KP Tissue Inc

TSX:KPT

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to KP Tissue First 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, May 7, 2021. I will now turn the conference over to Mike Baldesarra, Director, Investor Relations. Please go ahead.

[Mike Baldesarra, Director of Investor Relations]

Thank you, operator and good morning ladies and gentlemen. My name is Mike Baldesarra. I'm the Director of Investor Relations at KP Tissue Inc. The purpose of the conference call is to review the financial results for the first 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 in 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 contains the usual legal cautions including as to the 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 Q1 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 our website and will also be available on SEDAR.Finally, I would 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. We would also appreciate that during the Q&A period for you to limit your questions to 2.Thank you for your collaboration. Ladies and gentlemen, I'll now turn the call over to Dino Bianco, our CEO. Dino?

[Dino J. Bianco, Chief Executive Officer]

Thanks, Mike and good morning to all. I'd like to thank you for joining us today for our first quarter earnings call. After a year of incredible tissue demand, our Q1 results reflect the impact of significant inventory destocking across the North American consumer tissue category.While we are still moving through the volatility uncertainty driven by COVID, the magnitude and speed of the destocking was unexpected during the quarter. This destocking impact on our sales was the largest single driver of our EBITDA performance for the quarter. We began seeing the impact of the destocking of both consumer and retailer inventories in January with gradual improvement as we move through the quarter.Our analysis indicates this onetime volume impact has substantially moved its way through the supply chain as we begin to see a recovery in sales velocity as we exit Q1. The drivers of the destocking were threefold. First, consumers' confidence in the tissue supply chain enabled them to reduce their at-home inventory.Second, heavy retailer inventory exiting 2020 given COVID uncertainty. And the third area is reduced shop purchase, particularly in Canada as lockdown became more severe. On our AFH business, continued to show softness as end-user markets remained depressed. However, we did see improving trends in our U.S. AFH sales as hospitality and food-service channels began opening up.Despite these unique challenges in Q1 and the impact to sales, our EBITDA improved versus Q4 2020 and we will speak about those drivers shortly. In addition to the marketplace impacts described earlier, we are also lapping a very strong Q1 2020, as the surgeon tissue sales, driven by panic buying in March of last year drove strong prior year results. Let's now turn to the numbers on Slide 5. Q1 2021 revenues declined 17.3% while adjusted EBITDA in the quarter declined 26.5% versus prior year. Specifically, revenue came in at $310.4 million, while adjusted EBITDA was $37.5 million.Revenue declined in both Canada and in the U.S. at minus 15.4% and minus 20.2% respectively. EBITDA was not only affected by lower sales volume, but by higher pulp prices and increased freight and warehousing costs. This was partly offset by lower SG&A expenses.On Slide 6, in addition to the Q1 volume impact, the tissue industry is seeing significant pulp cost escalation in both dollar magnitude and speed of increase. These costs will begin to hit our P&L in Q2 and are part of cost inflation headwinds across many cost inputs facing most companies. Specifically on pulp, first quarter NBSK average prices in Canadian dollars increased 11.5%, while BEK average prices rose 13.8% compared to Q4 of last year.Average NBSK prices in U.S. dollars were up 14.3% and average BEK prices rose by 16.7% quarter-over-quarter. As indicated during our Q4 call, we expected NBSK and BEK prices to continue to increase and remain elevated for the balance of 2021. To counter these significant common industry cost increases, we announced the price increase in our Canadian consumer business, that will take effect in early July of this year. We also announced the price increase for our away from home business, which will take effect as contracts come up for renewal.Moving to the impact of COVID-19. As the health and well-being of our employees is paramount, we continue to make significant investments to keep our facilities safe. As a result, we see no evidence of interest-site virus transmission not had any major business disruptions in our network. With TAD Sherbrooke and strong legacy asset performance, we are in a strong inventory position to supply the market, including reintroducing some SKUs that were temporary halted last year. As things stand now, we expect consumer demand to start stabilizing in the current quarter with the return to normal buying patterns, while U.S. market conditions for the AFH segment are gradually improving, the Canadian market will remain challenged a significant COVID-19 restrictions are still present. As we continue to manage the pandemic's impact, we are also preparing for a post-pandemic recovery. We want to continue to carry forward some of the learnings brought to our business by the pandemic such as permanently eliminating slow-moving SKUs, building our e-commerce muscle and building our new distribution opportunities. Consumer trust in our brands is also a key differentiator. And in this period of uncertainty, this is one of the factors leading to our strong market share performance. The past few quarters have showcased the high level of trust in our brands.I am exceedingly proud of our leadership position in Canada and I will discuss this further in a few slides. In terms of our network, TAD Sherbrooke is ramping up faster than expected. Our paper machine and converting lines continued to track above anticipated start up curves. It was quite an incredible accomplishment by our team to start up this facility on time and on budget during the pandemic. One of the first products commercialized from this facility is our new SpongeTowels Ultra Pro, which is on the shelf at most accounts in Canada. With the TAD Sherbrooke ultra premium capability, we now have a product that provides consumers industry leading quality that is made right here in Canada. The launch of Ultra Pro provides timely support to our share momentum in the category and is a welcome addition to our SpongeTowels lineup.Regarding our Sherbrooke expansion. We are in the process of finalizing the project scope. Engineering, environmental and geotechnical studies are underway and we're in the final stages of completing the project's financing. As a reminder this expansion combined with TAD Sherbrooke will create a tissue hub, capable of flexible, high quality tissue production across all segments. I hope to share more in the coming months as this project comes to life. We also expect our previous OpEx investments and enhanced maintenance to drive stronger performance in our legacy assets. This year's focus has been expanded to include more assets and a special focus on waste reduction.We're also gratified to see sustainable benefits from a higher level of employee engagement, empowerment and positive cultural shift driving long-term operational excellence. From a long-term standpoint, we continue to make the investments needed to modernize our North American network, increased capacity and benefit from greater product flexibility in both conventional and premium products. As part of this strategy, we also invested in a state of the art facial tissue line in our Memphis facility, which will come on stream in 2022. On to our trademarks. We continue to focus on investing and building our brands.During this pandemic, we have increased our marketing investment, changed our marketing tactics and refined our consumer messaging to be more relevant to consumers, while giving back to those in need. As we look to 2021, we will continue to increase our investment and strengthened our bonds with existing and new consumers. The quarter saw a full distribution of our quality improved Cashmere supported by strong advertising campaign. As well our new Unleash the Scotties campaign is gaining strong consumer traction as we continue to move towards bolder more distinctive marketing campaigns.What's more, our close NHL partnership continues with the activation of our Find the Cup to Win, Stanley Cup playoffs promotion. And finally, as mentioned earlier, we are very pleased with the launch of the new SpongeTowels Ultra Pro paper towels, which is hitting stores across Canada as we speak with strong early results. The data presented in Slides 10 and 11 is from Nielsen. It shows dollar market share and represents a 52-week period ended March 27, 2021. Once again, thanks to an improved supply position, strong customer partnerships and continuing marketing support, we delivered strong market share growth in all categories. Our Cashmere and Purex brands are bathroom tissue market leaders, closing 2020 with a combined share of 36.9% and posting further gains in Q1 with 37.1%. We achieved similar growth in facial tissue with a share of 33% this quarter compared to 30.9% for the corresponding quarter last year. And our Scotties is a clear number one with many Canadian consumers considering the brand to be synonymous with facial tissue.In addition we've made appreciable share gains in the paper towel category, where our share grew from 20.5% last year to 22.2% this quarter. We're excited about our growth prospects in 2021 and beyond in this category. Finally, we continue to see opportunities to further expand our distribution and sales of the White Cloud in the U.S. We are working to build the brand at focused retailers as a better value, high quality products versus the leading brands. In our AFH segment, success going forward depends on end market recovery. There was a modest increase in March volumes, but first quarter volume was approximately 25% below pre-pandemic levels. Ongoing COVID-19 restrictions in Canada are negatively impacting our AFH volume.The good news is that there are encouraging trends in the U.S. as it lessens restrictions and continues to make meaningful progress in the number of people vaccinated. As indicated earlier, we announced price increases, which will progressively take effect as contracts come up for renewal. And the benefits of our OpEx program have allowed us to achieve significant progress over the past 2 years and our operations are now performing well. Our AFH operations network is recovery ready as we anticipate growth in the upcoming quarters tied to end market recovery.With that, I will now turn the call over to Mark, who will review our quarterly results.

[Mark Holbrook, Chief Financial Officer]

Thank you, Dino, and good morning, everyone. Please turn to Slide 13 for a summary of our financial performance for our Q1 2021. Revenue was down 17.3% to $310.4 million in the first quarter compared to $375.1 million for the same period last year. Adjusted EBITDA decreased 26.5% to $37.5 million from $51 million in Q1 of last year, but increased sequentially by $1.3 million or 3.5% from $36.2 million in Q4 of 2020. From a margin perspective, adjusted EBITDA decreased to 12.1% from 13.6% in Q1 last year, while it increased from the 9.4% posted in Q4 2020.In the first quarter of 2021, net income amounted to $6.8 million compared to $8.4 million last year. The $1.6 million decrease was primarily due to lower adjusted EBITDA and higher interest and depreciation expense, which were partially offset by an increase in other income, primarily related to a foreign exchange gain on U.S. dollar denominated debt and no consulting costs related to operational transformation initiatives in Q1 of this year compared to Q1 last year.In the quarterly segmented view on Slide 14, consumer revenue decreased 13.3% year-over-year to $271.4 million. It also declined on a sequential basis by 18.6% compared to a strong Q4 2020. In the Away From Home segment, revenue declined 37% to $39 million. On a sequential basis, AFH revenue decreased 24.6% over Q4. Consumer segment adjusted EBITDA decreased by $10.2 million to $44.1 million and adjusted EBITDA margin decreased from 17.3% to 16.2%. For the AFH segment, adjusted EBITDA decreased by $3.8 million to a loss of $4.8 million and adjusted EBITDA margin stood at negative 12.3% versus negative 1.7% for the previous quarter. Corporate and other costs were a loss of $1.8 million in Q1 2021 compared to a loss of $2.3 million for the prior year.On Slide 15, we review Q1 2021 revenue over Q1 2020, which was down by $64.7 million or 17.3%. The decline was primarily attributable to significant sales volume decreases in both Canada and the U.S. resulting first from the comparison to last year's high COVID-19 buying activity in Q1 across all business segments. Second, from destocking of tissue inventories in Q1 of this year by retailers and consumers. And third from the unfavorable impact of COVID-19 related restrictions on the AFH segment.Revenues also declined to the unfavorable impact of FX on U.S. sales. By geography, Canadian revenues decreased by $35.5 million or 15.4% and in the U.S., revenues decreased by $29.2 million or 20.2%. On Slide 16, we provide further insight into our Q1 2020 adjusted EBITDA, which decreased year-over-year by $13.5 million or 26.5% to $37.5 million. Gross margin for the quarter decreased slightly from 16.2% to 15.2%. The decrease in adjusted EBITDA was primarily driven by lower sales volume, net of overhead absorption, also by the unfavorable impact of higher pulp prices and outsourcing costs as well as higher freight rates and warehousing costs.These factors were partially offset by lower SG&A expenses. For a sequential perspective, let's turn to Slide 17, where, we compare Q1 2021 to Q4 2020 revenue. Quarter-over-Quarter revenues decreased by $74.6 million or 19.4%. The decrease was primarily due to lower consumer sales volume due to the retailer and consumer destocking, relative to the high Q4 demand that we saw from wave 2 of COVID, also AFH sales were lower, which reflect the new wave of COVID restrictions in Canada. And there was a negative impact from the lower FX on U.S. By geography, revenue in Canada decreased by $49.5 million or 20.3%, while revenue in the U.S. decreased by $25.1 million or 17.8%.On Slide 18, Q1 2021 adjusted EBITDA increased sequentially by $1.3 million or 3.5% compared to Q4 of 2020. And gross margin rose from 13.7% to 15.2%. The increase in adjusted EBITDA was primarily due to a decrease in SG&A spending and that's related to lower seasonal advertising. We also paid a bonus to our hourly workers in Q4 2020, which was one time. And with the successful ramp up of production, TAD Sherbrooke had a modest positive contribution this quarter compared to a negative contribution related to start-up costs in Q4 of 2020. These factors were partially offset by a significantly lower sales volume in both business segments net of overhead absorption and also by higher pulp prices and increased freight rates. I'll now turn to our balance sheet and financial position on Slide 19. Our cash position was $57.6 million at the end of Q1 2021, a decrease of $71.1 million from $128.7 million position at the end of Q4.The cash position includes $22.4 million in the TAD Sherbrooke entity at the end of Q1. At quarter-end, total liquidity representing cash and cash equivalents and availability under the revolving credit agreements was a healthy $225.2 million. Overall net debt at quarter end stood at $795.2 million, up from $624.7 million at the end of Q4. Net debt increased due to higher working capital requirements, particularly higher inventory and heavier seasonal payments typical in Q1 and due to the debt financing used for the investment in TAD Sherbrooke. Our net debt to trailing 12 month adjusted EBITDA ratio increased to 4.3x. Subsequent to the quarter end on April 8, we issued $135 million of senior unsecured notes due in 2029, with the proceeds being used to pay down the revolving debt and for other corporate purposes. In conjunction with the issuance of the notes, the limit on the senior credit facility was reduced from $250 million to $200 million.Overall, this resulted in an increase in liquidity of $82 million after fees. I will conclude my section by reviewing the CapEx on Slide 20. Q1 CapEx totaled $54.7 million including $51.1 million for TAD Sherbrooke. At quarter end, accrued and unpaid capital spending on the new facilities stood a $25.2 million. Looking at the full year 2021. Our anticipated CapEx range has not changed from what we have previously provided. We expect TAD Sherbrooke CapEx to total approximately $115 million, once all project payments are completed. Remaining CapEx, including the new Sherbrooke expansion project is expected to be in the $45 million to $65 million range. That puts total CapEx for 2021 in the range of $160 million to $180 million. Thank you for joining us this morning. And I'll now turn the call back over to Dino.

[Dino J. Bianco, Chief Executive Officer]

Thank you, Mark. Turning to Slide 21. We recently announced the launch of our Re-Imagined 2030 sustainability platform. This program sets long-term ambitious goals that will make Kruger Products, a leader in sustainability and transform our culture, as we focus on being better environmental stewards in everything that we do. Last week, we also announced that we became a signatory of the Canada Plastics Pack or CPP making us the first tissue company to do so. The CPP is an initiative that brings together Canadian partners united behind the vision of creating a circular economy that keeps plastic waste in the economy and out of the environment. One of the targets of Re-Imagine 2030, is to reduce virgin plastic in our trademark packaging by 50%.As a Canadian leader, we have a responsibility and a duty to be part of the solution for upcoming generations. In conclusion, our focus remains on investing in our brands and innovation to build market share leadership in Canada, while expanding the White Cloud brand in the US. In order to offset unprecedented increases in pulp prices, we have taken pricing action in both Canada, consumer and AFH and expect to see benefits starting in the third quarter to offset some of the pulp increases.Furthermore, with the TAD facility in Sherbrooke exceeding the ramp-up curve, we're well positioned to support the launch of the new SpongeTowels Ultra Pro, an ultra premium paper towel Made in Canada. The OpEx program combined with the announced Sherbrooke expansion will increase capacity and optimize the cost structure for the future. Meanwhile, the AFH segment is preparing for a recovery in the end-user markets. Re-Imagine 2030, our new sustainability commitment is designed to superior transformative growth and sustainable innovation.And finally, we're developing our organizational capability and culture to ensure our organization is future ready.Regarding our outlook. With the continued volatility of the COVID-19 recovery, the impact on sales and AFH and consumer and significantly higher pulp prices, Q2 2021 adjusted EBITDA is expected to be in line with Q1 2021 results. We do expect that more favorable market conditions combined with pricing actions will translate into improved performance in the second half of the year. I'd like to thank our many employees for their unrelenting dedication during these unprecedented and challenging times. Kruger Products has played an important role since the onset of the pandemic securing much needed tissue products for consumers who know they can count on us for their tissue supply and quality.Our outstanding employees are the ones whose daily efforts make this happen and provide us with the confidence that we enjoy. To each one of them, I want to convey my utmost gratitude and thanks. We will now be happy to take your questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Paul Quinn of RBC.

[Paul C. Quinn]

Yes. First question would be on the inventory destocking that you saw most of your peers that have reported earlier sort of describe this is something that happened in March to them. And where you sort have described that is something to happen earlier in the quarter and you've seen gradual improvement. Is that change by geography and do you think we're through that now?

[Dino J. Bianco, Chief Executive Officer]

Yes, Paul. Obviously, anybody in tissue in North America has talked about it. We saw it starting in January. It's interesting that sometimes the pandemic impacts happened earlier in Canada than they do in the U.S. So we started to see it in January. In fact, when we did our Q4 earnings call, you remember, I highlighted that given the inventory changes that could be happening in Q1 as we started to see that in January and February before we did our call. I would say that the degree and the magnitude of the inventory destocking caught us by surprise. We knew there was going to be some of that during the year. We had it more prolonged and didn't have it as deep. And of course, it's imperfect data. You don't get exact data how many, how many packages consumers have at home. The good news is we started to see improvement as we exited the quarter. Each month got sequentially better than the last month. I do think we're primarily through it. We're seeing positivity. And as we look at the upcoming quarter in terms of velocity starting to improve across the business. So I do view this as a onetime adjustment. I don't think it changes the fundamentals of this category and the strength of this category. And it is part of the COVID volatility. Last year, the volatility was upside. This quarter the volatility was downward.

[Paul C. Quinn]

And then, I'm just trying to understand how to offset this rising pulp costs. I mean you've announced a price increase. Others some others have I've seen some branded guys that look like those increase your marketing budget and going for market share and not increasing prices. So just wondering, the price increase if you get it, does that fully offset the anticipated cost increase that you're going to see in pulp?

[Dino J. Bianco, Chief Executive Officer]

Well, so just to clarify, we did announce a price increase, I do want to clarify that. And we are moving forward with that price increase to be effective in early July in our Canadian consumer business. We have pegged that price increase to not just cover pulp. But as I mentioned, there is increased costs in freight packaging, energy, labor. I mean we're in an inflationary period across many other factors, pulp clearly being the largest part of that. We are in the area of covering the pulp. If the full increase goes through, the pulp market continues to change the fastest escalated since we announced our price increase.So we're watching that very carefully. But I think the number that we announced and where pulp, looks like it's going to settle is following an equilibrium. And we're working through with our customers now, working through with them. Obviously, the rationale for the increase, which I think they absolutely understand. And as you mentioned, some other tissue players have decided not to announce. And clearly they must be feeling the impact of the pulp increases on their P&L. They will choose to go their own way.So we're watching the market closely. We want to always make sure we're competitive. We're watching for what may be de-sheeting or taking pulp out of the product, if you will. So we're watching for that. It's not a method that we prefer to use. Consumers usually aren't happy as you reduce the size of their products. But that may be attacked that gets used and we'll continue to watch to make sure our pricing is competitive. Our sizing is competitive in the marketplace and that we continue to support our customers through this.

[Operator]

Your next question comes from the line of Hamir Patel of CIBC Capital Markets.

[Hamir Patel]

A few comments on at least in the Canadian context, we've seen sort of mix pricing announcements in the U.S. But in the Canadian market has all the major players announced price hikes?

[Dino J. Bianco, Chief Executive Officer]

Well, I mean, it's not, it's never. We choose to do a public announcement as a public company obviously. So ours is very clear and transparent in the marketplace. We don't get that from others. Generally as part of the negotiation with customers, they choose to tell us how the category is moving. But we don't have official confirmation other than we feel comfortable that this cost impact is affecting everybody. And we're likely going to see pricing some way somehow and at some level by most of the players in Canada.

[Hamir Patel]

And then, just turning to your new SpongeTowels offering. Do you think that, that puts you on a path to get to market share leadership in towels over time in Canada?

[Dino J. Bianco, Chief Executive Officer]

Yes. I mean I don't want to announce that I don't want to define it as an endpoint. I think that with being market share leader, I think we'll do all the right things, not just with the Ultra Pro, which we're very proud of. And it's interesting I had my Board meeting yesterday and one of the questions was, why aren't you talking more about the incredible performance of Sherbrooke? And absolutely Sherbrooke has been quite a story. Any point as you guys know, anytime you can come in on time and on budget with a major startup is amazing. And to do it we'll have the construction phase being during pandemic is spectacular. And I don't want to diminish it.It's still early and maybe in the quarter 2 results of beat our chest a little more around incredible work around Sherbrooke. But that site, the quality of the product that's coming out of that site is spectacular. And we see it through the new Ultra Pro towel that we've launched. The product design that was done by our product development group and the capability of that facility to deliver against that quality spec. We tested it with consumers. We know we've got a winning product and it's part of our line-up. So we will continue to have our others SpongeTowels brands. So we've now segmented the line-up to be an ultra premium, kind of a premium offering and more of an entry offering as well for the marketplace. So we think, we're well positioned with a strong brand, strong segmentation, a fair value versus the market. And quite frankly, for Canada, made in Canada positioning. That product is made right here by Canadians for Canadians. So that's also a differentiator for us.

[Hamir Patel]

And I want to start ask about that announcement recently about plastic reduction. How do you see, where do you see that trend going? I know in Europe, we're starting to see some more experimentation with actually selling tissue sort of packaged more and corrugated material. And obviously, you got your sister company producing that. So do you think it's recycled plastic is where you're heading or are you looking at other options?

[Dino J. Bianco, Chief Executive Officer]

We're looking at a couple of options, obviously paper, you'll see Paper Packaging in Europe, so we're looking at that and this area keeps evolving. So we are aggressively working on this. To be frank with you, it got delayed because of COVID. We focused COVID on the bread and butter of our business, which is existing SKUs. So we kind of put this a little bit on the back burner as we were focusing on getting product out for COVID. So we're reenergizing that now, working with various suppliers to eliminate single use plastic in our -- we don't use a lot of in general. We're not a big user of plastic. But we do contribute to single-use plastics in the environment.So we want to make sure that we're doing the right thing by eliminating that. The question with all the different versions that come along is, does it looked good on shelf? Does it survive the network to supply chain, et cetera? Those are all the work that we're doing now is the cost structure there. That's a fair cost structure for what we need on our product. So more to come on that, Hamir. I'm excited by it and packaging will only be one component of what we're looking at as far as lot launching new products into the future that are sustainability driven at the core.

[Operator]

Your next question comes from the line of Zachary Evershed of National Bank Financial.

[Zachary Evershed, Analyst]

You mentioned that the price increase will just about cover the ramp up in pulp. If it settles, where you think it will? What level is that, where you think it's going to settle out?

[Mark Holbrook, Chief Financial Officer]

Yes. I'm not going to quote a number for that, Zachary. I mean we're using, obviously, there's different net indicators in the marketplace in terms of price points. There is VC, we see pics, there's purchase price, there's China market. Surprised to say that, when we announced the pricing in April, so we announced that April 5. We were probably spending a couple of weeks getting it ready. So if you look at the pulp prices that were in play around that time is kind of what we used to determine our pricing. And then, as you know, since that time has gone up. So are they going to stay up, are they going to settle down a little bit, very crazy world. And as it relates to just economies in general, but particularly anything that's going on with lumber and pulp as you know. So we'll watch it accordingly. If it goes up, we may need to modify if it. If it goes down, we may need to modify. We're going to stay very flexible and agile with this to make sure we're balancing the need to cover the costs and the competitiveness of our products.

[Zachary Evershed, Analyst]

And then, you get some benefits from a stronger Canadian dollar on some input purchasing, but a headwind of course on the translation of U.S. revenues. So if the Canadian dollar keep strengthening and moves towards, say 1.2 or 1.15, how much of an impact does that have on your EBITDA and bottom line?

[Mark Holbrook, Chief Financial Officer]

Zachary, it's Mark here. We would say on a net basis, if you take the total company, there's about $700,000 impact for each cent of FX movement. So in that case, it would be favorable for us as the Canadian dollar strengthens as you described.

[Operator]

[Operator Instructions] Your next question comes from Kasia Kopytek of TD Securities.

[Kasia Trzaski Kopytek, Associate]

Would you be able to provide some context for pulp you buy on spot versus?

[Dino J. Bianco, Chief Executive Officer]

Sorry, Kasia, cut out. Can you just repeat your question?

[Kasia Trzaski Kopytek, Associate]

Yes, no problem. I was just wondering if you could provide some context around how much pulp you buy on spot versus lead?

[Dino J. Bianco, Chief Executive Officer]

Yes, I'm not going to give you that, Kasia, sorry. What I will say is we have long-term, 1- to 2-year contracts with pulp suppliers, probably use about 2 different suppliers to be. And in those contracts, as part of those contracts, we have flexibility to buy a certain amount on spot. And we will then just arbitrage the market to Chairman when we do that. So there's always a portion of our purchases that are expired. It's contractually permitted and creates the right balance between securing supply and taking advantage of market arbitrage between contract and spot.

[Kasia Trzaski Kopytek, Associate]

And as you guys preproduced your fees last year, your cost base is benefitted and you've indicted that you're looking to expand some of those SKUs going forward. Any color that you can provide around how that might impact your costs in the coming quarters?

[Dino J. Bianco, Chief Executive Officer]

The crisis enabled us to do what we probably should have done many years ago. It forced to real lifetime, a real time experiment on reducing slower moving SKUs, it's always hard to remove the skew. There's always a customer that wants that or a region that wants it and nobody wants to give up sales. But we were forced to do so, as many companies did to ensure that we could run our lines as efficiently as possible. So the numbers I quoted, without talking about SKUs. The number I quoted last year was, if you use a 100 Index as pre-COVID, during the heat of COVID, it was, which was still in. But during most of last year, if you will, we went to 50% index. And basically what we eliminated were the slower moving SKUs and focused just on the main SKUs. And then, if you think about an index so where we're going to come back to, we're going to be at a 75 index.So 25% will be totally eliminated SKUs that as I said probably should have been eliminated anyways, less relevance, particularly as now as we're launching some new products. There may be less of the need. Those are sizes. Those are maybe some sub-brands, et cetera, that we're eliminating. And those quite frankly not every SKU is the same cost impact or some SKUs that are really difficult to make, slower runs more complexity higher changeover and some SKUs are flow through and in fact don't cost anymore saving anymore by cutting them. So I have confidence that the ones that we cut, that are the more problematic ones and the smaller ones will be the ones that we will permanently cut and therefore we should continue to see the benefit of it in our supply chain.

[Kasia Trzaski Kopytek, Associate]

And just turning to away from home. You mentioned that you're seeing some encouraging signs in the U.S. The candidates still being undermined by the third wave. Just trying to gauge a sense of how much that could impact results from newly from segment in the coming quarters on a net basis, maybe you should speak to how you expect that to trend relative to Q1 result?

[Dino J. Bianco, Chief Executive Officer]

Yes, I mean, I won't give you guidance on it. But we do expect to see it improve as the year moves. It's been very encouraging to see how quickly the U.S. market has recovered. So maybe that is an analog for how the Canadian market will recover in the away from home segment, particularly foodservice and hospitality.I do believe, we believe is an organization that will benefit on AFH is almost the contrary that happened with consumer is that you'll get some pipeline fill, you get pipeline filled at the end customer. So the restaurant itself let's say, and you'll get some pipeline fill that the distributor. So you'll get an inventory replenishment through the network to get us back to normal inventory levels.So we'll probably see a bit of that. And then, of course, we'll see improved consumption as consumers are using tissue more out of home. For Canada, when we came into the year, we projected that to start happening in the second half, so July onwards. Despite the increased shutdowns that have happened over the last couple of months. We still believe that, that is the right timing for the recovery. U.S. was recovering a little quicker, but unfortunately we're smaller there. So our benefit is consistent with our size, but obviously we're a smaller player in the U.S. market.

[Kasia Trzaski Kopytek, Associate]

Can you just remind me how much the U.S. represents of the whole AFH segment volume?

[Dino J. Bianco, Chief Executive Officer]

Well, I can't, you remind me, because we never told you. So we always -- we included in our U.S. results. So we only be as a segment will be for consumer and AFH as you know, and then we report U.S. and Canada, which includes U.S. consumer and U.S. AFH and Canada consumer AFH. So we're just, I mean, the reality is we're a smaller player in the U.S., which in many ways, a bit of a different model for us. We're more nimble, we're more opportunistic. We can decide what channels, what customers, what format to go into, whereas in Canada, we've got a very strong presence and a very disciplined approach to how we go to market.

[Operator]

Your next question is a follow-up question from Hamir Patel of CIBC Capital Markets.

[Hamir Patel]

I just wanted to ask given how successful the Sherbrooke ramp up and sale process has been, do you start to think about a potential had 3 or at least starting to do the engineering work. So where are you at with thinking about that future growth and any thoughts about when you're going to need additional capacity?

[Dino J. Bianco, Chief Executive Officer]

Yes, I mean that's a great question. We're always thinking about the future. So Ted 2, Ted 3 have been and even Ted 4 is start on the horizon in our start plan. As obviously we wanted to make sure we got Ted 2 started off and got any learnings from that, that gives us a bit of confidence and wind in our sales as it relates to our ability to start up a site and every site. We expect to get better Memphis was our first TAD startup. We have a lot of learning Ted to utilize that learning in some of the same people to start that up. And then of course, now we're looking at and where the future to go and it isn't just a tag story with Sherbrooke expansion. We're also looking at modernizing our assets as well and capability, not just intact. Most of the market continues to be LDC and will likely be LDC with complement of for the more the premium products. So the answer is yes. Well, we're looking at it, I don't think there's any company that's not looking at what their next 5-year horizon is where they need capacity. So we're looking at it. And it's a long process as you know during the business work and understand the financing and then the engineering and the construction. So it's usually a multi-year project from start to finish when you think of it that broadly. So we're starting our process. And as soon as we've got anything to let you know, we'll let you know. And just rest assured that we're managing our business, not just for today, we're looking out 5 to 10 years where we need to be as a North American tissue supplier

[Hamir Patel]

And just with White Cloud can you maybe, I don't know if you have any data points you can share about your distribution, how much distribution you've achieved in the U.S., any recent developments on that front? And just in general, I was also curious what the sort of percent of your business is happening through e-commerce today?

[Dino J. Bianco, Chief Executive Officer]

Yes. So 2 separate questions. So as I've said, you would have talked about White Cloud in terms of what we can do it within our portfolio. And we do believe it is a strong brand, we know, we've tested it, it has a lot of latent equity with consumers. They know the brand and it is part of our future growth. As far as what happened last year, the pandemic opened the door for White Cloud. There were customers that maybe weren't ready to take it. But during COVID and wanting to get tissue they brought it in. So that opened the door for us. And our U.S. team knows that, that door opened and it's our job now to keep it open and continue to build that those accounts. So it doesn't just disappear.So we are continuing to work. Our approach with White Cloud is a few accounts where we can build a deep versus trying to spread ourselves too thin across every account and we just don't have the resources to do it that way. So we're going to be more either regional or customer focus. We have some pretty big customers that have supported us from before COVID and through COVID you can find White Cloud at Southeast grocers in the U.S., which is a more Florida based Winn-Dixie brand for instance in Florida Home Depot Amazon shop. Right.Many others, you'll see some of it, the BJ's, Albertsons, et cetera. So it's the distribution has increased. I don't know if we'll keep all those distribution points, but we want to make sure that the ones we got, we will build on and create a success and that we can continue to roll it out other customers and that's not just a customer strategies consumer strategy. We want to support it from a consumer front as well to make sure we're building affinity with consumers.As far as e-com, I mean, again, imperfect data. But I think you could see in most regards particularly in our category e-com would have doubled last year as a percentage of total tissue. Sometimes it's so many different numbers of how e-commerce is measured. But if you measure I really look at is how much of tissue goes through e-commerce? We think it's probably 4% to 5%, imperfect measure because not all the e-com players report out. Some of it's qualitative, whereas it is probably in the 2-2.5 range pre-COVID.And our goal is to be equal or better than our bricks and mortar position with our brands in e-commerce in Canada. That not only include supply, includes the marketing, the social media, the path to purchase that we undertake so that our brands are prominent on e-commerce shopping sites, whether they'd be a bricks and mortar extension or pure e-commerce players.

[Hamir Patel]

Are margins comparable on the e-commerce channel is the regular distribution?

[Dino J. Bianco, Chief Executive Officer]

They are, we're kind of we're neutral as it relates to where the product is sold, Hamir. And so quite frankly, when you say margins, the only reason I'm hesitating is because we're actually investing more there. So as the margin play yes, but we're putting relative to the size of the business we're putting more dollars against that channel. So on a total contribution basis, it's less because we're making a conscious decision to invest. But as it relates to product profit, that's similar to bricks and mortar. And the other thing we've done is we've staffed up our e-commerce capability. We've added and I hope they're listening, because we've got a 2 incredible incredibly bright people such a passionate and knowledge in this area that they make head spin in terms of how much he and how we can succeed here. So we've added that in our organization in the last of the year, really to make sure we play a leadership role here.

[Operator]

At this time there are no further questions. I will now turn the floor back over to management for any additional or closing remarks.

[Dino J. Bianco, Chief Executive Officer]

All right, thank you. Thank you for joining us on this call today. We look forward to speaking with you again following the release of our second quarter. I wish you all a pleasant weekend and a very Happy Mother's Day to all the moms on the call. Stay safe, stay healthy and we'll talk you soon. Thank you.

[Operator]

Thank you for joining today's event. We're now concluded. You may now disconnect.