Cascades Inc
TSX:CAS
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Cascades Inc
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[Foreign Language] Good morning, my name is Taka and I will be your conference operator today. At this time, I would like to welcome everyone to the Cascades First Quarter 2020 Financial Results Conference Call. [Operator Instructions] I will now pass the call to Jennifer Aitken, Director of Investor Relations for Cascades. Ms. Aitken, you may begin your conference.
Thank you, operator. Good morning, everyone, and thank you for joining our first quarter 2020 conference call. I hope this finds you all well. 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.The speakers on today's call will be Mario Plourde, President and CEO and Allan Hogg, CFO. Also joining us on today's call are the Presidents of Cascades business segments: namely Charles Malo, President and COO of the Containerboard Packaging Group; Luc Langevin, President and COO of the Specialty Products Group; and Jean-David Tardif, President and COO of the Tissue Papers Group. They will be available for the question-and-answer period at the end of the call.Before I turn the call over to my colleagues, I would like to highlight that Reno de Medici's interim report released on April 29 can be viewed on the Reno website. I would also note 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 listed in our public filings. These statements, the investor presentation, and the press release also include data that are not measures of performance under IFRS. Please refer to our Q1 2020 Investor Presentation for details. The presentation along with our first quarter press release can be found in the Investors 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. I would like to begin by thanking every one of our employees for their incredible dedication during these very difficult times. Their hard work has allowed Cascades to continue providing our customers with the essential tissue and packaging products they need. The past few months have been unprecedented on many levels and I'm very proud of how we managed the situation. All of our clients are considered essential businesses. And thanks to the response of our employees, we have not had any interruption in production. We are able to continue providing service to all our customers and support our community and we will remain well organized in doing so. With that, I will begin with Slide 3 on our presentation, which provides an overview of the tangible actions we have taken in response to COVID-19. Our top priority is the health and safety of our employees. In early March, we limited visit to our working facilities to only what was essential. We restricted work-related travel and prevented workplace social distancing measures and introduced extensive screening protocols at our operations. Our health centers of expertise, HR teams, and senior management are also in regular communication with our employees, providing them with protocols, safety measures, and equipment and update and support when and where needed.We can report that just a few employees had been affected by COVID-19 but none of them were determined to have contracted the virus at the workplace and none of our operations we're required to shut down. However, all necessary measures were taken to ensure the safety of everyone at their respective workplace.At the operational levels, we are maintaining open lines of communication with our customers to ensure all of our product needs are being fulfilled. To date, we have not had any material logistical interruptions and are adjusting to meet the fluctuation needs of our customers whenever possible.Finally, we are committed to helping our communities whenever, wherever possible during these challenging times. In addition to the local effort being undertaken by many of our facility across North America, Cascades is helping to produce over a million medical visors, has installed portable laboratory units in key areas in Quebec to support truck drivers. We are also supplying buses for the delivery of food to those in need and is providing transportation for food-linked organizations in upstate New York to stock local food pantries. Helping our local community has always been part of Cascades culture and value and this commitment remains resolute. Given the very difficult circumstances. We are very pleased with our solid Q1 2020 results. All of our segments executed well and we are particularly encouraged by the performance of our Tissue segment. Net earnings were $22 million or $0.24 per share. This compared to earnings of $0.26 per share last year and a loss of $0.27 per share in Q4.On an adjusted basis, we generated $0.42 per share in Q1. This was above the $0.30 per share generated in Q4 and $0.14 per share last year. On an adjusted basis, EBITDA of $161 million increased 19% over the same period last year and 6% when compared to Q4. On a consolidated basis, our adjusted EBITDA margin reached 12.3% in Q1. Slide 5 and 6 provide details for each of our business segment. On the raw material side highlighted on Slide 7, the Q1 average index price for OCC was down 41% year-over-year, but increased by 20% from Q4. White recycled paper grade used in our Tissue segment decreased by 49% year-over-year in Q1 and were essentially flat compared to Q4. On the virgin pulp side, hardwood and softwood pulp price decreased year-over-year in Q1 and were stable sequentially.Moving now to the brief comments on the performance of each of our business segments highlighted on Page 9 through 12 of the presentation. The Containerboard segment generated Q1 adjusted EBITDA of $99 million, down 7% sequentially and 5% year-over-year. In both cases, the benefit from higher shipment levels were offset by lower average selling price and higher production costs. Moving now to Tissue Paper. This segment posted solid result generating important improvement both sequentially and compared to last year. Shipment levels in both cases benefited from the COVID-19 entry starting demand and from the favorable impact of the Orchids acquisition. This combined with higher average selling price and improved operational efficiency contributed to significant improvement and EBITDA levels both year-over-year and sequentially. The European Boxboard operation generated good Q1 results, shipment levels increased both year-over-year and sequentially, the effect of which helped offset lower average selling price, Q1 results also benefited from lower energy and raw material cost, both year-over-year and sequentially. Q1 result in the Specialty Products segment improved sequentially driven largely by higher sales and the return to normal operation of the Rockingham moulded pulp plant following a fire at this facility in Q3 last year. Conversely, year-over-year result decreased, this reflected higher production cost and lower sales, mostly related to our plant closure and business disposal in the third quarter of 2019. They were partially offset by lower raw material costs. As a reminder, sales and EBITDA numbers of our recovery activity were reclassified as of Q4 and now reported within the corporate activity segment.To this end, the recovered paper market remained difficult in Q1 with average selling price continuing their decline year-over-year. While these conditions are favorable for other segments, they negatively impact the performance of recovery activity which nonetheless improved profitability slightly in the first quarter. I will now pass the call to Allan, who will discuss the main highlights of our financial performance. Allan?
Yes. Good morning, everyone, and thank you, Mario.So I will begin with an overview of our key PPIs on Slide 16, our first quarter shipments increased by 69,000 short tons or 8.2% from Q4. This was driven by increases of 15% in European Boxboard, 8% in Tissue, and 2% in Containerboard. While some of this reflects usual seasonal demand trends, most notably in Europe, the main levels undeniably benefited from pantry stocking and product mix demand shift related to the COVID-19 pandemic. First quarter capacity utilization rate of 97% increased 6% compared to the prior year and 7% from fourth-quarter levels. Working capital came in at 9.9% of sales, while return on assets stood at 12.3%.Moving now to sales, as detailed on Slides 17 and 18. On a year-over-year basis, first quarter sales increased by $83 million or 7%. This reflects the contribution from higher volumes in the Containerboard and Tissue Paper segments, including the recent acquisition of Orchids as well as a net positive impact from COVID-19 hygiene and packaging solutions demand. Offsetting these benefits were less favorable selling price and sales mix in all business segments with the exception of Tissue and lower sales in recovery activities attributable to lower recycled material pricing and also the impact of business closure and disposal in the specialty products group in the second half of 2019. Sequentially, sales increased by $86 million or 7% with increases in all business segments that were in part driven by COVID-19 related demand. Moving now to operating income and adjusted EBITDA. As highlighted on Slide 19, Q1 adjusted EBITDA of $161 million increased $26 million from the prior-year level. Results benefited from a stronger performance from the Tissue segment that was partially mitigated by slightly lower container board and specialty products results. Special -- sequentially, Q1 adjusted EBITDA increased by $9 million as shown on Slide 20. This was driven by stronger performances in all business segments with the exception of Containerboard. I would note that we took a $10 million credit loss provision on accounts receivable, which negatively impacted EBITDA levels. This amount is a global amount encompassing all of our business segments, with more than half in our Containerboard segment. This provision will be adjusted based upon credit risk evolution. To this end, we continue to work with our customers whose businesses have been impacted by the pandemic to help them through the crisis while limiting our risk.Slide 21 and Slide 22 illustrate the year-over-year and sequential variance of our Q1 adjusted earnings per share and the reconciliation with the specific items that affected our quarterly results. As reported, earnings per share were $0.24 in the first quarter, this compared to earnings per share of $0.26 last year. Both periods included specific items. On an adjusted basis, EPS increased by $0.28 compared to last year's result. Higher operating results and lower financing expenses were offset by higher depreciation, reflecting business acquisition and operational capital projects. On an adjusted basis, sequential first-quarter EPS increased $0.12 per share from Q4 last year.Slide 23 and Slide 24 illustrated specific items recorded during the quarter. The only item worth mentioning is a $17 million foreign exchange loss on long-term debt and financial instruments. First quarter adjusted cash flow from operations increased by $68 million year-over-year to $153 million. This reflected strong operating results and lower net financing expenses in the first quarter of this year following our Q4 2019 refinancing. Adjusted free cash flow levels increased by $58 million year-over-year despite higher net CapEx and dividends paid in the current period. Moving now to our net debt reconciliation as detailed on Slide 26. Our net debt increased by $249 million in the quarter. This reflects the $121 million acquisition costs of the Caisse de dépôt's interest in our Greenpac Mill, which closed in early January 2020 in addition to a negative foreign exchange impact of the $140 million. These impacts were partially offset by positive cash flow from operations. Our net debt leverage ratio stood at 3.5 at the end of the first quarter, up from 3.25 at the end of Q4. This, along with other financial ratios and information about maturities, are detailed on Slide 27. On Slide 28, we provide details about our updated capital investment plans for the full year. Given current market uncertainties, we are focused on taking a prudent approach on cash flow management.We are updating cash flow forecasts regularly across our business segments, and we remain committed to managing our debt profile. Currently, our available liquidity stands at approximately $650 million. Mario will give you more details, and we'll wrap up the call with a brief conclusion before we begin the question period. Mario?
Thank you, Allan. As in the past, we have provided details regarding our new term operational outlook on Slide 31 of the presentation. My concluding comments, however, will focus on what our scene today and what our focus on given the present-day circumstances. Current demand remained good for our product offering of hygiene and packaging solution, including retail tissue, some food packaging, and corrugated products used by essential company operating in the industry that includes food, personal care, and the like.There is a potential mix demand impact, both positive and negative, depending on the timing granted the success of gradual reopening of the North American economy. It would be a mistake not to expect in the coming months a decrease in demand from some of our product categories. As of today, good demand for some of our products offset the slowdown in other non-essential market. To this end, in addition to our North American positioning in Tissue, I would like to highlight the fact that our packaging business is exposed to end customer industry that should remain active as shown on Slide 30.On the North American cost side, we expect to see near term margin impact from higher OCC and SOP prices and our increased use of pulp in the Tissue side due to the lower levels of available white recycled grades. We expect this to remain the case while businesses remain closed. That said, our recovery group is well positioned on the sourcing side due to the size of our operation, our footprint, and the long-term relation with suppliers. These facts alone with strategic actions taken enabled our recovery group to maintain raw material inventory level at our mills within the normal parameters in Q1. Currently, raw material levels are sufficient to meet production requirement. As is the case in our North American operations, the duration and impact of COVID-19 pandemic translate into uncertainty regarding the near-term outlook for European Boxboard. That said, order intake and pricing trends are currently fairly positive while rising raw material price are expected to have a negative impact on results. As Allan mentioned, our liquidity and cash flow levels are good to meet our requirements. As such, our dividend policy remains unchanged at this time. We are focused on cost management and are completing an updated cash flow forecast regularly across our businesses.On the CapEx side, we have reduced our previously announced plans and level of 2020 from $250 million to $175 million to $200 million. Modernization initiative on the way on our Tissue segment are continuing while a portion will be delayed until 2021.We have continued to advance our plans for the Bear Island project, albeit at a slower pace given the current circumstances. We do not have any update specific our timeline to provide at this time. The Bear Island project remains strategic for the long-term future of our Containerboard business. We will continue to monitor evolving business condition and macro factor and we'll remain extremely vigilant in our approach to both capital expenditure and liquidity management.Before we open the call to questions, let me finish by saying we are pleased with our solid first quarter 2020 results given the wide-ranging impact levels of COVID-19. I would like once again to express my appreciation to all of our employees and partners for their dedication over the past few weeks.With that, we will now be happy to answer your questions. Operator?
[Foreign language] [Operator Instructions]Your first question comes from Sean Stuwart.
Congratulations on a very strong quarter. Question on recycled fiber costs, you referenced the accelerating gains we've seen for OCC and so prices through March and even more so in April. I'm wondering if you can provide some context on how much more pressure we might see over the mid-term and I gather with respect to your comments regarding your inventory levels headed into Q2 you're going to be able to get around some of that near-term pressure is I guess the way I would think about it. How much should we expect to see that inflation show up in Q2 results?
At this time, Sean, our inventory levels are at normal levels, I would say 3 to 4 weeks and we keep having good supply and majority of this is an OCC. So for the next month, in our opinion, we will be able to probably slow down our purchase in the market and avoid a portion of this increasing costs. Difficult to predict how much will be the impact on our results for the coming quarter, but obviously the price increase, we said this week, was way over what we were expecting. And I don't know, Luc, if you would want to add a comment to mine.
Yes, as you mentioned, Mario, earlier, we had no difficulty at all to maintain and even increase inventories over the last few weeks. Despite the fact that our mills operate very well so far this year, so as Mario said, we were -- we think that based on the reading we have in the market, the May increase was overstated versus the market conditions. We need to understand now that we're getting into a higher generation season. We had -- and also with the confinement, this should help. We have to see also if the demand in the containerboard will remain as strong as it has been since the beginning of the year. This should have also an impact on the market dynamic. And I think something we need to understand also is when we started the year, the global inventory levels of the OCC were I would say lower than average, lower than we typically see. We got a strong demand, low generation and the situation has been aggravated with the COVID -19. So there has been a number of conditions that made the market may be tighter than we typically see normally at this time of the year, so we do believe in the short terms that the market conditions will improve like they typically do at this time of the year.
Mario, just a follow-up on the CapEx guidance. Am I to understand that the reduction versus the previous guidance is Tissue projects and if so, there will be catch-up in 2021. Is that the right way to think about it?
Well, we'll be postponing the majority -- well, the reduction is spread over the three groups. The biggest share of the envelope this year was dedicated to Tissue, so those projects are keeping on lines, but we are postponing some of it to 2021, so -- but the reduction of the CapEx is spread over the three books.
Your next question comes from Adam Josephson.
I hope you and your families are safe and healthy. One question on your Containerboard outlook. Can you discuss your April shipments relative to what you saw in the first quarter in March? And I know you have that helpful slide on your packaging end markets, but could you go into any more detail as far as what level of sequential demand slowdown you're expecting? Obviously, your shipments were up 9% in the first quarter and you're saying you're only going to be up slightly in the second, so obviously you're expecting a reasonable sequential slowdown. So can you give me any more details to April and then what you're expecting sequentially 1Q to 2Q?
Charles, can you take that one please.
Yes, I just want to start with saying that we live in the very, very difficult world right now, even our own group trying to predict what's going to happen in the next few months is very difficult to say. One thing that I would like to mention is we have about 80% of our overall sales that are, I'd say, just round numbers that are considered as essential goods and some of them -- some of those goods have increased in the first quarter, late first quarter and also even in the month of April. And the same thing that we have, about 20% of the -- our goods that are considered as durable goods or non-essential. So some of that 20% is a bit more effective, but what we're seeing right now with the COVID. And I'm giving example like automotive and parts and things like that within that that have been more affected, so this 20% is probably where we're going to see a bit more impact in the coming months. So what we see just not for April but probably for Q2, this is the percentage that would be more impacted. To what extent, I mean, it's very difficult to give a number right now, so I'm not sure if I'm answering your question correctly. But percentage right now would be very difficult for us to say, but our April is still doing well on those line of product and probably the month of May would be also good.
And then maybe what we can add to that comment is what we are seeing today is the market that are negatively impacted. They are overcompensated by the good retail business that we're having.
Sure, I appreciate that. And just one on your Tissue business, can you talk about the different trends you're seeing in retail versus away-from-home and to what extent you can shift some of your away-from-home production to make retail products?
Jean-David?
Yes, I can. Certainly moving ahead, there is a small percentage of our business that we can switch from away-from-home to retail, but there is some of that that we can do without for sure. Right now, even if lot of businesses or things are closed, we still see really strong demand on our away-from-home side because we are overdeveloped on the hand towel, so majority of our business is in the hand towel and we see huge demand. So people are cleaning and washing their hands much more often. So for the one that are still open, the consumption is beyond what it was. We also see back tissue that was -- that we're selling to away-from-home channel but that are ending on the retail market, we believe because of the demand is really high on kitchen room towel and tissue right now on the away-from-home side. So right now, even if people have some concern about the away-from-home market, that's not what we see. We see for sure on the napkin, on the food service, but this has been among businesses for us. So right now we believe we're in good shape, so April was good and May looks good as well.
And just one clarification on the sequential decline in volume you're expecting in Tissue, is that both retail and away-from-home or just away-from-home?
Just away-from-home and the volume, the factors that we depleted the inventory significantly in March and in April. We had our inventory because of -- we've closed Kingman and the Waterford, New York plants as scheduled in March. So we had higher than normal inventory to make those moves because we're transferring assets from one plants to another, so we're in consolidation right now. But we depleted those inventories significantly as we're working with our customers right now on less SKUs and those type of things, so we have increased efficiencies, but we won't be able to maintain the surge that we had the recent weeks.
Your next question comes from Hamir Patel
Jean-David, could you tell us what was your mix effect, consumer versus away-from-home, in the quarter? And has the sort of market share gains that you achieved in the quarter change how you think about the mix that you want to position the business for over the long term?
Right now, the business is slightly larger in consumers, so 55% to 60% probably on the consumer side versus the retail -- the away-from-home, I guess, which is around 45%. We don't see a big switch from one market to the other at this moment just because what I said, I think we're -- the portfolio that we have on the away-from-home side is okay based on the demand, so there is less and less [ error ]. For example, we see big lift on towel again and other products, so there is not that many equipment that we can move from one market to the other, some especially on bath and kitchen towel. But at this moment, we don't see the need of the swinging capacity from one market to the other. We don't have the numbers for market share. I think we gain more than maybe our peers because we had a higher inventory I believe than others before the pandemic, so I think we've got a good performance in terms of sales.
Great. And then just given the fiber supply challenges right now, are you expecting to use significantly more virgin pulp in Q2 and Q3 in Tissue?
Not significantly but for sure. The thing is we're working with our customer again to focus on the virgin items. So for example on the retail, most of our customer and the portfolio of products including recycled product and also premium product based on virgin fiber so we stopped producing some of the recycled items and focusing on the virgin items. So we see minimal negative impact, if I can say, on the bottom line because those items are designed with virgin fiber, if I can say, so we don't see negative impact on that side and that allows us to then recycle fiber for our [ boards ] business. So right now, the impact on virgin fiber on product that used to be made with recycle is minimal
Okay, great. And then just a question for Mario. The outlook for Q2 for Europe was stronger than I expected. Are you expecting to get some price gains to offset the input cost inflation there? And just how significant has been the move-in in that recycled fiber prices that you're seeing? I know you guys commented that the trade prices for North America we're printing more than what you're actually seeing in the market. What are you actually seeing in Europe?
Well, right now, demand in Europe is very solid in the market we play. Majority of the market we're servicing in Europe are all essential business-related consumption. So the backlog actually is higher than Q1 and Q4 last year, so we're in very good position. Plants are running very good. We only have one facility which produces packaging for the luxury market, which is slowed down. So we feel that Q2 will be a good quarter as well. As you probably are aware, the majority of the players in Europe have announced price increase. I don't know to what extent we will be able to capture all of it, but I think before the end of Q2, we should see a portion of this increase in our result. So we feel Q2 for Europe should be in good position. And, Hamir, don't forget also the exchange rate. So far, it's favorable compared to Q1 when we translate the results, so don't forget that.
Your next question comes from Zachary Evershed.
Congrats on the quarter. With the uptick in SOP prices and availability issues that you're seeing, do you have an updated margin guidance range for the Tissue segment? Previously, we were talking about a 10% to 12% margin.
Jean-David, can you answer that?
That's difficult to predict because we don't know what will happen exactly to predict what will be the market in a month or 2. But we're continuing our consolidation plan, we're increasing efficiencies. So we're really positive on the next few months.
I think the margin should remain fairly the same as in Q1 considering that we managed to sell more virgin product with included -- the impact of cost is included in the price, so we should be in the same range. And over time, Zachary, the -- our target for Tissue remains the same as we continue to gain on efficiency and so on, so we'll make it happen.
Understood. In terms of the SOP and OCC kind of run rate prices, as retail opens backup, we'll see better generation obviously but it's possible we could see kind of stickier work from home scenario. So what are you guys forecasting for your long-term SOP and OCC price ranges?
Well, as generation increase in OCC, I would think that we have it -- probably it's a high price for the year considering there is enough generation right now to supply the market. On the SOP, it's pretty tough to predict as we know -- we don't know how much business will open, how much people will come back to work. So as generation will not be there. I think SOP will remain a commodity that will be fairly difficult to capture and we certainly would probably have to compensate with the use of virgin fiber. So pretty tough to predict. If offices open rapidly and people go back to work, then maybe we'll see a ease off. But from, let's say, the next quarter, we don't see that -- we don't see ease off on the price of the SOP.
That's helpful. And then just one more one for me. The provisions that you're taking, what levels did bad debt write-off hit during the great recession? And how does that compare to what you're expecting in the coming quarters?
About the credit-loss provision you're referring to?
Yes.
We'll see if the global provision -- we have not had a lot of loss during the Q1. The effect of the COVID or the pandemic on will show up in the coming weeks or months, so we just took a provision given the credit -- the market credit spreads that have increased and based upon the analysis of our customer portfolio. We felt that it was the right thing to do. So it's -- we're not saying that we are expecting, obviously, we will do everything we can to minimize that. But it's a provision we took based on the evaluation of our risk.
[Operator Instructions] Your next question comes from Paul Quinn.
Just a couple of minor questions here. But on the recovered paper price side, you guys mentioned on the call here that the April increase was a lot more than you expected. What did you expect for April?
Luc, can you take that one?
Yes. We were expecting -- we are talking about the May one, the May increase or the increase that is impacting the May numbers.
Yes.
We were expecting half of this.
Well, that' a fair difference. And in terms of your ability to switch on the -- especially on the -- I guess on the Tissue side, your ability to switch from away-from-home to consumer, if I look at 2019 kind of on sales, you're kind of even in both at 40%, right? So when you say that you can move from one, is it material? Or is it like more than 5% or is it like 1% or 2%?
No. It's between 10% and 15%, I would say.
Okay, that's significant. And then just looking at overall leverage at 3.5x on trailing, how do you think about that balance sheet, especially in light of your decision on Bear Island?
Well, we will manage carefully the cash flow, Paul, as well as the CapEx. If situation will deteriorate in Q2 or in Q3, we again have other tools to reduce, we would again revisit the CapEx envelope and adjust to make sure that we are managing the debt level.
All right. And then the -- I guess maybe just one last one on Tissue. You've got pretty strong Boxboard demand in Europe and, guys, you're looking for a price increase there. Have you heard any signs of price increase in North America on Tissue?
We are not commenting, Paul, on any future price increases.
Thank you. There are no further questions at this time. Mr. Plourde, please continue.
Thank you very much, everyone, for being with us this morning and please be safe, and we're looking forward to see you on the next quarter. Thank you.
[Foreign language] Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.