KP Tissue Q4 2023 Earnings Call Transcript

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Provided by Quartr
March 7, 2024

There are 6 speakers on the call.

Operator

Thank you for standing by. Welcome to the KP Tissue 4th Quarter 2023 Results Conference Call. At this time, all participants are in listen only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions.

Operator

Before turning the meeting over to management, I would like to remind everyone that this conference call is being recorded on Thursday, March 7, 2024. I will now hand the call over to Mike Baldacera, Director of Investor Relations. Please go ahead.

Speaker 1

Thank you, operator. Good morning, ladies and gentlemen. My name is Mike Baldesser. I'm the Director of Investor Relations at KB Tissue Inc. The purpose of the conference call today is to review the financial results of the Q4 of 2023 for Cougar Products, which I'll refer to as Cougar Products going forward.

Speaker 1

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 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 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.

Speaker 1

There's a page at the beginning of the written presentation, which contains the usual legal cautions, including as to the 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 Q4 2023 results were published this morning and will be accessible from our website at kptishoenc.com. Please be aware that our MD and A will be posted on our website and will also be available on SEDAR.

Speaker 2

Finally, I

Speaker 1

would ask that during the call to refer to the presentation we have prepared to accompany these discussions, which is also available on the website. We'd also appreciate that during the Q and 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?

Speaker 3

Thank you, Mike. Good morning, everyone, and thank you for joining us for our Q4 and full year 2023 earnings call. We are pleased with our strong financial results in fiscal 2023. We delivered record revenue and record adjusted EBITDA driven by many positive factors. Overall, our business benefited from robust volume, positive margin management and strong operational efficiency across our network.

Speaker 3

In our Consumer segment, we gained market share within the facial tissue and paper towel categories while improving our share trend on bathroom tissue. We also stepped up to support and supply SCOTTe's facial tissue to consumers and customers given the exit of Kleenex from the Canadian grocery market. Our away from home business continued to deliver sustainable results with another strong adjusted EBITDA quarter year. In the Q4, our underlying results remained solid despite strategically increasing investments in marketing and operational maintenance to enable us to enter 2024 in a stronger competitive position. Looking ahead, we plan to manage our margins amid rising pulp costs, continue to invest in our brands, grow our facial tissue position and implement the successful start up of our Sherbrooke expansion.

Speaker 3

Now let's review our quarterly numbers on Slide 6. Revenue growth of 5.3% in the Q4 of 2023 can mainly be attributed to higher sales volume, partially offset by increased promotional spending year over year. Canadian revenues increased 4.8% in the 4th quarter, while the U. S. Improved 5.9%.

Speaker 3

Adjusted EBITDA was up 37.9% year over year to $61,200,000 in the 4th quarter, mainly driven by higher sales volume and a lower cost base. Mark will provide you with more details in the financial section. Turning to full year financial results on Slide 7. Record revenue of $1,900,000,000 grew 11.4% year over year on the strength of higher sales volume, the positive effect of selling price increases implemented during 2022 and a favorable foreign exchange impact on U. S.

Speaker 3

Dollar sales. Canadian revenues rose 7.4% in 2023, while the U. S. Grew at 17.1%. In terms of profitability, adjusted EBITDA more than doubled to $238,600,000 in 2023 for the same reasons as revenue growth along with lower pulp prices and reduced freight expenses.

Speaker 3

These factors were partially offset by higher cost inflation, increased manufacturing overhead and higher SG and A expenses compared to the prior year. On Slide 8, pulp average prices in Canadian dollars increased single digits in the Q4 of 2023 from the previous quarter, while year over year prices dropped. NBSK and VEK average prices fell 24.6% and 32.1% year over year in Q4 2023. Based on industry forecasts, and we've already witnessed this early in 2024, pulp prices are expected to rise over the course of the year. Let's move on to Sherbrooke operations and our expansion at that site, which is on Slide 9.

Speaker 3

Our TAD operations continue to track above expectations. Construction on our new production facility is progressing well as our facial tissue line began production in early February and our paper machine start up is expected in early Q4 facial market update on Slide 10. As the Canadian leading supplier of facial tissue, we are fulfilling consumer demand following the grocery exit of the Kleenex brand in Canada by providing more innovation and expanding our distribution. We are delivering Scotty's facial tissues in different formats, sizes and quality types to meet the diverse needs and requirements of our consumers. We have also expanded our facial distribution with new customers in the U.

Speaker 3

S. To serve that market. Scotty's made significant gains in the 4th quarter by achieving a 38.9% share of total facial tissue sales in Canada, which is according to Nielsen's 52 week numbers. These figures are even higher for 4 week and 12 week data, which will be reflected in future 52 week numbers. To meet demand for added we added capacity.

Speaker 3

The new facial line within our Sherbrooke expansion has been running since early February, and we also recently announced the acquisition of a new line in our Gatineau, Quebec facility, which will increase capacity by 25% there. This new Gatineau line reflects an additional $14,500,000 investment that will deliver much needed facial supply for us to grow in the North American facial market. Aligned with these new assets, we are increasing marketing efforts to further build brand awareness for Scotts across Canada while expanding our facial presence in the United States. Turning to our Memphis operations on Slide 11. We are happy with the progress made on our TAD manufacturing operations.

Speaker 3

Paper production efficiency has stabilized, and we expect performance to continue to improve. In terms of converting, we're riding a longer learning curve there, but investments are being made in maintenance and technical leadership to improve performance. The deployment of digital twin and AI tools has been successful on the new facial line in Memphis, and we are expanding this capability across our TAD converting assets at the site as well. Finally, we are relaunching our operational excellence program at the site while leveraging best practices from both Sherbrooke and Memphis. As a result of these actions, we should see progressive improvement in output throughout the year.

Speaker 3

Now let's move on to brand support on Slide 12. As mentioned earlier, we made incremental marketing investments in the Q4 to drive brand share in a highly competitive environment. Multi brand activities continued with our unapologetically human Love is Messy campaign, and we unveiled the 4th year of a successful Cougar Big Assist program for young hockey players across the country. In terms of Canadian brands, we increased media support on Scotty's, Bonterra and Ultralux during the quarter to drive awareness and purchase. We also maintained strong shopper marketing and activation behind the sports partnerships such as our entrenched relationship with Hockey and NHL.

Speaker 3

In the United States, strategic shopper investments behind White Cloud continues to drive trial and awareness across the portfolio. Turning to Slide 13. The data presented is taken from Nielsen. It shows market share performance over a 52 week period ending December 30, 2023. The data validates our investments as share is growing in facial tissue and paper towel after a high inflationary period in the prior year.

Speaker 3

Share gains are up 2.9 percentage points and 2.1 percentage points year over year for these respective categories. As for bathroom tissue, we are improving our share trend in what is a highly competitive category. Looking at Away From Home on Slide 14. Sales volume in the 4th quarter increased 6% year over year and was stable sequentially. AFH has now delivered 6 consecutive quarters of positive EBITDA, including robust profitability in Q4 2023.

Speaker 3

I believe that the foundations we have put in place in this business is having a positive impact on profitability. Going forward, asset performance and the start up of our new paper machine will provide strong growth opportunities for AFH. However, we keep monitoring the potential impact of an economic slowdown on the AFH market due to its increased exposure to shifting economic conditions. I will now turn the call over to Mark. Mark?

Speaker 2

Thank you, Dino, and good morning, everyone. Please turn to Slide 15 for a summary of our financial performance for the Q4 of 2023. As Dino mentioned, we delivered adjusted EBITDA of 61 point $2,000,000 on sales of $482,300,000 in the quarter, a marked improvement over the same period last year. I will comment on net income, which totaled $16,500,000 in the 4th quarter compared to $16,000,000 in Q4 2022. The increase can be attributed to several factors with the higher adjusted EBITDA of $16,800,000 year over year playing a major part in generating growth.

Speaker 2

Along with lower depreciation and amortization expense, a higher foreign exchange gain and lower interest expense. These were mostly offset by the comparison to a 2022 gain and the change in the amortized cost of the partnership unit's liability. In the quarterly segmented view on Slide 16, consumer revenue increased 5.8% year over year to $400,900,000 in the 4th quarter and 2.7% sequentially from Q3 2023. Consumer segment revenue rose both in Canada and the U. S.

Speaker 2

Year over year. In the Away From Home segment, revenue improved 2.6 percent year over year to $81,400,000 in the 4th quarter, but declined 2.1% sequentially from a seasonally strong Q3. Consumer adjusted EBITDA in the 4th quarter totaled $59,800,000 compared to $42,700,000 in Q4 2022 with an adjusted EBITDA margin of 14.9% versus 11.3% for the same respective period. Sequentially, consumer adjusted EBITDA was down $6,100,000 or 9.2 percent from Q3 2023. For our AFH business, adjusted EBITDA amounted to $5,700,000 in the 4th quarter, the same compared to last year's results with a margin of 7%.

Speaker 2

Sequentially, AFH adjusted EBITDA was down $2,700,000 from Q3 2023, reflecting the seasonality. On Slide 17, we review year over year consolidated revenue growth for Q4, which grew $24,200,000 or 5.3 percent. Growth was driven by higher sales volume, partially offset by increased promotional spending. On a geographical basis, revenues in Canada rose $12,500,000 or 4.8 percent year over year, while U. S.

Speaker 2

Revenues grew 11,700,000 dollars or 5.9 percent. On Slide 18, we provide additional insight into profitability for the 4th quarter. Adjusted EBITDA increased by $16,800,000 to $61,200,000 representing a margin of 12.7 percent from $44,400,000 in Q4 last year or a margin of 9.7%. Several factors contributed to generating strong adjusted EBITDA in the 4th quarter, including higher sales volume, lower pulp and other input costs, increased productivity and operations and lower freight costs. These factors were partially offset by increased promotional spending along with higher warehousing and SG and A expenses.

Speaker 2

Now let's turn to Slide 19 where we compare Q4 revenue sequentially to Q3 2023. Revenue improved by $8,900,000 or 1.9 percent, mainly due to higher sales volume in our consumer segment and an increase in FX on U. S. Dollar sales. Geographically, revenue in Canada grew by $7,300,000 or 2.7 percent sequentially, while revenue in the U.

Speaker 2

S. Rose by $1,600,000 or 0.8 percent. On Slide 20, adjusted EBITDA in the 4th quarter decreased sequentially by $11,200,000 or 15.4 percent. On higher pulp costs, increased freight and warehousing expenses, higher plant overhead costs as well as incremental marketing and SG and A expenses. These factors are partially offset by greater sales volume.

Speaker 2

Adjusted EBITDA margin of 12.7 percent was down 2.6 margin points from 15.3% in Q3. Turning to our balance sheet and financial position on Slide 21. Our cash position stood at $135,700,000 at the end of the Q4, a decrease of $15,400,000 from Q3 2023. The sequential decrease in cash is mainly explained by lower adjusted EBITDA generated in the 4th quarter. Year over year, cash increased by 57,300,000 dollars Total long term debt at quarter end stood at $1,030,000,000 down $32,100,000 from the end of the previous quarter.

Speaker 2

Net debt decreased $15,800,000 sequentially to 933,000,000 dollars as improved working capital allowed us to pay down debt. As a result, our net debt to last 12 months adjusted EBITDA ratio decreased to 3.9x in the 4th quarter from 4.3x in Q3 and 8.9x in Q4 2022. Leverage improved on the strength of a lower net debt and higher adjusted EBITDA in the last 12 months. We expect our leverage ratio to remain in the 4x range in 2024 as we are using debt financing for the Sherbrooke expansion and there is significant capital spending for the final year of the project. At quarter end, total liquidity representing cash and cash equivalents and availability from revolving credit agreements stood at $326,700,000 In addition, dollars 15,000,000 of cash was held for the Sherbrooke expansion.

Speaker 2

I'll conclude my section by reviewing capital expenditures on Slide 22. Total CapEx in Q4 was $79,600,000 including $58,100,000 for the Sherbrooke expansion. For fiscal 2023, CapEx stood at $185,400,000 including $148,400,000 for the Sherbrooke expansion. The total capital cost of the Sherbrooke expansion remains at 3.78 $1,000,000 with a significant portion of that coming in 2024. We have therefore increased our CapEx forecast for fiscal 2024 to between $200,000,000 $220,000,000 This range includes between $45,000,000 to $55,000,000 for regular and maintenance CapEx.

Speaker 2

Thank you for joining us this morning, and I'll now turn the call over to Dino. Thank you, Mark.

Speaker 3

Please turn to Slide 24 for my closing comments. We delivered broad top line growth and strong profitability in the Q4 and the fiscal year despite what continues to be an uncertain economic environment. After the impact of COVID and 2022 inflation, we have really improved our capabilities and approach, which I believe will make our business more resilient to future volatility. As we look ahead to 2024, we intend to manage our margins amid rising pulp prices. We will continue investing in our brands to drive long term growth.

Speaker 3

We will increase capacity to meet strong demand through our Sherbrooke expansion and our new facial lines. Our Away From Home segment should maintain its upward trajectory and continue to deliver against sustainable profit model. As Mark mentioned, our leverage ratio is expected to remain within its current range based on the final year of spending for the Sherbrooke Expansion project in 2024. And finally, we will keep investing in our organization and capabilities to drive future growth. Now let's turn our attention to the outlook for the Q1 of 2024.

Speaker 3

We expect margins to remain consistent and adjusted EBITDA to be in a similar range to Q4 2023. Before I open the line to questions, I'd like to take this opportunity to recognize Mark Holbrook on a successful 26 year career with Kruger Products and many contributions to the grocery industry over a distinguished 30 year 38 year career. Mark's steadfast leadership and sound advice has been instrumental to the success of our company, and Mark's guidance, objectivity and knowledge have been critical for me as I joined the company 6 years ago. This will be Mark's last official earnings call for Kruger Products as CFO, but we are fortunate to have Mark continue in the organization until the end of 2025. Mark will be a special advisor reporting to me, and he will work on many key strategic projects.

Speaker 3

Mark will also provide a strong transition to Michael Keyes, our new CFO, effective March 11, 2024. Michael has been with Kruger Products since 2008 and has built his career in various progressive finance leadership roles across our businesses in Canada, U. S. And Mexico. We are confident that Michael will play a pivotal role in driving our financial objectives, fostering continued sustainable growth and building the finance team's capabilities.

Speaker 3

I and Kruger Products are fortunate to have 2 strong leaders in Mark and Michael continuing their new roles. We will now be happy to take your questions.

Operator

Our first question comes from the line of Hamir Patel of CIBC. Please go ahead. Your line is open.

Speaker 4

Hi, good morning. Dino, with one of your U. S. Competitors undertaking a strategic review of their own tissue business, like we're going to see some industry consolidation play out. Would KP consider expanding its platform via M and A?

Speaker 4

And how do you think about what comes next after Sherbrooke?

Speaker 3

Yes. It's a great question, Amir. Obviously, this has been a topic for a while. I think I've been asked this on previous calls. I would support the comment that this industry needs to consolidate some way.

Speaker 3

I know one of our competitors has been a little more blunt about that. Look, we're a growing company. We grow organically, and we've grown through acquisition. It's been part of our DNA in the history and will continue to be our part of our DNA going forward. We're always looking for opportunities geographically, capability wise to grow.

Speaker 3

And I'm going to just say what I always say, which is we look at everything and we talk about nothing. And clearly, I think you know enough about our organization that if there is a chance that is strategically a good fit and economically a good fit where value creation can happen, we will be there looking at it. And there's nothing different about tomorrow versus what it was yesterday.

Speaker 4

Fair enough. And I just want to ask about the market share slide. Clearly, we're seeing momentum in facial. Would you expect that to continue into 'twenty four? Or did a lot of that Kleenex exit already show up in the Q4?

Speaker 3

Yes. So I show you 52 week shares there, right? So and I mentioned in my comments, even though we don't talk about it, I don't share it, we see the 4 week and the 12 weeks. So 4 week, in this case, would be the month of December and the 12 week would be the Q4. We do see stronger shares there for us because that's the prime time that Kleenex was exiting.

Speaker 3

Those will start reflecting in the 52 week as they become a greater part of the 52 week. Our approach going forward on this when the news was made public is that we believe we should and we're starting to we're seeing that already that we should be at least fair share gain of any losses that come from Kleenex. We certainly feel our brands are very strong and very committed to the Canadian market with Scotty's. So we have a great brand, and now we've added capacity to make sure that we can fulfill the demand. And not just adding capacity, but also adding capability around innovation in new formats to make sure that we look after the needs of consumers certainly in Canada, but also we're looking to expand in the United States with our U.

Speaker 3

S. Partners.

Speaker 4

Okay, great. And just a final question for Mark. It looks like the CapEx budget for 2024 was raised slightly. How do we think about the step down in CapEx in 2025?

Speaker 2

Good morning, Hamir. Yes, we're looking at about $200,000,000 to $220,000,000 for 2024. That includes a substantial portion for the Sherbirke expansion. We typically don't give out 2025 at this point in time, but certainly with the completion of the project, we would see a step down from that back to more normalized. And that's still leaving us open for any strategic investment that we might do in 2025 as well.

Speaker 2

But we'll save that for a later call, and Michael can comment further. Thanks.

Speaker 4

Okay. Fair enough. Thanks. And yes, Marco, all the best in retirement. That's all I have.

Operator

Our next question comes from the line of Sean Steuart at TD. Please go ahead. Your line is open.

Speaker 5

Thanks. Good morning, everyone.

Speaker 3

Good morning.

Speaker 5

Just one question. The bridge to flat quarter over quarter EBITDA, I guess I'm just trying to understand the puts and takes there. So you'll have further pulp cost inflation presumably reflected in the numbers. Is the flat earnings simply a function of a lower promotional spend? Is there any other factors that are feeding into that?

Speaker 3

No. I think you hit it on the head. I mean we said in the range of, so we don't have that level of position whether it's going to be flat or slightly better. So we use the term in the range, which will mean that what we're seeing as it relates to volume, our volume, we believe, will continue to stay very strong. Our operations will continue to stay very strong.

Speaker 3

Obviously, we're onboarding our new assets, so that will barrel later in the year with the facial lines. The biggest wildcard is, as you mentioned, is what's going on with pulp. And we have seen a very dramatic increase in pulp pricing. We've also seen some weakening of the Canadian dollar. So we're cautious there, and that's probably the biggest headwind against what I think are many, many positive things going on in the quarter.

Speaker 3

And that's why we're being, I think, fairly cautious in the way that we talked about the Q1 given that volatility. Okay.

Speaker 5

Thanks for that detail. One other question, Dino. You touched on the away from home business being more exposed to macro headwinds or tailwinds. And I think the suggestion was you're cautious potentially on that front given certain macro outlook. Maybe I'm reading too much into it, but are you seeing any signs of emerging weakness in demand into that channel?

Speaker 5

Any further context you can give us there?

Speaker 3

Yes. Sometimes in that channel, the potential of a recession has just as much impact as an actual recession because everybody starts to pull back a little bit in anticipation of a recession. So I would say

Speaker 4

there's a

Speaker 3

lot of debate whether we're going to be in a recession or just an economic slowdown or whatever. And I'm not going to comment on kind of what we're hearing from the Bank of Canada and others that are experts in this area. But I would say we probably saw a little bit of inventory tightening coming out of the 4th quarter. I think some of it may be just be normal. I don't I'm not anticipating any.

Speaker 3

I'm not trying to send any coded messages. I just think it's important that just given where we are and where the economic state is that I make a comment on that. The other part of your question could be if there's economic impacts to AFH, there's generally a benefit on the consumer side. People are staying at home more or not going out for dinner, they're eating at home, we could benefit on the consumer side as it relates to tissue usage. So I wouldn't read too much into it other than a statement of potential that could happen.

Speaker 3

Got it.

Speaker 5

Okay. Thanks for that Dino and congrats to both Mark and Michael. Thanks.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from the line of Zach Evershed at National Bank Financial. Please go ahead. Your line is open.

Speaker 3

Good morning, everyone. This is Nathan calling in for Zach. So my first question is your regarding your market share. So obviously your market share took a noticeable jump in facial after the Kleenex exit. Has taking that incremental share put any strain on your capacity on either the production side or the converting side?

Speaker 3

Well, it did coming out of last year. But as I mentioned in my notes, Nathan, we were benefiting from our long ago announced facial line in the Sherbrooke expansion, which has started up so that it is running. And then we were able to secure an additional asset in late Q4, a brand new asset in our Gatineau facility. So those two assets, in addition to the legacy assets that we have across our network, which are all running quite well, by the way, we feel now that we have the capacity and firepower and capability to be able to take advantage of the growth opportunities, including the Kleenex exit in our strong facial category. That's great.

Speaker 3

And so with the commissioning of the facial tissue converting line, can you give some color into your integration rates and how this will affect that? The integration rates, I assume you're talking about our ramp up curve in terms of production. I won't give you any numbers other than to say that the Gatineau line let's talk about both lines. The Gatineau line and the Gatineau team at our Gatineau facility, who already have facial equipment there, did an outstanding job of commissioning that line in a very short period of time and really got ahead of the ramp up curve quickly. So I give that team tremendous credit in what they have done, and they should all be very proud of what they were able to do in a time of much need.

Speaker 3

And then on the Phoenix side, we had announced that, that got delayed from Q4 into Q1 because of supply chain challenges, but that line started up in early February, and it too has exceeded its ramp up curve at this point. Still early, we're only a few weeks into it. But that group in Sherbrooke facility is also doing an outstanding job of beating the ramp up curve because we all understand that the market opportunity exists and consumers need facials. So everything we're making, we're basically selling. And I think that's a key motivator as much for over performance on the facial category.

Operator

Thank you. And currently, there are no further questions in the queue at this time. So I'll hand the floor back to our speakers for the closing comments.

Speaker 3

Great. Thank you all for joining us on this call today. I again want to thank Mark and congratulate Michael, and I look forward to continuing to work with both of you over the coming years. As far as the earnings call, we look forward to speaking with you again following the release of our Q1 results. Thank you, and have a great day.

Operator

Thank you. This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines.

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Key Takeaways

  • KP Tissue reported record revenue of $1.9 billion and record adjusted EBITDA of $238.6 million in fiscal 2023, driven by robust sales volume, positive margin management and strong operational efficiency.
  • In the Consumer segment, the company gained market share in facial tissue (achieving a 38.9% share in Canada), paper towels and improved bathroom tissue trends, capitalizing on Kleenex’s grocery exit and increased promotional support.
  • The Sherbrooke expansion is on track, with the new facial tissue line online in early February and a paper machine start-up expected in Q4 2024, while TAD operations continue to exceed expectations.
  • After year-over-year pulp price declines in Q4, pulp costs are rising in early 2024 and KP Tissue plans to carefully manage margins and expects Q1 EBITDA in a similar range to Q4.
  • Away From Home delivered six consecutive quarters of positive EBITDA, though it remains sensitive to economic conditions, and capital expenditures for 2024 have been raised to $200–220 million primarily for the Sherbrooke project, with leverage expected to stay near 4x.
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