Cascades Inc
TSX:CAS
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
8.91
14.94
|
| Price Target |
|
We'll email you a reminder when the closing price reaches CAD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Cascades Inc
You don't have any saved screeners yet
[Foreign Language] Good morning. My name is Simon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cascades First Quarter 2021 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, Simon. Good morning, everyone, and thank you for joining our first quarter 2021 conference call. We will begin with an overview of our operational and financial results, followed by some concluding remarks, after which we will begin the question period. The speakers on today's call will be Mario Plourde, President and CEO; and Allan Hogg, CFO. Also joining us on the 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 all 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 Reno's 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 2021 investor presentation for details. This 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 contact us after the session.I will now turn the call over to our CEO. Mario?
Thank you, Jennifer, and good morning, everyone. Before beginning, I would like to thank our employees for their continued hard work and resiliency, our customers, supplier and the community in which we operate for their strong partnership as well as our shareholders for their ongoing support. Our results for the first 3 months of the year stay directly to today's dynamic business environment. By far, the most important driver of our performance this quarter was demand contraction in retail and Away-from-Home tissue volume.Higher raw material prices and transportation cost inflation also limited the first quarter performance of our Containerboard and Boxboard Europe segments. Solid results from our North American packaging segment driven by higher demands and sales prices and Containerboard offsetting slightly lower volumes and the Specialty Products segment, good sequential margins improvement helped counter these headwinds. On a consolidated basis, first quarter sales levels decreased 5% from Q4 and 7% from a year ago, while adjusted EBITDA decreased by 13% and 10% respectively.Slide 4 and 5 provide details of each of our business segments. I will provide additional detail about the performance of each of our business segment in a few minutes. On the raw material side, highlighted on Slide 6, the Q1 average index price for OCC increased 97% year-over-year and was 9% higher than Q4. This reflects the high domestic demand levels for this fiber as Containerboard production levels have respond to pandemic buying pattern and export activity.Average prices for white recycled paper grades were stable year-over-year in Q1 and decreased 16% from Q4 levels. On the virgin pulp side, hardwood and soft pulp prices both increased year-over-year and sequentially in Q1. Hardwood pulp registered an increase of 17% year-over-year and 19% sequentially, while softwood pulp prices rose 16% and 14% respectively. It is important to note that the higher transportation cost and the less favorable exchange rate are also factor affecting the cost of our materials.Moving now to some brief comments on the performance of each of our business segment highlighted on Page 8 through 11 of the presentation. The Containerboard segment generated a slight 1% increase in sales sequentially, driven by a higher average selling price and improved mix. These benefits were offset by the less favorable exchange rate and a 2% decrease in shipments, which reflected usual seasonality and planned 11,700 short ton of downtime taken during the period.Jumbo roll shipments decreased 3% as capacity utilization remained stable, and we increased our integration rate by 2%. On the converting side, shipments decreased by 1% sequentially in millions of square feet, outperforming the 11% decrease in the Canadian market and the 3% decrease registered in the U.S. market for the period. When compared to Q1 of last year, shipments of converted product increased 10%. This outperformed both Canadian and U.S. market, which increased 8% and 4% respectively. I would also add that shipment levels in the first 3 months of the year attained a new record level for Q1.Q1 adjusted EBITDA of $108 million or 21.5% on a margin basis was $2 million or 2% below Q4 levels. Results benefited from solid sales and a higher average selling price. However, these were offset by higher raw material and transportation costs and lower volume-related to seasonality and planned downtime that I just mentioned.Year-over-year, sales increased 10%, driven by better volume, improved sales mix and higher average selling prices, partially offset by the impact of a less favorable FX. Adjusted EBITDA increased 9% year-over-year.Our Tissue business had a difficult first quarter on a comparative basis. Sales decreased 23% sequentially. As I mentioned earlier, this was driven by lower volume and was also impacted by weather-related production loss in one of our southern U.S. tissue plants and continued lower volume in the Away-from-Home side. Less favorable FX and realized pricing in the sales mix also impacted sales sequentially. Adjusted Q1 EBITDA decreased 50% from the same reason. However, lower production cost was a positive contributor to results.On a year-over-year basis, the factor driving Tissue performance were similar with volume contraction being the most important factor beyond both the sales and adjusted EBITDA decrease. Q1 sales from the European Boxboard increased 13% sequentially, reflecting better volume and sale prices and the beneficial impact of a more favorable exchange rate.Adjusted EBITDA decreased $4 million from Q4 levels, reflecting higher raw material prices and energy cost. Year-over-year, sales increased 7%, driven by volume and better pricing and mix. Conversely, adjusted EBITDA decreased by $7 million from prior year levels as the beneficial impact on sales were more than mitigated by higher raw material prices and higher energy and production costs.The Specialty Products segment generated solid Q1 results sequentially and year-over-year. Sequentially, Q1 sales were stable, decreasing by $1 million and adjusted EBITDA increased $3 million. In both cases, better pricing and sales mix drove these results. When compared to the prior year, Q1 sales increased by $9 million, driven by a stronger volume and better pricing and mix, the benefit of which more than offset a less favorable exchange rate.Adjusted EBITDA levels increased by 50% or $6 million year-over-year with higher volume, better pricing and mix and lower production cost more than offsetting the impact of higher raw material cost and less favorable exchange rate.I will now pass the call to Allan, who will discuss the main highlights of our financial performance, and I will be back after Allan.
Thank you, Mario, and good morning, everyone. So before discussing our financial results, I would like to highlight that following the European Boxboard segment announcement to sell its virgin hybrid manufacturing mill in France that these operations are not presented as discontinued with retrospective adjustments. We provide relevant details regarding the changes to the financial consultant results on Slide 13. Note that this transaction closed last Friday, April 30.Looking now at an overview of our key KPIs on Slide 14. Our first quarter shipments increased by 6,000 short tons or 1% from Q4. This was driven by a 16% increase in Boxboard Europe, offset by a decrease of 19% in Tissue and a slight 2% decrease in Containerboard. First quarter capacity utilization rate of 91% decreased 1% compared to the prior year and increased 3% from the fourth quarter levels. Average working capital came in at 9.5% of sales, down from 9.6% in Q4, while consolidated return on assets stood at 13%, down slightly from 13.1% in Q4.Moving now to sales as detailed on Slide 15 and 16. Year-over-year, Q1 sales decreased by $83 million or 7%. As we have already highlighted during this call, this was driven by the important volume decrease in Tissue in the period with unfavorable exchange rate also impacting sales level of our North American business segments. Volumes in all of our other businesses were up year-over-year and pricing and sales mix were beneficial factors for our North American operations. On a sequential basis, first quarter sales decreased by $60 million or 5%, largely reflecting lower volumes in Tissue and less favorable exchange rate. These were partially offset by higher shipments in Europe and better pricing and mix in Containerboard.Moving now to operating income and adjusted EBITDA on Slide 17. Q1 adjusted EBITDA of $141 million decreased $16 million from the prior year level. The decrease was largely due to the lower results from the Tissue segment as a result of lower demand. Boxboard Europe also decreased year-over-year as a result of higher raw material costs. And North American packaging segments both generated stronger results compared to the prior year period.Sequentially, Q1 adjusted EBITDA decreased by $21 million or 13%, as shown on Slide 18. This was driven by the weaker Tissue performance with Containerboard and Boxboard Europe all sourcing softer results sequentially due to raw material price inflation. Specialty products and corporate activities both generated improved results in the period.Our quarterly results continue to benefit from our margin improvement initiatives as we move towards our objective of improving our EBITDA margin by 1% for the second consecutive year when compared to our baseline year of 2019. On that basis, we have realized $40 million in the first 3 months, and every initiative that we have implemented are mitigating market headwinds and cost inflation and are also improving the execution of our business processes.Slide 19 and 20 illustrate the specific items recorded during the quarter. The main items worth mentioning are $5 million of restructuring charges recorded in Containerboard and Tissue segments related to restructuring and profitability improvement initiatives. An $8 million unrealized loss on financial instruments and a $3 million foreign exchange gain on long-term debt and financial instruments.Slide 21 and 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 $0.22 the first quarter. This compared to earnings per share of $0.24 last year, both per year included specific items. On an adjusted basis, EPS decreased by $0.13 compared to last year results. Lower operating results and higher depreciation expense were partially offset by lower financing expenses and a lower earnings attributable to noncontrolling interests.On an adjusted basis, sequential first quarter EPS decreased also by $0.13 per share from Q4 2020, reflecting the same factors in addition to a positive variance resulting from a tax asset reassessment of prior year's losses, which occurred in Q4 of last year.As highlighted on Slide 23, the first quarter adjusted cash flow from operations decreased by $47 million year-over-year to $102 million and adjusted free cash flow levels decreased by $59 million year-over-year. This reflected lower operating results, higher net financing expense paid and higher CapEx incurred, including the Bear Island project, which is well underway and going as planned.Moving now to our net debt reconciliation on Slide 24. Our net debt decreased by $25 million in the quarter, reflecting a positive exchange rate impact of $21 million as free cash flow was slightly negative. Net debt was also adjusted to reflect discontinued operations. Our leverage ratio of 2.5 is unchanged from the end of 2020. We would also like to report that we just extended our revolving bank credit facility for 2 years to July 2025 with the same terms and conditions.This, along with other financial ratio and information about maturities are detailed on Slide 25.Slide 26 provides details about our capital investment plans for 2021. They remain unchanged in the range of $450 million to $475 million, which includes $250 million of investment associated with our Bear Island conversion project. Capital expenditures, net of disposal, totaled $78 million in Q1. We remain focused on prudently managing our cash flow and debt profile with the objective of keeping our leverage ratio within a range of 2.5 to 3x while we execute our Bear Island project.At the end of the first quarter, we had cash and revolver availability of approximately $1 billion stable with year-end 2020. Mario will conclude the call with some brief comments before we begin the question period. Mario?
Thank you, Allan. We provide details regarding our near-term outlook on Slide 28 of the presentation. As a reminder, this outlook is based on what we are seeing today and may change in the coming months given the dynamic nature of the ongoing unusual circumstances. Our near-term outlook for Containerboard segment is good, stable sequentially and up year-over-year. We continue to see solid demand in both the manufacturing and converting side. And the rollout of the announced price increase is underway as the second market price increase should be largely in place by the end of Q3.These factor are expected to offset higher raw material pricing and upward pressure on transportation side. I would highlight that we have planned maintenance downtime of approximately 15,000 short ton in Q2, slightly higher than the 11,700 short ton we took in Q1. We are expecting steady sequential results from Specialty Products segment. This reflects stable volume and a higher average selling price offsetting higher raw material costs. Year-over-year results are expected to increase, reflecting improvement in both volume and selling price.Near-term performance in European Boxboard is also expected to be stable sequentially, with stable volume and better pricing offsetting higher raw material costs. Year-over-year results are expected to decrease as the impact of higher raw material cost is expected to more than mitigate volume and pricing improvement. Our cautious near-term outlook for the Tissue segment is for stable sequential results. Volumes are expected to remain stable at lower levels on a sequential basis, with production cost structure efficiency mitigating the impact of higher raw material and transportation costs.Year-over-year Tissue results will be down from last year strong results driven by elevated COVID-19 demand on the retail tissue side. Pricing improvement will support result going forward as the high single-digit price increase we announced for consumer and Away-from-Home tissue product in North America will begin to take effect in the third quarter. While first quarter results were disappointing for this segment, we view this underlying cost as temporary.Long term, we expect demand level for both consumer and Away-from-Home tissue product to return to a normalized level as inventory are rebalanced and businesses and the economy reopen. Modernization and margin improvement initiatives have not only equipped this segment to better mitigate -- navigate the current challenging environment, but have also positioned this business for long-term market competitiveness.Moving now to the raw material outlook. The recovered paper market saw increased activity in the first quarter, which usually -- usual seasonality linked to lower generation of material. Domestic demand remained robust and export prices remain high with limited container availability and port congestion, we maintained good inventory level, finished the quarter well-supplied and have not had difficult securing needed fiber. We have seen higher generation of material in the past month, and we expect similar OCC dynamics to persist for the coming months, with domestic demand remaining robust, persistent export activity and OCC trading with a narrow range of the current level.Conditions for the white grade were more complex and are more difficult to predict. Material has remained readily available, and we have continued to maintain good inventory level. Lower demands for Away-from-Home product are -- has eased demand. Looking ahead, the recent increase in virgin pulp prices will likely put an indirect upward pressure on cost and recycled white grades.The virgin pulp market saw a continuation of the rapid surge in pricing at year-end during the first quarter. This was driven by strong demand and extended plan and unplanned on time at pulp mill. We should expect market conditions to ease as mill maintenance is completed and production is resumed. Currently, our mills are supply, and we will continue to manage our needed support by our long-term supplier relationship and good inventory management.With that, we will now be happy to answer your question. Operator?
[Foreign Language] [Operator Instructions] Your first question comes from the line of Sean Steuart with TD Securities.
A couple of questions. Jean-David, wondering if you can give us some context on when you expect consumer tissue destocking will work through the system. It sounds like Q2 you're expecting an ongoing overhang. Any clarity on when that situation will resolve?
So just to give you some numbers to support what we believe. If you look at the total U.S. converted shipments over the last few years, the increase versus 2018 to 2019 to 2020, we see that there's about a full month of inventory that went to this system. So from 8.8 million to 9 million to 9.7 million tons into the market. So you can see that there's 0.5 million ton that was shipped in 2020, maybe more than what the consumer consumed.So which equal about a month of retail sales total. So if you look also at the Nielsen data, April is the first month that we see positive increase from month-over-month. So we believe that the consumer are pretty much done with the inventory at their level, but they're still higher inventory at the retailer or distributor and also the manufacturer side. So all in all, we believe that there's maybe 2, 3 months still of unbalance, but still we see better sales in Q2 than in Q1 on our side.
That's great detail. Second question is on OCC costs. In particular, we're seeing ongoing pressure or inflation into the second quarter. Wondering if you can handicap the various factors at play here, offshore shipments, domestic consumption as these new containerboard mills start production, generation rates, what's driving it more so than other factors? And any visibility on when you might expect to see some relief on that front?
Well, on the -- what we see obviously now is that the containerboard activity is their domestic business is strong and robust. So this is obviously a significant component of the market. The generation itself is also an important one. The first quarter of the year is always a quiet quarter for fiber generation. When you get into the March-April season, the generation increased significantly. And this is very stable. Year after year, you see the same trend in fiber generation. And 2021 makes no exception. We've seen a significant increase in generation in the last few weeks.More recently, there's been more export activity, mainly to India. And we've seen in the last few weeks, some -- this was less present for a couple of reasons. You probably have seen that the recycled brown pulp in China, there's a little bit of oversupply and softening in the pricing. And obviously China is an important final destination for recycled pulp and linerboard. And we believe also that the current challenges that India has with the pandemic is also impacting the demand.So what we've seen in our region, where we are more active, which is Northeast U.S., Canada, is definitely a significant softening in the market conditions. Yesterday, the proposed a stable pricing for us for the Northeast. We would have thought even a small decrease on the street base on our own perception. So that this definitely shows that something is -- we're getting a more favorable season with fiber generation.Another thing also that we need to consider is the challenge with logistics, with containers, availability, difficulty of booking and the concern that people have to export material these days with what's going on in India. So that's all these conditions. So first quarter is always a more sensitive quarter because of the lower generation. And this year has been amplified because the mills were -- in the country more mills have been fairly busy. So that's probably why the market was a little bit tighter than it normally is. But I think that evolves more favorably for us in the last few weeks.
Your next question comes from the line of Anojja Shah with BMO Capital Markets.
I was wondering, with your leverage at 2.5x and containerboard market clearly improving, can you give any thoughts around incremental capital returns to shareholders? Just what you're thinking right now?
Well, what we said when we announced Bear Island, it's a fairly significant investment, and we'd rather remain prudent during that time. And now that we see that Tissue was affected in the first quarter. So for now, our plan is maybe more to remain on the safe side until the Bear Island project is completed.
Okay. And then when you think about the pandemic and what the impact it's had on your Tissue business, has it made you think about any potential shifts in your mix between consumer and Away-from-Home?
A few years ago, our mix was close to 50-50 with from home and retail. Now if we look at last quarter, it's 65-35, but for sure the market is below. So I think we would end up after pandemic around 60-40, which is in line with what the market is consuming. So we are -- we're pleased with the mix that we have now. We've invested a lot to renew or converting assets over the last few years. So we're pretty much at the right level.
Great. And I just wanted to ask one last one about cybersecurity, given the issue faced by some of your competitors in the U.S. and in Canada. What measures have you taken to protect yourself in this arena?
Well, we have our internal security group that always measure and monitors what attack we may have. We do have insurance to cover ourselves, but we also have outside supplier, if anything happened that would recover rapidly in case of a ransomware. But so far, you saw a few in the industry. And I think it proves that our systems are quite solid, and we have improved since because we saw that the paper industry was under a lot of pressure. So we improved this safety since. And we will keep on improving as we go -- move forward anyway because it will never stop.
Something we did also is maybe to accelerate any plan for recovery if any situation happens in our production facility. So this is something we accelerate given what we saw. But we were doing a lot in the last 4, 5 years. But again, as Mario said, it's a continuous program. We need to improve and be really, really careful and mindful of anything. So we're monitoring that.
Your next question comes from the line of Hamir Patel with CIBC Capital Markets.
Charles, could you give us an update as to -- with Bear Island, where the sort of order books stands for that and how you see -- what are you targeting by the time you start up?
Yes. So just first, maybe on the Bear Island, the project is going as on schedule right now. So the work on the site is progressing well. So we still are aiming to start in December 2022. In regards to the volume, I mean, our goal at the beginning was to try to secure about 150,000 tonnes with different agreement. So I'm going to wait for the agreements to be signed officially, but we are in discussion with current and new customers also to secure that volume. So once we're going to have more formal agreements, we will inform on that, but it's going in the right direction, I can say, at this point.
Okay. That's helpful. And just turning to containerboard demand. Can you speak to if you're noticing any differences between Canada and the U.S.? And how is the e-commerce growth been trending this year?
So the demand, I would say there is a bit of difference depending on the seasonality between U.S. and Canada, but nothing major. Both are very good as we speak still. Our first quarter, we were very happy with the demand and the way that things are going. And we see that from what we see at the beginning of the Q2, the demand still very strong. So this is a good sign, and this is on both side of the border. So this is good.And on the e-commerce, we are seeing that there is a high demand for products that are moving on the e-commerce. We are starting to see now that some of these changes are probably going to stay for the long term, which is good because these goods, when they travel with the supply chain on e-commerce, they need packaging and corrugated. So this is a good sign. So we are seeing a positive sign on the demand coming from the e-commerce. And the good news is when we look at the Bear Island and the new mill that we have, also, the Greenpac, offering lighter weight.So it helps reducing the weight of packaging on e-commerce, and we're well-equipped to offer that to our customers. So we're very positive on that side.
Your next question comes from the line of Zachary Evershed with National Bank Financial.
Could you give us a little more detail on the tissue modernization push wrapping up and where you think that leaves the segment in a more normalized environment margin-wise?
So we've done a lot over the last 2 years. So we -- as you know, we've shut 7 sites. We installed 13 new converting lines. About 1/3 was for retail, 2/3 was for Away-from-Home. But we curtailed or we retired a lot of assets at the same time. So all in all, the capacity increased by about 13%, converting capacity, I mean. So this is where we're at right now. So the -- all the efforts that we've put in help us last year to generate still 11% with the Away-from-Home market being really low.And still, we will have more capacity on the retail side next year than we had last year. So all in all, when the market on the Away-from-Home side will come back, we believe that we'll be in a strong position to well execute. So we still have a target of 15% EBITDA margin without that retail slow down -- an expected slowdown, I will say we were targeting a 12% this year. For sure, there's input cost inflation, but we're still committed to deliver because everything we've done I think is really a nice improvement over the fundamentals of the group. So we're in much better shape than we were 2019 or 2018.
That's helpful. And then for Specialty Products, very strong quarter. Can you dive into the structural improvements that drove that? And then how much is more transitory in nature?
Yes, Zachary. Actually, we -- the result we had this quarter include no extraordinary result. I mean it's normal results from the current operation we have. So we have better product mix. Mario explained earlier that we spent quite a lot of efforts in margin improvement. We were very involved in that process, and we're starting to see the benefits of these efforts. And the last thing also obviously is the -- we made investments over the last couple of years to go more about the food packaging business, fresh fruit packaging business. It's -- I think it was a good decision, good orientation. And with the solid demand in fresh food packaging business that we see now, we're also benefiting from that.
[Operator Instructions] Your next question comes from the line of Paul Quinn with RBC Capital Markets.
Just a couple of questions, starting on I guess Containerboard. Just wondering how the November price increase was implemented. When do you see any change for the March-April price increase?
Yes, Paul. So we were successful in implementing the November price increase. So when I look at the realization of the increase, we did very well. So I can say that at the end of Q1, it's mainly fully implemented. There may be some small exception because of contract or things like that. But we can say that this is well done on our side. The impact right now that we can see is about, on a sequential basis, about $25 million of impact on the -- on our Cascades, which is good.And we are deploying right now the second price increase, which is going well. We did announce both on the box side and also on the Containerboard at the same time. So we are deploying as we speak, and we see that things are progressing well right now. So with the demand that is happening right now and our low inventory level, we are focusing on making this happen. And we are working also at the same time with our customers to minimize also the impact for them, but we're fully aligned for realization of the increase.
Okay. So then when I can relate that back to that Slide 28, the near-term factors where you see essentially flat results sequentially, just -- and I recognize the increased maintenance downtime in Q2 here, but I would have thought the implementation of the second price increase would have pushed and just seasonality in the business would have put that more positive than flat?
Yes. The -- there is a major annual shutdown that we have provided in our guidance that we show there. The maintenance is on our Niagara Falls complex. So we have 3 of our paper machine that will be affected. We also have been cautiously with the increase of the OCC, and that's what we factored in, in our numbers.
Okay. And then maybe just over on the Tissue side. I mean you guys are probably seeing some significant cost increases on the pulp and cycle fiber side. Just wondering how the price increases are being implemented, whether you're confident that you'll be able to offset that cost inflation?
Well, as you know, Paul, the price increase acceptance would follow the market dynamics. So we believe that there's good fundamentals to support those price increase at this moment. We're not alone thinking this also in the market. So we're going to work really hard to get as much as we can out of those price increase for July and August. So it's hard to see for now, but we'll work very really hard.
There are no further questions at this time. Mr. Plourde, please continue.
All right. Thank you, everyone, for being on the line this morning, and we are looking forward to meet you on the Q2 result. Have a good day, everyone.
[Foreign Language] Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.