Welcome to KP Tissue First Quarter 2019 Results Conference Call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at the time for you to queue up for questions. If anyone has difficulty hearing the conference, please press star followed by zero, and an operator will come back to assist you. Before turning the meeting over to management, I would like to remind everyone that this conference is being recorded on Friday, May 10, 2019. I will now turn the call over to Mr. Mike Baldesarra, Director, Investor Relations. Please go ahead.
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 today is to review the financial results of the first quarter of 2019 for Kruger Products LP, 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 LP, and Mark Holbrook, the Chief Financial Officer of KP Tissue and Kruger Products LP. 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 contains 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 Q1 2019 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 during the call to refer to the presentation we presented to accompany these discussions, which is also available on the website. We'd appreciate that during the Q&A period, you'd limit your questions to two. Thank you for your collaboration. Ladies and gentlemen, now I'll turn the call over to Dino Bianco, our CEO. Dino?
Thank you, Mike. Good morning, everyone, and thank you for joining us on our conference call today. Let's start with our first quarter highlights on slide 5. In the first quarter, we posted solid revenue growth of 8.4%, driven by both higher volume and the benefit from our recent price increases. Revenue increased in all geographic regions. Adjusted EBITDA totaled CAD 23.6 million, a decrease of 23.2% over last year. While the adjusted EBITDA contribution of the consumer segment remained relatively stable year-over-year and sequentially, our away from home or AFH business reported a negative adjusted EBITDA of CAD 6.6 million.
Although the drivers of this loss are understood, we are disappointed in these results. I will discuss the AFH EBITDA drivers and action plans later in the presentation. On slide six, you see the market pulp prices in US and Canadian dollars. The picture is somewhat similar to previous quarters, with NBSK pulp prices in Canadian dollars and BEK or eucalyptus pulp prices on an upward trend since the end of 2016. However, more recently, prices have fallen from their peak. Q1 pulp prices declined sequentially compared to Q4 and increased year-over-year in both US dollars and Canadian dollars, and pulp prices in Canadian dollars continue to be near historical highs.
Pulp prices in US dollars have moderated in Q1 2019, and based on industry forecasts, we expect that they'll remain in a similar range throughout the year. Let's turn to slide seven, which summarizes the market situation regarding freight costs. As you can see, these costs are also at near all-time highs, which were reached in October, but have declined since then. We expect freight costs to remain near current levels for the remainder of 2019. On slide 8 are details of our price increases that we have recently implemented.
We did see a benefit from the Canadian consumer price increase in Q1, and we should see benefits from our US consumer price increase starting in Q2, as that pricing has lagged our Canadian pricing. We also recently announced a price increase in our AFH business in Canada and the US, which took effect on May 1, 2019. And considering the competitive pressures, this increase should partially offset the higher pulp and freight costs that are impacting that business. Let's turn to slide 9, which provide details of our recently announced operational excellence program.
As mentioned on the last earnings call, we have engaged a third-party consulting firm to help us drive savings across our manufacturing network. The work started in February of this year, and the initial focus is on two of our leading facilities. The focus of this work is to implement lean manufacturing practices to help us increase capacity through operating efficiency improvements and to reduce waste. The work is in the early stages, but we are already starting to see some benefits in reduced machine downtime, waste reduction, and increased machine speed.
In addition to this initiative, we also engaged a third-party firm to focus on improving our transportation and warehouse cost structure. This work is just underway and is also in the early stages. The financial benefits from these two initiatives will continue to build over time, and as indicated before, we are expecting cost savings of CAD 15 million-CAD 20 million on a run rate basis by the end of 2020. It's also important to note that these plans are not CapEx dependent and focus primarily on process standardization and improvement.
We believe that these initiatives will allow us to expand our existing capacity and reduce costs across the network in advance of the TAD Sherbrooke project. On Slide 10, I want to write an update of our TAD 2 project, which we will now refer to as the TAD Sherbrooke project. As you know, this project is central to our long-term North American growth strategy in the ultra-premium paper tissue segment. This project is on time and on budget, and we are progressing against our execution plan. We recently started the excavation at the site and have also purchased or contracted for most of the assets required for this new plant. Startup is still expected for early 2021. I will now turn the call over to Mark, who will review our quarterly results.
Thank you, Dino, and good morning, ladies and gentlemen. Before reviewing our first quarter results, let me mention that effective January 1, 2019, KPLP adopted IFRS 16 leases, the new accounting standard covering lease accounting, using the full retrospective approach. Under this approach, all comparative period information has been restated to reflect the adoption of IFRS 16. We provided you in the appendix on Slide 28, restated annual segmented results. Note that IFRS 16 lease accounting had no effect on revenue or net income.
For adjusted EBITDA, IFRS 16 had a full year positive impact of CAD 16 million for 2018, and for Q1 2018, the positive impact was CAD 3.7 million. Now, please turn to Slide 11, which reviews our financial performance for the first quarter. Our revenues for the quarter were up 8.4% to CAD 351 million, compared to CAD 323.7 million for the same period last year. Adjusted EBITDA, however, declined to CAD 23.6 million in Q1 of 2019, from CAD 30.7 million in Q1 last year. From a margin perspective, adjusted EBITDA decreased to 6.7% from 9.5% last year, but remained relatively at the same level as Q4 2018.
As Dino mentioned, higher pulp costs continued to have a significant impact on our results year-over-year. In the first quarter of 2019, we recorded a net loss of CAD 3.2 million, compared to net income of CAD 1.6 million last year. This was primarily due to lower Adjusted EBITDA and a lower income tax recovery in Q1 2019, compared to the same period last year, partially offset by a positive change in the amortized cost of the partnership units liability, a decrease in interest expense and lower depreciation expense. In the quarterly segmented view on Slide 12, Consumer revenue increased by 9.6% year-over-year to reach CAD 296.2 million.
Regarding the Away From Home segment, revenue rose by 2.4% to CAD 54.8 million. Adjusted EBITDA decreased by CAD 1 million to CAD 30.1 million for the Consumer segment, and margin declined from 11.5% to 10.2%. For the away from home segment, Adjusted EBITDA decreased by CAD 6.9 million to a loss of CAD 6.6 million, and margin stood at -12%, compared to 0.5% in Q1 of last year. On Slide 13, we review Q1 2019 revenue over Q1 2018, which was up by CAD 27.3 million or 8.4%. The increase is attributable to higher sales volume, the Canadian consumer selling price increase implemented in Q4 2018, and the favorable effect of foreign exchange fluctuations on US sales.
By geography, Canadian sales increased by CAD 8.8 million or 4.6%, and in the US, sales grew by CAD 12 million or 10.4%. Mexican operations also saw their sales increase significantly, although it is a low contribution business. On Slide 14, we provide further insight into our Q1 adjusted EBITDA, which decreased by CAD 7.1 million or 23.2% to CAD 23.6 million. Gross margin in the quarter also decreased from 11.6% to 8.8%. As mentioned earlier, the decrease in adjusted EBITDA was primarily driven by significantly higher fiber costs, increased warehousing costs, and other contributing factors were capacity-driven cost challenges, unfavorable sales mix, and FX.
These were partially offset by the Canadian consumer selling price increase in Q4, increased sales volume, and a decrease in SG&A expenses. For a sequential perspective, let's turn to Slide 15, where we compare Q1 2019 to Q4 2018 revenue. Quarter-over-quarter, revenues decreased by CAD 8.5 million or 2.4%. The consumer segment decreased 1.6%, whereas away from home decreased by 6.5%. Q1 is typically a lower quarter on a seasonal basis than Q4. By region, revenue decreased in Canada by CAD 9.5 million or 4.6%. The US by CAD 0.8 million or 0.6%. Revenue increased CAD 1.8 million or 7.3% in Mexico.
On slide 16, Q1 adjusted EBITDA decreased by CAD 0.9 million compared to Q4 or 3.7%. Gross margin, however, improved from 7.8% to 8.8%. The decrease in adjusted EBITDA is mainly due to lower sales volume, typical of Q1 compared to Q4, the cost of outsourced manufacturing, and the unfavorable net impact of foreign exchange fluctuations. These are partially offset by slightly lower pulp costs. Now I'll turn to our liquidity and financial position on slide 17. Our cash position was CAD 142.1 million as at the end of Q1 2019, down from CAD 169.9 million at the end of Q4.
The Q1 cash balance includes the TAD Sherbrooke project, initial financing proceeds, less spending to date, or a net a CAD 119.5 million of TAD Sherbrooke cash at the end of Q1. Overall, net debt at the end of Q1 stood at CAD 462.5 million, or up CAD 54.5 million, or from CAD 408 million at the end of Q4 2018. Consequently, our net debt to latest 12 month Adjusted EBITDA ratio is now at 4.2 times, up from 3.4 times at the end of Q4 2018. Looking forward, the TAD Sherbrooke project will result in the total company leverage increasing as spending on the project occurs over the next 2 years.
To conclude, please turn to slide 18. Our fiscal 2018 CapEx was CAD 62 million, including CAD 27 million from our TAD Sherbrooke project. For fiscal 2019, we expect our CapEx, excluding TAD Sherbrooke, to be between CAD 30 million and CAD 35 million, similar to 2018, and our TAD Sherbrooke CapEx to be between CAD 250 million and CAD 275 million in 2019. Thank you for your attention, and I'll now turn the call back over to Dino.
Thank you, Mark. Let's turn to slides 19 and 20, where we provide a summary of our market share positions in the Canadian consumer segment. We are the market leader in bathroom tissue with a 34.3% share, and after some recent declines, we begin to stabilize our share in this segment. As for the facial tissue and paper towel categories, we've actually registered some market share gains on a 52-week basis after, again, some previous year declines. We plan to continue to build our market share through increased marketing investment, new products, strong customer support, and our new NHL multi-year partnership, which was announced a few months ago. Let's now turn to slide 21, where I'd like to give more context to our AFH results.
As dis cussed in previous calls, our AFH business is critical for Kruger Products to leverage our cost structure as it absorbs a high portion of our fixed costs. Nonetheless, Q1 was a challenging quarter for AFH, as higher pulp and freight costs, combined with a competitive AFH environment and increased outsourcing costs, drove the weak performance. On the outsourcing costs, our continued total company growth has created tight capacity across our network, and as a result, we have chosen to use most of our internal capacity for our higher margin consumer business.
This has required our AFH business to source some of its paper in the open market at higher costs. In addition, the variability of paper quality purchased has caused production and logistics inefficiencies in our AFH plants. Going forward, we are focused on increasing the capacity of our paper assets, as explained earlier, and sourcing more stable and better quality paper externally for AFH. Through these production challenges, we remain focused and committed to servicing our customers with high-quality products. Another factor that will improve AFH results is that we recently announced a price increase that took effect on May 1, 2019.
While in the early stages, we should see the benefit of this pricing as we move through 2019. However, we expect continued market outsourcing costs to impact AFH in the year. Our cost structure improvements and our pricing should drive improved results as we move through 2019. I also want to announce that Rob Latter, our General Manager of our AFH business, has announced his retirement after a distinguished 23-year career with Kruger. Replacing Rob will be John O'Hara, who currently runs our logistics and product deployment group. John is very familiar with the AFH business, which will ensure a smooth transition with Rob over the coming months.
I want to thank Rob for his leadership over the years and wish both Rob and John best wishes in the future. Finally, I will conclude the call with slide 22. Despite ongoing business challenges, we believe we can drive solid performance from our businesses as we are putting actions in place to stabilize AFH and continue to grow our consumer segment. More specifically, we continue to grow the top line and volume across all key geographies and segments. We have priced all of our businesses to offset higher fiber costs and restore margins. We are creating a more efficient and capable supply chain network...
We are building ultra-premium capacity with the TAD Sherbrooke project to address the growing segment of the industry. We continue to invest to build our brands, as is the case with the multi-year partnership with the NHL. And perhaps most importantly, we're building organizational capability and culture to meet the needs of today and tomorrow to deliver strong, positive results. Looking forward, Kruger Products will benefit from the consumer Canada price increase implemented in Q4 2018, along with the consumer US and away from home price increases announced in 2019.
These price increases, combined with our cost reduction initiatives, are expected to largely offset the continued high input costs and unfavorable impacts of foreign exchange and outsourcing over the course of 2019. However, for Q2 2019, Adjusted EBITDA is anticipated to show a sequential improvement compared to Q1 2019, and trend lower than Q2 2018 results. In conclusion, we are confident that we have the right vision and strategies to move the company forward as a North American tissue leader. Thank you for your time and attention. At this point, Mark and I will be pleased to answer any questions you may have.
At this time, I'd like to remind everyone, in order to ask a question, please press star and the number one on your telephone keypad. Your first question comes from the line of Hamir Patel from CIBC Capital Markets. Your line is open.
Hi, good morning.
Good morning, Hamir.
Dino, could you give us an update on the TAD Sherbrooke? You know, how much of those volumes are already committed, and how much are you targeting to have sold by the time the machine starts up?
Sure, Hamir. So as you know, the selling process usually takes 12 to 18 months. So it's a little early to start the official discussion, but let me say, we've had lots of dialogue with existing customers and potential customers. As I think I mentioned on a previous call, we did TAD 1 in Memphis. We were still a bit of an unknown in the marketplace, and it was probably a lot harder to make those calls with customers. Now, we've got a proven track record with quality supply and the go-to-market strategy, so we've got a lot more interest and credentials when we're talking to customers about supplying them with TAD products out of Sherbrooke. So I would say the ...
Lots of dialogue, lots of interest, lots of discussion. Probably not till later this year, where we start actually getting finalized contracts and product SKUs known.
Thanks. Thanks, Dino. That's, that's helpful. Could you speak to maybe how, how is the, the NTT product that some of your competitors have out there? How, how is that being perceived in the market today relative to, to TAD, and does that differ for, bath tissue versus, towels?
Sure. I mean, I'll give you the industry perspective. I mean, I think when you look at TAD, by all measures, it is recognized as the ultra-premium product that's out there, both in bath tissue and in paper towels. Bulkiness, absorbency, softness, all the metrics, no matter what charts you look at, TAD tends to be in the top quadrant. And then you've got a range of qualities that go down from there. NTT, QRT, obviously LDC, traditional LDC. So they all vary, and some are better at bath tissue, some are better at paper towel. So, I would say to you, there's a spectrum of quality out there.
We know TAD, by all measures, is the best and provides the greatest performance, and that's obviously where our focus is for Sherbrooke.
Okay, great. And, Dino, any update on the White Cloud repositioning? How that's been going?
Yeah. Thank you for that question. So White Cloud continues to build distribution more as a customer play right now. So we're launching it selectively at customers where there's a need. As I've mentioned on previous calls, we're looking at a consumer launch of that brand and trying to figure out what's the right positioning and where does it fit in the marketplace. Obviously, it's a very competitive marketplace, but we do know from the research, preliminary research that we have done, there's a lot of consumer equity and knowledge of that brand. So now we're putting together the business plan for that.
I hope to share more of that information with you in the future, but we are progressing with not only the consumer work, the customer work, the product portfolio work, and then ultimately, the business launch.
Okay, great. That's all I had. I'll turn it over. Thanks.
Thanks, Hamir.
Your next question comes from the line of Sean Steuart from TD Securities. Your line is open.
Good morning, guys. It's Sean, TD.
Good morning.
A couple questions. Following on Hamir's question on Sherbrooke, any context you can give, Dino, on how much of the product, as you get a sense from your customer build up, how much will go to Canada versus the US? And then following on that, updated thoughts on the time to what you think is, will be the machine's full EBITDA capability. Memphis was several years. Is your timing thinking on Sherbrooke different from that?
Sure. It's a good question. You know, until we get the final orders, I think it's hard to say, but I think if you use a 40/60 or 60/40 range between Canada and the US, you're probably in a good place. You know, obviously, it could get influenced one by one large customer in a particular geography, that could have an impact. But as we're thinking about how we're laying out our warehousing strategy, and our current view of customer interest, we're probably looking 40/60 or 60/40 one way. So that's kind of the range you need to think about as that plays out. As far as the ramp-up curve, clearly, we're gonna be better.
I mean, having done it the first time and actually having beaten our own curve when we did Memphis, the first time, we were ahead of our curve. We expect to be ahead of the curve on this one as well. I think we're targeting a 3 year ramp up. I think Memphis was a four. The reality is we've done it before, so we should be faster. We have many people that were involved in the Memphis startup that are actually gonna be involved in Sherbrooke, so we've got the institutional knowledge of doing it. And then the other benefit, you know, I've talked about a bit in the past, is that with TAD 1, we actually have a great training ground to train people we're bringing on board early to spend time in Memphis to learn that asset.
And the other side of that is, with the second TAD machine, we have the benefit of optimizing our network between TAD 1 and TAD 2, which also should aid in the startup of Sherbrooke.
Thanks for that. Just one other question. The away from home hike across North America, is 8% the right number to think about? And should we think of this as fully in by year-end? Is that the timeframe to fully implement it with contract rollover?
I would think the right way to think about the range is probably mid to high single digits. So-
Okay.
8 fits within mid to high. But, you know, it, it's more mid to high. The price increase took effect May 1. As you know, that business is contract-based, so as contracts come through, you're able to move the pricing. It depends sometimes on the geography, US versus Canada, it depends sometimes on the category, whether it's towel or bath tissue. We're starting to get some early traction, which is good. And I think it also, there's been public announcements by some of the bigger players of pricing as well, and obviously, there's been lots of pricing in consumers.
So I think there's a readiness by the market, and there's an understanding in the market that pricing will be moving through. We anticipate, as I mentioned earlier in my call, that the Canada consumer started first in Q4 last year, so we're starting to see the benefits of that in Q1. The US consumer price increase started kicking off in Q1, and we should see some of those or those benefits start coming through in Q2. And then AFH, obviously, being the last now in Q2 being announced, we should start to see those play through in Q3 and then ramping up in Q4 and beyond.
Thank you very much. That's great detail. That's all I have.
Thanks, Sean.
Your next question comes from the line of Keith Howlett from Desjardins. Your line's open.
Yes, I'm wondering if you could just summarize the relationship of AFH to the consumer business. In terms of converting plants, I think they're separate, and I don't know if the sales force is separate, but I would have thought so. So I'm just trying to get a sense of where the key cost-sharing benefit of the AFH is.
Sure. So, Keith, what I would say is, we have structured AFH as a separate business with a separate P&L, separate leadership. Anything that faces the customer or market is very unique to AFH, so sales would be unique, marketing would be unique, product development would be unique, because obviously it's a different business model. Manufacturing on converting is unique. We've started that process a couple of years ago because the converting side of AFH is very different than consumer. So we've been investing in setting up dedicated converting facilities.
What it does share is it shares obviously paper from our network. And, by the way, AFH has always bought paper on the market, so this isn't new. What's happening now is with the growth in our consumer business, it's having to buy more on the market. And as many of you know, who follow this market, the market's very tight on paper supply, parent rolls. Depends on the grade, but generally very tight. So we're dealing also with a tight market, a higher cost, variable quality, and that's been the issue that I talked about in driving the results on the business.
So, you know, what we've got to do is we've got to increase the capacity of our own paper machines, and we're doing that through the work we're doing with a 3rd party consultant. We're getting our OEEs up on our paper, particularly the ones that have an influence on AFH. We used to buy paper more tactically. As we needed, we bought it. We're now getting into more of a strategic partnership with suppliers to guarantee volumes and know that we're gonna be in this space probably till TAD 2 comes on board. And then the other thing we're doing is, you know, when you're tight on capacity, and I didn't mention it in my prepared remarks, is where we have lower margin businesses, we should be pricing them or exiting them, and we're doing that work as well as we're looking at the portfolio.
So would you be self-sufficient in parent rolls for consumer? You're short on AFH, and then on converting capacity, do you have sufficient AFH converting capacity, or are you contracting any, any of that as well?
No, we have sufficient converting capacity. At some times, we will use outside converters, where we may have, you know, if there's a machine downtime or a particular issue. But generally, we are self-sufficient on converting. What has happened here, though, and the two are interrelated, as we have brought in new suppliers on paper, paper variability, it's not only do you pay for that paper, it also diminishes your throughput on your converting lines because you're tweaking the lines if the quality is not there, so you get inefficiencies on your converting.
You know, that shows up as a production inefficiency, but it's driven by outsourcing. So the more we can source internally or stabilize internally, the better we'll have a cost structure and more operating efficiency.
Then, if I might just ask on the pricing architecture and the private label penetration across paper towels, bathroom tissue, and facial tissue. Is there quite a spread on the private label penetration? I presume it's... I'm guessing it's highest in paper towels, but I'm not sure.
You're talking about market share?
Right.
Yeah, I would say, you know, private label is continues to be a growing segment in the market. It is represented across all three. Bathroom tissue is obviously more overdeveloped. The ranges tend to be 30% to 34% on the categories, and depending on the customer. But, you know, we're looking at about a marketplace that is one third, essentially one third private label across the three segments. With some continued growth, obviously, the US is growing faster in this area, but in Canada, it is growing, but at maybe a lower pace because it's overdeveloped versus the US on private label in Canada.
Does facial tissue have a similar penetration?
It does a little lower than bath and paper towel.
Great. Thanks very much.
Thank you.
Your next question comes from the line of Zachary Evershed from National Bank Financial. Your line is open.
Good morning.
Morning.
I have a more of a broad question. I was hoping you could comment on industry supply and dynamics and how you view them going forward. You're gonna be ramping up quite a large machine. We also saw that GP is starting up a TAD machine in Florida, as well as another in Alabama the following year. So how do you view supply and demand in the competitive marketplace?
It's a great question. It's a question that gets talked about a lot. So I guess, I would answer it this way: the marketplace, just based on regular category growth of 1.5%, and I'm talking North America here, because these assets tend to be North American fungible. The market, just to service normal growth, needs about 2 to 3 70,000-ton machines a year. So you think about having to put in 2 to 3, assuming efficiency stay the same across the network, you have to put in 2 to 3 new machines every year, just to meet the growth in the category across North America.
And at any point in time, you're gonna have a potential imbalance, more machines come on board, and then eventually, the less efficient, higher cost machines get shut down, if you will. So, you know, I see that phenomena continuing to happen. In the short term, there may be a little more excess capacity, but what ends up happening is, ourselves included, you announce the shiny new machines three years ahead of time, and then if you're closing an asset, you announce it, you know, three months ahead of time. So you don't always get all the new ones coming on board, you haven't heard which ones might be coming out of the system because they usually get announced with a shorter lead time in the marketplace.
I suspect, you know, you'll see the new ones come on board. There might be some excess capacity in the short term, and you'll probably see companies, as some have already done so, and will continue to do, take inefficient or high-cost machines off the grid.
Do you think that the definition of high-cost machine will continue to evolve and essentially choke out the more marginal players in the same way that we saw selling prices get stuck for a long period of time?
Potentially. I mean, if you just look at macro, macroeconomics and supply and demand, you know, scale does matter in this industry, particularly on paper making. Low cost is so critical given the thin margin structure. So I think those companies that can convert more of their portfolio on the manufacturing side to higher efficient, large scale, low cost. Low cost meaning fiber, energy, water, all factors, and obviously labor and other elements. I think you'll get the normal supply and demand and economic impacts of the marginal machines or players, if they're only invested in marginal machines, you know, may be in trouble.
That's extremely helpful. Thank you very much.
Thank you.
Again, if you'd like to ask a question, please press star and 1 on your telephone keypad. Our next question comes from the line of Paul Quinn from RBC Capital Markets. Your line is open.
Yeah, thanks very much. Good morning, guys.
Morning, Paul.
Morning, Paul.
Just trying to understand what's going on in AFH and you know, I appreciate, you know, some of the, some of the things you're trying to do to turn around, but what's your estimate about how long you think that business will take to turn around to get back to sort of a reasonable return on your, on your assets?
That's a great question, Paul. I, I expect we should see. We are, you know, even through the quarter, we saw sequential improvement. You know, we had a rough January, a better February, a better March, as, as it relates to the cost structure side, which is, you know, one of the big drivers. So we've seen sequential improvement because we've taken immediate actions. You know, we put, we put OEM contractors in place to help with get our converting lines right. We've put, resources from our other facilities that know these assets into play, into those facilities.
This work that we're doing with the third party consultant, we're advancing that. So we've put a, we've put a SWAT team in place, to, to help with the AFH, assets. So we're starting to see improvements already. The reality is, though, even with ROEs improving on paper, we're gonna continue to stay tight. So now it's a matter of being as efficient as we can with respect to knowing that we have a certain part of our paper that's gonna be supplied externally. And that's why I talked about, you know, linking in with a strategic supplier on paper so that we know until TAD2 comes on board, we're likely gonna be capacity constrained because our businesses will continue to grow.
So I can't give you a specific timeline other than I would say with pricing and the cost curve getting better, and if fiber continues to cooperate, we're gonna see sequential improvements in this business through 2019 and into 2020. We are still a very strong, healthy business. We're the market leader in Canada and growing quite substantially in the US. We've got good quality products, great customer relationships, great marketing. So all the elements of the business fundamentals and the strength that we have are all there. We just got to fix the back end and get that cost structure cleaner so that we can not only grow, but deliver good profit.
Okay. And then, you know, we expected a slightly better result in Q1. Just wondering if there's a lag on the cost. Like, we obviously saw pulp, you know, and fiber prices come down in Q1. Does that take a while before it flows through to your business?
Yeah, usually there is a 1 month lag, let's say. It could be, could be 3 to 6 weeks, but usually there's a lag there. It depends on the inventory levels that we've got and what we've got it priced at, and what segment it's in. But I think a 3 to 6 week, six would be the high side, 3 would be, you know, low, low, more normal side.
Okay. And then, just, just, if you could give some details on the partnership with the NHL. You know, that sounds great at a, at a high level. Just wondering how, you know, is that advertising during games? How is that gonna, you know, incrementally, help you going forward?
Yeah, that's a great question, and I didn't talk a lot about it because I talked about it at the last earnings call. But really, what the NHL partnership allows us to do, and quite frankly, the number one benefit for us and most partners of the NHL, is really to get merchandising activity at store level. I mean, clearly, it's good to be associated with such a great brand, and we're proud of that. But for us, to be able to sell more tissue by having more merchandising at store level, and many of our customers are also supporting the NHL, so it's a symbiotic relationship. It also takes a bit of the pressure off the price point.
You know, when you're doing a promotion or a special pack or some sweepstakes or giveaways, we know from the data that the NHL has provided that, you know, the moms overindex with the NHL, millennials overindex with the NHL, new Canadians are acculturating through hockey in the NHL, and these are key targets for us. So, and they're all willing to support a brand that is supporting the NHL. So all those factors work together to help us get more merchandising, more support, and then more brand affinity and connection to NHL hockey and, quite frankly, our Canadian roots. So it's a multifaceted approach.
We, we started slowly or started small because, the NHL playoffs was a big period for the NHL, and our contract, just recently came on board, so we did some activation in for the playoffs, but we'll, we'll do more and bigger events as we move through, next year's season, and then into the new year.
Okay. And then, thanks for that. And then just, last on Sherbrooke, just so I understand, I mean, you, you're flip-flopping between 60/40 and 40/60. So basically, you're not quite sure, you know, how much of the product you're selling in the US and Canada, but that's kind of the range you'll sell between 40 and 60 in Canada, and I guess 40 and 60 in the US?
... Yeah, I wouldn't have used the word flip-flopping. I'm just saying based on a-
Yes.
forecast that we have, we have one scenario that has it at 40/60. We have another scenario that has it at 60/40. We're not flip-flopping. We just, depending on how it plays out, it's gonna be one or the other. It's not a 90/10 scenario or a 10/90 scenario. It's within a range of, you know, 20-point difference between 40/60. So, and that'll clarify itself out as we solidify the customers and the portfolio later this year.
Okay, so what are the key criteria around those scenarios that move that dial 20% either way?
Well, you know, if you pick up a large US customer, and it's a product that we can supply economically, geographically, and it's not a complicated portfolio, we may push more that way, and it could be more 60/40 or the other way, if that large customer is in Canada, we've got criteria, and they're a strategic customer of ours, it could go 60/40 Canada. So it depends on the product portfolio, the geography, the if they're an existing customer, a new customer, all those factors will play out. At the end of the day, we want to be as efficient as we can in not only production, but distribution.
Try to simplify our portfolio as best we can, because it creates more capacity and operating efficiency, and obviously continue to supply our customer base and our growing customers.
Okay, so I get, I guess, given the fact that you're probably gonna go to the market at the end of this year, you know, start to talk to customers, I guess it'll be early 2020 before we sort of have a really more narrow idea as to where the product could go.
Yeah, I don't think I'll ever reveal which customers we got, because that's obviously pretty confidential still. But I'd be able to tell you better some of the macro elements around where the distribution of those and maybe the categories. And don't forget, a lot of that, you know, a big part of that machine is gonna go to support our brands in Canada, because we don't have a strong brand business in the US. So that also plays at this, you know, where is it a 60/40, 40/60? Because our Canadian business is obviously a high priority for us to make sure we support our brands from quality and innovation point of view.
Great! That's all I had. That's all I care, thanks.
Thank you.
Thanks, Paul.
Your next question comes from the line of Keith Howlett from Desjardins. Your line is open.
Yes, I was just wondering what the economic shipping distance is from Sherbrooke to a customer?
I think the rule of thumb of 500 miles, or let's say, seven to 800 kilometers at the max, is probably still fair. Obviously, sometimes you get different shipping lanes and costs, but I think that's a good rule of thumb. So you can get your protractor out or compass out and do a kind of a circle around where Sherbrooke is, and that will tell you, you know, generally where the best places are. Now, in some cases, you can ship by rail at lower cost, ship further, particularly if you've got satellite warehouses. So other things come into play, but I think the 400 to 500 mile rule is probably a good starting place.
Thank you.
Your next question comes from the line of Benoit Laprade from Scotiabank. Your line is open.
Thank you. Good morning, guys.
Good morning.
Just a quick one. Just one clarification. In your outlook, you mentioned that Q2 should be stronger than Q1, yet not as good as Q2 last year. I assume you're talking about Q2 last year, restated for IFRS 16, which would have added about CAD 4 million to the quarter?
Yeah, that's correct, Benoit. We would be comparing with the IFRS lease adjustment in 2018, and it would be in that range. A little shorter than CAD 4 million, but close to that. Yeah.
Great. Thank you.
Welcome. Thank you.
There are no further questions at this time. I turn the call back over to the presenters.
Okay, thank you. Thank you for joining us on this call this morning. We look forward to speaking with you again in August following the release of our second quarter results. Thank you for your questions, and have a great day and a great weekend, and we'll see you soon. Thank you.
Thank you.
This concludes today's conference call. You may now disconnect.