Cascades Inc
TSX:CAS
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Cascades Inc
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[Foreign Language] Good morning. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to Cascades Fourth Quarter 2021 Financial Results Conference Call. [Operator Instructions]And now I would like to pass the call over to Jennifer Aitken, Director of Investor Relations for Cascades. Ms. Aitken, you may begin.
Thank you, Sylvie. Good morning, everyone, and thank you for joining our fourth quarter 2021 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 for the question-and-answer period at the end of the call are Charles Malo, President and COO of Containerboard Packaging; Luc Langevin, President and COO of Specialty Products; and Jean-David Tardif, President and COO of Tissue Papers.Before I turn the call over to my colleagues, I would like to highlight that certain statements made during this call will discuss historical and forward-looking matters. The accuracy of these statements is subject to risk factors that can have a material impact on actual results. These risks are listed in our public filings. These statements, the investor presentation and the press release also include data that are not measures of performance under IFRS. Please refer to our Q4 2021 investor presentation for details. This presentation along with our fourth quarter press release can also 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.Before going into details of each of our businesses, let me begin by saying that the fourth quarter was a challenging end to the year. And let me be clear, we are very disappointed with this performance. A powerful mix of wide-ranging inflationary pressure on costs, labor challenge and constraint and logistics and the supply chain led to our initial fourth quarter warning on December 22. However, their impact continued to escalate as the quarter progressed, and we were subsequently made worse by lasting secondary effects of the flooding and the rail disruption in Western Canada and the steep rise of Omicron cases in December. The first of these factors significantly impact the cost and availability of transportation in Canada, the second led to staffing shortage in several of our operations and both impacted production level and several of our facility. As a result, we issued a second fourth quarter warning at the end of January.Moving now to our financial results on a consolidated basis, fourth quarter sales were stable year-over-year and compared to the previous quarter, while adjusted EBITDA decreased notably in both cases. Slide 4 and 5 provide quarterly information for each of our business segments. On the raw material side, highlighted on Slide 6, the Q4 average index price for OCC increased 183% year-over-year and was slightly higher than Q3. As has been the case throughout the year, these higher prices reflect elevated domestic demand driven by strong containerboard industry production levels. Average index prices for white recycled paper grade also rose in Q4, increasing 103% year-over-year and 12% from Q3. On the virgin pulp side, the hardwood pulp index increased 45%, while the softwood pulp index price rose 29% from last year level. Subsequently, both decreased by approximately 5%.Moving now to the results of each of our business segments, as highlighted on Page 7 through 9 of the presentation. Beginning with the sequential performance. Sales in containerboard decreased marginally in Q4. This reflects lower volume, partially offset by a more favorable sales mix and benefits from price increases during the year. The 2% volume decrease reflects decrease of 4% in parent roll and 1% in converted products. I would highlight that shipment levels were impacted by approximately 20,000 short tons in Q4 as rail disruption in Western Canada made an already challenging transportation situation worse. This transportation shortage combined with little availability of labor as the Omicron variant escalated in December impacted production level at several of our facility.Converting shipments decreased by 1% in millions of square feet, in line with the 1.2% decrease in the Canadian market and the 0.3% decrease registered in the U.S. market for the period. On a per day basis, converting shipment increased by 4%, slightly below both the Canadian and the U.S. market average, which were in the range of 5%. Q4 adjusted EBITDA of CAD 70 million or 13.9% on a margin basis was CAD 24 million or 26% below Q3 level. This reflected higher raw material costs, which also included inbound freight costs as well as lower volume and higher logistics and operational costs due to the reasons just discussed. These impacts were partially offset by the continued rollout of price increases. Year-over-year, sales were stable, while adjusted EBITDA decreased 36% due to many of the elements discussed.It was a difficult quarter for our tissue business for the reason laid out earlier. Sales were largely stable sequentially as a 2% increase in average selling price was offset by a 3% decrease in volume. Specifically, parent roll shipments decreased by 16%, while shipment of converted product increased by 1%. This resulted in a 5% improvement in the integration rate. Shipment of away-from-home product were flat sequentially, while those of retail converted products grew 3%. Adjusted EBITDA decreased CAD 18 million sequentially as sales mix benefits were offset by lower volume and higher raw material production, supply, logistics and energy costs. Year-over-year, sales and adjusted EBITDA both decreased reflecting many of the factors we have highlighted.Specialty product group continued to generate solid results sequentially. Q4 sales increased 5% from the prior quarter as the implementation of price increases in response to cost inflation offset lower volume. Adjusted EBITDA increased CAD 4 million sequentially as higher price offset the impact of volume decrease and higher operating and SG&A costs. When compared to the prior year, Q4 sales increased by CAD 28 million or 23%, while adjusted EBITDA level increased by CAD 6 million as a higher realized spread offset higher production costs. The impact of logistics and Omicron variant also impacted the performance of this segment. However, strategic investment, production, innovation and commercial strategy applied in recent years, supported this segment 23% year-over-year increase in adjusted EBITDA in 2021.Allan will now discuss the main highlights of our financial performance. Allan?
Thank you, Mario, and Good morning, everyone.As a quick reminder, once again, that results of the European boxboard segment have been presented as discontinued as of the second quarter of 2021, following the sales of our equity position in Reno de Medici. We provide relevant details regarding the changes to financial consolidated results on Slide 10.Looking at sales, as detailed on Slide 11 and 12, year-over-year Q4 sales decreased by CAD 2 million. This reflects favorable pricing and sales mix in our packaging businesses. The benefits of these elements were offset by lower volumes in containerboard and tissue related to the factor that Mario discussed earlier and unfavorable exchange rate, which also impacted sales levels for all of our business segments. On a sequential basis, fourth quarter sales also decreased by CAD 2 million as the impact from constraints in labor and transportation that were discussed earlier on volumes offset improved pricing and mix in all of our business sectors.Moving now to operating income and adjusted EBITDA. As highlighted on Slide 13, Q4 adjusted EBITDA of CAD 62 million decreased CAD 77 million from the prior-year level. The decrease was due to lower volumes and higher raw material and operational costs, as already discussed. These were partially offset by stronger results in specialty products. Sequentially, Q4 adjusted EBITDA decreased by CAD 45 million, as shown on Slide 14. This decrease reflects all the elements we have highlighted throughout the call so far.Slides 15 and 16 illustrate the specific items recorded during the quarter. The main item that impacted operating income before depreciation that is worth mentioning is a total of CAD 92 million of impairment charges and restructuring costs that were recorded in tissue, reflecting the current challenging results. Other items also impacted our net results. These include a CAD 20 million loss on the repurchase of senior notes debt in November and a CAD 204 million net gain on the sales of our equity stake in Reno de Medici.Slide 17 and 18 illustrate the year-over-year sequential variance of our Q4 adjusted earnings per share and the reconciliation with the specific items that affected our results. As reported, earnings per share were CAD 1.04 in the fourth quarter. This compared to earnings per share of CAD 0.72 last year. Both periods included specific items. On an adjusted basis, the loss per share of CAD 0.09 was CAD 0.51 below last year results. This mainly reflects our lower operating performance. On an adjusted basis, sequential fourth quarter EPS decreased CAD 0.08 per share from Q3 2021 levels, which included a negative adjustment of tax assets totaling CAD 0.19.As highlighted on Slide 19, fourth quarter adjusted cash flow from operations decreased by CAD 86 million year-over-year to CAD 51 million, and adjusted free cash flow levels also decreased significantly year-over-year. This reflects lower operating results, costs related to the repurchase of senior notes and higher net CapEx paid in the current period.Moving now to our net debt reconciliation on Slide 20. Our net debt decreased by CAD 409 million in Q4, reflecting the CAD 450 million of net proceeds from the sales of our European segment. Our leverage ratio of 3.5x is down from 3.8x at the end of the third quarter despite lower adjusted EBITDA levels. Our leverage ratio includes the impact of the construction of the Bear Island containerboard mill. When excluding the project cash investment to date, our leverage ratio would stand at 3x. Financial ratios and information about maturities are detailed on Slide 22.Slide 23 provides detail of our capital investments. Gross capital and expenditures totaled CAD 330 million, including USD115 million for the Bear Island project. After subtracting asset disposal and amounts not paid at year end, net cash outflow amounted to CAD 233 million. In 2022, we are now expecting total investment of CAD 450 million, which includes approximately CAD 275 million of investment associated with our Bear Island conversion project. Inflation is also impacting project cost. And in this regard, Bear Island is no different. After being increased from USD380 million to USD400 million, the project investment is now expected to be in a range of USD425 million to USD450 million. We continue to secure contractors installation contracts and payment terms agreement with suppliers, which has also resulted in cash outflow moving from 2022 to 2023. This situation does not impact the expected startup date of December 2022.Mario will conclude the call with some brief comments before we begin the question period. Mario?
Thank you, Allan.Many of the factors discussed have continued to impact our performance at the start of 2022. However, we have begun to see positive signs of improvement in labor availability in the recent weeks. Details regarding our near-term outlook can be found on Slide 24 of the presentation. Given the dynamic nature of the current business circumstances, I would remind you that this outlook is based on what we are seeing today and may change in the coming months.Our near-term outlook for containerboard is for stronger sequential results. Despite a slow start in January, demand remains good in both the manufacturing and the converting side, but our ability to ship continue to be challenging. However, our expected results will benefit from lower raw material costs. This is expected to help offset the combined influential refresher on operation and production costs. Our Bear Island project is progressing as planned and sales commitment continue to be put in place. As we mentioned in our Q3 calls, 100% of production of year 1 has been secured, and we have now confirmed that we have commitment for approximately 75% of the total plant capacity for the first 3 years.Results for the tissue segment will continue to be under pressure and are expected to remain flat sequentially. This reflects persistent cost inflation for raw material and transportation and continued operational constraints in logistics and labor. As it is the case with many industrial company, labor availability and recruitment remain a challenge. This situation is limiting our ability to optimize our recent investment, which lower our production efficiency as we continue to produce below optimal capacity. This factor will be partially offset by benefit from announced price increases. We have also announced additional price increase up to 12% in the retail and away-from-home product effective April and May, respectively, across North America. Lastly, we are expecting continued positive momentum from the specialty products segment.Moving now to raw material. OCC was readily available throughout Q4, and we built a solid inventory level at all of our operating sites before year end and inventory level are on target, and we are prepared for the current lower generation season. Transportation continued to require a higher level of our attention. Market condition for SOP and high grades have not improved since the last quarter. Generation remained impacted by limited office building activity and an overall market that is showing a slow structural decrease. More recently, we have seen increased purchasing activity from southern mills and higher export activity to South America. This dynamic has led to sequential increase in SOP index price in the last few months.Until late December, virgin pulp condition continued to be favorable. However, the situation has reversed in the last few weeks. The global pulp market has been impacted on the supply side by multiple events, pulp mill strike, unplanned maintenance downtime and the forced idling of mills due to the major transportation challenge. Tonnage interest is very high and transportation continued to disrupt the supply chain, especially in Canada. Several major producers have recently announced price increases for the month of February and March.Let me finish by saying that without question, business conditions have been very challenging in recent quarter. This was due to a variety of factors, many of which we discussed during this call and many of which remain today. To this end, we have announced cost inflation-driven price increases in most of our subsegments. We look forward to sharing the path forward we have outlined in our new strategic plan for 2022 to 2024 on our call with you later this morning.We will now be pleased to answer your questions and ask that they be limited to our Q4 results and full year results 2021. Operator?
[Foreign Language] [Operator Instructions] And your first question comes from Hamir Patel at CIBC Capital Markets.
First question I had was for Charles. On the containerboard side, I know Cascades had announced some larger medium price hikes than some of your peers ended up falling with. Are you realizing the full levels that you've announced so far this year?
So we have announced, as you know, the dates are starting in March. So we're still working on getting both of our announced price increases. So basically, CAD 40 on medium additional to our CAD 70 announced, so we have CAD 110 on medium and CAD 70 on liner. So the reason why we went with this is because of the profitability level that we see in our facility between medium and liner. So at this point, we're still working on getting these amounts. It is probably going to be a challenge to get 100% of it, but we're working with our customers to work where that amount.
Great. Charles, that's helpful. And I realize we'll kind of delve into some of the outlook stuff on the subsequent call. But I was just wondering, in terms of the spring containerboard hike, just given the cost inflation in recent months, at least based on the sort of current cost profile, how much of that price hike would you expect to kind of drop down to the bottom line versus just make just being eroded by the cost inflation that you've seen?
Okay. So I'm going to give -- you can make a calculation of, let's say, CAD 70 on 1.5 million tons. So that's going to give you the price increase announced with the way that the increase works on a year impact is probably about 50% of that amount. So that's on the plus side. And you can apply the impact on transportation and other costs like we've made in our presentation. So we do have CAD 3 million to CAD 5 million per month of transportation and other cost inflation.
Okay. Charles, that's helpful. And just a final question I had on the tissue side, Jean-David. I just wondered if you could perhaps just clarify. I know Mario mentioned them in his prepared remarks, but the price hikes that you have underway in both consumer and away-from-home, if you could just maybe run through what is in the market today, the level of the increases and the timing that you would expect that to flow through your results?
So we announced 12% on both markets. March 1 -- sorry, May 1 from home April 11 for retail. Right now, we have a strong justification to support those increases. I won't comment on the value on the bottom line of those increases since we're negotiating with customers, as we speak. But we saw letters from competitors in the last 2 weeks that are also announcing similar price increase for the same date as well. So again, we are firmly convinced that this can move forward.
Great. And Jean-David, is there also some element of perhaps de-sheeting underway across your retail business this year? Or is any price gains or any margin improvement coming from these sort of over the roll price increases?
Yes. There's many initiatives going on. We are working a lot to improve portfolio. So we're continuing SKUs rationalization as we started at the beginning of pandemic. So we've never stopped those initiatives. Same thing with the customer portfolio as well. And there's also de-sheeting project or basis way project adjustments with specific customers as well. So there's many initiatives going on right now to improve margins.
Next question will be from Sean Steuart at TD Securities.
A question on the tissue impairment charge. Can you give us some context on any specific assets that were affected by this? Or is it a general provision across the segment? And are there read-throughs for your perspective on the long-term earnings potential for that segment?
Well, Sean, the impairment, there's 2 categories of impairment that we took. First one is on intangible assets and goodwill. So that's for the tissue group as a whole or one of the business segments. And there's a small amount on a specific fixed asset, but I won't mention which one, but again, it's -- the rules of impairment are different than maybe some that you see in U.S. GAAP. Under IFRS, it's much more restrictive, but it doesn't change the outlook -- long-term outlook on these assets. We continue to deploy our margin initiative there. So it's more accounting based than long-term outlook there.
Okay. That's relatively encouraging. The second question I have is -- I appreciate the general inflationary cost environment you're in. My specific question on costs are you seeing any easing in the shipping constraints that you faced in the fourth quarter, especially in Western Canada and the labor availability issues associated with the Omicron variant, any easing at this stage on that front? I'm just trying to get a perspective on how that feeds into your near to midterm outlook?
Sean, I will start. It's Mario, with the labor recruitment and availability of the people. Honestly, December was very important and impacting the way we were operating. So we had to find ways to do over time, even ask retirees to come back to our plants to help us operate, so it was a difficult period. But it lasts a little bit. I would say, in January. Now we see the pandemic and the Omicron behind us. We see people coming back. Recruitment even in the U.S. is much easier now. So hopefully, within a quarter from now, the labor activity and labor availability will be behind us. I will leave Charles because for the transportation because Charles is the most impacted with transportation, so I will leave him with the answer.
Yes. So the situation with transportation out west is getting better, though that we still have some impact mainly on the rail side, and it's all across Canada, by the way, it's still some railcars that have stocked at ports and on boats -- so we figured that this situation will improve in Q1, but still have some impact till the end of Q1 at least. But the transportation, the rail is also being impacted in the U.S.So we have 2 of our main, I would say, shipping points that are affected by transportation and rail mainly, one in our major facility in Niagara Falls, where we have been packing the paper machine and one also in the east of Canada that are still impacted by the ripple effect of the out west. So I know it's a long answer. It is improving in Q1, but there's still some ripple effect to us. And mainly there is some limitation on our capacity to ship. We're trying to compensate data every day, but we have to ship what we can't ship by rail. We're trying to find some trucks to do it. So the cost is going up. And that's the impact. There's going to be less impact on the quantity shipped, but there is still going to be a lot of pressure on costs for the quarter in Q1.
Next question will be from Mark Wilde at BMO.
Allan, I wondered if you could help us, just in general terms, think about your expectations around price cost in '22. And then also to just confirm it, it sounded like in containerboard, it might be a wash this year if you get about 50% of the price hike benefit, but you're seeing kind of CAD 3 million to CAD 5 million per month in costs. And can you confirm that?
Just maybe, this is Charles. So there's probably a plus I'm being cautiously. I wanted to give some numbers as probably a positive at the end of the year, but I want to be cautiously optimistic on this.
Okay. For the overall company?
No, for the containerboard, yes. On the CAD 70, the question was asked on CAD 70 and then times USD1.5 million, that's US, by the way. So -- and then when you look at the CAD 3 million to CAD 5 million, these costs are in Canadian. So there's a small potential positive or potential positive on a year basis.
In tissue market, can continue. There's continued increases on their raw material side. So that may be more of a headwind in tissue than in containerboard and in specialty. So -- but everyone is impacted by transportation cost. But as Charles mentioned, the railway availability, it's more on the containerboard side than the others.
Okay. And in tissue, can you just help us, I know a lot of times, there's a variance between sort of announced tissue price hikes and realized tissue price hikes? And can you just give us any historical perspective on what you've typically been able to realize as a percent of the announced increase?
I don't think that the past will be -- will guide the future with this market. I think we've not been able to materialize most of those price increases in the past. But today, the situation is different. And with the inflation that we're facing and the market condition, I'm sure we're going to realize much more than what we realized in the past. So we used to realize the half to 2 quarter of the announced pricing. But now we are firmly working on 100% of it. And in fact, we are increasing even more than 12% on many categories. So there's many categories right now that are under a location. There's really strong demand, especially on the away-from-home side. So overall, we're really working hard for the full 12% on both markets.
Okay. That's encouraging. And then finally, just possible to get a little bit of color on the increase in cost at Bear Island project. And whether at this point, do you think there's any more risk of upward kind of cost creep?
Yes. So I can give you maybe a bit of where we stand. So in our range that we provided, CAD 425 million to CAD 450 million, we built in known increases from now until the end of the year. So big portion of the increases were steel, concrete, labor and all other costs that we plan from now until the end of the project. The other thing is we have about 80% of our contracts that are now signed, secured or agreed. So this is reducing the risk from now till the end. So we feel pretty comfortable with the number that we've announced in the range. So right now, we're on the low end with the contingency, so we feel comfortable it's going to be on the CAD 425 million to CAD 450 million.
[Operator Instructions] And your next question will be from Zachary Evershed at National Bank.
I was hoping you could give us a bit more color on the pace of Bear Island investments in 2022 and 2023 and speak to your confidence on the December start-up date?
Okay. So on 2022, I'm going to answer on the starting and second part of your question, I'm going to have to ask you again. But just on the starting date right now with all the team is working on making the date stick our schedule, we have to make a lot of adjustment, but still working. We're hiring more people right now than our original curve. We're making changes based on the challenges that we're seeing. But as we speak, the date is still holding for the end of December. So we made some commitment also with customers. So we're really focusing on meeting that date with the teams.
Zachary, on your other question, the layout of the investment, you'll have a slide on the next deck at 11 o'clock, but it's about USD210 million in 2022 and USD50 million in 2023.
That's very helpful. And then one last one for me. The tissue industry in North America is still pretty highly fragmented. And some of your competitors have indicated they're working on consolidation there. Are you active on that front as well? Or is your plate pretty full with Bear Island?
Zachary, thank you for your question. But if I may, I would like to defer it for our call at 11. We'll answer that question.
Thank you. There are no further questions at this time. Mr. Plourde, please continue.
Thank you, everyone, for being on the call this morning, and we are looking forward for presenting our Strat Plan '22-'24 at 11. So meet you at 11. Thank you.
[Foreign Language] Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.