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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to KP Tissue Third Quarter 2021 Results Conference Call. [Operator Instructions] Before turning the meeting over to management, I would like to remind everyone that this conference call is being recorded on Friday, November 12, 2021. I would now like to turn the conference over to Mike Baldesarra, Director, Investor Relation. Please go ahead.
Thank you, operator, and good morning, ladies and gentlemen. My name is Mike Baldesarra. I'm the Director of Investor Relation at KP Tissue Inc. The purpose of this conference call is to review the financial results for the third quarter of 2021 for Kruger Products L.P., which I'll refer to as KPLP going forward. With me this morning is Dino Bianco, the Chief Executive Officer of KP Tissue and Kruger Products L.P.; and Mark Holbrook, the Chief Financial Officer of KP Tissue and Kruger Products L.P. The following discussions and responses to questions contain forward-looking statements concerning the company's activities. Forward-looking statements involve known and unknown risks and uncertainties, which could cause the company's actual results to differ materially from those in the forward-looking statements. Investors are cautioned not to rely on these forward-looking statements. The company does not undertake to update these forward-looking statements, except if required by applicable laws. There is a page at the beginning of the written presentation, which contain the usual legal cautions, including as to forward-looking information, which you should be aware of. I'd like to point out that all figures expressed in today's call are in Canadian dollars unless otherwise stated. The press release reporting our Q3 2021 results were published this morning and will be accessible from our website at kptissueinc.com. Please be aware that our MD&A will be posted on the website and will also be available on SEDAR. Finally, I'd ask that you during the call to refer to the presentation we have prepared to accompany these discussions, which is also available on our website. [Operator Instructions] Thank you for your collaboration. Ladies and gentlemen, I'll now turn the call over to Dino Bianco, our CEO. Dino?
Thank you, Mike. Good morning, everyone, and thank you for joining us for our third quarter earnings call. We are pleased with our third quarter results despite a macro environment that is impacted by COVID, inflation pressures and supply chain disruptions. On the COVID front, we are seeing a near-normal return to pre-pandemic demand after a first half inventory de-load across the system. We're also seeing recovery in Away-From-Home markets and pockets of elevated consumer demand in the U.S. On the inflation front, we are beginning to see the impact of escalated costs across our whole business system. This is particularly evident in costs such as sorted office paper, packaging, freight and energy. On the supply chain disruption side, we have not seen any major impacts to our raw materials at this point but continue to monitor the situation closely. One area that we have seen some impact on is securing freight carriers, particularly in the Southeast United States. This has resulted in increased costs and some delayed deliveries. One last area I will talk about later is the impact of labor shortages. This is an issue across all industries and has had the greatest impact in our Memphis facility. Given this environment, we remain agile and flexible to respond to the changing landscape to ensure we continue to grow and deliver strong performance. We are building contingency plans, including additional pricing and cost reductions, to mitigate any costs. With that context, let's now turn our attention to the numbers on Slide 5. Our revenue growth of 6% for the third quarter of 2021 reflects the benefit of our pricing action in our Canadian Consumer segment combined with higher sales volume. In the Away-From-Home business, we saw gradual improving commercial end markets and the benefits of a successful execution of our recovery plan. Revenue is also up 15.3% on a sequential basis versus Q2. Canadian revenues increased 4.6% from the same period last year, while the U.S. improved 8.3%. We had some negative FX impact on the U.S. sales, and in constant currency, the increase was actually 14.4%. This strong performance reflects the faster recovery of our U.S. Away-From-Home business and also a relatively weaker quarter last year during the pandemic. Our adjusted EBITDA was down 12.8% compared to the same period last year due to the impact of higher inflationary costs and near-record pulp prices. With the benefits of the Canadian pricing action, adjusted EBITDA improved sequentially to $40.3 million versus Q2 of 2021. Pulp and BEK have remained at near-peak levels, and the rise has been quite dramatic over the last year, as you can see on Page 6. Third quarter NBSK average prices in Canadian dollars increased 29% versus prior year, while BEK average prices rose 42% compared to prior year. For the balance of the year and heading into 2022, we expect NBSK and BEK prices to remain elevated. Also impacting our fiber cost and not reflected on this chart is sorted office paper, which has seen a greater than 100% increase over 2020. In terms of our network on Slide 7 and 8. The paper machine and converting ramp-up at TAD Sherbrooke continues to stay ahead of our start-up plan. In fact, it recently hit our substantial completion hurdle as a commercial facility. In June, we announced additional investments of $25 million in Sherbrooke for an artificial intelligence project with $6.7 million to be contributed by both levels of government. This will bring our total investments at that site to over $600 million. This project consists of creating and implementing a digital twin of the entire plant supply chain. The virtual supply chain model will be using real-time data augmented by predictive and prescriptive AI capabilities to improve the plant's overall performance. This should help us serve our customers and consumers more efficiently than ever. It will also raise the capability of our state-of-the-art facility and provide us learnings to roll out AI to other facilities. We have already begun to see strong benefits from the first phase of our AI program at this early stage. As for our Sherbrooke expansion, we are currently finalizing the project scope. Engineering, environmental and geotechnical studies are progressing well. We are focused on finalizing the scope to ensure this new facility and its assets will meet our future growth needs across all our segments and is synergistic with our existing network. Moving on to the next slide. In Memphis, as indicated before, we are investing more than $20 million in the new facial tissue line that will allow us to produce both TAD and conventional products. This project is progressing well. However, recent supply chain impacts on this equipment may slightly delay our startup. Once operational, this new line, combined with the new Sherbrooke facial line, will increase our North American capacity and improve our position in this category. Let me move on to the OpEx program. Our waste-reduction initiatives are showing positive results in most of our sites. We are also pleased to report that overall equipment efficiency is showing an upward trend. That being said, beginning in late -- the second quarter of 2021, we began to see labor shortages in our Memphis plant that have affected productivity and resulted in increased incremental costs in the third quarter. These labor challenges are not unique to us, and we expect this labor issue will persist into the fourth quarter. We are establishing several measures to mitigate its impact. Our ability to support Memphis with our other plants is a testament to the strength of our North American network and continued investment for long-term growth. The goal with all our network investments is to deliver improved product capability, capacity and cost efficiencies in both conventional and premium tissue segments in North America. Let me move on to Slide 9. We continue to focus on building the equity of our brands with increased marketing investments. This in turn has helped drive market share gains. In short, we're extremely pleased by the overall performance of our brands in all categories since 2019. Our Unapologetically Human campaign employing purpose-driven messaging continues to be recognized worldwide with 17 awards in total. In early October, we had our 18th annual Cashmere collection fashion show. The collection made of sheets of Cashmere bathroom tissue served as the annual kickoff to the October Breast Cancer Month. This year, the event was a huge success with an in-person audience. The marketing reach was further extended with the first-ever 30-minute special air prime time on the CTV network. More recently, the successful launch of SpongeTowels Ultra Pro based on very strong 6-month trial and the addition of new category users has led to further share momentum in towels. This made-in-Canada, ultra-premium product is ahead of our plan on all metrics, including revenue, share, distribution and trial. Like many other companies, we are seeing strong growth in e-commerce. We have added additional resources to capitalize on the shift. And year-to-date, our e-commerce sales have increased over 80% versus the previous year. We also have been working on new on-trend innovations that will be ready for launch in the first quarter 2022, which I'll speak about in our next earnings call. The data presented on Slides 10 and 11 is from Nielsen. It shows solid market share performance over a 52-week period ending on October 9, 2021. Our stable supply position, our innovation, strong customer partnerships and continued marketing are all factors that supported our strong overall market share gains. With a combined 35.6% share, our Cashmere and Purex brands are the leaders in the bathroom tissue category. Looking back since 2019, this represents an increase of 2.4 share points. During the same period, we achieved notable growth in facial tissue, reporting a 35.5% share or an increase of share -- 4 share points. Scotties has strengthened its position and is the clear #1 with many Canadian consumers who consider the brand synonymous with facial tissue. As previously noted, we also posted solid market share gains in the paper towel category. Since the beginning of 2020, our share has increased by 2.6 points to reach 23.2%. This was driven by strong marketing and sales execution across our entire SpongeTowels lineup, and we will continue to make further investments in this category. On Page 12, Away-From-Home delivered positive adjusted EBITDA as the business is progressing across various areas and benefiting from a faster recovery in the U.S. market. We estimate the volume remains approximately 10% lower than pre-COVID levels compared to the same quarter in 2019. We are also witnessing the benefits in Away-From-Home from increased in-house paper production, which translates into lower costs and higher quality. This, combined with improved volume, higher asset utilization and cost-reduction initiatives, led to strong results for the third quarter. And to offset overall inflation costs, we've also implemented a new price increase in Away-From-Home that will be effective in January 2022. The benefits will fall through the P&L with contract renewals beginning in Q1 2022. I will now turn the call over to Mark.
Thank you, Dino, and good morning, everyone. Please turn to Slide 13 for a summary of our financial performance for Q3 2021. Revenue was up 6% to $391.4 million in the third quarter of 2021 from $369.1 million for the same period last year. On a sequential basis, revenue was up 15.3% from $339.3 million. Adjusted EBITDA decreased 12.8% to $40.3 million in Q3 2021 from $46.2 million in Q3 last year, but increased 8% sequentially from $37.3 million in Q2 of 2021. From a margin perspective, adjusted EBITDA amounted to 10.3% in Q3 2021 compared to 12.5% in Q3 last year and 11% in Q2 of 2021. In the third quarter, there was a net loss of $9.3 million compared to net income of $18.5 million for the same period last year. The decrease can be attributed primarily to lower adjusted EBITDA, a foreign exchange loss on U.S.-denominated debt and higher depreciation and interest expenses. These items were partially offset by a higher income tax recovery. In the quarterly segmented view on Slide 14, Consumer revenue increased 3.9% year-over-year and 13.7% sequentially to $332.4 million in the third quarter of 2021. In the Away-From-Home segment, revenue grew 19.9% year-over-year and 25.5% sequentially to $59 million. Consumer adjusted EBITDA amounted to $39.1 million in the third quarter of 2021 compared to $55.3 million in Q3 2020, while adjusted EBITDA margin was 11.8% and 17% for those same periods, respectively. Sequentially, Consumer adjusted EBITDA was slightly lower by $1.2 million with the margin 2 percentage points lower. For the AFH segment, adjusted EBITDA improved by $2.2 million in the third quarter compared to minus $3.5 million in Q3 2020 and minus $0.4 million in Q2 2021. It's important to note the favorable impact of the release of a COVID-19-related accounts receivable provision of $1.3 million in Q3 2021 for AFH that was originally recorded in 2020. Excluding that onetime item, AFH results were still in positive territory and at a much higher level compared to last year and sequentially. Corporate and other costs amounted to $1 million in Q3 2021 compared to $5.6 million for the same period last year, which included start-up costs for the TAD project. On Slide 15, we review the year-over-year revenue growth for Q3, which was $22.3 million or 6%. This increase can be attributed to a selling price increase in Consumer Canada, slightly higher sales volume in the Consumer segment and a pickup in demand in the AFH business resulting from the easing of COVID-19 restrictions. These factors were partially offset by a negative foreign exchange impact on U.S. sales. From a geographical basis, revenues in Canada improved $10.3 million or 4.6% year-over-year, while U.S. revenues grew by $12 million or 8.3%. And in constant currency, U.S. revenue increased by 14.4%. On Slide 16, we provide further insight into our Q3 2021 adjusted EBITDA, which decreased year-over-year by $5.9 million or 12.8% to $40.3 million. In terms of adjusted EBITDA margin, it was 10.3% in Q3 compared to 12.5% in Q3 2020. The decrease in adjusted EBITDA was primarily driven by an unfavorable sales mix, higher pulp prices, labor shortages at our manufacturing plant in Memphis and inflationary pressure as well as higher freight rates and warehousing costs. These factors were partially offset by more in-sourcing activity for the Away-From-Home segment and net favorable FX impact and lower SG&A expenses. Now let's turn to Slide 17, where we compare Q3 2021 to Q2 2021 revenue. Sequentially, revenue increased by $52.1 million or 15.3%. This quarter-over-quarter growth was driven by higher Consumer and Away-From-Home sales volume in the United States and Canada and the benefits of pricing actions in Consumer Canada and the positive impact on U.S. sales of FX. In terms of geography, revenue in Canada increased by $14.3 million or 6.5%, while revenue in the U.S. grew by $37.8 million or 31.5%. On a constant currency basis, U.S. revenue increased by 28.2%. This significant increase in U.S. revenue was due to a higher inventory de-load in Q2 2021 and a consumer and customer reload in Q3 due to the Delta variant in the U.S. On Slide 18, Q3 2021 adjusted EBITDA increased sequentially by $3 million or 8% from Q2. The increase in adjusted EBITDA was mainly due to higher sales volume in the Consumer and Away-From-Home segments as well as the selling price increase in Consumer Canada, which took effect in Q3. These factors were partially offset by higher pulp prices and inflation on manufacturing costs, fixed cost absorption as we reduced our inventory, a net unfavorable impact from FX, increased freight and higher SG&A expenses. In terms of adjusted EBITDA margin, it was 10.3% in Q3 compared to 11% in the previous quarter. I'll now turn to our balance sheet and financial position on Slide 19. Our cash position stood at $118.6 million at the end of Q3 2021 versus $129.7 million at the end of Q2. The $11.1 million cash decrease was mainly due to repayments on the senior credit facility. Overall, net debt at quarter end stood at $835.7 million, up slightly by $8.1 million from the end of Q2. The variation reflects higher FX on U.S. debt. Overall, our net debt to trailing 12-month adjusted EBITDA leverage ratio increased to 5.5x in Q3 2021 compared to 5.3x in Q2. This increase was primarily due to the slightly higher level of net debt and a lower trailing 12-month adjusted EBITDA. At quarter end, total liquidity, representing cash and cash equivalents and availability from the revolving credit agreement, was a healthy $273.6 million. In addition, there was $25.5 million in cash set aside in the TAD Sherbrooke entity, and $24.8 million of cash was held by KPSB and available for the TAD Sherbrooke -- sorry, the Sherbrooke expansion project at the end of Q3. I will conclude my section by reviewing the CapEx on Slide 20. Year-to-date 2021 CapEx amounted to $109.1 million, including $88.9 million for TAD Sherbrooke, of which $5.5 million consisted of accrued and unpaid capital spending as of the end of September. We expect TAD Sherbrooke CapEx to total approximately $100 million for 2021. Subsequent to the quarter end, the TAD Sherbrooke Project achieved substantial completion from a lender perspective, which also provides a reduced interest rate on the debt going forward as of November 1. Remaining CapEx, including the new AI project and the Sherbrooke expansion project, is expected to be in the $40 million to $50 million range. That puts total CapEx for 2021 in the range of $140 million to $150 million. Thank you for joining us this morning, and I'll now turn the call back over to Dino.
Thanks, Mark. Turning to Slide 21. Climate change and climate action is one of the most important issues facing the world today. For our part, we are fully engaged towards achieving sustainable development. In fact, one of the key pillars of our program is planet-positive. We have a bold and long-term commitment throughout multiple dimensions of our business and our culture to deliver against our goals. Sustainability is not only part of our business plan but part of our purpose as a company. I want to conclude with Slide 22. To offset widespread inflationary costs, we have taken additional pricing actions. During the third quarter, we began to see benefits from our price increase in Canada Consumer with the full impact beginning in Q4. Our U.S. Consumer business has also implemented pricing, which will begin to flow to P&L in 2022. On the Away-From-Home side, we have implemented further price increases to counter inflationary pressures, which will also begin to flow through in Q1 2022. In terms of our brands, we continue to invest in innovation to build share in Canada while expanding the brand name recognition and reach of White Cloud in the U.S. Turning to our TAD facility in Sherbrooke. We're exceeding the ramp-up curve initially established for bathroom tissue and paper towels, including the manufacturing of our new SpongeTowels Ultra Pro product. Being ahead of schedule will enable us to meet upcoming volume requirements as we secure new customers and grow our existing customer base. Our operational excellence program, Memphis facial line expansion and Sherbrooke expansion will increase our volume capacity and optimize our cost structure for the future. The Away-from-Home segment is well positioned for a recovery in end-user markets and will gradually benefit from price increases and cost management. As previously stated, we're fully committed to Reimagine 2030, our new sustainability plan. We are firm believers that our plan will spearhead transformative growth and sustainable innovation. And we continue to develop our organizational capability and culture to drive future growth. Now turning our attention to our outlook for Q4. We are seeing activities and customer behavior starting to return to pre-COVID levels in both business segments. However, cost inflation and lag pricing in the fourth quarter are expected to impact results. Q4 2021 adjusted EBITDA, therefore, is expected to be in the range of Q3 2021 and Q4 2020. I would like to close by saying that despite the current industry cost and volume impacts, our long-term outlook for the business remains healthy, and our growth strategy remains unchanged. The gap between higher costs and price increases is a timing issue and not a permanent step down in margins. We fully expect to reap the benefits of our network modernization efforts, volume capacity ramp-up, new product introductions, strong customer relationships and marketing initiatives to deliver growth and create value for shareholders in 2022 and beyond. Finally, I would like to thank our employees for their ongoing resilience and determination to stay safe and make our company great, especially during the challenges of COVID. We will now be happy to take your questions.
[Operator Instructions] Your first question comes from Roshni Luthra from CIBC Capital Markets.
Dino, can you quantify the level of pricing action you're taking in both the Consumer and Away-From-Home segments?
I will tell you -- I won't give you an amount, but I will tell you, it's -- the new increases are going to go out for U.S. Consumer and for AFH, which are the new increase. In Canada, as you know, price effective July, Canada Consumer. They will be in the high single-digit amount. We have -- those price increases will have reflected our pulp estimates, plus all the best position we have on inflation. So we should be in a -- despite the lag, we should be in a margin-neutral position with pricing and costs once the pricing kicks in.
Okay. Just how is the expansion of White Cloud in the U.S. progressing?
I would say we are above 2019 levels but not at 2020 levels. Obviously, in 2020, with the pandemic, we had a lot of doors open for us because of supply issues. So we were able to move White Cloud in. We've retained many of those, some within, some were in and out. But we continue to build the brand and invest in the brand. In fact, probably something I'll talk about in future earnings calls about what we're doing with the White Cloud brand in the U.S. It is part of our growth strategy for the future. And with the addition of our network and our assets and our capability, it will be a benefactor from that additional capacity.
Okay. And then just the last one for me. Are you able to give us like an initial CapEx guide for 2022?
I'm sorry, I didn't hear the first part of that question. Guidance, did you say?
Sorry. I was just wondering if you could give us like a preliminary CapEx guide for 2022.
Oh, CapEx, CapEx guide. Yes, we generally don't provide that at this point. You said CapEx, I assume, right?
Yes. Yes.
I would use -- for nonstrategic, probably in the same range that we have been investing this year, give or take. We haven't finalized our budgets yet. So...
Your next question comes from Sean Steuart from TD Securities.
A couple of questions. The labor situation in Memphis, and you touched on your mitigation efforts, is that just rolling out these automation initiatives? Are you paying more? Any more detail you can give us on how you're mitigating the pressure there?
Yes, yes and yes. I would say -- we're in a new world, as you know, Sean. It's not just our business, it's all businesses post COVID. And the demand for labor is incredible, and there's pockets of it that are hit a little harder. Memphis definitely has hit harder for us. There's always been a challenge for labor availability, and it's been spiked because of various factors.So we're being very creative. Automation is part of it, for sure. So we're looking at investing in automation. Hiring, retention, bonuses, looking at our pay grade, looking at strengthening our purpose and noncomp sort of benefits in that region. So we're -- we've approached this with an open book and trying to be very creative because it certainly hit us in Q3. We think it will hit us in Q4. It will gradually improve as we move through, but this won't be something that turns overnight. I think the labor challenges for many companies are going to persist for quite some time.
Okay. And Dino, you mentioned the strong year-over-year growth in your e-commerce business. I would guess that's still a pretty small percentage of the overall mix. Can you give us context on, whether it's sales or shipments, what percentage goes into that channel now and where you can envision that share growing to over time?
Yes. Sure. It's a bit imperfect data, Sean. But our guess is that 5% of our volume is going through e-com. And the reason why it's imperfect data is because you don't always see from bricks-and-mortar companies that have their e-com wing or their arm, you don't always get the clear data. For other companies that are pure e-com like Amazon, it's a little easier.So we think we're about 5% of our sales. Obviously, almost doubled versus where it was as you see in the market for everybody. We do think it's going to plateau post the COVID. So I don't expect it to retract substantially, but I don't expect the same growth curves that you've seen. So we're targeting probably in the high single digit in the next couple of years. So 8% to 9% probably is what we think our e-commerce will be for us.And part of our e-commerce strategy, I didn't talk about it on the chart. I mean, certainly, there's a whole path to purchase for the consumer. How do we engage them before they get to e-com, how do we highlight and talk about our brands, the descriptive, the quality of the photography, the pack sizes. Our products were mainly designed to sit on a grocery shelf, and e-com is a different configuration requirements. So it's a whole business system. Even though it's easy to quote, we're up 100%, there's a lot going on there to drive sustainable growth for the future.
Your next question comes from Paul Quinn from RBC Capital Markets.
Just following up on Sean's e-commerce question. That 5%, what's the split between e-commerce for KPT and e-commerce for others like Amazon?
Well, the 5% is our Canadian-branded sales that we believe goes through an e-commerce channel. Whether it's an Amazon or bricks-and-mortar, we don't have -- I don't have the split in front of me. Obviously, Amazon is a big, probably -- it is the biggest player still in that segment. But it is -- all our channels. It's Costco, it's Loblaws, it's Walmart, it's Sobeys, Metro, you name it. So it represents all -- Amazon would be one of the larger ones and as it is in the marketplace, but others are quickly catching up. You see a lot of investment from our bricks-and-mortar companies that have really stepped up their e-commerce efforts. So we're seeing aggressive growth across all our customers.
Okay. So just so I understand, you guys aren't selling it through your e-commerce channel directly? You're selling it to customers who are selling it through e-commerce?
No, no. Yes. Yes, Paul. Yes, we were not going direct to consumer. We're working through our customer base. Sometimes they're dedicated warehouse, sometimes they're shared warehouses. So -- that's why I say it's imperfect data because sometimes it's hard to track exactly what went through an e-com versus a cash register.
Yes. No, I understand that. I'm just wondering why wouldn't you go direct-to-consumer on e-commerce?
I think, at this point, we have strong customer partnerships. They have infrastructure already built in place. They are a consolidator of other products. When you're going on e-com, you're not just buying tissue. So the business model works for us right now.Will we someday get into it? Maybe. But at this point, we don't see a need to have to get into it. We feel our needs are being well served by our existing customer base through e-com.
Okay. And then just -- you made that comment on pulp that you expect it to be elevated through 2022. What does elevated mean to you guys?
Yes. I think the crystal balls are a little dusty for forecasting anything these days. We see it kind of moving sideways to slightly down, but we don't see a dramatic change. If you look at past pulp cycles, you had rapid increases, rapid decreases. I think this pulp cycle will be different. Rapid increase and probably a lot of sideways motions, going down. You've got obviously COVID is a factor, still the recovery. You've got supply chain factor. You've got countries like China curtailing a lot of industry. You've got new facilities in South America that are going to produce eucalyptus. So that's -- obviously, that's a bullish aspect.So there's a lot of dynamics in the marketplace right now. So our best call is that it will likely go sideways on a slight decline, but other inflation costs will continue to rise. So it'll keep pressure on our total cost basket.And as I said in my comments, any company that's operating in this world, in this market today just has to be ready to pivot as things change. You don't put the playbook and move with it. You got to be ready to move. And if costs decrease significantly or increase significantly, we've got to be ready to move.
Okay. And then just on, I guess, the Away-From-Home section on Page 14 there, you've got a negative 3.7% margin. I think that should be positive 3.7%. That's a first positive we've seen since Q1 of '18. Just wondering why -- just trying to understand that $1.3 million one-timer in the quarter that helped you out. What is that related to again?
Paul, it's Mark. We had an accounts receivable provision that we set up in 2020 during COVID-19 as -- because of the situation with the Away-From-Home market. And as the market has recovered for Away-From-Home, we released that provision in Q3. We didn't need that any longer. So that's what that $1.3 million is for, one-time.
Right. One-timer. Okay. And then just overall, I mean, Dino, you talked about the $600 million you're investing in Sherbrooke. And I'm just looking at your guidance, which is pretty muted for Q4 here. Just wondering when you expect the big ramp-up of cash flow and results to come back from that -- from these investments in Sherbrooke?
Yes. I think the ramp-up, as I've mentioned, has been ahead of schedule. I think the -- as you said, the muted results for Q4 is more -- it's not a volume-driven issue. It's more of a margin catch-up issue. Our volume will continue to be strong, as we see, and that's -- a lot of it is just the markets turning around plus the added capacity we have from Sherbrooke.So we're already starting to see those benefits, and we expect to continue to grow in 2022. The margin structure in Q4 is dealing with the lag between costs and pricing, if you will, that we don't see as being sustained into 2022.
[Operator Instructions] Your next question comes from Zachary Evershed from National Bank Financial.
So with inflation in raw materials and labor pretty much across the board, are you concerned at all about budget overflows on the Sherbrooke expansion?
No. You said budget overflows?
That's right.
Are you talking about capital? Are you talking about profit? What are you -- sorry, Paul -- or Zach, just a little clarity.
Yes. On the Sherbrooke expansion, the $240 million expansion.
Oh, yes. There is some inflation. Anybody obviously who's putting in equipment -- if you remember, that project has 3 stages and had a bath line, a facial line and a paper machine. I think where our biggest concern around some inflation will be around the paper machine. It's the last one that comes on board, and the procurement process is really starting now.I feel on the bath tissue line, we're good. A little bit of inflation relative to our plan on the facial line since that's the second piece to come in and is starting to see some inflation. And then the paper machine.I would say it would -- it doesn't change the economics dramatically. I don't have a final number, but I know we've put a provision in for incremental inflation costs with that project.
Perfect. And could you tell us a little bit more about the investment in automation and artificial intelligence?
Yes. I mean we've broken it down into different stages. So the first stage really focused on, first of all, collecting the data and then using the data to help us with our center linings on the converting line. So we have 3 converting lines at that facility. We really used line 1 as our first line and then rolling it out to line 2 and 3. The degree of precision that we're able to get on our center lining was able to increase our OEs beyond our planned OE ramp-up driven -- because of the benefits that we're getting from AI. And then the next phase, which we're working on now and announcing, will also look more holistic around production planning, inventory management and a couple of other areas of the facility, waste reduction, to add further value on the site.So I don't want to, if you will, share anything confidential. I think on a macro basis, we're doing what AI is meant to do, which is to take repetitive data and create predictability with it. And the information platform that we have put in to collect the data, they're state-of-the-art, and now the algorithms that we're using from that data is what's going to yield the benefit.And this is a journey for us. Certainly, we're putting it in Sherbrooke and rolling it out, but we see this going across our whole supply chain. And then in other areas, like finance and production and sales forecasting, et cetera, other areas of our business as well. So this is a long-term journey that we'll take in stages because, as you know, it's expensive investment to make.
That's great color. And one last one for me. Given your view of pulp prices moving mostly sideways but potentially downward in the months ahead, weighed against potential supply chain disruptions, how are you managing the pace of investment in your inventories?
So when COVID hit, we ramped up -- immediately ramped up our production -- or sorry, our purchases of pulp on site. So we would -- we ramped them up to three, fourfold what we'd normally carry because we weren't sure what was going to happen in the market. We started easing those up as it became clear on the supply chain side.I think now with the refocus on supply chain challenges, we will continue to ramp up but not to the levels pre-COVID as we have not seen any disruptions nor do we anticipate any disruptions on the -- particularly on the pulp side. Despite the fact that most of our pulp is sourced from Canada or South America -- even the South American pulp is moving well, and we don't -- we're in close contact with our suppliers there. We don't see an issue. But nonetheless, we will ramp up a bit on the raw material side.Packaging, we are increasing our inventory there as well, but not -- again, not to the extent that we had during COVID. So I would say it's being smart without investing significant amounts in building inventory. Unless we hear news, then we'll take action to build inventory in that particular raw material.
And there are no further question at this time. I will turn the call back over to the presenters for closing remarks.
Great. Thank you. I want to thank everyone for joining us on this call today. We do look forward to speaking with you again following the release of our fourth quarter results. Thank you and have a great day.
This concludes today's conference call. You may now disconnect.