Good morning. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to Cascades' third quarter 2022 financial results conference call. Note that all lines are currently in a listen-only mode. After the speaker's remarks, there will be a question-and-answer session. I will now pass the call to Jennifer Aitken, Director of Investor Relations for Cascades. Ms. Aitken, you may begin the conference.
Thank you, and good morning, everyone. Thank you for joining our third quarter 2022 conference call. We will begin with an overview of our operational and financial results, followed by some concluding remarks, after which we will begin the question period. Today's speakers will be Mario Plourde, President and CEO, and Allan Hogg, CFO. Also joining us for the question period at the end of the call are Charles Malo, President and COO of Containerboard Packaging, Luc Langevin, President and COO of Specialty Products Group, and Jean-David Tardif, President and COO of Tissue Group. Before I turn the call over to my colleagues, I would like to highlight that certain statements made during this call will discuss historical and forward-looking matters. The accuracy of these statements is subject to risk factors that can have a material impact on actual results. These risks are outlined in our public filings.
These statements, the investor presentation, and the press release also include data that are not measured at performance under IFRS. Please refer to our Q3 2022 Investor Presentation for details. This presentation, along with our third quarter press release, can be found in the Investor section of our website. If you have any questions, please feel free to call us after the session. I will now turn the call over to our CEO, Mario.
Thank you, Jennifer, and good morning, everyone. Our Q3 results met expectations, and we are satisfied with our improved sequential performance in light of unprecedented cost inflation and labor constraints we faced during the year. Company-wide, the price increases we have put in place mitigated the impact of persistent cost inflation quarter- over- quarter. We provide a breakdown of the factors impacting our EBITDA level on slide three. As the numbers highlight, however, benefits from these and other initiatives lagged the impact of cost inflation year- to- date by CAD 67 million, the lion's share of which are within our tissue segment. Moving now to our financial results.
On a consolidated basis, third quarter sales increased 14% year-over-year and 5% from Q2, while adjusted EBITDA increased 4% from last year levels and 22% sequentially, reflecting the sales price increases implemented in all our business segment and improved result in our Tissue Paper business, driven by profitability initiatives. On the raw material side, highlighted on slide five and six, the Q3 average index price for OCC decreased 33% year-over-year and 20% from Q2. Reduced demand levels following lower activity at containerboard mills and less export led to an excess of fiber in all North American market. This resulted in a rapid decrease in pricing for this grade during the quarter, and all of our mills are well supplied.
Average index price for white recycled paper grade continued to increase in Q3, up a substantial 60% year-over-year and 7% from Q2. As we have highlighted in the past, these unrelenting cost headwinds have had an important impact on our Tissue results. The same can be said about virgin pulp. The hardwood pulp index increased 7% sequentially, while the softwood pulp index prices rose a more moderate 3%. Year-over-year, these indexes have increased by 23% and 17% respectively. While the market remained challenging for the white fiber grade, with prices remaining high, we have begun to see some easing in recent weeks and our mills are adequately supplied. Moving now to the results of each of our business segments, as highlighted on page seven through 14 of the presentation.
Beginning with the sequential performance, sales in Containerboard increased 5% in Q3. This was largely driven by higher selling prices for both parent rolls and converted products, higher volume levels, and a beneficial exchange rate. The 3% volume increase reflects an 8% increase in shipments of parent rolls and a 1% decrease in converted product shipments. Sequentially, converting shipments decreased by 1.9% in Canada, outperforming the 3.1% decrease in the Canadian market. U.S. converting shipments increased 1.1%, well above the 3.8% U.S. market decrease. On a per day basis, our total converting shipments were stable sequentially. This outperformed the decrease of 3.2% in the Canadian market and 5.3% in the U.S. market.
Q3 adjusted EBITDA of CAD 103 million or 17.3% on a margin basis was 4% above the Q2 levels. This reflect benefit from higher selling price and lower raw material costs, offsetting higher energy costs and less favorable sales mix in the quarter. Year-over-year, sales increased by 17% driven by pricing and volume. Adjusted EBITDA increased by 10% for the same reason I just mentioned. Year-over-year shipment increased by 4%, reflecting a 9% increase in external parent roll shipments and a 1% decrease in total converting shipments, mainly driven by lower volume in the Canadian market. On a per day basis, our global converting shipments were also stable, outperforming the 4.5% decrease in both the Canadian and the U.S. market. Moving now to our Bear Island project.
We are continuing to make good progress during the quarter, and we are preparing the commissioning of certain key equipment. Despite the progress in the construction over the past three months, the supply chain constraints that delayed certain construction milestones in Q2 continue in the current quarter. As a result, startup of the machine is now scheduled for Q1 2023. A multi-year project of this magnitude is complex in the best of times and was made even more so by cost inflation and supply chain and labor constraints. We are focused on starting up the facility and ramping up production. Given this slightly modified timeline, 2023 production is expected to total 265,000 short tons and adjusted EBITDA is forecast to be $20 million-$30 million.
Under current market conditions, total expected return for the project remain within our target and despite the higher project cost level. Continuing with our packaging business, Q3 sales levels in our specialty product segment were stable sequentially. This reflected the implementation of price increases in response to cost inflation and a favorable exchange rate, the benefit of which offset lower volume. Adjusted EBITDA was also stable sequentially as higher selling prices mitigated the impact related to volume and sales mix, as well as higher production and energy costs. When compared to the prior year, Q3 sales increased by CAD 24 million or 17%, and adjusted EBITDA levels increased by CAD 8 million or 47%. As a higher realized spread more than counterbalances slightly less favorable volume and sales mix and higher operating costs.
We are pleased with the performance trends of the Specialty Product business this year, which reinforce the progress being made toward meeting a targeted margin range of 17%-19% by 2024. Moving now to our Tissue business. Sales increased 12% sequentially in Q3, while adjusted EBITDA level improved CAD 12 million to CAD 4 million. Top line growth was driven by pricing and sales mix initiative, higher volume and favorable exchange rate. Sequentially, improvement was largely driven by benefit generated by improved selling prices, offsetting higher costs for energy and raw material. Year-over-year sales level rose 11%, with pricing and sales mix initiatives offsetting the impact from lower volume. Adjusted EBITDA decreased CAD 8 million year-over-year, mainly due to higher raw material costs offsetting benefit from our pricing initiatives. We have provided an update on our Tissue Profitability Plan Initiative on slide 14.
The impact of rapidly escalating costs in this business has been unrelenting and pronounced in 2022, and the financial performance of this business year-to-date clearly demonstrates the immediate effect that this has had on results ahead of benefits being realized from corrective measures. Pricing and other cost-saving initiatives continue to be implemented to offset these headwinds, and we are expected to generate additional positive upside in the fourth quarter throughout 2023. To this end, we are forecasting adjusted EBITDA of CAD 8 million-CAD 12 million for the segment for the fourth quarter. This outlook, however, implies that the Tissue segment will not achieve the objective of CAD 25 million-CAD 40 million of adjusted EBITDA for the calendar year 2022. Notwithstanding this, we continue to expect that these initiatives will allow the Tissue segment to deliver on its long-term 2024 target.
Allan will now discuss the main highlights for our financial performance, after which I will conclude our presentation. Allan?
Yes, thank you, Mario, and good morning. Slides 15 and 16 illustrate the specific items recorded during the quarter. The main items that impacted operating income before depreciation were CAD 14 million of impairment charges in our Tissue segment related to the decision to permanently close the Memphis tissue mill that ceased operation in 2020. It also includes CAD 10 million foreign exchange loss on long-term debt and financial instruments, CAD 3 million unrealized loss on financial instruments, and CAD 2 million of impairment charges in our containerboard segment related to assets optimization initiatives in Ontario. Slides 17 and 18 illustrate the year-over-year and sequential variance of our Q3 adjusted earnings per share and a reconciliation with the specific items that affected our quarterly results. As reported, Q3 net loss per share was CAD 0.02.
This compared to net earnings per share of CAD 0.32 last year and CAD 0.10 in Q2. On an adjusted basis, net earnings per share were CAD 0.20 in the current quarter. This compared to a net loss per share of CAD 0.01 in last year's results, and net earnings per share of CAD 0.10 in Q2. This variance mainly reflects improved adjusted EBITDA and a reversal of tax assets in Canada in the third quarter of last year. As highlighted on slide 19, third quarter adjusted cash flow from operations decreased by CAD 8 million year-over-year and CAD 62 million, and adjusted free cash flow levels decreased by CAD 123 million year-over-year. This reflects stable operating results and significantly higher net CapEx paid in the current period, largely associated with our Bear Island conversion project. Slide 20 provides detail about our capital investments.
CapEx net of disposal totaled CAD 121 million in Q3, and CAD 333 million for the first nine months. Of this amount, CAD 83 million was invested in the Bear Island project in the third quarter and CAD 228 million so far this year. For 2022, our total capital investment forecast remains in a range of CAD 450 million-CAD 470 million, which include CAD 310 million-CAD 330 million for the Bear Island project. Moving now to our net debt reconciliation as detailed on slide 21. Our net debt increased by CAD 299 million in Q3. This is a reflection of the combined effect of our current investment in Bear Island, higher working capital requirements, and an unfavorable FX impact in the period.
Our leverage ratio of 6.2x is up from 5.4x at the end of Q2. As we have mentioned in the past, we expect this leverage trend to reverse with improved operational performance and results, and the start-up of the operation at the Bear Island facility. When excluding cash investments made to date in the construction of Bear Island and its negative contribution to operating results, our leverage ratio would stand at approximately 4.9x . I would highlight that our bank agreement do not include a leverage ratio covenant. This remains the case following the recent amendments to our existing credit facility that we announced on October 19. Specifically, we increased our term loan by $100 million, by $100 million to $260 million and extended the maturity by two years to December 2027.
Concurrently, we extended the revolving facility by one year to July 2026. These amendments reinforce our financial flexibility as we complete the Bear Island project. Financial ratios and information about maturities are detailed on slide 22. Sequential and year-over-year sales and EBITDA performance analysis can be found on slide 25 through 28 of the deck, and historical pricing on slide 29 and 30. Mario will conclude the call with some brief comments before we begin the question period. Mario.
Thank you, Allan. We provide details regarding our near-term outlook on slide 23 of the presentation, and would remind you that this is based on what we are seeing today and may change in the coming weeks. Our near-term outlook for Containerboard is for stable sequential results, with lower raw material costs expected to offset softer volume and continued upward pressure on operational costs driven by inflation. We have scheduled additional downtime totaling approximately 13,000 short tons on our machine two at our Niagara Falls facility to manage inventory levels for corrugated medium. This planned downtime followed the 18,000 short tons of downtime already taken in Q3. We also announced that we will be permanently shutting down the corrugator at our Belleville, Ontario facility in December.
This decision is part of the continuing optimization initiative of our Ontario asset base and strategically reposition the Belleville facility as a high volume graphic sheet plant by redeploying its corrugated product to our other units. We are expecting a stable performance in our specialty product segment sequentially, with steady volume and selling price trend expected to offset cost inflation pressure. Our outlook for Tissue is slightly improved sequential result and a stronger performance year-over-year. The strategic initiatives we are putting in place are meeting our expectation. The exception of this is our productivity volume target, which continue to be hindered by labor availability and training. That said, we continue to put in place additional action plan to correct this and help drive meaningful financial and operational benefit going forward. To this end, our long-term 2024 target for this business remain unchanged.
With that, we can now open the call to questions. Operator.
Merci. Si vous voulez poser une question, veuillez s'il vous plaît composer l'étoile suivi du un sur votre clavier téléphonique. Si vous voulez retirer votre question, s'il vous plaît composez l'étoile et deux. Thank you. If you would like to ask a question, simply press star then number one on your telephone keypad. If you would like to withdraw your question, please press star then number two. Again, if you have a question, please press star one on your telephone keypad. Your first question will be from Hamir Patel at CIBC. Please go ahead.
Hi. Good morning. First question I had was for Charles. Could you know, comment on in terms of the reduction in the Bear Island EBITDA contribution in 2023. How much of that reflected the lower production assumptions, and how much was maybe adjustments you might have made to your price forecast?
Well, go ahead, Charles.
The new assumption that we made is based on the startup and the ramp-up mainly. These are the assumptions. Because for the rest, when we look at the long-term, the premises that we have announced on the project stays still the same, so for the long term.
I mean, you will understand that we will not provide the details of the assumption yields in that. As Charles mentioned, the important point is it doesn't change a long-term outlook on this.
Okay. Fair enough. Charles, there's been some commentary in the trade press about recycled prices declining. You know, has that been your experience so far in your open market sales? Then can you just remind us, are your box prices tied to the kraft liner benchmark, or are some of them tied to some recycled pricing?
Okay. You understand, I'm not gonna comment on specifics on pricing, especially forward-looking and things like that. I can talk about what we're experiencing right now. The grades that we're selling today, with whether it's going to be Bear Island or Greenpac, are high grade, high performance. We don't follow new indexes. As you see in our results as we speak right now, our pricing has been maintaining as we know today.
Okay. Fair enough. Just a final question I had for Allan. Just given the, you know, the elevated leverage here, are there any covenants that may be of concern that you might be looking to renegotiate?
Nope. There's no concern on. As I mentioned, there's no leverage ratio in our covenant package, so there's nothing to worry about.
Great. Thanks. That's all I had. I'll get back in the queue.
Thank you.
Thank you. Next question will be from Sean Steuart at TD Securities. Please go ahead.
Thank you. Good morning. With respect to Q4 guidance, little surprised that it's tempered, and I appreciate there's extra downtime plans and other cost inflation factors. With OCC collapsing to the extent that it has, I guess how much of that decline in OCC do you expect to see in Q4, or should we think of that as more of a first half of 2023 benefit for your margins?
I just want to mention on the overall guidance for our results, we are being cautious also considering the market condition today. We are not seeing the uptake that we usually see this time of the year for seasonal pickup. We're being part of this is yes, we're being cautious about the results. When you look at the impact of the OCC or the fiber is about CAD 40 million.
Sorry, for the next year or what's the time frame you're referencing there, Charles?
Sequentially, I mean.
Oh, sequentially.
Yes.
Okay.
There's positive impact of OCC, obviously, but inflation continues on chemical and stuff like that. We are cautious on the volume side of things.
Okay. That makes sense. Allan, any initial views on the 2023 CapEx budget with the Bear Island complete? Any initial thoughts you can give us there?
Well, it will be, CapEx will be, limited for next year as the focus will be to complete the Bear Island project. There's nothing big next year, so it will be very limited. We are in the process of evaluating everything and with the business environment, we'll be very cautious on this next year.
Got it. Okay, that's all I have for now. Thank you.
Thank you. Next question will be from Paul Quinn at RBC Capital Markets. Please go ahead.
Thanks. Just a follow-up question on Bear Island. That reduced volume is about 20% off the original guide. Just wondering if the expected startup is at the end of Q1 as a result of that. When do you expect to start up the machine?
You know, we mentioned in our last call that we were still working towards the end of the year, and we know today that it's going to be in Q1. So we're not going to say, is it gonna be in January or February or provide the date, but we're aligned to do a good startup, and it's going to be in Q1. One thing I can say is we're at the peak of the amount of people that we have on site. The work is progressing very well.
We have fiber on site. The mechanical installation is going very well. We're focusing right now. We already started, by the way, to do some commissioning as we speak for a certain area in the facility. We're confident now that we can formalize a bit more at the date in Q1. One thing that I wanna say also is that there's less unknowns today than we had three or four months ago. The risks are lower since we're getting closer to the date. Main components are being installed as we speak. That's why we're saying that now.
We're confirming that it's gonna start in Q1, but we don't want to provide any fixed date on that.
Okay, thanks very much, on that. Then maybe just on recovered paper. I think you guys are commenting in the past, the sustainability of OCC prices down at this level is really not there. Just, what's your expectation, you know, through Q4 is for OCC as well as SOP?
You know, we don't see any significant change on the OCC side for sure until the end of the year. However, we are in the period of high generations now, and the demand remains stable and not very strong, so there's an abundance of fibers in the market. For SOP, we've seen, Mario said earlier, some easing in the market conditions recently. Hard to predict what's going to happen. We are looking also closely at what's going to happen on the virgin pulp, which indirectly would impact the cost of recycled grades. I cannot really comment. There are too many variables now with regards to virgin pulp. Typically, everybody sees additional volumes coming to the market, especially in the hardwood by mid-next year.
Definitely the fundamentals should promote some easing condition on the virgin pulp next year.
Okay. Just over on Tissue, can you remind me what the 2024 target is? I was expecting, you know, on the guide, a higher Q4 estimate. Just wondering, do we need additional tissue price hikes to be able to get it to get to your 2024 target?
Well, Paul, I will answer the first part of your question. The target for tissue was CAD 150 million of EBITDA in 2024. I will let Jean-David talk about what needs to happen, but that's the target of 2024.
Yeah. The main driver for us is the productivity, Paul. We're working really hard to increase productivity on the newer assets that we installed over the last two years and also the Orchids facilities that we're ramping up. It was certainly more difficult than expected with all the challenges on labor and the support that we were able to provide and with parts and other technical support. The goal is to get back to the 2022 target, which was 68 million cases or so. As you can see, we're gonna finish the year about 60 million cases. We should be able to go back to the 2022 target next year.
All right. That's all I had. Thanks very much.
Thank you. Again, if you would like to ask a question, please press star followed by one on your telephone keypad. Your next question is from Zachary Evershed at National Bank Financial. Please go ahead.
Good morning. This is actually Nathan calling in for Zach. Thanks for taking my question. First of all, other than the challenging macro environment, can you share some details on the Tissue Profitability progress and maybe some things that should or could be done and that are not being properly executed?
Yeah. There's a lot of initiative going on in Tissue for sure. On pricing, we made a lot this year. There's still a lot of initiative on the table with products back, price increases, et cetera. Again, productivity is the main driver, really making more cases. That's gonna be the driver for the coming months.
By having productivity higher, it will help the cost and the efficiency of the cost throughout the system. That's a double attack.
Okay. Now switching over to Containerboard. Some contacts are saying that the retailer destocking has continued up until now. On your end, what's the inventory situation looking like at your retail customers?
I'd say that when I mentioned that we don't see necessarily the seasonal pickup that we usually see, I would even say that we're more in the normal pre-COVID or 2019. So yes, w e are seeing that some of our customers right now are readjusting. Supply chain is now picking up, meaning that it's becoming a bit more normalized. We see that trucking is a bit more available. So we know that some of our customers are adjusting, and this is one of the reason that we believe that the volume are being adjusted and we don't see the same pickup for this time of the year. So overall, there are some customers that are still busy. One thing, depending on which sector, like the food and beverage is still very good.
The industrial seems to be a bit more in adjusting inventory at this point. When we look also at the e-com, the growth is still good for us at this point. Maybe one thing that I can add also is, when you look at the performance of our growth, our commercial initiatives that we've put in place since this year has been paying off. Also, the investment that we made in certain regions over the last two years are also benefiting Cascades as we speak.
All right. Thanks for the color. Just one last quick one. In your presentation, it says that there's additional planned downtime, excluding the 18,000 short ton in Q3. Is there a certain way we should be thinking about how the rest of that is spread out?
Mainly, we've announced that it's mainly focused on one grade, which is right now medium in one of our sites, which is in Niagara Falls, one machine. I mentioned in the past that we are taking actions to balance and watch our inventory level to service our customers. At this point, this is what we're planning to do to take additional downtime in one of our, mainly in one of our machines. And we'll take the right decision in the future. Always keeping in mind that we also took the downtime at the least, I would say, performing or contributing machine to maximize the profitability of the company.
Okay, thanks. I'll turn it over.
Thank you. At this time, there are no further questions. I would like to turn the call to Mr. Plourde.
Thank you everyone for being with us this morning, and we're looking forward to talk to you for the next quarter. Have a good weekend, everyone. Thank you.
Thank you. Merci. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending, and at this time, we do ask you to please disconnect your line.