KP Tissue Inc. ($KPT)

Good morning, and welcome to KP Tissue's First Quarter 2026 Results Conference Call. Today's call is being recorded for replay. [Operator Instructions] I will now turn the call over to Doris Grbic, Director of Investor Relations. You may begin your conference.

Thank you, operator. Good morning, everyone, and thank you for joining us to review Kruger Products First Quarter 2026 Financial results. With me this morning is Dino Bianco, the CEO of KP Tissue and Kruger Products; and Michael Keays, the CFO of KP Tissue and Kruger Products. Today's discussion will include certain forward-looking statements. Actual results could differ materially from these forward-looking statements due to known and unknown risks and uncertainties. A list of risk factors can be found in our public filings. In addition, today's discussion will include certain non-GAAP financial measures. The reconciliation of these non-GAAP financial measures to the most comparable GAAP measure can be found in our MD&A. The press release reporting our Q1 2026 results was published this morning and will be available on our website at kptissueinc.com. The financial statements and MD&A will also be posted on our website and on SEDAR+. The investor presentation to accompany today's discussion can be found in the Investor Relations section of our website. I will now turn the call over to our CEO, Dino Bianco. Dino?

Thank you, Doris. Good morning, everyone, and thank you for joining us for our first quarter earnings call for fiscal 2026. Despite a volatile economic environment, we generated Q1 2026 adjusted EBITDA of $86.9 million and a margin of 16%. This is driven mainly by lower year-over-year pulp prices and warehousing costs. Our top line declined slightly by 0.3% due to unfavorable foreign exchange impact and a high year-over-year comparison against the prior year quarter that delivered double-digit revenue growth. Overall, we are pleased with our financial performance in the opening quarter. Looking ahead to the remainder of 2026, market demand for our leading tissue products remains healthy. Production rates across our paper machines and converting lines are exceeding targets at all sites, supported -- and this is supporting our continued momentum on the revenue side. In early April, we also began ramping up the state-of-the-art converting line at our Memphis facility, which is expected to add capacity to our growing U.S. network. We will also actively focus on margin delivery in light of escalating input costs, including higher fuel and freight expenses by continuing to assess our basket of product costs to determine any potential need for pricing. Now let's take a closer look at our quarterly numbers on Slide 6. As mentioned, we delivered adjusted EBITDA of nearly $87 million in the first quarter of 2026, up 14.6% year-over-year on relatively stable revenue of $544.6 million. Revenue in Canada improved 0.8% in the first quarter, while sales in the United States declined 1.5%. It should be noted that we were lapping a high comparable in the United States with sales growth of more than 21% in the first quarter of 2025. Let's look at pulp prices. NBSK average prices in Canadian dollars decreased sequentially and year-over-year in the first quarter of 2026, while BEK prices were up during the same comparable periods. This variance in pulp prices can be attributed to an overcapacity of NBSK in the market. Industry analysts expect both NBSK and BEK prices to trend upwards in 2026, but BEK should accelerate at a faster pace and higher level. Let's move on to our operations on Slide 8. As previously mentioned, our manufacturing assets exceeded expectations across all our network sites in the first quarter of 2026. In addition, we are pleased to report that we maintained our strong safety record in Q1. At Memphis, our new state-of-the-art converting line, which launched as scheduled early in the second quarter, will support our renewed focus on premium products, specifically in the bathroom tissue and paper towel categories. With Memphis meeting production targets, we are pleased that the turnaround is progressing well, and I want to thank the entire Memphis team for making this happen. Regarding our proposed TAD facility in the Western United States, we are finalizing incentives and permitting and financing with the preferred location and expect to make an official announcement before the end of the first half of 2026. The project involves construction of a new state-of-the-art tissue plant featuring the most modern through-air drying paper machine and related converting lines. The facility will allow the company to better service its fast-growing U.S. business with ultra-premium tissue products. The new TAD machine will have an annual production capacity of approximately 75,000 metric tons with start-up expected in late 2028. Let's turn to brand support. We continue developing strong on-air equity campaigns for our Cashmere, SpongeTowels and Scotties brands, along with our Kruger Big Assist program for hockey families, including our role as official partner of the CBC Olympic broadcast. In addition, we activated our annual Scotties Tournament of Hearts campaign. Kruger Products has been a proud sponsor of the Canadian Women's Curling Championship for 45 years. Congratulations to the Einarson rink for winning the 2026 events in Mississauga. Also during the first quarter, we launched our Find-the-Cup-to-Win promotion for the StanleyCup playoffs. Further, we introduced a collection of nature-inspired plastic-free Bonterra facial tissue boxes created by Canadian interior designer and TV personality, Sarah Richardson. This collaboration is a natural fit for a sustainable Bonterra brand, blending eco-conscious products with stylish home decor. Finally, we continue to build trial and awareness behind our new Scotties Ultra Soft brand in the first quarter. Let's turn to Slide 10. The data presented is taken from Nielsen and shows Kruger Products branded market share performance in Canada over a 52-week period ending March 21, 2026. The numbers reflect a relatively stable share in the highly competitive bathroom tissue category. And in paper towel, our share grew slightly, but we continue to see momentum in this segment, and we intend to continue to build on our #2 position. In facial tissue, we raised our leadership position to almost a 47% share of the Canadian market, supported by strong investments in our Scotties brand and innovations. Let's look at our Away-From-Home segment. Q1 2026 revenue, volume and profitability grew year-over-year, but declined sequentially due to seasonality. It should be noted that Away-From-Home revenue growth in the first quarter was mainly driven by the U.S. market, which is seeing stronger performance relative to Canada. Profitability improved from the same period last year, driven by cost savings from paper in-sourcing. Our Cashmere, Scotties and Titan wiper brands continue to deliver growth in the first quarter. I will now turn the call over to Michael.

Thank you, Dino, and good morning, everyone. Please turn to Slide 12 for a summary of our financial performance for the first quarter of 2026. As Dino mentioned, we generated an adjusted EBITDA of $86.9 million on sales of $544.6 million in the quarter, representing a strong year-over-year adjusted EBITDA growth of 14.6%. Net income totaled $19.8 million in Q1 2026 compared to $15.4 million in the first quarter of 2025. The year-over-year increase is due to higher adjusted EBITDA of $11.1 million, lower depreciation expense of $1.5 million and reduced interest and other finance costs of $1.3 million. These items were partially offset by unfavorable FX difference of $5.6 million as well as higher income tax expense of $4.2 million. In our quarterly segmented view on Page 13, revenue from our Consumer business decreased slightly by 0.8% year-over-year to $461.7 million. The slight decline was primarily due to unfavorable FX impact on -- from U.S. dollar sales and higher U.S. sales volume was essentially offset by the decrease in Canada. In our Away-From-Home segment, revenue improved 2.5% year-over-year to $82.9 million due primarily to higher U.S. volume. The Consumer adjusted EBITDA in the first quarter totaled $83.9 million compared to $76.1 million in Q1 2025, with a margin of 18.2%, representing an improvement of 2 points over the same period last year. On a sequential basis, Consumer adjusted EBITDA increased by $5.8 million from Q4 2025. For our Away-From-Home business, adjusted EBITDA amounted to $6.3 million compared to $2.8 million in Q1 2025. The margin more than doubled year-over-year to 7.6%, partially driven by the expected benefits of in-sourcing our paper supply. And sequentially, AFH adjusted EBITDA decreased $3.4 million from Q4 2025, driven by some of the seasonality we see in Q1 volume for AFH. Moving on to Slide 14. We show our consolidated revenue for Q1 2026, which reached $544.6 million, down slightly by 0.3% year-over-year. The decrease was primarily due to unfavorable FX impact, lower selling prices in the U.S. and volume -- slightly lower volume in Canada. These items were partially offset by slightly higher AFH and Consumer volume in the U.S. and a small favorability in our Canadian pricing. On a geographic basis, revenue in Canada grew $2.4 million or 0.8% year-over-year, while U.S. revenue decreased $3.9 million or 1.5%. Now on Slide 15, we provide the details of our year-over-year profitability. The adjusted EBITDA increased $11.1 million to $86.9 million, resulting in a margin of 16% compared to 13.9% for the same period last year. The year-over-year increase was driven by the lower pulp prices, reduced warehousing costs, partially offset by some of the higher manufacturing overhead costs. Now if we turn to Slide 16, where we compare Q1 revenue to Q4 2025, revenue decreased $15.5 million sequentially or 2.8%, primarily due to lower Canadian sales volume and unfavorable FX impact, which were partially offset by higher selling prices. Geographically, revenue in Canada declined by $17.5 million or 5.7%, while U.S. revenue increased by $2 million or 0.8%. On Slide 17, adjusted EBITDA improved sequentially by $2.7 million or 3.2% to $86.9 million, mainly due to lower manufacturing overhead costs, reduced SG&A expenses and slightly higher selling prices. These factors were partially offset by lower Canadian volume, elevated freight costs and warehousing expenses, higher pulp prices and an unfavorable FX impact. The adjusted EBITDA margin reached 16.0% in the first quarter compared to 15.0% in Q4 2025. Now turning to our balance sheet and financial position on Slide 18. Our cash position continues to improve, reaching $205.9 million at the end of the first quarter, up from $196.1 million at the end of Q4 2025. The increase was primarily due to the higher adjusted EBITDA. Long-term debt at quarter end stood at $1.058 billion, a decrease of $16.1 million sequentially, reducing net debt by $14.4 million. Our leverage ratio also declined to 2.9x compared to 3.1x in Q4 2025, further demonstrating our commitment to strengthening our balance sheet. Now to conclude my section, we will review capital expenses on Slide 19. Our CapEx for Q1 2026 totaled $16 million. And for 2026, we expect to be in the range of $100 million to $120 million, which will include some spending related to strategic projects that we've previously shared. Thank you for joining us this morning, and I'll now turn the call back to Dino.

Thank you, Michael. Let's turn to my closing comments. To summarize, we're very pleased with our profitability in the first quarter, and we intend to actively focus on margin delivery given escalating and uncertain input costs. We will continue to monitor our total basket of product costs to assess any need for potential pricing. Secondly, we're ramping up our new converting line in Memphis, which will add capacity to our U.S. network, in addition to the stronger performance. I think we have a great opportunity to increase sales driven by that capacity. We will continue investing in our brands to drive long-term share growth. We expect our Away-From-Home segment to continue to deliver against the profitable growth model. As mentioned, we are finalizing the details for the new TAD tissue plant in the Western United States, which is expected to start up in late 2028. And we continue to develop our organizational capability to strengthen our adaptability and resilience. Finally, our adjusted EBITDA outlook for the second quarter of 2026 is expected to be in the range of our first quarter 2026 results. We will now be happy to take your questions.

[Operator Instructions] Your first question comes from the line of Hamir Patel from CIBC Capital Markets.

Dino, could you walk us through the cost mitigation initiatives that you put in place since the war in the Middle East started? And with respect to pricing, are there any planned increases in the market?

Well, this is all recent news, obviously. And so we're watching it very closely. It didn't have a significant impact on Q1. But if prices stay where they are, they will probably -- they will likely have a greater impact towards the second half of the year. I would say from a cost mitigation point of view, it's been pretty well business as usual. We haven't made any dramatic changes. We have rejected some cost increases from our suppliers that we felt were a little aggressive or premature. So we have taken that stand. The other thing, Hamir, when we look at pricing our business, we look at our basket of goods. So that would include pulp, which is the biggest driver, both NBSK and BEK and then other key factors like freight and packaging and labor and so forth. So we'll manage the whole basket. Pulp has been a little favorable. Some of the other oil and oil-based costs are starting to increase. So we're watching the dynamics of what's going on. And listen, at the end of the day, we're going to deliver our margin, and we'll do it through cost initiatives as well as pricing if we have to.

Okay. Fair enough. But sorry, just to confirm, so that you don't have any new price increases that are currently in the market?

Nothing has been announced in the market currently, no.

Okay. And then I noticed your parent company, Kruger Inc. recently announced a $333 million project to enter the wipe nonwovens market. Are there going to be any sales synergies across the enterprises once this new venture comes online?

Yes. Clearly, we're looking at it. Wipes has always been an adjacency opportunity for us. I think with this investment, it gives us an opportunity to decide where we want to play -- if and where we want to play in that segment. So I know my team is actively involved in looking at future plans and what opportunities we may have given what I think is a strong investment and a strong point of difference in the marketplace.

Okay. Great. And just lastly, I noticed the TAD, the slide deck referenced late 2028. Has there been any sort of change in timing there? I think previously, you just sort of pointed to 2028, but what sort of things that maybe pushed out a quarter or 2?

Yes. I think it's always been late 2028 in our mind. I would say the process is probably taking a little longer, just given a lot of uncertainty in the world and market and just working very closely with our lead location and just it's pretty dynamic. And I think we're moving in a very positive direction. And as I said, I hope we have an announcement out before the end of Q2. But still progressing on plan, still progressing with the 2028 start-up. We just wanted to create a little more certainty that it's more later in '28 than earlier.

Your next question comes from the line of Ahmed Abdullah from National Bank of Canada.

Your adjusted EBITDA margin improvement was pretty substantial. How much of that expansion came from the costs going down versus the Memphis productivity gain?

Ahmed, it's Michael here. So overall, the improvements over our complete operation network definitely had a positive impact on our cost structure, and that enabled us to obviously offset the slight increases that we saw in pulp or even fuel towards the end of the quarter. So overall, as you know we still ended the quarter in a positive position overall in our cost structure. We do expect this performance to be as strong in the coming quarters as well. Obviously, if the fuel and other commodities continue to increase at the rate they're increasing, they have been increasing over the last few weeks. The decisions around our commodity contract that we have with our customers and so on will trigger pricing discussions, at least with the ones that are on contract to be able to maintain the margins that you've seen in Q3, Q4 and Q1. We believe that our margin will stay fairly strong throughout events like this compared to when it was in 2022 based on how we're approaching commodities today versus the past.

Okay. But does that mean that your Q2 outlook kind of accounts for some pricing that's already embedded in that?

No, there's been no announcement for pricing, as Dino mentioned already. So even when we do announcements, these can take up to 2 months to take effect. So based on where we're at today, there's currently no announcement made in the market for pricing.

Understood. And then just touching on volumes. Your Canada consumer volumes were a bit lower, while pricing was better. Are you seeing some category softness there? Or is there some deliberate pricing moves happening there?

Yes, it's a good question. It's Dino here. It's -- we are seeing category softness. Nielsen reported data for Q1, which show the category down 1% on units. I think that's driven by a few things, lower population growth. I think that's temporary, but there's an adjustment going on in population. I think there is some less discretionary spending on paper towel, which is more of a discretionary product because we've seen that segment down a little more than the average. I think consumers are pantry deloading or moving to just-in-time buying for tissue, which is probably having some impact there. And maybe there's some nonmeasured channels where consumers are shopping like ethnic or health that we're not picking up. But there has been some softness in the market in Q1. Actually, both in Canada and the United States, we're much closer to the Canadian market because of our brands. So it's been down about 1%.

Your next question comes from the line of Sean Steuart from TD Cowen.

Dino, I know this won't have a bearing on your U.S. expansion plans, but GP has announced more tissue capacity growth on the TAD side in 2028 as well. And I guess the question is more around sector operating rates, the industry's ability to absorb more supply. How do you see operating rates for the broader industry trending and an ability to bring your project in as others are also adding supply?

Yes. Great question, Sean. Before we announced our project, we did extensive long-term scenario planning on demand, forecast, and capacity forecast, use industry information, including some conservative numbers around population growth. They continue to show the need for all the announced machines and potentially a few more. And obviously, GP coming in now kind of validates that the market will be tight. As we look out to 2033, the market will continue to be tight. We still believe that utilization rates will be in the mid, low 90s, which is probably a stable place to be. There might be some bumpiness, if you will, as individual sites start up over time. So as you know, there's quite a few sites starting up in '27, '28, '29. So we don't see a change in the long-term dynamics. We feel comfortable with the first location that we're going to have, the ability to service a lot of our existing customers that are growing and be able to service existing customers versus having to go after new customers. So we feel comfortable in the long-term dynamics of setting up that site, and we'll be ready with some contingency planning if there's some short-term bumpiness, if you will, as the sites come up.

Okay. And with respect to your Western U.S. project, I guess what's left to finish off before you officially move ahead with it and we can get a better sense of the project economics and funding plan?

Yes. I would say the 2 -- there's 2 left. One is in a broad bucket would be just finalizing the incentive investment scenarios from the city, counties and states. So we're on the verge of getting those all contracted up. I think we have agreements in principle now on all of them. So now it's a matter of getting pen to paper and get an understanding how that will play out and the obligations of both parties. So working aggressively with that side of it. The second side, which is probably will be the last piece is just the final approval on financing. We've been working with our lead banks around the project and getting their interest in it. But obviously, that won't be signed up until everything comes together, but we don't see any issues with that. So those are really the 2 last pieces.

[Operator Instructions] Your next question comes from the line of Frederic Tremblay from Desjardins.

Looking at the revenue drivers in the quarter, we see favorable pricing in Consumer Canada, but lower volumes and then the opposite in the U.S. with unfavorable pricing and higher volumes. Does that mean that we've reached a key pricing level in terms of consumer price elasticity? And do you expect resistance if you had to pass through additional cost in future quarters?

Yes. I would say that our pricing has been stable. I think what you're seeing is a bit more of a mix aspect there that's going on in Canada, specifically. We have not made any pricing changes up or down since the last update. Yes, nobody wants the price. I mean we understand how constrained the consumer is and the mindset of consumers, it's a tough market out there. So we would only do it if that was our last resort. So that's why we're being careful to watch it and making sure we're evaluating a full basket of goods. It's a volatile market out there. The oil prices, you could argue -- I mean, you can't argue, it's a fact that it's event-based. And if that event goes away, then we could see that coming back down to maybe more normal levels. Pulp has been certainly pushing a little more upwards with BEK moving quicker. So we'll see how fast and how high that starts to go. So at the end of the day, all I can say is we're going to certainly target our margin delivery. We're going to do it through some cost incentives. And if we have to, we're going to price for the business. But that will only be determined once we understand the cost environment around us. On the U.S. side, a little different. In Canada, we price a general market. In the U.S., we've got contracts and some of those expire at different points in time, and they're based on the same basket of goods, but they just -- they may -- they don't all happen at the same time. So you'll see some ebb and flow of decreases and increases at any point in time depending on when those contracts come due. And that's probably what you're seeing a little bit of on the U.S. side.

That's very helpful. And just moving to the away-from-home channel. Just your general thoughts on the demand outlook given the uncertain macro environment. And if I'm not mistaken, I think for the quarter, you mentioned a bit more strength in the U.S. compared to Canada and AFH. Wondering if you could provide a bit more color on the factors behind that.

Yes. I just think -- I think at least in the first quarter, maybe has changed in the month of April and May, there was more strength in the U.S. marketplace, just economically, there's more higher consumer confidence, just more better indicators around GDP performance and so forth. So I think that's driving it. And then specifically for us, we're a smaller player in the U.S. So it's growth with our customers will show more of an impact on our total business than anything in Canada because of the fact that we're coming off a small base.

There are no further questions at this time. I would like to turn the call back to Dino Bianco for closing comments. Sir, please go ahead.

Great. Thank you. Thank you. Thank you all for joining us on the call today. We look forward to speaking with you again following the release of our second quarter results for 2026. I do want to remind you that on June 15 at 11:00 a.m. Eastern Time. We will be hosting our Annual Meeting of Shareholders at the TMX Market Center in Toronto. Your vote and participation at the annual meeting are important to us. Thank you, and have a great day.