KP Tissue Inc.

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

I'm the Director of Investor Relations for KP Tissue Inc. The purpose of this conference call is to review the financial results for the second quarter of 2021 for Kruger products L.P., which I'll refer to as KPLP going forward.

With me this morning is Dino Bianco, 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 all the figures expressed in today’s call are in Canadian dollars unless otherwise stated. The press release reporting our Q2 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’d also 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?

Thank you, Mike. Good morning, everyone, and thank you for joining us for our second quarter earnings call.

Despite the volatility of a COVID recovery marketplace, our results for the quarter were largely in line with our expectations. Our results reflect soft demand related to continued destocking by retailers and consumers, strong headwinds from pulp prices and other cost inflation and a gradual market recovery in the Away-From-Home segment.

Recapping some of the quarter's highlights. We are pleased to report that our share position across the portfolio remains strong and the launch of our new SpongeTowels Ultra Pro continues to exceed our expectations.

Furthermore, TAD Sherbrooke's start-up curve remains ahead of schedule, providing the paper tissue capacity required to meet our long-term growth plans. In late June, we also announced an exciting artificial intelligence or AI project of $25 million for the facility, and I'll be discussing that in greater detail later.

Our legacy assets continued to perform well driven by our OpEx program. And after several quarters of depressed end-user demand in AFH, volume has gradually picked up with the easing of COVID-19 restrictions across North America.

Let's now turn our attention to the numbers on slide 5. Q2 2021 revenues declined 12.3% while adjusted EBITDA in the quarter declined 42.1% versus a very strong previous year.

Specifically, revenues came in at $339.3 million while adjusted EBITDA was $37.3 million, which is very similar to our Q1 2021 numbers. Canadian revenues remained relatively stable compared to last year while the US decreased by 28.7%.

We had some negative ForEx impact on US sales and actually in constant currency, the decline was 19.4% in the US and minus 6.6% on a total basis. EBITDA was not only affected by lower sales volume, but by higher pulp prices and increased other costs.

These were partially offset by a favorable ForEx impact and lower SG&A expenses. Pulp and BEK have remained at historically high levels and the rise has been quite dramatic, as you can see on the charts on page 6.

Second quarter NBSK average prices in Canadian dollars increased 18.7%, while BEK average prices rose over 20% compared to Q1. Average NBSK prices in US dollars were up almost 23% and average BEK prices were up over 24% quarter-over-quarter.

For the balance of the year, we expect NBSK and BEK prices to remain elevated. As you know, in an effort to counter these significant cost increases, we have taken pricing actions in both the Consumer and Away-From-Home segments.

In terms of our network on pages 7 and 8, the paper machine and converting ramp-up at TAD Sherbrooke are tracking well ahead of plan. In June, we announced additional investments of $25 million in Sherbrooke for an AI project, with $6.7 million to be contributed by both levels of government.

This will bring our total investments there to over $600 million. The project consists of creating and implementing, a digital twin of the entire plant supply chain.

The virtual model of the supply chain will be using real-time data, augmented with predictive and prescriptive AI capabilities to improve the plant's overall performance and help us serve our customers and consumers more efficiently than ever. This will elevate the capability of the state-of-the-art facility and provide us with great learning's to roll out AI to our other facilities.

As for our Sherbrooke expansion, we are currently finalizing the project scope with engineering, environmental and geotechnical studies underway. We have also secured the $240 million in financing for the project.

Moving on to the next slide. In Memphis, we are investing almost $22 million in the new facial tissue line that will allow us to produce both TAD and LDC products.

Our existing lines are at capacity, and this line will allow us to grow with key customers, while carrying a made in the USA label. This investment along with our new Sherbrooke facial line will elevate our North American capacity in the facial category.

Start-up of the Memphis line is expected in the second quarter of 2022. On the OpEx program now into year four, we've initiated a number of improvements related to waste reduction and equipment reliability at all our sites.

We also increased our training and coaching of our workforce on a structured problem-solving methodology through Lean Six Sigma certifications. As you can see, we are making the necessary investments to support our long-term growth, and to provide us with improved product capacity, capability and cost in both conventional and premium tissue products in North America.

With regards to our trademarks, we continue to focus on building our brands with increased marketing investment. Over the past 52-week period, we continued to register overall share gain and maintained momentum from late 2019.

More recently, the successful launch of SpongeTowels UltraPro has allowed us to make further inroads in the paper towel category. At this stage, this brand is ahead of our plan on both revenue and share expectations.

Our Unapologetically Human media campaign employing purpose-driven messaging continues to distinguish itself and win several awards, including a Bronze Lion at the International Cannes Advertising Festival, one of the most prestigious distinctions in the advertising world and a first for our company. As a Canadian company and true hockey fans, we also felt compelled to support Canadian hockey families during difficult times and that was the purpose of our Kruger Big Assist program.

This program is a huge success with consumers and hockey associations across Canada and 15 associations received $10,000 each to help hockey families in need. We have some of the most trusted and loved brands and it's important for our marketing message to resonate emotionally with Canadian consumers.

Consequently, we've been leveraging and promoting our proudly Made in Canada message as this is an important factor for Canadian consumers and Canadian customers. We also have new media campaigns on SpongeTowels and Scotties, and we continue to increase our investment in digital and social media.

The data presented on slides 10 and 11 is from Nielsen. It shows solid market share performance over a 52-week period ending on June 19, 2021.

Over the past year or so, our stable supply position strong customer partnerships and continued marketing support have allowed us to post strong share gains. With a combined 36.1% share our Cashmere and Purex brands are the clear leaders in the bathroom tissue category.

We achieved notable growth in facial tissue reporting a 34% share this quarter compared to 30.9% for the corresponding period last year. Scotties has strengthened its position and is the clear number one with many Canadian consumers who consider the brand to be synonymous with facial tissue.

As previously noted, we posted good share gains in the paper towel category going from 21.5% last year to 22.6% this quarter. We're excited about our growth prospects for the remainder of 2021 and beyond.

On page 12, we began to see improved revenue and profit performance in our AFH segment. This improvement was driven by strengthening end market demand as a result of post-COVID recovery in the US and Canada.

We are also seeing the benefits in AFH as we have increased in-source paper and lowering our outsourcing costs. And combined with operations that continue to perform well we are well-positioned to benefit from the market recovery.

To offset higher fiber costs and other inflation we have also implemented a price increase in AFH that will flow-through to the P&L with contract renewals over the next 12 months. I will now turn the call over to Mark.

Thank you, Dino, and good morning everyone. Please turn to slide 13 for a summary of our financial performance for Q2 2021.

Revenue was down 12.3% to $339.3 million in the second quarter compared to $386.8 million for the same period last year. However, on a sequential basis revenue was up by 9.3% compared to Q1.

Adjusted EBITDA decreased 42.1% to $37.3 million from $64.4 million in Q4 of last year and remained relatively flat with $37.5 million in Q1. From a margin perspective, adjusted EBITDA decreased to 11% from 16.7% in Q2 last year and 12.1% in Q1 of 2021.

In the second quarter of 2021, net income amounted to $2.2 million compared to $28.9 million last year. The decrease was primarily due to lower adjusted EBITDA, higher depreciation expense, higher interest expense and a decrease in other income partially offset by lower income taxes.

In the quarterly segmented view on slide 14. Consumer revenue decreased 13.6% year-over-year to $292.3 million but increased by 7.7% compared to Q1 this year.

In the Away-From-Home segment, revenue declined 3.1% to $47 million year-over-year, but increased by 20.5% from $39 million in Q1 2021. Consumer segment adjusted EBITDA decreased by $29.3 million to $40.3 million and adjusted EBITDA margin decreased from 20.6% to 13.8%.

For the AFH segment adjusted EBITDA increased by $1.7 million year-over-year to a loss of $0.4 million and adjusted EBITDA margin improved compared to both last year and Q1. Corporate and other costs were a loss of $2.6 million in Q2 2021 compared to a loss of $3 million for the prior year.

On slide 15, we review in more detail Q2 2021 revenue over Q2 2020, which was down by $47.5 million or 12.3%. In constant currency this decline was 6.6%.

The decline was primarily attributable to sales volume decreases in the consumer segment due to the comparison to last year's high COVID-19 buying activity in Q2 as well as continuous destocking of tissue inventories in Q2 of this year by retailers and consumers. Q2 2021 AFH revenue was impacted by continued COVID-19 restrictions while sales volume was flat compared to Q2 2020.

By geography, Canadian revenues increased by $0.9 million or 0.4%, and the US revenue decreased by $48.4 million or 28.7%. US revenues also declined due to the unfavorable impact of FX.

In constant currency US revenue decreased by 19.4%. On slide 16, we provide further insight into our Q2 2021 adjusted EBITDA, which decreased year-over-year by $27.1 million or 42.1% to $37.3 million.

Gross margin for the quarter decreased from 19.8% to 13.1%. The decrease in adjusted EBITDA was primarily driven by lower sales volume, also by the unfavorable impact of higher pulp prices, as well as higher freight rates and warehousing costs.

These factors were partially offset by the net favorable impact of FX and lower SG&A expenses. For a sequential perspective, let's turn to Slide 17, where we compare Q2 2021 to Q1 2021 revenue.

Quarter-over-quarter revenue increased by $28.9 million or 9.3%. In constant currency, the increase was 10.9%.

The increase is primarily driven by higher sales volume in both the Consumer and AFH segments. This was partially offset by the negative impact of lower FX on US dollar sales.

By geography, revenue in Canada increased by $24.8 million or 12.7% and revenue in the US increased by $4.2 million or 3.6%. On a constant currency basis, US revenue increased by 6.8%.

On Slide 18, Q2 2021 adjusted EBITDA decreased sequentially by $0.2 million or 0.5% compared to Q1. Gross margin declined from 15.2% to 13.1%.

The slight decrease in adjusted EBITDA was due to several factors, which almost offset. The favorable aspects were higher sales volume in both, the Consumer and AFH segments, higher AFH contribution and favorable FX impact.

The unfavorable aspects were lower Consumer segment contribution, higher pulp prices, increased freight rates and warehousing costs and higher advertising expenses. I'll now turn to our balance sheet and financial position on Slide 19.

Our cash position was $129.7 million at the end of Q2, an increase of $72.1 million from our $57.6 million position at the end of Q1. The cash increase and also the increase in total long-term debt was driven primarily by the issuance in April of new eight-year senior unsecured notes, with part of the proceeds used to reduce the outstanding balance on the senior credit facility.

Also, the financing for the Sherbrooke expansion was completed in May and $27 million of convertible debentures were issued to Investissement Québec with the proceeds remaining in cash at quarter end. Overall, net debt at quarter end stood at $827.6 million, up by approximately $32 million from the $795.2 million at the end of Q1, including the impact of higher working capital and the increase in debt related to capital investments in TAD Sherbrooke.

Our net debt to trailing 12-month adjusted EBITDA leverage ratio increased to 5.3 times compared to 4.3 times in Q2 -- sorry in Q1 this year, which was primarily due to the higher level of net debt incurred and a lower trailing 12-month adjusted EBITDA in Q2 of this year. At quarter end, total liquidity representing cash and cash equivalents and availability from the revolving credit agreements was a healthy $284.2 million.

In addition, there was $36.5 million in cash set aside in the TAD Sherbrooke entity at the end of Q2, which is available for the project. I will conclude my section by reviewing the CapEx on Slide 20.

The year-to-date 2021 CapEx amounted to $87.6 million, including $75 million for TAD Sherbrooke. Looking at the full year 2021, our anticipated CapEx range is slightly reduced from what we had previously provided.

We expect TAD Sherbrooke CapEx to total approximately $110 million, once all project payments are completed and that includes the start of the new AI project. Remaining CapEx including the new Sherbrooke expansion is expected to be in the $40 million to $50 million range.

That puts total CapEx for 2021 in the range of $150 million to $160 million. Thank you, for joining us this morning, and I'll now turn the call back over to Dino.

Thank you, Mark. I will not spend too much time on page 21, but this slide was introduced at our Q1 earnings call and reflects our bold commitment to sustainability over the coming decade, across multiple dimensions of our business and our culture.

I want to conclude on slide 22. To build a strong future, we remain focused on investing in our brands and innovating to build market share leadership in Canada, while expanding our White Cloud brand in the US.

In order to offset unprecedented increases in pulp prices and other rising costs, we're taking pricing actions and expect to see the benefits of these measures starting in the second half of the year. Furthermore, with the TAD facility in Sherbrooke exceeding the ramp-up curve, we are well positioned to support the new SpongeTowels Ultra Pro growth objectives, as well as grow our business in the ultra-premium tissue segment across North America.

We continue to make the investments needed to support our network's modernization, expansion and cost structure. With the new $25 million AI project, our investments in TAD Sherbrooke will reach $600 million.

Moreover, the Sherbrooke expansion is another $240 million project, which we have secured financing for. And finally, in Memphis, our new facial tissue line represents a total investment of close to $22 million.

Our OpEx program remains an integral part of our DNA and will serve to increase capacity and optimize the cost structure for the future. Meanwhile, the AFH segment is improving profitability and is preparing for the recovery of end-user markets.

Reimagine 2030, our new sustainability plan, will spearhead transformative growth and sustainable innovation. And finally, we continue to develop our organizational capability and culture to ensure that we are future ready.

Before I conclude, let me briefly discuss our outlook. In terms of the outlook for consumer tissue, we expect a gradual month-after-month improvement, with a return to more normal tissue buying patterns and demand from retailers and consumers in the second half of the year.

We've also worked hard to position AFH for a market recovery and expect sales to improve, as end markets recover across North America. We see the market softness in the first half of 2021, as temporary and expect that the tissue category will return to strong stable demand post COVID.

High pulp prices and cost inflation will continue to be a headwind for this year. In spite of these factors, we expect that the pricing measures we have announced, as well as a more favorable sales outlook, will translate into stronger performance during the second half of 2021.

More specifically, we expect Q3 2021 adjusted EBITDA to be higher than Q2, 2021, and lower than 2020, Q3. At this point, I'd like to thank our many employees for their steadfast support during these continued challenging times.

Despite much discussion on post COVID trends, we are still in COVID and our employees continue to work safe and productively to ensure tissue supply for the market today and for the future. Our outstanding employees are the ones who allow us to earn the confidence and success we enjoy.

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

Hi. Good morning.

Good morning.

Good morning.

Dino, could you quantify the non-pulp inflation you're seeing? And if you could speak to how much that might be on the freight side and on the labor front as well?

Well, Hamir, it's more than it's normally been. I mean, normally this has been a pulp story that's triggered pricing.

This year, of course, pulp is increasing, but you've seen from other reports and other industries, what's going on around the globe, as we're going through a boom here, with freight costs, warehousing costs, energy costs, labor costs. I mean everything is going up.

I won't give you a specific split, but I'd say, particularly, for the quarter and as we look to the back half, it'll still be dominated by fiber, but I would say that, the non-fiber costs will be a significant portion. If you look at a number, it's probably 60-40, 70-30 fiber, versus in the past it's normally been -- we've had increases.

It's been primarily fiber. So I'm being hesitant because I don't want to -- I'm not going to divulge all the single moves that have happened across the network.

But when we did our pricing action in -- for July 5 across not only just Canada, AFH in the US, we took into account a projected inflation curve. So we were able to build that in as we looked at the cost headwinds that were coming our way with pulp and with other costs.

So we feel particularly in Canadian consumer we have covered those costs through pricing not as much in the US because we're a price follower there. And unfortunately that market hasn't quite moved to the level it needs to move.

And then AFH will be a longer road to get that cost recovery as contracts renew.

Okay. Dino that's helpful.

And you gave your outlook on pulp prices, but I was just curious to get your thoughts on the recycled products that you buy sorted office papers. How do you see prices faring there for the balance of the year?

And just remind us what percent of your fiber mix is the recycle grade?

Yes. So generally our recycled fiber represents 20% to 25% of our total fiber mix.

It's a little lower because our AFH businesses have been depressed in terms of the volume over the COVID period. As it relates to how we have priced our business.

When we have priced our business Hamir, we have built in sorted office paper price increases. As you know and you've heard from many other analysts or other companies that have reported that market continues to escalate.

It escalates in port as it moves with pulp, but also generation is not there. It's -- as the world is moving more to digital and then as you had primarily offices and work locations shutting down the generation isn't there.

So we have seen a continued escalation in sorted office paper as well. But it stays to my previous comment that we have reflected those increases -- projected increases from what we see in the marketplace in our pricing recommendations.

Okay. Great.

Thank you. That’s all I had.

I will turn it over.

Thanks, Hamir.

Thank you. Good morning.

Good morning.

Dino, when you qualify TAD Sherbrooke both the machine and the converting productivity is well above plan. Can you give us some metrics for context?

And I guess absent the expansion what's the potential for further productivity gains there over what sort of, time frame?

Sean that's a great question. I'm going to give you some context.

I'm new to the tissue business as many of you know and I've heard the horror stories of machine start-ups across North America various companies. So my expectations were already adjusted.

And then when we brought in TAD2, it has been an incredible journey to watch that facility start up. The leadership -- first of all to get it ready on time and on budget during COVID.

And an incredible work that our team, our engineering team, our suppliers, our partners have done has been incredible just to get it going in February according to plan. But then to see the start-up curve that we have at that site is a testament to the site leadership, the training we have done, the OpEx program, the future AI that we're bringing in it's been an incredible journey to watch.

And they have exceeded plan. I'm not going to give you a number, but it's a big number well double-digit if you will.

Maybe we had a conservative plan. I don't know.

But at the end of the day it's incredible the number that they're producing both on paper and -- on converted cases both paper towel and bath issue. So we really run all the different products through that site, expecting we'd run into some hiccups.

And so far we have not. What the challenge has been for us is trying to sell that excess capacity in a market that's down 13%, 14%, 15% or whatever numbers you look at.

We were ready and geared and oversold on our planned consumption and now we get this excess capacity that we are working to move through the system. We'll get it through.

It's just taking a little longer and we'll start converting that excess production into sales. We're working with our existing customers who are now starting to see some turnarounds on their end as well and starting to see the movement there.

And we're also of course working with new customers to supply them with a fantastic TAD product that's coming out of that facility.

Thanks for that detail. Second question, the Away-From-Home segment, obviously not EBITDA positive yet, but I think it's your best result there since Q1 of 2018, despite demand headwinds.

And I gather a lot of that from the paper in-sourcing. Any thoughts on the margin potential for Away-From-Home as reopening hopefully, gained some momentum here and it seems like you've initiated some company-specific measures to improve margins there?

Yes, Sean, it's a great question. And our long-term outlook for AFH is that we should be in the mid- to high single-digit EBITDA margins.

I mean that is the goal and that is the strategic plan that that group is working towards. And it is absolutely a doable plan.

It involves not just the manufacturing side. It involves the demand side, the types of products we're in, where we're going, the portfolio and then of course a network that can support that cost effectively.

So it's a total plan that the AFH team has been working on pre-COVID and of course COVID to everybody for readjustment but we stay true to that plan as we're emerging out of COVID. So I have high expectations for AFH recovery.

We're starting to see the benefit of that as you said in Q2 and we continue to expect AFH to perform better than it has, driven by volume increases, driven by pricing recovery. But as you mentioned on the network side, there's two aspects that are helping us.

One is the fact that we are in-sourcing paper, more paper. So our legacy assets are running well and quite frankly we've had with Sherbrooke coming on board and then the other Sherbrooke expansion project, we will be essentially self-sufficient on AFH paper.

So that will help the long-term cost structure. And every time you in-source paper, it depends on the grade, it could be CAD 200 to CAD 500 a ton benefit.

So there's a lot – it's real money and it's there. And then the second thing that AFH has done more for long-term as well is they were the last – or one of the last areas to implement OpEx.

So we started implementing OpEx during COVID. And it's been incredible to watch the performance of those assets and how ready they are now for the market that's going to recover that we're going to get more capacity and more productivity out of those assets going forward.

So lots of good work done. There was a lot of learning in AFH during COVID.

What do we do well? What don't we do well?

Where do we want to be? And I think that team is now ready to really take advantage of the market recovery in Canada but also in the US as well.

That’s great. Thanks for the detail, Dino.

You’re welcome.

Good morning. It's actually Thomas calling in for Zach.

Just a quick question for me. Throughout the destocking drag, was premium tissue moving better than other categories?

And did that provide a mix lift to margins that we may see revert in the future quarters?

I apologize, I missed the first part of your question. Can you just repeat that, please?

Yes. I was asking about the destocking drag.

Was premium tissue moving better than other categories?

I mean the destocking drag I think affected every category, all segments of tissue and all categories bathroom tissue paper towel and even to a certain extent facial. We saw it in the US and Canada.

The interesting thing is that the destocking impact has actually been somewhat greater in the US than it has been in Canada. The dynamics here have been that the US has generally lagged a little bit in terms of the COVID bubble and have now lagged a little bit on the deload that's happening.

Canada got a big hit of deload in kind of the first four months of the year. US saw a little bit more in the second quarter.

Just to give you some perspective because it's a clear answer. And I think many have been asked about it.

We saw -- if you look at our second quarter, April was our toughest comp. We were tracking against a destocking and a strong quarter -- month last year.

And then May and June started improving. So that tells me the trend in the velocity and the destocking is out of the system plus we're hearing it from customers.

They're starting to load again and we're starting to see them bring in inventory and we're starting to see market consumption increase. So I guess a long-winded answer, it's not specific to an individual segment or geography.

It is pretty well across the board that we saw from our business anyways.

That’s helpful. Thank you very much.

Yeah. Thanks.

Good morning, Dino.

Good morning, Paul.

Question is you shared your margin goal on AFH in the mid- to high single-digits. Can you share what you expect out of the Consumer side?

Yeah. I mean, we should be in mid-teens.

So our business should be mid-teens. And depending on the portfolio even high teens within that because there's lots of as you know SKU matters.

There's branded, there's private label. There's different segments.

We play in the value in the premium. But generally, I would say we should be in a mid to better teen position on our consumer.

And as more of our business with our Sherbrooke facility starts to move more to the premium segments, I hope to push that even higher.

Okay. And then you expressed some difficulty in ramping up or selling the capacity out of your new machine in newer market that's down somewhere around 15%.

We've got three new tissue machines starting up in 2022. Is that going to pose an additional problem going forward?

I don't think so Paul, because those are always part of the long-term projection. So I know there's a lot of nervousness rightfully so across a lot of companies right now with what's happened out in the first quarter or in the first half, I should say.

I do and I've said and I think others said like -- other companies have said, it's a short-term displacement at least on the volume side, you can talk inflation as a different comment. But on the sales side this market is going to return.

And in fact, we've seen lots of projections. It's going to say that -- the curve is going to actually improve for the two reasons that I think I've talked about in previous meetings more people work from home.

It won't be, what it is today but it will be more than there was pre-COVID and more focus on hygiene, particularly as it reflects to cleaning and towel usage. So I don't see that as being an issue.

I mean there's always -- every time when a machine comes out there's always a bit of disequilibrium in the short-term. But I think the long-term prognosis for the category and the supply/demand balance is still very healthy.

Okay. And then maybe just lastly, if you could comment on where the overall market is going and whether that differs between Canada and the US?

And why I ask that is that, you brought up a TAD machine but you're also doing an LDC machine. So just wondering, where the consumer or where the AFH market is going in the future?

And are you well positioned for that?

Yes. Paul, look if -- I'll talk about a little bit of market and our focus.

I mean, if you think about it, let's start with AFH because that was the last we talked about. I think our goal in AFH is still to be a full-service provider on tissue.

But we want to beef up our premium end, of our segment. We make great quality products.

We have great brands. We have a great network.

So I think you're going to see more focus in trying to move a bit more upstream across Canada and the US in that one because that's an opportunity for us specifically. I think in the US on Consumer, you are seeing a faster migration to premium consumer products.

So TAD TAD-like products moving in the US that trend has been there is more. More private label supply has been in that market.

So we continue to see that happening. But let's not forget and my numbers may not be perfect but the core LDC or the conventional products still represent 75% to 80% of the market.

So it's still a large part. In Canada, we see more of a balanced mix.

There is -- we are and we see a more move to premium as well but not at the -- necessarily the rapid pace that you're seeing in the US will be a little more balanced. And then our decision around TAD and LDC was made as it relates to -- first of all, we are essentially a two-technology company.

We look at LDC and LDC-type assets as being our conventional entry. And then we look at TAD as being our premium.

We're able to play with those two to kind of make sure we got a portfolio that is representative of what the customer and consumer needs. Our decision to go LDC and I talked about the scope being finalized on Sherbrooke because -- and most of that attention is just making sure we got our paper machine right.

So I think on the converting side, what we're going to do in Sherbrooke is pretty -- the expansion I'm talking about we're pretty comfortable. But on the paper machine, we're doing a lot of work just to make sure this is a long-term investment and making sure we're projecting it right not just for Canada for North America.

So that's when I talked about finalizing the scope. That's where we're spending our time.

We do believe LDC is the place to be. So I think we're pretty comfortable with that as it relates to the expansion.

And the other thing it does for us quite frankly, is it derisks our network. We've got a couple of old machines in the network that we're always keeping performing well.

But when you look long-term we've got to make sure we derisk our network as well.

Great. That’s really helpful.

Thanks very much. And best of luck.

Thanks, Paul.

Great. Thank you.

Thank you all for joining us on this call today. We look forward to speaking with you again following the release of our third quarter results.

Thank you and have a great day.