KP Tissue Inc. (KPT) Earnings Call Transcript

Good morning, and welcome to KP Tissue's Third Quarter 2026 Results Conference Call. Today's call is being recorded for replay. [Operator Instructions] 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 Third 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 measures can be found in our MD&A. The press release reporting our Q3 2026 results was published this morning and will be available on our website at kptissueinc.com. The financial statements and MD&A will also be posted on our website and on SEDAR+. 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, and thank you for joining us for our third quarter earnings call for fiscal 2026. Our continued strong momentum in the third quarter has led us to deliver more than 3 consecutive years of profitable growth. Revenue in the quarter increased 5.1% and adjusted EBITDA grew 9.1% despite an uncertain economic environment. Growth was broad-based with higher sales in both Canada and the United States. In Canada, revenue increased 3.2% in the third quarter. We are seeing positive momentum from our Made in Canada positioning, our targeted promotional activity and product and packaging innovation. Building on this progress, we remain focused on investing in our brands and enhancing our value proposition for Canadian customers and consumers while rebuilding our share to support sustainable growth and strengthen our market-leading position. The U.S. remains an important part of our long-term growth strategy, where we delivered robust growth in the quarter, supported by continued strength in premium private label segment. In our Away-From-Home segment, Kruger PRO, we are expanding our trademark brands and building distribution across the portfolio to support future growth. We're also making progress on our new TAD facility. However, a final decision will be deferred until there is greater certainty in the economic and trade environment. Accordingly, we anticipate that the new TAD facility will be delayed and will not commence operations in 2028. Overall, our third quarter performance demonstrates the resilience of our business, and we continue to grow despite broader economic and trade uncertainty. Looking ahead, we expect to navigate escalating input costs and increased inflationary pressure. Productivity initiatives and pricing adjustments are among the mitigation measures that are under consideration to manage these pressures and support margin delivery. At the same time, we remain focused on investing in our brands, rebuilding share and driving strong execution to sustain our momentum going forward. Now let's take a closer look at the third quarter results on Slide 6. We generated adjusted EBITDA of $93.5 million in the third quarter of 2026 on revenue of $589.7 million. Revenue in Canada rose 3.2% year-over-year, while sales in the United States grew 7.3%, reflecting increased momentum with premium private label. On Slide 7, average pulp prices in Canadian dollars increased slightly in the third quarter on a sequential basis. Year-over-year, average NBSK prices decreased 6.2% due to overcapacity, while BEK prices increased by more than 30%. Industry analysts expect NBSK prices to start to trend upward while BEK will remain stable. Let's move to operations on Slide 8. Production rates for our paper machines and converting operations continued to exceed expectations across our network in the third quarter and year-to-date. We're also pleased to have achieved this success while maintaining a strong safety record and culture. At Memphis, the ramp-up of our new converting line remains ahead of plan, adding capacity to support our continued future growth. The facility also continues to deliver against key safety, productivity and sustainability metrics. Finally, as mentioned earlier, we continue to make progress on our new TAD facility project, but have deferred a final decision until there is greater clarity in the overall economic and trade environment. Let's turn to Slide 9. We present Kruger Products branded market share performance in Canada based on Nielsen data for the 52-week period ended September 5, 2026. Against the softer Canadian market, we experienced share pressure in bathroom tissue and paper towels, while facial tissue continued to perform well. This further strengthened our leadership position on Scotties. During the third quarter, we ramped up execution of our trademark recovery plan in Canada focused on rebuilding share through investment in our brands, targeted pricing, promotional activity, innovation and strong retail execution. While still early, initial results from these initiatives are encouraging. Scotties and Bonterra continue to perform well and SpongeTowels is starting to respond positively to these recovery efforts. Turning to brand support on Slide 10. Investing in our brands remains central to our trademark recovery plan. Given the current consumer sentiment around Canadian brands, we have increased investment to further leverage our Made in Canada positioning and contribute to rebuilding share. This has been complemented by targeted campaigns and product innovation across our core brands, including the introduction of a softer Scotties facial tissue alongside new Canadian series carton designs. We also upgraded our SpongeTowels UltraPro, featuring enhanced Sponge Pockets technology designed to provide greater absorbency and thickness, and this is supported by new on-shelf packaging. During the quarter, we continued equity building campaigns across Cashmere, Purex, Scotties, SpongeTowels and Bonterra to strengthen our core brands and support share recovery. We also presented our 23rd Annual Cashmere Collection at a gala evening and fundraiser in Toronto on October 7 in support of breast cancer awareness, prevention and treatment programs. Inspired by this year's Symphony theme, 16 Canadian designers showcased garments made entirely of Cashmere, which is Canada's best-selling bathroom tissue. Since 2004, the Cashmere Collection has raised more than $5.6 million in support of the breast cancer cause to the Canadian Cancer Society and the Quebec Breast Cancer Foundation. This year, we are continuing that support with specifically marked pink packaging for Cashmere and Purex Ultra Soft and Ultra Strong with $1 per pack sold donated to the cause. Let's flip to Page 11, where Kruger PRO remains an important part of our growth strategy. Revenue and volume increased year-over-year in the third quarter, although profitability was affected by higher logistics costs. On a sequential basis, volume increased in both Canada and the United States. As announced last quarter, a price increase took effect September 1 to offset inflationary impacts on our Kruger PRO business, primarily related to higher fuel and transportation costs. We also continue to strengthen the portfolio by expanding our trademark brand in the commercial segment and building distribution for our recently launched Titan Wipers & Cloths. Overall, we remain focused on driving sustained growth in Kruger PRO while continuing to invest in the business and manage inflationary pressures. 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 third quarter of 2026. As Dino mentioned, we delivered adjusted EBITDA of $93.5 million on sales of $589.7 million in the quarter, representing a strong year-over-year adjusted EBITDA growth of 9.1%. Net income amounted to $27.7 million in Q3 compared to $14.6 million in the same period last year. This increase was primarily due to higher adjusted EBITDA and a favorable foreign exchange difference. In our quarterly segmented view on Slide 13, revenue from our Consumer business increased by 5.2% year-over-year to $492.8 million in the third quarter of 2026. This increase was primarily driven by higher sales volume in Canada and the U.S., increased selling prices in the U.S. and a favorable FX impact on U.S. dollar sales. In our Away-From-Home segment, revenue improved 4.4% year-over-year to $96.9 million, primarily due to higher sales volume in the U.S., which was partially offset by slightly lower sales volume in Canada. The Consumer adjusted EBITDA in the third quarter of 2026 totaled $88 million, compared to $78.2 million in Q3 2025, with a margin of 17.9%, representing an improvement of over 1 point compared to the same period last year. On a sequential basis, Consumer adjusted EBITDA increased by $2.7 million from Q2 2026. For our Away-From-Home segment, the adjusted EBITDA amounted to $8.9 million in the third quarter of 2026, compared to $10.4 million in Q3 2025. And sequentially, AFH adjusted EBITDA increased $0.4 million from Q2 2026, with a stable margin of 9.2%. Moving on to Slide 14. We show our consolidated revenue for Q3 2026, which reached $589.7 million, up 5.1% year-over-year. The increase was primarily due to higher Consumer and U.S. AFH sales volume, along with a favorable foreign exchange impact on U.S. dollar sales. On a geographic basis, revenue in Canada improved by $9.7 million or 3.2% year-over-year, while U.S. revenue increased by $18.9 million or 7.3%. On Slide 15, we provide details of our year-over-year profitability. The adjusted EBITDA increased $7.8 million to $93.5 million in Q3 2026, resulting in a margin of 15.9% compared to 15.3% for the same period last year. The year-over-year increase was primarily due to lower pulp prices, higher sales volume and these items were partially offset by higher manufacturing overhead costs and elevated logistics costs. Now if we turn to Slide 16, where we compare Q3 revenue to Q2 2026, revenue increased $38.8 million sequentially or 7%, primarily due to higher sales volume across all segments. Geographically, revenue in Canada increased by $19.2 million or 6.6%, while U.S. revenue grew by $19.6 million or 7.6%. On Slide 17, adjusted EBITDA improved sequentially by $2.9 million or 3.2% to $93.5 million, mainly due to the higher sales volume, along with lower marketing and SG&A expenses. These factors were partially offset by higher manufacturing overhead costs, increased pulp prices as well as elevated freight costs and warehousing expenses. The adjusted EBITDA margin did reach 15.9% in the third quarter of 2026, compared to 16.4% in Q2 2026. Now turning to our balance sheet and financial position on Slide 18. Our cash position improved, reaching $176.4 million at the end of the third quarter, up from $165.2 million at the end of Q2 2026. The increase was primarily due to the higher adjusted EBITDA. Total debt at quarter end stood at $1.14 billion, a decrease of $18.4 million sequentially, reducing net debt by $29.6 million. Our leverage ratio also declined to 2.7x, compared to 2.9x in Q2 2026, further demonstrating our commitment to strengthening our balance sheet. Now to conclude my section, we will review capital expenditures on Slide 19. Our CapEx for Q3 2026 totaled $22.1 million compared to $15.5 million in the second quarter. For 2026, we have lowered our CapEx outlook to between $80 million and $100 million, which includes the spending related to pre-engineering work for the TAD expansion and other strategic projects. Now for 2027, our CapEx is expected to be in the range of $60 million to $80 million and at this time, excludes any spending related to our TAD expansion. Thank you for joining us this morning, and I'll now turn the call back to Dino.

Thank you, Michael. Please turn to Slide 21 for my closing comments. Our third quarter results demonstrate the resilience of our business as we continue to grow despite escalating input costs and broader economic and trade uncertainty. This performance was supported by strong execution, increasing contribution from our U.S. business and continued growth in Kruger PRO. In Canada, we remain focused on investing in our brands and rebuilding share through our trademark recovery plan while pursuing cost mitigation measures and maintaining our focus on margin delivery and continued profitable growth. We are developing scenario planning to address potential market opportunities and challenges and support our ability to respond as market conditions evolve. At the same time, we continue to advance our plans for our new TAD facility while taking a measured approach to its timing given the economic environment and the trade environment that we are currently in. Looking to the fourth quarter and assuming a similar tariff environment, we expect adjusted EBITDA to be slightly below Q3 2026 while remaining above the same quarter last year. We will now be happy to take your questions.

[Operator Instructions] The first question comes from Ahmed Abdullah from National Bank of Canada.

Just touching on the new TAD facility now being pushed beyond 2028. How much additional U.S. growth can your existing network kind of support until you perhaps see that TAD facility come online? And what kind of specific developments are you looking for from an economic perspective or a macro perspective that would give you the confidence to finalize this site decision?

Yes. Great question, Ahmed. I think on the first question, I'm not going to give you specifics, but I think we still have good runway to grow. We are investing in our existing assets, both Sherbrooke and in Memphis, our existing TAD assets, which helps our premium segment. We have capital programs in place to expand output in those assets. So we think we can get more out of the products -- out of the assets that we have to help us to continue to grow. We'll also look at our portfolio, making sure that we're maximizing the opportunities in our portfolio and maybe simplify it a bit. We've added the new converting line in Memphis, as mentioned. So I think that's going to help us. So I think with relatively minimal capital requirements, we can continue to expand before we start up a new facility, both in Canada and the United States for that matter. As it relates to what are the economic conditions, I think that's a great question. Obviously, when you spend the level of investment that needs to be made for a project of this size, you need to have security in terms of the outlook in the market, I think things like tariffs, understanding where that's going to land, not just for a month or 6 months, for long term. So I'm hoping we get some clarity on what is the trade environment going to be from Canada to the U.S. and U.S. into Canada so that we have clarity on the impact to either our brands -- or sorry, our products or the input costs for our products or the equipment we use to make those products. There's a whole network there that gets affected by that trade environment, not just as I said, the finished goods, raw materials, et cetera. So love to have some clarity there. Obviously, as much clarity as we can have on other cost inputs like fuel and so forth, that market tends to be more volatile naturally, but at least trying to understand whether there's at least a return to some level of normalcy in that. So I think those would be factors that would help us then decide when is the right time to make that decision.

No, that's definitely fair. In your remarks, you've obviously noted escalating costs and potential pricing adjustments. Which costs do you see potentially spilling into 2027 as a headwind for you? And how far along are discussions around pricing?

Yes. So you look at 2026, pulp, obviously, BEK continue to increase, NBSK was fairly docile, if you will. But freight and transportation costs really escalated during the year. And that was -- as you look at our cost basket, which includes, obviously, pulp is the biggest one, but we have packaging, a lot of petroleum-based products we use, fuel for transportation, those all escalated. We see those staying high, and then we see pulp, particularly, NBSK moving up in 2027, which will then create a cost basket that's going to require action to maintain our margin. And of course, we're looking at pricing, but we're also looking at any productivity initiatives we can do. Particularly, I'm speaking about the Canadian market on pricing. Last time we took pricing was 2024, for the Consumer business. So as we look at now the cost basket since that time, it has -- it will increase as we see costs go up. I'll remind you, we also priced our Away-From-Home business in September. So we're starting to see some of that traction come through. That was mainly driven by the impact of freight and transportation costs on that business. So it's -- we don't like to price if we don't have to. But I think if the estimates are where they expect them to be, then we will be ready to take action. How far along are we? Obviously, we've done the modeling. We have not made any official announcements. But if -- that could be pending very shortly.

Okay. That's fair. And I guess that's what's driving your fourth quarter kind of outlook, expecting the modest sequential decline in the fourth quarter.

Yes. Look, yes and no. I mean, I think fourth quarter is always a wildcard. I think if everything goes to plan, we could be at the high end of that range. And obviously, if there's pricing noise or more tariff noise or executional hiccups, everybody is jockeying for a final end of the year, customers, consumers, competitors. So we wanted to give ourselves a bit of room there. I think the fundamentals of the business are very strong. So I wouldn't read into that as any watch-out on the business. I just think we're trying to give ourselves some space, particularly with escalating costs coming our way.

The next question comes from Hamir Patel with CIBC Capital Markets.

Dino, for TAD 3, are you still viewing it as a U.S. project? Or are you also maybe considering locations in Western Canada?