KPT KP Tissue Inc

KP Tissue Inc. (KPT) (TSX: KPT) reports the Q3 2021 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 (AFH) market and continues to grow in the U.S. Consumer tissue business with the White Cloud® brand and premium private label products. KPT currently holds a 14.5% interest in KPLP.

KPLP Q3 2021 Business and Financial Highlights

• Revenue increased by $22.3 million or 6.0% to $391.4 million in Q3 2021 compared to $369.1 million in Q3 2020.
• Adjusted EBITDA was $40.3 million in Q3 2021 compared to $46.2 million in Q3 2020, a decrease of 12.8%, and improved sequentially from $37.3 million in Q2 2021.
• TAD Sherbrooke continues to run above the expected start-up curve.
• Declared a quarterly dividend of $0.18 per share to be paid on January 17, 2022

“Our solid revenue growth of 6% for the third quarter reflects pricing actions in our Canadian Consumer segment, combined with slightly higher volume and gradually improving commercial end-markets, along with the execution of our recovery plan in the Away-From-Home business. High inflationary costs and near-record pulp prices negatively impacted our Adjusted EBITDA compared to the same quarter last year, but the benefits of recent price increases resulted in a sequential improvement to $40.3 million for the quarter," stated KP Tissue’s Chief Executive Officer, Dino Bianco.

“Market share data in Canada for the most recent 52-week period further highlights the significant progress we have made since the beginning of 2020. In our market-leading categories we have grown bathroom tissue by 2.4 share points to 35.6% and facial tissue increased by 4.0 share points to 35.5%. In the paper towel category, we consolidated our strong second place through innovations and the introduction of new products, translating into gains of 2.6 share points to 23.2% with continued strong investments ahead.

“The Away-From-Home segment, which was hardest hit by the COVID-19 pandemic, showed further signs of recovery in the quarter with 20% year-over-year revenue growth supported in part by the faster re-opening of the U.S. economy. On the strength of higher sales volumes, more in-house paper production and cost-reduction initiatives, Adjusted EBITDA for this business turned positive in Q3 2021.

“Inflationary pressure and labour shortages are among the key challenges we will be facing in upcoming quarters. We are executing pricing actions across the business along with a more focused labour approach to manage our margins, while continuing to invest to grow the top-line in both Consumer and AFH. TAD Sherbrooke performance continues to be well ahead of our growth curve and a key enabler for future growth,” concluded Mr. Bianco.

OutlookWe are seeing activities and behaviour start to return to more pre-COVID levels in both the Consumer and Away-From-Home segments. However, cost inflation and lagged pricing in the fourth quarter are expected to impact results. Q4 2021 Adjusted EBITDA is therefore expected to be lower than Q3 2021 and higher than Q4 2020.

KPLP Q3 2021 Financial ResultsRevenue was $391.4 million in Q3 2021 compared to $369.1 million in Q3 2020, an increase of $22.3 million or 6.0%. The increase in revenue was due to a selling price increase in Consumer Canada, slightly higher sales volume in the Consumer segment compared to the year ago quarter, and an increase in sales volume in the AFH segment resulting from the beginning of COVID-19 related demand recovery. Revenue was unfavourably impacted by foreign exchange fluctuations on U.S. dollar sales.

Cost of sales was $345.6 million in Q3 2021 compared to $307.7 million in Q3 2020, an increase of $37.9 million or 12.3%. Manufacturing costs increased primarily due to higher sales volumes net of overhead absorption, increased pulp costs, labour shortages in Memphis manufacturing, higher depreciation expense and inflation. These increases were partially offset by the favourable impact of more in-house paper production in AFH and favourable foreign exchange fluctuations on U.S. dollar costs. Freight costs and warehousing expenses also increased compared to Q3 2020. As a percentage of revenue, cost of sales was 88.3% in Q3 2021 compared to 83.4% in Q3 2020.

Selling, general and administrative (SG&A) expenses were $29.0 million in Q3 2021 compared to $31.2 million in Q3 2020, a decrease of $2.2 million or 7.1%. The decrease was primarily due to a reduction in compensation related costs, the release of a COVID-19 related AFH accounts receivable provision recorded during 2020 and foreign exchange gains, partially offset by higher marketing expenses. As a percentage of revenue, SG&A expenses were 7.4% in Q3 2021 compared to 8.5% in Q3 2020.

Adjusted EBITDA was $40.3 million in Q3 2021 compared to $46.2 million in Q3 2020, a decrease of $5.9 million or 12.8%. The decrease was primarily due to the unfavourable impact of sales mix, higher pulp prices, inflation and higher freight rates and warehousing costs, partially offset by the net favourable impact of foreign exchange fluctuations and lower SG&A expenses.

Net loss was $9.3 million in Q3 2021 compared to net income of $18.5 million in Q3 2020, a decrease of $27.8 million. The decrease was primarily due to lower Adjusted EBITDA of $5.9 million, and higher other, interest and depreciation expenses, partially offset by a higher income tax recovery.

KPLP Q3 2021 Financing ActivityTotal liquidity, representing cash and availability under the revolving credit agreements, was $273.6 million as of September 30, 2021. In addition, $25.5 million of cash was held for the TAD Sherbrooke Project and $24.8 million of cash was held for the Sherbrooke Expansion Project.

KPT Q3 2021 Financial ResultsKPT had a net loss of $2.2 million in Q3 2021. Included in net loss was $1.4 million representing KPT’s share of KPLP’s net loss, depreciation expense of $1.3 million related to adjustments to carrying amounts on acquisition and an income tax recovery of $0.4 million.

Dividends on Common SharesThe Board of Directors of KPT declared a quarterly dividend of $0.18 per share to be paid on January 17, 2022 to shareholders of record at the close of business on December 31, 2021.

Additional InformationFor additional information please refer to Management’s Discussion and Analysis (MD&A) of KPT and KPLP for the third quarter ended September 30, 2021 available on SEDAR at www.sedar.com or our website at www.kptissueinc.com.

Third Quarter Results Conference Call InformationKPT will hold its third quarter conference call on Friday, November 12, 2021 at 8:30 a.m. Eastern Time.

Via telephone: 1-800-599-5188 or 647-365-5897

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 19, 2021 by dialing 1-800-770-2030 or 647-362-9199 and entering passcode 9884406.

The replay of the webcast will remain available on the website until midnight, November 19, 2021.

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 14.5% 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 2,700 employees and operates nine FSC® COC-certified (FSC® C-104904) production facilities in North America. For more information visit www.krugerproducts.ca.

Non-IFRS MeasuresThis 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 have referenced Adjusted EBITDA as a non-IFRS financial measure. This term replaces the previously referenced non-IFRS financial measure EBITDA. 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, (x) change in fair value of derivatives, (xi) consulting costs related to operational transformation initiatives, (xii) corporate development related costs and (xiii) loss (gain) on sale of shares. A reconciliation of Adjusted EBITDA to the relevant reported results can be found in the MD&A of KPT and KPLP for the quarter ended September 30, 2021, available on SEDAR at www.sedar.com.

COVID-19In March 2020, the World Health Organization characterized the outbreak of the novel strain of coronavirus, specifically identified as “COVID-19” as a global pandemic. There remains significant uncertainty as to the duration and impact of the COVID-19 outbreak at this time. It is not possible to reliably estimate or quantify the impact this pandemic may have on the financial results and condition of KPLP in future periods.

Forward-Looking StatementsCertain 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, the anticipated benefits of the TAD Sherbrooke Project and the Sherbrooke Expansion Project and the expected dates for commencement of construction and production of the Sherbrooke Expansion Project. 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. 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 Q4 2021 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 KPT’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 11, 2021 available on SEDAR at www.sedar.com (the Annual Information Form), except for the risks associated with the Sherbrooke Expansion Project, which are discussed in greater detail in Risk Factors in the MD&A of KPT and KPLP for the 3-month and 9-month periods ended September 30, 2021 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 Sherbrooke Project; operational risks; 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; information technology; cyber-security; insurance; internal controls; trade related; and risk related to COVID-19.

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 ParoyanGeneral Counsel and Corporate SecretaryKP Tissue Inc.Tel.: 905.812.6936francois.paroyan@krugerproducts.ca

INVESTORS:

Mike BaldesarraDirector of Investor RelationsKP Tissue Inc. Tel.: 905.812.6962IR@KPTissueinc.com

	Kruger Products L.P.
	Unaudited Condensed Consolidated Statements of Financial Position
	(thousands of Canadian dollars)
		September 30, 2021			December 31, 2020
		$			$
Assets
Current assets
	Cash, cash equivalents and restricted cash	118,639			128,739
	Trade and other receivables	98,827			88,041
	Receivables from related parties	1,076			13
	Advances to partners	9,937			5,647
	Inventories	258,189			215,934
	Income tax recoverable	505			358
	Prepaid expenses	8,243			8,315
		495,416			447,047
Non-current assets
	Property, plant and equipment	1,207,540			1,194,191
	Right-of-use assets	107,002			107,633
	Other long-term assets	40,364			10
	Goodwill	152,021			152,021
	Intangible assets	30,084			26,205
	Deferred income taxes	33,383			24,217
Total assets		2,065,810			1,951,324
Liabilities
Current liabilities
	Trade and other payables	231,904			332,072
	Payables to related parties	7,429			9,097
	Income tax payable	371			554
	Distributions payable	12,202			11,919
	Current portion of provisions	3,192			4,913
	Current portion of long-term debt	39,205			9,495
	Current portion of lease liabilities	30,175			25,341
		324,478			393,391
Non-current liabilities
	Long-term debt	915,142			743,978
	Long-term lease liabilities	99,799			105,634
	Long-term payable to related party	41,777			-
	Long-term provisions	8,885			9,549
	Other long-term liabilities	-			575
	Pensions	26,972			161,333
	Post-retirement benefits	57,747			63,038
	Liabilities to non-unitholders	1,474,800			1,477,498
	Current portion of Partnership units liability	14,132			31,244
	Long-term portion of Partnership units liability	164,040			154,180
	Total Partnership units liability	178,172			185,424
Total liabilities		1,652,972			1,662,922
Equity
	Partnership units	455,939			439,571
	Deficit	(116,504	)		(224,503	)
	Accumulated other comprehensive income	73,403			73,334
Total equity		412,838			288,402
Total equity and liabilities		2,065,810			1,951,324

Kruger Products L.P.
Unaudited Condensed Consolidated Statements of Comprehensive Income
(thousands of Canadian dollars)
	3-month			3-month			9-month			9-month
	period ended			period ended			period ended			period ended
	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020
	$			$			$			$
Revenue	391,392			369,103			1,041,132			1,131,012
Expenses
Cost of sales	345,577			307,733			903,885			932,255
Selling, general and administrative expenses	29,055			31,267			86,404			91,393
Loss on sale of non-financial assets	2			-			5			1
Restructuring costs, net	166			52			207			1,273
Operating income	16,592			30,051			50,631			106,090
Interest expense	18,740			9,746			47,925			31,659
Other expense	11,728			2,477			10,781			10,629
Income (loss) before income taxes	(13,876	)		17,828			(8,075	)		63,802
Income taxes	(4,618	)		(627	)		(7,823	)		8,055
Net income (loss) for the period	(9,258	)		18,455			(252	)		55,747
Other comprehensive income (loss)
Items that will not be reclassified to net income (loss):
Remeasurements of pensions	44,377			(4,142	)		138,418			(40,797	)
Remeasurements of post-retirement benefits	1,670			(439	)		6,019			(3,827	)
Items that may be subsequently reclassified to net income (loss):
Cumulative translation adjustment	7,441			(6,320	)		69			7,907
Total other comprehensive income (loss) for the period	53,488			(10,901	)		144,506			(36,717	)
Comprehensive income for the period	44,230			7,554			144,254			19,030

Kruger Products L.P.
Unaudited Condensed Consolidated Statements of Cash Flows
(thousands of Canadian dollars)
	9-month			9-month
	period ended			period ended
	September 30, 2021			September 30, 2020
	$			$
Cash flows from (used in) operating activities
Net income (loss) for the period	(252	)		55,747
Items not affecting cash
Depreciation	61,292			48,497
Amortization	2,539			1,184
Loss on sale of property, plant and equipment	326			87
Change in amortized cost of Partnership units liability	10,283			10,903
Foreign exchange loss	498			86
Change in fair value of derivatives	-			(360	)
Interest expense	47,925			31,659
Pension and post-retirement benefits	12,486			11,121
Provisions	1,547			6,137
Income taxes	(7,823	)		8,055
Loss on sale of non-financial assets	5			1
Total items not affecting cash	129,078			117,370
Net change in non-cash working capital	(120,743	)		27,086
Contributions to pension and post-retirement benefit plans	(11,451	)		(11,793	)
Provisions paid	(4,173	)		(2,054	)
Income tax payments	(2,019	)		(1,808	)
Net cash from (used in) operating activities	(9,560	)		184,548
Cash flows from (used in) investing activities
Purchases of property, plant and equipment	(19,438	)		(12,758	)
Purchases of property, plant and equipment related to the TAD Sherbrooke Project	(88,273	)		(194,118	)
Interest paid on credit facilities related to the TAD Sherbrooke Project	(608	)		(7,167	)
Purchases of software	(774	)		(1,633	)
Proceeds on sale of shares	-			992
Proceeds on sale of property, plant and equipment	8			-
Net cash used in investing activities	(109,085	)		(214,684	)
Cash flows from (used in) financing activities
Proceeds from long-term debt	225,197			193,538
Repayment of long-term debt	(21,913	)		(84,520	)
Payment of deferred financing fees	(8,935	)		(500	)
Payment of lease liabilities	(18,954	)		(14,506	)
Interest paid on long-term debt	(24,753	)		(21,762	)
Distributions and advances paid, net	(41,360	)		(18,372	)
Net cash from financing activities	109,282			53,878
Effect of exchange rate changes on cash and cash
equivalents held in foreign currency	(737	)		586
Increase (decrease) in cash, cash equivalents and restricted cash during the period	(10,100	)		24,328
Cash, cash equivalents and restricted cash - Beginning of period	128,739			93,141
Cash, cash equivalents and restricted cash - End of period	118,639			117,469

Kruger Products L.P.
Segment and Geographic Results
(thousands of Canadian dollars)
		3-month			3-month			9-month			9-month
		period ended			period ended			period ended			period ended
		September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020
		$			$			$			$
Segment Information
Segment Revenue
Consumer		332,416			319,869			896,144			971,400
AFH		58,976			49,234			144,988			159,612
Total segment revenue		391,392			369,103			1,041,132			1,131,012
Adjusted EBITDA
Consumer		39,092			55,264			123,563			179,193
AFH		2,162			(3,466	)		(3,174	)		(6,632	)
Corporate and other costs		(941	)		(5,550	)		(5,296	)		(10,939	)
Total Adjusted EBITDA		40,313			46,248			115,093			161,622
Reconciliation to Net income (loss)
Depreciation and amortization		23,464			15,948			63,831			49,681
Interest expense		18,740			9,746			47,925			31,659
Change in amortized cost of Partnership units liability		3,427			5,863			10,283			10,903
Change in fair value of derivatives		-			-			-			(360	)
Loss on sale of property, plant and equipment		62			38			326			87
Loss on sale of non-financial assets		2			-			5			1
Restructuring costs, net		166			52			207			1,273
Foreign exchange (gain) loss		8,301			(3,386	)		498			86
Corporate development related costs		27			159			93			159
Consulting costs related to operational transformation initiatives		-			-			-			4,331
Income (loss) before income taxes		(13,876	)		17,828			(8,075	)		63,802
Income taxes		(4,618	)		(627	)		(7,823	)		8,055
Net income (loss)		(9,258	)		18,455			(252	)		55,747
Geographic Revenue
Canada		233,529			223,272			647,516			671,805
US		157,863			145,831			393,616			459,207
Total revenue		391,392			369,103			1,041,132			1,131,012

KP Tissue Inc.
Unaudited Condensed Statements of Financial Position
(thousands of Canadian dollars)
	September 30, 2021			December 31, 2020
	$			$
Assets
Current assets
Distributions receivable	1,774			1,755
Receivable from Partnership	-			21
Income tax recoverable	106			-
	1,880			1,776
Non-current assets
Investment in associate	80,017			69,537
Total Assets	81,897			71,313
Liabilities
Current liabilities
Dividend payable	1,774			1,755
Payable to Partnership	74			-
Current portion of advances from Partnership	1,478			874
Income tax payable	-			1,722
	3,326			4,351
Non-current liabilities
Deferred income taxes	1,022			634
Total liabilities	4,348			4,985
Equity
Common shares	21,471			20,355
Contributed surplus	144,819			144,819
Deficit	(101,760	)		(111,907	)
Accumulated other comprehensive income	13,019			13,061
Total equity	77,549			66,328
Total liabilities and equity	81,897			71,313

KP Tissue Inc.
Unaudited Condensed Statements of Comprehensive Income (Loss)
(thousands of Canadian dollars, except share and per share amounts)
	3-month period ended September 30, 2021			3-month period ended September 30, 2020			9-month period ended September 30, 2021			9-month period ended September 30, 2020
	$			$			$			$
Equity income (loss)	(2,686	)		1,355			(4,033	)		4,155
Dilution gain	81			77			243			528
Income (loss) before income taxes	(2,605	)		1,432			(3,790	)		4,683
Income taxes	(382	)		667			(1,542	)		2,340
Net income (loss) for the period	(2,223	)		765			(2,248	)		2,343
Other comprehensive income (loss)
net of tax expense (recovery)
Items that will not be reclassified to net income (loss):
Remeasurements of pensions	5,600			(355	)		17,152			(4,010	)
Remeasurements of post-retirement benefits	147			(39	)		536			(348	)
Items that may be subsequently reclassified to net income (loss):
Cumulative translation adjustment	1,092			(1,003	)		(42	)		1,128
Total other comprehensive income (loss) for the period	6,839			(1,397	)		17,646			(3,230	)
Comprehensive income (loss) for the period	4,616			(632	)		15,398			(887	)
Basic earnings (loss) per share	(0.23	)		0.08			(0.23	)		0.24
Weighted average number of shares outstanding	9,853,722			9,721,047			9,817,280			9,688,788

KP Tissue Inc.
Unaudited Condensed Statement of Cash Flows
(thousands of Canadian dollars)
	9-month period ended September 30, 2021			9-month period ended September 30, 2020
	$			$
Cash flows from (used in) operating activities
Net income (loss) for the period	(2,248	)		2,343
Items not affecting cash
Equity (income) loss	4,033			(4,155	)
Dilution gain	(243	)		(528	)
Income taxes	(1,542	)		2,340
Total items not affecting cash	2,248			(2,343	)
Net change in non-cash working capital	95			94
Tax payments	(3,311	)		(1,504	)
Tax Distribution received	1,738			781
Advances received	1,478			629
Net cash from (used in) operating activities	-			-
Cash flows from investing activities
Partnership unit distributions received	4,158			4,193
Net cash from investing activities	4,158			4,193
Cash flows used in financing activities
Dividends paid	(4,158	)		(4,193	)
Net cash used in financing activities	(4,158	)		(4,193	)
Increase (decrease) in cash and cash equivalents during the period	-			-
Cash and cash equivalents - Beginning of period	-			-
Cash and cash equivalents - End of period	-			-