Cascades Inc
TSX:CAS
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Cascades Inc
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Good morning. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cascades First Quarter 2023 Financial Results Conference Call. After the speakers' remarks, there will be a question-and-answer session. I will now pass the call over to Jennifer Aitken, Director of Investor Relations for Cascade. Ms. Aitken, you may begin your conference.
Thank you, operator. Good morning, everyone, and thank you for joining our first quarter 2023 conference call. We will begin with an overview of our operational and financial results, followed by some concluding remarks and highlights of our 2022 to 2024 strategic plan update that was released this morning, after which we will begin the question period. Today's speakers will be Mario Plourde, President and CEO; and Allan Hogg, CFO. Also joining us for the question 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. 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 2023 investor presentation for details. This presentation, along with our first quarter press release, can be found in the Investors section of our website. The company's 2022 to 2024 strategic plan update documents can also be found on our website and on SEDAR later today. 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 discussing our first quarter results, I would like to mention that we published our updated 2022 to 2024 strategic plan this morning. I will briefly discuss some of the highlights at the end of this call. This document is available on SEDAR and on our website. Moving now to our first quarter results. We are pleased with our Q1 consolidated performance. First quarter sales increased 9% year-over-year, while adjusted EBITDA of $134 million more than doubled from last year. In both cases, selling prices and foreign exchange were beneficial while volume and sales mix had a net negative impact. Lower raw material costs was a tailwind at the EBITDA level, offsetting the impact of higher production costs year-over-year. Sequentially, sales were stable as negative impact from pricing, sales mix and foreign exchange fully offset the benefit of stronger volume in all business segments. EBITDA increased $80 million or 16% sequentially. This was driven by a raw material pricing tailwinds, favorable volume and mix in our Packaging segment and stronger results from our Tissue segment. On the raw materials side, price for OCC decreased 76% year-over-year and 6% from Q4. The OCC market was relatively balanced in the first quarter with limited export activity counterbalancing the lower seasonal generation correction recently to a more normalized level, but remain at historic lows. We are not expecting any material pricing movement or seasonal generation. Average index prices for white recycled paper grades decreased 11% in Q1 but remained 8% above the prior year levels. We saw more favorable market dynamics over the quarter and more recently, similar trends were seen with virgin pulp. The hardwood pulp index decreased 5% sequentially, but was 16% year-over-year, while softwood pulp index prices decreased 4% from Q4 and were up 10% year-over-year. Conditions have improved for virgin pulp following lower demand from Asia, improved logistics and steadier domestic production and new capacity. Pricing indexes have been going down rapidly recently, which will provide some cost relief in our Tissue segment. Material is available and our mills are adequately supplied. Moving now to the results of each of our business segments, as highlighted on Page 8 through 13 of the presentation. Beginning with the sequential performance. Sales in containerboard decreased 1% in Q1. This was driven by a less favorable mix and lower U.S. dollar selling prices for both parent rolls and converted products. The 5% volume increase reflects a 16% increase in shipment of parent roll and a 4% decrease in converted product shipments. Sequentially, converting shipments decreased by 3% in Canada, underperforming the 0.5% increase in the Canadian market. U.S. converting shipment decreased 8.4% and below the 1% U.S. market decrease. I would highlight that Cascades outperformed both the Canadian and the U.S. market in the previous quarter, impacting sequential relative performance in the current quarter. Q1 adjusted EBITDA of $126 million or 22.5% on a margin basis, was 6% above the Q4 levels. Q1 results include the final $7 million insurance settlement from water affluent treatment issue in mid-2021 at our Niagara as complex, while those of Q4 include the first $5 million partial settlement related to disclaim. Sequentially, EBITDA level benefited from higher volume and lower raw material, energy and production costs. These were partially offset by lower U.S. selling prices and a less favorable sales mix. Year-over-year, sales increased by 5%, driven by pricing, volume and foreign exchange. EBITDA increased by 58% or $46 million, reflecting lower raw material costs, more favorable exchange rate and a slight selling price benefit. Year-over-year shipment increased by 3%, reflecting a 10% increase in external parent roles, offset by a 4% decrease in converting shipments mainly driven by lower volume in the Canadian market. Continuing with our packaging business, Q1 sales levels in our Specialty Products segment were stable sequentially. This reflected slightly higher volume in our cardboard and model pulp segment and higher average selling price in our plastic activities, offset by a less favorable mix and lower average selling price primarily in Carbo. EBITDA increased by $7 million sequentially, reflecting better realized spread in most of our segments, higher volume and lower transportation costs. These were partially offset by higher operational costs during the quarter. When compared to the prior year, Q1 sales increased by $4 million or 3%, driven by higher average selling prices and a more favorable exchange rate. EBITDA level increased 23% or $5 million as higher realized spread and a more favorable exchange rate more than offset the lower volume in plastic and cardboard and higher transportation and production costs. Moving now to Tissue business. Sales were stable sequentially in Q1, while adjusted EBITDA levels doubled to $16 million. Top line performance reflects higher selling prices and slightly stronger volume as well as ongoing profitability and productivity initiatives, partially offset by a less favorable mix. Shipments increased 1% from Q4, reflecting a 3% decrease in shipment of converted product and a 27% increase in parent roll shipments following the restart of our machine at the Santaland facility in February. Sequentially, EBITDA improved was largely driven by benefit from improved selling prices and lower raw material prices. Year-over-year, sales levels rose 23%, with pricing and sales mix initiatives and more favorable exchange rate offsetting the impact of lower volume. Q1 EBITDA of EUR 16 million compared to a loss of $17 million in the prior year period. This year-over-year improvement was driven by higher selling prices and lower transportation costs, the benefit of which more than offset higher raw material, labor and production costs. Allan will now discuss the main highlights of our financial performance, after which I will discuss the highlights of our updated 2022 to 2024 strategic plan and conclude our presentation. Allan?
Yes. Thank you, Mario, and good morning, everyone. So Slides 14 and 15 illustrate the specific items recorded during the quarter. The main items that impacted EBITDA were $152 million of impairment charges in our Tissue and Containerboard segments related to U.S. assets. In addition, net earnings also include a $9 million gain on the sale of an investment in a joint venture in our Tissue segment. Slide 16 and 17 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, Q1 net loss per share was $0.75. This compared to a net loss per share of $0.15 last year and a net loss of $0.27 per share in Q4 2022. On an adjusted basis, net earnings per share were $0.32 in the current quarter. This compared to a net loss per share of $0.15 in last year's results and net earnings per share of $0.22 in Q4. In both periods, this variance mainly reflects improved adjusted EBITDA. As highlighted on Slide 18, first quarter adjusted cash flow from operations increased by $64 million year-over-year to $90 million, and adjusted cash flow levels improved by $22 million year-over-year. This reflects higher operating results and significantly higher interest and net CapEx paid in the current period largely associated with our Bear Island project. Slide 19 provides details about our capital investments. paid capital expenditures net of disposal totaled $137 million in Q1. Of this amount, $100 million was paid for the Bear Island project. For 2023, our planned capital investments of $325 million, which includes approximately $175 million for Beisanhave not changed. Moving now to our net debt reconciliation. Our net debt increased by $104 million in the first quarter. This is a reflection of the combined effects of our common investment in Bear Island unusual working capital requirements, exceeding cash flow from operating activities. Our leverage ratio of 4.6x is down from 5.2% at the end of Q4. As we have mentioned in the past, we expect this leverage trend to continue with improved operational performance of our Tissue segment and the startup of operations at the Bear Island facility. When excluding cash investment made to date in Bear Island and its negative contribution to operating results, our leverage ratio would stand at approximately 3.1x. Financial ratios and information about maturities are detailed on Slide 21 and and sequential and new overyear sales and EBITDA performance analysis can be found on Slide 38 through 41 of the deck. Cost of sales detailed on Slide 42 and historical index pricing on Slide 43 and 44. Mario will now conclude the call with some brief comments and an update on our strategic plan before we begin the question period. Mario?
Thank you, Allan. We provide details regarding our near-term outlook on Slide 22 of the presentation. As a reminder, this outlook is based on what we are seeing currently and may change in the coming weeks. Our near-term outlook for containerboard is for results to be lower sequentially. This is driven by slightly higher raw material costs, lower average selling prices, slightly softer volume and reflect the recent startup of the Bear Island and nonrecurrent of the Q1 insurance income. We are expecting slightly softer results sequentially from the Specialty Products segment. This reflects stable volume and selling prices trend offset by slightly higher raw material costs. Our outlook for tissue is for our second quarter results to improve sequentially and to be significantly above prior year levels. This stronger outlook reflects more formable raw material prices, ongoing initiatives and stable volume. Moving now to our updated 2022 to 2024 strategic plan. We provide highlights on Slide 24 to 36 in the presentation and invite you to refer to our detailed strategic plan update document that is available on our website and SEDAR. Before going into some of the details, I would like to underscore that our focus remains squarely on driven revenue, profitability level and efficiency across our business platform. To this end, our 2024 objective remain largely unchanged. What has changed most notably for our tissue business is the fact we are taking to get there. At the operational level, our updated plan takes into account the changes to our tissue platform, the revised ramp-up schedule of our Bear Island mills and the closure of one of our containerboard machine at our Niagara fall facility. We have also refreshed growth target for some of our strategic markets to reflect demand trends and fine-tuning of our commercial approach and have updated pricing and input cost per meter to reflect current market conditions. With that, I will start with our containerboard business. We are very pleased to have announced that the first paper rolls was produced at the Bear Island facility on May 2. We have updated annual production and EBITDA forecast for 2023 to account for this start-up. Our 2024 and 2025 and full potential forecasts have also been updated to reflect current market conditions. Notwithstanding the higher project cost and the delay in start-up following the significant inflationary cost pressure and supply chain disruption in 2021 and 2022. This facility remains a key strategic move for our containerboard business. lightweight, 100% recycled and geographically well positioned the mill position in our containerboard operation platform very competitively from our cost curve perspective and in terms of our ability to provide customers with top quality, low basis weight recycled solution. We provide the highlights of our updated action plan for containerboard on Slide 27 and 28. At the revenue level, our 2024 target has decreased to $2.6 billion from EUR 2.9 billion, and our EBITDA margin target decreased slightly to a range of 18% to 20% from '19 to '21. These reflect updated margin prices and input cost assumption, including raw materials and our decision to delay any potential decision on adding converting capacity. We will continue to explore opportunity in this regard, but our capital allocation focus right now is on debt repayment. Moving now to our Specialty Packaging segment. This business performed well in 2022, generating sales growth of between 10% and 23% in each of its strategic market. Our objective for each of these markets have been adjusted to account for changes and external demand pattern, relying our commercial strategy and priorities, capital allocation plan and updated made to selling prices, raw material and other pet. This business is on track to deliver on its 2024 objective. 2 new sustainable products were successfully launched in recycled pet trade for the food processor and food retailer market and the addition of innovative Northbox tend technology to its line of isothermal packaging solution. Both are made of recycled material and are recyclable. In addition, 6 new products launched our plan for 2023. In terms of financial performance, the 2024 revenue objective has been increased to approximately $735 million from $700 million, and we continue to expect margin within the range of 17% to 19%. We are very pleased with the growth and the potential we see in this business, and it plays a central role of our goal to be the go-to provider for sustainable packaging solutions for our customers. Turning now to our tissue business. Before discussing our updated objectives, I would like to take this opportunity to discuss the fact that led to our decision to reposition the operational platform of this business. As many of you know, we launched a comprehensive profitability plan for Tissue business in February 22. The pandemic and the repercussion of recent geopolitical events led to significant turbulence and add a wide-ranging impacts on business. Demand levels fluctuated widely, raw material costs rose dramatically. Production and other input costs significantly increased and the labor market became very constrained. The results generated by this business in 2022 are a testament to these factors as well as our own internal production challenge. Given this situation, change were necessary if we were to reach our goal. To do so, we conduct an extensive internal analysis and review the plan and initiatives that has initially been set in February 2022. The repositioning announced at the end of April is the result of this analysis, which indicate that additional actions were required to meet profitability and efficiency objectives. In other words, our goal for this business remains largely the same, is the fact that we are taking to reach them that has changed. We provide an update overview of our operational base on Slide 31. With the changes to our tissue platform, annual production capacity decreased by 92,000 short tons or 15% of the manufacturing side and by 10 million cases in converting. Slide 32 provides an update 2024 objective for this business following the announced change to our operational platform and amended market condition assumption. We will be focused on maximizing the operational efficiency and production capacity of our core production facilities while limiting investment to approximately $35 million annually through 2024. A large part of our focus is on our U.S. operations, most notably the Oklahoma facility where we have made good progress to the addition of management and technical resources focused on increasing production efficiency levels and improving overall execution. The announced change to our platform and update made to our market condition assumptions reduce our 2024 revenue objective to approximately $1.5 billion, down from $1.7 billion previously. Our 2024 EBITDA objective is now a range of $120 million to $140 million or 8% to 9% on a margin basis. We walk you through the key factor driving these objectives on Slide 33. I would highlight that the 2 main components supporting these objectives are internally driven and are already in place. We will continue to explore additional initiatives to further improve profitability in our Tissue Group. As a lighted on Slide 34, the adjustment to our 2024 tissue objective and those of our packaging businesses result in only slight modification to consolidated objectives. Our 2024 revenue targets remain unchanged to approximately $5 billion, and our EBITDA margin target has slightly decreased to a range of 12% to 14% from 13% to 15% previously. Target free cash flow from levels are largely unchanged as well and are expected to reach 9% to 10% on the revenue in 2024. We have slightly modified our 2024 year-end leverage target to a range of 2.5 to 3x following lower levels of cash flow generation in 2022 due to the significant cost inflation in the higher Bear Island project costs. Our capital allocation priority, our focus on reaching these leverage objective and ultimately our goal of 2% to 2.5% in the future. Given this, we are maintaining our dividend, but we have not renewed our normal course issuer bid in 2023. Our capital investment targets remain unchanged and will be limited to 4% of revenue for both 2023 and 2024, including the $175 million for Bear Island in the current year. As I mentioned, we are focused on debt reduction and reaching our leverage objectives. We provide an overview of how we currently see our net debt evolving over the 2022 to 2024 time frame on Slide 35. Slide 36 summarizes our top priority. We are focused on achieving our profitability objective in our tissue paper business and on ramping up production at our Bear Island mills. Over the long term, we will continue to explore opportunity to grow our sustainable packaging business in the U.S., including expansion of our converting capacity. Let me be clear, however, that this is a long-term objective. Our focus through the end of '24 is on reaching our leverage target by limiting CapEx, reducing debt and achieving our profitability target in each of our business segment. Overarching all this priority is our commitment to deliver on our comprehensive sustainability action plan and our continuing goal to recruit the best talent and train and develop our most important asset, our employees. With that, we can now open the call for questions, operator.
[Operator's Instructions]Your first question comes from Matthew McKellar from RBC Capital Markets.
I think there's a comment that your containerboard outlook for Q2 reflects slightly softer volumes sequentially. I was wondering if you could provide just a bit of color on what trends you've seen in that business through April and the start of May and how you're thinking about business and its progression through the balance of the quarter.
Okay. So Matthew, this is Charles. So what we see now is the usual pickup in seasonal pickup is not as strong as expected. Though we see that the volume now are more in line with the pre-COVID , I would say. So we're being cautious considering the question about the economy. And that's why we -- when we see our volume right now, we do our benefiting goals from the growth from our investments that we made in Piscataway in New Jersey and also in Ontario. So we're very cautious about our numbers, but we're also seeing at the same time that we do have some potential gain on the volume.
Okay. And then moving over to the tissue business, I think there's a comment that labor constraints there has improved. You've highlighted your efforts to attract, retain developed talent as part of the strategic plan update. I was wondering if you could provide a bit more clarity around whether labor is still a constraint on production at this point, what you might be hoping to achieve with your efforts there? -- whether it's from a production perspective or metrics around turnover retention? And then it also looks like you're maybe expecting more of your capacity to be unused in 2024 versus your prior expectations. I was wondering if that's maybe tied to the labor kind of issues there, if there are other drivers to be aware of?
So the constraint level is less than it was before less than last year, for example. So physicians are filled. So it's not a matter of recruiting anymore. We've been through this. Now it's a matter of training, getting the right level of skills and the right experience level to extract the most of the equipment. So yes, there's a portion of this that is reflected in the 2024 volume. But also, I would say, technical startup of new equipment that we have in prior and in Wagram, for example. So I think in the past, we overestimated a little bit the capacity of these equipments or were more realistic now in the targets, but there's still good potential there.
Your next question comes from Hamir Patel from CIBC Capital Markets.
Mario, I appreciate all the detail in the strategic plan. I noticed that you referenced CapEx in 2024 for approximately $175 million, but I mentioned that, that was before strategic CapEx. In your prepared remarks, you mentioned there's really not much on the table for '24. So are you able to scale what limited strategic CapEx you would expect to initiate next year? And when you do need to move forward with an additional box plant, how should we think about the timing of the spend there? Is that going to be kind of a 2025 event? And what's the sort of scale of investment that might be needed?
As we speak right now, strategic CapEx on the table, we have not -- so that's why we are focusing our CapEx to EUR 175 million. So nothing is planned. But we always keep our eyes open for opportunity that could be generating good value for the company. But for the moment, we have nothing on the table. As for a potential expansion on converting in the containerboard in the U.S. If ever we would be moving forward, a facility like this with the new cost of construction and constraint, I would say, would be around EUR 85 million to EUR 100 million, depending on how many equipment you would be installing. So -- but it will not happen before 2025.
So it might take over 18 months... So we might have a decision 25, 26. But I mean, everything -- all of that will be all linked to our balance sheet and our leverage. So we will manage, as Mario mentioned, our priorities in that record.
So we might have a decision to move forward in '24, but it really depends on how we achieve or execute our plan. So the target right now and the focus is really to reduce our debt and ramp up their Island and keep improving the tissue situation.
And just the last question I had for Charles. What sort of uplift would you expect in OCC and mixed paper prices as Bear Island ramps up and also some of your competitors new recycled machines start ramping up as well.
Will let just answer the first part of your question for the OCC. For the OCC currently, we are living in a global market. As you're probably aware, China is fairly quiet at this moment. It's impacting also the recycled brown pulp has been downtime that has been taken in 2 significant mills in North America now that obviously impact the availability of OCC. The domestic obviously, is in line with the containerboard production. So we're also now in a higher generation season. Look for the moment, we don't expect significant movement on the OCC pricing for the coming months.
Maybe the other thing also is location-wise. When we look at the Bear Island it's located and the work that has been done with our sourcing group, we started 1.5 years ago to develop some good contact with source supply. So we're well positioned.
Your next question comes from Zachary Evershed from National Bank Financial.
So with Bear Island ramping up now, can you tell us a little bit more about your plans for possible inclusion of mixed paper in the furnish and what that could do your cost of production over time?
Okay. So I'm not going to be too detailed, but I can just give you the -- when the investment that we made, this mill is very well equipped to have a lot of flexibility. So we can go up to a certain rate to 80% of the content for, let's say, if we produce medium that we can go to up to 80% in mixed waste. So I'm not saying that this is what we're going to do, but depending on the market, the dynamic we can do this. And that's why we made the investment on the stock prep and the cleaning capability of the mill. And that being said, we can do this in producing very high-quality also paper because this is a very important -- we want to be able to use the next was when the market gets a bit more tighter, but providing to our customers the same level of quality and furnish also on the sheet.
It's important, Zachary, you understand that in the ramp-up mode, we're using better quality material right now to stabilize the machine. And as we go, we'll use more mix and stabilize to the recipe that Charles just mentioned.
You haven't mentioned the potential for swing production to kraft paper in a while. Is that some option that you have able for Bear Island?
The machine design, again, can produce multi grade. So again, this gives us flexibility and time. But at this point, our mix that we are planning to produce is really a priority on linerboard and medium to a certain percentage. So really, these are what we're going to be focusing on.
And then just one last one. With the project start-up being pushed the right over time. Was there any difficulty in extending the commercial agreements that the offtake agreements?
No. We've been keeping our customers in form of our ramp-up curve. And also the delay, which they understand. So on that side, we're well covered. So that's why when we provided numbers saying that we're covered on the volume, 100% for the first year. You can extend that to the first year of operation by the way, for the first 12 months and the 75% for the year is following -- we want to keep that number though we have some potential to do better. We're maintaining the same comments based on what we have today.
[Operator's Instructions]Your next question comes from Mike Roxland from Truist Securities.
You mentioned that you're not seeing the usual seasonal pickup in containerboard volumes. Any way for you to quantify what the usual seasonal pickup is on a percentage basis historically and what you're seeing currently? And the reason I'm asking the question is that a number of your peers have noted that they're seeing a double-digit increase in bookings in May -- excuse me, in April versus March. So I was wanting a sense of what you're seeing relative to what they've already noticed.
Okay. So again, as I mentioned, we're being cautious because we did very well. And what we consider in our Q4 was very, very strong for us. Our Q1 was also good for what we see. We are on the -- when I say seasonal specialty product or the produce -- we usually see higher intake than what we see right now. So I would say that our volume right now is about the same as Q1 with some potential being made a bit stronger than April. So at this point, again, I want to be cautious in what we're saying.
Would you be able to comment just in terms of -- if you think about your integration rate currently as it stands, can you just remind us how integrated you are roughly? Is it 70% is degraded, 75% degraded, if you're more comfortable using a range, just to give a sense of how integrated your overall portfolio is on the containerboard side.
Okay. So we have the number that we have because we have some JV and some numbers that we consider an integration. So we're including our JV that we -- or partnership that we own in different businesses.
Got it. And that's particularly -- that's on the containerboard side specifically?
Yes.
Can you just remind us how much of the tonnage from Bear Island will be integrated into your own operations? Is it 50%, 70%? And maybe is it -- the way to think about it is maybe it's less today. And as you -- because you've delayed your plans to increase your U.S. containerboard converting capacity, so maybe it's at a lower percentage today and you're looking -- you will accelerate that level of integration as you pay down debt and expand your converting capacity. Just help us frame how much you intend to -- or how much you're using internally currently and where that should go?
So as we speak right now, we're using 0 because we're in the ramp up. So we're still improving on the quality of the sheet. So we're producing paper, but we need to bring it up to spec before using internally. But in our model, what we're planning with the current potential that we have in our converting facility, we want to go up to about 30% because we still have some capacity in though, we're not looking at on a short term, like Mario explaining to add up some converting. We do have some capacity in our own converting facility, so some potential growth in there. So our goal is to bring it up to about 30% of the volume to be used in term.
There are no further questions at this time. Mr. Plourde, please continue.
Thank you, everyone, for being on the call this morning. We appreciate and we're looking forward to present our Q2 results in August. So have a good summer. Thank you.
Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.