Cascades Inc
TSX:CAS
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Cascades Inc
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[Foreign Language] Good morning. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cascades First Quarter 2022 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.
Thank you, operator. Good morning, everyone, and thank you for joining our First Quarter 2022 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 for the Q&A period at the end of the call are Charles Malo, President and COO of Containerboard Packaging, Luc Langevin, President and COO of Specialty Products; and Jean-David Tardif, President and COO of Tissue Papers Division.
Before I turn the call over to my colleagues, I would like to highlight 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 2022 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 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 this morning's call with some high-level comments before going into details of each of our businesses.
The first quarter was a challenging from a cost and execution standpoint. Combined, these factors negatively impacted consolidated first quarter adjusted EBITDA by $36 million sequentially and nearly $150 million year-over-year. We are operating in a difficult macroeconomic environment, which is driving up cost for fuel, logistics and raw material.
Notwithstanding this internal initiative on both pricing and mix offset these headwinds sequentially, but a lag year-over-year. The continued rollout of announced price increases in our business segment will close this gap beginning in Q2. In our Tissue business, these are being expanded by extensive profitability initiatives currently underway with benefits expected to be weighted to the back half of the year. We highlight some key takeaway on Slide 3 of our deck.
Moving now to our financial results. On a consolidated basis, first quarter sales increased 10% year-over-year and were stable compared to the previous quarter, while adjusted EBITDA decreased notably from prior year levels and by 6% sequentially from the reason I just mentioned.
On the raw material side, highlighted on Slide 5 and 6. The Q1 average index price for OCC increased 77% year-over-year and decreased by 16% from Q4. Export level has been limited by port and container constraint and the market is generally stable despite persistent transportation challenges and elevated costs to source our material within North America. Average index price for white recycled paper grade increased notably in Q1, up 109% year-over-year and 16% from Q4.
The impact of these cost headwinds can be seen in our tissue result this quarter as this is the primary raw material for this business. On the virgin pulp side, the hardwood pulp index increased 27%, while softwood pulp index price rose from 17% from last year level. Sequentially, both increased by 4%.
Moving now to the results of each of our business segments, as highlighted on Page 7 through 14 of the presentation. Beginning with the sequential performance, sales in Containerboard increased 6% in Q1. This was largely driven by higher selling price, partially offset by a less favorable sales mix. The 1% volume increase reflects the combination of a decrease of 1% in converted product and a 4% increase in parent roll shipments. Sequentially, converting shipments decreased by 1% in millions of square feet, in line with the 1% decrease in both the Canadian and the U.S. market for the period. On a per day basis, converting shipment decreased by 1.6% sequentially, outperforming the decrease of 5.2% in the Canadian market and 5.7% in the U.S. market.
I would highlight that shipment levels were impacted as a result of challenges on transportation side. As you know, roughly 65% of our Containerboard business is in Canada, where we have been -- we have seen greater logistics headwind in terms of availability. These constraints were also felt by some of our customers, preventing them from getting product out the door, which resulted in lower order. Given this backup, we temporarily limited production at some of our operations, which impacted our shipments level and therefore, top line sales in the quarter. To put it simply, we could have shipped more product had transportation been available.
Q1 adjusted EBITDA of $80 million or 15% on a margin basis was $10 million or 14% above the Q4 levels. While an improvement, it is not where we wanted to be, with cost inflation and freight limitation impacting profitability by $17 million, muting the $26 million pricing and mix benefits in the quarter. Year-over-year, sales were also up by 6%, while adjusted EBITDA decreased 26% due to the significant cost inflation already discussed.
Notably, raw material costs had a $31 million negative impact on profitability. This reflects that we are over 80% recycled, well above our containerboard peers. Year-over-year, converting shipment decreased by 6% in millions of square feet, underperforming the 1% decrease in the Canadian market and the 0.3% decrease in the U.S. market. On a per day basis, converting shipments were down 4.3%, below the 1.2% and 1.8% decrease in the Canadian and the U.S. market respectively. Lower year-over-year volume reflects labor and transportation constraints at the beginning of 2022 and some customer account erosion related to profitability initiatives.
Before moving on to the Specialty Products segment, a quick update on the Bear Island Project. The project remains on track from both a cost perspective in the mid-December startup. We currently have over 490 people on-site, increasing to 725 by mid-June. And we have received our first delivery of raw material. We are very encouraged that 100% of the volume secured for 2023 and 75% is secured for the following 2 years. Our sales team continued to advance discussions to secure additional production update for the coming year.
Specialty Products continued to generate solid results sequentially with Q1 sales up 4% from the prior quarter. This reflected the implementation of price increases in response to cost inflation, the benefit of which offset a less favorable mix in the Plastics segment and lower volume in the ag distribution sector from seasonally strong Q4. Adjusted EBITDA increased $1 million sequentially as higher prices offset the impact of higher operating and transportation costs. When compared to the prior year, Q4 sales increased by $35 million or 29%, while adjusted EBITDA level increased by $4 million, as higher realized spreads offset higher production costs.
Moving now to our Tissue business. While expectations were for results to be stable sequentially, sales decreased 7%, and our adjusted EBITDA loss grew to $17 million in the quarter. We fell short for 2 main reasons. As was the case for all of our businesses, cost inflation was a key factor. For our Tissue business, this included not only logistics and energy, but also raw material, which I touched on earlier. Combined, these elements had a negative $13 million sequential impact on profitability.
The second element was a $6 million impact due to the lower volume. While logistics and production constraints at the beginning of the year certainly contributed to this decrease, this is also the result of tactical and strategic decisions we are implementing to optimize our customer and production portfolio as part of the steps outlined in our profitability plan. Year-over-year, first quarter sales increased 8% with the shipment and the average selling price up 7% and 1% respectively.
Significantly higher raw material costs combined with inflationary pressure on production, transportation, and energy costs impacted profitability level by $47 million year-over-year. These were partially offset by better volume and better pricing and mix, which added $10 million year-over-year.
Moving now to the Slide 14 in the presentation. We have successfully implemented the January price increase in our Away-from-Home segment and expect benefit from the price increases announced in both markets in early 2022 to begin in Q2. Given this first quarter result in our Tissue business reflects full growth of our cost inflation without any offsetting benefit from these increases being realized. I would also add that we have just announced an additional price increases for Away-from-Home product effective July 1 to counter the high cost environment. Currently, we anticipate that cost inflation will result in approximately $65 million of additional headwinds from the level outlined in our strategic plan. We expect these to be offset by benefits from revenue management initiative announced price increase and other revenue and cost initiatives being ruled out.
Notwithstanding this disappointing Q1 results, I am encouraged by the progress being made with our profitability plan. We are in the midst of executing extensive turnaround initiative, making adjustments when and where needed and are optimistic that these efforts are equipping our Tissue business to reach its objective of generating adjusted EBITDA of $60 million to $80 million in 2022.
Allan will now discuss the main highlights of our financial performance, after which I will conclude the presentation.
Yes. Thank you, Mario, and good morning. So on Slide 15 and 16, it illustrates the specific items recorded during the quarter. The main items that impacted operating income before depreciation were a $7 million unrealized loss on financial instruments, a $6 million gain on asset disposal in our Specialty Products Group and a $1 million of restructuring costs recorded in our Tissue segment.
Slide 17 and 18 illustrate the year-over-year and sequential volumes of our Q1 adjusted earnings per share and the reconciliation with the specific items that affected our quarterly results. As reported, loss per share were $0.15 in the first quarter just compared to earnings per share of $0.22 last year and to $1.04 in Q4 2021. Both periods included specific items. On an adjusted basis, the loss per share of $0.15 was $0.44 below last year, resulted in $0.06 lower than last quarter. This mainly reflects our lower operating performance.
As highlighted on Slide 19, the first quarter adjusted cash flow from operations decreased by $58 million year-over-year and $2 million to $28 million, and adjusted free cash flow levels decreased by $85 million year-over-year. This reflects lower operating results and higher net CapEx paid in the current period largely associated with our Bear Island project.
Slide 20 provide details about our capital investments. New capital expenditures totaled $78 million, including $57 million for the Bear Island project. After subtracting asset disposal and adding amounts that paid at the end of the year, net cash outflow amounted to $96 million. For 2022, we continue to expect total investments of $415 million, which includes approximately $275 million for Bear Island. We expect the project to remain within the range of USD 425 million to USD 450 million, notwithstanding the current inflationary pressures on cost.
Moving now to our net debt reconciliation on Slide 21. Our net debt increased by $198 million in Q1, reflecting the planned elevated capital program, lower profitability and higher working capital requirements in the period. Our leverage ratio of 4.8x is up notably from 2.5 at the end of 2021, also reflecting higher capital investments and lower adjusted EBITDA levels. When excluding cash investments made to date in the construction of Bear Island, our leverage ratio would stand at 3.9.
Financial ratios and information about maturities are detailed on Slide 22. Sequential and year-over-year sales and EBITDA performance analysis can be found on Slide 28 -- 25 to 28 of the deck and historical index pricing on Slide 29 and 30.
Mario will conclude now 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 23 of the presentation. I will remind you that this outlook is based on what we are seeing today and may change in the coming months. Our near-term outlook for Containerboard is for stronger sequential results, driven by lower average raw material pricing, benefits from the rollout of announced price increases and good seasonal demand. However, these tailwinds are expected to be partially muted by the continued inflationary pressure on operational and production costs. We are expecting continued positive momentum from the Specialty Products segment sequentially with stable volume and favorable selling price trend expected to offset cost inflation pressure.
As I mentioned during my earlier update on our strategic plans for Tissue, we expect the extensive profitability initiative underway in this segment to generate growing benefit as they continue to be implemented. At the room, these actions are targeting profitability level will help mitigate current cost headwind and will generate an improved financial performance sequentially in the second quarter.
Let me finish by saying that cost inflation and constraint in logistics played an important part of our first quarter performance. And our execution, we'll need to continue improving within the context of the current business condition. We are systematically addressing these factors across our operation and important benefit will be realized over the coming months as our strategic plan continue to be implemented.
We will now be pleased to answer your questions. Operator?
[Foreign Language] [Operator Instructions] Your first question will be from Sean Steuart at TD Securities.
Mario, a question on the Tissue guidance and the commitment to the EBITDA guidance of $60 million to $80 million for this year. It looks like you're guiding to still improved sequential results in Q2, but still negative EBITDA. So the implication is a rapid turnaround in the second half of the year, which is consistent with what you're talking about. I just -- I want to understand, though, these incremental profitability improvement initiatives, some of which are price hikes. These are above and beyond what you would have envisioned at the strategic review that you presented a few months ago. It just feels like an ambitious target through the second half of the year given the struggles you've had of late. Can you go into any further detail beyond price hikes, what you're expecting to see flow through to those results in the second half?
Sean, yes. Certainly, I can't. The inflationary pressure we get on many of our different raw material and cost throughout the operation and the speed of them are quite of a surprise for us. So that's why we initiated another price increase to compensate for those inflationary costs. So we basically have not just to pass on those increased costs to our customers to protect our margins. So it was not on the plan when we launched our plan in February, but with actual result of these inflationary, we have no choice to increase pricing. But at the same time, we're looking at many different options. Network optimization between where we're producing, where we'll be shipping, the numbers of SKU will be producing, and the numbers of customers will be shipping. So all of these are being addressed in our action items as we speak today. And we're quite confident because as it doesn't show in Q1, we have those benefits in our plants, and we are quite confident to deliver on them for the second half of the year, and we'll see results of that in Q2.
And in addition, I may add to this also additional production output volume output increase in the coming months, yes.
Okay. My second question is on OCC. We've seen gradual declines in recent months. I would have thought maybe even a bit faster given lockdowns in China. Can you speak to the tension in the market? Is there just that much incremental competition for supply domestically with the new capacity starting up that it's tempering the pace of decline? And what are your expectations for those costs into the summer?
Sean, this is Charles Malo. I will take your question.
To be frank and honest with you, we would have expected a more significant decline based on the reading we have of the market. Since the beginning of the year, typically, the first quarter is a low generation season for OCC. And despite the low generation season, we have seen most of the news have been [indiscernible]. I think what potentially has slowed down the decrease is probably more the logistic challenges we had at the beginning of the year that seems to be coming back to more normal now. That puts a little bit more pressure and stress.
I think this is probably what could have limited the decrease of OCC. And we would believe that with the normalization of the logistics, slow normalization of the logistics over the next few months, that we will see further more favorable market conditions for buyers. With regards to the start-up of new mills, I think everybody already is active and it doesn't put significant pressure on the market, and we don't have any -- I would speak for our own startup. We have no challenge to meet the target that we have planned for the buildup of inventory in provision of the start-up of Bear Island.
And your next question will be from Hamir Patel at CIBC.
First question I have is for Charles. Are you able to comment on how your box shipments have fared in Q2 to date and what you might be seeing in the e-commerce side of the business, given tougher comps there?
Yes. So Hamir, the volume in Q2 from what we see the start of the Q2 as we see the seasonal uptake, which is more normal than the COVID in Q1 last year, so -- which is a good sign right now. On the e-commerce, the exposure that we have with the e-commerce, the Q1 is good as we see. But mind you that Q4 was extremely busy. So it's more stabilized right now on the e-commerce side.
But our Q2 overall volume, we are benefiting from seasonal trend rate now.
Okay. Fair enough. And Charles, I was wondering, are you seeing any -- do you have any trouble getting start? And are you seeing any further cost pressure there?
Yes. So the availability is still good. So we have a good agreement with suppliers. But there is cost pressure, especially with what's going on in the world right now. But on the availability side, we are comfortable with being able to supply our customers and with respond to our needs.
Okay. Great. That's helpful. And just the last question I have for Allan. As a company that wants to grow its integration rates in Containerboard in coming years, just given the high leverage at the moment, how do we think about the timing of when Cascades might look to construct additional box plants? And what kind of capital cost would that be?
Well, as we stated in our plan, it's something we would like to put forward before 2024. And now to start something depending on how we do it, it takes 12 to 24 months. So it's something that we believe that at that time with the Bear Island project being started and everything we're doing right now to improve profitability, we believe that our leverage will gradually come back to where we wanted to be. So we don't feel this is a problem right now. And the level of investment, if we refer to state a way of something to $80 million or a bit more right now with all the costs going up. And again, depending on how -- what the size would be and how we do it, so it has to be finalized. But that's what I can say right now.
[Operator Instructions] Your next question will be from Zachary Evershed at National Bank Financial.
With inflation running hot and interest rates rising, how do you feel right now about future Containerboard demand against a likely pressured consumer?
Well, there is more, I would say, more normal demand as we see right now than the -- I would say, the Q1 and Q2 of 2021. But the need to move goods are still there. Again, in our case, in Cascades, we are seeing right now the uptake from the seasonality. So we kind of see the trends of the pre-COVID. And so at this point, unless the macro economy changed drastically, we're still confident that there is going to be a good demand in 2022.
That's helpful. And then we know that closure announcements have a much shorter lead time than capacity addition. So we may not have the full picture for the end of 2022 and 2023. But if there is to be capacity rationalization in the industry given how Cascades is positioned with the quality of its asset base, would you see yourselves participating in that as well?
Well, as we said earlier, the investments that we've made always been to improve our asset base. We've proven that with recent investments, like Greenpac, it's got a way. The same thing also with our Bear Island. So it's hard to predict the moves that we are going to be making in '23, '24. But one thing I can say is Cascades is going to be better equipped to compete with the type of product that we are offering, recycle high performance. But if the market conditions change drastically, like we've done in the past, we are going to take the proper decision to maximize the profitability and create value for Cascades.
That's good color. Then one last one for me. Allan, you're saying that you do see a path down on the leverage ratio naturally. But at what point does your net debt-to-EBITDA ratio become a concern?
Well, now it's -- the increase in net leverage is mainly driven by EBITDA, so that's our focus right now towards the end of the year and for next year. So we feel that working on profitability initiative in Tissue and having all these price increases being implemented, will revert back rapidly to where we could be and will have sufficient leeway to complete that Bear Island project. So for now, the last 2 quarters were not great. We know that, but we expect that we're going to get back on track in the near future.
And any commentary on covenants?
No. There's no debt to EBITDA in our bank covenants. So it's only as we disclosed an interest coverage ratio and debt to cap. So we have plenty of leeway right now on the bank covenants.
Next question will be from Paul Quinn at RBC.
Just a question on the Tissue guidance that $60 million to $80 million by the end of the year. I mean you've guided for Q2 to be up over Q1 here. I still suspect it will be negative. So you probably -- first half of the year, you'll be down sort of negative 20%, negative 25%. Does that imply that you're going to be 80%, 85% in the back half to get to the 60% to 80%?
Well, I would say if you do the math, as you did, yes. But remember that we have just announced price increases yesterday or -- and other price increases yesterday for July 1. And as we illustrated in our deck, these are part of the initiative that have to be implemented, so it includes that.
If I may add, also, we're really confident about the price increases. I think the market is able to absorb those increases. We've been happy with the increases that we've done so far for May 1, and we believe that the other one as well. So your math is correct.
Okay. And then just on the leverage question, given these headwinds and also the Bear Island spend, where do you expect that leverage to speak of it?
At the end of the year?
Sure.
It's -- for now, we're within a range of 3% to 3.5%, we stated 2.5% to 3% in our plan, but may be higher than that due to the slower first quarter.
Thank you. And at this time, we have no further questions. Mr. Plourde, please continue.
Thank you, everyone, for being on the call this morning, and looking forward to see you on the next call. Have a good day. Thank you.
Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your line.