KP Tissue Q2 2023 Earnings Call Transcript

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August 10, 2023

There are 8 speakers on the call.

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the KP Tissue Second Quarter 2023 Earnings Conference Call. At this time, all participants are in listen only mode. Following the presentation, we will conduct a question and answer session.

Operator

Before turning the meeting over to management, I would like to remind everyone that this conference call is being recorded today, Thursday, August 10, 2023. I would now like to turn the call over to Mike Baldacera, Director, Investor Relations. Please go ahead.

Speaker 1

Thank you, operator, and good morning. Ladies and gentlemen, my name is Mike Baldesser. I'm the Director of Investor Relations of KP Tissue Inc. The purpose of the conference call is to review the financial results of the Q2 of 2023 for Kruger Products Inc, which I'll refer to as Kruger Products going forward. With me this morning is Dino Bianco, the Chief Executive Officer of KP Tissue and Kruger Products and Mark Holbrook, the Chief Financial Officer of KP Tissue The following discussions and responses to questions contain forward looking statements concerning the company's activities.

Speaker 1

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 if required by applicable laws. There is a page at the beginning of the written presentation, which contains the usual legal cautions, including as to forward looking information, which you should be aware of. I'd like to point out that the figures expressed in today's call are in Canadian dollars unless otherwise stated.

Speaker 1

The press release reporting the Q2 2023 results were published this morning and will be accessible from our website at kptissuing.com. Please be aware that our MD and A will be posted on our website and will also be available on SEDAR. Finally, I would ask that you during the call to refer to the presentation we've prepared to accompany these discussions, which is also available on the website. We'd also appreciate that during the Q and A period, we'd limit your questions to 2. Thank you for your collaboration, ladies and gentlemen.

Speaker 1

I'll now turn the call over to Dino Bianco, our CEO. Dino?

Speaker 2

Thank you, Mike. Good morning, everyone, and thank you for joining us for our 2nd quarter earnings call. We are pleased that margin recovery, along with improved sales volume and a better mix in our consumer business, generated strong adjusted EBITDA in the Q2 of 20 Ongoing cost management initiatives, including productivity gains and cost controls also contributed to increasing profitability. In addition, our Away From Home segment delivered a 4th consecutive quarter of positive adjusted EBITDA to maintain its growth momentum. As a result, our financial performance in the 2nd quarter normalized versus a more challenging market and operating environment in the same period last year.

Speaker 2

On a sequential basis, revenue and adjusted EBITDA continued to improve with solid incremental growth. Looking ahead to the second half of twenty twenty three, we anticipate an increasingly favorable landscape as input costs trend downwards, Attach Sherbrooke and the Sherbrooke expansion project continue to ramp up production capacity to meet customer demand and margins are restored to the pre pandemic levels. Now let's take a look at our quarterly numbers on Slide 6. Revenue increased 17.3 percent to $466,300,000 in the Q2 of 2023 on the strength of selling price increases across all segments and regions in 2022. A favorable sales mix and higher sales volume in our consumer segment as well as positive foreign exchange impact on U.

Speaker 2

S. Dollar sales. Revenue in Canada rose 10.8 year over year in the Q2, while in the U. S. It grew 27.1% as the market benefited from strong volume in both our consumer and AFH segments.

Speaker 2

Adjusted EBITDA was up 365 0.8% year over year to $55,000,000 in the 2nd quarter off a low 2022 base due to several factors, including selling price increases, favorable sales mix and higher sales volume, Memphis plant operations improvement and lower freight rates. These factors were partially offset by inflation on manufacturing costs, higher warehousing and SG and A expense and an unfavorable foreign exchange impact. On Slide 7, Pulp average prices in Canadian dollars decreased double digits in the Q2 of 2023 from the previous quarter, While year over year prices declined to a lesser extent, NBSK and Bek average prices fell 8.9% and 11 point 4% year over year in Q2 2023. And based on industry analysis, pulp prices are near or at the bottom of the price Let's move on to our Sherbrooke operations and expansion on Slide 8. Tad Sherbrooke continues to Both our facial line scheduled to launch late in Q4 and our paper machine slated for the end of 2024 are still tracking to plan, but we are keeping a close eye on supply chain and inflationary pressures.

Speaker 2

I'm also pleased to report that the start up of our most recent converting line, which was started up in Q1 2023, was the fastest of all our Sherpa converting lines due to OpEx learnings, staff maturity and artificial intelligence implementation. As we look to the new facial line and paper machine, the hiring process It's progressing well, and we are continuing to onboard employees to manage those lines. Turning to our Memphis operations on Slide 9. We have maintained our focus on TAD manufacturing for both converting and paper machine assets after the shutdown of our LDC assets earlier in the year. The new facial tissue line, which was recently strengthened with And the cost structure have also improved at Memphis during the last two quarters, while employee turnover has stabilized following the shutdown of the legacy operations.

Speaker 2

Now let's pivot to brand support on Slide 10. As indicated last quarter, we plan on reinvesting in our brands to recover share in 2023. Q2222023 marketing was focused on multi brand activities highlighted by the NHL Bring Home the Stanley Cup promotion that offered 3 pairs of VIP experiences to winning participants for the Stanley Cup finals. Other key marketing activities during the quarter included our made in Canada drive to support the positioning of our Canadian brands, The successful launch of the 2nd chapter of our unapologetically human campaign entitled Life, Love is Messy the release of new Scotty's house and home designs and facial tissue and finally, we continue to make strategic shopper investments behind White Cloud at Key accounts in the U. S.

Speaker 2

Moving to Slide 11. The data presented is taken from Nielsen. It shows market share performance over a 52 week period ended June 17, 2023. The data reflects that Kruger product share has incrementally improved from the previous quarter, particularly for bathroom tissue and paper towels. We're seeing improvement in our branded products driven by pricing stability in the marketplace and a return to a more normalized promotion agenda at retail.

Speaker 2

Looking at Away From Home on Slide 12. Volume strength reflects market recovery and accelerated growth at some key customers. As mentioned earlier, this business delivered a 4th Consecutive quarter of positive adjusted EBITDA in Q2 2023, as we are seeing structural signs that this profitability 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.

Speaker 2

Mark?

Speaker 3

Thank you, Dino, and good morning, everyone. Please turn to Slide 13 for a summary of our financial performance in Q2 2023. As Dino mentioned earlier, margin recovery and strong top line growth generated adjusted EBITDA of to a loss of $35,500,000 in Q2 of 2022. The increase was primarily due to higher adjusted EBITDA and a foreign exchange gain. These factors were partially offset by greater income tax and depreciation expense, higher interest expense and other finance And the loss on the sale of fixed assets.

Speaker 3

In the quarterly segmented view on Slide 14, Consumer revenue increased 17.5 percent year over year to $383,500,000 in the 2nd quarter and 1.8% sequentially compared to Q1 2023. Consumer segment revenue rose both in Canada and the U. S. In the Away From Home segment, revenue grew 16.4% year over year to $82,800,000 and 11.2% sequentially from the previous quarter. Consumer adjusted EBITDA totaled $53,300,000 in the second quarter compared to $14,300,000 in Q2 of 2022 with an adjusted EBITDA margin of 13.9% versus sequentially, consumer adjusted EBITDA was up $2,000,000 or 3.8 percent from Q1 of 'twenty three.

Speaker 3

For our AFH business, adjusted EBITDA amounted to $5,800,000 in the quarter compared to negative $500,000 in Q2 2022 with a positive margin of 7%. Sequentially, adjusted EBITDA for Away From Home was up $4,900,000 from Q1 of 2023, as Q2 is seasonally a stronger quarter. On slide 15, we review year over year revenue growth for Q2, which improved by $68,800,000 or 17.3 percent. This growth is attributable to the carry forward of selling price increases from 2022 across all segments and regions. Favorable sales mix and higher sales volume from our consumer segment as well as a positive foreign exchange impact on U.

Speaker 3

S. Dollar sales. On a geographical basis, revenues in Canada rose 25 $900,000 or 10.8 percent year over year, while U. S. Revenues grew $42,900,000 or 27.1 percent.

Speaker 3

On Slide 16, we provide additional insight into profitability in the 2nd quarter. Adjusted EBITDA increased by 43,200,000 The $55,000,000 representing a margin of 11.8%. That's from a trough of $11,800,000 in Q2 last year for a margin of 3%. The increase in adjusted EBITDA was primarily due to higher selling prices relative to the Q2 last year, Favorable sales mix and higher sales volume, improvement in our Memphis plant operations and lower freight rates. These factors were partially offset by inflation on manufacturing costs, higher warehousing and SG and A expenses and the unfavorable impact of Foreign exchange fluctuations.

Speaker 3

Now let's turn to slide 17, where we compare Q2 revenue sequentially to Q1 2023. Revenue improved by $15,300,000 or 3.4 percent, mainly due to higher sales volume in both our consumer and AFH segments, partially offset by a slightly negative foreign exchange impact on U. S. Dollar sales. Geographically, revenue in Canada rose by $4,400,000 or 1 point 7% sequentially, while revenue in the U.

Speaker 3

S. Grew by $10,900,000 or 5.7%. On slide 18, adjusted EBITDA in the 2nd quarter increased sequentially by $5,000,000 or 10.2 percent on higher sales volume and lower freight costs. These factors are partially offset by higher warehousing costs, greater plant overhead and absorption from inventory reduction and higher SG and A expenses, particularly marketing spending. Turning to our balance sheet and financial position on Slide 19, our cash position stood at $88,200,000 at the end of the second quarter, an increase of $42,900,000 from Q1 2023.

Speaker 3

Long term debt at quarterend totaled $1,777,000,000 down $18,400,000 from the end of the previous quarter. Net debt decreased by $61,600,000 sequentially to $1,236,000,000 as we remain disciplined with capital spending and generated cash from reduced working capital. Consequently, our net debt to last 12 months adjusted EBITDA ratio decreased to 5.7 times in the second quarter from 7.9 times in Q1 of 'twenty three and 8.1 times in Q2 of 2022. Leverage improved on the strength of lower net debt and 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 keeps growing on a last 12 months basis.

Speaker 3

At Quarter end total liquidity representing cash and cash equivalents and availability from revolving credit agreements stood at $181,600,000 In addition, dollars 13,800,000 of cash was held for the Sherbrooke Expansion Project. I will conclude my section by reviewing capital expenditures on Slide 20. Total CapEx in Q2 2023 was 40 $2,800,000 including $36,900,000 for the Sherbrooke expansion project. At the end of the second quarter, CapEx stood at $77,400,000 We are maintaining our CapEx forecast between $200,000,000 $230,000,000 for 2023 As spending related to the Sherbrooke expansion project and regular CapEx is expected to pick up significantly in the second half of the year. Thank you for joining us this morning, and I'll now turn the call back over to Dino.

Speaker 2

Thank you, Mark. Please turn to Slide 22 for my closing comments. We are steadily progressing along the recovery curve, highlighted by strong revenue and margin improvement in the 2nd quarter to drive adjusted EBITDA growth. We are managing pricing margins given changing input costs. We are increasing our marketing investment Our Sherbrooke expansion project is moving forward With the start up of the facial line scheduled for the end of this year and the paper machine for the end of next year, while the Memphis turnaround is progressing according to plan.

Speaker 2

Our Away From Home segment is delivering against sustainable profit model on the strength of our 4 consecutive quarters of positive adjusted EBITDA. As Mark mentioned, our leverage ratio is progressively coming down as adjusted EBITDA improves. And finally, we'll keep investing in our organization and culture to drive future growth. Now let's turn our attention to the outlook for the Q3 of 2023. As commodity and other input costs decline, we will focus on maintaining margins while continuing to reinvest in the business to drive long term value.

Speaker 2

Accordingly, adjusted EBITDA for Q3 2023 is expected to be in the range of Q2 2023. We will now be happy to take your questions.

Operator

Thank you. We will now begin the question and answer session. We will pause for a moment as callers join the queue. Our first question comes from Hamir Patel of CIBC Capital Markets. Please go ahead.

Speaker 4

Hi, good morning. Hi.

Speaker 2

Do you know when

Speaker 4

do you expect To fully realize the benefit from the year to date decrease that we've seen in benchmark pulp prices?

Speaker 2

Well, we're starting to see some of it already, even though I think Mark may have alluded to this. Year to date pulp is still up versus prior year, but we're starting to see it moving through our P and L. There's usually a lag. It could be 2 to 3 months based on inventory moving through the system. So we should start seeing more of that in the second half of the year, Amir.

Speaker 4

Great. Thanks, Dino. And Dino, could you speak more to your White Cloud investments that you mentioned and how you Your market share in the U. S. Evolving across your private label and white cloud offerings?

Speaker 2

Yes. On the white cloud basis, I think I mentioned this before, our approach there is to strategically have that product at customers where it makes sense and So we don't want to go wide across the whole retail landscape. We want to pick key customers And focused on growing with them where there's an opportunity, and that's what we've been doing. And our investments, particularly after a difficult year last year and starting This year, our investments have been more tactical in terms of driving awareness and growth as it relates to the marketing side and continuing to build share At key accounts, I'm very pleased with the direction we have moved in this narrow but deep approach To building the brand on the customer front, and we will continue to invest as we are able to build a brand. We think it has a lot of equity.

Speaker 2

We know the quality is top level and there's a lot of affinity for that brand based on the longevity of that brand. So we'll continue to invest.

Speaker 4

Great. Thanks, Peter. And just the last question I had for Mark. Any preliminary CapEx Estimate you can provide for 2024?

Speaker 3

Well, we have provided our 'twenty three forecast and we would provide 24 when we go to our Q3 call, EMEA, that would be appropriate at that point, I think.

Operator

Our next question comes from Kasia Kopytek of TD Securities. Please go ahead. Hi, good morning, everyone. It's Kasia

Speaker 5

on the line. I wanted to ask about EBITDA margins. Last quarter, you talked about targeting Mid to high single digits for the Away From Home segment, what about the company as a whole? Once you've rolled out and implemented all these initiatives that you've talked about, where do you the aggregate margins for the company settling at?

Speaker 2

Yes. Good question, Katya. We have 3 different types of businesses. So I think we actually we have 4 different types of business. We have a branded business in Canada That has a certain margin structure.

Speaker 2

We have a private label business in Canada that has a certain margin structure. We have an away from home business that has a different margin structure. We have A U. S. Primarily private layout business has a different margin structure.

Speaker 2

So depending on the relative growth of each of those segments, that will change the weighted average Our margin structure, we have targets within each of those segments that I won't disclose with you, but I think you can probably figure out how they rank based on the business models that exist there. So I think we should this company on a weighted average Business should be low teens, just on a weighted average business. Obviously, there will be segments that are much higher than that and segments that will be lower than that, but we In the low teens and we're starting to progress towards that.

Operator

Got you. Okay. And then when

Speaker 5

I look at historically, I mean, the best you've ever done was during the pandemic that was 17% and pre pandemic it was 15%. So do you think you can get there, 15%?

Speaker 2

I think that would that to me would be in the low teens, yes.

Speaker 5

Okay. And just how much is private label of your business Can you disclose that?

Speaker 2

No, I can't. Obviously, in the U. S, it's most of the business. So let me be very clear other than White Cloud. On the consumer side, mostly private I'm not talking AFH.

Speaker 2

So let's just say it's north of 90%. In Canada, it's a smaller role and a smaller business. And in Canada, we work Strategic approach and we use it accordingly with a few key customers here where it makes sense.

Speaker 5

Right. Understood. And when you say 90% for the states, is that on a volume basis or just generally speaking, maybe on a dollar sales basis?

Speaker 2

I think either volume or revenue would be the same given the dominant portion of private label down there.

Speaker 5

Got it. Fair enough. And Last one for me, just sticking with this theme. And when I look at your brand and competitors, their EBITDA margins are quite a bit north of your mid teen target. Anything structural that you would say is at play here of why you can't bridge towards perhaps even higher margins relative to your Well,

Speaker 2

as I said, we have different businesses that make different margin levels. The number I gave you is weighted average. So we have a branded business. You said our branded competitors, so we have a branded business that makes a higher margin and we have away from home, which we talked 5% to 10%, which makes a lower mid So we feel segment by segment, we are equal or better than our competitors, if you look segment by segment.

Speaker 5

Got you. Okay. Thanks. I appreciate that context. I'll turn it over.

Operator

Our next Question comes from Paul Quinn of RBC Capital Markets. Please go ahead.

Speaker 6

Yes, thanks. Good morning. Why the outlook on Q3 is so conservative in light of you'll have declining pulp prices, freight and probably a couple of other cost inputs, but why go so

Speaker 2

Well, hi, Paul. Good question. I mean, it's a volatile period. There's a lot of moving pieces. This business can be made or lost on the cycles, the down cycle and the up cycle.

Speaker 2

And with pulp prices changing, capacity changes in the marketplace, customer demands changing, I think we're being reasonable on our approach. Obviously, our goal would be to beat that. But just given, it isn't just a pulp coming down story, right? There's capacity plays. There's pricing movement in the marketplace.

Speaker 2

And I think we're taking a reasonable approach with that. If it moves in our favor and if the category in the market moves in our favor, Certainly, we would be able to beat that. And if it doesn't, then hopefully, we've protected against that with our call.

Speaker 6

Okay. And then just on customers, any pushback yet? I mean, your customers are seeing lower pulp prices and You guys have successfully implemented a number of price increases on Leticia's side. Any pushback on customers in terms of pricing that would stall out your margin growth?

Speaker 2

Yes, sure. On the As I said earlier, this business competitively only allows you to work within a certain margin structure. And the key is how we manage the And obviously last year, us and a lot of tissue manufacturers lost on that because of The speed of the inflation that happened and the breadth of it and the lag that happens before you get pricing. This year, we're seeing the other side of that. I think customers understand there's a lag involved.

Speaker 2

Customers understand there's volatility. And clearly, as we look at pricing for The future, let's say, for the whole second half, we take a couple of different approaches. In Canada, we are the market leader. And I've always believed that the role of the market leader is to establish a healthy margin structure for the category, A reasonable but healthy margin structure and we will try to do that and we'll see how that plays out, which may mean and will mean price declines if these Quality costs continue to fall. In the U.

Speaker 2

S, we're more of a follower. So it depends what others are doing and how we have to play because we're a smaller player there and we'll have So you are definitely going to start to see deflation in this category. Some are contractually Based like a lot of the AFH business, some of our private label contracts that will naturally have a deflation factor within that. The magic will be in I'm not worried about our behavior. Certainly, we know how we want to approach this, but at the same time, we want to make sure we're competitive.

Speaker 2

We want to make sure that our business is strong, our relationships with our customers remain strong and our brands remain strong. So That's where the black box is, Paul. We'll just have to manage with this as it continues to change. And that ties back a little bit to the Q3 Call that we made.

Speaker 6

All right. Thanks very much,

Operator

Our next question comes from Zachary Evershed of National Bank Financial. Please go ahead.

Speaker 7

Good morning, everyone. This is actually Nathan calling in for Zach Good morning. So my first question is with respect to your cost efficiency initiatives, How far along your process are you and how much further do you think you can extract from that?

Speaker 2

Well, I guess what I would say, Nathan, is we have every year we undertake productivity initiatives Cost efficiency initiatives, whatever you want to call them. I think every company does that as they try to offset costs through efficiencies and effectiveness in the network. Most of it is in the production area, but there are other areas like supply chain that we do that as well. So every year we do that. It's That's baked into our DNA as a company.

Speaker 2

We accelerated that coming out of last year and into this year, just given the magnitude of the cost increases. I'm very proud of how our organization has responded. It is a muscle that's well developed. We had to do more of it, but we knew what to do and how to do it. And at the same time, do it without jeopardizing product quality or integrity of our business.

Speaker 2

So I would say we're very far along. I'm very pleased with the progress, and we will hit our internal number, which, of course, we don't share, but We will hit our internal number as it relates to productivity this year.

Speaker 7

Great to hear. And given the trade downs typical in the face of inflation, how are you evaluating The effectiveness of your marketing spend?

Speaker 2

Well, I would say the trade downs have stabilized. In fact, they're probably turning more to a normal mix. We started seeing I mentioned in the last few quarters as pricing has stabilized, customers are returning to regular promotion activity. We believe our brands will continue to grow. I think the marketing piece of it is Even more important when you have high inflation to make sure your brand stay on the radar, we did move more of our marketing to Transactional type marketing versus last year versus doing big advertising.

Speaker 2

This year, we're moving we're adding More equity what I call equity advertising, which is long term building of the brand, while still continuing to do tactical in the store activity. So it's a mix. Marketing is a mix. It's not just a TV advertising. It's social.

Speaker 2

It's digital. It's in store. It's PR. It's promotions. It's video.

Speaker 2

So we use that mix accordingly. And last year, we spent more of that mix to drive Sales, short term, this year we're maybe balancing it more to drive still sales but longer term equity.

Operator

This concludes the question and answer session. I would like to turn the conference back over to Dino Bianco for any closing remarks.

Speaker 2

Great. Thank you all for joining us on the call today. We look forward to speaking with you again following the release of our Q3 results. Thank you and have a great day.

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Key Takeaways

  • Revenue rose 17.3% to C$466.3 million and adjusted EBITDA climbed 365.8% to C$55 million year-over-year, driven by selling price increases, favorable mix, higher volume and lower freight costs.
  • Ongoing cost management and productivity initiatives fueled margin recovery, and the Away-From-Home segment delivered its fourth consecutive quarter of positive adjusted EBITDA.
  • The Sherbrooke expansion remains on schedule, with a new facial tissue line due late Q4 2023 and a paper machine targeted for end-2024, while Memphis operations focus on TAD assets and stabilized workforce turnover.
  • Net debt declined by C$61.6 million sequentially, reducing the net debt/EBITDA ratio from 7.9x to 5.7x and leaving C$181.6 million in total liquidity.
  • Q3 2023 adjusted EBITDA is expected to be in line with Q2 2023 as input costs trend downward and the company continues to reinvest in brands and capacity.
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Earnings Conference Call
KP Tissue Q2 2023
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