Good morning, ladies and gentlemen. Thank you for standing by. Welcome to KP Tissue first quarter 2023 results conference call. At this time, all participants are listening in read-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties during the conference, please press star followed by zero for operator assistance at any time. Before turning the meeting over to management, I would like to remind everyone that this conference call is being recorded on Thursday, May eleventh, 2023. I will now turn the conference over to Mike Baldesarra, Director, Investor Relations. Please go ahead, sir.
Thank you, operator. Good morning, ladies and gentlemen. My name is Mike Baldesarra. I'm the Director, Investor Relations for KP Tissue Inc. The purpose of this call today is to review the financial results for the first quarter of 2023 for Kruger Products and KP Tissue. We this morning have Dino Bianco, the Chief Executive Officer of KP Tissue and Kruger Products, and Mark Holbrook, the Chief Financial Officer of KP Tissue and Kruger Products. 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 as required by applicable laws.
There's 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 2023 results were published this morning and will be accessible from our website at kptissueinc.com. Please be aware that our MD&A will be posted on the website and will also be available on SEDAR. I would ask that during the call to refer to the presentation we have prepared to accompany these discussions, which is also available on our website. We'd also appreciate that during the Q&A period for you to limit your questions to two. Thank you for your collaboration. Ladies and gentlemen, I'll now turn the call over to Dino Bianco, our CEO. Dino?
Thank you, Mike. Good morning, everyone, and thank you for joining us for our first quarter earnings call for 2023. We are pleased to have delivered a strong quarter driven by our multifaceted approach to counter inflation, which included pricing and cost management initiatives. We also had a turnaround in our Memphis plant operations and continued strong revenue and operations across our network. Although we are still dealing with volatile pulp prices and a weakened Canadian dollar, we believe the actions we have undertaken and the investments we have made have set us up for continued strong performance in 2023 and beyond. We are steadily progressing along the road to recovery while continuing to invest in our business for the long term. Now, let's take a look at our quarterly numbers on slide five.
Revenue increased 13.1% to CAD 451 million in the first quarter of 2023 on the strength of 2022 implemented price increases across all segments and regions. Also, a favorable sales mix in the consumer segment and higher sales volume from our AFH business, as well as positive foreign exchange impact on US dollar sales. Canadian revenues improved 7.4% in the first quarter, while the US grew 22.1% due to higher pricing, increased away-from-home volume, a shift in mix towards our high-quality TAD and facial products, and a favorable foreign exchange impact.
Adjusted EBITDA was up 71.9% year-over-year to CAD 50 million in the first quarter, largely for the same reasons as stated above, but combined with the Memphis plant cost recovery, and then we did have some negative impact from foreign exchange on our cost base. On slide six, pulp average prices in Canadian dollars declined single digits in the first quarter of 2023 from the previous quarter, while year-over-year prices rose significantly. NBSK and BEK average prices increased 10% and 15% in Q1 2023. Based on industry forecast for 2023, pulp prices will continue to remain volatile but trend downwards, while the weakened Canadian dollar is expected to temper the decline. Turning to slide seven, inflationary pressure on input costs continued to rise in Q1 2023 compared to the same period last year, but at a slower rate.
We estimate that inflation increased our cost base year-over-year by between 4% and 6% in the first quarter of 2023. On the pricing side, all announced price increases have been implemented. We're continuing to monitor the market to ensure that we remain competitive. Finally, we have maintained cost management initiatives to offset inflationary pressure in 2023. Key initiatives introduced last year mainly targeted CapEx, inventory, productivity, and discretionary spending. Let's move on to our Sherbrooke operations and expansion on slide 8. TAD Sherbrooke continues to exceed ramp-up plans, including improvements in paper machine capacity. The startup of our new bathroom tissue line surpassed expectations in the first quarter, while our facial tissue and paper machine lines are scheduled for implementation in the fourth quarter of 2023 and the end of 2024.
Phase three of our AI implementation is ongoing, including supply chain improvements. To sum up, Sherbrooke is performing extremely well and sales are beginning to catch up to this increased manufacturing capacity. Turning to slide nine. The shutdown of legacy assets in Memphis was completed as planned in the first quarter. Manufacturing focus has now shifted towards higher margin TAD and facial tissue products. The new facial line, which has ramped up ahead of expectation, will also benefit from AI capability to optimize productivity. This new facial line in Memphis, along with the upcoming startup of the line in Sherbrooke, will step up our capacity to provide high quality facial tissue products to the North American market. This market, on the consumer side, is tight on capacity and these new assets will drive incremental sales and customers for Kruger.
Our Memphis TAD operations continued to progress sequentially after several measures were implemented to increase manufacturing output. The recovery at our Memphis operations has enabled us to improve our overall cost structure there. Let's pivot to brand support on slide 10. Based on improved financial performance, we plan on reinvesting in our brands to drive share growth. Q1 2023 marketing was focused on multi-brand activities with the 42nd Annual Scotties Tournament of Hearts and the 3rd year of the Kruger Big Assist program taking center stage. We're also ramping up our investment around Made in Canada products to support our Made in Canada positioning for our brands. Finally, Bonterra, our environmentally conscious product line, captured three packaging awards in year one of its launch and was shortlisted for two other innovation and advertising awards. Moving to slide 11.
The data presented is taken from Nielsen. It shows market share performance in Canada over a 52-week period ending March 25th, 2023. The data reflects that branded share continued to be affected by higher selling prices, a change in customer promotion strategy and consumers trading down. Given pricing has recently stabilized and combined with increased marketing and continued innovation support, we should start seeing our market leading share recover in the upcoming quarters. Looking at away from home on slide 12. Volume in a seasonally soft first quarter was down sequentially but still 9% higher than Q1 2022. The business delivered a third consecutive quarter of positive Adjusted EBIT on Q1 2023 based on higher selling prices and increased sales volume. Our AFH segment is performing above its historical level and we believe its new operating model is sustainable.
We will keep monitoring the potential impact of any economic slowdown on this business. I will now turn the call over to Mark.
Thank you, Dino. Good morning everyone. Please turn to slide 13 for a summary of our financial performance in Q1 2023. As Dino mentioned earlier, we delivered strong revenue and Adjusted EBITDA growth in the first quarter as previous selling price increases and also cost management initiatives improved results. There was a net loss in the quarter that totaled CAD 49.3 million in Q1 compared to net income of CAD 1.4 million for the same period last year. The decrease was primarily due to a deferred tax expense of CAD 57 million, recognized as a result of the corporate reorganization on January 1st. Other items affecting the net loss primarily included a lower foreign exchange gain and greater depreciation expense, partially offset by improved Adjusted EBITDA and lower interest expense and other finance costs.
In the quarterly segmented view on slide 14, consumer revenue increased 9.8% year-over-year to CAD 376.5 million in the first quarter, and sequentially decreased slightly by 0.6% compared to Q4 2022. In the AFH segment, revenue grew 33.2% year-over-year to CAD 74.5 million, and was down sequentially 6.1% from the previous quarter due to seasonal factors. Consumer Adjusted EBITDA totaled CAD 51.3 million in the first quarter compared to CAD 35.4 million in Q1 2022, with an Adjusted EBITDA margin of 13.6% versus 10.3% for the same respective period. Sequentially, consumer Adjusted EBITDA was up CAD 8.6 million or 20.2% from Q4 2022.
For the AFH segment, Adjusted EBITDA amounted to CAD 0.9 million in the first quarter compared to CAD -3.2 million in Q1 2022 with a positive margin of 1.2%. Sequentially, AFH Adjusted EBITDA was down CAD 4.8 million from Q4 2022 as Q1 is a seasonally lower quarter. On slide 15, we review year-over-year revenue growth for Q1, which improved by CAD 52.3 million or 13.1%. This growth is attributable to the carry forward of selling price increases from 2022 across all segments and regions, favorable sales mix in the consumer segment, and higher sales volume from our AFH business, as well as a positive foreign exchange impact on US dollar sales.
These factors were partially offset by lower sales volume in the consumer segment. On a geographical basis, revenues in Canada rose CAD 17.9 million or 7.4% year-over-year, while US revenues grew by CAD 34.4 million or 22.1%. On slide 16, we provide additional insight into profitability in the first quarter. Adjusted EBITDA increased CAD 20.9 million to CAD 50 million, representing a margin of 11.1% from CAD 29.1 million in Q1 2022, or a margin of 7.3%. The increase in Adjusted EBITDA was primarily due to the higher selling prices relative to Q1 last year, favorable sales mix in the consumer segment, reduced costs in Memphis plant operations and lower freight rates.
These items were partially offset by significant inflation on pulp and other input costs, lower sales volume in the consumer segment, higher warehousing and SG&A expenses, and the unfavorable impact of foreign exchange fluctuations. Now let's turn to slide 17, where we compare Q1 revenue sequentially to Q4 2022. Revenue declined by CAD 7.1 million or 1.6%, primarily due to seasonally lower sales volume in our AFH segment and less volume in the US consumer business, along with a slightly negative foreign exchange impact on US dollar sales. Geographically, revenue in Canada was slightly lower by CAD 1.5 million or 0.6% sequentially, while revenue in the US decreased CAD 5.6 million or 2.9%.
On slide 18, Adjusted EBITDA in the first quarter increased sequentially by CAD 5.6 million or 12.6%, despite a decrease in revenue from Q4 2022. This growth was due to several factors, including favorable sales mix, lower freight and warehousing costs, Memphis plant cost recovery, as well as reduced energy costs. These factors were partially offset by lower sales volume and higher SG&A expenses. Turning now to our balance sheet and financial position on slide 19. Our cash position stood at CAD 45.3 million at the end of the first quarter, a decrease from CAD 78.4 million at the end of Q4 2022 as we continued investing in our Sherbrooke expansion project. Long-term debt at quarter end totaled CAD 1.096 billion, up CAD 18.8 million from the end of the previous quarter.
Net debt increased CAD 51.9 million sequentially to CAD 1.085 billion, again due to the Sherbrooke expansion project and higher working capital. Our net debt to last 12 months Adjusted EBITDA ratio improved to 7.9 times in the first quarter from 8.9x in Q4 2022. Leverage decreased on the strength of higher Adjusted EBITDA in the last 12 months. We expect deleveraging to continue in 2023 despite ongoing investments in our Sherbrooke expansion project as Adjusted EBITDA improves. At quarter end, total liquidity representing cash and cash equivalents and availability from revolving credit agreements stood at CAD 101.3 million. CAD 10.7 million of cash was held for the Sherbrooke expansion project. I will conclude my section by reviewing capital expenditures on slide 20.
Total CapEx in Q1 was CAD 34.6 million, including CAD 31.8 million for the Sherbrooke expansion project. We are maintaining our CapEx forecast between CAD 200 million and CAD 230 million for 2023, primarily related to the Sherbrooke expansion. Thank you for joining us this morning. I'll now turn the call back over to Dino.
Thank you, Mark. Please turn to slide 21. Our key targets for Reimagine 2030, which is our sustainable development plan, are documented on this page. I just wanna highlight a couple of efforts that we are deploying against this. First, we're entering year two of our Bonterra product launch. Just to remind you that key features of this environmentally focused brand include plastic-free paper packaging, high-quality FSC certified recycled fiber, carbon neutral production, and partnerships with 4ocean and One Tree Planted, and it's a Made in Canada product. Customer traction has been encouraging given the current market environment, and we continue to look to grow this business and invest in it. The second area I wanna highlight is that we're also using electric semi-trailer trucks have started carrying tissue products between Kruger Products facilities in Quebec.
These trucks are among the first all-electric Class eight vehicles operating in Canada and the first in the Canadian tissue industry. Their use is expected to eliminate 150,000 liters of fossil fuel, resulting in removing the equivalent GHG emissions of 90 cars annually from Canadian highways. We are also looking to expand our use of these electric trucks in the near future. Let me conclude on slide 22. We are steadily progressing along our recovery curve to drive long-term value. It's highlighted by strong top-line growth and improved profitability in the first quarter. We are closely monitoring pricing margins and input costs to ensure that we remain competitive while continuing to deliver strong margins. As the business continues to strengthen, we plan on reinvesting in our brands to drive share recovery after a very challenging 2022.
Our Sherbrooke expansion project is moving forward with a successful startup of the bathroom tissue line in the 1st quarter . While the Memphis turnaround is progressing quite well. Our away-from-home segment is delivering against a sustainable profit model on the strength of three consecutive quarters of positive Adjusted EBITDA. Our leverage ratio should progressively come down as Adjusted EBITDA improves throughout 2023. Finally, we keep investing in our organization and culture to drive future growth. Now let's turn our attention to the outlook for the Q2 of 2023. While we believe inflationary pressure has stabilized and our operating efficiency continues to improve, we will also be reinvesting in the business to drive long-term value. As a result, we expect Adjusted EBITDA in Q2 2023 to be in the range of Q1 2023. We'd be more than happy now to answer any questions you may have.
Thank you, sir. Ladies and gentlemen, we now begin the question and answer session. If you have a question, please press star followed by one on your touchtone phone. Should you wish to decline from the polling process, please press star followed by two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from Hamir Patel with CIBC Capital Markets. Please go ahead.
Hi. Good morning.
Morning.
Do you know, how long do you expect it to take to restore your Canadian market share? I'm sure if you could speak to some of the innovations or promotions you're planning to support that initiative.
That's a great question, Hamir. You know, I look at share, building share as kind of a mid, long-term play. If you try to do it short term and try to do, you know, discounting or other activity, it doesn't stick, and it, quite frankly, is disruptive. So we wanna build share, the right way, and it takes a little longer to do so. The things that we're looking at is, obviously, we gotta stabilize pricing. A lot of volatility in pricing, last year in price gaps, so we think we're getting there, that the pricing is now stabilized. We wanna make sure that the promotion strategy that is being used by our retailers continues to be, progressive for our brands. Obviously, our brands are powerful and drive traffic, store traffic.
The third area is reinvesting in marketing. We did pull back on that last year given the financial challenges. We're gonna redeploy marketing investment across our brands collectively and then by category. I would say, the last one is just continuing to support the innovations. You know, we did some pretty significant innovations last year in a difficult environment. It's always tough to do innovation during inflationary period. You know, the focus now as we start stabilizing in the marketplace is to reinvest in those innovations to continue to grow those unique segments.
That'd be great.
What you should see, Hamir, is just continued, progressive growth on share. I show 52-week share here, so you know it takes a while to get that 52-week share back in the positive territory, but you should see it in a continuous migration in the right direction.
Okay, great. Thanks. You know, that's helpful. Just a question from Mark. How should we think about the timing of lower pulp prices flowing through your results? Is there an opportunity to perhaps run with more spot tonnage in the future just given that you've now kind of got more certainty of supply with Kruger Products?
Thanks, Hamir. Good morning. With regard to pulp, we're seeing the slow decline in the market, and that's taking effect through our inventory, so we're going to see the benefit of that starting next quarter. What we're seeing though in terms of spot is definitely an improvement. We do have contracted pulp with our suppliers, so there's a limitation there for us. But definitely we're taking advantage of spot where we can.
Okay, great. Thanks. Thanks, Mark. That's all I had. I'll turn it over.
Thank you.
Thank you. Your next question comes from Kasia Kopyciok with TD Securities. Please go ahead.
Hi. Good morning, everyone. Looks like you had some good traction on the cost recovery at Memphis this quarter. Dino, can you speak to how you expect that to trend going forward through the remainder of 2023?
Sure. I mean, obviously a lot of focus has been on Memphis. You know, we announced the shutdown of our legacy assets 'cause we didn't see a path to profitability. That was an unfortunate event, but it was executed successfully. That is now behind us. A couple things are going on. One is we're focusing on higher margin products. Our TAD and our facial products tend to be better margin in the marketplace. We are also increasing productivity on particularly on the TAD side. I talked about facial ramping up above the curve. Our TAD assets are not quite running where we expect them to be, but they continue to move in the right direction.
That'll give us a better cost structure, with more output and obviously gives us an opportunity to sell more product, so that should help. What's also happening is the benefit of a pricing kicking in, so that helps our profit margin coming out of the Memphis site in terms of the products that we sell there. We continue to manage our fixed cost structure and look for efficiency there. There's several factors that are going on, all moving in the right direction. You know, we continue to see Memphis being a positive contributor to our financial results for this year and beyond.
That's really helpful color. Just to follow up, so do you expect that, you know, in the results, we'll see it kind of flow through in more of a lumpy fashion or just linearly more or less through the remainder of the year?
You know, I think we've been seeing them move on a quarterly basis, let's say not monthly, but let's say quarterly. We continue to see improvement sequentially as we move through last year. Started making a turnaround in December, in the fourth quarter. An improvement now in Q1. Our projection for the rest of the year that will continue to sequentially improve as we move through the year.
Wonderful. Okay, thanks. Turning over to the AFH business, how do you expect that to perform in a potential recessionary environment?
Yeah, I think that's a great question. You know, first of all, we're very happy with the results of AFH. It's been a business in many calls in the past where we unfortunately had brackets on our EBITA. Really proud of what the teams have been able to do, particularly as COVID hit and hurt that business. I think they refocused on what they needed to do, was get the right mix, get the right margin structure, get operations in line. They've done all that. Very proud of the results for AFH, even though they were down versus the fourth quarter. We know the fourth quarter is a strong quarter for AFH, and the first quarter is a softer quarter. I think the team is doing great work.
We talk about the sustainable business model because we see those elements of sales, those elements of pricing margin, fixed cost management, and operational success, being systemic for us. That's good news. We have quoted, you know, a mid to high single digit EBITA margin, so we're progressing towards that. The wild card right now, and I'd say there's probably two wild cards. One is just reducing any paper that we need to buy externally. Our paper capacity continues to be tight, so we're watching that. The second one, which you mentioned, is what's going on in the market. We haven't seen any impact on that just yet as it relates to softness. You know, of course, AFH plays in multiple channels.
Hospitality is one which may see the biggest impact, but we also play in healthcare and many other segments. Overall, I don't think it'll be a material or significant impact unless it's a very dramatic reduction in the economy. Based on what we're seeing and what we're hearing, you know, we're just watching it, but I don't anticipate it to be a significant impact on AFH or to change our business model or our strategy.
Okay, got it. Just one last one from me. Drilling down to some of those subsegments in AFH hospitality versus perhaps maybe the less impactful ones like supplying schools and whatnot, how would you say your business breaks down among those?
Yeah, I'm not gonna give you specifics, but I would say we're well balanced. You know, I think we're not overly developed at any one of those. A lot of them tend to be a natural hedge against each other. We're well balanced both in Canada and the US.
Okay, got it. Thanks for the color, Dino. Appreciate it. I'll leave it there.
Thank you.
Thank you. Ladies and gentlemen, as a reminder, if you have any questions, please press star one. Your next question comes from Zachary Evershed with National Bank. Please go ahead.
Good morning, guys. It's actually Nathan calling in for Zachary. My first question is pertaining to the multitude of macro factors at play, such as stabilizing, deflating input costs, but also industry commentary on waning volumes. Can you dig a bit deeper into perhaps upside or downside risk to the Adjusted EBITDA guidance for Q2, especially as all prior pricing has been fully implemented?
Yeah, I mean, we're quoting in the range of, so we feel pretty confident about that. We are, you know, into almost mid-May. Based on what we see, I feel that's a pretty good number. We use the word in the range of because you never know if there's some tweaks around the edges, but I feel that that's a very good number, otherwise we wouldn't have quoted it. You know, the wild cards are certainly on the inflation side as that moves around. I expect that that will continue to decline, and just watching our pricing margins and making sure that we're competitive as in a deflationary period, and staying ahead of our margin curve. We have a process in place, a very disciplined pricing process in place, to manage that.
The volatility on volume. The markets have been soft. US and Canada consumer markets have been soft. AFH has been strong, but the consumer markets continue to be soft as consumers have adjusted to higher prices. As you know, our products are repertoire products. They need them. Consumers need them. There has been some shifting, pantry deloading going on. Movements of, you know, more to discount to channel or club channels. We're watching that. The good news is we're generally well balanced there. I expect that we've hit bottom as it relates to the consumer volume piece of it, and that we should start seeing now growth off of a very challenging 2022.
My next question is pertaining to some of other tissue players announcing closures of facilities that are no longer economically viable. How do you feel about your positioning on the cost curve today, and perhaps about your new lines coming up in 2023 and 2024?
Yeah, I think, you know, with the difficult year that existed last year, a lot of companies, ourselves included, we looked at our asset base and tried to understand the long-term profitability. We made our announcement last year around the difficult decision of having to shut down some older legacy assets. I know some of our competitors have made announcements recently as well. That's obviously a decision each company that I'm sure does not take lightly and takes a long-term view of that. At the end of the day, I think, our legacy assets now are very cost competitive. We know that. We do benchmarking. We use a third party to do that.
We definitely know that our new assets are top quartile, and even top quartile within top quartile. We know that with our Sherbrooke facility, and we expect, just based on the quality of the assets that we have bought and the AI that we're putting in place and the operating OpEx, and the talent that we've hired, that we will continue to operate those new ones in particular, in the top range of assets in North America.
Thank you very much. I'll turn it over.
Thank you. There are no further questions at this time. Mr. Bianco, back over to you.
Great. Thank you for joining us on the call today. We look forward to speaking with you again following the release of our second quarter results for 2023. Thank you, and have a great day.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your line.