Cascades Inc
TSX:CAS
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Cascades Inc
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Thank you, Operator. Good morning, everyone, and thank you for joining our fourth quarter and full year 2017 financial results conference call. Our speakers on this morning's call are Mario Plourde, President and CEO; Allan Hogg, CFO; Charles Malo, President and COO of our Containerboard Packaging Group; Luc Langevin, President and COO of our Specialty Products Group; and Jean Jobin, President and COO of our Tissue Papers Group. After discussion surrounding our North American operations, Mario will review results from our European Boxboard segment, followed by some concluding remarks, after which we will begin the question period. Before I turn the call over to my colleagues, I would like to highlight that Reno de Medici's fourth quarter financial report released on February 13 can be reviewed 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 accompanying Q4 2017 investor presentation for details. This presentation, along with our fourth quarter press release, can be found on the Investors section of our website. [Operator Instructions] I will now turn the call over to our CEO. Mario?
Thank you, Jennifer, and good morning, everyone. Earlier this morning, we published our fourth quarter and full year 2017 results. On a consolidated basis, our operations generated year-over-year increases in shipments, sales and operating income in Q4. This was largely driven by strong performance in Containerboard and European Boxboard where improved pricing and dales mix offset higher average raw material costs compared to the prior year. Containerboard results similarly benefitted from the Q2 2017 consolidation of the Greenpac mill.Touching briefly on our Specialty Products segment, quarterly results were below those of last year due to slightly higher production costs and lower contribution from Recovery and Recycling activity. Finally, our Tissue segment faced challenging market conditions during the quarter. Looking briefly at our sequential performance, Q4 sales declined by 2% on a consolidated basis. That was largely due to a lower contribution from Recovery and Recycling activity following the decrease in OCC market pricing and the competitive market in tissue that led this division to take reductions on tine during the period to manage inventory. On an adjusted basis, fourth quarter EBITDA was essentially unchanged from Q3 levels, reflecting improvements in our Containerboard and European Boxboard segment, the benefits of which were offset by lower results in our Tissue segment. Jean will discuss the factors driving performance in tissue later in the call. On a KPI front, fourth quarter shipments decreased by a marginal 1% from Q3. This reflected higher shipment levels in Containerboard driven by a strong demand and a stable performance in European Boxboard, highlighting solid industry fundamentals. There were offset by seasonality and market condition in tissue. On the year-over-year basis, Q4 shipment increased 14% compared to last year driven primarily by the consolidation of Greenpac and slightly higher shipment in the European Boxboard and Tissue. Our Q4 capacity utilization rate of 91% was 1% below Q3, largely driven by a decrease in Tissue. Compared to the fourth quarter of last year, capacity utilization increased by 2%. On the raw materials side, the average Q4 index price for OCC brown paper grade fell by a significant 39% from Q3 and decreased 2% year-over-year. The average price of white recycle grade decreased by 5% compared to Q3 and 4% year-over-year. Conversely, virgin pulp prices increased both sequentially and compared to prior year levels. Hardwood virgin pulp was up 7% from Q3 and 27% year-over-year, while softwood virgin pulp increased 7% and 19% respectively. Looking more specifically at OCC, price fluctuated quite substantially in the months following its high of CAD175 in March 2017. Price fell by a total of CAD54 from September through November, ending the year at an index level of CAD100 in the northeast US, which I would not is an average quarterly level that we have not experienced since mid-2016. I will now pass the call over to Allan, who will provide more details regarding our financial results. Allan?
Yes, thank you, Mario. And good morning, everyone. So I will begin with sales as detailed on Slides 12 and 13 of our fourth quarter conference call presentation which can be found in the Investors section of our website. And also, please note that all reconciliation of non-IFRS measures are also available on our website. On a year-over-year basis, fourth quarter sales increased by CAD103 million or 11%. This reflects the consolidation of Greenpac, improvements in pricing and sales mix in all of our segments, with the exception of Tissue. The less favorable foreign exchange rate for our North American operations was an offsetting factor. Sequentially, Q4 sales decreased by CAD21 million or 2%. Lower volumes, mainly in tissue, and a lower contribution from our Recovery and Recycling activities were the reasons for this decrease. Favorable foreign exchange rates and acquisition in our Containerboard segment were the main positive contributor to sales sequentially. Moving now to operating income and adjusted EBITDA, as highlighted on Slide 14, Q4 operating income was CAD12 million above last year, while adjusted EBITDA of CAD105 million increased CAD23 million from prior year levels. The president of each of our segments will provide more details regarding performances of their respective groups. On a consolidated basis, the benefit derived from the full consolidation of Greenpac results and the favorable average selling prices and product mix in Containerboard and European Boxboard were partially offset by higher raw material costs in Containerboard, higher energy costs in Europe, ad a lower contribution from the Tissue segment. Depreciation expense was also higher due to the Greenpac consolidation, while corporate activities contribution was positive in Q4. Sequentially, Q4 adjusted EBITDA decreased by a marginal CAD1 million. The performance of our Tissue segment was offset by improvements in our European Boxboard and Containerboard segments, both of which benefitted from lower raw material pricing. Corporate activities variance was also positive. Slide 16 and 17 of the presentation illustrate the year-over-year and sequential variance of our Q4 earnings per share and the details of the specific items that affected our quarterly results. As reported, earnings per share totaled CAD0.60 in the fourth quarter, including specific items what I will detail in a moment. This compares to reported earnings per share of CAD0.04 last year. Our fourth quarter adjusted EPS decreased to CAD0.14 from CAD0.16 last year. Our higher EBITDA was offset by higher depreciation and slightly higher financing expense, bot due to the full consolidation of Greenpac. Also, the mix of contributor to our results has also changed compared to last year as Greenpac and our Boxboard Europe segment represent a higher proportion of operating income. Consequently, net earnings attributable to non-controlling interest in Greenpac and Reno de Medici was higher compared to last year, thus reducing our share of the net results. On a sequential basis, fourth quarter adjusted earnings per share decreased by CAD0.06 from the adjusted earnings per share of CAD0.20 in the third quarter of 2017. This reflects our sequential overall operating income and stronger results from our Boxboard Europe segment and Greenpac which resulted in higher noncontrolling interest. Slide 18 and 19 of the presentation illustrate specific items recorded during the quarter which were not significant when looking at our operating income. With regards to net earnings, the main items are a CAD14 million loss related to the early repurchase of our US denominated long term debt and CAD57 million income tax gain resulting from the US Tax Reform announced at the end of 2017. Cash flow from operations decreased by CAD8 million year-over-year to CAD77 million. Adjusted free cash flow remains stable with last year's level. For the year, adjusted free cash flow is lower due to the lower EBITDA, higher cash tax and interest payments compared to last year.As illustrated on Slide 20, you can see that CapEx paid were also higher than last year and a CAD4 million increase in dividends is related to the dividends paid to the noncontrolling shareholders in Greenpac and Reno di Medici. Our net debt decreased slightly in Q4 due to business acquisition completed during the quarter in Containerboard and in Boxboard Europe segments. And also for our ownership increase in Greenpac. There were partially offset by our cash flow from operations and lower working capital requirements. Our net debt leverage ratio stood at 3.6 at the end of 2017 on a pro forma basis, to include our recent business acquisitions. Slides 23 through 28 provide details of our fourth quarter performance on a segmented basis and our near-term outlook is detailed on Slide 31. Thank you, and I will ask Charles to discuss our fourth quarter results from our Containerboard Packaging Group.
Good morning, everyone, and thank you, Allan. The Containerboard Group shipments increased 4% sequentially in the fourth quarter of 2017 to reach 372,000 tons. Paper shipments to strategic customers increased by 7,000 tons from the previous quarter which reflects the 1% increase in our operating rate during Q4 combined with the 3% reduction in our integration rate. To this end, when including paper sold to our strategic companies, our Q4 integration rate totaled 64%, down from 67% in the previous quarter. Planned and unplanned downtime during the quarter subtracted 8,000 tons of production compared to the previous quarter. On the converting side, shipments decreased by 4,000 tons or 2% sequentially, which is in line with the 2% decrease reported to the Canadian market, but underperformed the 1% increase reported for the US market. I would remind you that 65% of the Containerboard segment sales are generated in Canada. On the pricing front, our average selling price decreased by CAD4 on a sequential basis reflecting a less favorable product sales mix in the fourth quarter compared to the prior quarter. On a segment basis, our average Canadian selling price for Containerboard increased by CAD18 or 2% in the fourth quarter, while our corrugated product average selling price in Canadian remained stable compared to previous period. The Canadian dollar weakness helped to partially mitigate the impact of the unfavorable product mix. The Containerboard Group generated an EBITDA of CAD74 million during the fourth quarter which represents a margin of 17%. This represents a 1% increase on a sequential basis and a 4% increase compared to the same quarter of last year. The sequential increase in our results was mostly driven by improvements in raw material costs mainly due to lower OCC prices which added CAD60 million to profitability. This more than offset the lower average selling price which negatively impacted profitability by CAD6 million and higher energy costs which also reduced profitability by CAD2 million. Higher operation costs during the period also reduced our results by CAD6 million mainly due to repair and maintenance and increased labor costs. We are optimistic with regards to the short-term outlook as we expect demand levels to be in line with historical trends and our results should continue to benefit from the more favorable OCC pricing. In addition, we will begin to realize benefits from the recently announced price increase of CAD50 of liner board, CAD60 per short ton on medium, and 8% on boxes, beginning in April and May. Unfortunately, these positive economic impacts will be partially offset by lower than anticipated shipments in the first quarter of 2018 following unplanned downtime in some of our mills. We estimate that these one-time mechanical issues and related repairs will results in a production shortfall of 14000 short tons in the first 2 months of the year. Looking briefly at our strategic initiatives during the quarter, we announced the acquisition of 4 facilities and the purchase of 33% ownership position in Tencorr Holdings Corporation in Ontario on December 4 that will strengthen our position in Ontario Containerboard packaging sector. I'm also pleased to note that we successfully increased our equity holding of the Greenpac mill from 62.5% to 66.1% during the quarter. Finally, a word on the construction of the new corrugated plant in Piscataway, New Jersey. The construction is well underway, and we continue to expect to start operating in the second quarter of 2018, within our announced CAD80 million budget. Thank you for your attention. And I will now ask Mario to provide you with an overview of our Boxboard activity in Europe. Mario?
Thank you, Charles. The European Boxboard segment generated strong result in Q4 with sales and EBITDA up year-over-year. This performance was driven by increase both in average selling prices and shipped volume, both of which reflect the more favorable market condition throughout 2017. On a year-over-year basis, recycled boxboard shipment increased by 2% in the fourth quarter of 2017, with strong demand in Italy and Eastern Europe, while shipments of virgin boxboard increased by 1% during the period. The average selling price rose by 8% in Canadian dollar and 4% in Euro when compared to Q4 2016. This was driven by a EUR28 increase in the average selling price in recycled boxboard partially offset by a EUR7 year-over-year decrease in the average selling price of virgin boxboard during the period. The 11% year-over-year increase in sales in sales in Canadian dollar reflect higher volume, higher average recycled boxboard selling prices, and a more favorable exchange rate. Fourth quarter adjusted EBITDA increased by CAD8 million year-over-year, largely due to higher selling process and volume in recycled Boxboard. Higher raw material costs, primarily from recycled materials, partially offset these benefits during the quarter. On a sequential basis, Q4 sales increased 5% as shipment levels were unchanged from Q3. This was driven by a more favorable sales mix and a increase in the average selling price in Euro. In Canadian dollar, the average selling price increased 5% sequentially, reflecting the more advantageous foreign exchange rate during the period. Adjusted EBITDA increased by 36% sequentially to CAD19 million in the fourth quarter, reflecting the already-mentioned factor and lower raw material costs. The near-term outlook continued to be very positive for Europe with order inflow and order backlog both higher than prior year levels, adding additional support to the positive macroeconomic forecasts for the Euro area for 2018 and the 8% sequential decrease in average recycled fiber costs in Q4, both of which should support performance and results in Q1. Furthermore, the acquisition of the residual ownership of the Italian cardboard processing and sheeting company, Pac Services, effective January 1, 2018 is expected to positively contribute to result going forward. Finally, on the pricing front, first quarter result will continue to benefit from price increases implemented over the course of 2017. I will now pass the call to Luc, who will provide you with an overview of the performance of the Specialty Products Group. Luc?
Thank you, Mario, good morning. For the fourth quarter of 2017, the Specialty Products Group reported sales of CAD161 million, slightly above the prior year, but 10% below Q3 sales levels. This sequential decrease is largely attributable to the impact of lower fiber prices on results from the recovery activities and, to a lesser degree, seasonally lower sales, primarily in the Consumer Product Packaging segment. Our fourth quarter EBITDA of CAD14 million, which represents a margin of 8%, decreased slightly from CAD15 million in Q3. Again, lower volumes in our packaging activity and lower contribution from our Recovery operations explain this variance. Looking at the performance on a segmented basis, the Industrial Packaging subsegment EBITDA in Q4 was marginally higher than Q3. This reflects slightly lower volumes in maintenance costs at our URB mill, the effects of which were more than offset by higher spread. The EBITDA of our Consumer Products Packaging subsegment was sequentially lower. Lower seasonal volume in the rigid and flexible packaging markets combined with lower spreads due to less favorable product mix were the contributing factors. Finally, results from our Recovery subsegments were lower, as the favorably evolution of foreign exchange during the quarter and the slightly higher volumes were more than offset by lower spreads, higher maintenance costs, and increased logistics costs. Regarding the near-term outlook, our Recovery subsegment performance will be negatively impacted in Q1 by declines in recovered paper prices. Since Q3 2017, OCC has been in abundant supply in North America even during February where generation is typically at its lowest. Inventories are very good at our mills. Near term, OCC pricing could potentially continue to decline. This is certainly good news for Cascades as a whole, but it will make it harder for the Recovery subsegment to replicate last year's outstanding Q1 performance. For white fibers, the market is currently more balanced in regions where we're active with supply being generally more limited. The situation for mixed grade is challenging. Pricing varies according to quality in region and inventories are generally high. The domestic market can currently absorb all the quality and quantity being generated and residual volumes are moving to alternative export markets. I would note that our exposure to this market is limited as we sell only small volumes of this grade. In the long term, the Chinese requirements for cleaner recycle material will be tighter and we believe that this trend is here to stay. Consequently, pricing for higher quality materials could be impacted. Future exports volumes to China remain unclear at this moment as Q2 import licenses have not yet been communicated to the market. Moving to our other business areas, I'm pleased to note that our plants are currently busy and we expect demand for our products to remain solid. The recently announced price increase for uncoated recycle board is positive for our packaging operation and we are entering into favorable quarters for demand in our converting facilities. Recent price increase for polystyrene and polyethylene resin are keeping materials costs at the higher level in our consumer product packaging segment. We continue to closely manage our selling price to counterbalance this negative input cost impact. Finally, looking ahead to Q1, we expect our results to be sequentially positive, but to be below our Q1 2017 performance. Thank you for your attention and I will now pass the call to Jean, who will present the results for our Tissue Group.
Thank you, Luc. Good morning, everyone. The Tissue Group faced challenging market conditions during 2017 with an adjusted EBITDA of CAD94 million or a margin of 7.4%. This compared to an adjusted EBITDA of CAD150 million and a margin of 11.5% in 2016. During the fourth quarter of 2017, we generated CAD12 million of adjusted EBITDA which represents a margin of 3.9%. I will note that our fourth quarter is always less profitable than Q3 due to lower seasonal volumes and winter-related costs. On a year-over-year basis, our Q4 performance was also below the adjusted EBITDA of CAD30 million and related to 10.,2% margin that we generated in Q4 2016. Our overall performance, both sequentially and year-over-year, was negatively impacted by higher raw material prices, lower volume, the continued ramp up of our new Oregon converting facility, and higher maintenance costs. I will touch on each of those key drivers one by one beginning with volume. Fourth quarter shipments decreased by 4% compared to Q3. IN the parent roll segment and 8% in both the away from home and the retail segment, largely due to the usual yearend seasonality. However, on a year-over-year basis, parent toll shipment increased by 15% while shipment of converted product decreased by 3%. As we have noted in previous quarterly conference calls, we are presently faced with overcapacity In the hand towel segment and expect that this will remain the case as we integrate our Oregon converting plant. To help manage inventory levels during the quarter, we scheduled paper machine shutdowns representing 11000 tons and also temporarily sold limited amount of hand towel and bathroom tissue overseas. In terms of pricing, our fourth quarter average selling price decreased by 1% on a sequential basis. This reflects a less favorable customer mix and a less favorable product mix that was mainly driven by a lower percentage of converted products in our overall sales. We have finalized the price increase in the Canadian Consumer Products segment that we announced in Q3, representing up to 10.5% and we will begin to see the positive impact in Q1, mainly due to the agreement state. On a year-over-year basis, our average selling price decreased by 4% in Q4 which reflects the same factors that I have use outlined in adding to the competitive market environment. On the materials side, Q4 pulp prices remained very high. The significant price increases seen in both recycled fiber and virgin pulp, coupled with our higher utilization of virgin pulp in our products to enhance quality, negatively impacted our performance by increasing our total raw material by CAD7 million compared to last year's Q4. While OCC pricing has decreased in Q4, this has only a limited benefit for the Tissue Group as OCC accounts for less than 20% of our overall raw material usage in terms of mix. On the other hand, the steadily increasing process in pulp and other white fiber has a more pronounced negative effect on our results, as these fibers make up more than 80% of our raw materials. Lastly, I would note that our growing use of virgin pulp is both purposeful and strategic as it supports important growth with our key retail customers, while also helping us to increase the quality of our products, making us more competitive. Looking ahead, even though the first quarter is usually our lowest season, we expect higher shipment primarily in the converting segment. In terms of raw materials, we expect an increase in virgin fiber process and white recycled fibers. And a reduction in OCC reflecting recent index pricing changes. Moving now to our west coast converting plant, this new facility and the (inaudible) papermill negatively contributed to our EBITDA for approximately CAD15 million in 2017. Market development efforts are progressing and while penetrating and developing a new market always takes time, we are making inroads and are steadily our market share. Therefore, we expect to significantly reverse this trend by the end of this year. While we expect continued challenging market condition in the next quarter, we are focused on execution. Our efficiency levels are at the same level of 2016 and our variable costs are also in line with 2016. We are proactively managing our controllable fixed costs and continue to grow our west coast market penetration. We are also anticipating higher volume in our CP Division starting in Q2 as we have successfully secured new important strategic customers. Thank you. I will now turn the call back to Mario for the conclusion. Mario?
Thank you, Jean. We expect near-term result to benefit from several favorable external factors. The first of these are the change related to the recent corporate tax reform in the US which will reduce our US corporate transaction rate to approximately 25% in 2018 from 38% previously. The second is the current lower average price of OCC which accounts for a large portion of the raw material we use across our operation and the recently announced price increase in out Containerboard segment that will benefit, that will be effective on March 5, 2018. Providing additional support for our near-term performance, our positive underlying industry fundamentals for both Containerboard businesses in North America and Boxboard operations in Europe. As discussed earlier in the call, our Tissue division continued to face difficult market conditions. New industry capacity addition and the sales ramp up the Oregon converting facility. That said, our sales and marketing effort on the west coast are generating positive results and we are confident that this facility will become a solid contributor to our Tissue division in the future. We have provided an overview of our near-term outlook for each of our business segments in Slide 31 in our Investor Presentation. The slide highlights the expected net impact of various factors on our operational performance, both on a sequential and year-over-year basis. To summarize, Q1 result in Europe in Boxboard and Containerboard are expected to be stronger both year-over-year and sequentially. First quarter result in the Specialty Products Group are expected to be positive sequentially and slightly below prior year levels. And finally, for the reason highlighted throughout the call, Q1 results from our Tissue Paper segment are expected to decrease year-over-year, but increase sequentially. Before we open the call for questions, let me touch briefly on some of our plans for 2018. As highlighted on Slide 30 of our Investor Presentation, we are planning to invest between CAD250 million and CAD300 million during the year. Note that this amount is net of the proceeds from the sales of our New York facility. We are planning additional investment in tissue over the next several years that will further modernize both the retail and the away from home platform and equip the segment with an asset base that is positioned for the long-term growth. In summary, as we move forward, we are focusing on projects that will increase integration, modernize our operation base, and optimize our geographical footprint. I will now open the line for the questions. Operator?
[Foreign language][Operator Instructions] Hamir Patel, CIBC Capital Markets
I had a couple of questions. Perhaps we start with Allan. The CapEx spend this year of potentially up to CAD385 million seems a lot higher than I think the CAD200 million figure that you guys were previously pointing to. So could you elaborate more on maybe where that incremental increase is coming from in terms of the various dividends and what's sort of step down in CapEx should we expect in 2019?
Hamir, it's Mario talking, so good morning. Some of the CapEx you see on the envelope we have this year are carryover from 2017 as we have large project going on, the (inaudible) project. And this project is still ongoing so we are still installing equipment so a good chunk of this is part of the envelops. Secondly, as we said on the call, we want to accelerate the modernization on our Tissue, both retail and away from home. As you know, this market is getting very active. There's a lot of activities and investment, so we want to make sure that we stay competitive in this field of activity. So a portion, a large portion of the CapEx we announced today will be directed to the same area. At the same time, we have to protect our Recovery and Recycle division on SPG and we will be investing as well to increase our capacity on the recycling side. What will be the envelope for 2019, it's a little early to talk about this. I think we will just finish 2018, see how we progress in the installation of all these large projects. Most of the envelope is directed towards large investment, large CapEx, so it's not spread all over the company, so that's basically my answer.
Mario, that's helpful. I guess some of that might be capital to just maintain your competitive position, so what sort of incremental EBITDA do you expect from the growth CapEx and then what's the sort of timing for that to show up in your results?
In terms of numbers, that's not something we're going to disclose right now. But in terms of delivery into our results, you know that if we modernize and we add new lines let's say in Tissue, it takes a few months or even a year to order and then to install. So we should see the main impact in 2019. So some projects are still to be finalized and defined, so when we have more clarity we can be a bit more precise on the where and the when of the CapEx will be put into operations, but so far, that's what we can say.
Fair enough, Allan. Mario, another question for you on the Boxboard Europe business. I was curious how much mixed paper gets actually used in producing Boxboard at Reno versus OCC. And is the mixed paper effectively free right now for producers?
They have the same dynamic in terms of recycling. I would say it's probably on the average of 50/50 depending of the grade they're producing. Don't forget that we are also producing virgin Boxboard Europe, so on the net side I would say probably 40% mixed, 40% OCC and 20% virgin. But that's on average and I would have to come back to you to be a little more precise. That's my take.
And how do mixed paper prices in Europe fare relative to North America?
I would say similar to what we lived in North America.
That's helpful. And just final question I had on the Containerboard business for Charles. The RISI benchmarks look like they average about CAD100 in Q4. I'm assuming you guys had some higher cost inventory that perhaps you were working through in the fourth quarter, but can you help us understand what OCC, maybe what that OCC Price that showed up in your P&L was? And how long will it take before your results reflect spot pricing?
In the Q4, you're talking about the Q1 2018 compared to Q4?
The benchmark looked like it averaged about CD100, but perhaps maybe you guys had some higher cost inventory going into the quarter. I know there is a lot of view in the industry, myself included, that perhaps OCC was going to run up by the end of Q4 and it didn't end up happening. So just curious if maybe you've positioned yourselves with some higher cost inventory.
You're right about that, the impact for Q4 is I think around Q3 to Q4 about CAD8 differential, is that what we -- about CAD8. And we're going to have additional impact in Q1, in Q1 2018.
Paul Quinn, RBC Capital Markets.
I just had a couple questions. One on Containerboard, just if you could give us an idea of how you've been operating in January and what that rate has been?
As I mentioned, the start of 2018, in January and February, we did have some issues in our paper mills, 2 of our paper mills. One with a major electrical breakdown which will bring our operating rate about the same level of the Q4 including our shutdowns. So we're going to be around 90% to 92%.
In terms of the conversations you've been having with your customers on the March 5 price increase, can you give us some color on how that's going?
I'm not going to comment on too much detail, but what I can tell you is we made the announcement. As you know we made CAD50 on liners, CAD60 on the medium. We also made an announcement of 8% on our converted product. And as we speak, we're still focusing on making that happen.
Okay, then maybe we can switch over to recovered paper and just I guess maybe overall, Cascade's forecast on Chinese recovered paper imports in 2018, what you've seen for the Q1 import permits versus what you expected and what you expect for the balance of the year and how that's going to affect pricing. Pretty easy question overall.
Yes, I wish I had a crystal ball to answer your questions. I think something that is clear and actually the real start date of the application of the new regulation was today, March 1. Speaking with my team, we are very anxious to see what's going to happen over the next 2 months to see exactly how the China authorities will be applying the new rules for contaminants. As you are aware, the actual percentage that are put in these are extremely low, very difficult to achieve even in almost ideal conditions. So we are very anxious to see exactly what will be happening over the next 2 months. With regards to, as I said in my earlier presentation, haven't seen yet the import licenses for the second quarter. As you are aware, the first quarter was 26% below last year. Are they going to keep the same trend? Honestly, I don't have the answer for that. What do you see though is that it's for sure higher quality OCC will be something that will become more desirable for this type of exports. The average OCC coming from [Merth] will likely not going to be able to do the job and it's going to be very difficult for that volume to move to China with the quality coming up on the line stock. So it's likely going to be more domestic volumes.
So it sounds like you might have a split in the market between the really super high quality stuff that can get to China and the domestic stuff.
This is also the perceptions we have at this moment. I don't know how this is going to translate into market conditions and pricing, but this is definitely something that we see coming.
Just flipping back to your use of OCC, is that -- are you to the most extent domestic or do you use quite a bit of the higher premium OCC?
We're using both actually. We have a large part of our supply is coming from our own recovery operation.
Right, okay. I think, oh yeah, one question just on tissue, it sounded like you had CAD50 million in losses from Oregon in 2017 and stated significantly reversing this. Do you expect to get back that CAD50 million in 2018 or is that going to be even more positive than that as you fill up your order file at the mills?
Well, obviously it will go, Paul, at the rhythm that we're going to be able to bring sales in, but we don't expect to reverse at all this year, only a partial of that, our volume, in 2018 is about twice what we expect to have of what we had as a run rate by the yearend. So it's going to help a lot, but still have a lot of room before getting to profitability over there.
So Paul, just to be clear, the CAD50 million we stated includes our sold impact on the paper mill in (inaudible) because we had to adapt, modernize and adapt the product there. And we said that the trend should be reversing by the end of the year. So on a trend basis, yes, it will be positive, but oval, not positive again this year.
Keith Howlett, Desjardins Securities.
I was wondering if you can provide a breakdown by the segments on the capital spending of CAD250 million to CAD300 million plus the proceeds of the plant sale?
No, Keith, honestly we can't provide this detail at this moment. But later in the year we might be in a more, a better position to give you more clarity around it.
But you can see by the project that we highlighted on the slide that you can have an appreciation but in terms of dollar amounts we still have some work to finalize.
Perhaps just specifically on the Tissue division, would your focus there be on additional converting capacity? Or is it modernization of some of your parent roll mills?
(indiscernible) of what we'll do in CapEx in the Tissue group will be towards converting facility, modernizing lines that we already have. So shut down lines that are older lines and bringing in new lines more efficient, that will give us more ability to give good quality. And that capacity, to answer your question, we're just replacing capacity with newer equipment.
And would that be both in your converting capacity in the US and Canada?
Yes.
Sean Steuart, TD Securities.
A couple of questions. It sounds like your ERP program is wrapped up. Wil Q4 corporate costs be typical of what we can expect going forward?
In the corporate costs, Sean, there's an FX gain in that number of about CAD5 million resulting from the cash movement we had when we sold the Boralex investment. However, as we said, the costs relating to everything we did is starting to ramp down starting in Q1. So it should come back, not at a level that we saw maybe in Q2 and Q3, but closer to what we see in Q4 and a bit lower once the costs are all removed.
Okay, that helps. Then just a question on your blended tax rate. You mentioned your US tax rate goes to 25% from 38%. How should we think about your blended effective tax rate for the whole company and appreciating it depends on the relative contribution from each region. And can you also review the NOLs you have available across your regions as well?
The overall tax rate in Canada is about 27%, so 25% in the US, so it will be around that 26%, 27%, 28% depending on the mix. And the NOLs, we have a few in the US, but today on the US side we don't expect to pay tax until 2021. This might change depending on the level of CapEx we will do in the US. And in Canada, we expect the current trend to use our NOLs in the next 2, 3 years. And after that -- so no cash, no significant cash tax in the coming 2, 3 years.
[Operator Instructions] Hamir Patel.
I just had a couple of follow-ups. Charles, on the Containerboard side, you referenced that you guys had announced a converted I guess box price hike. It seemed at least in Pulp and Paper Week, I think was maybe a week ago, that only IP had announced. Have we seen other, like have the other major integrated announced box hikes as well yet?
Hamir, I'm not going to comment with what the others are doing, but what I can tell you is once we announce a container board price increase at the converter, we are going to work on increasing also the converted product. And so that's our focus and we're going to make that a priority in the next quarters.
And then, Charles, typically the box price cycle, what, that usually follows 30 days, the announcement follows 30 days after the parent roles? And then can you remind us the timing of how you expect that flow through realizing the full increase down to the box?
I'm going to try to. First, the 30 days after, it's the start of the price increase on the converting product, for the main part. But as I mentioned in the past, it takes about 4 or 5 months to get to the full benefit of the price increase due to contracts and the sequence of the price increases. That's usually the time that it takes to get the full benefit.
Great. That's helpful. And just a final question I had for Jean on the Tissue side. I appreciate the comments about Scappoose. Just curious, when you look at EBITDA for the Tissue segment for the year, sort of just under CAD95 million, just given how weak Q4 was, should we be bracing for 2018 to be down year-over-year in Tissue?
It's a good question and I don't want to speculate on a lot of things that are moving right now. One thing for sure, we are affected by the pulp price and the (inaudible) price drastically, so depending on this, this is for us the main driver. We are finding solution for the volume part, so volume part will get better. So it's really tough for me to answer that, but my answer would be look at the raw material price and that's going to be the main driver for us this year.
So Jean, maybe we can add that productivity is good, volume is all positive. We are making inroads. So it's a matter of input cost that is the main driver maybe for profitability next year.
And maybe just a question for Mario. ON the investor slides, I think in the past you've sort of targeted a longer-term EBITDA margin of sort of 15%. Do you still see that as sort of line of sight? And how long do you think it takes to get there?
When we presented tis to market, we give yourself 5 years, it's a 5-years plan. And yes, we keep on the same objectives and the investment we're making today, Piscataway or Scappoose will benefit the company long term no doubt. So no, we have not changed our objective of 15% and the target is still in 5 years, by 2022.
Keith Howlett.
I just wonder if you could explain the interrelationship between the away from home tissue market and the retail tissue market. Do they sort of price independently? Or if there is capacity, or overcapacity issues at retail, does that sort of flow over to away from home? And can you introduce away from home prices, price increases if Tissue, if the retail segment is not experiencing any price increase?
That's a very good question, Keith. As you know, normally the 2 sectors are totally different. Because you will see more virgin on the retail side than the away from how side. So normally, they are very independent and they are not necessarily using the same raw material lot more OCC in away from home, in retail there's basically none. So that's one of the first things. The relationship between the 2 is, as you know, there is so much capacity addition in terms of the retail US producer on jumbo roll side, that those guys right now have nothing to do with their jumbo rolls. So what do they do with that? They sell it to away from home converter. And they sell it at a good price because they have too much capacity, they don't want to stop their machines. So based on that, it is tough to increase prices in the away from home market because the converters are not having price increase in their input costs. This is a producer of the input cost that is going up. So that's the relationship that we feel that we see and in our case it's the hand towel that is our biggest problem. But in general, that is what is happening. Retail producers are selling bath napkin, towel to converter that maintain their process at the same level. So that's what we see right now. That's the worst timing for us with the pulp and (inaudible) very high and having a hard time to push price increases in the market.
Thank you. There are no further questions at this time. Mr. Plourde, please continue.
Thank you, everyone. Have a good day and we're looking forward to see you in the next call. Have a good day.
[Foreign language]. Thank you, ladies and gentlemen, this concludes today's conference call. You may now disconnect.