, removing barriers to Canada's national game and giving more kids a chance to participate. Over the past five years, we have donated $1 million to over 50 hockey communities across Canada. And finally, we implemented our in-market activations with our partners, the Toronto Maple Leafs, Montreal Canadiens, and the NHL during the ongoing playoffs. Let's turn to slide 10. The data presented is taken from Nielsen. It shows branded market share performance over a 52-week period ending March 22nd for 2025 numbers, while the data from 2021 to 24 is based on 52-week periods for those years. The numbers reflect relatively stable share both in the bathroom tissue and paper towel categories, and this was reflected as the pricing that we took in Q4 of last year. We're also seeing some share improvements in the first quarter of this year, which will benefit our future 52-week share going forward. In facial tissue, we consolidated our leadership position in the Canadian market with a 45% share on the strength of the Scotties brand and our innovations. Looking at the away from home segment on slide 11, sales volume increased year over year in Q1 2025, but was down sequentially due to typical seasonality. Although orders remained strong during the quarter, much of the customer discussions were based on tariffs, supply, sourcing, and cost. We do believe, though, that our strong business fundamentals and our customer relationships allowed us to deliver strong growth in the quarter. Profitability decreased year over year, driven primarily by continued external purchase sales. We expect that our new LDC paper machine in Sherbrooke will meet internal requirements for paper and improve margins beginning in Q2 2025. And finally, we intend to launch our Cashmere and Scotties brands in the away-from-home market in June, which should become visible in key commercial settings for our common consumer. I will now turn the call over to Michael.

Thank you, Dino, and good morning, everyone. Please turn to slide 12 for a summary of our financial performance for the first quarter of 2025. As mentioned by Dino, we generated revenue of $546.1 million and a strong adjusted EBITDA of $75.8 million in the quarter despite the very volatile economic conditions. Net income totaled $15.4 million in the first quarter of 2025 compared to $9 million in the first quarter of 2024. The year-over-year increase can be attributed to a higher FX gain of $9.7 million and greater adjusted EBITDA of $8.7 million. These factors were partially offset by higher depreciation expense of $6.4 and greater interest and other finance costs of $4.6 million. In the quarterly segmented view on slide 13, revenue from our consumer business grew 15.1% year-over-year to $465.2 million. The double-digit increase was mainly due to higher sales volume in both US and Canada, favorable selling prices across the segment, and a positive foreign exchange impact on U.S. dollar sales. In the away-from-home segment, revenue improved 7.7% year-over-year to $80.9 million in the first quarter, driven by higher sales volume in the U.S., along with higher selling prices in both U.S. and Canada. The consumer adjusted EBITDA in the first quarter totaled $76.1 million compared to $62.6 million in Q1 2024, with a margin of 16.3% versus 15.5% for the same period last year. On a sequential basis, consumer adjusted EBITDA grew $12.1 million from Q4 2024. For our away-from-home business, adjusted EBITDA amounted to $2.8 million in the first quarter, compared to $7.8 million in Q1 2024. The AFH adjusted EBITDA decreased $5 million year-over-year, with a margin of 3.4%, while sequentially AFH adjusted EBITDA declined $1.8 million from Q4 2024. As Dino mentioned, our AFH segment was unfavorably affected by external purchase paper and products, along with higher fiber prices, freight rates, and one-time warehousing expenses. Moving on to slide 14, we present our consolidated revenue for Q1 2025, which grew $66.7 million, or 13.9% year-over-year. The decrease was mainly due to higher consumer sales volume, favorable selling prices across consumer and AFH segments, and a positive foreign exchange impact. On a geographic basis, revenue in Canada rose 20.4 million or 7.6% year-over-year, while U.S. revenues grew 46.3 million or 21.7%. On slide 15, we provide details about year-over-year profitability. The adjusted EBITDA increased by 8.7 million to 75.8 million in the quarter, resulting in a comparable margin between each period. Several factors account for the year-over-year growth in adjusted EBITDA in the first quarter, including higher sales volume, increased selling prices, and lower manufacturing overhead costs. These items were partially offset by higher cult prices, greater freight costs and warehousing costs, the impacts of tariffs, and increased SG&A expenses. Of note, we estimate the impact related to the trade disruptions on our business amounted to approximately $3 million in Q1 2025. This includes direct tariff charges and supply chain disruption. Now let's turn to slide 16, where we compare Q1 revenue to Q4 2024. Revenue increased $6.5 million sequentially, or 1.2%, primarily due to higher consumer sales volume and a positive FX impact. These factors were partially offset by lower selling prices. Geographically, revenue in Canada declined by 4.9 million, or 1.7%, while revenue in the U.S. grew by 11.4 million, or 4.6%. On slide 17, our adjusted EBITDA improved sequentially by 9 million, or 13.5%, to 75.8 million, mainly due to lower manufacturing overhead costs and increased sales volume. These factors were partially offset by increased SG&E expenses, lower selling prices, as well as greater freight costs, the impact of tariffs, and higher warehousing expenses. Adjusted EBITDA margin increased 1.5 points to 13.9%. Now turning to our balance sheet and financial position on slide 18. Our cash position reached $141.8 million at the end of the first quarter, an increase of $22.3 million from Q4 2024. And long-term debt at the quarter end stood at $1.186 million, up $6.2 million sequentially, while net debt decreased $9.3 million based on a stronger cash position. Based on the lower net debt and higher adjusted EBITDA, our net debt to EBITDA ratio improved to 4.0 times, versus 4.2 times in Q4 2024. Total liquidity stood at $356.8 million at the end of the first quarter of 2025. And in addition, $4.4 million of cash was held in the Sherbrooke expansion project. I will now conclude my section by reviewing capital expenditures on slide 19. CapEx for Q1 2025 amounted to $17.5 million. which included $15.4 million for the Sherbrooke Expansion Project. Finally, we still expect our CAPEX to reach $80 to $100 million of spend for 2025. This outlook does include over $20 million left for the completion of the Sherbrooke Expansion Project. Thank you for joining us this morning, and I'll now turn the call back to Dino.

Thank you, Michael. Please turn to slide 20 for an update on our sustainability focus, Reimagine 2030. Our sustainable development plan has been established with the belief that growing our business and protecting our planet are not mutually independent goals. Our four pillars supporting this strategy remain unchanged. Products empower, planet conscious, employee impact, and community embrace. Our new sustainability report will be published next month to disclose the progress achieved in 2024. In the meantime, I wanted to share with you some early findings from the report, including a 26% reduction in GHG emissions, a 35% decrease in water consumption, and 100% use of third-party certified fibers in the manufacturing of our products. It should also be noted that we continue to be recognized by several organizations for our contributions as an outstanding corporate citizen. Okay, let's move to slide 21 for my closing comments. We delivered strong sales growth in the first quarter and we expect this trend will continue throughout 2025. We are closely monitoring an uncertain trade environment while leveraging our Made in Canada positioning. We intend to manage our margins amid a changing cost base. We will continue investing in our brands to drive long-term share growth. We expect our new LDC paper machine in Sherbrooke will significantly reduce our reliance on purchased paper beginning in the second quarter. And our way-from-home business should benefit from internally sourced paper with improved profitability, also rebranding the business to Kruger Pro and leveraging our brands in the market. And we are developing our organizational capability to strengthen the adaptability and the resiliency of our employees. Finally, let's turn to our outlook for the second quarter of 2025. We expect adjusted EBITDA to be in the range of $70 to $75 million despite an uncertain and volatile economic environment. We will now be happy to take your questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. And if you wish to ask a question, please press star followed by the number one on your telephone keypad and wait for your name to be announced. Once again, star and one if you wish to ask a question. Please stand by while we compile the Q&A roster. Thank you for waiting. We now have our first question, and this comes from Amir Patel from PIBC Capital Markets. Your line is now open. Please go ahead.

Hi. Good morning. Do you know... Any update in how you think about future growth and the timing and location of potential third TAD?

Yeah, great question, Amir. We announced last year that we were accelerating our analysis on that. Our hope was that we would have an announcement in the first half of this year, but given just all the economic uncertainty and volatility that still exists, It'll more likely be in the second half of the year. We continue to do aggressive work on this. We know the market is tight. We know, particularly in the TAT area. So, you know, we're focused on continuing to grow. So we are doing the work, lots of work being done, a couple of locations being looked at, working with customers in terms of long-term plans. I'm just not in a position yet to announce it, but our hope is that we will have something announced in the second half.

Fair enough. And just given the various marketing and innovation strategies you've got underway, how do you see that market share gap between yourself and the number one player in TELS evolving as some of those improvements play out?

Yeah, I mean, you know, it's very tough to... to steal share, and you've got to do it the right way, and we're trying to do it the right way, which is do it through quality and innovation and brand support. So it's a long journey. Gaining share is a long-term game for us, and I think we're doing a lot of the right things. And, you know, you should see a continuous progression of share gains on our end on Sponge Towel. Who it comes from, I don't know, but, you know, I think – As we continue to build the equity of that brand and the presence of that brand through distribution, we will see share growth over time. We know we have the right quality. We know we have the credentials. We know we have Made in Canada positioning on towel, which is somewhat unique for us. We know we have great customer support. So I think all the ingredients are there for us to continue to show good share growth on that segment.

Great. Thanks, Dino. That's all I have. Thank you.

Thank you. And the next question comes from Cassia Kopitap from TD Calvin. Your line is now open. Please go ahead.

Hi. Good morning, everyone. Dino, I want to start off with AFH and your prepared remarks. You talked about customer discussions focusing on potential tariff impact. Can you expand on that a little bit?

Yeah, I would say more so in AFH. It's a very diversified segment in North America. Lots of players, small to large. You've also got foreign players in place. So I think the noise around tariffs and the permutations is louder there, if you will. So, you know, we've been working with our customer base, both in Canada and the U.S. We've got really great relationships, but I think there's been a lot of discussion of the segments, the impact to Asia on tariffs and what that does, you know, impact on finished goods and raw materials. So I would just say there was a lot of noise. And I put it out there on purpose because it just shows a little bit of volatility instead of, spending our time talking about how we're going to grow the business and, you know, long-term plans. We're talking about some of the distractions here. Now, having said that, I think we've got a great business, very strong. And, you know, when the internal paper comes in, we'll even make it stronger. We have great customer relationships. We're doing the right things, obviously, in Canada, launching our brand. So I think the business is resilient, but there is a distraction. And then, you know, while I'm talking about AFH, obviously we're keeping an eye on the on the outlook for the market. There's a lot going on with consumer and travel and commercial. We're well diversified, which is great, both in Canada and the U.S. and the various segments, but uncertainty creates concerns, so we're getting ready to make sure that we have contingency plans in the away-from-home segment in particular as segments may change, expand, or shrink, and that we're ready to take advantage of that.

Right. Okay. And so on that note, maybe just remind us, within AFH, the different sub-segments, what is your broad exposure there? And I'm thinking some of them may be more segments that are more elastic in their demand versus the inelastic ones, you know, restaurants, hospitality versus maybe, I don't know, hospitals or schools, that kind of thing. Can you just remind us what your exposure is there?

Yeah, I'm not going to go through sub-segment. I would say in some segments, as you mentioned, the restaurant business, food service, some of the commercial space may be a little more vulnerable to things like recessions. And then you've got the healthcare segments. You've got industrial, some of those segments which tend to be less exposed. So I think we're well-balanced. We're not overly developed in one particular segment, and we're well-balanced between U.S. and Canada. And then, of course, if the AFH segment declines, we have a retail segment that also benefits generally because those two tend to be offsetting each other. So we also have a retail segment if the AFH segment declines that people will use more at home. Okay.

And maybe it's a question for Michael, but CAPEX is up a little bit, about $15 million versus previous guidance. What's the cause behind the increase?

Mainly the carryover on the Sherbrooke expansion project at the close of 2024 into 2025 would be the largest piece of that increase, Cassia. Otherwise, our base CAPEX is still within the range we had provided at the end of Q4.

Gotcha. Okay. And there's no, the amount remaining on Sherbrooke, that's about 25 million, right, Michael?

Yeah, just below 25. Yeah. Below 25. Okay.

Gotcha. That's all I have. Thanks very much. Thank you.

Thank you. Once again, as a reminder, for those who want to ask a question, just press star and one on your telephone keypad and wait for your name to be announced. Star and one for questions. And the next question comes from Zachary Evershed from National Bank Financial. Your line is now open. Please go ahead.

Good morning, everyone. Congrats on the quarter.

Morning. Thank you.

Can you comment on promotional activity levels and your evaluation of the health of the consumer, maybe on both sides of the border?

Yeah, obviously we're closer to the Canadian one because of our brand presence, and we're a bigger player here, so you can see that. There's obviously a lot of Made in Canada, Made in Quebec sentiment going on. If you watch the stores, you'll see it everywhere. We have been Made in Canada long before the Made in Canada wave started in the last few months. It's been part of our core of our businesses and the root of our brands. So we are seeing a lot more activity, and that's why I quoted, I don't usually talk about in-period share, but we're starting to see that reflected in our Q1 shares. Whether there's a direct correlation, it's hard to pinpoint it exactly, but they are moving in the right direction, and our promotional activity is strong. I think that we generally get a lot of promotional activity in our brands, but I think it's been amplified Some retailers in particular even more with the made in Canada positioning that we've done. U.S., it's harder to see it. You know, obviously the markets continue to be strong. You have seen the trend over time moving more to private label, although the data we're seeing recently has showed that stabilizing. Now we'll see if that starts to change. move again in private label's favor if there's a recession or inflation in the marketplace. I think one of the big worries, and we talked about this in our call, the tissue market in North America is capacity tight, if you will. So my worry, and I think any customer's worry, is any disruptions because of tariffs or supply chain could have an immediate impact. So we're really looking to offset that and we're carrying a little more inventory right now, quite frankly, because of just wanting to have a little more product available in case there are any shocks to the system. So I would say it's a volatile market. The benefit is people need our product, which is great. They don't always need our brands, but they need our products and hopefully need our brands or products we make for our customers in the private label space. And, you know, we're working with all our customers kind of setting out certainly long-term plans, but, you know, more now may be focused on what are the next six, 12 months look like so that as we're going through any potential changes, we're there to service them. So it's definitely an interesting time. You know, COVID was a different world. You didn't know it, but you kind of, you know, it was driven by a singular activity. This one with tariffs and global trade and, Canadian dollar changes and, you know, there's collateral aspects to what's going on, whether it be freight or ocean freight or road freight or, as I said, just recession or no recession. There's just a lot going on. So I think what we're trying to do as an organization is build our resiliency and adaptability and be ready to pivot if things move one way or the other.

Great, Collier. Thanks. A follow-up on that stocking up at your level, are you seeing anything down the chain as well, either at retailers or maybe in customer pantries?

I would say no. I would say no. There's not a concern in the market, nor am I trying to indicate that there will be, that there's a supply issue. I think we're ready just in case a supply chain shock, not at the consumer level, at the supply chain side. I would not say that there's pantry loading. I would not say that customers are loading. You know, we're seeing buying behavior that is strong, but not unlike what we saw, obviously, during COVID, where there was pantry loading. We're not seeing that.

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

Thank you. Seems like there are no further questions that came through. I will now turn the call over back to Dino Bianco. Please go ahead, sir.

Thank you all for joining us on this call today. We look forward to speaking with you again following the release of our second quarter results for 2025. As a reminder, on June 23rd at 2 p.m. Eastern Time, we will be hosting our virtual-only annual meeting of shareholders. Your vote and participation at the annual meeting are important to us. I want to thank everybody for joining us today, and have a great day. We'll see you in a few months. Thank you.

Thank you. This concludes our conference call for today. Thank you all for participating. You may now disconnect.