KP Tissue Inc.

Thank you, operator, and good morning, ladies and gentlemen. My name is Mike Baldesarra, I’m the Director of Investor Relations at KP Tissue Inc.

The purpose of this conference call is to review the financial results of the first quarter of 2021, for Kruger Products L.P., which I’ll 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 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 the forward-looking information, which you should be aware of.

I’d like to point out that today all the figures expressed in today’s call are in Canadian dollars unless otherwise stated. The press release reporting our Q1 2021 results was 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 would ask that you during the call to refer to the presentation we prepared to accompany these discussions, which is also available on our website.

We would appreciate also that during the Q&A period for you to limit your questions to two. Thank you for your collaboration, ladies and gentlemen, I’ll now turn the call over to Dino Bianco, our CEO.

Dino?

Thanks, Mike, and good morning to all. I’d like thank you for joining us today for our first quarter earnings call.

After a year of incredible tissue demand, our Q1 results reflect the impact of significant inventory destocking across the North American consumer tissue category. While we are still moving through the volatility uncertainty driven by COVID, the magnitude and speed of the destocking was unexpected during the quarter.

This destocking impact on our sales was the largest single driver of our EBITDA performance for the quarter. We began seeing the impact of the destocking of both consumer and retailer inventories in January with gradual improvement as we move through the quarter.

Our analysis indicates this one-time volume impact has substantially moved its way through the supply chain as we begin to see a recovery in sales velocity as we exit Q1. The drivers of the destocking were three-fold.

First, consumers’ confidence in the tissue supply chain enabled them to reduce their at-home inventory. Second, heavy retailer inventory exiting 2020 given COVID uncertainty.

And the third area is reduced shop purchase, particularly in Canada as lockdown became more severe. On our AFH business, continued to show softness, as end user markets remain depressed.

However, we did see improving trends in our U.S. AFH sales as hospitality and food service channels began opening up.

Despite these unique challenges in Q1 in the impact to sales, our EBITDA improved versus Q4 2020 and we will speak about those drivers shortly. In addition to the marketplace impacts described earlier, we are also lapping a very strong Q1 20, as the surgeon tissue sales, driven by panic buying in March of last year drove strong prior year results.

Let’s now turn to the numbers on Slide 5. Q1 2021 revenues declined 17.3%, while adjusted EBITDA in the quarter declined 26.5% versus prior year.

Specifically, revenue came in at $310.4 million, while adjusted EBITDA was $37.5 million. Revenue declined in both Canada and the U.S.

at minus 15.4% and minus 20.2% respectively. EBITDA was not only affected by lower sales volume, but by higher pulp prices and increased freight and warehousing costs.

This was partly offset by lower SG&A expenses. On Slide 6, in addition to the Q1 volume impact, the tissue industry is seeing significant pulp cost escalation in both dollar magnitude and speed of increase.

These costs will begin to hit our P&L in Q2 and are part of cost inflation headwinds across many cost inputs facing most companies. Specifically on pulp, first quarter NBSK average prices in Canadian dollars increased 11.5% while BEK average prices rose 13.8% compared to Q4 of last year.

Average NBSK prices in U.S. dollars were up 14.3% and average BEK prices rose by 16.7% quarter-over-quarter.

As indicated during our Q4 call, we expected NBSK and BEK prices to continue to increase and remain elevated for the balance of 2021. To counter these significant common industry costs increases, we announced the price increase in our Canadian consumer business that will take effect in early July of this year.

We also announced the price increase for our away from home business, which will take effect as contracts come up for renewal. Moving to the impact of COVID-19.

As the health and well-being of our employees is paramount, we continue to make significant investments to keep our facilities safe. As a result, we see no evidence of interest-site virus transmission have not had any major business disruptions in our network.

With TAD Sherbrooke and strong legacy asset performance, we are in a strong inventory position to supply the market, including reintroducing some SKUs that were temporary halted last year. As things stand now, we expect consumer demand to start stabilizing in the current quarter with a return to normal buying patterns, while U.S.

market conditions for the AFH segment are gradually improving, the Canadian market will remain challenged a significant COVID-19 restrictions are still present. As we continue to manage the pandemic’s impact, we are also preparing for a post-pandemic recovery.

We want to continue to carry forward some of the learnings brought to our business by the pandemic, such as permanently eliminating slow moving SKUs, building our e-commerce muscle and building on new distribution opportunities. Consumer trust in our brands is also a key differentiator.

And in this period of uncertainty this is one of the factors leading to our strong market share performance. The past few quarters have showcased the high level of trust in our brands, I’m exceedingly proud of our leadership position in Canada and I will discuss this further in a few slides.

In terms of our network, TAD Sherbrooke is ramping up faster than expected. Our paper machine and converting lines continue to track above anticipated startup curves.

It was quite an incredible accomplishment by our team to start up this facility on time and on budget during a pandemic. One of the first products commercialized from this facility is our new SpongeTowels Ultra Pro, which is on the shelf at most accounts in Canada.

With TAD Sherbrooke ultra premium capability, we now have a product that provides consumers industry leading quality that is made right here in Canada. The launch of Ultra Pro provides timely support to our share momentum in the category is a welcome addition to our SpongeTowels lineup.

Regarding our Sherbrooke expansion, we are in the process of finalizing the project scope. Engineering, environmental and geotechnical studies are underway, and we’re in the final stages of completing the project’s financing.

As a reminder, this expansion combined with TAD Sherbrooke will create a tissue hub, capable of flexible, high quality tissue production across all segments. I hope to share more in the coming months as this project comes to life.

We also expect our previous OpEx investments and enhanced maintenance to drive stronger performance in our legacy assets. This year’s focus has been expanded to include more assets and a special focus on waste reduction.

We’re also gratified to see sustainable benefits from a higher level of employee engagement, empowerment and positive cultural shift driving long-term operational excellence. From a long-term standpoint, we continue to make the investments needed to modernize our North American network, increased capacity and benefit from greater product flexibility in both conventional and premium products.

As part of the strategy, we also invested in a state of the art facial tissue line in our Memphis facility, which will come on stream in 2022. On to our trademarks, we continue to focus on investing and building our brands.

During this pandemic, we have increased our marketing investment, changed our marketing tactics, and refined our consumer messaging to be more relevant to consumers while giving back to those in need. As we look to 2021, we will continue to increase our investment and strengthen our bonds with existing and new consumers.

The quarter saw full distribution of our quality improved Cashmere supported by strong advertising campaign. As well our new unleash the Scotties campaign is gaining strong consumer traction as we continue to move towards bolder, more distinctive marketing campaigns.

What’s more, our close NHL partnership continues with the activation of our Find the Cup to Win, Stanley Cup playoffs promotion. And finally, as mentioned earlier, we are very pleased with the launch of the new SpongeTowels Ultra Pro paper towels, which is hitting stores across Canada as we speak with strong early results.

The data presented in Slides 10 and 11 is from Nielsen. It shows dollar market share and represents the 52-week period ended March 27, 2021.

Once again thanks to an improve supply position, strong customer partnerships and continuing marketing support, we delivered strong market share growth in all categories. Our Cashmere and Purex brands are bathroom tissue market leaders, closing 2020 with a combined share of 36.9% and posting further gains in Q1 with 37.1%.

We achieve similar growth in facial tissue with a share of 33% this quarter compared to 30.9% for the corresponding quarter last year. And our Scotties is a clear number one with many Canadian consumers considering the brand to be synonymous with facial tissue.

In addition, we’ve made appreciable share gains in the paper towel category where our share grew from 20.5% last year to 22.2% this quarter. We’re excited about our growth prospects in 2021 and beyond in this category.

Finally, we continue to see opportunities to further expand our distribution and sales of the White Cloud in the U.S. We are working to build the brand that focused retailers as a better value, high quality product versus the leading brands.

In our AFH segment, success going forward depends on end market recovery. There was a modest increase in March volumes for first quarter volume was approximately 25% below pre-pandemic levels.

Ongoing COVID-19 restrictions in Canada are negatively impacting our AFH volume. The good news is that there are encouraging trends in the U.S.

as it lessens restrictions and continues to make meaningful progress in the number of people vaccinated. As indicated earlier, we announced price increases, which will progressively take effect as contracts come up for renewal.

And the benefits of our OpEx program have allowed us to achieve significant progress over the past two years and our operations are now performing well. Our AFH operations network is recovery ready as we anticipate growth in the upcoming quarters tied to end market recovery.

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

Thank you, Dino and good morning everyone. Please turn to Slide 13 for a summary of our financial performance for Q1 2021.

Revenue was down 17.3% to $310.4 million in the first quarter compared to $375.1 million for the same period last year. Adjusted EBITDA decreased 26.5% to $37.5 million from $51 million in Q1 of last year, but increased sequentially by $1.3 million or 3.5% from $36.2 million in Q4 of 2020.

From a margin perspective, adjusted EBITDA decreased to 12.1% from 13.6% in Q1 last year, while it increased from the 9.4% posted in Q4 2020. In the first quarter of 2021, net income amounted to $6.8 million compared to $8.4 million last year.

The $1.6 million decrease was primarily due to lower adjusted EBITDA, and higher interest and depreciation expense, which were partially offset by an increase in other income primarily related to a foreign exchange gain on U.S. dollar denominated debt and no consulting costs related to operational transformation initiatives in Q1 of this year compared to Q1 last year.

In the quarterly segmented view on Slide 14, consumer revenue decreased 13.3% year-over-year to $271.4 million. It also declined on a sequential basis by 18.6% compared to a strong Q4 of 2020.

In the Away From Home segment, revenue declined 37% to $39 million. On a sequential basis AFH revenue decreased 24.6% over Q4.

Consumer segment adjusted EBITDA decreased by $10.2 million to $44.1 million and adjusted EBITDA margin decreased from 17.3% to 16.2%. For the AFH segment, adjusted EBITDA decreased by $3.8 million to a loss of $4.8 million and adjusted EBITDA margin stood at negative 12.3% versus negative 1.7% for the previous quarter.

Corporate and other costs were a loss of $1.8 million in Q1 2021 compared to a loss of $2.3 million for the prior year. On Slide 15, we review Q1 2021 revenue over Q1 2020, which is down by $64.7 million or 17.3%.

The decline was primarily attributable to significant sales volume decreases in both Canada and the U.S., resulting first from the comparison to last year’s high COVID-19 buying activity in Q1 across all business segments. Second, from destocking of tissue inventories in Q1 of this year by retailers and consumers.

And third, from the unfavorable impact of COVID-19 related restrictions on the AFH segment. Revenues also declined to the unfavorable impact of FX on U.S.

sales. By geography, Canadian revenues decreased by $35.5 million or 15.4%, and in the U.S.

revenues decreased by $29.2 million or 20.2%. On Slide 16, we provide further insight into our Q1 2020 adjusted EBITDA, which decreased year-over-year by $13.5 million or 26.5% to $37.5 million.

Gross margin for the quarter decreased slightly from 16.2% to 15.2%. The decrease in adjusted EBITDA was primarily driven by lower sales volume net of overhead absorption, also by the unfavorable impact of higher pulp prices and outsourcing costs, as well as higher freight rates and warehousing costs.

These factors were partially offset by lower SG&A expenses. For sequential perspective, let’s turn to Slide 17, where, we compare Q1 2021 to Q4 2020 revenue, quarter-over-quarter revenues decreased by $74.6 million or 19.4%.

The decrease was primarily due to lower consumer sales volume due to the retailer and consumer destocking relative to the high Q4 demand that we saw from wave two of COVID, also AFH sales were lower, which reflect a new wave of COVID restrictions in Canada, and there was a negative impact for lower FX on U.S. dollar sales.

By geography revenue in Canada decreased by $49.5 million or 20.3%, while revenue in the U.S. decreased by $25.1 million or 17.8%.

On Slide 18, Q1 2021 adjusted EBITDA increased sequentially by $1.3 million or 3.5%, compared to Q4 of 2020, and gross margin rose from 13.7% to 15.2%. The increase in adjusted EBITDA was primarily due to a decrease in SG&A spending and that’s related to lower seasonal advertising.

We also paid a bonus to our hourly workers in Q4 2020, which was one time, and with the successful ramp up of production TAD Sherbrooke had a modest positive contribution this quarter, compared to a negative contribution related to startup costs in Q4 of 2020. These factors were partially offset by significantly lower sales volume in both business segments net overhead absorption and also by higher pulp prices and increased freight rates.

I’ll now turn to our balance sheet and financial position on Slide 19. Our cash position was $57.6 million at the end of Q1 2021, a decrease of $71.1 million from our $128.7 million position at the end of Q4.

The cash position includes $22.4 million in the TAD Sherbrooke entity at the end of Q1. At quarter end total liquidity representing cash and cash equivalents and availability under the revolving credit agreements was a healthy $225.2 million.

Overall net debt at quarter end stood at $795.2 million up from $624.7 million at the end of Q4. Net debt increase due to higher working capital requirements, particularly higher inventory and heavier seasonal payments typical in Q1 and due to the debt financing used for the investment in TAD Sherbrooke, our net debt to trailing 12 months adjusted EBITDA ratio increased to 4.3 times.

Subsequent to the quarter and on April 8, we issued $135 million of senior unsecured notes due in 2029, with the proceeds being used to pay down the revolving debt and for other corporate purposes. In conjunction with the issuance of the notes, the limit on the senior credit facility was reduced from $250 million to $200 million.

Overall, this resulted in an increase in liquidity of $82 million after fees. I will conclude my section by reviewing the CapEx on Slide 20.

Q1 CapEx totaled $54.7 million, including $51.1 million for TAD Sherbrooke. At quarter end, accrued and unpaid capital spending on the new facilities stood at $25.2 million.

Looking at the full year 2021, our anticipated CapEx range has not changed from what we have previously provided. We expect TAD Sherbrooke CapEx to total approximately $115 million once all project payments are completed.

Remaining CapEx including the new Sherbrooke expansion project is expected to be in the $45 million to $65 million range that puts total CapEx for 2021 in the range of $160 million to $180 million. Thank you for joining us this morning, and I’ll now turn the call back over to Dino.

Thank you, Mark. Turning to Slide 21.

We recently announced the launch of our Re-Imagine 2030 sustainability platform. This program sets long-term ambitious goals that will make Kruger Products, a leader in sustainability and transform our culture as we focus on being better environmental stewards and everything that we do.

Last week, we also announced that we became a signatory of the Canada Plastics Pack or CPP, making us the first tissue company to do so. The CPP is an initiative that brings together Canadian partners united behind the vision of creating a circular economy that keeps plastic waste in the economy and out of the environment.

One of the targets of Re-Imagine 2030, is to reduce virgin plastic in our trademark packaging by 50%. As a Canadian leader, we have a responsibility and a duty to be part of the solution for upcoming generations.

In conclusion, our focus remains on investing in our brand and innovation to build market share leadership in Canada, while expanding the White Cloud brand in the U.S. In order to offset unprecedented increases in pulp prices, we have taken pricing action in both Canada consumer and AFH and expect to see benefits starting in the third quarter to offset some of the pulp increases.

Furthermore, with a TAD facility in Sherbrooke exceeding the ramp up curve, we’re well positioned to support the launch of the new SpongeTowels Ultra Pro, an ultra premium paper towel made in Canada. The OpEx program combined with the announced Sherbrooke expansion will increase capacity and optimize the cost structure for the future.

Meanwhile, the AFH segment is preparing for recovery in the end user markets. Re-Imagine 2030, our new sustainability commitment is designed to spearhead transformative growth and sustainable innovation.

And finally, we’re developing our organizational capability and culture to our ensure our organization is future ready. Regarding our outlook, with the continued volatility of the COVID-19 recovery, the impact on sales and AFH and consumer and significantly higher pulp prices, Q2 2021 adjusted EBITDA is expected to be in line with Q1 2021 results.

We do expect that more favorable market conditions combined with pricing actions will translate into improved performance the second half of the year. I’d like to thank our many employees for their unrelenting dedication during these unprecedented and challenging times.

Kruger Products has played an important role since the onset of the pandemic, securing much needed tissue products for consumers who know they can count on us for their tissue supply and quality. Our outstanding employees are the ones whose daily efforts make this happen and provide us with the confidence that we enjoy.

To each one of them, I want to convey my utmost gratitude and thanks. We will now be happy to take your questions.

Thanks very much. Good morning guys.

Good morning.

Good morning, Paul.

Yes. First question would be on the inventory to stock in that you saw most of your peers that have reported earlier, sort of describe this as something that happened in March to them.

And where you sort of describe that is something that happened earlier in the quarter, and you’ve seen gradual improvement. Is that changed by geography?

And do you think we’re through that now?

Yes, Paul. Obviously, anybody in tissue in North America has talked about it.

We thought starting in January. It’s interesting that sometimes it can the pandemic impacts happen a lot earlier in Canada than they do in the U.S.

So we started to see it in January. In fact, when we did our Q4 earnings call you remember, I highlighted that, given the inventory changes that could be happening in Q1 as we started to see that in January and February, before we did our call.

I would say that the degree and the magnitude of the inventory destocking caught us by surprise, we knew there was going to be some of that during the year, we had a more prolonged and didn’t have it as deep. And of course, its imperfect data, you don’t get exact data, how many packages consumers have at home.

The good news is we started to see improvement as we exited the quarter in the each month got sequentially better than the last month. I do think we’re primarily through it.

We’re seeing positivity and as we look at the upcoming quarter, in terms of velocity starting to improve across the business. So I do view this as a onetime adjustment.

I don’t think it changes the fundamentals of this category and the strength of this category. And it is part of the COVID volatility last year, the volatility was upside this quarter, the volatility was downward.

Okay, thanks for that. And then I’m just trying to understand how to offset this rising pulp costs.

I mean, you’ve announced a price increase others. Some others have I’ve seen some branded guys said that look like those increase your marketing budget and going for market share and not increasing prices.

So just wondering, the price increase. If you get it, does that fully offset the anticipated cost increase that you’re going to see in Pulp?

Well, so just to clarify, we did announce a price increase. I do want to clarify that and we are moving forward with that price increase to be effective in early July and our Canadian consumer business.

We have pegged that price increase to not just cover pulp but as I mentioned, there’s increased costs in freight packaging, energy, labor, I mean, we’re in an inflationary period across many other factors pulp clearly being the largest part of that. We are in the area of covering the pulp.

If the full increase goes through the pulp market continues to change fastest escalated since we announced our price increase. So we’re watching that very carefully.

But I think the number that we announced and we’re pulp looks like it’s going to settle is following an equilibrium. And we’re working through with our customers now.

Working through with them. Obviously, the rationale for the increase which I think they absolutely understand and as you mentioned, some other tissue players have decided not to announce, and clearly, they must be feeling the impact of the pulp increases on their P&L, they will choose to go their own way.

So we’re watching the market closely, we want to always make sure we’re competitive. We’re watching for what may be de-sheeting or taking pulp out of the product, if you will.

So we’re watching for that it’s not a method that we prefer to use. Consumers usually aren't happy as you reduce the size of their products.

But that may be attacked that gets used and we'll continue to watch to make sure our pricing is competitive, our sizing is competitive in the marketplace, and that we continue to support our customers through this.

Great, thanks. That’s all I had.

Great job and [indiscernible].

Thank you for, Paul.

Hi, good morning. Do you know why a few comments on, at least in the Canadian context, we’ve seen sort of mixed pricing announcements in the U.S.

but in the Canadian market, has all the major players announced price hikes.

Well Hamir, it’s not, it’s never. We choose to do a public announcement as a public company, obviously.

So ours is very clear and transparent. In the marketplace, we don’t get that from others generally, as part of the negotiation with customers, they choose to tell us, how the categories moving, but we – you don’t have official confirmation other than we feel comfortable that, this cost impact is affecting everybody.

And we’re likely going to see pricing some way somehow and at some level, by most of the players in Canada.

Great. Thanks.

That’s helpful. And then just turning to your new SpongeTowels offering.

Do you think that puts you on a path to get to market share leadership in towels overtime in Canada?

Yes, I mean, I don’t want to announce it. I don’t want to define it as an endpoint.

I think the with being market share leader, I think we’ll do all the right things, not just with the Ultra Pro, which we’re very proud of. And it’s interesting, I had my board meeting yesterday and one of the questions was, why aren’t you talking more about the incredible performance of Sherbrooke?

And absolutely, Sherbrooke has been quite a story at any point. As you guys know, anytime you can come in on time and on budget with a major startup is amazing.

And to do it with half the construction phase being during pandemic is spectacular. And I don’t want to diminish it.

It’s still early and maybe in the quarter two results, I’ll beat our chest a little more around incredible work around Sherbrooke. But that site, the quality of the product that’s coming out of that site is spectacular.

And we see it through the new Ultra Pro towel that we’ve launched, the product design that was done by our product development group, and the capability of that facility to deliver against that quality spec. We tested it with consumers, we know we got a winning product.

And it’s part of our lineup. So we will continue to have our other SpongeTowels brands.

So we’ve now segmented the lineup to be an Ultra premium, kind of a premium offering. And more of an entry offering as well, for the marketplace.

So we think we’re well positioned with a strong brand, strong segmentation, a fair value versus the market. And, quite frankly, for Canada made in Canada positioning that product is made right here by Canadians, for Canadians.

So that’s also a differentiator for us.

That’s helpful. And I want to start ask about that announcement recently about plastic reduction.

How do you see, where do you see that trend going? I know in Europe, we’re starting to see some more experimentation with actually selling tissue sort of packaged more in corrugated material.

And obviously, your sister company producing that. So do you think it’s recycled plastic is where you’re heading, or you’re looking at other options?

We’re looking at a couple of options, obviously paper, you’ll see paper packaging in Europe. So we’re looking at that and this area keeps evolving.

So, we are aggressively working on this. To be frank with you it got delayed because of COVID.

We focused COVID on the bread and butter of our business, which is the existing SKUs. So we kind of put this a little bit on the backburner as we were focusing on getting product out for COVID.

So we’re re energizing that now working with various suppliers to eliminate single use plastic in our, we don’t use a lot of in general we’re not a big user of plastic, but we do contribute to you know to single use plastics. In the environment, so we want to make sure that we’re doing the right thing by eliminating that.

The question with all the different versions that come along is, does it looked good on shelf? Does it survive the network to supply chain, et cetera.

Those are all the work that we’re doing now is a cost structure there. That’s the fair cost structure for what we need on our product.

So more to come on that. Hamir, I’m excited by it.

And packaging will only be one component of what we’re looking at, as far as, launching new products into the future that are sustainability driven at the core.

Great, thanks Dino. That’s all I had.

Good morning. Thanks for taking my question.

I already mentioned that the price increase we’ll just about cover the ramp up in pulp if it settles where you think it will. What level is that we’re using?

It’s going to settle out?

Yes, I’m not going to quote a number for that Zachary sorry. I mean, we’re using obviously; there’s different net indicators in the marketplace.

In terms of price points, there’s we see there’s pics, there’s purchase price, there’s China market. Surprised to say that when we announced the pricing in April, so we announced at April 5, we were probably spending a couple of weeks getting it ready.

So if you look at the pulp prices that were in play around that time is kind of what we use to determine our pricing. And as, since that time has gone up.

So are they’re going to stay up, or they’re going to sell down a little bit, very crazy world. And as it relates to just economies in general, but particularly anything that’s going on with lumber and pulp, as you know.

So we’ll watch it accordingly. If it goes up, we may need to modify if it goes down, we may need to modify, we’re going to stay very flexible and agile with this to make sure we’re balancing the need to cover costs and the competitiveness of our products.

Appreciate that thanks. And then you get some benefits from a stronger Canadian dollar on some input purchasing.

But a headwind, of course on the translation of U.S. revenues.

So if the Canadian dollar keeps strengthening and moves towards, say 1.2 or 1.15. How much of an impact does that have on your EBITDA and bottom line?

Zachary, it’s Mark here. We would say on a net basis, if take the total company, there’s about $700,000 impact for each cent of FX movement.

So in that case, it would be favorable for us as the Canadian dollar strengthens, as you described.

That’s great. Thanks very much.

I’ll turn it over.

Thank you.

Hi, good morning. Kasia from TD.

Good morning.

Good morning.

Would you be able to provide some context for pulp you buy on spot versus?

Sorry, Kasia cut out. Can you just repeat your question?

Yes, no problem. I was just wondering if you could provide some context around how much pulp you buy on spot versus lead?

Yes, I’m not going to give you that Kasia sorry, what I will say is we have long-term, one to two year contracts with pulp suppliers, probably use about 10 different suppliers. And in those contracts, as part of those contracts, we have flexibility to buy a certain amount on spot.

And we will then just arbitrage the market to determine when we do that. So there’s always a portion of our purchases that are at spot it’s contractually permitted, and creates the right balance between securing supply and taking advantage of market arbitrage between contract and spot.

Fair enough, and now as you guys reduced your SKUs last year, your cost basis benefited and then you’ve indicated that you’re looking to expand some of those use going forward any color that you can provide around how that might impact your costs in the coming quarters?

The crisis enabled us to do what we probably should have done many years ago, it forced the real lifetime, real time experiment on, reducing slower moving SKUs always hard to remove a skew. There’s always a customer that wants that or a region that wants it and nobody wants to give up sales.

But we were forced to do so as many companies did to ensure that we could run our lines as efficiently as possible. So the numbers I quoted without talking about SKUs.

The number I quoted last year was, if you use 100 index as pre-COVID, during the heat of COVID was, which was still in, but during, most of last year, if you will, we went to a 50% index. And basically, what we eliminated were the slower moving SKUs.

And focus just on the main SKUs. And then if you think about an index of where we’re going to come back to, we’re going to be at a 75 index.

So 25% will be totally eliminated, excuse that, as I said, probably should have been eliminated anyways, less relevant, particularly now, as we’re launching some new products. They’re made to be less of a need, those aren’t, those are sizes.

Those are maybe some sub brands, et cetera, that we’re eliminating. And those quite frankly, not every SKU is the same cost impact, there’s some SKUs that are really difficult to make slower runs, more complexity, higher changeover.

And some SKUs are flow through and in fact, don’t cost anymore saving anymore by cutting them. So, like I have confidence that the ones that that we cut, that are that the more problematic ones and the slower ones, will be the ones that we will permanently cut.

And therefore we should continue to see the benefit of our supply chain.

Thanks for letting me know, appreciate your context. And just turning to away from home, you mentioned that you’re seeing some encouraging signs in the U.S., the candidates still being undermined by the third wave.

Just trying to gauge a sense of how much that could impact results from newly from segment in the coming quarters on a net basis, maybe you should speak to how you expect that to trend relative to Q1 results?

Yes, I mean, I won’t give you guidance on it. But we do expect to see it improve as the year moves.

It’s been very encouraging to see how quickly the U.S. market has recovered.

So maybe that is an analogue for how the Canadian market will recover in the away from home segment, particularly foodservice and hospitality. I do believe we believe as an organization, that what will benefit on AFH is almost the contrary that happened with consumer is that you’ll get some pipeline filled, you’ll get pipeline fill at the end customer, so the restaurant itself, let’s say, and you’ll get some pipeline filled at the distributor.

So you’ll get an inventory replenishment through the network to get us back to normal inventory levels. So we’ll probably see a bit of that.

And then of course, we’ll see improved consumption, as consumers are using tissue more out of home. For Canada, when we came into the year, we projected that to start happening in the second half.

So July onwards. Despite the increased shutdowns that have happened over the last couple of months, we still believe that, that is the right timing for the recovery, U.S.

was recovering a little quicker, but unfortunately, we’re smaller there. So our benefit is consistent with our size.

But obviously, we’re a smaller player in the U.S. market.

Can you just remind me how much the U.S. represents of the whole AFH segment volume?

Well, I can’t you remind me, because we never told you. So we always we included in our U.S.

results. So we only as a segment will be for consumer and AFH, as.

And then we report U.S. and Canada, which includes U.S.

consumer and U.S. AFH and Canada consumer.

So we’re just I mean, the reality is we’re a smaller player in the U.S., which in many ways, a bit of a different model for us. We’re more nimble, we were more opportunistic, we can decide what channels, what customers, what format to go into.

Whereas in Canada, we’ve got a very strong presence in a very disciplined approach to how we go to market.

Thanks for that Dino. That’s all I have.

Thanks, Kasia.

Hey Dino, I just wanted to ask, given how fast or successful though the Sherbrook, ramp up and sale process has been, do you start to think about a potential had three or at least starting to do the engineering work. So where are you at with, thinking about that future growth and the any thoughts about, when you’re going to need additional capacity?

Yes, I mean, that’s a great question. We’re always thinking about the future.

So, Ted two, Ted three have been and even Ted four as a start on the horizon in our start plan, as obviously, we wanted to make sure we got Ted two start it off and got any learning’s from that. That gives us a bit of confidence and wind in our sales as it relates to our ability to start up a site.

And every site we expect to get better, Memphis was our first TAD startup, we had a lot of learning Ted to utilize that learning and some of the same people to start that up. And then of course, now we’re looking at where the future could go.

And it isn’t just a tag story, with Sherbrooke expansion. We’re also looking at modernizing our assets as well and capability not just intact, most of the market continues to be LDC, and will likely be LDC, with complimentary tag for the more the premium products.

So the answer is yes, we’re looking at it, I don’t think there’s any company that’s not looking at what their next five year horizon is, where they need capacity. So we’re looking at it, and it’s a long process, as you know, during the business work and understand the financing, and then the engineering and the construction.

So it’s usually a multiyear project, from start to finish, when you think of it that broadly. So we’re starting that process.

And as soon as we got anything to let, we’ll let you know. And just rest assured that we’re managing our business, not just for today, we’re looking at five to 10 years of where we need to be as a North American tissue supplier.

Makes sense. And do, just with White Cloud, can you make, if you don’t know, if you have any data points you could share about your distribution?

How much distribution you’ve achieved in the U.S. any recent developments on that front?

And just in general, I was also curious what the sort of percent of your business is happening through e-commerce today?

Yes, so two separate questions. As I said, Hamir, you would have talked about White Clouds, in terms of what we can do with it within our portfolio.

And we do believe it is a strong brand, we know we’ve tested it, it has a lot of latent equity with consumers, they know the brand. And it is part of our future growth.

As far as what happened last year, the pandemic opened the door for White Cloud, there were customers that maybe weren’t ready to take it. But during COVID and wanting to get tissue, they brought it in.

So that opened the door for us. And our U.S.

team knows that door open. And it’s our job now to keep it open, and continue to build that those accounts.

So it doesn’t just disappear. So we are continuing to work with our approach with White Cloud is a few accounts where we can build a deep versus trying to spread ourselves too thin across every account.

And we just don’t have the resources to do it that way. So we’re going to be more either regional or customer focus.

We have some pretty good customers that have supported us from before COVID and into COVID. You can find White Cloud at Southeast grocers in the U.S., which is more Florida based Winn-Dixie brand, for instance, in Florida, Home Depot, Amazon ShopRite, many others, you’ll see some of the BJs, Albertsons, et cetera.

So it’s the distribution is increased. I don’t know if we’ll keep all those distribution points.

But we want to make sure that the ones that we got we will build on and create a success, so that we can continue to roll it out and other customers. And that’s not just a customer strategies, consumer strategy, we want to support it from a consumer front as well, to make sure we’re building affinity with consumers.

As far as e-com, I mean, again, imperfect data. But I think you can see, in most regards, particularly in our category, e-com would have doubled last year as a percentage of total tissue.

Sometimes it’s so many different numbers of, how ecommerce is measured, but it’s a measure I really look at is how much of tissue goes through e-commerce. We think it’s probably 4% to 5%.

Imperfect measure because not all the e-com players report out. Some of its qualitative, whereas it was probably in the two, two and a half range pre-COVID.

And our goal is to be equal or better than our bricks and mortar position. With our brands in e-commerce in Canada, that not only includes supply, includes the marketing the social media the path the purchase that we undertake, so that our brands are prominent on e-commerce shopping sites, whether they be a bricks and mortar extension or pure e-commerce players.

So…

Are margins comparable on the e-commerce channel is the regular distribution?

They are we’re kind of, we’re neutral as it relates to where the product is sold Hamir. And so, quite frankly, when you say margins, the only reason I’m hesitating is because we’re actually investing more there.

So as a margin play, yes, but we’re putting relative to the size of business, we’re putting more dollars against that channel. So on a total contribution basis is less because we’re making a conscious decision to invest.

But as it relates to product profit, that’s similar to bricks and mortar. And the other thing we’ve done is we’ve stopped up our e-commerce capability, we’ve added an I’m hope they’re listening because we’ve got a two incredibly bright people who have such a passionate and knowledge in this area that they make no head spin in terms of how much they know and how we can succeed here.

So we’ve added that in our organization in the last year, really to make sure we play a leadership role here.

Great, thanks. Thanks, Dino.

That’s all I have.

Thanks, Hamir.

All right, thank you. Thank you for joining us on this call today.

We look forward to speaking with you again following the release of our second quarter. I wish you all a pleasant weekend and a very Happy Mother’s Day to all the moms on the call.

Stay safe, stay healthy. I will talk to you soon.

Thank you.