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FINANCIAL ANALYSTS: KP Tissue - Q213 results better than expected

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FINANCIAL ANALYSTS: KP Tissue - Q213 results better than expected

August 14, 2013 - 08:35
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VANCOUVER, BC, Aug. 13, 2013 (Viewpoint) - excerpt from RBC Dominion Securities

Impact: Slightly positive

First Impression

Q213 Results Better than Expected - KP reported adjusted EBITDA of $32MM in Q213, higher than our $27MM forecast and consensus of the same. Q2 EBITDA included $2.4MM of start-up costs related to the TAD project. Revenues of $247MM in the quarter were ahead of our $239MM forecast (consensus = $242MM) due to higher-than-anticipated promotional activities (leading to market share gains across all categories). Adjusted EBITDA margins increased 154bps in the quarter to 12.8% vs. the tissue segment results of peers such as Cascades (12.5% margin), Clearwater Paper (11.3%), Orchids Paper (21.8%) & Wausau (10.1% ---> guided for ~17% by Q4).

Consumer (83% of Revenues) - KP reported adjusted segment EBITDA of $29.1MM compared to our estimate of $25.2MM.

Away-From-Home (16% of Revenues) - KP reported adjusted segment EBITDA of $2.7MM compared to our estimate of $2.1MM. The AFH business has been at more normalized levels in H113 after falling into negative EBITDA territory in Q412.

Balance Sheet in Good Shape - Cash from operations was $16MM for the quarter after a $10MM working capital build. After non-TAD Capex of $4.7MM in Q2, FCF was $12MM. KP ended Q2 with $78MM of cash.

Management Outlook for New Memphis TAD Tissue Machine - Ramp-up of the new US$322MM Memphis TAD machine (66K tpy) is "progressing as planned" with ultra-grade private-label bathroom tissue products on the shelves of some major US retailers since shipments started in February. Mgmt noted that interest in its private-label TAD "continues to build" and the company has now lined up customers for its entire H213 TAD production schedule and is now working on filling out its 2014 order book. While the TAD had a negative impact on EBITDA in H113 mgmt reiterated prior guidance for a "modest positive" contribution for the whole year as the company gradually ramps up the machine (mgmt guidance is for trend EBITDA from the TAD of $60MM by 2017).

Tissue Market Capacity Additions May Impact Pricing - The ~6.6% increase in NA tissue capacity expected over 2011-2013E could lead to lower tissue prices over the near-term as we expect operating rates will fall from 97% in 2011 to 94% in 2013 (close to levels where balance typically shifts to buyers). Capacity totaling ~350K tpy has started up over the last ten months from Wausau Harrodsburg (75K tpy ATMOS), Clearwater Shelby (70K TAD), ST Paper Franklin (70K parent rolls), First Quality Anderson (70K TAD) and KP Memphis (66K TAD).

Paul Quinn, RBC Dominion Securities