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	-			-			-			-