Cascades Inc
TSX:CAS
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Cascades Inc
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[Foreign Language] Good morning, my name is Taka and I will be your conference operator today. At this time, I would like to welcome everyone to the Cascades Fourth Quarter 2019 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 fourth quarter and full year 2019 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 February 14 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 Q4 2019 investor presentation for details. This presentation along with our fourth quarter press release can be found in the Investors section of our website. If you have any questions, please feel free to call us after the session. I will now turn the call over to our CEO, Mario.
Thank you, Jennifer, and good morning everyone. We are very pleased with the solid 2019 result that we are presenting to you today. Our operation generated record annual adjusted EBITDA level for the second consecutive year. Annual adjusted EBITDA surpassed the $600 million mark for the first time in Cascades history. All of our segment executed well in 2019. We are particularly encouraged by the operation improvement in Tissue as the point to benefit being built from our ongoing modernization and optimization initiative. On a consolidated basis, in addition to the above, tailwind for our businesses in 2019 include lower raw material and energy prices, sales mix and pricing improvement in the recent business acquisition. These were partially offset by higher production costs per ton largely due to the greater proportion of sales coming from converting activity and a slightly lower volume. Q4 sequential results reflected usual softer seasonal demand and less favorable pricing and sales mix in all business segment. Net earnings for the quarter were a loss of $26 million or $0.27 per share. This compared to earnings of $0.42 in Q3 and a loss of $0.71 last year. On an adjusted basis, we generated $0.30 per share in Q4. This was stable with the third quarter and above the break-even level in the fourth quarter of 2018.Again on an adjusted basis, EBITDA of $152 million increased 35% over last year and decreased 6% when compared to Q3. On a consolidated basis, our adjusted EBITDA margin reached 12.4% in Q4. On the raw material side, the Q4 average index price for OCC was down 56% year-over-year and 9% from Q3. For the full year, the average OCC price was 45% below the 2018 levels. White recycled paper grades used in our Tissue segment decreased by 53% in Q4 year-over-year and 13% from Q3. Annually, the price for white grade paper decreased 34% from 2018 levels. On the virgin pulp side, hardwood and softwood pulp prices decreased sequentially and year-over-year in Q4, and were also down for the full year. Pricing for raw material remain favorable for our operation outlook.I will now briefly discuss the sequential fourth quarter performance for each of our business segment highlighted on page 8 to 11 on the presentation. The Containerboard segment generated Q4 adjusted EBITDA of $106 million, down 10% sequentially and 5% year-over-year. The sequential decrease reflect lower average selling price, following the industry decreases announced in 2019. And lower seasonal volume and a slight market softness. Q4 margin remained very healthy at 23.5%, but were down slightly from the 24.9% in Q3 and were flat with last year. We are pleased with this overall performance given the slight market softness. In Q4, operating rate was 92%, down 2% sequentially with paper shipment to external customer decreasing 8,000 short ton reflecting seasonal trends and timing of the holiday season in 2019. Shipments of converted product decreased 1% sequentially in millions of square feet outperforming the 4% decrease in the Canadian market and in line with the 1% decrease in the US market. We took 18,000 ton of scheduled maintenance and CapEx downtime in Q4 in line with announced plan.Slide 8 provides our downtime plan for 2020. We expect to take between 45,000 to 50,000 tons of maintenance CapEx and all of these on time throughout the year. This compared to 61,000 tons in 2019. Moving now to Tissue Paper, this segment post stronger results both sequentially and compared to last year. Highlighting the successes we are generating from our turnaround initiative and good operational execution. Performance benefited from lower raw material prices, higher volume, more stable transportation costs, price increases in all market announced in 2018 and a net positive contribution for Orchids.Fourth quarter EBITDA totaled $35 million, representing a margin of 9%. This was up from $24 million or a margin of 6% in Q3. On the volume side, shipment increased by 3% year-over-year. This reflects a 4% decrease in external shipment of parent rolls due to higher integration in the closure of 2 paper machine in Toronto, which remove 44,000 tons annually. Converting shipment increased 5% reflecting higher demand in our work targeted market segment. Our average selling price increased 4% year-over-year in the fourth quarter. This reflect price increase announced in the second half of 2018, a favorable sales mix and a stronger Canadian dollar. On a sequential basis, the average selling price decreased by 1% largely due to the lower portion of converted product in our sales mix compared to Q3. The European Boxboard operation generated good Q4 result. Sales decreased 1% compared to last year and were down 5% from Q3. Sequential result reflected lower seasonal volume, partially offset by a slightly higher selling price, while year-over-year performance reflects the reverse. The exchange rate impact was negative in both cases. The average Q4 selling price decreased in both euro and Canadian dollar year-over-year. This reflects the higher portion of recycled products sold following the acquisition of Barcelona Cartonboard, price decreased due to market softness in recycled board in a less favorable geographical sales mix.The average Q4 selling price of recycled boxboard decreased by EUR24 year-over-year, while virgin boxboard increased by EUR22. On a sequential basis, the 5% decrease in sales reflects the decrease in volume related to the usual seasonality in the period. Adjusted EBITDA decreased by $1 million or 4% from Q3 levels primarily due to the usual seasonality and the energy credit received in Q3.Year-over-year EBITDA increased by $4 million or 20% as the impact from the lower average selling price was offset by benefits related to lower raw material and energy costs and higher shipment levels largely related to the acquisition of Barcelona. As for the specialty products, please note that the sales and EBITDA numbers of our recovery activity has been reclassified and are now reported within the corporate activity segment. Prior year's numbers have been adjusted to reflect this change.Fourth quarter sales in the Specialty Products were $105 million, down 15% from the $123 million in Q3. This was largely driven by the divestiture of our activity in France in Q3 to a lesser degree, lower seasonal volume, and industrial and consumer packaging and the less favorable sales mix in the molded pulp segment also impacted the top line performance.Q4 EBITDA of $9 million was $7 million below Q3 levels. This reflected the business divestiture of our operation in France, lower overall volumes and higher fixed costs. The September 2019 fire at the Rockingham, North Carolina molded pulp facility also had negative impact result during the quarter. We are very satisfied with the performance and the integration of the US molded pulp assets acquired in the fourth quarter of 2018. This acquisition solidifies our position in the North American market. For the year EBITDA margin for the Specialty Product Group stood at 11.2% in 2019 compared to 9.2% last year.As mentioned before, corporate activity now includes the result of our recovery operation. The recovery -- the recovered paper market remains difficult with quarterly average selling price continuing their decline. While these conditions are favorable for other segments, the negatively impact the performance of the recovery activities and explain the negative variance versus 2018.We expect OCC market to remain favorable for buyers in the coming months due to the excess of material in North America. The current low generation season in rubbers demand from domestic mill supported the recent small index adjustment published in February and the market for higher grade as recently experienced tighter condition and is more influenced by export activities. There appears to be a consensus in the market, the pricing for virgin pulp, both hardwood and softwood has likely hit bottom. With Canadian NBSK producer announcing price correction in the last few months.It is currently difficult to estimate any potential impact on the global market stemming from the recent global event including Finland mill strike, drought condition in Chile and Indonesia and corona virus outbreak in China. I will now pass the call to Allan, who will discuss the main highlights for our financial performance after which I will conclude our presentation. Allan.
Thank you, Mario and good morning everyone. So will begin on Slide 15 with an overview of our KPIs. Our fourth quarter shipments decreased by 22 short --22,000 short tons or 2.6% from Q3. This was driven by decreases of 2% and 5% in Containerboard and European Boxboard respectively reflecting the usual seasonal demand trends in the last 3 months of the year.Shipment levels increased by 4% in tissue with the addition of the Orchids activities. Fourth quarter capacity utilization rate of 90% was stable compared to the prior year and was 3% below third quarter levels. For 2019, working capital came in at 10.1% of sales. While consolidated total return on assets stood at 12%. Moving now to sales as detailed on slide 16 and 17 on a year-over-year basis. Fourth quarter sales increased by $31 million or 3%. This reflects the contribution from recent business acquisition in Tissue, Boxboard Europe and Specialty Products and higher sales volume in tissue and specialty products. Offsetting these benefits were less favorable selling price and sales mix in all business segments with the exception of Tissue and lower sales in recovery activities attributable to lower recycled material pricing. Sequentially, Q4 sales decreased by $37 million or 3% reflecting less favorable selling price and sales volume.Moving now to operating income and adjusted EBITDA as highlighted on slide 18, Q4 adjusted EBITDA of $152 million increased $39 million from the prior-year level. Results benefited from a stronger performance of the Tissue segment that were partially mitigated by lower Containerboard and recovery activities results. Sequentially, Q4 adjusted EBITDA decreased by $9 million. This was largely the result of softer performances in Containerboard and Specialty Products, the effect of which were more than offset by a stronger contribution from Tissue Papers. Take note, once again that the impact of IFRS 16 accounting for leases contributed approximately $7 million to EBITDA in the quarter and $29 million for the full year. Please refer to slide 32 for supplemental information.Slide 20 and 21 illustrate the year-over-year and sequential variance of our Q4 adjusted earnings per share and a reconciliation with the specific items that affected our quarterly results. As reported, the company reported a loss of $0.27 in the fourth quarter, this compared to a reported loss of -- per share of $0.71 last year. Both periods included specific items.On an adjusted basis, EPS increased by $0.30 compared to last year's results. Higher operating results and lower financing expenses were offset by higher depreciation expenses. The change in depreciation reflects the business acquisitions and operational capital projects and the adoption of IFRS 16 standard for leases. On an adjusted basis, sequential EPS of $0.30 were unchanged from Q3 levels.On slide 22 and 23, we illustrate the specific items that were recorded during the quarter. The main items includes $64 million of impairment charge related to certain tissue and Boxboard Europe assets and to the goodwill in our recovery operations. A $10 million loss from the sale of some equipment restructuring costs and other charges following facility closures and the acquisition of Orchids. A $2 million unrealized loss on financial instruments and also were $14 million charge on the repurchase of long-term debt related to our refinancing last November.Fourth quarter adjusted cash flow from operations increased by $18 million year-over-year to $107 million. Adjusted free cash flow levels increased by a smaller amount of $1 million year-over-year. This reflects the higher net CapEx and dividend paid in the current period as well as higher net financing expenses in the fourth quarter of this year due to the refinancing of our unsecured notes in November.Moving now to our net debt reconciliation as detailed on slide 25, our net debt decreased by $107 million in the quarter reflecting positive sequential cash flow from operations and changes in non-cash working capital in addition to a favorable exchange rate. I would highlight that net debt does not include the acquisition cost of the Caisse de dépôt's interests in our Greenpac mill as this transaction closed in early January 2020.Our net debt leverage ratio stood at 3.25x at the end of the fourth quarter compared to 3.7x at the end of Q3 and 3.6 at the end of last year. This along with other financial ratios and information about maturities are detailed on slide 26. On slide 27, we provided details about our capital investments for the full year on a segment-by-segment basis. Our annual CapEx plan for 2020 will be approximately $250 million. Based on current conditions, we are forecasting our annual, sorry -- our annual 2020 cash flows to exceed our capital expenditure requirements by over $100 million. These funds will go towards debt repayment and the Bear Island project once it is approved and finalized.I will now pass the call back to Mario, who will wrap up the call with a brief conclusion before we begin the question period, Mario?
Thank you, Allan. In summary, we are pleased with our solid fourth quarter performance and with our record annual performance in 2019. On the strategic side, we announced that we were exercising our option to purchase the Caisse de dépôt 20.2% interest in our Greenpac mill in mid-December. The transaction closed in January 3, 2020, and our ownership in this facility now stands at 86.3%. This strategic decision will improve our available cash flow levels and Tissue, we continue to advance the integration of the Orchid activity in Q4 and completed the conversion of the Barnwell paper machine from QRT to conventional paper in mid-January 2020. The machine is running very well and trending above our expectations.On the Slide 29, we provided an update on the integration, which is going according to plan. We continue to finalize plan for the Bear Island project and as such, we do not add any update to provide at this time. Once the analysis and necessary steps have been completed and the project is approved, we will provide the market with an update. Finally, we successfully refinanced our senior note in November taking advantage of favorable market pricing condition and proactively managed our debt profile.Moving back to operation, we can find our near-term outlook for our business segment on Slide 30 of our presentation. Sequentially, we expect Q1 performance in both Tissue and Containerboard to decrease slightly. Specialty Product and Boxboard Europe are forecast to generate slightly higher result, and all of our business segments are expected to generate stable year-over-year result, with the exception of tissue which should benefit from recent tailwind.Our annual operation outlook is positive for 2020. We believe we are well positioned to deliver strong EBITDA in 2020 primarily, due to an expected positive contribution from the tissue segment. Looking ahead, we will continue to monitor the potential impact of micro factor which may impact our outlook. And as Allan mentioned, based on our current interpretation of the market condition, we expect to both fund our CapEx plan with available cash flow and have an excess of $100 million to be allocated to our Bear Island conversion project and to reduce debt.We will now be happy to answer all your questions. Operator?
[Foreign Language] [Operator Instructions] Your first question comes from the line of Hamir Patel of CIBC Capital Markets.
Mario, could you give us a sense as to how the coronavirus in Italy, how that might be affecting Reno's operation so far?
So far it has not affected the plant, so our plants are running with the exception of where we have another issue at the mills. In terms of administration, the office in Milan shut down so we ask all our employees to work from home, but we continue to do business, you know, plants are operating as usual, so we're monitoring the situation quite closely, but other than that we have nothing to present or to tell.
Okay, that's helpful. And just on Bear Island. I know there's not much you can say, but do you have a sense as to when you would expect to come to a decision?
We hope, let's say, between the next two quarter.
Okay. So should we assume then that the timing of the project. If it does come on has then also been delayed and realistically if you do go forward then what does that suggest as the earliest that the machine would come up?
We still are planning to -- this is Charles Malo, Hamir. We are still working on this project and this is for us long term. This is a big, big project for Cascade. We understand also all the market dynamics and so we want to make sure that we do it right and as Mario mentioned when we have a bit more information, we will be able to provide that for the Group. For the time being, we still have access to the site, so we're still using the time to clean up and to do all of this. So our goal as we speak today with the time frame and time line that Mario talked about the goal would be to start in the first or second quarter of 2022.
Okay. Great. And just another question I had on Containerboard these new Pulp & Paper Week recycle benchmarks have been around now for a couple of months as you're box contracts renewals have played out with. Have you started to see customers want to switch the underlying index to away from kraftliner?
I'm not going to be as you know this a sensitive. So I'm not going to disclose how we vary our customers’ prices with our contract but one thing I can mention is that the index is an index, so it's used to make price variation. So the index is pretty new right now. So the customer will have to look at what it does really. So as we speak right now, if a customer wants to have or use this mechanism, we are open to look at both the options. So but at this point it's too soon to give what would be a trend in the market or what customers would like to use as a mechanism.
Okay, fair enough. And just the final one from me for Jean-David, in Tissue with the Barnwell QRT, I mean you've converted to conventional, is the expectation down the line that you could run that on the higher grades, and what's the thinking as to the flexibility of how you as that ramps up, how you maybe move that up the quality curve?
Yes. We expect to continue to produce QRT, so we will swing the machine back to QRT for a certain period of time, end of March, so we already have good customer for the QRT products. So the goal is to be able to get as many done as possible from that machine while working with strategic customer. So that's why we are in need of conventional parent rolls, so we're getting those rolls as we speak from conventional and the machine is running well. It's a nice well equipped machine, so it's producing good quality product. So eventually as the market will evolve and we will evolve with our customers, we will be able to maximize the portfolio and get the most out of it either in QRT or in conventional.
And where do you think the QRT sits in the quality spectrum, when we think about TAD and NTT and conventional?
It's difficult. I would say it's pretty close to TAD but it's not that TAD so it's something similar with Atmos. We've got the same, same history or same experience with the hybrid technology where it doesn't match 100% a national brand, but with certain specific customer, we believe that there is, there is a good opportunity, especially on the sustainable product sites, so QRT can develop really high quality product based on 100% recycled material which TAD cannot. So we believe there is a niche market for sustainable product with the QRT being really close to TAD but with the more eco-friendly materials.
Your next question comes from the line of Sean Steuart of TD Securities.
A couple of questions. I want to dig a bit more into the Tissue results this quarter, which were quite strong relative to our expectations. And when you reported your Q3 results in November, there was a suggestion that you expected that point sequential pressure on tissue EBITDA and I guess some of that variance is ongoing fiber cost relief through the quarter, but I'm wondering if you could give a little bit more context on what surprised you to the upside through the remainder of Q4 and how those trends might be continuing into 2020?
It's Jean-David. So we've got great results first from our Oregon facilities you know last year 2018 that was really difficult for us until early 2019 but with good operational excellence there, I think we've been able to turn around that facility so we've got a good positive contribution from Oregon facilities in Q4, which was not the case in Q3 so it's going in the right direction. We also got some positive contribution from raw mat as you said, from freight and Orchids was also better than expected on Q4.
Okay. And maybe you can answer this, maybe not, but if Bear Island is approved at some point over the first half of the year, how much CapEx this year could you envision adding on to the, the guidance you've given of $250 million ex-Bear Island?
Well, Sean, it's Allan speaking. It depends also how we structure this project so depending on the, if we do a similar structure than Greenpac obviously it may just be equity investment, if not it will be on the full balance sheet. So this is still to be decided and structure so it's difficult for us to answer, but the total project you know we know it's a big amount over the next 24 months so that's what we can say at this time.
Okay. And then last question for me, you guys are not planning any market downtime in Containerboard for 2020 and should I view that as recycled fiber costs are low enough that even if prices weaken and they are a little wobbly to start the year, your margins are strong enough that you don't envision having to take downtime or is this something you'll play by ear quarter-to-quarter and can maybe change as the year progresses?
This is Charles. The way that we see with the customer base that we have also the GV that we have and we do our forecasting, we don't see any market trends or anything like that would tell us that market downtime would have to be made and we also have with the Greenpac all the products that we are producing right now are well in demand. So it's still a high value product low basis weight, so we foresee that we're going to be able to compete and not have to take any downtime as we speak.
Your next question comes from the line of Paul Quinn of RBC Capital Markets.
And just on Containerboard and just your outlook for input prices on OCC and pulp on the Tissue side as well.
This is Luc Langevin. I can speak for that one. More recently on the OCC price, we have seen over the last few weeks slightly tighter market but we need to understand that we are in the lower generation season. And as I mentioned as Charles just mentioned the demand, the domestic demand is quite robust for the beginning of the year. So this condition created, I would say for a temporary tighter market conditions, but we expect that with the generation of fibers that will start to increase again by the end of March that we will get back to a favorable market for OCC for buyers. With regards to the raw material on the Tissue side, it's very difficult to predict for the moment. We all know that the price are quite low you we've have seen the decrease over last year, which are significant on both the virgin fibers and the white grades, the recycled white grades. So on the softwood, there has been an attempt to increase price obviously a few circumstances has helped this strike as Mario mentioned that the strike in Finland, some fiber shortage in BC, some drought conditions in South America and the closure of the fixed mill in Nova Scotia. But this being said, we have no challenge now getting supply with both hardwood and softwood, so we are following this very closely. We are also monitoring the situation in China with the coronavirus and how this will be impacting the global demand, but for the time being we don't see any significant price increase in the market on both sides but again, there are so many variables going on, especially on the white rate and the virgin pulp that would be prudent for the long term.
Then I guess maybe just on European Boxboard you guys described it as slight market softness. I'm just wondering if that carry through 2020. I mean it looks like it's tightening up on the Containerboard side and the number of people are expecting a price increase there just wondering whether that will move over to Boxboard side.
We think so. With the beginning of the year, the improvement in terms of recycle grade. So the year-end up being softer, but the beginning of the year surprises in terms of order inflow and backlog both on virgin and recycled, so we think it could move up there and we could see a good 2020 in Europe as well.
Thanks for the extra color on Barnwell. But overall on Orchids, the acquisition, what are the main takeaways so far that you've seen on especially on the integrations?
It's positive, it's going according to the plan that we made last year. I think that we have positive response from the employees, people are really engaged in achieving the plans with us, so it's great to see this. We don't have many surprises other than maintenance I would say for sure equipments were not well maintained over the last few years, so this is mainly our issue right now, but all in all it's great.
Okay and then just lastly on CapEx, you guided that 250, let's say, $45 million coming on the corporate side, what is that for?
Well, there is a IT and also there is a recycling activities there now that we present the refurbishing order, maintenance CapEx in recovery. And there's always other services that we need to have some investment.
Transportation is in the corporate activities, so few trucks, IT and now recovery operation that we are upgrading.
[Operator Instructions] Your next question comes from the line of Zachary Evershed of National Bank Financial.
Congrats on the quarter following the reclassification of the recovery segment, is it fair to expect a lot more volatility in your corporate EBITDA?
For sure that for that portion as it was in Specialty in the past. Yes, it will now be in corporate, but it's really bought them right now, so we can expect that it will go higher but with the price being so low, so yes volatility will be there for now. Yes.
And with the remaining industrial packaging subsegment in Specialty Products, can you give us an idea of what the seasonality is like for that?
Well, typically our best quarter for our business has always been the Q2 and Q3. So this will not change. We do expect though a better Q1 as we expected. We've been impacted last quarter by a fire in our molded pulp which obviously impacted us in both on our fixed costs and on the maintenance costs. So it's not going to be different than it has been in the previous year, so we should see better results for the next 2 to 3 quarters.
That's helpful. Any update on the Boxboard Europe mill in Villa Santa Lucia?
We have no other news, you probably saw the communication in Europe. So we are down now because of the subcontractor not being able to service us with the water treatment, so we're waiting for our call on the judge to reopen, so timing now for us would be probably another week but we don't know, you know, it's, we have to follow the legal system and we are anxiously looking at it and hopefully we can restart the mill quite rapidly because this mill is a good mill for us.
But Mario is it fair to say that we are redeploying some volumes to other mills and [indiscernible] customers?
Yes, to a certain degree. To a certain degree, we are, we have the capacity now to move that down to other mills, but obviously we want this mill to go back in operation as soon as possible.
Understood. And then last one from me. In terms of your CapEx budgets for the various segments, are you able to further break that down into what is maintenance and what is efficiency improvements or perhaps capacity additions?
Well, we always said in the past that minimum maintenance was in the $70 million range, so we'll leave it at this, but for sure the difference is always cost improvement and replacement and modernization with quick payback, so that always has been our objective, but you see that the biggest chunk of our CapEx is in tissue to finish what has been started, the last 2 years and the modernization of the converting side of our Tissue business. So that's what we are -- it's according to our plan we were under -- we undertook in tissue the last few years, yes.
And so fair to say that in that $250 million budget, there is no real capacity increases.
In terms of paper mills, no, it's mainly on the converting side. Yes.
There are no further questions at this time, Mr. Plourde. Please go ahead.
Thank you, everyone, for being on the call this quarter and we are looking forward to see you on the next quarter. Have a good day. Thank you.
[Foreign Language] Thank you, ladies and gentlemen, this concludes today's conference call. You may now disconnect.