KP Tissue Inc.

consumer and retailers adjust to new price points. We anticipate shares to improve as the market adjusts to the new price points going forward. In terms of the away from home segment on slide 13, we benefited from a combination of factors, including a market recovery, share gains, price increases, and operating efficiency in our away from home facilities. This altogether posted one of our best quarters on records for that business. Volume was 12% higher in Q3, 2022 compared to the same period last year, driven by market and share gains. As a result, adjusted EBITDA for this segment was in positive territory for the quarter at $5.4 million. Keep in mind, third quarter is a seasonally strong period for this business. However, going forward, our goal is to continue to drive positive EBITDA for our AFH segment. I will now turn the call over to Mark.

Thank you, Dino, and good morning, everyone. Please turn to slide 14 for a summary of our financial performance in Q3. Dino has highlighted many of the numbers on this page. We had strong revenue growth, and while adjusted EBITDA was lower than last year, we saw a significant improvement from Q2. We had a net loss in the quarter of $38.8 million compared to $9.3 million for the same period last year. The 29.5 million decrease was due to a number of factors, lower adjusted EBITDA of 9.6 million, higher foreign exchange loss of 17.7 million, consulting costs related to operational transformation initiatives of 3.5 million, and a higher depreciation expense of 1.4 million. These items were partially offset by a lower charge in the amortized cost of the partnership unit's liability of $3.5 million. In the quarterly segmented view on slide 15, consumer revenue increased 4.1% year-over-year and 6% sequentially to $346 million. In the away-from-home segment, revenue grew 37.3% year-over-year. and 13.8% sequentially to $81 million. Consumer adjusted EBITDA totaled $25 million in Q3 compared to $39.1 million in Q3 2021, with adjusted EBITDA margin at 7.2% compared to 11.8% for the same respective period. Sequentially, consumer adjusted EBITDA was up by $10.7 million from $14.3 million in Q2. For the AFH segment, adjusted EBITDA amounted to $5.4 million in Q3 compared to $2.2 million in Q3 2021 and negative $0.5 million in Q2. Corporate and other costs were $0.3 million in Q3 compared to negative $0.9 million for the same period last year and negative $2 million for Q2. On slide 16, we review year-over-year revenue growth for Q3, which improved 35.6 million, or 9.1%. This growth can be attributed to selling price increases in both consumer and AFH, and in both Canada and the U.S., along with higher AFH sales volume and a favorable foreign exchange impact on U.S. dollar sales. These were partially offset by lower sales volume in the consumer segment and also some unfavorable sales mix. On a geographical basis, revenues in Canada rose 16.3 million, or 7% year over year, while US revenues grew 19.3 million, or 12.2%. On slide 17, we provide additional insight into the profit impact in the third quarter. Adjusted EBITDA decreased 9.6 million to 30.7 million, representing a margin of 7.2%, from 40.3 million in Q3 2021, or a margin of 10.3%. The decrease in adjusted EBITDA was primarily due to significant inflation on pulp, manufacturing costs, and freight. Memphis plant labor and productivity issues, as well as lower sales volume in the consumer segment. These factors were partially offset by selling price increases and a recovery in AFH volume. Let's turn to slide 18, where we compare revenue sequentially in Q3 to Q2. Revenue increased by $29.5 million, or 7.4% from the previous quarter. Increase was mainly due to price increases, slightly higher volume, and favorable foreign exchange impact on U.S. dollar sales. Geographically, revenue in Canada was up by 10.5 million or 4.4% sequentially, while revenue in the U.S. improved 19 million or 12%. On slide 19, adjusted EBITDA in Q3 increased sequentially by 18.9 million, or almost 160% from Q2. This significant growth was due to several factors, including the higher revenue, as previously mentioned, from price increases and slightly higher volume, along with lower freight and warehousing costs, increased productivity, and significantly reduced SG&A spend. These factors were partially offset by higher pulp and sorted office paper costs. Turning now to our balance sheet and financial position on slide 20, Our cash position stood at 82.1 million at the end of Q3, a decrease from 100.3 million at the end of Q2. Long-term debt at quarter end totaled 1.095 billion, up 55.5 million from 1.0395 billion at the end of the previous quarter. Net debt increased from $973 million to $1.0477 billion. The $74.7 million rise in net debt was primarily due to a significant FX increase on our U.S. dollar debt, the use of previously financed cash and debt for the Sherbrooke Expansion Project and the Tad Sherbrooke Project, as well as for other capital spending and working capital. Our net debt to the last 12 months adjusted EBITDA leverage ratio rose to 9.5 times in Q3 from 8.1 times in Q2. Leverage increased due to a higher level of net debt and also lower adjusted EBITDA level in the last 12 months. We expect our leverage ratio to remain relatively stable in the fourth quarter as we continue to spend on the Sherbrooke expansion project but get the benefit of improved adjusted EBITDA and lower working capital. While we're in a unique situation with our leverage at the end of Q3 2022 with ongoing strategic projects financed with debt along with currently deflated adjusted EBITDA, we anticipate that deleveraging will gradually take place as we move through 2023. As Tad Sherbrooke continues to ramp up and the adjusted EBITDA improves, as pricing catches up to inflation. At quarter end, total liquidity representing cash and cash equivalents and availability from revolving credit agreements stood at $112.4 million. In addition, $50.6 million of cash was held for the Tad Sherbrooke and Sherbrooke expansion projects. Going forward, as indicated last quarter, liquidity will be positively impacted by Kruger, Inc.' 's decision to increased its participation in the Dividend Reinvestment Plan from 50 percent to 100 percent, which was effective on July 15th. On September 15th, we completed an amendment to the Ag Credit Agreement, which covers our financing for the Tad Sherbrooke and Memphis sites, so that the starting date of the fixed charge coverage ratio covenant was changed from Q3 to Q4 of 2022, and the calculation of this ratio now uses the financial results starting as of October 1, 2022, instead of using the latest 12 months. I will conclude my section by reviewing CAPEX on slide 21. CAPEX after nine months reached $76.6 million, including $15.2 million for Tad Sherbrooke and $30.2 million for the Sherbrooke Expansion Project. We have lowered our CAPEX range to $130 to $140 million for 2022, including the Sherbrooke expansion project. This forecast represents a capex reduction of approximately $30 to $40 million from the previous quarter, based on planned reductions in discretionary projects and also some delays caused by supply chain issues on strategic projects, which are not expected to significantly impact the startup timing on these projects. Thank you for joining us this morning, and I'll now turn the call back over to Dino. Thank you, Mark.

I will conclude on slide 23. Our main goal remains to grow the business for the long term, while managing the inflationary pressure on a short-term basis. Against this backdrop, we continue to deliver solid top-line growth in the third quarter. Price increases and cost efficiencies mitigated inflationary pressure in the quarter, with a further improvement in profitability expected in Q4 2022. We're prudently investing in our brand to support price increases in the market and managing price gaps. Strong awareness and trial-building activities continue behind our Cashmere and Purex Ultra Luxe, Sponge Towels Ultra Pro, Bonterra, and White Cloud launches. Our Tad Sherbrooke facility continues to exceed its ramp-up curve, while recovery benefits from our Memphis operations are expected to progressively improve. We're very pleased with the robust away-from-home recovery across North America and aim to sustain positive adjusted EBITDA for the segment going forward. We will progressively strengthen liquidity and improve our leverage ratio, as Mark mentioned. The ratio is temporarily inflated due to large investments in strategic projects and temporarily reduced profitability caused by inflationary pressure. Finally, we will continue to invest in our organization and culture to drive future growth. Now let's turn our attention to the outlook for the fourth quarter of 2022. We believe that inflationary pressure has stabilized, price increases are in place, cost cutting programs have been implemented, discretionary spending has been restricted, and operating efficiency is gaining traction. While the market continues to be very volatile, adjusted EBIT on Q4 2022 is expected to exceed last year's fourth quarter level. With that, we'd now be happy to take your questions.