KP Tissue Inc. (KPT) Earnings Call Transcript

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to KP Tissue First Quarter 2023 Results Conference Call. [Operator Instructions]. Before turning the meeting over to management, I would like to remind everyone that this conference call is being recorded on Thursday, May 11, 2023. I will now turn the conference over to Mike Baldesarra, Director of Investor Relations. Please go ahead, sir.

Thank you, operator, and good morning, ladies and gentlemen. My name is Mike Baldesarra. I'm the Director of Investor Relations for KP Tissue Inc. The purpose of this call today is to review the financial results for the first quarter of 2023 for Kruger Products and KP Tissue. We this morning have Dino Bianco, the Chief Executive Officer of KP Tissue and Kruger Products; and Mark Holbrook, the Chief Financial Officer of KP Tissue and Kruger Products. The following discussions and responses to questions contain forward-looking statements concerning the company's activities. Forward-looking statements involve known and unknown risks and uncertainties, which could cause the company's actual results to differ materially from those in the forward-looking statements. Investors are cautioned not to rely on these forward-looking statements. The company does not undertake to update these forward-looking statements except as required by applicable laws. There's a page at the beginning of the written presentation which contains the usual legal cautions, including forward-looking information, which you should be aware of. I'd like to point out that all figures expressed in today's call are in Canadian dollars unless otherwise stated. The press release reporting our Q1 2023 results was published this morning and will be accessible from our website at kptissueinc.com. Please be aware that our MD&A will be posted on the website and will also be available on SEDAR. Finally, I would ask that during the call to refer the presentation we have prepared to accompany these discussions, which is also available on our website. We'd also appreciate that during the Q&A period for you to limit your questions to 2. Thank you for your collaboration. Ladies and gentlemen, I'll now turn the call over to Dino Bianco, our CEO. Dino?

Thank you, Mike. Good morning, everyone, and thank you for joining us for our first-quarter earnings call for 2023. We are pleased to have delivered a strong quarter driven by our multifaceted approach to counter inflation, which included pricing and cost management initiatives. We also had a turnaround in our Memphis plant operations and continued strong revenue and operations across our network. Although we are still dealing with volatile pulp prices and a weakened Canadian dollar, we believe the actions we have undertaken and the investments we have made have set us up for continued strong performance in 2023 and beyond. We are steadily progressing along the road to recovery while continuing to invest in our business for the long term. Now let's take a look at our quarterly numbers on Slide 5. Revenue increased 13.1% to $451 million in the first quarter of 2023 on the strength of 2022 implemented price increases across all segments and regions. Also a favorable sales mix in the consumer segment and higher sales volume from our AFH business as well as positive foreign exchange impact on U.S. dollar sales. Canadian revenues improved 7.4% in the first quarter, while the U.S. grew 22.1% due to higher pricing, increased away-from-home volume, a shift in mix towards our high-quality TAD and facial products and a favorable foreign exchange impact. Adjusted EBITDA was up 71.9% year-over-year to $50 million in the first quarter, largely for the same reasons as stated above, but combined with the Memphis plant cost recovery, and then we did have some negative impact from foreign exchange on our cost base. On Slide 6, Pulp average prices in Canadian dollars declined single digits in the first quarter of 2023 from the previous quarter, while year-over-year prices rose significantly. NBSK and BEK average prices increased 10% and 15% in Q1 2023. Based on the industry forecast for 2023, pulp prices will continue to remain volatile but trend downwards, while the weakened Canadian dollar is expected to temper the decline. Turning to Slide 7. Inflationary pressure on input costs continued to rise in Q1 2023 compared to the same period last year but at a slower rate. We estimate that inflation increased our cost base year-over-year by between 4% and 6% in the first quarter of 2023. On the pricing side, all announced price increases have been implemented, and we're continuing to monitor the market to ensure that we remain competitive. And finally, we have maintained cost management initiatives to offset inflationary pressure in 2023. Key initiatives introduced last year mainly targeted CapEx, inventory, productivity, and discretionary spending. Let's move on to our Sherbrooke operations and expansion on Slide 8. TAD Sherbrooke continues to exceed ramp-up plans, including improvements in paper machine capacity. The start-up of our new bathroom tissue line surpassed expectations in the first quarter, while our facial tissue and paper machine lines are scheduled for implementation in the fourth quarter of 2023 and the end of 2024. And Phase 3 of our AI implementation is ongoing, including supply chain improvements. To sum up, Sherbrooke is performing extremely well, and sales are beginning to catch up to this increased manufacturing capacity. Turning to Slide 9. The shutdown of legacy assets in Memphis was completed as planned in the first quarter. The manufacturing focus has now shifted towards higher-margin TAD and facial tissue products. The new facial line, which has ramped up ahead of expectations, will also benefit from AI capability to optimize productivity. This new facial line in Memphis, along with the upcoming start-up of the line in Sherbrooke will step up our capacity to provide high-quality facial tissue products to the North American market. This market on the consumer side is tight on capacity and these new assets will drive incremental sales and customers for Kruger. Our Memphis TAD operations continue to progress sequentially after several measures were implemented to increase manufacturing output. As a result, the recovery at our Memphis operations has enabled us to improve our overall cost structure there. Now let's pivot to brand support on Slide 10. Based on improved financial performance, we plan on reinvesting in our brands to drive share growth. Q1 2023 marketing was focused on multi-brand activities, with the 42nd Annual Scotties Tournament of Hearts, in the third year of the Kruger Big Assist program, taking center stage. We're also ramping up our investment around mating Canada products to support our Maiden Canada positioning for our brands. And finally, Bonterra, our environmentally conscious product line captured 3 packaging awards in year 1 of its launch and was shortlisted for 2 other innovation and advertising awards. Moving to Slide 11. The data presented is taken from Nielsen. It shows market share performance in Canada over a 52-week period ending March 25, 2023. The data reflects our branded share continued to be affected by higher selling prices, a change in customer promotion strategy, and consumers trading down. Given pricing has recently stabilized and combined with increased marketing and continued innovation support, we should start seeing our market-leading share recovery in the upcoming quarters. Looking at Away-from-Home on Slide 12. Volume in a seasonally soft first quarter was down sequentially, but still 9% higher than Q1 2022. The business delivered a third consecutive quarter of positive adjusted EBITDA in Q1 2023 based on higher selling prices and increased sales volume. Our AFH segment is performing above its historical level, and we believe its new operating model is sustainable. However, we will keep monitoring the potential impact of any economic slowdown on this business. I will now turn the call over to Mark.

Thank you, Dino, and good morning, everyone. Please turn to Slide 13 for a summary of our financial performance in Q1 2023. As Dino mentioned earlier, we delivered strong revenue and adjusted EBITDA growth in the first quarter as previous selling price increases and also cost management initiatives improved results. There was a net loss in the quarter that totaled $49.3 million in Q1 compared to net income of $1.4 million for the same period last year. The decrease was primarily due to a deferred tax expense of $57 million, recognized as a result of the corporate reorganization on January 1. Other items affecting the net loss primarily included a lower foreign exchange gain and greater depreciation expense, partially offset by improved adjusted EBITDA and lower interest expense and other finance costs. In the quarterly segmented view on Slide 14, consumer revenue increased 9.8% year-over-year to $376.5 million in the first quarter and sequentially decreased slightly by 0.6% compared to Q4 2022. In the Away-From-Home segment, revenue grew 33.2% year-over-year to $74.5 million and was down sequentially 6.1% from the previous quarter due to seasonal factors. Consumer adjusted EBITDA totaled $51.3 million in the first quarter compared to $35.4 million in Q1 2022 with an adjusted EBITDA margin of 13.6% versus 10.3% for the same respective period. Sequentially, consumer-adjusted EBITDA was up $8.6 million or 20.2% from Q4 2022. For the AFH segment, adjusted EBITDA amounted to $0.9 million in the first quarter compared to a negative $3.2 million in Q1 2022 with a positive margin of 1.2%. Sequentially, AFH adjusted EBITDA was down $4.8 million from Q4 2022, as Q1 is a seasonally lower quarter. On Slide 15, we review year-over-year revenue growth for Q1, which improved by $52.3 million or 13.1%. This growth is attributable to the carryforward of selling price increases from 2022 across all segments and regions, favorable sales mix in the consumer segment, and higher sales volume from our AFH business as well as a positive foreign exchange impact on U.S. dollar sales. These factors were partially offset by lower sales volumes in the consumer segment. On a geographical basis, revenues in Canada rose $17.9 million or 7.4% year-over-year, while U.S. revenues grew by $34.4 million or 22.1%. On Slide 16, we provide additional insight into profitability in the first quarter. Adjusted EBITDA increased $20.9 million to $50 million, representing a margin of 11.1% from $29.1 million in Q1 2022 or a margin of 7.3%. The increase in adjusted EBITDA is primarily due to the higher selling prices relative to Q1 last year, favorable sales mix in the consumer segment, reduced costs in Memphis plant operations, and lower freight rates. These items were partially offset by significant inflation on pulp and other input costs, lower sales volume in the Consumer segment, higher warehousing and SG&A expenses, and the unfavorable impact of foreign exchange fluctuations. Now let's turn to Slide 17, where we compare Q1 revenue sequentially to Q4 2022. Revenue declined by $7.1 million or 1.6%, primarily due to seasonally lower sales volume in our AFH segment and less volume in the U.S. consumer business, along with a slightly negative foreign exchange impact on U.S. dollar sales. Geographically, revenue in Canada was slightly lower by $1.5 million or 0.6% sequentially, while revenue in the U.S. decreased $5.6 million or 2.9%. On Slide 18, adjusted EBITDA in the first quarter increased sequentially by $5.6 million or 12.6% despite a decrease in revenue from Q4 2022. This growth was due to several factors, including a favorable sales mix, lower freight and warehousing costs, Memphis plant cost recovery as well as reduced energy costs. These factors were partially offset by lower sales volume and higher SG&A expenses. Turning now to our balance sheet and financial position on Slide 19. Our cash position stood at $45.3 million at the end of the first quarter, a decrease from $78.4 million at the end of Q4 2022 as we continued investing in our Sherbrooke expansion project. Long-term debt at quarter end totaled $ 1.096 billion, up $18.8 million from the end of the previous quarter. Net debt increased $51.9 million sequentially to $1.085 billion, again due to the Sherbrooke Expansion project and higher working capital. Our net debt to last 12 months adjusted EBITDA ratio improved to 7.9x in the first quarter from 8.9x in Q4 2022. Leverage decreased on the strength of higher adjusted EBITDA in the last 12 months. We expect deleveraging to continue in 2023 despite ongoing investments in our Sherbrooke Expansion project as adjusted EBITDA improves. At quarter end, total liquidity representing cash and cash equivalents and availability from revolving credit agreements stood at $101.3 million. In addition, $10.7 million of cash was held for the Sherbrooke Expansion project. I will conclude my section by reviewing capital expenditures on Slide 20. Total CapEx in Q1 was $34.6 million, including $31.8 million for the Sherbrooke Expansion project. We are maintaining our CapEx forecast between $200 million and $230 million for 2023, primarily related to the Sherbrooke Expansion. Thank you for joining us this morning, and I'll now turn the call back over to Dino.

Thank you, Mark. Please turn to Slide 21. Our key targets for Reimagine 2030, which is our sustainable development plan are documented on this page, and I just want to highlight a couple of efforts that we are deploying against this. First, we're entering year 2 of our Bonterra product launch. Just to remind you that key features of this environmentally focused brand include plastic-free paper packaging, high-quality FSC-certified recycled fiber, carbon neutral production, and partnerships with 4 Ocean and OneTreeplanted and it's a maiden Canada product. Customer traction has been encouraging, given the current market environment, and we continue to look to grow this business and invest in it. The second area I want to highlight is that we're also using electric semi-trailer trucks that started carrying tissue products between Kruger products facilities in Quebec. These trucks are among the first all-electric Class 8 vehicles operating in Canada and the first in the Canadian tissue industry. Their use is expected to eliminate 150,000 liters of fossil fuel, resulting in removing the equivalent GHG emissions of 90 cars annually from Canadian highways, and we are also looking to expand our use of these electric trucks in the near future. Let me conclude on Slide 22. We are steadily progressing along our recovery curve to drive long-term volume highlighted by strong top-line growth and improved profitability in the first quarter. We are closely monitoring pricing margins and input costs to ensure that we remain competitive while continuing to deliver strong margins. As the business continues to strengthen, we plan on reinvesting in our brands to drive share recovery after a very challenging 2022. Our Sherbrooke Expansion project is moving forward with a successful start-up of the bathroom tissue line in the first quarter, while the Memphis turnaround is progressing quite well. Our Away-From-Home segment is delivering against a sustainable profit model on the strength of 3 consecutive quarters of positive adjusted EBITDA. Our leverage ratio should progressively come down as adjusted EBITDA improves throughout 2023. And finally, we keep investing in our organization and culture to drive future growth. Now let's turn our attention to the outlook for the second quarter of 2023. While we believe inflationary pressure has stabilized and our operating efficiency continues to improve, we will also be reinvesting in the business to drive long-term value. As a result, we expect adjusted EBITDA in Q2 2023 to be in the range of Q1 2023. We'd be more than happy now to answer any questions you may have.

[Operator Instructions] Your first question comes from Hamir Patel with CIBC Capital Markets.

How long do you expect it to take to restore your Canadian market share? And I'm wondering if you could speak to some of the innovations or promotions you're planning to support that initiative.

That's a great question, Amir. I look at building share as kind of a mid-long-term play. If you try to do it short term and try to do discounting or other activity, it doesn't stick and it quite frankly, is disruptive. So we want to build share the right way, and it takes a little longer to do so. And the things that we're looking at is, obviously, we've got to stabilize pricing, a lot of volatility in pricing last year in price gap. So we think we're getting there that the pricing has now stabilized. We want to make sure that the promotion strategy that is being used by our retailers continues to be progressive for our brands. Obviously, our brands are powerful and drive traffic, store traffic. The third area is reinvesting in marketing. We did pull back on that last year given the financial challenges. So we're going to redeploy marketing investment across our brands collectively and then by category. And then I would say the last one is just continuing to support the innovations. We did some pretty significant innovations last year in a difficult environment. It's always tough to do innovation during an inflationary period. So the focus now, as we start stabilizing in the marketplace is to reinvest in those innovations to continue to grow those unique segments. So what you should see is just continued progressive growth on share. I show a 52-week share here. So it takes a while to get that 52-week share back in the positive territory, but you should see a continuous migration in the right direction.

Okay. Great. That's helpful. And just a question for Mark. How should we think about the timing of lower pulp prices flowing through your results? And is there an opportunity to perhaps run with more spot tonnage in the future just given that you've now kind of got more certainty of supply with Kruger?

Thanks, Hamir. With regard to pulp, we're seeing a slow decline in the market, and that's taking effect through our inventory. So we're going to see the benefit of that starting next quarter. What we're seeing though in terms of spot is definitely an improvement. We have contracted both with our suppliers. So there's a limitation there for us. But definitely, we're taking advantage of spots where we can.

Your next question comes from Kasia Trzaski with TD Securities.

It looks like you had some good traction on the cost recovery in Memphis this quarter. Can you speak to how you expect that to trend going forward through the remainder of 2023?

Sure. I mean, obviously, a lot of focus has been on Memphis. We announced the shutdown of our legacy assets because we didn't see a path to profitability. So that was an unfortunate event, but it was executed successfully, and that is now behind us. So a couple of things are going on. One is we're focusing on higher-margin products. Our TAD and our facial products tend to be better margins in the marketplace. We are also increasing productivity, particularly on the TAD side. I talked about facial ramping up above the curve. Our TAD assets are not quite running where we expect them to be, but they continue to move in the right direction. So that will give us a better cost structure with more output and obviously gives us an opportunity to sell more products. So that should help. What's also happening is the benefit of pricing kicking in, so that helps our profit margin coming out of the Memphis site in terms of the products that we sell there. And we continue to manage our fixed cost structure and look for efficiency there. So there are several factors that are going on all moving in the right direction, and we continue to see Memphis being a positive contributor to our financial results for this year and beyond.