KP Tissue Inc.

Thank you, Operator, and good morning, ladies and gentlemen. My name is Mike Baldesarra.

I am the Director of Investor Relations at KP Tissue Inc. The purpose of the conference call is to review the financial results of the fourth quarter of 2019 for Kruger Products L.P., which I will refer to as KPLP going forward.

With me this morning is Dino Bianco, the Chief Executive Officer of KP Tissue and Kruger Products L.P.; and Mark Holbrook, the Chief Financial Officer of KP Tissue and Kruger Products L.P. The following discussions and responses to questions contain forward-looking statements concerning the company’s activities.

Forward-looking statements involve known and unknown risks and uncertainties, which could cause the company’s annual results or 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’s 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. The press release reporting our Q4 2019 results were published this morning and will be accessible from our website at kptissueinc.com.

Please be aware that our MD&A will be posted on our website and will also be available on SEDAR. Finally, I ask that during the call to refer to the presentation we have prepared to accompany these discussions, which is also available on our website.

We would appreciate that at during the Q&A period for you to limit your questions to two. Thank you for your cooperation.

Ladies and gentlemen, I will now turn the call over to Dino Bianco, our CEO. Dino?

Thank you, Mike. Good morning everyone and thank you for joining us on today’s call.

Let’s start with a brief review of our financial performance for 2019 and for the fourth quarter. We are very pleased with our results for fiscal 2019 and in particular with the second half of the year.

On a full year basis, our sales were up 5.8%, excluding the impact of Mexico, which as you know, we divested in September 2019. The revenue increase was driven by the benefits of our previously announced price increases and strong volume across all our business segments.

By geography, U.S. sales increased by $36.9 million or very strong 7.7% and Canadian sales grew by $37.3 million or 4.6%.

Adjusted EBITDA totaled $145 million, an increase of 22.6% over last year. Our EBITDA improvement was driven by price increases across all business segments, favorable sales mix, the impact on lower fiber costs, higher sales volumes and the benefits of our OpEx program.

These factors were partially offset by the cost of outsource manufacturing, higher maintenance spend and increased SG&A costs and some unfavorable net foreign exchange. For the fourth quarter, excluding Mexico, revenues increased by 3.9% to $348.1 million, driven by the same factors I discussed earlier.

Adjusted EBITDA totaled $46 million, an increase of 87.5% over last year. We are very pleased with the strong performance as it reflects our business turnaround but also keep in mind it’s of a weak comparative from a year ago.

As we look at market pulp prices, NBSK and eucalyptus prices in Canadian and U.S. dollars have maintained a downward trend moving into the fourth quarter of last year.

In Q4, NBSK pulp prices declined sequentially by just under 5% compared to Q3 and by 22% compared to last year in Canadian dollars. The trend was very similar for BEK or eucalyptus, which was down 28% in Canadian dollars over the last year.

Market forecasts had initially predicted pulp prices to rise through the year, but given current global market uncertainty this has had an impact on our ability to forecast pulp prices going forward. We are pleased to update you on our TAD Sherbrooke facility.

As you can see on slide eight, construction is progressing very well and our buildings for the paper machine, warehouse and converting were all closed at the end of last year, and in recent weeks we received a paper machine and part of our converting equipment. A commissioning startup of our first converting line is expected this summer and the plan remains unchanged and the startup of our paper machine is anticipated for early 2021.

Finally, the sales in trade mark plans are also progressing very well with many customer meetings taking place across North America to establish our partnership on the new business. Turning to our OpEx program, we are entering the second year of this project, so far the program has been rolled out to 17 lines across five sites at this stage more than 300 of our employees were OpEx trained.

Our OpEx program is supported by five key pillars, environment, health and safety, asset care, progressive maintenance, end-to-end quality and strategic deployment initiative management, which all work together to drive manufacturing excellence. As mentioned earlier last year, our logistics initiative was also kicked off and is also yielding strong savings and is part of our expected total savings goal of $15 million to $20 million on a run rate basis by the end of 2020.

I am happy to say that we are progressing well and anticipate delivering against this objective. Let me now turn to our Away-From-Home business.

We are pleased to have again seen sequential improvement on AFH as Q4 adjusted EBITDA had a sequential improvement of $0.80 million over Q3 2019 and $2.7 million versus Q4 2018. We are seeing the benefits of pricing which we implemented in both Canada and the U.S.

earlier this year as fiber costs both on recycled and virgin continue to be favorable to this business. We had also reprioritized the top OpEx rollout to our AFH sites and have been seeing improved operating efficiency from those assets resulting in better costs and improved customer service.

For 2020, we will continue to focus on driving operating efficiency over the impact of tight internal paper capacity at least until TAD Sherbrooke comes online and the recent unknown tissue demand impact from COVID-19 creates some uncertainty for this business that we will need to manage through. Lastly, on our branded business, in January we announced the retirement of Nancy Marcus as Chief Marketing Officer effective February 28, 2020.

Nancy had been with the company since 2001 and had many accomplishments in her distinguished career. She helped grow the Cashmere and SpongeTowels brand significantly and elevated the company’s multicultural and CSR marketing initiatives.

On behalf of everyone at Kruger Products, I would like to sincerely thank Nancy for significant contribution to our brands and to our organization. I am also pleased to have Susan Irving as our new Chief Marketing Officer.

Susan’s CPG experience and proven track record, building brands across multiple touch points with enlarged Tier 1 companies in the U.S. and Canada makes her well suited to take our brands to the next phase of growth.

We continue to be the branded leader of the Canadian tissue market, despite seeing some share erosion to private label during the year. However, I am pleased with our strong Q4 shares as our incremental programs began showing positive results.

Long-term our goal is to create sustainable share growth through strong brands and consumer connections. This will be achieved with a multi-faceted plan, which includes improved product quality, increased innovation, bigger impact promotion such as the NHL, increase brand investment, stronger social media presence and strengthening our retail activation.

For 2020 this will translate into a step up of brand activity and investment ahead of our 2021 TAD enabled product restages. We believe with these actions and our increased investment we will see our shares strength over time.

I will now turn the call over to Mark who will review our quarterly results.

Thank you, Dino, and good morning, ladies and gentlemen. Before reviewing our fourth quarter results, let me remind you that Krueger Products adopted the new IFRS 16 leases accounting standard effective January 1, 2019, using the full retrospective approach.

Under this approach all comparative information has been restated to reflect the adoption of IFRS 16. Note that IFRS 16 lease accounting had no effect on our revenue or net income.

For adjusted EBITDA IFRS 16 had a full year positive impact of $16 million for 2018 and for Q4 2018, the positive impact was $4.2 million. I will now ask you to turn to slide 14, which reviews our financial performance for the fourth quarter, excluding Mexico revenues were up 3.9% to $348.1 million in the fourth quarter compared to $335.1 million for the same period last year.

Adjusted EBITDA increased by $21.5 million to $46 million from $24.5 million in Q4 of last year and increased sequentially by $2 million from $44 million in Q3 of 2019. From a margin perspective, adjusted EBITDA increased to 13.2% from 6.8% last year and 11.9% in Q3 2019.

In the fourth quarter of 2019, we recorded a net loss of $6.1 million, compared to a net income of $38 million last year. The decrease was primarily due to a $64.9 million swing in the change in the amortized cost of the partnership units’ liability.

In the quarterly segmented view on slide 15, excluding Mexico consumer revenue increased by 3.3% year-over-year to reach $285.6 million. In the Away-From-Home segment, revenue rose by 6.8% to $62.5 million.

Consumer segment adjusted EBITDA increased by $17.8 million to $47.4 million and adjusted EBITDA margin increased from 9.8% to 16.6%. For the Away-From-Home segment, adjusted EBITDA improved by $2.7 million to a loss of $1.1 million and adjusted EBITDA margins stood at negative 1.8% versus negative 6.5% for the previous year.

On slide 16, we review Q4 2019 revenue over Q4 2018, which was up by $13 million or 3.9% excluding Mexico. The Increase was primarily attributable to the previous price increases across all business segments in 2019 and higher sales volumes in Canada.

By geography, Canadian sales increased by $15.4 million or 7.4% and in the U.S., sales decreased by $2.3 million or 1.8%. For your information, the revenue of the Mexican operations last year for the fourth quarter was $24.2 million.

On slide 17, we provide further insight into our Q4 2019 adjusted EBITDA, which increased year-over-year by $21.5 million or 87.5% to $46 million. Gross margin for the quarter also increased from 9% to 15.5%.

Increase in adjusted EBITDA was driven by a combination of factors including the previous selling price increases, favorable impact of lower pulp prices, favorable sales mix and the benefits from the operational transformation initiatives, including the OpEx program. These elements were partially offset by the cost of outsourced manufacturing an increase in maintenance spending and higher SG&A cost.

For a sequential perspective, let’s turn to slide 18, where we compare Q4 2019 to Q3 2019 revenue, excluding Mexico quarter-over-quarter revenues increased by $4.2 million or 1.2%. Consumer segment increased by 2.1% whereas away from home decreased by 2.8%, reflecting the typical seasonality over Q3, partially offset by the growing traction of AFH selling price increases.

By region the revenue in Canada increased by $9 million or 4.2% and in the U.S. revenue decreased by $4.8 million or 3.7%.

On slide 19, Q4 adjusted EBITDA increased sequentially by $2 million or 4.5% compared to Q3 and gross margin improved from 14.2% to 15.5%. Increase in adjusted EBITDA was mainly driven by the increased sales volume in the Canadian Consumer segment, favorable pulp prices and improved AFH results.

I will now turn to our balance sheet and financial position on slide 20. Our cash position was $93.1 million at the end of Q4 2019, up from $82.4 million at the end of Q3.

The cash position includes $16.4 million in the TAD Sherbrooke entity at the end of Q4. Overall net debt at yearend stood at $497.9 million, down $16.1 million from $514 million at the end of Q3 2019.

Our net debt to trailing 12-month adjusted EBITDA ratio is now at 3.4 times, that’s down from 4.2 times at the end of Q3 2019. This reduced leverage ratio is due to the increase in adjusted EBITDA and relatively low debt raise in TAD Sherbrooke to-date.

Looking forward, TAD Sherbrooke project will result in the total company leverage increasing as spending on the facility occurs over the current year and into Q1 2021. I will conclude my section by reviewing the CapEx on slide 21.

2019 CapEx totaled $175 million, including $143.1 million for the TAD Sherbrooke facility. In addition, I want to highlight the fact that we had $43.1 million in accrued liabilities related to the project at year-end.

Looking at full year 2020, we expect regular CapEx to be in the $25 million to $40 million range, the TAD Sherbrooke CapEx is forecast to be between $340 million to $360 million and this provides a total CapEx range for fiscal 2020 of $365 million to $400 million. Thank you for your attention and I will now turn the call back over to Dino.

Thank you, Mark. Finally I will conclude the call with slide 22.

Our strong Q4 results clearly reflect our focus on Kruger Products business fundamentals, combined with a more favorable cost environment. Going forward, our message has been consistent.

We will focus on several key initiatives. One is, I am pleased to say that despite some of our capacity constraints, we have been successful in generating solid top line growth during the past few quarters.

We will continue to drive this trend in all our business and geographies going forward. In fact one of the key elements of OpEx is to help drive more capacity across our network.

The second area is increasing our brand leadership position and regaining market share in Canada over the long-term. We will achieve this by increasing brand investment and working close collaboration with our customers and partners.

We will also be managing our pricing in response to seeing changes in fiber costs and we will focus on ensuring a more efficient and capable supply chain networks through OpEx. We are taking the necessary actions to strengthen our Away-From-Home business through several key initiatives as this business is a key part of our future success.

As mentioned, construction on the TAD Sherbrooke facility is progressing well and we will provide much needed ultra-premium capacity and I am encouraged by the progress of our commercial plans. And finally and perhaps most importantly we will continue to develop our organizational to build this capability, capacity and culture to drive future growth.

As for our quarterly guidance, with favorable input cost compared to Q1 2019 along with the benefits of our operational transformation initiatives and a partial offset by incremental spending, our Q1 2020 adjusted EBITDA is expected to be higher than the year ago quarter, while being sequentially lower than Q4 2019 due primarily to seasonally lower sales volume. Of course, in this context, we continue to monitor the challenges and risks and opportunities associated with the COVID-19 virus and the uncertainty that it may present on our business.

We also anticipate full year 2020 to be a year of reinvestment back into our business in three key areas. One, is marketing to drive our trademarks, two, is asset maintenance to drive our operational network, and three, is our people.

We also see some negative financial impact as we start up our new TAD converting lines in late 2020. In conclusion, we are fully confident that we have the right vision and strategies to move KP Tissue forward as a North American tissue leader.

I want to thank you for your time and attention today, and at this point, Mark and I will be happy to answer any questions you may have.

Hi. Good morning.

Good morning, Hamir.

Dino, I want to ask about the Q1 guidance of sequentially lower volumes. Is that -- I am assuming that’s not baking in any potential volume uplift associated with the Coronavirus?

And then can you speak to maybe what you have been seeing in recent weeks on the consumer retail side?

Thanks Hamir. I wonder how long it will take for that question to be asked.

So, yes, the original guidance we gave you is our plan coming in prior to seeing what’s been going on last couple of weeks, so that may have some impact on our business results. As you know, to answer the second part, but related part of that question has been very strong consumer demand not just across Canada, across the globe for staple products including tissue.

I think it’s been related to the concern that consumers have that they might have to self-quarantine. I want to make sure that they have got those products in their home.

I would say that there is no tissue shortage in the marketplace. It is just a lag of responding to the increased demand that has been happening.

We are operating our mills at full capacity, trying to replenish customer orders both in Canada and the U.S. We are expediting orders and focusing production on our key products to make sure we can optimize our production capacity.

And for us you know, given our footprint in Canada and the U.S., where we are serving close to our markets, you know we have a facility on the west coast as well, we are able to serve our customers more -- be more responsive to their needs and be able to utilize all our facilities to make sure that we are delivering against the increased orders that we are getting. I also want to say that we have not changed any of our pricing to our customers as a result of this increased demand and we are treating all our customers fairly as we manage supply and help get them back in stock on tissue products.

And while I am on this topic, I would also say, longer term, the longer this goes on and we anticipate some negative impact to our Away-From-Home business. As you can imagine less travel, less hospitality, will ultimately have an impact there, but there should be a positive impact upon our Consumer business as people remain more at home.

And then within our consumer products, depending on how long this goes, we see upside from increased usage in our products like sponge towels and with paper towels and Scotties facial tissue as we look at that market. So bringing that all around, we are seeing some strength in the last couple of weeks of March as we are closing out this quarter, so that may provide some strength on the revenue side, but we are also incurring some incremental cost as we are trying to get orders out as quickly as possible and maybe not producing as efficiently just trying to get production done, so we can get it out to our customers as quickly as possible.

Great. Thanks, Dino.

That’s helpful. And Mark, could you let us know the OpEx target the $15 million to $20 million by the end of this year, how much of that has already been achieved?

Hi, Hamir. Yes.

We have at the end of 2019 we are at about halfway through on a run rate basis and then we would expect to fully achieve $15 million to $20 million by the end of 2020.

Okay. Great.

Thanks. That’s all I had.

I will turn it over.

Thanks.

Thanks. Good morning.

Good morning.

Follow-up on the Coronavirus impact on your Consumer business, is there enough tension from your perspective in the market that the price hikes could be under consideration. I typically think about those initiatives as a function of the input cost environment sometimes and pretty benign cost environment ongoing for you guys?

Is there enough tension the price hikes could be on the table?

What I would say to that is, our pricing is based on the value of our product that’s dependent somewhat on internal input costs and as long as those costs remain benign or neutral, I do not see us having to take any pricing on our end. We may have to recover some freights and inefficient production, but that would be relatively minor.

We are obviously not trying to take advantage of the situation we want to be a good supplier and make sure consumers have our products and can buy our products. So we are not anticipating any changes in the pricing side, of course, there’s a fluid situation things may change, but at this point we are not anticipating any changes on pricing.

Okay. Thanks for that.

And on the OpEx program side, you guys have broken out the consulting costs, and I think, there was some mention in the outlook of that mitigating some of the near-term improvement. Can you give us an idea of what you are budgeting for consulting costs in 2020 for that program?

Yeah. We haven’t really provided that in the past, but it would be $3 million to $4 million range for 2020, not quite as significant as we had in 2019.

So it’s a pretty significant deceleration from your Q4 run rates?

Yeah. Yeah.

Okay. That’s all I have for now.

Thanks very much.

Sure.

Yeah. Thanks very much.

Good morning, guys.

Hi, Paul.

First one I discovered TAD Sherbrooke, you mentioned, the first converting line coming up this summer, is that tissue, bath or towel and how many converting lines you are going to have and what’s the percentage of converted product when you are all done?

Yeah. It’s great question.

I also want to say, I think, I mentioned, most of our major assets are at that site already and enclosed in and we are in the installation stage of getting those assets done. Converting line one of three, we are anticipating three to start is going to be commissioned and up probably in July is our guess, we will we will source paper from our Memphis TAD facility as we run production and commission that line.

So we will have some case -- we will have cases produced out of that facility for sale in the market. And as we look at the business going forward, I think, I have said, and I probably will still say in the same range it’s a 50-50-ish range in terms of what was in Canada or the U.S.

and it will more be paper towel than it will be bath, but all lines will be able to swing.

Okay. And then just like one on the Away-From-Home where you mentioned paper availability limited until TAD is -- TAD comes on line.

Just want -- just trying to understand that one because I didn’t think a lot of TAD went into Away-From-Home?

Yeah. So what will happen -- so as I said this before, our paper making network TAD or conventional paper is fairly tight.

We are doing OpEx to continue to improve the OEs to get and we are very happy with where that’s going. But if consumer demand takes off significantly that will be tied on paper, AFH will get affected has to buy on the market.

So the reason why Paul I referenced TAD Sherbrooke as being alleviating capacity is because as more of our products go to TAD, at Sherbrooke, it frees up capacity in other mills including conventional capacity. So there will be some collateral benefit in capacity across all our network for paper and that will allow AFH to be able to utilize some of the freed up capacity in conventional paper.

Okay. And then, I guess, on slide 13, you know you so brand -- Canadian brand leadership and that seems like we have seen a slow erosion since 2017 in bath and towel?

And I guess, it’s still you would characterize it as early days for the NHL and maybe Canada’s marketing effort. Do you expect that to pick back up or when you expect to return to 2017 levels, is that is that a 2020 event or is that a 2021, 2022?

Yeah. I think, you are going to see, our goal is to have continued progress in 2020.

We want to build share through strong foundation of brand and consumer. We could do it just by taking pricing and we don’t want to do it that way.

We want to build this, so it’s sustainable, which is why we are investing all the programs that we have got. I am encouraged -- and I said in my prepared remarks, I am encouraged by our exit shares in 2019, much stronger than the year shares that you are seeing here.

So there was some recovery particularly in bath, tissue and facial. So I would expect 2020 to be a year of stabilization if not building of shares and spot building, as then we get into TAD Sherbrooke in 2021 and we are able to do much more innovation and get products on the marketplace, particularly on paper towel and see a step up in 2021.

Okay. And then just last question, just on slide 17 here at $21.5 million increase in EBITDA year-over-year.

You have got a whole bunch of factors here and then some offsets, but I suspect the main factor is on the plus side are price increase in the lower pulp cost. May you could just give us some additional color on how much of the $21.5 million represents those two?

Yeah. Thanks Paul.

You have got it right. Pulp and the selling price increase combined in the year were the two drivers of the overall increase there.

We have got some other offsets they are showing on the slide as well, which really are combined there to give the full effect of $21.5 million. We are not actually providing the detail on each one of those but you have got the main drivers there.

All right. That’s all I had.

Good quarter. Thanks.

Thanks Paul.

Thanks Paul.

Good morning. First question for you on the timing of TAD Sherbrooke CapEx, is it going to be heavier in any particular quarter or has?

No. We expect that spending to continue to be a building as we go through 2020.

It would be fairly consistent from month-to-month as we go through there in quarter-to-quarter and then we will have it ramping up into 2021. And as you can see from our numbers, there’s a significant increase in the overall spend as we go through to finishing the project and starting up.

Any follow-up on that, Zach? Zach, are you still there?

Thank you. Good morning.

Good morning, Fred.

Good morning.

I am wondering if you can comment on the expected trajectory of your margins and consumer for 2020, given different factors like the OpEx program and mentioned increased brand investments and some potential impact in late 2020 from your TAD startup. So all this being put together, what’s sort of your expectation for consumer margins in 2020?

Well, we don’t provide year-over-year guidance, so I am not prepared to tell you what our expectation is on our margin. I mean, we are committed to grow our business across all our business, including consumer.

I think between good strong revenue growth price and commodity management and the OpEx program offset by some reinvestment, we should continue to still grow that business. We are not proposing investment here per se, as we are investing as we earn to invest.

The other thing I would also say on that one, Fredrick, is we have these investments, which I talked about in marketing and maintenance and people. Obviously, with the uncertainty that’s going on with COVID-19, we are developing contingencies and if things change, we will change accordingly.

Our initial plan is to invest and we hope will be able to, but we will be ready to make any changes that we need to change. So I would say that we will continue to grow on our business.

We expect to continue to grow and that the investments that are made will be self-funded not detraction from the business.

And Dino, that’s helpful. And then appreciate the color on the revenue from the Mexico business.

Can you provide some color on what the EBITDA contribution was there or if it was in line with the overall margins at KPT?

Yeah. Hi, Fredrick.

Our Mexico business is a low margin business. It’s really based on a facility that’s in Mexico that we are just basically getting a commission on some very low margins.

So that it’s not a significant EBITDA contribution. And going forward with -- we won’t have the revenue which is about 6.5% of our sales, but on an annualized basis that the impact on adjusted EBITDA would be very minimal.

Great. Thank you and congrats on the strong quarter.

Thank you.

Thank you.

Hey. Sorry guys.

I lost you for a second there.

Welcome back.

So looking at the potential for interruptions to trade flow and logistics, can you speak to any particular risks in your supply chain the concentrations in any one country outside of the usual suspects of the U.S. and Canada?

Yeah. It’s a great question.

I mean, every organization is obviously assessing this. We like every organization have implemented a special response team that is active and break meeting regularly across all elements of our business.

Our primary focus has been ensuring the safety of our employees and communities and we have done like many organizations and recommendations from government and World Health Organization around reducing travel, reducing large gatherings, increased cleansing of facilities, et cetera. So we are doing that.

Within business ops, we are -- all our plants are running, running at full capacity, given the discussion on demand that’s happened. So we are good there.

We are restricting any visitors to our sites as mission critical only visitors and that they have to go through an additional assessment before they are able to enter our facilities or protecting our environment. All our raw materials continue to flow, our supply chains are still active and we don’t see any countries of risk as it relates to supply and we have also made sure we have built redundancy into a suppliers that we have got alternative points of supply or that supplier has alternative factories across the globe that could supply us.

So we have reached out and insured that. So I think we are doing as best we can in terms of readiness, in terms of making sure that we can keep our business operations.

As you guys know, it’s a very fluid situation and we continue to monitor we will take actions as necessary to adjust.

That’s great. Thank you.

And then one last one for me, could you walk me through your bear case and bull case on a long-term view for pulp given the term while we are seeing on an international scale?

Yeah. We know a lot about pulp we are not experts in it and anybody who can predict it is very unique, because they have been very difficult even for the last few years without what’s going on to be able to predict it.

I will give you strictly a personal opinion, I think, as we came into this year and based on the forecast we saw we figured the market had bottomed out on both BK or hardwood and softwood, and we were projecting sequential increases in pulp through the year. That’s what we were we were getting from our experts internally and externally.

I think with COVID-19 now, even though there’s some push to get pricing through, it probably will be harder in the short-term, if that’s three months, six months, I don’t know what that short-term is. But then I see kind of a quick bounce back after that much like you I think you will see in many, many equity markets as well, a quick bounce back after this thing settles if you will.

So we still believe it’s bearish. It’s just a matter of the slope of the curve and the timing of that curve of when that will happen based on what’s going on in the global economy.

Appreciate that. Thank you very much.

I will turn it over.

Thank you.

Okay. I want to thank you for joining us on this conference call this morning.

We look forward to speaking with you again next in May following the release of our first quarter results. We thank you and have a great day.

Thank you.