KP Tissue Releases First Quarter 2023 Financial Results

KP Tissue Inc. reports the Q1 2023 financial and operational results of KPT and Kruger Products Inc. (Kruger Products). Kruger Products is Canada's leading manufacturer of quality tissue products for the consumer market (Cashmere, Purex, SpongeTowels, Scotties, White Swan and Bonterra) and the Away-From-Home (AFH) market and continues to grow in the U.S. Consumer tissue business with the White Cloud brand and premium private label products. KPT currently holds a 13.5 percent interest in Kruger Products.

Kruger Products Q1 2023 Business and Financial Highlights

Revenue was $451.0 million in Q1 2023 compared to $398.7 million in Q1 2022, an increase of $52.3 million or 13.1 percent.
Adjusted EBITDA1 was $50.0 million in Q1 2023, compared to $29.1 million in Q1 2022, an increase of 71.9 percent.
Net loss was $49.3 million in Q1 2023 compared to net income of $1.4 million in Q1 2022, a decrease of $50.7 million.
Declared a quarterly dividend of $0.18 per share to be paid on July 17, 2023.

“We are pleased that our multi-faceted strategy to counter inflation is gaining traction as reflected by our strong first-quarter performance in 2023,” stated KP Tissue’s Chief Executive Officer, Dino Bianco. “Adjusted EBITDA increased nearly 72 percent year-over-year to $50 million on improved revenue of $451 million in the first quarter. These results were achieved mainly due to higher selling prices across all segments and regions, favourable sales mix, cost management initiatives implemented companywide, as well as ongoing productivity gains and our Memphis plant cost recovery.”

“Although we are still coping with volatile pulp prices and a weakened Canadian dollar, profitable growth remains our goal for 2023 and beyond. As the business strengthens, we intend to reinvest in our brands to drive share gains and take advantage of incremental manufacturing capacity from our Sherbrooke Expansion Project. The ramp-up of our bathroom tissue line exceeded expectations in the first quarter, while the start-up of our facial tissue and paper machine lines are scheduled for the fourth quarter of 2023 and end of 2024, respectively. As a result, we are steadily progressing along the road to recovery, while investing for the long-term,” Bianco added.

Outlook for Q2 2023

Looking ahead to the second quarter of 2023, while we believe inflationary pressure has stabilized and our operating efficiency continues to improve, we will be reinvesting in the business to drive long-term value. Accordingly, Adjusted EBITDA¹ in Q2 2023 is expected to be in the range of Q1 2023.

Kruger Products Q1 2023 Financial Results

Revenue was $451.0 million in Q1 2023 compared to $398.7 million in Q1 2022, an increase of $52.3 million or 13.1 percent. The increase in revenue was primarily due to the favourable impact of selling price increases implemented across all segments and regions during 2022, along with favourable sales mix and higher sales volume in the AFH business, partially offset by lower sales volume in the Consumer segment. Revenue was also favourably impacted by foreign exchange fluctuations on U.S. dollar sales.

Cost of sales was $389.0 million in Q1 2023 compared to $363.8 million in Q1 2022, an increase of $25.2 million or 6.9 percent. While the significant inflation experienced during 2022 appears to be moderating on a sequential basis, manufacturing costs increased year-over-year, despite the favourable impact of lower sales volumes and reductions in Memphis plant costs, primarily due to significantly higher pulp and other input costs compared to Q1 2022 along with the unfavourable impact of foreign exchange fluctuations on U.S. dollar costs. Warehousing costs increased as a result of additional logistics network costs while freight rates declined compared to historically high rates in Q1 2022. As a percentage of revenue, cost of sales was 86.3 percent in Q1 2023 compared to 91.3 percent in Q1 2022.

Selling, general and administrative (SG&A) expenses were $36.3 million in Q1 2023 compared to $28.9 million in Q1 2022, an increase of $7.4 million or 25.7 percent. The increase was primarily due to higher personnel costs. As a percentage of revenue, SG&A expenses were 8.0 percent in Q1 2023 compared to 7.2 percent in Q1 2022.

Adjusted EBITDA¹ was $50.0 million in Q1 2023 compared to $29.1 million in Q1 2022, an increase of $20.9 million or 71.9 percent. The increase was primarily due to a combination of factors: selling price increases in 2022, favourable sales mix, Memphis plant manufacturing cost recovery and lower freight rates, which were partially offset by higher pulp prices and other input cost inflation compared to Q1 2022, lower sales volume and higher warehousing and SG&A expenses, along with the unfavourable impact of foreign exchange fluctuations.

Net loss was $49.3 million in Q1 2023 compared to net income of $1.4 million in Q1 2022, a decrease of $50.7 million. The decrease was primarily due to higher income tax expense resulting from the recording of a significant deferred tax liability related to the Reorganization, lower foreign exchange gains and higher depreciation expense, partially offset by higher Adjusted EBITDA and lower interest expense and other finance costs.

¹ Adjusted EBITDA is a non-GAAP financial measure. Refer to the Non-GAAP Financial Measures section of this news release for more information on these measures

Kruger Products Q1 2023 Liquidity

Total liquidity, representing cash and availability under the revolving credit agreements, was $101.3 million as of March 31, 2023. In addition, $10.7 million of cash was held by Kruger Products for the Sherbrooke Expansion Project.

Reorganization of KPLP

As previously announced, on January 1, 2023, KPLP undertook a corporate reorganization (the Reorganization) pursuant to which KPLP, a limited partnership, was essentially replaced by a corporate entity without adversely affecting KPT. More specifically, KPLP sold and assigned to its wholly-owned subsidiary, Kruger Products Inc. (Kruger Products), and Kruger Products purchased and assumed from KPLP, in exchange for common shares, all of the properties, operations, assets and liabilities of KPLP, and KPLP was subsequently dissolved and wound-up into its partners. As a result of the Reorganization, Kruger Products, as the successor corporate entity to KPLP, now operates the business previously operated by KPLP.

The interest that KPT previously held in KPLP is now held in Kruger Products, and, through a shareholders’ agreement dated January 1, 2023, entered into with Kruger Inc. (the Shareholders’ Agreement), KPT has substantially equivalent rights in respect of the operation of, and its investment in, Kruger Products, as it had in respect of KPLP. The Reorganization was undertaken to realize certain tax efficiencies for Kruger Products and to simplify Kruger Products’ corporate structure and financial reporting. The Reorganization was approved by the independent directors of KPT.

The Shareholders’ Agreement, and certain other agreements with Kruger Inc. that were amended and restated to reflect the Reorganization, are described in KPT’s Annual Information Form dated March 9, 2023, and copies of those agreements are available under KPT’s profile on SEDAR at www.sedar.com.

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