KP Tissue Releases Third Quarter 2018 Financial Results

KP Tissue Inc. (KPT) (TSX: KPT) reports the Q3 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 15.8% interest in KPLP.

KPLP Q3 2018 Business and Financial Highlights
Revenue increased by 3.6% to $348.4 million in Q3 2018 compared to Q3 2017
Adjusted EBITDA was $28.3 million in Q3 2018 compared to $39.4 million in Q3 2017
Pulp and freight costs continued to escalate in the quarter
Announced plans to invest $575 million to build a second TAD paper machine and state-of-the-art plant
Declared a quarterly dividend of $0.18 per share to be paid on January 15, 2019

“Our results for the third quarter reflect continued negative impact from high pulp prices and freight costs. Despite this difficult cost environment in 2018, we are undertaking several key initiatives that will strengthen our business over the longer term, and reinforce our leadership position in the market,” said Dino Bianco, CEO of KP Tissue and KPLP.

“The recent selling price increase announced in our Canadian consumer business will take effect in the fourth quarter and is expected to fully materialize in the first quarter of 2019. Our decision during the quarter to proceed with the $575 millionTAD2 Project is central to our long-term North American growth strategy in the ultra-premium paper tissue segment. We also have further plans to optimize our operational network.

“We are confident that we have the right vision and strategy to move the Company forward and create increased value for our shareholders,” concluded Mr. Bianco.

TAD2 Project
On August 16, 2018, KPLP announced its plan for a capital investment of $575 million in the Brompton area of Sherbrooke, Quebec, to build a new, state-of-the art tissue plant featuring Canada’s largest and most modern TAD paper machine (TAD2) along with related converting equipment and infrastructure (the TAD2 Project). The TAD2 Project is projected to produce at maturity approximately 70,000 metric tonnes per annum of bathroom tissue and paper towels which will enable KPLP to increase its offering of ultra-premium and innovative tissue products under the Cashmere, Sponge Towels and Purex brands. Construction of the TAD2 Project is anticipated to begin in early 2019 and commence production in early 2021.

The TAD2 Project is expected to be financed with 40% equity and 60% debt in a newly-created, wholly-owned subsidiary of KPLP, Kruger Products Sherbrooke Inc. (KPSI), which will construct and operate the TAD2 Project. KPLP believes that negotiations and documentation are close to being finalized for long-term construction financing of KPSI for the anticipated $345 million debt portion. The $230 million equity portion of the financing is expected to be funded by the Government of Quebec through Investissement Quebec (IQ), which has agreed to invest $105 million by way of subscription to a convertible debenture, and by KPLP, which intends to acquire an equity interest in KPSI for the remaining $125 million of the equity component.

KPLP Q3 2018 Financial Results
Revenue in Q3 2018 was $348.4 million, compared to $336.3 million in Q3 2017, an increase of $12.1 million or 3.6%. The increase in revenue was primarily due to the following factors: increased sales volume in the U.S. and Mexico, partially offset by a decrease in sales volume in Canada; the Consumer selling price increase in Canada in Q4 2017; and the favourable impact of foreign exchange fluctuations on U.S. dollar sales.

Cost of sales in Q3 2018 increased to $312.6 million from $290.8 million in Q3 2017. Manufacturing costs increased primarily due to significantly higher pulp and sorted office waste costs, increased sales volume and the unfavourable impact of foreign exchange fluctuations on U.S. dollar denominated costs. Freight costs increased primarily due to higher carrier rates and increased sales volume. As a percentage of revenue, cost of sales were 89.7% in Q3 2018 compared to 86.5% in Q3 2017.

Selling, general and administrative (SG&A) expenses in Q3 2018 were $20.5 million, compared to $20.7 million in Q3 2017. As a percentage of revenue, SG&A expenses were 5.9% in Q3 2018, compared to 6.2% in Q3 2017.

Adjusted EBITDA in Q3 2018 was $28.3 million, compared to $39.4 million in Q3 2017, lower by $11.1 million or 28.2%, due primarily to significantly higher fibre costs and increased freight costs, unfavourable sales mix and the net unfavourable impact of foreign exchange fluctuations. These were partially offset by the Q4 2017 Canadian Consumer selling price increase.

Net income in Q3 2018 was $4.2 million, compared to $16.5 million in Q3 2017, primarily due to the factors that resulted in a lower Adjusted EBITDA set out above, as well as an increase in interest expense of $1.6 million, an increase in the change in amortized cost of partnership units liability of $0.9 million and a change in foreign exchange gain (loss) of $0.7 million. These items were partially offset by lower depreciation expense of $1.6 million and a decrease in income taxes of $0.7 million.

Total liquidity, representing cash and cash equivalents and availability under the credit line within covenant limitations, was $63.6 million as of September 30, 2018, compared to $64.5 million as of July 1, 2018.

KPT Q3 2018 Financial Results
KPT incurred a net loss of $0.8 million in Q3 2018. Included in the net loss was $0.7 million representing KPT’s share of KPLP’s income. The income was reduced by depreciation expense of $1.4 million related to adjustments to carrying amounts on acquisition, partially offset by an income tax expense of $0.1 million.
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