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KP Tissue Inc.

Exchange: TSX Exchange | Oct 17, 2017, 5:32 AM EDT

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KP Tissue Releases Second Quarter 2017 Financial Results

Continued improvement despite pulp price headwinds

MISSISSAUGA, ONTARIO--(Marketwired - Aug. 9, 2017) - KP Tissue Inc. (KPT) (TSX:KPT) reports the Q2 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 Q2 2017 Business and Financial Highlights

  • Revenue increased by 6.3% to $314.4 million in Q2 2017 compared to Q2 2016
  • Adjusted EBITDA was $37.3 million in Q2 2017 compared to $35.9 million in Q2 2016, up 3.9%
  • TAD Products sales and profits continue to be strong, in line with previously set targets
  • AFH business segment improved profitability
  • Declared a quarterly dividend of $0.18 per share to be paid on October 16, 2017

We are pleased with our second quarter Adjusted EBITDA performance of $37.3 million, despite the continued upward trend of pulp market prices to near peak levels in Canadian dollars. Supported by new customers and higher manufacturing efficiency, TAD products sales and profits continue to meet our targets in the U.S., while the Away-from-Home business started to get the benefits from new production lines," said Mario Gosselin, CEO of KP Tissue and KPLP.

"We are pleased by the progress achieved in Crabtree with our new paper machine project, representing a total investment of $55 million. The project is on time and on budget, and in the third quarter we will start the commissioning process and will incur some start-up costs. Considering the commercial ramp-up phase in 2017, we expect to achieve a positive contribution from the project in the first quarter of 2018.

"A selling price increase to our Canadian retail customers was announced in late July 2017 and will take effect in the fourth quarter. This price increase will partially offset a double digit increase in pulp market prices over the past year as well as increases in other commodity costs in Canadian dollars.

"Adjusted EBITDA for Q3 2017 is expected to decrease over Q3 2016 due to higher input costs but increase sequentially over Q2 2017 due to higher promotional activities in Q3," concluded Mr. Gosselin.

KPLP Q2 2017 Financial Results

Revenue in Q2 2017 was $314.4 million, compared to $295.8 million in Q2 2016, an increase of $18.6 million or 6.3%. The increase in revenue was primarily due to higher sales volume and the favourable impact of foreign exchange on U.S. dollar sales.

Cost of sales in Q2 2017 increased to $267.1 million, compared to $249.9 million in Q2 2016, primarily due to higher sales volumes, an increase in fibre and natural gas prices and the unfavourable impact of foreign exchange on U.S. dollar denominated costs, as well as higher freight and warehousing costs, partially offset by cost reduction initiatives and the impact of capital projects. As a percentage of revenue, cost of sales were 85.0% in Q2 2017 compared to 84.5% in Q2 2016.

Selling, general and administrative (SG&A) expenses in Q2 2017 were $22.5 million, compared to $22.0 million in Q2 2016. The increase was primarily due to higher selling expenses related to higher sales volume and the unfavourable impact of foreign exchange. As a percentage of revenue, SG&A expenses were 7.2% in Q2 2017, compared to 7.4% in Q2 2016.

Adjusted EBITDA in Q2 2017 was $37.3 million, compared to $35.9 million in Q2 2016, primarily due to increased sales volume and the benefit of cost reduction initiatives and capital projects, partially offset by higher commodity, logistics and SG&A costs and the unfavourable impact of foreign exchange.

Net income in Q2 2017 was $9.9 million, compared to $12.0 million in Q2 2016, primarily due to an increase in the change in amortized cost of Partnership units liability of $2.5 million and an increase in tax expense of $1.3 million. These increases were partially offset by higher Adjusted EBITDA of $1.4 million.

Total liquidity, representing cash and cash equivalents and availability under the credit line within covenant limitations, was $80.3 million as of June 25, 2017, compared to $88.6 million as of March 26, 2017.

KPT Q2 2017 Financial Results

KPT incurred a net loss of $0.6 million in Q2 2017. Included in the net loss was $1.6 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 and income tax expense of $0.8 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 16, 2017 to shareholders of record at the close of business on September 29, 2017.

Additional Information

For additional information please refer to Management's Discussion and Analysis (MD&A) of KPT and KPLP for the second quarter ended June 25, 2017 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 Wednesday, August 9, 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, September 9, 2017 by dialing 800-585-8367 or 416-621-4642 and entering passcode 47442643.

The replay of the webcast will remain available on the website until midnight, September 9, 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 second quarter ended June 25, 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 start-up of the Crabtree paper machine in Q4 2017; 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 Q3 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)  
   
  June 25, 2017   December 31, 2016  
  $   $  
Assets        
Current assets        
  Cash and cash equivalents 28,286   36,511  
  Trade and other receivables 107,667   123,095  
  Receivables from related parties 273   185  
  Current portion of advances to partners 3,678   5,465  
  Inventories 187,199   179,543  
  Income tax recoverable 666   423  
  Prepaid expenses 11,679   7,286  
  339,448   352,508  
Non-current assets        
  Property, plant and equipment 778,072   762,270  
  Other long-term assets 5,900   6,075  
  Goodwill 160,939   160,939  
  Intangible assets 14,781   15,270  
  Deferred income taxes 35,506   39,913  
Total assets 1,334,646   1,336,975  
Liabilities        
Current liabilities        
  Bank indebtedness 3,732   9,007  
  Trade and other payables 180,883   201,477  
  Payables to related parties 3,756   3,606  
  Income tax payable 508   1,779  
  Distributions payable 10,259   10,148  
  Current portion of provisions 1,487   1,885  
  Current portion of long-term debt 8,754   8,859  
  209,379   236,761  
Non-current liabilities        
  Long-term debt 441,249   415,379  
  Provisions 6,878   6,487  
  Pensions 107,411   92,646  
  Post-retirement benefits 60,629   57,162  
  Liabilities to non-unitholders 825,546   808,435  
  Current portion of Partnership units liability 8,611   8,611  
  Long-term portion of Partnership units liability 133,745   137,296  
  Total Partnership units liability 142,356   145,907  
Total liabilities 967,902   954,342  
Equity        
  Partnership units 346,334   336,576  
  Deficit (65,094 ) (42,792 )
  Accumulated other comprehensive income 85,504   88,849  
Total equity 366,744   382,633  
Total equity and liabilities 1,334,646   1,336,975  
         
         
Kruger Products L.P.  
Unaudited Condensed Consolidated Statement of Comprehensive Loss  
(thousands of Canadian dollars)  
   
  3-month   3-month   6-month   6-month  
  period ended   period ended   period ended   period ended  
  June 25, 2017   June 26, 2016   June 25, 2017   June 26, 2016  
  $   $   $   $  
                 
Revenue 314,388   295,757   603,659   575,447  
                 
Expenses                
  Cost of sales 267,077   249,878   511,331   490,525  
  Selling, general and administrative expenses 22,520   21,986   45,741   43,638  
  Gain on sale of non-financial assets (81 ) -   (68 ) -  
  Restructuring costs, net -   393   11   393  
                 
Operating income 24,872   23,500   46,644   40,891  
                 
  Interest expense 10,757   10,921   21,021   22,135  
  Other (income) expense 2,018   (291 ) 3,963   (1,120 )
                 
Income before income taxes 12,097   12,870   21,660   19,876  
                 
Income taxes 2,150   834   4,764   1,450  
                 
Net income for the period 9,947   12,036   16,896   18,426  
                 
Other comprehensive loss                
  Items that will not be reclassified to net income:                
  Remeasurements of pensions (12,656 ) (27,120 ) (15,223 ) (43,889 )
  Remeasurements of post-retirement benefits (2,317 ) (1,755 ) (3,201 ) (1,634 )
  Items that may be subsequently reclassified to net income:                
  Available-for-sale investment -   -   -   (290 )
  Cumulative translation adjustment (2,580 ) (6,846 ) (3,345 ) (20,827 )
                 
Total other comprehensive loss for the period (17,553 ) (35,721 ) (21,769 ) (66,640 )
                 
Comprehensive loss for the period (7,606 ) (23,685 ) (4,873 ) (48,214 )
                 
                 
Kruger Products L.P.  
Unaudited Condensed Consolidated Statement of Cash Flows  
(thousands of Canadian dollars)  
   
  3-month   3-month   6-month   6-month  
  period ended   period ended   period ended   period ended  
  June 25, 2017   June 26, 2016   June 25, 2017   June 26, 2016  
  $   $   $   $  
Cash flows from (used in) operating activities                
Net income for the period 9,947   12,036   16,896   18,426  
Items not affecting cash                
  Depreciation 12,316   11,681   24,064   21,768  
  Amortization 249   296   489   580  
  Gain on sale of property, plant and equipment -   (4 ) (2 ) (3 )
  Change in amortized cost of Partnership units liability 2,531   -   5,060   1,234  
  Gain on sale of investment -   -   -   (324 )
  Foreign exchange gain (513 ) (291 ) (1,097 ) (2,030 )
  Interest expense 10,757   10,921   21,021   22,135  
  Pension and post retirement benefits 2,513   2,659   5,026   5,318  
  Provisions 94   658   338   799  
  Income taxes 2,150   834   4,764   1,450  
  Gain on sale of non-financial assets (81 ) -   (68 ) -  
  Total items not affecting cash 30,016   26,754   59,595   50,927  
Net change in non-cash working capital (2,229 ) 12,177   (31,089 ) (4,462 )
Contributions to pension and post-retirement benefit plans (3,933 ) (5,462 ) (7,671 ) (11,305 )
Provisions paid (116 ) (642 ) (450 ) (1,118 )
Income tax payments (1,547 ) (508 ) (3,054 ) (1,373 )
Net cash from operating activities 32,138   44,355   34,227   51,095  
Cash flows from (used in) investing activities                
Purchases of property, plant and equipment (25,511 ) (22,512 ) (38,245 ) (38,701 )
Capitalized interest paid (159 ) -   (381 ) -  
Proceeds on sale of investment -   -   -   1,439  
Government assistance received 2,033   -   2,949   1,209  
Purchases of software -   (2 ) -   (71 )
Proceeds on sale of property, plant and equipment 127   4   1,170   4  
Net cash used in investing activities (23,510 ) (22,510 ) (34,507 ) (36,120 )
Cash flows from (used in) financing activities                
Proceeds from long-term debt (1,245 ) -   26,770   791  
Repayment of long-term debt (375 ) (306 ) (501 ) (7,510 )
Payment of deferred financing fees (3 ) (5 ) (12 ) (335 )
Interest paid on long-term debt (8,553 ) (8,737 ) (11,111 ) (9,756 )
Distributions and advances paid, net (8,711 ) (5,530 ) (17,729 ) (12,077 )
Net cash used in financing activities (18,887 ) (14,578 ) (2,583 ) (28,887 )
Effect of exchange rate changes on cash and cash equivalents held in foreign currency
(31

)

(1,143

)

(87

)

(1,439

)
Increase (decrease) in cash and cash equivalents during the period (10,290 ) 6,124   (2,950 ) (15,351 )
Cash and cash equivalents - Beginning of period 34,844   3,980   27,504   25,455  
Cash and cash equivalents - End of period 24,554   10,104   24,554   10,104  
                 
                 
Kruger Products L.P.  
Segment and Geographic Results  
(thousands of Canadian dollars)  
   
  3-month   3-month   6-month   6-month  
  period ended   period ended   period ended   period ended  
  June 25, 2017   June 26, 2016   June 25, 2017   June 26, 2016  
  $   $   $   $  
                 
Segment Information                
                 
Segment Revenue                
  Consumer 252,152   231,924   491,079   460,076  
  AFH 59,919   59,051   108,593   108,102  
  Other 2,317   4,782   3,987   7,269  
Total segment revenue 314,388   295,757   603,659   575,447  
                 
Segment Adjusted EBITDA                
  Consumer 34,902   33,719   67,874   61,526  
  AFH 2,333   1,775   2,988   1,805  
  Other 121   372   276   622  
Total segment Adjusted EBITDA 37,356   35,866   71,138   63,953  
Reconciliation to Net Income:                
Depreciation and amortization 12,565   11,977   24,553   22,348  
Interest expense 10,757   10,921   21,021   22,135  
Change in amortized cost of Partnership units liability 2,531   -   5,060   1,234  
Gain on sale of property, plant and equipment -   (4 ) (2 ) (3 )
Gain on sale of non-financial assets (81 ) -   (68 ) -  
Restructuring costs -   393   11   393  
Foreign exchange gain (513 ) (291 ) (1,097 ) (2,030 )
Income before income taxes 12,097   12,870   21,660   19,876  
Income taxes 2,150   834   4,764   1,450  
Net income 9,947   12,036   16,896   18,426  
                 
Geographic Revenue                
                 
Canada 187,783   180,263   361,660   344,035  
U.S. 114,904   102,617   219,553   206,403  
Mexico 11,701   12,877   22,446   25,009  
Total revenue 314,388   295,757   603,659   575,447  
                 
                 
KP Tissue Inc.  
Unaudited Condensed Statement of Financial Position  
(thousands of Canadian dollars)  
         
  June 25, 2017   December 31, 2016  
  $   $  
Assets        
         
Current assets        
  Distributions receivable 1,647   1,636  
  Receivable from Partnership -   426  
  Income tax recoverable 629   -  
  2,276   2,062  
Non-current assets        
  Investment in associate 109,750   117,349  
Total Assets 112,026   119,411  
         
Liabilities        
         
Current liabilities        
  Dividend payable 1,647   1,636  
  Payable to Partnership 271   -  
  Current portion of advances from Partnership 596   914  
  Income tax payable -   884  
  2,514   3,434  
Non-current liabilities        
  Deferred income taxes 1,021   893  
Total liabilities 3,535   4,327  
         
Equity        
  Common shares 14,116   13,176  
  Contributed surplus 144,819   144,819  
  Deficit (65,643 ) (58,729 )
  Accumulated other comprehensive income 15,199   15,818  
Total equity 108,491   115,084  
Total liabilities and equity 112,026   119,411  
         
         
KP Tissue Inc.  
Unaudited Condensed Statement of Comprehensive Loss  
(thousands of Canadian dollars, except share and per share amounts)  
   
  3-month   3-month   6-month   6-month  
  period ended   period ended   period ended   period ended  
  June 25, 2017   June 26, 2016   June 25, 2017   June 26, 2016  
  $   $   $   $  
                 
Equity Income (loss) 115   469   (248 ) 91  
                 
Dilution gain 47   255   97   84  
Income (loss) before income taxes 162   724   (151 ) 175  
Income taxes 752   1,329   1,000   2,258  
                 
Net loss for the period (590 ) (605 ) (1,151 ) (2,083 )
                 
Other comprehensive loss                
  net of tax recovery                
  Items that will not be reclassified to net loss:                
  Remeasurements of pensions (1,771 ) (3,829 ) (2,130 ) (6,209 )
  Remeasurements of post-retirement benefits (227 ) (174 ) (314 ) (162 )
  Items that may be subsequently reclassified to net loss:                
  Available-for-sale investment -   -   -   (41 )
  Cumulative translation adjustment (447 ) (1,675 ) (619 ) (4,206 )
Total other comprehensive loss for the period (2,445 ) (5,678 ) (3,063 ) (10,618 )
Comprehensive loss for the period (3,035 ) (6,283 ) (4,214 ) (12,701 )
Basic loss per share (0.06 ) (0.07 ) (0.13 ) (0.23 )
                 
Weighted average number of shares outstanding 9,144,390   9,016,939   9,130,890   9,005,511  
                 
                 
KP Tissue Inc.  
Unaudited Condensed Statement of Cash Flows  
(thousands of Canadian dollars)  
                 
  3-month   3-month   6-month   6-month  
  period ended   period ended   period ended   period ended  
  June 25, 2017   June 26, 2016   June 25, 2017   June 26, 2016  
  $   $   $   $  
Cash flows from (used in) operating activities                
Net loss for the period (590 ) (605 ) (1,151 ) (2,083 )
Items not affecting cash                
  Equity (income) loss (115 ) (469 ) 248   (91 )
  Dilution gain (47 ) (255 ) (97 ) (84 )
  Income taxes 752   1,329   1,000   2,258  
  Total items not affecting cash 590   605   1,151   2,083  
Net change in non-cash working capital -   -   697   -  
Tax payments (525 ) -   (1,774 ) (205 )
Tax Distribution received -   -   481   -  
Advances received 525   -   596   205  
Net cash from (used in) operating activities -   -   -   -  
                 
Cash flows from investing activites                
Partnership unit distributions received 1,192   935   2,368   2,548  
Net cash from investing activities 1,192   935   2,368   2,548  
                 
Cash flows used in financing activities                
Dividends paid (1,192 ) (935 ) (2,368 ) (2,548 )
Net cash used in financing activities (1,192 ) (935 ) (2,368 ) (2,548 )
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:
KP Tissue Inc.
Francois Paroyan
General Counsel and Corporate Secretary
905.812.6936
francois.paroyan@krugerproducts.ca

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

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