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KP Tissue Inc.

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KP Tissue Releases Third Quarter 2017 Financial Results

Revenue Growth and Continuing Pulp Price Headwinds

MISSISSAUGA, ONTARIO--(Marketwired - Nov. 8, 2017) - KP Tissue Inc. (KPT) (TSX:KPT) reports the Q3 2017 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 16.0% interest in KPLP.

KPLP Q3 2017 Business and Financial Highlights

  • Revenue increased by 7.5% to $336.3 million in Q3 2017 compared to Q3 2016
  • Adjusted EBITDA was $39.4 million in Q3 2017 compared to $45.6 million in Q3 2016
  • TAD Products sales and Adjusted EBITDA contribution continued to be strong, in line with previously set targets
  • Successful start-up of new Paper Machine #8 and a new converting line in Crabtree, Quebec site
  • Declared a quarterly dividend of $0.18 per share to be paid on January 15, 2018

"Third quarter results were in-line with our expectations, however they reflect the continued negative impact of rising pulp prices which have reached record levels, and also higher freight costs driven by the recent hurricanes in the southern U.S., said Mario Gosselin, CEO of KP Tissue and KPLP.

"Our new paper machine in Quebec started production during the third quarter, and as planned we incurred start-up costs. The project was completed on time and on budget, and we anticipate that it will positively contribute to our Away-from-Home business starting in the first quarter of Fiscal 2018.

"The selling price increase announced in the Canadian market in July has started to take effect in the fourth quarter. Given the further escalation in pulp prices, Adjusted EBITDA for Q4 2017 is expected to decrease compared to Q4 2016 Adjusted EBITDA of $42.9 million," concluded Mr. Gosselin.

KPLP Q3 2017 Financial Results

Revenue in Q3 2017 was $336.3 million, compared to $312.8 million in Q3 2016, an increase of $23.5 million or 7.5%. The increase in revenue was primarily due to higher sales volume, partially offset by the unfavourable impact of foreign exchange on U.S. dollar sales.

Cost of sales in Q3 2017 increased to $290.8 million from $256.8 million in Q3 2016, primarily due to higher sales volumes, a significant increase in fibre costs, as well as higher freight costs and PM#8 project start-up costs, partially offset by the favourable impact of foreign exchange on U.S. dollar denominated costs. As a percentage of revenue, cost of sales were 86.5% in Q3 2017 compared to 82.1% in Q3 2016.

Selling, general and administrative (SG&A) expenses in Q3 2017 were $20.7 million, compared to $22.7 million in Q3 2016. The decrease was primarily due to the timing of spend and cost reduction initiatives. As a percentage of revenue, SG&A expenses were 6.2% in Q3 2017, compared to 7.3% in Q3 2016.

Adjusted EBITDA in Q3 2017 was $39.4 million, compared to $45.6 million in Q3 2016, lower by $6.2 million or 13.6%, primarily due to significantly higher fibre costs, increased freight costs, and start-up costs, partially offset by increased sales volume and lower SG&A costs.

Net income in Q3 2017 was $16.5 million, compared to $21.6 million in Q3 2016, primarily due to lower Adjusted EBITDA of $6.2 million and higher depreciation expense of $2.3 million. These items were partially offset by a change in foreign exchange gain of $2.0 million.

Total liquidity, representing cash and cash equivalents and availability under the credit line within covenant limitations, was $76.0 million as of September 24, 2017, compared to $80.3 million as of June 25, 2017.

KPT Q3 2017 Financial Results

KPT incurred a net loss of $0.1 million in Q3 2017. Included in the net loss was $2.6 million representing KPT's share of KPLP's income. The income was reduced by depreciation expense of $1.4 million related to adjustments to carrying amounts on acquisition and income tax expense of $1.3 million.

Dividends on Common Shares 

The Board of Directors of KPT declared a quarterly dividend of $0.18 per share to be paid on January 15, 2018 to shareholders of record at the close of business on December 29, 2017.

Additional Information

For additional information please refer to Management's Discussion and Analysis (MD&A) of KPT and KPLP for the third quarter ended September 24, 2017 available on SEDAR at www.sedar.com or our website at www.kptissueinc.com.

Third Quarter Results Conference Call Information

KPT will hold its third quarter conference call on Wednesday, November 8, 2017 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, November 15, 2017 by dialing 800-585-8367 or 416-621-4642 and entering passcode 84517935.

The replay of the webcast will remain available on the website until midnight, November 15, 2017.

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 16.0% 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 third quarter ended September 24, 2017 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. 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 information is based on certain key expectations and assumptions made by KPT, 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 believes 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 information 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 Q4 2017 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, 2017 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 TAD Project; 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, restrictive covenants; interest rate and refinancing risk; information technology; cyber-security; insurance; internal controls; and trade related risk.

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.

   
Kruger Products L.P.  
Unaudited Condensed Consolidated Statement of Financial Position  
(thousands of Canadian dollars)  
             
    September 24, 2017     December 31, 2016  
    $     $  
Assets          
Current assets          
  Cash and cash equivalents 26,997     36,511  
  Trade and other receivables 126,591     123,095  
  Receivables from related parties 69     185  
  Advances to partners 6,417     5,465  
  Inventories 174,003     179,543  
  Income tax recoverable 293     423  
  Prepaid expenses 10,503     7,286  
    344,873     352,508  
Non-current assets          
  Property, plant and equipment 748,458     762,270  
  Other long-term assets 6,150     6,075  
  Goodwill 160,939     160,939  
  Intangible assets 14,955     15,270  
  Deferred income taxes 33,359     39,913  
Total assets 1,308,734     1,336,975  
             
Liabilities          
Current liabilities          
  Bank indebtedness -     9,007  
  Trade and other payables 196,459     201,477  
  Payables to related parties 5,089     3,606  
  Income tax payable 592     1,779  
  Distributions payable 10,324     10,148  
  Current portion of provisions 757     1,885  
  Current portion of long-term debt 186,695     8,859  
    399,916     236,761  
Non-current liabilities          
  Long-term debt 238,487     415,379  
  Provisions 6,969     6,487  
  Pensions 112,671     92,646  
  Post-retirement benefits 57,881     57,162  
  Liabilities to non-unitholders 815,924     808,435  
  Current portion of Partnership units liability 5,571     8,611  
  Long-term portion of Partnership units liability 135,903     137,296  
  Total Partnership units liability 141,474     145,907  
Total liabilities 957,398     954,342  
             
Equity          
  Partnership units 351,381     336,576  
  Deficit (61,775 )   (42,792 )
  Accumulated other comprehensive income 61,730     88,849  
Total equity 351,336     382,633  
Total equity and liabilities 1,308,734     1,336,975  
           
   
Kruger Products L.P.  
Unaudited Condensed Consolidated Statement of Comprehensive Income (Loss)  
(thousands of Canadian dollars)  
                         
                         
    3-month
period ended
September 24, 2017
    3-month
period ended
September 25, 2016
    9-month
period ended
September 24, 2017
    9-month
period ended
September 25, 2016
 
    $     $     $     $  
                         
Revenue   336,284     312,823     939,943     888,270  
                         
Expenses                        
  Cost of sales   290,777     256,823     802,108     747,348  
  Selling, general and administrative expenses   20,726     22,645     66,467     66,283  
  Gain on sale of non-financial assets   (12 )   (395 )   (80 )   (395 )
  Restructuring costs, net   (245 )   25     (234 )   418  
                         
Operating income   25,038     33,725     71,682     74,616  
                         
  Interest expense   10,533     11,192     31,554     33,327  
  Other (income) expense   (2,103 )   813     1,860     (307 )
                         
Income before income taxes   16,608     21,720     38,268     41,596  
                         
Income taxes   158     162     4,922     1,612  
                         
Net income for the period   16,450     21,558     33,346     39,984  
                         
Other comprehensive loss                        
  Items that will not be reclassified to net income:                        
  Remeasurements of pensions   (5,424 )   (20,097 )   (20,647 )   (63,986 )
  Remeasurements of post-retirement benefits   2,929     (2,885 )   (272 )   (4,519 )
  Items that may be subsequently reclassified to net income:                        
  Available-for-sale investment   -     -     -     (290 )
  Cumulative translation adjustment   (23,774 )   3,969     (27,119 )   (16,858 )
                         
Total other comprehensive loss for the period   (26,269 )   (19,013 )   (48,038 )   (85,653 )
                         
Comprehensive income (loss) for the period   (9,819 )   2,545     (14,692 )   (45,669 )
                         
   
Kruger Products L.P.  
Unaudited Condensed Consolidated Statement of Cash Flows  
(thousands of Canadian dollars)  
                         
                         
    3-month
period ended
September 24, 2017
    3-month
period ended
September 25, 2016
    9-month
period ended
September 24, 2017
    9-month
period ended
September 25, 2016
 
    $     $     $     $  
Cash flows from (used in) operating activities                        
Net income for the period   16,450     21,558     33,346     39,984  
Items not affecting cash                        
  Depreciation   14,350     12,007     38,414     33,775  
  Amortization   286     296     775     876  
  Gain on sale of property, plant and equipment   -     -     (2 )   (3 )
  Change in amortized cost of Partnership units liability   (882 )   -     4,178     1,234  
  Gain on sale of investment   -     -     -     (324 )
  Foreign exchange (gain) loss   (1,221 )   813     (2,318 )   (1,217 )
  Interest expense   10,533     11,192     31,554     33,327  
  Pension and post retirement benefits   2,513     2,487     7,539     7,805  
  Provisions   (127 )   392     211     1,191  
  Income taxes   158     162     4,922     1,612  
  Gain on sale of non-financial assets   (12 )   (395 )   (80 )   (395 )
  Total items not affecting cash   25,598     26,954     85,193     77,881  
                         
Net change in non-cash working capital   5,130     (6,009 )   (25,959 )   (10,471 )
Contributions to pension and post-retirement benefit plans   (3,735 )   (2,613 )   (11,406 )   (13,918 )
Provisions paid   (565 )   (334 )   (1,015 )   (1,452 )
Income tax payments   (115 )   (514 )   (3,169 )   (1,887 )
                         
Net cash from operating activities   42,763     39,042     76,990     90,137  
                         
Cash flows from (used in) investing activities                        
Purchases of property, plant and equipment   (12,033 )   (19,965 )   (50,278 )   (58,666 )
Capitalized interest paid   (116 )   -     (497 )   -  
Proceeds on sale of investment   -     -     -     1,439  
Government assistance received   923     -     3,872     1,209  
Purchases of software   (460 )   -     (460 )   (71 )
Proceeds on sale of property, plant and equipment   14     535     1,184     539  
                         
Net cash used in investing activities   (11,672 )   (19,430 )   (46,179 )   (55,550 )
                         
Cash flows from (used in) financing activities                        
Proceeds from long-term debt   (5,893 )   4,204     20,877     4,995  
Repayment of long-term debt   (4,749 )   (596 )   (5,250 )   (8,106 )
Payment of deferred financing fees   -     (376 )   (12 )   (711 )
Interest paid on long-term debt   (7,819 )   (8,538 )   (18,930 )   (18,294 )
Distributions and advances paid, net   (8,263 )   (4,806 )   (25,992 )   (16,883 )
                         
Net cash used in financing activities   (26,724 )   (10,112 )   (29,307 )   (38,999 )
                         
Effect of exchange rate changes on cash and cash equivalents held in foreign currency   (1,924 )   (80 )   (2,011 )   (1,519 )
                         
Increase (decrease) in cash and cash equivalents during the period   2,443     9,420     (507 )   (5,931 )
                         
Cash and cash equivalents - Beginning of period   24,554     10,104     27,504     25,455  
                         
Cash and cash equivalents - End of period   26,997     19,524     26,997     19,524  
                         
   
Kruger Products L.P.  
Segment and Geographic Results  
(thousands of Canadian dollars)  
                         
    3-month
period ended
September 24, 2017
    3-month
period ended
September 25, 2016
    9-month
period ended
September 24, 2017
    9-month
period ended
September 25, 2016
 
    $     $     $     $  
                         
Segment Information                        
                         
Segment Revenue                        
  Consumer   272,917     248,792     763,996     708,868  
  AFH   62,497     59,411     171,090     167,513  
  Other   870     4,620     4,857     11,889  
                         
Total segment revenue   336,284     312,823     939,943     888,270  
                         
Segment Adjusted EBITDA                        
  Consumer   38,077     42,907     105,951     104,433  
  AFH   1,852     2,425     4,840     4,230  
  Other   (512 )   326     (236 )   948  
                         
Total segment Adjusted EBITDA   39,417     45,658     110,555     109,611  
                         
Reconciliation to Net Income:                        
                         
Depreciation and amortization   14,636     12,303     39,189     34,651  
Interest expense   10,533     11,192     31,554     33,327  
Change in amortized cost of Partnership units liability   (882 )   -     4,178     1,234  
Gain on sale of property, plant and equipment   -     -     (2 )   (3 )
Gain on sale of non-financial assets   (12 )   (395 )   (80 )   (395 )
Restructuring costs, net   (245 )   25     (234 )   418  
Foreign exchange (gain) loss   (1,221 )   813     (2,318 )   (1,217 )
                         
Income before income taxes   16,608     21,720     38,268     41,596  
                         
Income taxes   158     162     4,922     1,612  
                         
Net income   16,450     21,558     33,346     39,984  
                         
Geographic Revenue                        
                         
Canada   209,289     195,186     570,949     539,221  
U.S.   113,157     105,114     332,710     311,517  
Mexico   13,838     12,523     36,284     37,532  
                         
Total revenue   336,284     312,823     939,943     888,270  
                         
   
KP Tissue Inc.  
Unaudited Condensed Statement of Financial Position  
(thousands of Canadian dollars)  
             
    September 24, 2017     December 31, 2016  
    $     $  
Assets            
             
Current assets            
  Distributions receivable   1,653     1,636  
  Receivable from Partnership   -     426  
  Income tax recoverable   1,031     -  
    2,684     2,062  
             
Non-current assets            
  Investment in associate   104,650     117,349  
             
Total Assets   107,334     119,411  
             
Liabilities            
             
Current liabilities            
  Dividend payable   1,653     1,636  
  Payable to Partnership   52     -  
  Advances from Partnership   1,040     914  
  Income tax payable   -     884  
    2,745     3,434  
Non-current liabilities            
  Deferred income taxes   1,946     893  
             
Total liabilities   4,691     4,327  
             
Equity            
             
  Common shares   14,573     13,176  
  Contributed surplus   144,819     144,819  
  Deficit   (67,862 )   (58,729 )
  Accumulated other comprehensive income   11,113     15,818  
             
Total equity   102,643     115,084  
             
Total liabilities and equity   107,334     119,411  
             
     
KP Tissue Inc.    
Unaudited Condensed Statement of Comprehensive Loss    
(thousands of Canadian dollars, except share and per share amounts)    
                           
    3-month
period ended
September 24, 2017
    3-month
period ended
September 25, 2016
    9-month
period ended
September 24, 2017
    9-month
period ended
September 25, 2016
   
    $     $     $     $    
                           
Equity income   1,179     2,010     931     2,101    
                           
Dilution gain   39     58     136     142    
                           
Income before income taxes   1,218     2,068     1,067     2,243    
                           
Income taxes   1,288     1,299     2,288     3,557    
                           
Net income (loss) for the period   (70 )   769     (1,221 )   (1,314 )  
                           
Other comprehensive loss                          
  net of tax expense (recovery)                          
  Items that will not be reclassified to net income (loss):                          
  Remeasurements of pensions   (755 )   (2,825 )   (2,885 )   (9,034 )  
  Remeasurements of post-retirement benefits   287     (285 )   (27 )   (447 )  
  Items that may be subsequently reclassified to net income (loss):                          
  Available-for-sale investment   -     -     -     (41 )  
  Cumulative translation adjustment   (4,086 )   711     (4,705 )   (3,495 )  
                           
Total other comprehensive loss for the period   (4,554 )   (2,399 )   (7,617 )   (13,017 )  
                           
Comprehensive loss for the period   (4,624 )   (1,630 )   (8,838 )   (14,331 )  
                           
Basic earnings (loss) per share   (0.01 )   0.08     (0.13 )   (0.15 )  
                           
Weighted average number of shares outstanding   9,176,138     9,051,321     9,146,312     9,021,008    
                           
   
KP Tissue Inc.  
Unaudited Condensed Statement of Cash Flows  
(thousands of Canadian dollars)  
                         
    3-month
period ended
September 24, 2017
    3-month
period ended
September 25, 2016
    9-month
period ended
September 24, 2017
    9-month
period ended
September 25, 2016
 
    $     $     $     $  
Cash flows from (used in) operating activities                        
Net income (loss) for the period   (70 )   769     (1,221 )   (1,314 )
Items not affecting cash                        
  Equity income   (1,179 )   (2,010 )   (931 )   (2,101 )
  Dilution gain   (39 )   (58 )   (136 )   (142 )
  Income taxes   1,288     1,299     2,288     3,557  
  Total items not affecting cash   70     (769 )   1,221     1,314  
                         
Net change in non-cash working capital   (219 )   -     478     -  
Tax payments   (225 )   -     (1,999 )   (205 )
Tax Distribution received   -     -     481     -  
Advances received   444     -     1,040     205  
                         
Net cash from (used in) operating activities   -     -     -     -  
                         
Cash flows from investing activites                        
Partnership unit distributions received   1,218     1,180     3,586     3,728  
                         
Net cash from investing activities   1,218     1,180     3,586     3,728  
                         
Cash flows used in financing activities                        
Dividends paid   (1,218 )   (1,180 )   (3,586 )   (3,728 )
                         
Net cash used in financing activities   (1,218 )   (1,180 )   (3,586 )   (3,728 )
                         
Increase (decrease) in cash and cash equivalents during the period   -     -     -     -  
                         
Cash and cash equivalents - Beginning of period   -     -     -     -  
                         
Cash and cash equivalents - End of period   -     -     -     -  
                         

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

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

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