KP Tissue releases Q4 and 2015 financial results
March 10, 2016 - KP Tissue Inc. reports the Q4 and full year 2015 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 16.3% interest in KPLP.
KPLP Q4 2015 business and financial highlights
•Revenue increased by 7.9% to $300.6 million in Q4 2015 compared to Q4 2014
•Adjusted EBITDA was $30.3 million in Q4 2015, consistent with Q4 2014 despite significant cost pressures
•TAD Product Q4 2015 Adjusted EBITDA increased by $4.1 million year-over-year to $13.2 million
•No.1 marketshare leader in Canada with Q4 growth
•Declared a quarterly dividend of $0.18 per share to be paid on April 15, 2016
KPLP full year 2015 business and financial highlights
•Revenue increased by 8.9% to $1,138.9 million in 2015 compared to $1,046.2 million in 2014
•Adjusted EBITDA of $126.4 million in 2015, up from $121.6 million in 2014
•TAD Product 2015 Adjusted EBITDA increased by $18.4 million year-over-year to $45.3 million
•Redeemed $175 million of senior notes by increasing existing credit facility to $300 million, resulting in interest expense savings of approximately $8 million annually at expected interest rates.
"In Fiscal 2015, the solid performance of our U.S. business combined with cost reduction initiatives, was masked by the significant negative impact of the lower Canadian dollar. This is reflected in higher commodity prices which impacted our Canadian business results," said Mario Gosselin, CEO of KP Tissue and Kruger Products L.P. "We are pleased with the progress of our TAD Products for their third full year of commercialization considering Adjusted EBITDA of $45 million. We remain confident that North American industry demand will absorb incremental capacity in upcoming years and provide us with solid growth opportunities in the private label market.
"The Away-from-Home segment reported a solid Adjusted EBITDA improvement over the prior year reflecting improved volume in the base business combined with cost reduction initiatives and also benefits from the Metro Paper acquisition.
"From a market share perspective in the Canadian Consumer segment, we maintained our momentum and continued to be the clear overall industry leader. Despite efforts to mitigate higher input costs, the pressure exercised by the weak Canadian dollar on commodity prices has had a significant and increasing negative impact on our Adjusted EBITDA over the past several quarters. In the context of a competitive and price sensitive environment, we recently announced a price increase effective at the end of April 2016 to our Canadian retailers to partially offset the rise of raw material prices.
"We expect first quarter Adjusted EBITDA for Fiscal 2016 to be below the same quarter last year, reflecting the ongoing impact of the weak Canadian dollar. In 2016, we plan to significantly invest in our operations to improve manufacturing costs with CAPEX in the range of $65-$70 million. Despite some important headwinds, we have an action plan in place to improve manufacturing costs and support growth opportunities," concluded Mr. Gosselin.
KPLP Q4 2015 financial results
Revenue in Q4 2015 was $300.6 million, compared to $278.6 million in Q4 2014, an increase of $22.0 million or 7.9%. The increase in revenue was primarily due to additional sales volume in the U.S consumer business from our TAD products and organic growth in the Away-From-Home (AFH) business. In addition, U.S. sales were favourably impacted by foreign exchange.
Cost of sales in Q4 2015 increased to $259.8 million compared to $234.0 million in Q4 2014 primarily due to the negative impact of foreign exchange, slightly offset by a decline in USD pulp and natural gas prices. Freight and warehousing costs increased due to higher sales volumes and inventory levels. Cost reduction initiatives partially offset the above increases in cost of sales. As a percentage of revenue, cost of sales were 86.4% in Q4 2015 compared to 84.0% in Q4 2014.
Selling, general and administrative (SG&A) expenses in Q4 2015 were $23.5 million, compared to $24.5 million in Q4 2014 primarily due to lower advertising & promotion and selling expenses and the benefit of cost reduction initiatives, partially offset by higher selling expenses resulting from increased sales volume and the unfavourable impact of foreign exchange. As a percentage of revenue, SG&A expenses were 7.8% in Q4 2015 compared to 8.8% in Q4 2014.
Adjusted EBITDA in Q4 2015 was $30.3 million compared to $30.4 million in Q4 2014 as the net unfavourable impact of foreign exchange and higher warehousing costs were almost offset by the positive impact of higher sales volumes and lower SG&A. TAD Product EBITDA increased to $13.2 million in Q4 2015 from $9.1 million in Q4 2014 due to increased sales volume, favourable foreign exchange and the continued ramp-up in manufacturing efficiencies.
Net income in Q4 2015 was a loss of $0.5 million, compared to income of $0.1 million in Q4 2014. The decrease was primarily due to a change in the tax expense of $5.9 million resulting from a $5.5 million reversal of previously recognized deferred tax assets in our U.S. subsidiary, higher depreciation expense of $2.0 million and restructuring costs of $0.9 million, partially offset by the change in the amortized costs of the Partnership unit liability of $8.9 million.
The cash balance as of December 31, 2015 was $25.5 million compared to $38.5 million as of September 27, 2015. Cash generated from operating activities resulting from Adjusted EBITDA in Q4 2015 was more than offset by higher working capital, pension funding, capital spending and interest payments in the quarter.
KPLP 2015 financial results
Revenue was $1,138.9 million in Fiscal 2015 compared to $1,046.2 million in Fiscal 2014, an increase of 8.9% or $92.7 million. The increase in revenue was primarily due to additional sales volume across all regions and in both the Consumer and AFH segments, including a significant increase in AFH segment revenue resulting from the acquisition of Metro Paper. In the Consumer and AFH U.S. businesses, sales were favourably impacted by foreign exchange on U.S. dollar sales.
Adjusted EBITDA was $126.4 million in Fiscal 2015 compared to $121.6 million in Fiscal 2014. Higher sales volumes in both the Consumer and AFH segments, lower costs (in U.S. dollars) for pulp and natural gas and cost reduction initiatives were partially offset by higher SG&A from increased sales and the net negative impact of foreign exchange. TAD Product Adjusted EBITDA was $45.3 million in Fiscal 2015 compared to $26.9 million in Fiscal 2014.
Net income was $1.5 million in Fiscal 2015 compared to $21.1 million in Fiscal 2014. The decrease in net income was primarily due to increases in interest and tax expense of $13.5 million and $9.2 million, respectively, the Q2 pension revaluation related to past service costs of $3.4 million, an increase in the unrealized foreign exchange loss of $3.4 million, and higher depreciation expense of $4.9 million. These increases were partially offset by higher Adjusted EBITDA of $4.8 million.
KPT Q4 2015 financial results
KPT incurred a net loss of $27.8 million in Q4 2015. Included in the net loss was $0.1 million representing KPT's share of KPLP's loss. The loss was increased by the net of depreciation expense of $1.4 million related to adjustments to carrying amounts on acquisition, partially offset by an income tax recovery of $1.8 million.
Also included in the loss was an impairment of KPT's investment in KPLP of $28.0 million. KPT performed an impairment test at December 31, 2015 as a result of the market value decline in KPT's publicly traded common shares during Fiscal 2015.
KPT 2015 financial results
KPT incurred a net loss of $31.3 million in 2015. Included in the net loss was $0.2 million representing KPT's share of KPLP's income. The income was reduced by the net of depreciation expense of $5.7 million related to adjustments to carrying amounts on acquisition, partially offset by an income tax recovery of $2.1 million.
Amendment to senior credit facility
Subsequent to the year-end, an amendment was obtained under the Senior Credit Facility to increase the Ratio of Funded Debt to EBITDA covenant for the entire 2016 fiscal year, which is expected to allow for the impact of foreign exchange fluctuations and the implementation of a significantly expanded 2016 capital spending program.
Dividends on common shares
The Board of Directors of KP Tissue Inc. declared a quarterly dividend of $0.18 per share to be paid on April 15, 2016 to shareholders of record at the close of business on March 31, 2016.
For additional information please refer to Management's Discussion and Analysis ("MD&A") of KPT and KPLP for the fourth quarter and year ended December 31, 2015 available on SEDAR at www.sedar.com or our website at www.kptissueinc.com.
About KP Tissue Inc.
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 16.3% interest in KPLP. For more information visit www.kptissueinc.com.
About Kruger Products L.P.
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 across North America and operates five FSC® CoC- certified mills (FSC® C104904), four of which are located in Canada and one in the US. For more information visit www.krugerproducts.ca.
This press release uses certain non-IFRS financial measures and ratios which KPLP believes provide useful information to both 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. Examples of such measures are Adjusted EBITDA and TAD Product Adjusted EBITDA. Beginning with Q4 2015 in accordance with Canadian Securities Administrators Staff Notice 52-306 (Revised), we reference Adjusted EBITDA and TAD Product Adjusted EBITDA as non-IFRS financial measures. These terms replace the previously referenced non-IFRS financial measures EBITDA and TAD Product EBITDA. Our definition of Adjusted EBITDA and TAD Product Adjusted EBITDA are unchanged from our former definition of EBITDA and TAD Product EBITDA respectively. Accordingly, this change in terminology has no impact on our reported financial results for prior periods. Adjusted EBITDA and TAD Product Adjusted EBITDA are not measurements 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 of non-financial assets, (vi) loss (gain) on disposal of property, plant and equipment, (vii) unrealized foreign exchange loss (gain), (viii) one-time costs related to restructuring activities, (ix) change in the amortized cost of the Partnership unit 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 Management's Discussion and Analysis ("MD&A") of KPT and KPLP for the fourth quarter ended December 31, 2015 available on SEDAR at www.sedar.com. "TAD Product Adjusted EBITDA" represents the portion of KTG Adjusted EBITDA generated by the sale of TAD products.
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. and stable interest rates. 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 Q1 2016 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 10, 2016 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 and innovation; insurance; and internal controls.
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.