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KP Tissue Inc.

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KP Tissue Releases Second Quarter 2018 Financial Results

Strong revenue growth offset by continued cost headwinds

MISSISSAUGA, Ontario, Aug. 09, 2018 (GLOBE NEWSWIRE) -- KP Tissue Inc. (KPT) (TSX:KPT) reports the Q2 2018 financial and operational results of KPT and Kruger Products L.P. (KPLP). Kruger Products is Canada's leading manufacturer of quality tissue products for the Consumer market (Cashmere, Purex, SpongeTowels, Scotties, and White Swan) and the Away-From-Home 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 15.9% interest in KPLP.

KPLP Q2 2018 Business and Financial Highlights

  • Revenue increased by 7.8% to $338.8 million in Q2 2018 compared to Q2 2017
  • Adjusted EBITDA was $26.7 million in Q2 2018 compared to $37.3 million in Q2 2017
  • Pulp and freight costs continued to escalate in the quarter
  • Announced a price increase in the Canadian consumer market effective mid-October
  • Declared a quarterly dividend of $0.18 per share to be paid on October 15, 2018

“We are pleased to report strong sales and volume growth for the quarter as we continue to maintain our market leadership position. Considering the significant negative impact of record-high pulp prices and freight costs on our results, we announced a price increase in the Canadian consumer business to take effect in mid-October. This increase is expected to provide a small benefit in our fourth quarter results and mainly impact 2019,” said Dino Bianco, CEO of KP Tissue and KPLP.

“During the second quarter, we made further progress on our value creation program, which, when combined with our recent capital projects, partially offset higher input costs. We do not expect changes in these challenging market conditions in the short-term and, consequently, anticipate third quarter Adjusted EBITDA to be lower than the same prior year period and also to reflect normal seasonality,” concluded Mr. Bianco.

KPLP Q2 2018 Financial Results
Revenue in Q2 2018 was $338.8 million, compared to $314.4 million in Q2 2017, an increase of $24.4 million or 7.8%. The increase in revenue was primarily due to increased sales volume and the Consumer selling price increase in Canada in Q4 2017, partially offset by the unfavourable impact of foreign exchange fluctuations on U.S. dollar sales.

Cost of sales in Q2 2018 increased to $304.9 million from $267.1 million in Q2 2017. Manufacturing costs increased primarily due to increased sales volume, significantly higher pulp costs and increased pension expense, partially offset by the favourable impact of foreign exchange fluctuations on U.S. dollar denominated costs and the benefits from cost reduction initiatives and capital projects. Freight costs increased primarily due to increased sales volume and higher carrier rates. As a percentage of revenue, cost of sales were 90.0% in Q2 2018 compared to 85.0% in Q2 2017.

Selling, general and administrative (SG&A) expenses in Q2 2018 were $20.1 million, compared to $22.5 million in Q2 2017. The decrease was primarily due to expense reductions. As a percentage of revenue, SG&A expenses were 5.9% in Q2 2018, compared to 7.2% in Q2 2017.

Adjusted EBITDA in Q2 2018 was $26.7 million, compared to $37.3 million in Q2 2017, lower by $10.6 million or 28.4%, due primarily to significantly higher pulp costs and increased freight costs. These were partially offset by increased sales volume, the Canadian Consumer selling price increase, the net favourable impact of foreign exchange fluctuations and the benefits from cost reduction initiatives and capital projects.  

Net income in Q2 2018 was $1.6 million, compared to $9.9 million in Q2 2017, primarily due to lower Adjusted EBITDA of $10.6 million, an increase in interest expense of $1.7 million, a decrease in foreign exchange gain of $1.4 million and higher depreciation expense of $0.4 million. These items were partially offset by a decrease in the change in amortized cost of partnership units liability of $4.5 million and a decrease in tax expense of $1.7 million.

Total liquidity, representing cash and cash equivalents and availability under the credit line within covenant limitations, was $64.5 million as of July 1, 2018, compared to $30.2 million as of April 1, 2018. KPLP issued $125 million of senior unsecured notes on April 24, 2018, and used the net proceeds to reduce the outstanding balance of the existing credit facility. KPLP also reduced the credit facility from $300 million to $200 million. With the issuance of the senior unsecured notes, total liquidity increased by $25 million.

KPT Q2 2018 Financial Results
KPT incurred a net loss of $1.3 million in Q2 2018. Included in the net loss was $0.3 million representing KPT’s share of KPLP’s income. The income was reduced by depreciation expense of $1.5 million related to adjustments to carrying amounts on acquisition, partially offset by an income tax expense of $0.2 million.

Dividends on Common Shares                                                     
The Board of Directors of KPT declared a quarterly dividend of $0.18 per share to be paid on October 15, 2018 to shareholders of record at the close of business on September 28, 2018.

Additional Information
For additional information please refer to Management’s Discussion and Analysis (MD&A) of KPT and KPLP for the second quarter ended July 1, 2018 available on SEDAR at www.sedar.com or our website at www.kptissueinc.com.

Second Quarter Results Conference Call Information
KPT will hold its second quarter conference call on Thursday, August 9, 2018 at 8:30 a.m. Eastern Time.

Via telephone:  1-877-223-4471 or 647-788-4922

Via the internet at: www.kptissueinc.com

Presentation material referenced during the conference call will be available at www.kptissueinc.com.

A rebroadcast of the conference call will be available until midnight, August 16, 2018 by dialing 800-585-8367 or 416-621-4642 and entering passcode 4789197.

The replay of the webcast will remain available on the website until midnight, August 16, 2018.

About KP Tissue Inc. (KPT)
KPT was created to acquire, and its business is limited to holding, a limited partnership interest in KPLP, which is accounted for as an investment on the equity basis. KPT currently holds a 15.9% interest in KPLP. For more information visit www.kptissueinc.com.

About Kruger Products L.P. (KPLP)
KPLP is Canada's leading manufacturer of quality tissue products for household, industrial and commercial use. KPLP serves the Canadian consumer market with such well-known brands as Cashmere®, Purex®, SpongeTowels®, Scotties® and White Swan®. In the U.S., KPLP manufactures the White Cloud® brand, as well as many private label products. The Away-From-Home division manufactures and distributes high-quality, cost-effective product solutions to a wide range of commercial and public entities. KPLP has approximately 2,500 employees and operates eight FSC® COC-certified (FSC® C-104904) production facilities in North America.  For more information visit www.krugerproducts.ca.

Non-IFRS Measures
This press release uses certain non-IFRS financial measures which KPLP believes provide useful information to management of KPLP and the readers of the financial information in measuring the financial performance and financial condition of KPLP. These measures do not have a standardized meaning prescribed by IFRS and therefore may not be comparable to similarly titled measures presented by other companies. An example of such a measure is Adjusted EBITDA. Beginning with Q4 2015 in accordance with Canadian Securities Administrators Staff Notice 52-306 (Revised), we reference Adjusted EBITDA as a non-IFRS financial measure. This term replaces the previously referenced non-IFRS financial measure EBITDA. Our definition of Adjusted EBITDA is unchanged from our former definition of EBITDA. Accordingly, this change in terminology has no impact on our reported financial results for prior periods. Adjusted EBITDA is not a measurement of operating performance computed in accordance with IFRS and should not be considered as a substitute for operating income, net income or cash flows from operating activities computed in accordance with IFRS. “Adjusted EBITDA” is calculated by KPLP as net income (loss) before (i) interest expense, (ii) income taxes, (iii) depreciation, (iv) amortization, (v) impairment (gain on sale) of non-financial assets, (vi) loss (gain) on disposal of property, plant and equipment, (vii) foreign exchange loss (gain), (viii) costs related to restructuring activities, (ix) changes in amortized cost of Partnership units liability, and (x) one-time costs due to pension revaluations related to past service. A reconciliation of Adjusted EBITDA to the relevant reported results can be found in the MD&A of KPT and KPLP for the second quarter ended July 1, 2018 available on SEDAR at www.sedar.com.

Forward-Looking Statements
Certain statements in this press release about KPT's and KPLP's current and future plans, expectations and intentions, results, levels of activity, performance, goals or achievements or any other future events or developments constitute forward-looking statements. Forward-looking statements in this press release include, but are not limited to, items such as: the potential installation of a second TAD paper machine; KPLP’s expansion efforts in U.S. premium private label; and KPLP’s future business strategy. The words "may", "will", "would", "should", "could", "expects", "plans", "intends", "trends", "indications", "anticipates", "believes", "estimates", "predicts", "likely" or "potential" or the negative or other variations of these words or other comparable words or phrases, are intended to identify forward-looking statements. The forward-looking statements are based on certain key expectations and assumptions made by KPT or KPLP, including expectations and assumptions concerning: the impact of the TAD Project on Adjusted EBITDA; the expectation of continued growth in sales of TAD products in the U.S.; a successful ramp-up of the Crabtree paper machine; improved performance of the Away-From-Home business; and expanded distribution of White Cloud to select U.S. retailers. Although KPT and KPLP believe that the expectations and assumptions on which such forward-looking information is based are reasonable, undue reliance should not be placed on the forward-looking statements since no assurance can be given that such expectations and assumptions will prove to be correct.

The outlook provided in respect of Adjusted EBITDA for Q3 2018 is forward-looking information and is subject to the risk and uncertainties referred to below. The purpose of the outlook is to provide the reader with an indication of management’s expectations, at the date of this press release, regarding KPLP’s future financial performance. Readers are cautioned that this information may not be appropriate for other purposes.  

Many factors could cause KPLP’s actual results, level of activity, performance or achievements or future events or developments (which could in turn affect the economic benefits derived from the corporation’s economic interest in KPLP) to differ materially from those expressed or implied by the forward-looking statements, including, without limitation, the following factors, which are discussed in greater detail in the “Risk Factors – Risks Related to KPLP’s Business” section of the KPT Annual Information Form dated March 9, 2018 available on SEDAR at www.sedar.com: Kruger Inc.’s influence over KPLP; KPLP’s reliance on Kruger Inc.; consequences of an event of insolvency relating to Kruger Inc.; risks associated with the Memphis TAD machine; operational risks; Gatineau Plant land lease; significant increases in input costs; reduction in supply of fibre; increased pricing pressure and intense competition; KPLP’s inability to innovate effectively; adverse economic conditions; dependence on key retail trade customers; damage to the reputation of KPLP or KPLP’s brands; KPLP’s sales being less than anticipated; KPLP’s failure to implement its business and operating strategies; KPLP’s obligation to make regular capital expenditures; KPLP’s entering into unsuccessful acquisitions; KPLP’s dependence on key personnel; KPLP’s inability to retain its existing customers or obtain new customers; KPLP’s loss of key suppliers; KPLP’s failure to adequately protect its intellectual property rights; KPLP’s reliance on third party intellectual property licenses; adverse litigation and other claims affecting KPLP; material expenditures due to comprehensive environmental regulation affecting KPLP’s cash flow; KPLP’s pension obligations are significant and can be materially higher than predicted if KPLP Management’s underlying assumptions are incorrect; labour disputes adversely affecting KPLP’s cost structure and KPLP’s ability to run its plants; exchange rate and U.S. competitors; KPLP’s inability to service all of its indebtedness; exposure to potential consumer product liability; covenant compliance; interest rate and refinancing risk; and risks relating to information technology, cyber-security, insurance, internal controls, and trade.

Readers should not place undue reliance on forward-looking statements made herein. The forward-looking information contained herein is expressly qualified in its entirety by this cautionary statement. The forward-looking information contained herein is made as of the date of press release and KPT undertakes no obligation to publicly update such forward-looking information to reflect new information, subsequent or otherwise, unless required by applicable securities laws.

INFORMATION:

Francois Paroyan
General Counsel and Corporate Secretary
KP Tissue Inc.
Tel.: 905.812.6936
francois.paroyan@krugerproducts.ca

INVESTORS:

Mike Baldesarra
Director of Investor Relations
KP Tissue Inc.
Tel.: 905.812.6962
IR@KPTissueinc.com

 

 
Kruger Products L.P.
Unaudited Condensed Consolidated Statement of Financial Position
(thousands of Canadian dollars)
      
 July 1, 2018  December 31, 2017 
 $  $ 
Assets     
Current assets     
Cash and cash equivalents  20,007    8,837 
Trade and other receivables   142,896    113,194 
Receivables from related parties  170    85 
Current portion of advances to partners  6,199    1,928 
Inventories   212,152    192,394 
Income tax recoverable   513    522 
Prepaid expenses   10,300    8,007 
   392,237    324,967 
Non-current assets     
Advances to partners  -     4,489 
Property, plant and equipment   777,368    761,610 
Other long-term assets   10    6,331 
Goodwill  160,939    160,939 
Intangible assets   15,619    15,327 
Deferred income taxes   29,182    26,092 
Total assets  1,375,355    1,299,755 
      
Liabilities     
Current liabilities     
Bank indebtedness  4,215    9,051 
Trade and other payables   192,755    190,698 
Payables to related parties  3,189    2,596 
Income tax payable  661    498 
Distributions payable   10,529    10,382 
Current portion of provisions   630    333 
Current portion of long-term debt   204,523    190,947 
   416,502    404,505 
Non-current liabilities     
Long-term debt   288,282    225,368 
Provisions   5,598    5,973 
Pensions   103,002    119,558 
Post-retirement benefits   60,598    60,457 
Liabilities to non-unitholders  873,982    815,861 
Current portion of Partnership units liability   1,928    1,928 
Long-term portion of Partnership units liability   157,169    158,381 
Total Partnership units liability   159,097    160,309 
Total liabilities  1,033,079    976,170 
      
Equity     
Partnership units  366,344    356,240 
Deficit  (106,065)   (99,742)
Accumulated other comprehensive income  81,997    67,087 
Total equity  342,276    323,585 
Total equity and liabilities  1,375,355    1,299,755 
      


 
Kruger Products L.P.
Unaudited Condensed Consolidated Statement of Comprehensive Income (Loss)
(thousands of Canadian dollars)
          
  3-month
 period ended
 July 1, 2018
  3-month
 period ended
 June 25, 2017
  6-month
 period ended
 July 1, 2018
  6-month
 period ended
 June 25, 2017
 
  $  $  $  $ 
             
Revenue    338,773    314,388    662,508    603,659 
             
Expenses            
Cost of sales    304,924    267,077    592,293    511,331 
Selling, general and administrative expenses    20,068    22,520    43,021    45,741 
(Gain) loss on sale of non-financial assets   7    (81)   (208)   (68)
Restructuring costs, net   1    -     1    11 
             
Operating income   13,773    24,872    27,401    46,644 
             
Interest expense   12,498    10,757    23,811    21,021 
Other (income) expense    (779)   2,018    1,009    3,963 
             
Income before income taxes   2,054    12,097    2,581    21,660 
             
Income taxes    410    2,150    (640)   4,764 
             
Net income for the period   1,644    9,947    3,221    16,896 
             
Other comprehensive income (loss)            
Items that will not be reclassified to net income:            
Remeasurements of pensions   865    (12,656)   17,671    (15,223)
Remeasurements of post-retirement benefits   (216)   (2,317)   422    (3,201)
Items that may be subsequently reclassified to net income:            
Cumulative translation adjustment   6,066    (2,580)   14,910    (3,345)
             
Total other comprehensive income (loss) for the period   6,715    (17,553)   33,003    (21,769)
             
Comprehensive income (loss) for the period   8,359    (7,606)   36,224    (4,873)
             


 
Kruger Products L.P.
Unaudited Condensed Consolidated Statement of Cash Flows
(thousands of Canadian dollars)
            
 3-month
period ended
July 1, 2018
  3-month
period ended
June 25, 2017
  6-month
period ended
July 1, 2018
  6-month
period ended
June 25, 2017
 
 $  $  $  $ 
Cash flows from (used in) operating activities           
Net income for the period  1,644    9,947    3,221    16,896 
Items not affecting cash           
Depreciation  12,568    12,316    25,383    24,064 
Amortization   438    249    733    489 
Loss (gain) on sale of property, plant and equipment  -     -     434    (2)
Change in amortized cost of Partnership units liability  (1,962)   2,531    716    5,060 
Foreign exchange loss (gain)  898    (513)   657    (1,097)
Change in fair value of derivatives  285    -     (364)   -  
Interest expense  12,498    10,757    23,811    21,021 
Pension and post-retirement benefits  3,575    2,513    6,919    5,026 
Provisions   13    94    61    338 
Income taxes  410    2,150    (640)   4,764 
Gain on sale of non-financial assets  7    (81)   (208)   (68)
Total items not affecting cash  28,730    30,016    57,502    59,595 
            
Net change in non-cash working capital   (4,279)   (2,229)   (40,900)   (31,089)
Contributions to pension and post-retirement benefit plans  (4,152)   (3,933)   (8,139)   (7,671)
Provisions paid  (206)   (116)   (247)   (450)
Income tax payments  (997)   (1,547)   (1,349)   (3,054)
            
Net cash from operating activities  20,740    32,138    10,088    34,227 
            
Cash flows from (used in) investing activities           
Purchases of property, plant and equipment  (12,600)   (25,511)   (28,318)   (38,245)
Capitalized interest paid  -     (159)   -     (381)
Government assistance received  11    2,033    11    2,949 
Purchases of software  (1,025)   -     (1,025)   -  
Proceeds on sale of property, plant and equipment  (7)   127    324    1,170 
            
Net cash used in investing activities  (13,621)   (23,510)   (29,008)   (34,507)
            
Cash flows from (used in) financing activities           
Proceeds from long-term debt  157,063    (1,245)   195,113    26,770 
Repayment of long-term debt  (126,823)   (375)   (127,108)   (501)
Payment of deferred financing fees  (3,685)   (3)   (3,917)   (12)
Interest paid on long-term debt  (13,636)   (8,553)   (16,876)   (11,111)
Distributions and advances paid, net  (5,740)   (8,711)   (12,765)   (17,729)
            
Net cash from (used in) financing activities  7,179    (18,887)   34,447    (2,583)
            
Effect of exchange rate changes on cash and cash equivalents held in foreign currency  157    (31)   479    (87)
            
Increase (decrease) in cash and cash equivalents during the period  14,455    (10,290)   16,006    (2,950)
            
Cash and cash equivalents - Beginning of period  1,337    34,844    (214)   27,504 
            
Cash and cash equivalents - End of period  15,792    24,554    15,792    24,554 
            


 
Kruger Products L.P.
Segment and Geographic Results
(thousands of Canadian dollars)
             
 3-month
period ended
July 1, 2018
  3-month
period ended
June 25, 2017
  6-month
period ended
July 1, 2018
  6-month
period ended
June 25, 2017
  
 $  $  $  $  
             
Segment Information            
             
Segment Revenue            
Consumer  277,495    252,152    545,191    491,079  
AFH  59,584    59,919    113,109    108,593  
Other  1,694    2,317    4,208    3,987  
             
Total segment revenue  338,773    314,388    662,508    603,659  
             
Segment Adjusted EBITDA            
Consumer  32,203    34,902    62,074    67,874  
AFH  (3,102)   2,333    (3,433)   2,988  
Other  (2,314)   121    (4,897)   276  
             
Total segment Adjusted EBITDA  26,787    37,356    53,744    71,138  
             
Reconciliation to Net Income:            
             
Depreciation and amortization  13,007    12,565    26,116    24,553  
Interest expense  12,498    10,757    23,811    21,021  
Change in amortized cost of Partnership units liability  (1,962)   2,531    716    5,060  
Change in fair value of derivatives  285    -    (364)   -  
(Gain) loss on sale of property, plant and equipment  -    -    434    (2) 
(Gain) loss on sale of non-financial assets  7    (81)   (208)   (68) 
Restructuring costs, net  -    -    1    11  
Foreign exchange (gain) loss  898    (513)   657    (1,097) 
             
Income before income taxes  2,054    12,097    2,581    21,660  
             
Income taxes  410    2,150    (640)   4,764  
             
Net income   1,644    9,947    3,221    16,896  
             
Geographic Revenue            
             
Canada  202,340    187,783    390,993    361,660  
U.S.  116,352    114,904    231,904    219,553  
Mexico  20,081    11,701    39,611    22,446  
             
Total revenue  338,773    314,388    662,508    603,659  
             


 
KP Tissue Inc.
Unaudited Condensed Statement of Financial Position
(thousands of Canadian dollars)
      
 July 1, 2018  December 31, 2017 
 $  $ 
Assets     
      
Current assets     
Distributions receivable  1,674    1,658 
Receivable from Partnership  94    -  
Income tax recoverable  1,108    826 
   2,876    2,484 
      
Non-current assets     
Investment in associate  98,490    98,674 
      
Total Assets  101,366    101,158 
      
Liabilities     
      
Current liabilities     
Dividend payable  1,674    1,658 
Payable to Partnership  -     52 
Current portion of advances from Partnership  1,005    309 
   2,679    2,019 
Non-current liabilities     
Advances from Partnership  -     731 
Deferred income taxes   1,982    1,483 
      
Total liabilities  4,661    4,233 
      
Equity     
      
Common shares  16,071    15,014 
Contributed surplus   144,819    144,819 
Deficit  (78,734)   (74,952)
Accumulated other comprehensive income  14,549    12,044 
      
Total equity  96,705    96,925 
      
Total liabilities and equity  101,366    101,158 
      


 
KP Tissue Inc.
Unaudited Condensed Statement of Comprehensive Income (Loss)
(thousands of Canadian dollars, except share and per share amounts)
            
 3-month
 period ended
 July 1, 2018
  3-month
 period ended
 June 25, 2017
  6-month
 period ended
 July 1, 2018
  6-month
 period ended
 June 25, 2017
 
 $  $  $  $ 
            
Equity Income (loss)  (1,195)   115    (2,397)   (248)
            
Dilution gain   46    47    89    97 
            
Income (loss) before income taxes  (1,149)   162    (2,308)   (151)
            
Income taxes  180    752    (141)   1,000 
            
Net loss for the period  (1,329)   (590)   (2,167)   (1,151)
            
Other comprehensive income (loss)           
net of tax expense (recovery)           
Items that will not be reclassified to net loss:           
Remeasurements of pensions   116    (1,771)   2,448    (2,130)
Remeasurements of post-retirement benefits   (30)   (227)   59    (314)
Items that may be subsequently reclassified to net loss:           
Cumulative translation adjustment   1,033    (447)   2,505    (619)
            
Total other comprehensive income (loss) for the period  1,119    (2,445)   5,012    (3,063)
            
Comprehensive income (loss) for the period  (210)   (3,035)   2,845    (4,214)
            
Basic loss per share  (0.14)   (0.06)   (0.23)   (0.13)
            
Weighted average number of shares outstanding  9,291,212    9,144,390    9,268,192    9,130,890 
            


 
KP Tissue Inc.
Unaudited Condensed Statement of Cash Flows
(thousands of Canadian dollars)
            
 3-month
period ended
July 1, 2018
  3-month
period ended
June 25, 2017
  6-month
period ended
July 1, 2018
  6-month
period ended
June 25, 2017
 
 $  $  $  $ 
Cash flows from (used in) operating activities           
Net loss for the period  (1,329)   (590)   (2,167)   (1,151)
Items not affecting cash           
Equity (income) loss  1,195    (115)   2,397    248 
Dilution gain   (46)   (47)   (89)   (97)
Income taxes  180    752    (141)   1,000 
Total items not affecting cash  1,329    590    2,167    1,151 
            
Net change in non-cash working capital   -    -    -    697 
Tax payments  (30)   (525)   (274)   (1,774)
Tax Distribution received  -    -    -    481 
Advances received  30    525    274    596 
            
Net cash from (used in) operating activities  -    -    -    - 
            
Cash flows from investing activites           
Partnership unit distributions received  1,157    1,192    2,301    2,368 
            
Net cash from investing activities  1,157    1,192    2,301    2,368 
            
Cash flows used in financing activities           
Dividends paid  (1,157)   (1,192)   (2,301)   (2,368)
            
Net cash used in financing activities  (1,157)   (1,192)   (2,301)   (2,368)
            
Increase (decrease) in cash and cash equivalents during the period  -    -    -    - 
            
Cash and cash equivalents - Beginning of period  -    -    -    - 
            
Cash and cash equivalents - End of period  -    -    -    - 

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