KP Tissue Inc.

Good morning and welcome to KP Tissue's second quarter 2025 results conference call.

Today's call is being recorded for replay. All participants are currently in 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 at any time you have difficulties hearing the conference, please press star followed by the zero for operator assistance. I will now turn the call over to Doris Gerbic, 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' second 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 KC 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 filing. 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 Q2 2025 results was published this morning and will be available on our website at kptishuin.com. The financial statements and MD&A will also be posted on our website and on CDAR+. 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? Dino?

Thank you, Doris. Good morning, everyone, and thank you for joining us for our second quarter earnings call for fiscal 2025. We are pleased with our overall performance in the second quarter of 2025 with adjusted EBITDA improving double digits year over year to $72.5 million. U.S. revenue growth slowed down in Q2 2025 due to front-loaded shipments made during the previous quarter to mitigate potential tariffs, along with softness in the away-from-home market. Nevertheless, U.S. sales have grown 12% after six months into 2025 and represent a key growth driver for Kruger products. In early July, we announced an additional investment of $35 million U.S. at our Memphis manufacturing facility to deploy a state-of-the-art multipurpose converting line. This initiative is part of a broader strategy to drive efficiency and support our growing U.S. business. Now let's take a look at our quarterly numbers on slide six. Revenue growth of just over 5% in the second quarter of 2025 was driven by higher sales volume in our consumer business, favorable selling prices across both consumer and away-from-home segments, and a positive foreign exchange impact. These factors were partially offset by slightly lower away-from-home volume. Revenue in Canada grew 7.4% in the second quarter, while U.S. sales rose 2.4% year-over-year. In terms of profitability, adjusted EBITDA increased 11% year-over-year to exceed the 70 million mark for the second consecutive quarter. The improvement can be attributed to higher sales volume, increased selling prices, and lower manufacturing overhead costs. These factors were partially offset by a number of items, including higher pulp prices, an unfavorable mill performance at our Memphis site, which Michael will elaborate on in his financial section. On slide seven, Average pulp prices in Canadian dollars have traded within a relatively narrow range during the past year, both for NBSK and BEK. Looking ahead, industry analysts expect pulp prices to continue trading in a narrow range in the near term. However, the economic environment does remain uncertain. Let's move on to our operations on slide 8. As previously mentioned, we are undertaking a number of initiatives at our Memphis facility to drive efficiency and capacity. The first action was to shut down older, unprofitable assets, including a paper machine and a facial line. And as mentioned earlier, we also announced a $35 million U.S. dollar investment to deploy a new multi-purpose converting line for bathroom tissue and paper towels. Startup is scheduled for the second quarter of 2026. And lastly, we consolidated our area warehouses into our Memphis facility to create a single large modern on-site warehouse. With these changes, Memphis will focus on higher margin premium products to support our U.S. growth. The results of these actions will begin to yield benefits in the back half of this year. For the overall network, production rates continue to exceed expectations in Q2 2025. Let's turn to brand support on slide nine. We intensified our Made in Canada positioning in Q2 2025 with new campaigns dedicated to our cashmere and Purex bathroom tissue brands combined with in-store promotions. As a company with deep roots across the country, we are a natural fit for consumers seeking high-quality products made by Canadians for Canadians. Consequently, our brands have continued to perform well during this period of market uncertainty. During the second quarter, we also developed equity-building campaigns behind Scotties, Sponge Towels, and Bonterra to increase consumer awareness. In addition, we sponsored the Canada's Got Talent televised program for a second consecutive year through Scotty's, the number one facial tissue brand in Canada. Let's turn to slide 10. The data presented is taken from Nielsen and shows Kruger Products' branded market share in Canada over a 52-week period ended June 14, 2025. The figures reflect significant growth in the facial tissue category compared to the same period last year. For bathroom tissue, our share slightly declined year-over-year due to higher pricing that was taken last fall, while it remained relatively stable for paper towels. In summary, we continue to deliver strong performance in a highly competitive market, and we are seeing share growth in recent quarters. Let's look at the away from home segment on slide 11. Sales volume decreased year-over-year in Q2 2025, but was up on a sequential basis. Despite a year-over-year decline in away-from-home revenue, we delivered nearly the same level of adjusted EBITDA as in Q2 2024 and achieved significantly higher sequential profitability, driven by our new Sherbrooke paper machine, which allowed away-from-home to source paper internally. We also launched the Cashmere and Scotty's brands into the away-from-home market in June with our new Kruger Pro repositioning, and we've had a positive response from end users and distribution partners. Away-from-home operations continues to expand our OpEx methodology, driving ongoing improvements in output and productivity. This, combined with internal paper usage, has improved our away-from-home network and cost space. Finally, we are closely monitoring potential signs of softness in the away-from-home market, which may be influenced by broader economic uncertainty. However, we do benefit from a well-diversified customer and segment portfolio to help mitigate any potential risk from an economic slowdown. 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 second quarter of 2025. As mentioned by Dino, we generated an adjusted EBITDA of $72.5 million on sales of $536.1 million in the quarter. a very solid improvement year-over-year. Net income also totaled $22.1 million in the second quarter compared to $10.6 million in the second quarter of 2024. The year-over-year increase is due to FX gain difference of $23.8 million, an income tax recovery of $8.1 million, and an increase adjusted EBITDA of $7.2 million. These factors were partially offset by higher depreciation expense from the Sherbrooke Expansion Project and a one-time expense related to certain older assets at our Memphis facility. In the quarterly segmented view on slide 13, revenue from our consumer business grew 6.5% year over year to $449.2 million. The increase was mainly due to higher sales volume in Canada, favorable selling prices, and a positive FX impact on U.S. dollar sales. In the away-from-home segment, revenue decreased 1.1% year-over-year to $86.9 million in the second quarter. This decline was primarily caused by lower sales volume, partially offset by higher selling prices, and a favorable FX impact. Consumer adjusted EBITDA in the second quarter totaled $69.2 million, compared to $60.3 million in Q2 2024. with a margin of 15.4%, representing an improvement of one point over 2024. On a sequential basis, consumer adjusted EBITDA decreased by 6.9 million from Q1 2025. For our away-from-home business, adjusted EBITDA amounted to 9 million in the second quarter, compared to 9.6 million in Q2 2024, which represents a margin above 10 points for both periods, On a sequential basis, AFH adjusted EBITDA grew 6.2 million from Q1 2025. The sequential increase is partially driven by the expected benefits of insourcing our paper supply post the Sherbrooke LDC paper machine startup. Moving on to slide 14, we present our consolidated revenue for Q2 2025, which improved 5.2% year-over-year to $536.1 million. The increase was mainly due to higher consumer sales volume, favorable selling prices, and a positive FX impact. These were partially offset by slightly lower AFH sales volume. On a geographic basis, revenue in Canada rose 20.7 million, or 7.4% year-over-year, while U.S. revenue grew 5.6 million, or 2.4%. On slide 15, we provide the details of our year-over-year profitability. Adjusted EBITDA increased $7.2 million to $72.5 million in the quarter, resulting in a margin of 13.5% compared to 12.8% for the same period last year. The following factors can explain the year-over-year growth, which is higher sales volume, increased selling prices, and lower manufacturing overhead costs. And these items were partially offset by higher pulp prices, unfavorable mill performance at our Memphis facility, greater freight costs, and an increase in SG&A expenses. Now, if we turn to slide 16, where we compare Q2 revenue to Q1 2025, revenue decreased by 10 million sequentially, or 1.8%, primarily due to U.S. sales volume and unfavorable FX impact. These factors were partially offset by an increase in selling prices. Geographically, revenue in Canada grew $13.2 million, or 4.6%, while revenue in the U.S. declined by $23.2 million, or 8.9%. The lower U.S. sales volume in Q2 reflects some inventory rebalancing by our customers following a build-up in Q1 as a proactive response to potential tariffs. On slide 17, adjusted EBITDA in the second quarter decreased sequentially by 3.3 million, or 4.3%, to 72.5 million due to higher manufacturing overhead costs, lower U.S. sales volume, increased pulp prices, and an unfavorable FX impact. These factors were partially offset by lower freight and warehousing costs, increased selling prices, as well as a decrease in marketing and SG&E expenses. Adjusted EBITDA margin reached 13.5% in the second quarter compared to 13.9% in Q1 2025. Now turning to our balance sheet and financial position on slide 18. Our cash position was $85.3 million at the end of the second quarter compared to $141.8 million at the end of the Q1 2025. The decrease was primarily due to a movement of $29 million U.S. to a restricted cash account as per one of our credit agreements. The long-term debt at quarter end stood at $1,125,500,000, down $61,200,000 sequentially, while the net debt increased slightly by $14,300,000. Our leverage ratio remains stable at four times across all three reporting periods. And to conclude my section, we will review the capital expenditures on slide 19. CapEx for Q2 2025 amounted to $10.8 million, which included a small carryover amount for the Sherbrooke expansion project. We now expect 2025 CapEx to range between $70 and $90 million for the year, and this includes some spending in the balance of the year related to the new Memphis converting line announced in July 2025. Thank you for joining us this morning, and I'll now turn the call back to Dino.

Thank you, Michael. Please refer to slide 20, which highlights our 2030 sustainability targets. On June 4th, we published our latest sustainability report, which tracks our progress towards these goals. This transparent reporting holds us accountable while allowing our key stakeholders to monitor our progress. We are proud of the progress we have made and encourage you to explore the full report on our corporate website. Now please turn to slide 21 for my closing comments. We are expanding our business across our customer base in 2025 and beyond. We have actions ready to manage our margins amid ongoing volatile economic conditions. We are investing in Memphis to drive efficiency and support growing U.S. sales. We will continue to drive long-term share gains across all our brands. We are leveraging our Made in Canada positioning to elevate our brands among Canadian consumers within an uncertain market environment. Our away from home business will continue to benefit from internally sourced paper with sustained profitability expected to continue. And we are actively developing our organizational capabilities to strengthen our adaptability and our resilience. Finally, let's turn to our outlook for the third quarter of 2025. We expect our performance to strengthen in Q3 2025 with adjusted EBITDA in the range of $75 to $80 million. We will now be happy to take your questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star key followed by the number one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star key followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Hamir Patel of CIBC Capital Market. Your line is now open.

Hi, good morning. Do you appreciate the overall dollar sales market share figures that you provide, but would you have any insights you could share into how your market share has been evolving specifically in away from home and what the upside there could be with the recent Kashmir and Scotty's launches?

Yeah, that data is less visible, obviously, just given that segment, Amir. So we measure it just based on how we see the market grow and then how we see our growth and do that kind of ratio. And we continue to show strength, notwithstanding a little softer Q2. We continue to show strength. We know we have a strong customer base. The branded business is an evolutionary opportunity for us and a natural fit, given the investments we make in our brands on the consumer side. And obviously, some fortuitous timing, you know, launching those brands at a time when there was a big focus on Made in Canada, and obviously those are well-known, strong Canadian brands. So that's also helped propel the interest in those brands in the away-from-home segments. So, you know, I don't know that I could give you a share number specifically, Amir, other than we continue to grow at or better than market. We are moving into the branded space. We are looking at innovation in other categories as well to expand our portfolio. And then clearly the opportunity for away from home is growing in the U.S. market. We are a fairly small player, and that is part of our strategic plan to continue to invest and grow in that marketplace.

I appreciate the call, Dino, and when you just referenced expanding into other areas, are there certain products in that away-from-home segment that you don't produce that you're considering producing?

I mean, we're always looking for adjacencies, not just in away-from-home and consumer as well, and I think as we look to launch adjacencies, we would like to make sure that we launch adjacencies both in the consumer segment and the away from home segment. So these would be products that are near in. I'm not going to give any specifics. But, you know, we're talking something that is within certainly our wheelhouse, something that we have a reason to believe that we can win and have a point of difference in the marketplace. Okay.

Fair enough. And, you know, are you able to give us any update on the potential TAD3 project and just, you know, given the evolving trade environment, should we assume that the next expansion, whenever it is actioned, would likely be south of the border?

So first of all, that is a very active project. I would say there's a lot of energy in our organization trying to bring that to closure to make a decision. Obviously, it's a big investment. There's a lot of work streams on that, including assets, location, customer base, et cetera, funding, you know, a key one. So we're very active on that. It's taking a little longer, just given the uncertainty in the market. However, we are committed to come to resolution on that. I won't give you a specific timing, but my hope is sooner versus later. As it relates to the trade environment, other than the economic uncertainty, we are going to make the decision based on long-term where our growth opportunities are. So You know, certainly we have to understand the current trade environment, but these assets are there for 50-plus years. We want to make sure we're making a decision based on where the market growth opportunity is for us, and that will be a key factor in the decision.

Okay. Fair enough. That's all I had. I'll turn it over. Thanks.

Thanks, Amir.

Our next question comes from Sean Stewart of TD Cowan. Please, go ahead.

Thank you. Good morning. Dino, just a follow-up question on the next TAD project. Does the Memphis reconfiguration have any bearing on the site or timing decision for that project? Can you give us a sense of how that might feed into the decision-making process for you guys?

No, it would not. You know, there... We needed to do the Memphis site. Obviously, we wanted to get converting capability as soon as possible, and our Memphis site is a great site for us. Yes, it's undergoing some transformation, and that was an ability for us to increase our converting firepower. Our paper output was actually outpacing our converting, so this will now give us an opportunity to be more in balance and the ability to continue to grow. That was done in isolation. Obviously, if and when we do announce a new site, then there will be synergistic benefits across Memphis, but also Sherbrooke that will make us more efficient from a geographic perspective. positioning, you know, focus on product production. So that'll help our network be more, our CAD network be more efficient. But they are unrelated decisions other than, as I said earlier, you know, a lot of our growth, despite a little bit of softness in Q2, our long-term growth continues to be in the U.S. So this will give us, Memphis capability gives us immediate opportunity to capitalize on some of that.

Thank you for that. On the away-from-home piece, some good progress this quarter, benefiting from the insourcing after the Sherbrooke project. Just on that front, how much of that insourcing is fully captured in these results? I'm just trying to get a sense of contribution upside for that segment, just related to the insourcing piece of it.

Yeah, maybe before I can ask Mike to answer that, but I just want to highlight one thing, because we talked about that new machine, and what the new machine allowed us to do is allowed us to kind of reset our network of paper production that allowed the right paper at the right location for the right business. So it wasn't that... AFH is taking all that Sherbrooke venue, Sherbrooke line, it's allowed us to reset our network and get the paper in the right place, which allowed AFH to now be substantially all internally sourced. As far as, I'll turn it over to Mike maybe to talk a little bit about how much of that's reflected.

Hey, Sean. So, you know, obviously as the machine's turning up, the first use of that paper will be to offset any external purchases like Dino mentioned. But as the machine continues to go up its learning curve, which is projected to be over multiple years as previously discussed, the additional gains will come from volume growth across various of our business areas. So it's not necessarily going to be specific to away from home or U.S. or Canada, but it will be a mixed bag across all three of them. And that will happen over the next few years. So in terms of the AFH performance itself, I mean, we'll see most likely continued improvements there, but maybe not as a drastic step up as what you saw from Q1 to Q2.

Got it. Okay. That's all I have for now. Thanks very much. Thank you.

As a reminder, if you wish to ask a question, please press star 1. Your next question comes from Zachary Evershed of National Bank Financial. Please go ahead.

With the latest tariff introductions in August, how is that going to affect your U.S. operations, thinking specifically about perhaps imported Brazilian pulp for the U.S. market?

Yeah, Zach, that's a great question. Obviously, almost all tissue manufacturers have some sourcing from Brazil, some more than others. So this is something that will impact any tissue manufacturing in the United States. Some tissue manufacturers obviously have a much bigger footprint than we do, and you've seen some announcements from some of them around the need to price to cover this. I would say it's a manageable number for us, just given the size of our business. I would also say that we are reflecting that in our pricing models for as long as it's going to be there. So I don't anticipate any material impact to our results because of it. either because it's not large and or because we will be pricing some of it in our models as long as it's there.

That's clear, thanks. And then at the AGM, you did mention M&A is on the radar. Can we get an update on what you're seeing out there and how that compares versus opportunities for greenfield expansion?

Yeah, I mean, pure tissue, there's not a lot left. Obviously, with the Clearwater and Royal Sail, there could be some tack-on opportunities. We'll continue to look at that, but they would likely be small. As I mentioned earlier and as we announced late last year, we're investigating a greenfield site. Even though they tend to be quite expensive capital costs, You know, Greenfield allows you to have the latest technology, allows you to geographically place it in the right location and set it up for future success. Obviously, you have to get your customer base. So, you know, we're looking at a Greenfield site and we are looking at TACON M&A opportunities, but I would suspect those to be fewer than they've been in the past and likely of smaller magnitude opportunities. So if something works, we will definitely look at it. Obviously, in addition to that, we've got to just manage our cash and capital allocation. So all those things will have to come together for us to want to take on M&A.

Gotcha. Thanks. And just one last one for me. On the front-loaded shipments that affected the quarter, would you be able to quantify that in any way, or did you see any abnormal behaviors this quarter that might affect Q3?

I don't think we're going to quote a number, but I would say that as you look at the quarter, the three months in the quarter, we saw the biggest impact in our April month, and then it started to recover so that we exited the quarter in June with a very good run rate. So even though the quarter looks soft, if you do the run rate in June, That would just tell me we're through that now, and one of the confidences we have in calling our Q3 guidance is because we're seeing that recovery coming. So we do believe that was temporary. I'm not going to quote a number on exactly what it was, but you can tell the difference in our EBITDA delivery and our U.S. performance in Q1 versus Q2. Probably figure out some sort of midpoint there that might give you some comfort.

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

There are no further questions at this time. I will now turn the call back over to Dino Bianco. Please continue.

Great. Thank you all for joining us on the call today. We look forward to speaking with you again following the release of our third quarter results for 2025. I want to thank you all and have a great day.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.