KP Tissue Inc.

Good morning and welcome to KP Tissue's second quarter 2026 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 the time for you to queue up for questions. If at any time you have difficulties hearing the conference, please press star followed by zero for operator assistance. I will now turn the call over to Doris Grbic, 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 2026 financial results. With me this morning is Dino Bianco, the CEO of KP Tissue and Kruger Products, and Michael Keays, the CFO of KP Tissue and Kruger 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 Q2 2026 results was published this morning and will be available on our website at kptissueinc.com The financial statements and NDNA 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?

Thank you, Doris. Good morning, everyone, and thank you for joining us for our second quarter earnings call for fiscal 2026. We maintained strong momentum in the second quarter of 2026, Highlighted by double-digit growth year-over-year and adjusted EBITDA to $90.6 million. This growth, achieved against an uncertain economic environment, was mainly driven by higher sales volume in the U.S. and lower pulp prices. Revenue grew nearly 3% in the second quarter, reflecting strong growth from our away-from-home business. Looking ahead to the second half of 2026... We anticipate ongoing market softness in the Canadian consumer market with some consumers trading down to private label products to contend with inflationary pressure. We have put in place a trademark recovery plan for the second half of 2026 which should deliver improving shares as we move through the year. Given the recent tariff announcements affecting North America, we do not expect the impact on our business to be significant. We will continue to closely monitor the impact of potential tariffs and develop contingency plans to mitigate any associated financial risk. For the longer term, we are making progress towards securing a preferred location for a new TAT facility in the western United States. And now I'd say let's take a closer look at our quarterly numbers on slide six. As previously mentioned, we delivered adjusted EBITDA of more than $90 million in the second quarter of 2026. This is up 25% year over year on a revenue of $550.9 million. Revenue in Canada declined 2.6% in the second quarter, reflecting the market softness I mentioned earlier. It should also be noted that we are facing a high comparable in Canada, with sales growth of 7.4% or $20.7 million in the second quarter of 2025, which is driven by strong made-in-Canada activities and promotion last year. Revenue in the U.S. remained robust with sales growth of 9.5% in the second quarter of 2026. Let's go to slide 7, which shows pulp average prices in Canadian dollars that increased sequentially in the second quarter of 2026. On a year-over-year basis, NBSK average prices declined 13.4% due to continued overcapacity, while BEK average prices were up 15.2% during the same period. Again, industry analysts expect both NBSK and BEK prices to trend upwards late into 2026 and into 2027, but BEK should accelerate at a faster pace and a higher level. Let's move on to our operations on slide eight. Production rates for paper machines and converting operations continue to exceed expectations across our network in Q2 and the first half of the year in general. We are very pleased to continue to maintain a strong safety culture and strong safety results through the middle of the year. At Memphis, our new state-of-the-art converting line, which launched early in the second quarter, is progressing ahead of plan, allowing us to expand our capacity and produce a wide range of high-quality tissue products for our U.S. customers. We are also pleased that our Memphis facility is delivering on key safety, productivity and Sustainability Metrics. And finally, as previously mentioned, we are progressing towards selecting a new TAT facility in the Western United States. Let's turn to slide nine on brand support. During the second quarter, we continued equity building campaigns for our cashmere, sponge towels, Scotties and Bonterra brands. We also leveraged our Made in Canada positioning with activities supporting cashmere and purex bathroom tissue. In addition, we modernized our cashmere packaging to enhance brand segmentation for our ultra-strong, ultra-soft, and original offerings, which should make it easier for consumers to shop our products. Also, during the second quarter, we launched our national and international award-winning Cashmere Ultra Luxe Bathroom Guide in Montreal, recognizing exceptionally luxurious restaurants' bathrooms in the Montreal area. We also introduced several product innovations in the second quarter, including the launch of sponge napkins premium, offering premium softness and strength in a napkin. And we expand our collection of nature-inspired plastic-free Bonterra official tissue boxes created by Canadian designer and TV personality Sarah Richardson with the introduction of single box offerings. Turn to slide 10. The data presented is taken from Nielsen and shows Kruger Products branded market share performance in Canada over a 52-week period ended June 13, 2026. The numbers reflect a soft Canadian market due to inflationary pressures and slower population growth. We also experienced some share losses in the bathroom tissue and paper towel categories with some consumers trading down to private label products. As previously mentioned, A share recovery plan has been put in place for the second half of 2026, which should deliver improving shares as we move through the year. In facial tissue, we increased our leadership position to 47% of the Canadian market, supported by continued strong investments in our Scottish brand and innovations. Let's look at Kruger Pro, our away-from-home segment on slide 11. Q2 2026 revenue and volume grew year-over-year, but profitability declined slightly due to high transportation costs. Although volume rose in both Canada and the United States in the second quarter, our U.S. business continued to drive stronger growth versus Canada. On a sequential basis, Kruger Pro delivered increased revenue volume and profitability. During the second quarter, we also announced a price increase to offset inflationary impacts on our Kruger Pro business, primarily driven by higher fuel and transportation costs. and finally strong operational performance continued to support sustained growth in the commercial market. 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 2026. As Dino mentioned, we generated an adjusted EBITDA of $90.6 million on sales of $550.9 million in the quarter. representing strong year-over-year adjusted EBITDA growth of 25%. Net income totaled $22.1 million in Q2 2026, comparable to the second quarter of 2025. The higher adjusted EBITDA was mainly offset by unfavorable foreign exchange difference. In our quarterly segmented view, on slide 13, revenue from our consumer business increased by 1.9% year-over-year to $457.6 million, This increase was driven by higher U.S. sales volume, partially offset by a slight decrease in Canada. In our away-from-home segment, revenue improved 7.4% year-over-year to $93.3 million, primarily due to higher U.S. sales volume. Consumer-adjusted EBITDA in the second quarter totaled $85.3 million compared to $69.2 million in Q2 2025, with a margin of 18.6%, representing an improvement of three points over the same period last year. On a sequential basis, consumer adjusted EBITDA increased by $1.4 million from Q1 2026. For our away-from-home segment, adjusted EBITDA amounted to $8.5 million, compared to $9 million in Q2 2025, with a margin declining by one point year-over-year to 9.1%. Sequentially, AFA suggested EBITDA increased $2.2 million from Q1, 2026. Moving on to slide 14, we show our consolidated revenue for Q2, 2026, which reached $550.9 million, up by 2.8% year-over-year. The increase was primarily due to higher U.S. consumer and AFH sales volume, partially offset by lower consumer volume in Canada. On a geographic basis, revenue in Canada declined $7.7 million or 2.6% year-over-year, while U.S. revenue increased $22.5 million or 9.5%. On slide 15, we provide details of our year-over-year profitability. The adjusted EBITDA increased $18.1 million to $90.6 million, resulting in a margin of 16.4% compared to 13.5% for the same period last year. The year-over-year increase was driven by improved mill performance at the Memphis facility, higher sales volume, and lower pulse prices, partially offset by elevated freight costs and greater SG&A expenses. Now let's turn to slide 16, where we compare Q2 revenue to Q1 2026. Revenue increased $6.3 million sequentially, or 1.1%, primarily due to higher AFH sales volume. Geographically, revenue in Canada increased by 3 million, or 1%, while U.S. revenue rose by 3.3 million, or 1.3%. On slide 17, adjusted EBITDA improved sequentially by 3.7 million, or 4.2%, to 90.6 million, and these were mainly due to lower manufacturing overhead costs, higher AFH sales volume, and lower marketing expenses. These factors were partially offset by the elevated freight costs and warehousing expenses and higher SG&A expense. Adjusted EBITDA margin attained 16.4% in the second quarter compared to 16.0% in Q1 2026. Turning to our balance sheet and financial position on slide 18, our cash position declined In Q2 2026, reaching $165.2 million compared to $205.9 million at the end of Q1 2026, the decrease was primarily due to changes in working capital. Total debt at the end of the second quarter remained stable compared to the end of Q1 2026. And our leverage ratio of 2.9 times at the end of the second quarter remained stable compared to Q1 since the increase in net debt was offset by a higher adjusted EBITDA over the last 12-month period. Now to conclude my section, we will review capital expenditures on slide 19. Our CAPEX for Q2 2026 totaled $15.5 million compared to $16 million in Q1. For 2026, our CAPEX is expected to be in the range of $90 to $110 million, which includes spending on related strategic projects, including the pre-engineering work for our U.S. HAT extension. Thank you for joining us this morning, and I will now turn the call back to Dino.

Thank you, Michael. Let's turn to slide 21 for my closing comments. We delivered strong profitability in the first half of 2026. We remain actively focused on margin delivery given potential escalating input costs and tariffs. We are ramping up our new converting line in Memphis, which is adding capacity to our U.S. network. We will continue to invest in our brands to drive long-term share, including the share recovery plan that I talked about for the back half. We expect our Kruger Pro business to continue to deliver profitable growth. We are making progress towards securing a location for the new TAS tissue plant in the western United States. And we are developing our organizational capability to strengthen our adaptability and resilience given the continuing economic changes. Finally, our adjusted EBITDA outlook for the third quarter of 2026 is expected to be in the range of our Q2 2026 results. We will now be happy to take your questions.

Thank you. Ladies and gentlemen, we will now conduct a question and answer session. If you have a question, please press the pound key followed by one on your touchstone phone. You will hear a one-time prompt acknowledging your request. Your questions will be polled in the order they are received. If you would like to decline from the polling process, please press the pound key. Please ensure you leave the handset if you are using a speakerphone before pressing any keys. One moment, please, for your first question. Your first question comes from Ahmed Abdullah with National Bank of Canada. Please go ahead.

Hi, good morning, and thanks for taking my question. You mentioned a share recovery plan for Canada in the second half. Can you perhaps give us a bit more color as to how that's going to work? What's the main levers behind that? Will it require promotional activity or grant investment? And how quickly do you expect to see that benefit?

Yeah, great question. You know, we saw some erosion to our share policy. Probably around the month of March and then continued into April and May. I'm talking mainly bathroom tissue and towel. Potential has been strong. We start to see some recovery in June as we put some plans in place and we expect to continue to see recovery. I guess it would come down to probably a couple of things. First off, I think in some accounts, some of our pricing got a little out of whack and We had to make some course corrections to make sure that our price gaps were in the place where we need them to be. So we have done that. We have worked with the accounts and done a category management story to be able to demonstrate the need to have the leading brands at a price that is good for the consumer and good for the customer. So we are doing that. We have secured additional promotional activity. because of some of the shortfalls that we had. I would also say there was a bit of a, you know, we all lapping a very strong last year. We had, you know, Made in Canada, a very strong sentiment from the consumer. I think the sentiment is still there, but not to the level it was last year. So some of that we're lapping, that's creating some of the share loss because we were benefactors of that. And then lastly, we put a product in the marketplace up on towel that we didn't probably support enough in terms of communication with the consumer of the value that that product delivered. So we're going to make some tweaks to our communication and to the product itself. So is it going to cost a lot of money? I don't think so. It's not material. We're basically tweaking at this point and really, really focused on getting the execution We're starting to see benefits already, as I'm speaking to you here in the mid-August, and we expect to continue to see progress through the second half.

Got it. So that perhaps talks to some sustainability of the consumer margin here. And just on the Memphis progress, how far along are you in kind of realizing the full earnings potential of that facility and What incremental productivity or cost benefits can we still see here?

Yeah, great question. And I've often talked about Memphis. Unfortunately, I've talked about the turnaround, and I am so proud of what that entire team has been able to do. I mentioned not only great performance, work that they're doing on sustainability, work that they're doing – to keep their people safe. I think there's a renewed culture and attitude there, thanks to the leadership and the entire team that is there with a new winning mentality, and they're delivering against that. Plus, as you know, we have been investing over the years with cash around putting new lines in, doing the maintenance on our lines. So we're progressing quite well. I would say we probably have another year before we get to our maturity level. You're seeing the performance improvement through the assets. I'd say the areas where we probably need to tweak a little bit more is we still spend a lot of maintenance because we've been getting those assets in place to working condition or base condition. Once we do that, we'll be able to get back to normalized maintenance costs, and I think that should also help improve the economics of that site. We're also looking at making additional investments to increase capacity at that site. So that would be not quite a big strategic investment, but some equipment improvements that we would look at making to expand capacity of what I would call Very ultra-premium tissues. So there's a lot of positive things going on in Memphis, and I think the turnaround is happening. It's sustainable. We'll continue to see growth as we go in through 2027. Okay.

That's helpful. Thanks. And just on the tax facility, I mean, it seems that things are just taking a bit longer than initially expected. What kind of milestones should we be looking for over the next You know, six months. And what do you expect kind of a final investment decision to happen where we can get more details around that project?

Yeah, I guess I'm not surprised by that question. So thank you for that question. I would say definitely it's taken longer. And I would characterize the reason why it's taking longer is first off, it's a greenfield site. So whenever you're dealing, you know, that's the primary site we're looking at. Whenever you're dealing with a greenfield site, there's a lot more work to be done. There's work to be done on, you know, infrastructure, water, permitting, road rail, wastewater, a lot of work to be done to make sure... Hello, are you still there?

Yes, hi, I'm still here.

Okay, I don't know what happened there. Somebody didn't like what I was saying. So anyways, a lot more work when it's a greenfield site, not just for us, for the particular city or region. So working through all that and doing the due diligence, I think that's one aspect. And we continue to do engineering and working to secure financing. I think the other piece that's maybe slowed it down a little bit is we're dealing with a very uncertain economic environment. So before we make the final announcement, we'd like to get more clarity on what's going on in the economic environment. Obviously, I talked about tariffs, the status of KUSMA, to some extent, the collateral impacts of the war in the Middle East. There's just a lot of unknown, and to make such a big investment, I think we want to get a little more clarity on what is going on in that environment. We're still very committed to the projects, but very committed to our growth in the United States, just doing a little more due diligence and taking time. As it relates to a specific timeline, I'm not going to give you a specific date. It's more based on the activity that I just explained, but I would hope before we got out of this year that we would have, you know, provide clarity.

Okay, that's very helpful. I'll pass the line. Thank you very much. Thank you.

Thank you.

The next question comes from Hamir Bedell with CABC Capital Markets. Please go ahead.

Hi. Good morning. Dino, are you able to quantify the magnitude of the price increases that you've announced in AFH?

Yeah, sure. So we announced a price increase of 3% to 5% that was going to be effective September 1st. That was mainly to cover, as I said earlier, transportation costs and packaging and oil-based inputs. So that is moving through the system. It's across both Canada and the United States. Moving through the system, obviously others have also announced pricing before and after our announcement. So it looks like the market is feeling the same sort of cost pressures. So, you know, and that price increase affected about two-thirds of our business because the other third is generally on contract and they renew as those contracts renew. So that's more of a general market increase that we took. And as I said, you've probably seen very similar announcements from others.

Okay, great. And just coming back to the consumer business, you know, your guidance overall is quite encouraging for Q3, but I know you're, you know, working to restore market share. You highlighted maybe, you know, your pricing, sticker prices have perhaps making some adjustments there, but Is there a component of perhaps balancing that with desheeting and other innovations about the, you know, maybe per sheet pricing relatively stable?

Yeah, we're looking at all that, Amir, but as you know, when you're dealing with product like particularly fat tissue, it's very important to get your format to be very competitive and very important to have a Competitive Price Point. We are not the lowest priced product in the market, as you know, but there's a certain gap that we need to maintain, and we just want to make sure that we have that gap and not more than that gap at any of our customers across the board. So we continue to look at Tissue Inc., we continue to look at innovation, we continue to look at product formats, obviously all the marketing and promotion that we do, but we need to get our fundamentals straight. and I think we've worked with particular accounts to make sure that we've got that balance in place. There's also a natural, I mentioned in my prepared remarks, there's also a natural movement, I think, to some private label products as consumers are feeling cash strapped and maybe going more on the value side. So we're seeing that. and maybe we will promote more of our base or value products and make sure we've got an offering for that consumer that wants that price point.

Okay, fair enough. And just, you know, with respect to the guidance, it's fair to assume the Q3 guidance assumes no tariff impact and then just related to the tariffs, the potential 338. So the worst case, if they were in effect for any period of time, what is the percent of your... Volumes would be affected.

Yeah, I think everybody is still working through all this. We're a week and a bit away, but a lot could happen between now and then. We're preparing mitigating actions around some pre-shifts, maybe looking at alternative sourcing. We don't want to trigger anything dramatic at this point, just want to make sure we understand if the tariffs are going through and if there's any changes in how they're going to be implemented. So we are doing some pre-card mitigating work ahead of time that's what I would call fairly minor in scope. We reassured all our customers that there's not going to be an impact to them from this. As it relates to your specific question, we would be looking at less than 1% of our total sales would be related to this tariff, and we would continue to manage that down.

Okay, great. So that's pretty minor. I just thought the last question I had, I know maybe back in June, Valmay announced a new advantage NTT technology for sort of ultra-premium tissue. You know, are you locked in with TAD technology for your next mill? And, you know, with respect to this newer version of NTT, do you see that as potentially a threat to TAD?

Well, I mean, there's always new technologies being introduced. I think TAD is a very proven technology. It's been around a long time. It proves that it can deliver what it delivers against. We obviously have two of them in our system. We know what they do. So, you know, we've declared internally and certainly you can see externally that we're going to have a strong conventional base, and we have that, and we launched a new technology. LDC machine a couple years ago in Quebec and we're going to have a strong premium base which is the TAD. Those are really the areas we're going to play in. Other technologies to me are you know I'd rather be in the technology we know and the technology the consumer wants and in the technology that we know how to and the market knows how to operate. So for me that's conventional and TAD.

Fair enough. That's all I have. I'll turn it over. Thanks, Dino.

Thank you. The next question comes from Ashon Stewart from Katie Cohen. Please go ahead.

Thanks. Good morning, everyone. Dino, you touched on relative positive momentum for her versus Softwood. and I'm wondering if you can remind us the mix between the two and your furnish and your ability to flex one way or the other depending on relative price momentum between hardwood and softwood.

Yeah, I'm not going to give you a specific answer, Sean. I know you want that, but we've been migrating more to NBSK as hardwood or BK, I should say, Over the years, we've been doing a lot of reformulation and really trying to understand what is the right bundle of pulp or furnish that gets us to the output we need at a favorable cost. And obviously, there's been improvements in areas like the EK as well in terms of its... Construct and being able to be used in substitution for MBSK. So we've been continuing to do that. We have some flex in some of our brands, and we can move between the two depending on the arbitrage. I've always said we're kind of 60-40 mix between the two, and I think that's the range we tend to operate in.

Okay, thanks for that detail. and one follow-up on the TAD project. You know, I appreciate all the details you've given around milestones to move this along. Just so I understand some context, though, you know, reading local press, it sounds like the site is locked in. Is that the case or is there still some competitive tension in one site versus another in the western U.S. to move this along?

Yeah, I'd say nothing's locked in until we tell you it's locked in. So, I mean, you know, there's always rumors out there. We have and we continue to look at various sites. We do have a lead site that we work with, but we do have other sites that are a small group of sites that meet the criteria. So, nothing's final until you hear it from us. There's always lots of speculation out there. And maybe I'll just leave it at that.

Okay, thanks very much. Thank you.

Thank you. Once again, if you would like to ask a question, please press the pound key followed by 1 on your touchtone phone. You will hear a one-tone prompt acknowledging your request. There are no further questions at this time. I will now transfer the call over to Dino Bianco for closing remarks. Please go ahead, sir.

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

Thank you. Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation. You may now disconnect your lines.