Morningstar DBRS Confirms Kruger Products Inc.'s Issuer Rating at BB and Senior Unsecured Notes Rating at B (high), Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating of Kruger Products Inc. (Kruger Products or the Company) at BB and the credit rating on the Company's Senior Unsecured Notes (the Notes) at B (high), both with Stable trends. The Recovery Rating on the Notes remains RR6.

KEY CREDIT RATING CONSIDERATIONS
The credit rating actions acknowledge the Company's stronger-than-expected operating performance in 2024 and reflect Morningstar DBRS' expectation that Kruger Products' credit risk profile will strengthen as the Company's expansionary capital expenditure (capex) projects ramp up and reach full production capacity, thus driving further earnings growth over the medium term.

EBITDA grew to $265 million in 2024 from less than $240 million in 2023, and exceeded Morningstar DBRS' projections, as higher selling prices in the Consumer and Away-from-Home segments, volume growth and a favourable sales mix in the Consumer segment, and lower pulp prices more than offset higher manufacturing costs. Notwithstanding the growth in EBITDA, and in line with Morningstar DBRS' expectations, debt-to-EBITDA increased to 5.5 times (x) from 5.0x in 2023 because of increased indebtedness associated with the Sherbrooke Expansion Project. That said, debt-to-EBITDA remained below the 6.0x level considered appropriate for the current credit rating category.

CREDIT RATING DRIVERS
Should debt-to-EBITDA increase above 6.0x because of weaker-than-expected operating performance and/or more aggressive-than-expected financial management, Morningstar DBRS could take a negative credit rating action. Furthermore, should the Company undertake further debt-funded capex such that Morningstar DBRS becomes concerned that debt-to-EBITDA will remain above 6.0x without a proportionate improvement in the Company's business risk profile, a negative credit rating action could result.

Conversely, Morningstar DBRS could take a positive credit rating action should the Company's business risk profile strengthen meaningfully with a commensurate improvement in debt-to-EBITDA to below 4.5x on a normalized and sustainable basis, based on growth in operating income.

EARNINGS OUTLOOK
Morningstar DBRS forecasts revenue to grow to approximately $2.1 billion in 2025 from $2.05 billion in 2024, primarily attributable to volume growth as the Sherbrooke Expansion Project's Light-Dry-Crepe tissue machine ramps up following its start-up in September 2024. Looking ahead to the medium term, Morningstar DBRS forecasts revenue to grow toward $2.3 billion in 2027, primarily driven by further volume growth as the Sherbrooke Expansion Project continues to ramp up toward full production capacity. Morningstar DBRS expects EBITDA margins to improve modestly in 2025 compared with 2024 as potential price increases and improving operating leverage should more than offset pulp price volatility and higher manufacturing costs. EBITDA margins could increase further in the medium term on the back of growing volumes of higher-margin tissue products combined with improving operating leverage. As such, Morningstar DBRS forecasts EBITDA to grow to more than $275 million in 2025 and to approximately $300 million in 2027. Morningstar DBRS acknowledges the considerable uncertainty about potential shifts in U.S. trade policy and its effect on Kruger Products' operating performance, particularly as approximately one-third of the Company's topline is exposed to potential tariffs, and the Company's U.S. operations are also dependent on softwood pulp imports from Canada. While this uncertainty presents a potential downside risk to these forecasts, Morningstar DBRS believes that Kruger Products will continue to have sufficient headroom to cushion any effects thereof within the current BB credit rating category.

FINANCIAL OUTLOOK
Morningstar DBRS forecasts a surplus free cash flow (FCF) (after dividends but before changes in working capital and principal lease payments) in 2025 compared with the net deficit position in 2024 as (1) operating cash flow continues to trend in line with earnings growth, (2) capex declines to between $70 million and $100 million as the Sherbrook Expansion Project nears completion, and (3) the gross dividend outlay increases modestly above 2024 levels. Following the completion of the Sherbrooke Expansion Project in 2025, Morningstar DBRS expects capex to normalize at $50 million to $70 million per year in 2026 and 2027. This lower capex, combined with higher operating cash flow and a further modest increase in the gross dividend outlay, should result in meaningful levels of FCF in the medium term. Morningstar DBRS believes that the projected FCF surplus, proceeds from Kruger Inc.'s Dividend Reinvestment Plan participation, and available liquidity should fund principal lease payments and mandatory debt repayments. Combined with the projected growth in EBITDA, Morningstar DBRS expects debt-to-EBITDA to improve toward 5.0x in 2025 and to approximately 4.5x by the end of 2027. While uncertainty about U.S. tariff policy could pressure Kruger Products' operating performance and reduce credit metrics below Morningstar DBRS' projections, Morningstar DBRS believes that the Company will have sufficient headroom within the current BB credit rating category to absorb any such downward pressure. Morningstar DBRS also notes that Kruger Products is currently evaluating the construction of a new tissue plant. Should the Company finance a meaningful portion of this expansionary capex initiative with debt such that Morningstar DBRS becomes concerned that debt-to-EBITDA will remain above 6.0x without a proportionate improvement in the Company's business risk profile, Morningstar DBRS could take a negative credit rating action.

CREDIT RATING RATIONALE
Comprehensive Business Risk Assessment (CBRA): BB
Kruger Products' CBRA continues to be supported by the Company's strong brands and leading market position in the tissue products industry, stable demand, and significant barriers to entry. The CBRA also reflects the intense competition, volatile input costs, and product/market concentration.

Comprehensive Financial Risk Assessment (CFRA): BBH/BB
Kruger Products' CFRA reflects Morningstar DBRS' expectation that, through EBITDA growth and mandatory debt repayment, debt-to-EBITDA should improve toward 5.0x in 2025.

Intrinsic Assessment (IA): BB
The IA is based on Kruger Products' CBRA and CFRA. Taking into consideration peer comparisons, among other factors, we place the IA in the middle of the IA range.

Additional Considerations: -0.5
The negative 0.5 adjustment to the Issuer Rating reflects the unmitigated structural subordination of Kruger Products' debt to the cash flows of the Company's Unrestricted Subsidiaries.

Further details on the Company's Corporate Intrinsic Assessment Framework can be found at https://dbrs.morningstar.com/research/451205.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

Notes:
All figures are in Canadian dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Companies in Manufacturing and Production Industries (February 3, 2025),
https://dbrs.morningstar.com/research/447185.

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025; https://dbrs.morningstar.com/research/447186) which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:

Morningstar DBRS Criteria: Approach to ESG Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781.

Morningstar DBRS Global Corporate Criteria (February 3, 2025), https://dbrs.morningstar.com/research/447186

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577