Cascades Inc
TSX:CAS
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Cascades Inc
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[Foreign language]. Good morning. My name is Joanne and I'll be your conference operator today. At this time, I would like to welcome everyone to the Cascades' Second 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 second quarter 2020 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 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 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 July 30 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 Q2 2020 Investor Presentation for details. This presentation along with our second 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. Good morning, everyone. Let me begin with a short update regarding COVID-19. Our top priority remains the health and safety of our employees. Visit to our facility remains limited to only what is essential and work-related travel continue to be restricted. Workplace social distancing and extensive cleaning protocol remain in force at all of our operations. As a result of these measures, we have not had any significant COVID-related production interruption at our operations.I would like to sincerely thank and applaud every one of our employees for their continued diligence, dedication, and hard work during these challenging times. Thanks to their effort, Cascades continue to supply our customer with the essential tissue and packaging solutions they need.We are very pleased with our second quarter execution and result. The record quarterly adjusted EBITDA generated in the period speaks to the resilience and adaptability of our business model. Our segment executed well within an ever-changing business reality and we are encouraged by the performance of all of our sector, particularly our Tissue segment, which nearly tripled adjusted EBITDA year-over-year.Net earnings were $54 million or $0.57 per share. This compared to earnings of $0.33 per share last year and $0.24 per share in Q1. On an adjusted basis, we generated $0.61 per share in Q2. This was a notable increase from the $0.28 per share generated in the same period last year and $0.42 per share recorded in Q1.On an adjusted basis, OIBD of $186 million, increased 19% over the same period last year and 16% when compared to Q1. On a consolidated basis, our adjusted OIBD margin reached 14.5% in Q2. Slide 4 and 5 provide details for each of our business segments.On the raw material side, highlighted on Slide 6, the Q2 average index price for OCC was up significantly in both a sequential and a year-over-year basis. As we mentioned in our first quarter call, we view this elevated OCC pricing levels as not being representative of what we were seeing in the market and, therefore, temporary. As expected, prices have since decreased.White recycled paper grade increased by 9% year-over-year in Q2 and by 67% compared to Q1. On the virgin pulp side, hardwood and softwood pulp prices decreased year-over-year in Q2 and were up marginally on a sequential basis.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 Q2 adjusted OIBD of $94 million, down 5% sequentially and 17% year-over-year. On both cases, higher raw material costs and lower shipment levels were the primary drivers of lower results.A total of 20,700 short ton of manufacturing downtime were taken in the second quarter. This reflected planned maintenance and additional downtime taken for inventory management and to balance production with lower demands related to COVID-19, most notably in June. Partially offsetting these impacts were lower energy and production costs. Volume are back to expected seasonal level in July.Result in Tissue Paper segment reflected favorable trends sequentially and year-over-year. Q2 adjusted OIBD of $54 million, increased 20% from Q1 and was 3x higher than prior-year levels. On both cases, result benefited from cost improvement initiatives, including benefit from plant closure over the past 12 months, a higher average selling price, and lower freight costs. Volume was positive year-over-year, but down slightly compared to Q1 as COVID pantry stocking demands level eased. Higher raw material costs negatively impact result in both cases.The European Boxboard operation generated strong Q2 results with adjusted OIBD up 43% on both a sequential and year-over-year basis. On a margin basis, this represent approximately 16%, a record for this segment. Sequentially, result benefited from lower energy costs, energy tax credit received in the current period, and a higher average selling price and lower fixed and SG&A costs. These were partially offset by higher raw material costs and lower volume.Year-over-year performance reflect lower energy and raw material and SG&A costs in addition to the energy tax credit received. These benefits were partially offset by lower average selling prices. The depreciation of the Canadian dollar compared to the euro was a net benefit in both cases.Q2 result in the Specialty Products segment improved sequentially and year-over-year. When compared to the prior quarter, sales increased 6% in Q2. This reflects volume increase in most business segments, notably 20% increase in food packaging sales. Conversely, shipment of industrial product decreased 5% compared to Q1 due to the economic impact of the COVID-19.Year-over-year sales level decreased 11%, reflecting the divestiture of the European activity and the closure of the vinyl backing mills in the second half of 2019. These impacts were partially offset by higher volume in plastic and moulded pulp and a beneficial exchange rate.Adjusted OIBD levels increased 42% sequentially and 6% year-over-year and benefited from higher volume and lower operational and administrative costs in both cases.Our recovery operation reported within the corporate activity segment as of Q4 2019 benefited from the higher raw material index prices in the second quarter and were a net contributor to results. While favorable for this operation, they negatively impacted the consolidated performance of our North American business activity in the second quarter.I will now pass the call to Allan who will discuss the main highlights of our financial performance. Allan?
Thank you, Mario, and good morning, everyone. So starting with an overview of our key KPIs on Slide 13. Our second quarter shipments decreased by 53,000 short tons or 5.8% from Q1. This was driven by decreases of 7% in European Boxboard, 8% in Tissue and 4% in Containerboard. This largely reflects an easing of elevated Q1 demand levels related to COVID-19.First quarter capacity utilization rate of 92% decreased 1% compared to the prior year and 5% from the first quarter levels. Working capital came in at 9.7% of sales, while consolidated return on asset stood at 12.7%.Moving now to sales, as detailed on Slides 14 and 15. Year-over-year Q2 sales increased by $10 million or 1%, driven largely by the volume increase in the Tissue segment and a beneficial foreign exchange rate for all of our business segments. Less favorable pricing and sales mix impacted sales level in all segments. The exception to this was Specialty Products where the year-over-year decrease was entirely due to a mill closure and a business divestiture completed in 2019.On a sequential basis, second quarter sales decreased by $28 million or 2%. This reflects lower volumes in all business segments with the exception of Specialty Products. Offsetting this were a more favorable FX impact and beneficial selling price and sales mix in all business segments.Moving now to operating income and adjusted OIBD. As highlighted on Slide 16, Q2 adjusted OIBD of $186 million, increased $30 million from the prior year level and attained a new record quarterly level for the corporation. Results benefited from stronger performances from the Tissue Paper and Boxboard Europe segments, the benefits of which were partially mitigated by lower Containerboard results as a result of higher raw material cost and lower average selling prices.Sequentially, Q2 adjusted OIBD increased by $25 million or 16%, as shown on Slide 17. This was driven by stronger performances in all business segments with the exception of Containerboard in which results were impacted by lower volumes and higher raw material prices. Second quarter results included a $9 million favorable R&D tax credit, while first quarter results included a $10 million credit loss provision.Slides '18 and '19 illustrate the specific items recorded during the quarter. The main items worth mentioning are $13 million of impairment charges and $2 million of restructuring costs that were recorded in Containerboard and Tissue segments as part of optimization initiatives, and a $9 million foreign exchange gain on long-term debt and financial instruments.Slides '20 and '21 illustrate the year-over-year sequential variance of our Q2 adjusted earnings per share and the reconciliation with the specific items that affected our quarterly results. As reported, earnings per share were $0.57 in the second quarter. This compared to earnings per share of $0.33 last year. Both periods included specific items. On an adjusted basis, EPS increased by $0.33 compared to last year. Higher operating results, lower financing expenses, and lower income tax were offset by higher depreciation expenses, reflecting business acquisition and operational capital projects. On an adjusted basis, sequential second quarter EPS increased $0.19 per share from Q1 levels, driven by higher operating results.As highlighted on Slide 22, second quarter adjusted cash flow from operations increased by $37 million year-over-year to $162 million. This reflected higher cash flows from operations due to strong operating results and lower net financing expenses in the second quarter of this year following our Q4 2019 refinancing.Adjusted free cash flow levels increased by $45 million year-over-year reflecting lower net CapEx, partially offset by higher dividends paid in the current period.Moving now to our net debt reconciliation as detailed on Slide 23. Our net debt decreased by $135 million in the quarter. This reflects strong cash flow from operations, a positive FX impact of $59 million, partially offset by higher dividends, changes in non-cash working capital and CapEx payments. Our net debt leverage ratio stood at 3.1x at the end of the second quarter, down 3.5x at the end of the first quarter and 3.25x at the end of 2019. This, along with other financial ratios and information about maturities, are detailed on Slide 24.On Slide 25, we provide details about our capital investment plan for the full year. We continue to expect to invest between $175 million and $200 million. We remain focused on prudently managing cash flow and our debt profile. Currently, our cash availability stands at approximately $650 million.Mario will give you more details and wrap up the call with a brief conclusion before we begin the question period. Mario?
Thank you, Allan. We have provided details regarding our near-term operational outlook on Slide 27 of the presentation. As a reminder, this outlook is based on what we are seeing today and what we are focused on given present day circumstances.Demands remain good for our hygiene and packaging solution in North America, including retail tissue, some food packaging and corrugated products used by company operating in industries such as food and personal care. There continue to be the potential for a mix impact on demand, both positive and negative, depending on how the reopening of the North American economy progress.In light of this, volume in the Away-from-Home Tissue business in particular are expected to decrease. Some product categories are currently experiencing 20% to 40% decrease in volume. This, coupled with the usual Q3 seasonal softness in European Boxboard activity, is expected to translate into a sequential decrease in consolidated Q3 result.On the positive side, lower raw material pricing is expected to be beneficial for our business segment, while recent price increase announced in our European Boxboard business will gradually start to take effect.In terms of raw material, the recovered paper market experienced a turnaround during the quarter with a complete reversal of the more challenging market condition in place at the beginning of May. The OTC market experienced the biggest change from scarcity to abundant in a few weeks, in fact, reflected by the index price returning to close to pre-COVID level by July. While increased fiber generation and mill downtime contributed to this reversal, the index price published in April and May that we believe overstated the severity of the prevailing market condition, also helped explain the amplitude of the speed of the following correction.Our recovery group is well positioned on the sourcing side. We maintain raw material inventory level at our mills with a normal parameter in Q2. OCC remain readily available despite a slight increase in export activity from which transacted prices are below current domestic market. Currently, our inventory levels are on the high side.We will not be providing any additional specific or timeline for Bear Island project at this time. As we have stated previously, this project remains strategic for the long-term positioning of our Containerboard business. Given COVID-19, plants are being advanced at a slower pace. We will update the market once detail has been determined.Before we open the call to questions, let me finish by saying that we are very pleased with our record quarterly performance in Q2. The highlighted resilience and the diversity of our business model, adaptability at the production level, and speak to the improvement being generated by the strategic step and investment that we have completed in recent years.With that, we will now be happy to answer your questions. Operator.
[Foreign language]. [Operator Instructions]. Your first question comes from the line of Adam Josephson from KeyBanc.
Mario, on Bear Island, thank you for what you just said. I appreciate that you don't have a concrete update. You mentioned it was COVID related. Can you just talk a little bit about what that means exactly? Is it inability to get personnel there? Is it inability to find a satisfactory number of financial or offtake partners? Is it something else? I'm just trying to better understand the precise reason for the ongoing delay there.
Well, I think, COVID is limiting us in the visit to eventual partner, customer, or either any related party that will be involved in this investment. So to name it, machinery supplier, subcontractors. So trying to plan a Bear Island project today in a COVID situation is a little tricky. And considering that the traveling is limited at this point, we're slowdown in the process and the progression of the project. So it's not only one item. It -- I would say it slows down in general.
Charles, just on the Containerboard business, can you talk about what your July shipments were up and about what is informing your belief that shipments will be modestly up sequentially and up year-over-year?
Yes. So we're -- thank you for the question. Our July, as we speak, shows strong numbers in both of our sector, meaning the manufacturing and also on the converting side. The reopening that we saw in most of our sectors and our customers is showing effect. The other effect also is we see that our customers played safe in the last month or so, second half of the Q2. So right now, they're reordering, revamping their inventory level. In addition, we also see the normal seasonal uptake. So that's why we are cautiously optimistic about what's going on right now, and the demand seems to be very good at this point.
And you're up year-over-year in July, I assume?
Yes, we are.
And Jean-David, on the Tissue business, can you just talk about roughly by how much you expect shipments to be down sequentially and about why? Forgive me for -- I would assume that Away-from-Home demand was already quite low in the second quarter. So I'm not sure why that would get worse sequentially. So just your thoughts about what exactly would drive total Tissue shipments down sequentially, by what order of magnitude, and the at-home versus Away-from-Home pieces there?
Yes, Adam. On the retail side, we don't foresee decrease. It's pretty much stable June-July. It's really on the Away-from-Home where we don't know exactly what's going on or what's going to happen. Like we see decrease in some categories. Right now we're down probably 30% overall in the Away-from-Home, 30, from numbers present right now, roughly 40% of our shipment in cases. So that's why we anticipate slower sales in Q3 overall.
Your next question comes from the line of Sean Steuart from TD Securities.
A couple of questions. The $9 million of R&D tax credits, was that all in the Tissue segment?
No. It was in all 3 business segments, and it was for prior year credit that we got confirmation of.
And Allan, how should we think about that going forward? Was this a -- I know these things pop up from time to time in quarters. Is there any visibility on continuing tax credits through the back half of the year?
Well, normally, we always provision for tax credit in Canada. Now we're going to also provision for tax credit in the U.S. This is a new fact for us. So that's why these credits were for the year 2016-2017. And we -- maybe in the coming quarters, I don't know which one exactly, we will be in a position to record something for '18 and '19. And then it will just roll as the others. So it will be taken on a quarterly basis, the provision. So because we applied for new in the U.S. and we were approved, so that's the reason why it's popping up in this quarter.
And a question for Jean-David on the Tissue mix this quarter. There was reference to a higher value mix within the converted shipments. Can you give us some context on that and views on sustainability of that mix headed forward as well?
It's mainly retail sales. The fact that we're also having optimized portfolio, I will say, still. So we're able to maximize production on the retail side. So it did help us to increase the volume. We anticipate that it's going to go back to a more normal or is a more difficult product mix down the road. So -- but we're going to continue to work with customer on this. So that's why we had a slight increase in Q2. But in, from what -- as I said, it's still challenging for the coming months.
Last question for me. Allan, you referenced the progress on bringing working capital as a percentage of sales down consistently the last several quarters. How do you think about further room for declines on that front? I mean, it sounds like your recycled inventories are full right now. Any guidance you can give on ultimate targets for that ratio?
Well, the target we set ourselves a few years ago was to be in and around 10%. We're there. And with the mix of business we have, I think, to go down to 9% is possible, but lower than that, I believe it would be difficult. So we're right -- I think we are at a good level. But there're certainly a few things we can do to further improve, but pretty happy for where we are right now.
Your next question comes from the line of Hamir Patel from CIBC Capital Markets.
Jean-David, on the Tissue side, we've heard some producers talk about price hikes for September. Can you speak to what initiatives you might have underway or planned? And how does that reconcile with the -- I think you said 20% to 40% volume declines that you've been seeing in that category.
We publicly announced a price increase in Away-from-Home in June, effective in September, up to 8%, the Away-from-Home business. We're working on it as we speak. We don't have anything planned for retail at this moment.
And then, Jean-David, related to that, are you seeing any signs of customers wanting to transition from air dryers to paper towels? And if so, should we expect maybe a higher initial investment associated with the dispensers there?
It's definitely a focus for us right now. We believe then when the economy will reopen, there will be an opportunity for us. So we're working hard with marketing and sales towards this. At this moment, I believe it's too early to say what would be the impact. But there's definitely some requests from customers. I think habits will change definitely. But we don't anticipate more expenses on the dispenser side at this moment.
[Operator Instructions]. Your next question comes from the line of Paul Quinn from RBC.
I just thought I'd start with -- got on the call a little bit late. But machine -- market-related downtime in Containerboard, can you sort of quantify how much you took.
Charles, you will go with that?
Yes. So this is Charles. The equivalent of about 16, close to 17 days. As you know, we have different machine, different sizes, different volumes. So the overall volume is about 20,000 tons total for the quarter.
Do you -- Charles, do you anticipate taking any market-related downtime in Q3 here?
No. So what we've done to manage during the Q2 based on our forecasting and our S&OP process, we wanted to manage the capacity, looking at their inventory and also our demand. So what we've decided to do is to take most of the downtime during the period -- during the Q2. And this happened, by the way, mainly in the second half of Q2. So what we're seeing right now with the level of demand and the reopening, we don't foresee any downtime for the -- additional downtime for the Q3. In fact, some of the downtime that we took would probably also help us in Q3 and Q4 to take less downtime than we have predicted at the beginning. So -- but we'll review that as we go depending on the reopening and the demand, but we're spending a lot of time right now on adjusting and well managing our inventory levels, demand, and output also.
And the results are very strong, even taking out the $9 million tax credit. One of the areas that we missed with Tissue. And I think your guidance at the Q1 call was for Tissue to be down sequentially, and it was up and up big. What happened in that segment that caused that outperformance?
We've done a lot of cost improvement initiative. We've been more efficient than expected on many plants. A lot of work with -- as we said, as Mario said, we're positively impacted also by the transportation cost, which include lower finalities from our customers. And also, as you know, we restructured, so we've closed some plants in the first quarter. So we're able to go faster than expected on this with more fixed cost savings. And maybe volume was a bit higher-than-expected when we did the forecast also right there.
And then just sticking with Tissue. I think last quarter, we talked about your ability to move from Away-from-Home volumes into consumer retail. I think you said on the call here, 40%. What additional room have you got to move for the balance of the year?
It was 45%, 46% for first quarter. It's down now to 40%. We don't have much room because the segment of product that are, I will say, changeable between the 2 markets are good. So for single role bath tissue, kitchen roll towel in the Away-from-Home side. Those are categories that are doing good. So the issues are more around larger roll, our long towel folded napkin, et cetera. And this is not interchangeable. So we're pretty much done. So there're still some innovations we're working on or some product development to try to move the capacity from one market to the other, but there's not much room left.
And then maybe one for Allan. Foreign exchange was the benefit in Q2, it looks like a headwind in Q3. Can you remind us your sensitivity to that?
Well, sensitivity is now mainly only on the translation of our U.S. results. So it's about -- we're still in the 2 million percent about on this. And on the cash flow side, it's really minimal right now. We're almost a neutral in terms of cash flow from -- in our Canadian operation from the U.S., so it's about 2 million percent right now on the EBITDA, we're 2 million now.
And then just lastly, [indiscernible] was purchased like over 2 years ago, and I understand the difficulties around COVID. But is this a decision that you intend to make in 2020 here?
We hope so, Paul. It is something we work on still. We have people on the site, and we're trying to advance the project as we can. But as I mentioned earlier, we're limited in what we can do and people we can have on the site. But, yes, this is our mission.
[Operator Instructions]. Your next question comes from the line of Zachary Evershed from National Bank.
The improvements that we saw in SG&A and expense contained in the quarter. Is all of this likely to continue into the coming quarters? Or was some of it made up of more temporary measures during the peak of the pandemic?
Globally, on SG&A, for sure that past few months had an impact. Some of these costs will certainly revert back when things -- when people start to come back, and we start to maybe travel a bit more. But we expect that at the end of the day, some costs will remain -- will be permanently down in the future because of the way we're now working. And also, as Mario mentioned, as cost initiative measure ongoing everywhere, so on the net position, I believe it will be down going forward compared to the historical.
And any kind of color on the magnitude of how much it will be down compared to historical?
No, nothing to provide.
We've seen some rationalization on the Containerboard side in terms of closures. What's in store for Tissue in terms of plant closures moving forward?
There is not much we can say at this moment, but what can I say is that we're working really hard on it right now to make sure we control the cost according to the demand. So we will do what we have to do to make sure we minimize the impact at this moment for sure.
And on that point, you mentioned a shift to more virgin products in Tissue, given the scarcity of SOP on the Q1 call. And obviously, this is a whip sign around fairly quickly. But what are you seeing in terms of SOP generation and collection currently?
Jean, can you take that one?
Yes. Well, SOP is fairly complex to understand. There's a lot of things that are impacting the market. Obviously, at this moment, the material is abundant. Yesterday, RISI announced a $40 decrease in SOP pricing, which reflects actually this abundance of material. There're a few things impacting the SOP market. There's obviously a slight improvement in the generation, there's obviously, with the reduction in Away-from-Home Tissue business, which is the significant consumers of these fibers, has an impact on the demand. And on top of that, you have to understand also that there's always a -- some kind of substitution between the virgin pulp and the recycled fibers and the virgin pulp currently is also on the downside. So all of these factors together makes the market now to be what it is. So we -- it's difficult to have a long-term visibility. But as long as these variables will stay in place, we will likely going through -- go through these low pricing, large -- high availability of material on the SOP side.
There are no further questions at this time. Mr. Plourde, please continue.
Thank you. Thank you, everyone, for being on the call. We wish you a good rest of the summer and looking forward to talk to you in Q3. Have a good summer. Thank you. Take care, everyone. Thank you.
[Foreign language]. Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.