Cascades Inc
TSX:CAS
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Cascades Inc
Earnings Call Analysis
Summary
Q2-2024
In the second quarter, sales rose by 6% sequentially, driven by better pricing and volume despite year-over-year stability. EBITDA increased 9% to $112 million, although this was partially offset by higher raw material costs. The Containerboard segment saw a 5% uptick in revenue from Q1 and a 20% rise in EBITDA. The Specialty Products segment continued strong performance with a 4% sales increase. Tissue segment sales grew 8%, supported by seasonal and promotional activities. Looking ahead, the company anticipates steady performance amid ongoing price increases and efficiency improvements, despite expected higher raw material costs.
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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 Second Quarter 2024 Financial Results Conference Call.
[Operator Instructions]
I will now pass the call to Jennifer Aitken, Director of Investor Relations for Cascade. Ms. Aitken, you may begin.
Thank you, Sylvie. Good morning, everyone, and thank you for joining our second quarter 2024 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.
Today's speakers will be Hugues Simon, 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; Jerome Porlier, President and COO of Specialty Products; Jean-David Tardif, President and COO of Tissue papers; and Luc Langevin, Senior VP of Corporate Services.
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 Q2 2024 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 contact us after the session.
I will now turn the call over to our CEO, Hugues Simon, who will begin with a review of our performance. Hugues?
Thank you, Jennifer. Good morning, everyone. I'm pleased to be here today and look forward to having the opportunity to meet you in person in the near future.
Beginning with a quick overview of our consolidated results. Our second quarter sales levels increased by 6% from Q1 and were essentially stable year-over-year. This performance was in line with our expectations. Volume, pricing and exchange rates drove the sequential improvement. Year-over-year sales mix and exchange rate were both tailwinds, while volume and pricing were headwinds.
Consolidated EBITDA of $112 million increased 9% from Q1, reflecting stronger pricing and favorable volume and mix, freight and energy costs. These were offset by higher raw material and production costs. Year-over-year consolidated EBITDA decreased 20%, mostly due to higher raw material cost and decrease in average selling prices. Our second quarter results also include a $5 million onetime compensation expense related to CEO transition.
On the raw material side, highlighted on Slide 5 and 6. The second quarter average index price for OCC increased 9% from Q1 and 134% year-over-year. The market for this material saw consistent demand domestically, including growing amounts needed for new recycled containerboard mills. We had no problem supplying our operations with good inventory management and in our internal supply network. We expect relatively stable markets in the coming months.
Average Q2 index prices for white recycled paper grades decreased 6% versus Q1 and 27% from last year. The market was balanced with readily available volumes and fibers translating into a small decrease in pricing in the quarter. Pulp prices were higher sequentially, up 18% in the case of softwood and 17% for hardwood. Year-over-year prices were also higher, up 12% and 13%, respectively. Our mills were adequately supplied throughout the period.
Moving now to the results of each of our business segments, as highlighted on Page 7 through 12 of the presentation. Beginning with Containerboard. Q2 sales increased by 5% sequentially, reflecting higher selling prices and volume and better sales mix and exchange rate. Shipments increased 1% from Q1 driven by converted products.
Sequentially, converting shipments increased 5.9% in Canada, slightly below the 6.2% increase in the Canadian market. U.S. converting shipments decreased 2.1% below the 3.3% U.S. market increase, reflecting the sale of our Newtown facility during the quarter. Excluding that sale, U.S. converting shipments increased 0.3% from Q1.
EBITDA in Q2 was $60 million or 10% on a margin basis. This represents a 20% increase from Q1. Results benefited from recent market price increases, offset by continued iron material costs. We also recorded a $4 million R&D credit during the quarter. This was in line with the range we provided with our Q1 results, but nonetheless, impacted by a colligation of planned maintenance downtime at our Greenpac and Bear Island mills.
In total, the additional downtime reduced our production capacity by a further 8,000 short tons in the quarter. Year-over-year sales increased by 4%, with benefits from higher volumes and more favorable sales mix and exchange rates, offsetting the impact from lower selling prices.
EBITDA levels decreased by 38%, a reflection of the combined impact from lower pricing and higher raw materials. Year-over-year shipments increased by 4% in Q2, mostly driven by the new Bear Island volume. Converting shipments increased by 8% in Canada, outperforming the 6% increase in the Canadian market. U.S. converting shipments increased 0.6%, slightly below the 1.1% U.S. market increase. Excluding Newtown, U.S. converting shipments increased 3.2% from the year ago period.
Continuing with our Packaging business. Our Specialty Products division continued to deliver strong results. Q2 sales were up 4% from Q1 on improved selling prices, sales mix, exchange rate and higher volume in plastic food packaging. EBITDA was up 4% or $2 million from Q1 and the margin of 15.6% remains solid and unchanged from Q1. Year-over-year sales increased 2% in Q2, with exchange rate and higher selling prices in certain projects driving this growth. EBITDA improved by $2 million to $26 million as lower operating costs offset lower realized spreads due to higher raw materials.
Moving now to our Tissue business. Second quarter sales increased 8% sequentially, largely due to volume increases of 16% in the away-from-home market and 3% in the retail market, both of which reflect seasonality, new business gains and promotional activities. EBITDA of $54 million increased 8% from Q1, driven by higher volume and lower transportation costs. These benefits were partially offset by higher raw material costs. Q2 margin of 13.6% remains stable with Q1 levels.
Sales decreased 5% year-over-year, reflecting lower shipment levels. This was driven by a decrease in parent roll shipments following mill closures and higher internal consumption. As a result, the integration rate increasing to 94% from 83% in the year-ago period.
On the converting side, shipments increased by 3%, the result of a 4% decrease in away-from-home following plant closures, offset by a 9% increase in retail. The average selling price increased by 4% driven by lower proportion of parent rolls in the sales mix and the beneficial exchange rate.
Year-over-year EBITDA increased by $10 million or 23%. This is the outcome of favorable product mix and lower production costs, the latter of which reflects the beneficial impact from recent plant closures.
I will now pass the call to Allan, who will briefly discuss some of the financial highlights. Allan?
Yes. Thank you, Hugues, and good morning, everyone. Slides 13 and 14 illustrate the specific items recorded during the quarter. The main item that impacted EBITDA were $10 million of restructuring costs related to the closure of plants, mainly in Containerboard and Tissue that occurred over the last 12 months.
Slide 15 and 16 illustrate the year-over-year and sequential volumes of our Q2 adjusted earnings per share and the reconciliation with the specific items that affected our quarterly results.
As reported, Q2 net earnings per share was $0.01. This compared to net earnings per share of $0.22 last year and a net loss per share of $0.20 in Q1. On an adjusted basis, net earnings per share were $0.08 in the current quarter. This compared to net earnings per share of $0.27 in last year's results and 0 in the first quarter. Year-over-year, this variance mainly reflects lower EBITDA and higher financing and depreciation expenses, while sequential volume reflects higher EBITDA levels.
As highlighted on Slide 17, second quarter adjusted cash from operations was $95 million, down from $122 million in the year ago period, but up $49 million sequentially. Adjusted cash flow used in the second quarter improved year-over-year, largely reflecting the higher levels of capital investments associated with Bear Island in the year ago period. Sequentially, adjusted cash flow from operations also improved due to lower net financing expenses paid.
Slide 18 provides detail about our capital investments. New investments in the second quarter totaled $62 million. For 2024, our planned capital investment will be below our initial forecast of $175 million.
Moving now to our net debt reconciliation, as detailed on Slide 19. Sequentially, our net debt increased by $73 million in the second quarter. Despite higher cash flow pharma operations in Q2, net debt increased due to the exchange rate, our paid capital investments, leases renewal and a negative working capital values. We also disposed of some assets for $17 million, largely related to the Newtown [ connected ] and converting facility in the second quarter. Higher levels of net debt and lower EBITDA levels on an LTM basis, increased leverage to 4.2x at the end of Q2 from 3.8x at the end of Q1. Financial ratios and information about maturities are detailed on Slide 20, and other information and analysis can be found on Slides 23 through 30 of the deck.
I will now pass the call back to Hugues, who will conclude with some brief comments on our net-term outlook before we begin the question period. Hugues?
Thank you, Allan. We've outlined our near-term outlook on Slide 21 of the presentation. As a reminder, actual results may differ from this outlook in the event of movements in index pricing, both in terms of raw material costs and selling prices.
Beginning with our Packaging businesses, we expect Q2 results to be stronger sequentially in Containerboard. Two main factors are driving this outlook. The first is the benefit being realized as price increases continue to be implemented. The second is improved operational efficiency following the important shutdowns in Q2 and good volumes given stronger seasonality. We expect raw material costs to continue to be a headwind for the business. We're planning approximately 11,000 short tons of maintenance scheduled downtime in the quarter.
Results in the Specialty Products segment are expected to be stable sequentially. This reflects higher selling prices in certain product categories and gains from efficiency improvements. These tailwinds are expected to offset any impact from higher production costs.
Finally, we expect third quarter results to be softer sequentially for our Tissue business. While we anticipate stable volumes, this will be outweighed by higher raw material costs and less favorable sales mix. Looking further ahead, our outlook is positive as we have announced a price increase of up to 8.5% for Canadian retail tissue products and some U.S. customers at the end of Q3. We also secured additional U.S. retail business volume that will be starting in Q4.
More broadly, we're focused on 4 main work streams. The first is the ongoing ramp-up of the Bear Island facility. Second is solidifying efficiency improvements across all of our production facilities. Third is on further improving customer satisfaction levels with our partners and remaining the supplier of choice. And last, but certainly not least, is the diligent implementation of already announced price increases. We remain cautious given the economy and persistent inflation and are committed to continuous operational improvements throughout our business while remaining rigorous when it comes to capital allocation.
Let me finish by saying that in my 8 weeks with Cascades, I've been very impressed with the fashion and the commitment of every employee. People are dedicated and proud, and doing everything they can to meet customers' expectations. To me, clearly, they're saying a company that people bring very true for Cascades, and I'm looking forward for the next step as we continue to grow our company.
And before I pass it to the operator, I want to thank the people who are on the table with me here that they made my life easy on this first call.
Back to the operator. Thank you.
[Foreign Language]
[Operator Instructions] And your first question will be from Jonathan Goldman at Scotiabank.
Maybe just one on the industry generally. Can you discuss how Containerboard end user demand trends have evolved since May?
Yes, I'll let Charles take this question?
Yes. So we see a general uptake due to the seasonal demand. But overall, the demand is pretty good in our -- sorry, third quarter demand right now is pretty solid.
Solid relative to Q2 or as solid as Q2?
Yes. Relative to Q2. Yes.
And it looks like another quarter where Containerboard shipments outperformed the industry. It actually looks in my model like the eighth quarter in a row. What do you think is driving that outperformance?
So basically, like we mentioned, we made some significant investments, strategic investments in our group, starting with Bear Island but also on the converting, we made a major investment in this [indiscernible] investment also in Central Canada and Ontario. So this also gave us some competitive advantage in the market and growth potential.
Okay. That makes sense. And then, I guess, maybe switching to Bear Island. Can you give us a status update on the ramp of the facility? And maybe specifically, how the transition to using more mixed paper is going?
So the Bear Island ramp-up is -- continues. We are now able to supply all the grades that we were supposed to do and that they've been qualified to the customer, which is a very good news. So now we can provide to the customers on a regular basis, 21 pound and over. And so we're working with our customers and potential future customers also to deploy that on the market.
And on the ramp-up and the use of the mixed waste, we're going gradually increasing the mix percentage but we're doing so and making sure that the quality of the product is there. So we're balancing more mix, but at the same time, monitoring the quality of our product to our customers.
Next question will be from Hamir Patel at CIBC Capital Markets.
Hugues, I realize it's only been 8 weeks. But can you maybe speak to some of the potential areas that you expect to look to make changes to, just given your operating background.
Yes. Thank you. As you said, it's been 8 weeks. Clearly, as I said in the outlook, the Bear Island ramp-up is going to be a focus to make sure that we go as fast as we can to get to capacity. Very satisfied with what we've seen so far. The next coming quarter is going to be really important that we have a good order file and we need this production to be coming as planned. The second one is on operational efficiencies to make sure that we capture all the potential efficiencies that we have with our current assets.
Fair enough. And just a last question for Allan. Just given the lower CapEx you're pointing to, how should we think about CapEx for 2025? And when you think about larger strategic projects for the business, what's kind of left other than maybe some more box plants over time?
Yes. So Hamir, I'll take that question. And as Allan mentioned, we will be spending less than $175 million in CapEx this year. We're currently doing a diligent work on how to allocate cash. So that will be coming in the coming months but we'll be really focused on capital allocation to make sure that what we do with cash will add long-term and sustainable value. So priority will remain a debt reduction in the coming quarters for sure.
Next question will be from Kasia Kopytek at TD Cowen.
Kasia, on the line. Maybe I'll just pick up that capital allocation thread a little more. You mentioned CapEx and debt reduction. Just curious around the deleveraging front. Any preliminary thoughts on reducing that, not just by a higher EBITDA, but actually reducing debt levels?
Well, yes, there are some initiatives ongoing in work with some working capital items, looking at everything on that. And there are some assets that we're looking to dispose following some closure in the recent quarters. But that's just as we did with Newtown in the second quarter. So that may be other items to further reduce debt in a nominal dollar. But the objective remain to be under 3x. So it's just delayed. But as Hugues mentioned, a rigorous capital allocation will get us there.
I'm glad you mentioned that target. That was going to be my follow-up. But Allan, any sense of the order of magnitude on the working cap reduction and/or asset disposals?
Well, asset disposal, it can change rapidly. It's maybe too early to give you amounts, but it's -- in working cap, I think we are under 10% of sales. It's a slight improvement here and there but we are pretty in good shape but there's always opportunity. So a couple of millions but we don't have any amount to state at this time.
Okay. Got you. The June containerboard price hikes, how are those progressing? Do you expect to get the full hike, any pushback from customers?
I'm not going to be too specific on the price increase but what I can tell you is we are still implementing the price increase. So there's some benefits in the Q2 but continue in Q3. So yes, we are diligently working with our customers to work with them and passing on the price increase.
And just beyond the price hikes themselves, any prospects -- other prospects rather for recouping margins in containerboard beyond price hikes and everything you release? And if you can get us a sense maybe of how much Bear Island has underlying margins to this point, that would be helpful?
So as far as the improvement, as Allen and Charles mentioned, some of it will come from -- for working cap. We have work streams on margin improvement and cost reduction in all of our businesses, and we're doing diligent work to track these changes with milestones that we have regularly. And on a specific mill with Bear Island, I'm not going to go specific on one mill but Bear Island is part of the process that I just mentioned.
Any numbers you can share around targets for how much margins can improve based on the efficiency and other streamline lens you referred to?
Yes. We're not going to put any number at this point. But let me tell you that we're really working diligently to make sure that we cover back end of margin so that we can further reduce somewhat that level.
Next question will be from Matthew McKellar at RBC.
I think in your prepared remarks, you mentioned securing some additional U.S. retail tissue volumes beginning in Q4. Can you maybe just provide a bit of color around how material the volumes associated with that new business should be?
Yes, on that, Jean-David, will respond to that.
Yes. Matthew, it's a nice business, honestly, it's slightly above 4 million cases for a major retailer in the U.S. So we're very pleased of those negotiations and discussion and the outcome.
Okay. Are you able to provide any more additional color around the mechanical break at Bear Island in the quarter?
Yes. So basically, as you know, let's say, ramp-up paper mill. So the items, there was a breakdown on the paper machine and the team worked diligently to run this up. But this is behind us right now. And it's not anything that will affect the future of the mill.
Okay. That's helpful. And then maybe last for me. I think earlier this year, you talked about relocating some tissue converting equipment from your operations in Oregon that are now closed and [ you'll ] start new network. Could you maybe speak to how that's progressing and maybe where you are in that process?
Yes, those 4 lines are already running in our other facilities. So the 4 million cases I was just talking about is going to fill about 50% of the capacity that we're adding. The remaining 2 are in ramp up and those 2 are for away-from-home market. So we still have some open capacity short term in the away-from-home. But overall, I will say that those [indiscernible] line relocation went pretty well and are according to the plan.
[Operator Instructions] And your next question will be from Zachary Evershed at National Bank Financial.
It's actually Thomas calling in for Zach. Could you give us a little bit more color regarding the tissue mix [indiscernible] the consumer trade down?
Yes, we see still the private label going up. So if you look at Nielsen data for the last quarter, private label is gaining share again. In terms of trading down into the category, we see some, I would say, moderate trading, I will say. But I think the biggest uplift that we see is retail price going down at some retailers, some important retailer in the U.S. that adjusted their -- so we see good uplift in volume for our own business in retail U.S. mainly.
That's helpful. And I'm sorry if I missed this but given the mechanical issues at Bear Island, are we expecting to see a catch-up in shipments in the third quarter?
Yes. So yes, the third quarter outlook is positive compared to the Q2. And this is a combination of market and also more ability on our production.
Bear Island but also all of the shutdown, we took in Q2 are much larger than what we expect in Q3. So yes, we should see pickup in shipments.
Thank you. There are no further questions at this time. Mr. Simon, please continue.
All right. Well, in conclusion. Thanks, everyone, for taking the time to attend our quarterly call, and we're looking forward to meet some of you in person in the near future.
Thank you, everyone.
Thank you.
[Foreign Language] Thank you. Ladies and gentlemen, this does conclude today's conference call. You may now disconnect your lines.