KP Tissue Inc. (OTCPK:KPTSF) Q2 2023 Earnings Name August 10, 2023 8:30 AM ET
Firm Contributors
Mike Baldesarra – Director, Investor Relations
Dino Bianco – Chief Government Officer
Mark Holbrook – Chief Monetary Officer
Convention Name Contributors
Hamir Patel – CIBC Capital Markets
Kasia Kopytek – TD Securities
Paul Quinn – RBC Capital
Operator
Good morning girls and gents. Thanks for standing by. Welcome to the KP Tissue Second Quarter 2023 Earnings Convention Name. Right now, all contributors are in listen-only mode. Following the presentation, we are going to conduct a question-and-answer session. [Operator Instructions] Earlier than turning the assembly over to administration, I wish to remind everybody that this convention name is being recorded right this moment, Thursday, August 10, 2023.
I might now like to show the decision over to Mike Baldesarra, Director, Investor Relations. Please go forward.
Mike Baldesarra
Thanks, operator, and good morning, girls and gents. My title is Mike Baldesarra, I am the Director of Investor Relations of KP Tissue Inc. The aim of the convention name is to overview the monetary outcomes of the second quarter of 2023 for Kruger Merchandise Inc., which I will discuss with as Kruger Merchandise going ahead.
With me this morning is Dino Bianco, the Chief Government Officer of KP Tissue and Kruger Merchandise; and Mark Holbrook, the Chief Monetary Officer of KP Tissue and Kruger Merchandise.
The next discussions and responses to questions comprise forward-looking statements in regards to the firm’s actions. Ahead-Wanting statements contain identified and unknown dangers and uncertainties, which might trigger the corporate’s precise outcomes to vary materially from these within the forward-looking statements. Traders are cautioned to not depend on these forward-looking statements. The corporate doesn’t undertake to replace these forward-looking statements besides if required by relevant legal guidelines. There’s a web page in the beginning of the written presentation which comprises the same old authorized cautions, together with as to the forward-looking info, which you ought to be conscious of.
I’d wish to level out that the figures expressed in right this moment’s name are in Canadian {dollars}, except in any other case said. The press launch reporting the Q2 2023 outcomes have been revealed this morning and will likely be accessible from our web site at kptissueinc.com. Please remember that our MD&A will likely be posted on the web site and also will be obtainable on SEDAR.
Lastly, I might ask that through the name you’d to refer the presentation, we have now ready to accompany these discussions, which can be obtainable on our web site. We’d additionally recognize that through the Q&A interval so that you can restrict your questions to 2. Thanks in your collaboration.
Girls and gents, I’ll now flip the decision over to Dino Bianco, our CEO. Dino?
Dino Bianco
Thanks, Mike. Good morning, everybody, and thanks for becoming a member of us for our second quarter earnings name.
We’re happy that margin restoration, together with improved gross sales quantity and a greater combine in our Client enterprise, generated sturdy Adjusted EBITDA within the second quarter of 2023. Ongoing price administration initiatives, together with productiveness beneficial properties and price controls, additionally contributed to rising profitability. As well as, our Away-From-Residence phase delivered a fourth consecutive quarter of optimistic Adjusted EBITDA to keep up its development momentum. Consequently, our monetary efficiency within the second quarter normalized versus a tougher market and working surroundings in the identical interval final yr. On a sequential foundation, income and Adjusted EBITDA continued to enhance, with stable incremental development.
Looking forward to the second half of 2023, we anticipate an more and more favorable panorama as enter prices development downwards, TAD Sherbrooke and the Sherbrooke Enlargement Undertaking proceed to ramp up manufacturing capability to satisfy buyer demand, and margins are restored to their pre-pandemic ranges.
Now let’s check out our quarterly numbers on slide six. Income elevated 17.3% to $466.3 million within the second quarter of 2023 on the energy of promoting worth will increase throughout all segments and areas in 2022. A positive gross sales combine and better gross sales quantity in our Client phase in addition to optimistic overseas change impression on U.S. greenback gross sales. Income in Canada rose 10.8% year-over-year within the second quarter, whereas within the U.S. it grew 27.1% because the market benefited from sturdy quantity in each our Client and AFH segments.
Adjusted EBITDA was up 365.8% year-over-year to $55 million within the second quarter off a low 2022 base attributable to a number of elements, together with promoting worth will increase, favorable gross sales combine and better gross sales quantity, Memphis plant operations enchancment and decrease freight charges. These elements have been partially offset by inflation on manufacturing prices, larger warehousing and SG&A expense and an unfavorable overseas change impression.
On slide seven, pulp common costs in Canadian {dollars} decreased double-digits within the second quarter of 2023 from the earlier quarter, whereas year-over-year costs declined to lesser extent. NBSK and BEK common costs fell 8.9% and 11.4% year-over-year in Q2 2023. And primarily based on business evaluation, pulp costs are close to or on the backside of the value cycle.
Let’s transfer on to our Sherbrooke operations and growth on slide eight. TAD Sherbrooke continues to type nicely surpassing manufacturing expectations on the paper machine and changing. Each our facial traces scheduled to launch late in fourth quarter and our paper machines slated for the top of 2024 are nonetheless monitoring to plan however we’re retaining a detailed eye on provide chain and inflationary pressures.
I am additionally happy to report that the startup of our most up-to-date changing line which was began up in Q1 2023 was the quickest of all our Sherbrooke changing traces attributable to OpEx learnings, employees maturity, and synthetic intelligence implementation. As we glance to the brand new facial line and paper machine, the hiring course of is progressing nicely and we’re persevering with to onboard workers to handle these traces.
Turning to our Memphis operations on slide 9, we have now maintained our concentrate on TAD manufacturing for each changing and paper machine property after the shutdown of LDC property earlier within the yr. The brand new facial tissue line which was not too long ago strengthen with digital twin AI instruments to optimize productiveness, continues to exceed its ramp up curve. Gross sales quantity in the fee construction have additionally improved at Memphis over the last two quarters, whereas worker turnover has stabilized following the shutdown of the legacy operations.
Now, let’s pivot to model assist on slide 10. As indicated final quarter, we plan on reinvesting in our manufacturers to get better share in 2023. Q2 2023 advertising was centered on multi-brand actions highlighted by the NHL Deliver Residence Stanley Cup promotion, that provides three pairs of VIP experiences to profitable contributors for the Stanley Cup Finals.
Different key advertising actions through the quarter included our manufactured in Canada drive to assist the positioning of our Canadian manufacturers. The profitable launch of the second chapter of our Unapologetically Human marketing campaign entitled ‘Love is Messy’. The discharge of latest Scotties Home and Residence designed and facial tissue. And eventually, we proceed to make strategic shopper investments behind White Cloud at key accounts within the U.S.
Transferring to slip 11, the information introduced is taken from Neilson, it reveals market share efficiency over a 52-week interval ended June 17, 2023. The information displays that Kruger Merchandise share has incrementally improved from the earlier quarter, notably for toilet tissue and paper towels. We’re seeing enchancment in our branded merchandise pushed by pricing stability within the market and a return to a extra normalized promotion agenda at retail.
Away-From-Residence on slide 12, quantity energy displays market restoration and accelerated development at some key clients. As talked about earlier, this enterprise delivered a fourth consecutive quarter of optimistic adjusted EBITDA in Q2 2023, as we’re seeing structural indicators that this profitability is sustainable. Nonetheless, we are going to maintain monitoring the potential impression of any financial slowdown on this enterprise.
I’ll now flip the decision over to Mark. Mark?
Mark Holbrook
Thanks, Dino, and good morning, everybody. Please flip to slip 13, for a abstract of our monetary efficiency in Q2 2023. As Dino talked about earlier, margin restoration and powerful topline development generated adjusted EBITDA of $55 million within the second quarter. Web earnings totaled $14.5 million within the quarter, in comparison with a lack of $35.5 million in Q2 of 2022. The rise was primarily attributable to larger adjusted EBITDA and a overseas change achieve. These elements have been partially offset by larger earnings tax and depreciation expense, larger curiosity expense and different finance price and a loss on the sale of mounted property. Within the quarterly segmented view on slide 14, shopper income elevated 17.5% year-over-year to $383.5 million within the second quarter, and 1.8% sequentially in comparison with Q1 2023.
Client phase income rose each in Canada and the U.S. Within the Away-From-Residence phase, income grew 16.4% year-over-year to $82.8 million and 11.2% sequentially from the earlier quarter. Client adjusted EBITDA totaled $53.3 million within the second quarter in comparison with $14.3 million in Q2 of 2022, with an adjusted EBITDA margin of 13.9% versus 4.4% for a similar respective interval. Sequentially, Client adjusted EBITDA was up $2 million or 3.8% from Q1 of ‘23. For our AFH enterprise adjusted EBITDA managed to $5.8 million within the second quarter in comparison with destructive $0.5 million in Q2 2022, with a optimistic margin of seven%. Sequentially, adjusted EBITDA for Away-From-Residence was up $4.9 million from Q1 of 2023 as Q2 is seasonally a stronger quarter.
On slide 15, we overview year-over-year income development for Q2, which improved by $68.8 million or 17.3%. This development is attributable to the carry ahead of promoting worth will increase from 2022 throughout all segments and areas, favorable gross sales combine and the next gross sales quantity from our Client phase in addition to a optimistic overseas change impression on U.S. greenback gross sales. On a geographical foundation, revenues in Canada rose $25.9 million, or 10.8% year-over-year, whereas U.S. revenues grew $42.9 million or 27.1%.
On slide 16, we offer extra perception into profitability within the second quarter. Adjusted EBITDA elevated by $43.2 million to $55 million, representing a margin of 11.8%. That is from a trough of $11.8 million in Q2 final yr, or a margin of three%. The rise in adjusted EBITDA was primarily attributable to larger promoting costs relative to the second quarter final yr, favorable gross sales combine and better gross sales quantity, enchancment in our Memphis plant operations and decrease freight charges. These elements have been partially offset by inflation on manufacturing prices, larger warehousing and SG&A bills, and the unfavorable impression of overseas change fluctuations.
Now let’s flip to slip 17, the place we evaluate Q2 revenues sequentially to Q1 2023. Income improved by $15.3 million or 3.4%, primarily attributable to larger gross sales quantity in each our Client and AFH segments, partially offset by a barely destructive overseas change impression on U.S. greenback gross sales. Geographically income in Canada rose by $4.4 million or 1.7% sequentially, whereas income within the U.S. grew by $10.9 million or 5.7%.
On slide 18, adjusted EBITDA within the second quarter elevated sequentially by $5 million or 10.2%, on larger gross sales quantity and decrease freight prices. These elements are partially offset by larger warehousing prices, larger plant’s overhead and absorption from stock discount and better SG&A bills, notably advertising spending.
Turning to our stability sheet and monetary place on slide 19, our money place stood at $88.2 million on the finish of the second quarter, a rise of $42.9 million from Q1 2023. Lengthy-term debt at quarter finish totaled $1.0777 billion, down $18.4 million from the top of the earlier quarter. Web debt decreased by $61.6 million sequentially to $1.0236 billion as we stay disciplined with capital spending and generated money from diminished working capital. Consequently, our internet debt to final 12 months adjusted EBITDA ratio decreased to five.7 instances within the second quarter, from 7.9 instances in Q1 of ’23 and eight.1 instances in Q2 of 2022. Leverage improved on the energy of decrease internet debt and better adjusted EBITDA within the final 12 months.
We anticipate deleveraging to proceed in 2023, regardless of ongoing investments in our Sherbrooke Enlargement undertaking, as adjusted EBITDA retains rising on a final 12 months foundation. At quarter-end whole liquidity, representing money and money equivalents and availability from revolving credit score agreements, stood at $181.6 million, as well as $13.8 million of money was held for the Sherbrooke Enlargement undertaking.
I will conclude my part by reviewing capital expenditures on slide 20. Whole CapEx in Q2 2023 was $42.8 million, together with $36.9 million for the Sherbrooke Enlargement undertaking. On the finish of the second quarter, CapEx stood at $77.4 million. We’re sustaining our CapEx forecast between $200 million and $230 million for 2023, as spending associated to the Sherbrooke Enlargement undertaking and common CapEx is predicted to choose up considerably within the second half of the yr.
Thanks for becoming a member of us this morning, and I will now flip the decision again over to, Dino.
Dino Bianco
Thanks, Mark. Please flip to slip 22 for my closing feedback. We’re steadily progressing alongside the restoration curve highlighted by sturdy income and margin enchancment within the second quarter to drive adjusted EBITDA development. We’re managing pricing margins given altering enter prices. We’re rising our advertising funding to assist model fairness and develop share for the long-term.
Our Sherbrooke Enlargement Undertaking is shifting ahead with the startup of the facial line schedule for the top of this yr and the paper machine for the top of subsequent yr, whereas the Memphis turnaround is progressing in response to plan. Our Away-From-Residence phase is delivering in opposition to sustainable revenue mannequin on the energy of our 4 consecutive quarters of optimistic adjusted EBITDA. As Mark talked about, our leverage ratio is progressively coming down as adjusted EBITDA improves. And eventually, we’ll maintain investing in our group and tradition to drive future development.
Now let’s flip our consideration to the outlook for the third quarter of 2023. As commodity and different enter prices decline, we are going to concentrate on sustaining margins whereas persevering with to reinvest within the enterprise to drive long-term worth. Accordingly, adjusted EBITDA for Q3 2023 is predicted to be within the vary of Q2 2023.
We are going to now be completely happy to take your questions.
Query-and-Reply Session
Operator
Thanks. We are going to now start the question-and-answer session. [Operator Instructions] Our first query comes from Hamir Patel of CIBC Capital Markets. Please go forward.
Hamir Patel
Hello, good morning.
Dino Bianco
Good morning, Hamir.
Hamir Patel
Dino, when do you anticipate to totally notice the profit from the year-to-date lower that we have seen in benchmark pulp costs?
Dino Bianco
Properly, we’re beginning to see a few of it already, although I feel, Mark might have alluded to this, year-to-date pulp continues to be up versus prior yr, however we’re beginning to see it shifting by means of our P&L. There’s often a lag. It might be two to a few months primarily based on, stock shifting by means of the system. So, we must always begin seeing extra of that within the second half of the yr, Hamir.
Hamir Patel
Nice. Thanks, Dino. And, Dino, might you communicate extra to your White Cloud investments that you simply talked about, and the way you see your market share within the U.S. evolving throughout your Personal Label and White Cloud choices?
Dino Bianco
Sure. On the White Cloud foundation, I feel I discussed this earlier than, our method there may be, to strategically have that product, that clients the place it is smart and it suits. So, we do not need to go extensive throughout the entire retail of panorama. We need to choose key clients and concentrate on rising with them, whether or not there’s a chance. And that is what we have been doing.
And our investments, notably after a tough yr final yr, and beginning this yr, our investments have been extra tactical by way of driving consciousness and development, because it pertains to the advertising facet and persevering with to construct share at key accounts. I am more than happy with the route we have now moved on this slim however deep method to constructing the model, on the shopper entrance, and we are going to proceed to take a position as we’re in a position to construct a model, we expect it has plenty of fairness. We all know the standard is prime stage, and there is plenty of affinity for that model primarily based on the longevity of that model. So we’ll proceed to take a position.
Hamir Patel
Nice. Thanks, Dino. And simply the final query I had for Mark, any preliminary CapEx estimate you may present for 2024?
Mark Holbrook
Properly, we have now offered our ‘23 forecast and we’d present 2024 after we go to our third quarter name, Hamir, that will be applicable at that time, I feel.
Hamir Patel
Okay. Truthful sufficient. Thanks. That’s all I had. I’ll flip it over.
Operator
Our subsequent query comes from Kasia Kopytek of TD Securities. Please go forward.
Kasia Kopytek
Hello, good morning, everybody. It is Kasia on the road. I needed to ask about EBITDA margins. Final quarter, you talked about concentrating on mid-to-high single digits for the Away-From-Residence phase. What in regards to the firm as a complete? As soon as you’ve got rolled out and applied all these initiatives that you simply talked about, the place do you see mixture margins for the corporate settling at?
Dino Bianco
Sure, good query, Kasia. We have now three various kinds of companies. So, I feel we, even have 4 various kinds of companies. We have now a branded enterprise in Canada that has a sure margin construction. We have now a Personal Label enterprise in Canada that has a sure margin construction. We have now an Away-From-Home based business that has a unique margin construction. We have now a U.S. major personal label enterprise that has completely different margin construction. So, relying on the relative development of every of these segments, that’ll change the weighted common of our margin construction.
We have now targets inside every of these segments that, I will not disclose with you, however I feel you could possibly in all probability determine how they rank, primarily based on the enterprise fashions that exist there. So, I feel we must always — this firm on a weighted common enterprise must be low-teens, simply on a weighted common enterprise. Clearly, there will be segments which can be a lot larger than that and segments that will likely be decrease than that, however we must be within the low-teens, and we’re beginning to progress towards that.
Kasia Kopytek
Acquired you. Okay. After which after I have a look at traditionally, I imply, one of the best you’ve got ever executed was through the pandemic that was 17% and pre-pandemic, it was 15%. So, do you suppose you will get there? 15%?
Dino Bianco
I feel that to me can be within the low-teens. Sure.
Kasia Kopytek
Okay. And, simply how a lot is personal label of your small business proper now? Are you able to disclose that?
Dino Bianco
No, I am unable to. Clearly, within the U.S., it is many of the enterprise. So, let me be very clear aside from White Cloud, on the patron facet, principally Personal Label, I am not speaking right here, so let’s simply say its north of 90%. In Canada, it is a smaller position and our smaller enterprise, and in Canada, we work strategically with clients the place we assist our manufacturers, and the class by means of Personal Label provide. So, there is a strategic method and we use it accordingly, with just a few key clients right here the place it is smart.
Kasia Kopytek
Proper, understood. And once you say 90% for the states, is that on a quantity foundation or simply typically talking, possibly on a greenback sale foundation?
Dino Bianco
I feel both quantity or income can be the identical —
Kasia Kopytek
Okay.
Dino Bianco
Given the dominant portion of Personal Label down there.
Kasia Kopytek
Acquired it. Truthful sufficient. And final one for me, simply sticking with this theme, and after I have a look at your model and opponents, their EBITDA margins are fairly a bit north of your mid-teen goal. Something structural that you’d say is at play right here of why you may’t bridge in direction of maybe even larger margins, relative to your —
Dino Bianco
Properly, as I mentioned, we have now completely different companies that make completely different margin ranges. The quantity I gave you is weighted common. So, we have now a branded enterprise. You mentioned our branded opponents, so we have now a branded enterprise that makes the next margin and we have now Away-From-Residence, which we have talked 5% to 10%, which makes a decrease mid enterprise. So, we really feel segment-by-segment, we’re equal or higher than our opponents, for those who look segment-by-segment.
Kasia Kopytek
Acquired you. Okay. Thanks, Dino. I recognize that context. I’ll flip it over.
Operator
Our subsequent query comes from Paul Quinn of RBC Capital Markets. Please go forward.
Paul Quinn
Sure, thanks. Good morning. Simply on the outlook on Q3. It is so conservative in gentle of you will have declining pulp costs, freight and possibly a few different prices inputs. However why go so conservative, Dino?
Dino Bianco
Hello, Paul. Good query. I imply, it is a unstable interval. There’s plenty of shifting items. This enterprise could be made or misplaced on the cycles, this down cycle and the up cycle. And with pulp costs altering, capability modifications within the market, buyer demand is altering, I feel we’re being cheap on our method. Clearly, our objective can be to beat that. However simply given — it is not only a pulp coming down story, proper, there’s capability performs, there’s pricing motion within the market, and I feel we’re taking an affordable method with that. If it strikes in our favor and if the class available in the market strikes in our favor, actually we might be capable to beat that, and if it would not, then hopefully we have protected in opposition to that with our name.
Paul Quinn
Okay. After which simply on clients, any pushback but? I imply, your clients are seeing decrease pulp costs and also you guys have efficiently applied quite a few worth improve on the Tissue facet. Any pushback on clients by way of pricing that will stall out your margin development?
Dino Bianco
Sure, certain. As I mentioned earlier, this enterprise competitively solely permits you to work inside a sure margin construction. And, the secret is how we handle the up swings and the down swings. And clearly, final yr, us and plenty of tissue producers misplaced on that due to the pace of the of the inflation that occurred and the breadth of it and the lag that occurs earlier than you get pricing. This yr we’re seeing the opposite facet of that. I feel clients perceive there’s a lag concerned. Prospects perceive there may be volatility and clearly as we have a look at pricing for the long run, for example for the entire second half. We take a few completely different approaches.
In Canada, we’re the market chief and I’ve all the time believed that position of the market chief is to determine a wholesome margin construction for the class. An inexpensive however wholesome margin construction, we are going to attempt to do this and we’ll see how that performs out, which can imply, and can imply, worth declines if these commodity prices proceed to fall.
Within the U.S., we’re extra of a follower. So it relies upon what others are doing and the way we have now to play as a result of we’re a smaller participant there and we’ll should be aggressive. So you might be undoubtedly going to begin to see deflation on this class.
Some are contractually, primarily based like plenty of the AFH enterprise, a few of our personal contracts that may naturally has a deflation issue inside that. The magic will likely be in — I am not nervous about our habits. Definitely, we all know how we need to method this, however on the similar time, we need to make sure that we’re aggressive and we need to guarantee that our enterprise is robust, {our relationships} and our clients stay sturdy and our manufacturers stay sturdy.
In order that’s the place the black field is. Paul, we’ll simply should handle with this because it continues to alter. And that ties again a bit bit to the Q3 name that we made.
Paul Quinn
Alright. Thanks very a lot. Better of luck.
Operator
Our subsequent query comes from Zachary Evershed of Nationwide Financial institution Monetary. Please go forward.
Unidentified Analyst
That is really Nathan calling in for Zach this morning. So my first query is with respect to your price effectivity initiatives, how far alongside your course of are you and the way a lot additional do you suppose you may extract from that?
Dino Bianco
Properly, I suppose what I might say Nathan is we have now — yearly we undertake productiveness initiatives or price effectivity initiatives, no matter you need to name them. I feel each firm does that as they attempt to offset prices by means of efficiencies and effectiveness within the community. Most of it’s within the manufacturing space, however there are different areas like provide chain that we do this as nicely. So, yearly we do this, it is baked into our DNA as an organization. We accelerated that popping out of final yr and into this yr simply given the magnitude of the fee will increase. I am very happy with how group has responded. It’s a muscle that is nicely developed.
We needed to do extra of it, however we knew what to do and the best way to do it. And on the similar time do it with out jeopardizing product high quality or integrity of our enterprise. So, I might say we’re very far alongside. I am more than happy with the progress and we are going to hit our inner quantity, which after all, we do not share, however we are going to hit our inner quantity because it pertains to productiveness this yr.
Unidentified Analyst
And given the commerce downs typical within the face of inflation. How are you evaluating the effectiveness of your advertising spend?
Dino Bianco
Properly, I, I might say the commerce downs have stabilized. In truth, they’re in all probability returning extra to a traditional combine we begin to see — I discussed in the previous few quarters as pricing has stabilized clients are returning to common promotion exercise. We imagine our manufacturers will proceed to develop I feel the advertising piece of it’s much more vital when you’ve got excessive inflation to ensure your manufacturers keep on the radar. We did transfer extra of our advertising to transactional kind advertising versus final yr versus doing huge promoting.
This yr, we’re shifting — we’re including extra fairness, what I name fairness promoting, which is the long run constructing of the model, whereas nonetheless persevering with to do tactical in retailer exercise. So it is a combine. Advertising and marketing is a mixture. It is not only a TV promoting, it is social, it is digital, it is in retailer, it is PR, it is promotions, it is video. So we use that blend accordingly and final yr we spent extra of that blend to drive gross sales brief time period. This yr we’re possibly balancing it extra to drive nonetheless gross sales however long term fairness.
Unidentified Analyst
Thanks. I’ll flip it over.
Operator
This concludes the question-and-answer session. I wish to flip the convention again over to Dino Bianco for any closing remarks.
Dino Bianco
Nice. Thanks all for becoming a member of us on the decision right this moment. We sit up for talking with you once more following the discharge of our third quarter outcomes. Thanks, and have an amazing day.
Operator
This concludes right this moment’s convention name. You might disconnect your traces. Thanks for taking part and a have a nice day.
