In its Third Quarter 2024 Earnings Call, KP Tissue Inc. (KPT) showcased a solid revenue increase of 10.1% reaching $521.1 million, attributed to heightened sales volume and favorable pricing in both Consumer and Away-From-Home segments.
However, the company faced a 9.3% decline in adjusted EBITDA at $65.7 million, primarily due to increased pulp prices and additional outsourcing activities. Despite these challenges, net income rose to $18 million, benefiting from a significant foreign exchange gain.
CEO Dino Bianco also highlighted the completion of the Sherbrooke manufacturing plant, which is expected to bolster production capacity and reduce costs in the long term.
Key Takeaways
- KP Tissue reported a 10.1% increase in revenue, reaching $521.1 million in Q3 2024.
- Adjusted EBITDA declined by 9.3% to $65.7 million, affected by rising pulp costs and outsourcing.
- The Consumer segment saw a 10% revenue growth, and Canadian facial tissue market share hit 44.1%.
- The completion of the Sherbrooke plant is projected to enhance production and reduce costs.
- Net income increased to $18 million, with a $13.7 million boost from foreign exchange gains.
- The company closed a $135 million senior unsecured notes offering for debt redemption and corporate purposes.
- Capital expenditure forecasts for 2024 were adjusted to $190-$210 million, with 2025 projections between $40-$60 million, excluding Sherbrooke expenses.
Company Outlook
- KP Tissue anticipates adjusted EBITDA for Q4 2024 to align with Q3 figures, supported by price increases and lower input costs, despite higher manufacturing overheads.
Bearish Highlights
- Adjusted EBITDA faced a year-over-year decrease of 9.3%, influenced by rising pulp prices and outsourcing activities.
- The net debt to last 12 months adjusted EBITDA ratio increased to 4.1 times from 4.0 times in the previous quarter.
Bullish Highlights
- Sequential revenue growth was observed with an increase of $11.3 million (2.2%).
- The company successfully increased its Canadian facial tissue market share to 44.1%.
- The Sherbrooke manufacturing plant's completion is expected to contribute positively to future production efficiency and cost savings.
Misses
- Cash at quarter-end was down $16 million sequentially, standing at $111.2 million.
- The EBITDA margin slightly decreased to 12.6% from 12.8% in the previous quarter.
Q&A Highlights
- CEO Dino Bianco discussed the market exit of Kleenex, noting KP Tissue's growth in the facial tissue segment and potential for further expansion in facial tissues and paper towels.
- Bianco addressed pulp price fluctuations and inflation concerns, suggesting pulp prices may stabilize or rise, and emphasized the company's flexible pricing strategies.
In summary, KP Tissue navigated a mixed financial landscape in Q3 2024, balancing revenue growth with cost-related challenges. The company's strategic moves, including the completion of the Sherbrooke plant and the issuance of senior unsecured notes, position it to potentially mitigate the impact of market headwinds while capitalizing on growth opportunities in the tissue segment.
Full transcript - None (KPTSF) Q3 2024:
Operator: Good morning, and welcome to KP Tissue's Third Quarter 2024 Results Conference Call. Today's call is being recorded for replay. All participants are currently in listen-only mode. Following the presentation, we will conduct the question-and-answer session. [Operator Instructions] I will now turn the call over to Doris Grbic, Director of Investor Relations. You may begin your conference.
Doris Grbic: Thank you, operator. Good morning, everyone, and thank you for joining us to review Kruger Products Third Quarter 2024 Financial Results. With me this morning is Dino Bianco, the CEO of KP Tissue and Kruger Products; and Michael Keays, the CFO of KP Tissue and Kruger Products. Today's discussion will include certain forward-looking statements. Actual results could differ materially from these forward-looking statements due to known and unknown risks and uncertainties. A list of risk factors can be found in our public filings. In addition, today's discussion will include certain non-GAAP financial measures. The reconciliation of these non-GAAP financial measures to the most comparable GAAP measure can be found in our MD&A. The press release reporting our Q3 2024 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?
Dino Bianco: Thank you, and welcome, Doris. Good morning, everyone and thank you for joining us for our third quarter earnings call for fiscal 2024. Our business continued to perform well with double-digit revenue growth in the third quarter of 2024 on the strength of higher sales volume and favorable selling prices across our North American network. Despite higher pulp prices and other manufacturing costs year-over-year, we also generated solid adjusted EBITDA that was within our expectations. In the Consumer segment, we maintained strong revenue momentum through ongoing investments innovation and brand support. The resulting impact has been encouraging with our leadership position rising above 44% in the Canadian facial tissue market, combined with share gains in the bathroom tissue and paper towel categories on a year-over-year basis. On the Away-From-Home front, sales volume slightly improved in the third quarter of 2024 compared to the same period in 2023, while profitability was tempered by additional outsourcing activity. The operational highlight of the quarter was the complete construction of our manufacturing plant in Sherbrooke, including the successful start-up of our LDC paper machine with added capacity of 60,000 metric tons. At maturity, the entire Sherbrooke site, which also contains the existing TAD facility along with the recently deployed facial tissue and bathroom tissue lines will produce more than 130,000 metric tons of high-quality tissue products. The overall expansion project represents a remarkable achievement for our entire team. I would like to thank and congratulate everyone involved in this incredible project. On top of that, I would like to welcome the more than 140 new employees who have joined us. Moving forward, we are fulfilling our vision of making Sherbrooke a major hub for tissue manufacturing in North America, enabling additional capacity reducing our costs and offering tissue products across all formats and quality tiers. Now, let's take a look at our quarterly numbers on slide 6. Revenue growth of 10.1% in the third quarter of 2024 was mainly driven by higher sales volume across both our Consumer and AFH segments and favorable pricing year-over-year, along with a positive foreign exchange impact on US dollar sales. Canadian revenues increased 5.5% in the third quarter, while the US sales improved 16.1% driven by both Consumer and AFH new and existing customers. Adjusted EBITDA of $65.7 million was in line with our expectations down 9.3% year-over-year in the third quarter, primarily due to higher pulp prices and additional paper outsourcing activity combined with rising freight rates and increased SG&A expenses. These factors were partially offset by a number of items, including higher sales volume and Michael will provide you with the details in his financial review. On slide 7, Pulp average prices in Canadian dollars increased slightly in the third quarter of 2024 from the previous quarter, while year-over-year average prices for NBSK and BEK were up 38.5% and 49.4% versus Q3 2023. Market pulp prices have recently moderated, but they are expected to remain volatile in 2025 according to industry analysts. We are also closely monitoring the weakening Canadian dollar. Let's move on to our operations on slide 8. Our new paper machine started ahead of schedule in September and already is exceeding the ramp-up curve. Our new facial tissue assets in Gatineau and Sherbrooke continue to perform well to meet robust market demand for facial tissue. Overall production rates at our facilities are on target while North American industry utilization rates remain high. And finally, TAD paper machine and converting output remains favorable compared to last year allowing us to meet heightened demand for premium tissue products. Let's turn to slide 9. We drove share growth in the third quarter through new marketing campaigns behind Sponge Towels with Nothing Absorbs Like It, and Scotties, Let's Get The Name Right. Both campaigns were humorous and playful strengthening our position as the top choice for consumers seeking premium paper towel and facial tissue products. These creative spots ran across broadcast, social, digital, and streaming channels. In Q3, 2024, we also maintained support behind Bonterra, our brand targeting environmentally conscious consumers, including a new shopper marketing program to drive engagement at the store level. This brand continues to build distribution and steady sales growth. In addition, we initiated robust consumer activation behind Made in Canada and Tennis Canada omnichannel programs. On facial, we followed up with a distribution focus behind our new high-quality Scotties Ultra Soft and Ultra Soft with Lotion innovation and our Pocket Pack launch. Turning to slide 10. The data presented is taken for Nielsen. It shows branded market share over a 52-week period ended September 7, 2024. We continued building our leadership position in facial tissue during the third quarter with market share reaching 44.1% of the Canadian market. In both bathroom tissue and paper towel, although, we are seeing some timing decline our Q4 activity on both these categories are expected to see improved share performance as we finish the year. Looking at the Away-From-Home segment on slide 11, sales volume slightly increased on a year-over-year basis and was stable sequentially. However, strong orders coupled with challenges in our paper supply hampered order fulfillment. As a result, our EBITDA performance in the third quarter was negatively affected by additional paper outsourcing activity compared to the third quarter of last year. Our new paper machine in Sherbrooke book will provide additional internal paper to reduce such external requirements going forward. I will now turn the call over to Michael.
Michael Keays: Thank you, Dino, and good morning, everyone. Please turn to slide 12 for a summary of our financial performance for the third quarter of 2024. As covered by Dino, we generated revenue of $521.1 million and adjusted EBITDA of $65.7 million in the quarter, which demonstrate a continued strong performance that was aligned with our expectations. Net income, which increased $5.1 million from $12.9 million in Q3, 2023, totaled $18 million in the third quarter of 2024. The year-over-year growth can be attributed to several factors including a higher FX gain of $13.7 million and a lower income tax expense of $2.1 million. These factors were partially offset by a lower adjusted EBITDA of $6.7 million, greater depreciation expense of $3.1 million and a higher interest expense of $1.3 million. In the quarterly segmented view on slide 13, revenue from our Consumer business grew 10% year-over-year to $429.2 million, mainly due to a stronger volume in the US, higher selling prices across our Consumer segment and a more favorable FX impact on US dollar sales in the quarter. Consumer revenue increased in both Canada and the US. For the Away-From-Home segment, revenue improved 10.6% year-over-year to $91.9 million for the same reasons as our Consumer segment, which is higher sales volume, increased selling prices and a favorable FX impact. Consumer adjusted EBITDA in the third quarter totaled $62.4 million compared to $65.9 million in Q3, 2023 with a margin of 14.5% versus 16.9% for the same period last year. On a sequential basis, Consumer adjusted EBITDA grew $2.1 million from Q2, 2024. For our Away-From-Home business, adjusted EBITDA amounted to $6.6 million in the third quarter compared to $8.4 million in Q3, 2023. On a year-over-year basis, AFH adjusted EBITDA decreased $1.8 million with a margin of 7.2% while sequentially AFH adjusted EBITDA declined $3 million from Q2, 2024. Moving on to Slide 14, we review consolidated revenue for Q3 2024, which grew by $47.7 million, or 10.1% year-over-year. The increase was primarily driven by higher sales volume in both Consumer and AFH segment favorable selling prices across our network and a positive FX impact. On a geographic basis, revenues in Canada rose $14.6 million, or 5.5% year-over-year, while U.S. revenues grew $33.1 million, or 16.1%. Next (LON:NXT) on Slide 15, we provide more details about our year-over-year profitability in the third quarter. Adjusted EBITDA decreased by $6.7 million, to $65.7 million in the quarter, resulting in a margin of 12.6%, compared to 15.3% for the same period last year. Several factors account for the year-over-year decline in adjusted EBITDA, including higher pulp prices, additional outsourcing activity, rising freight rates and increased SG&A expenses. These items were partially offset by a higher sales volume, increased selling prices and lower manufacturing overhead costs. Now if we turn to Slide 16, where we compare Q3 revenue to Q2 2024, revenue increased $11.3 million sequentially, or 2.2%, mainly due to higher selling prices and sales volume. Geographically, revenue in Canada rose by $3.2 million, or 1.2%, while revenue in the U.S. grew by $8.1 million, or 3.5%. On Slide 17, our adjusted EBITDA in the third quarter improved sequentially by $0.4 million to $65.7 million, mainly due to lower manufacturing overhead costs, favorable selling prices and higher sales volume. These were partially offset by increased pulp prices, higher marketing and SG&A expenses as well as greater freight and warehousing costs. The adjusted EBITDA margin of 12.6% in the third quarter was marginally lower than Q2 2024 at 12.8%. If we now move to Slide 18, our cash position reached $111.2 million at the end of the third quarter, a decrease of $16 million from Q2 2024. Long-term debt at the quarter end stood at $997.5 million, which was down $9.8 million sequentially and net debt increased $4.5 million. For our net debt to last 12 months adjusted EBITDA, the ratio rose slightly to 4.1 times in the third quarter versus 4.0 times in the second quarter due to a minor increase in net debt and a relatively lower adjusted EBITDA. When compared to Q3 2023, our leverage ratio improved from 4.3 times. Directionally, we also anticipate that our leverage ratio will decrease in 2025, as the Sherbrooke Expansion Project production continues to ramp up. In terms of total liquidity, we had $434.2 million available at the end of the quarter and $14.6 million of cash was held for the Sherbrooke Expansion Project. Following the quarter end, it's important to note that we did close a $135 million offering for senior unsecured notes at a rate of [indiscernible]. Interest under note is payable semiannually on May 1 and November 1 of each year beginning on May 1, 2025. The majority of the proceeds were used to redeem the senior unsecured notes that were due in April 2025 with the remainder being used for general corporate purposes. This redemption was completed yesterday on November 12, 2024. I will conclude my section by reviewing capital expenses on Slide 19. CapEx for 2024 totaled $37 million, which included $26.7 million for the Sherbrooke Expansion Project. And after the first nine months of 2024 total CapEx has now reached $137.4 million. In terms of our full year forecast, we are lowering our expected CapEx range from -- for the year to between $190 million and $210 million, compared to our previous range of $200 million to $220 million for 2024. Finally, our CapEx outlook for 2025 has been set to a range between $40 million and $60 million and this outlook does exclude any remaining spend for the Sherbrooke Expansion Project that could shift into 2025. Thank you for joining us this morning and I will now turn the call back to Dino.
Dino Bianco: Thank you, Michael. Please turn to Slide 21 for my closing comments. We benefited from strong top line contributions in the third quarter primarily driven by US sales. Recent price increases across our North American network are offsetting increased costs. We will continue investing in our brands to enable long-term share growth. We expect our new paper machine in Sherbrooke will enable the reduction of purchase paper and provide more overall capacity. Our Away-From-Home segment continues to deliver against a sustainable profit model and benefit from internal paper from the new paper machines. Our leverage ratio will slightly improve in 2025 with the Sherbrooke Expansion Project mostly complete. 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 fourth quarter of 2024. We expect adjusted EBITDA will be in the range of Q3 2024. It's mainly based on higher selling prices and slightly lower input costs partially offset by higher manufacturing overhead spend. We will now be happy to take your questions.
Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] One moment please for your first question. Your first question comes from the line of Sean Steuart of TD Cowen. Please go ahead.
Sean Steuart: Thank you. Good morning, everyone.
Dino Bianco: Good morning.
Sean Steuart: Thanks. A couple of questions on Sherbrooke. Dino, you indicated you're ahead of the ramp-up curve for the new machine. And I know you guys are usually reluctant to give numbers around these sorts of things. But can you qualify how far ahead you are of the expected ramp-up curve? Are there any figures you can put towards that assessment?
Dino Bianco: Yes Sean, I would say, it's still early. I mean you start one of these machines up you're obviously trialing different paper grades. So you get some ups and some downs. It's a little choppy over the first few months. So I don't have a steady trend. But I would say overall we look at the total numbers produced versus what we were expecting we are above. I'm not going to give you a number. And quite frankly this is just an indication of the quality of the team that we've got there. We had the same situation when we started up the TAD paper machine. So we really got a strong operational group there and I expect that that will continue to be the case as we ramp up that machine.
Sean Steuart: Okay. Thanks for that. And then the CapEx guide slight reduction to this year's forecast which I assume is just timing related to the completion of all the Sherbrooke work. Can you give us a sense of what's left on that CapEx spend? Where is it going exactly? And I think we know how much you have left to go into 2025 with but what exactly is the money going towards to finish that up?
Michael Keays: Hi, Sean. This is Michael. So in terms of the Sherbrooke CapEx spend really what's left at this stage since the paper machine did start up in September would be any closeout items. So last payments with various equipment providers, finishing up small details around the facility itself. So depending on the timing of that and our earners -- and our ability to complete those over the next two months we could see a small portion still into 2025. But I would expect that that number would be below $20 million if it does go past December 31.
Sean Steuart: Okay. That’s all I have for now. Thank you very much, guys.
Sean Steuart: Thank you.
Michael Keays: Thank you.
Operator: Your next question comes from the line of Hamir Patel of CIBC (TSX:CM) Capital Markets. Please go ahead.
Hamir Patel: Hi. Good morning. Dino, you previously announced high single-digit Canadian consumer tissue hike I believe it was effective in September. How -- could you speak to how implementation is going there? And just given the weakening CAD does that maybe necessitate another increase?
Dino Bianco: Good morning, Hamir. Yes, so we took the pricing in September. We started to see it really -- it will hit our P&L a little stronger in Q4. Obviously, September was a bit of a transition month in the new pricing. I would say that we are seeing that price reflected in market. So, we're seeing it across the entire tissue category. Obviously, it was based on common costs. As we're seeing CAD come down, we're also watching what's going on with pulp. There has been some moderation. But what's happening now is we're looking at our -- we're planning for 2025. We're seeing increased costs in other areas like freight and energy. So, we're just watching the bundle of inputs. And we'll make the decision once we realize, where do we sit on margin as we move into next year, incorporating all those factors including the Canadian dollar weakening. So it's probably part of our pricing model, Hamir. And one of the things I think I said on the last call is, we're going to -- we're trying to adopt the model that keeps us closer to the cost curves, not just pulp, but all their input costs. So it just -- it helps provide a bit more of a shock absorbency if you will around up or down movements.
Hamir Patel: Okay. Fair enough. Thanks, Dino. And just thinking through potential US tariffs, I think last time, there was a bit of an impact for you because you had some Memphis TAD product coming into Canada. Now that you have Sherbrooke, how do we think about -- if you did see maybe a 10% tariff on the US, how that would impact your -- where you ship product from the various mills?
Dino Bianco: Yes. I wondered how long that question would take to come up. But I'm sure like any Canadian company that exports into the US, we're all running scenarios, we're running scenarios as well on our network. We're also running scenarios of what ifs in terms of how we move production around. One thing I would say and I'm not going to try to predict what the new -- what Trump and the new President will do, but the US is an importer of tissue. It needs imports to satisfy its consumers. And those imports come from Canada, Mexico, Asia. So, to put a tariff would -- I understand the tariff logic, but it would be detrimental I think to supply because the US market cannot supply tissue for its consumers right now. So, we'll see if it happens. I mean we'll watch it. Obviously, we have a great relationship with our US customers and we'll run a bunch of different scenarios. There's not much more I can say other than being aware of it and trying to be ready for whichever way this thing goes.
Hamir Patel: Fair enough. That’s all. I'll turn it over. Thanks.
Dino Bianco: Thank you.
Operator: Your next question comes from the line of Zachary Evershed of National Bank Financial. Please go ahead.
Zachary Evershed: Good morning. Congrats on the quarter.
Dino Bianco: Thank you.
Zachary Evershed: So we're looking at the market share gains. Obviously, there's the effect of the departure of Kleenex from the market. What other market share gains do you think you're getting on top of that? Or is it primarily driven by that vacuum in the market?
Dino Bianco: Well, I think certainly, facial has been growing because of the exit of Kleenex, but also because of the work we've done in terms of innovation, distribution, communication, et cetera that has helped us gain our share equivalent of that. So I think that one has still got some room to go, particularly as we're working just over a year of their exit. So, I think we still are building a stable position on growth in facial. I think bath is going to continue to be a very tough category. It's a very competitive category. So holding or slight increases would be great news for us. And paper towel, I think we have room to grow. We're number two. We have a very high-quality product on Towel that our Sherbrooke facility helps us compete in the marketplace. So I think we've got great opportunity to grow on Towel. So Facial number one opportunity, Towel number two opportunity and Bath flat plus a little bit would be great.
Zachary Evershed: Got you. Thanks. And then…
Dino Bianco: Go ahead, Zachary.
Zachary Evershed: Can you still hear me?
Dino Bianco: Can you repeat the question from the beginning?
Zachary Evershed: Yes, sir. So pulp prices are trending favorably but we're seeing the weakening Canadian dollar and you mentioned a basket of other inflation and input costs. How far down do you think pulp prices have to fall before you start to worry about pressure on tissue selling prices?
Dino Bianco: Yeah. I mean, it's never one month or one week. I think the market you saw it kind of fall particularly, as it related to BEK or the Hardwood. A lot of it's driven by China, if you've been following the news. I would say based on our experts that we rely on, markets probably bottomed out. And it's either going to go sideways or start to increase again. And like I said, we're watching the basket of goods such as pulp, because freight in 2022 we had a very difficult year. A big driver of that was the freight costs were going through the roof. We're starting to see that starting to creep up again. And then, yes, you said, the Canadian dollar. So I think we're stable -- to answer that question dead on, I think our pricing is stable right now in terms of representing pool -- at least on the consumer side because that's where we price the business representing a pool of cost inputs. And we'll just keep watching it. I've always said that we can't predict where this market is going, but what we can do is be ready to change if it goes up or down to be able to be ready. So that's how we are approaching this.
Zachary Evershed: Thank you very much for your color.
Operator: [Operator Instructions] There are no further questions at this time. I'd now like to turn the call back over to Dino, for final closing remarks. Please go ahead.
Dino Bianco: Great. I want to thank everyone for joining us on this call today. We look forward to speaking with you again, following the release of our fourth quarter results. Thank you. And have an amazing day.
Operator: Ladies and gentlemen, this concludes our conference call for today. We thank you for participating, and ask that you please disconnect your lines.
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