Cascades Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 9, 2023

There are 12 speakers on the call.

Operator

Good morning. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cascade Third Quarter 2023 Financial Results Conference Call. Note that all lines are currently in a listen only mode. After the speakers' remarks, there will be a question and answer session.

Operator

I will now pass the call over to Jennifer Aitken, Director of Investor Relations for Cascade. Ms. Aitken, You may begin the conference.

Speaker 1

Thank you, Sylvie. Good morning, everyone, and thank you for joining our Q3 2023 conference call. Conference call. We will begin with an overview of our operational and financial results, followed by some concluding remarks, after which we will begin the question period. Today's speakers will be Mario Plourde, President and CEO and Alan Hogg, CFO.

Speaker 1

Also joining us for the question period at the end of the call Arshard Malo, President and COO of Containerboard Packaging Jerome Pournier, President and COO of Specialty Products Jean David Tardive, President and CRO of Tissue Papers and Luc Langevin, Senior VP of Corporate Services. Before I turn the call over to my colleagues, I would like to highlight that certain statements made during this call will discuss historical and forward looking matters. The accuracy of these statements is subject to risk factors that can have a material impact on actual results. These risks are listed in our public filings. These statements, the investor presentation and the press release also include data that are not measures of performance under IFRS.

Speaker 1

Securities and Exchange Commission. Please refer to our Q3 2023 investor presentation for details. This presentation along with our 3rd quarter press release can be found in the Investors section of our website. If you have any questions, please feel free to contact us after the session. I will now turn the call over to our CEO, Mario?

Speaker 2

Thank you, Jennifer, and good morning, everyone. Before discussing our results, I would like to announce that we have some sad news this morning. Mr. Bernard Lemaire, founders of our company, died yesterday. Even though Bernard has retired from Cascade several years ago, he remained the heart and the soul of the company and never cease to inspire us.

Speaker 2

Cascade will be mourning for this great man and will celebrate his memory and exceptional achievement. On behalf of all Cascade employees, I would like to offer our most sincere condolences to the La Mer family and Bernard Loveschwan. Beginning with the calls. We are pleased with our strong Q3 consolidated result and in particular, the record quarterly performance of our Tissue Paper segment. On a consolidated basis, sales In both cases, strong results in the tissue paper segment were the main driver as benefits from our strategic action yield result.

Speaker 2

More broadly, year over year top line growth benefited from strong volume in containerboard, which include Bear Island and a favorable foreign exchange for all of our business segments. While our packaging businesses saw lower average selling prices following the index increase. The impact at that consolidated level was partially offset by higher selling price in tissue. Year over year EBITDA improve was also driven by stronger tissue result and lower raw material prices for all segments. Freight and energy costs were lower, but benefits were largely offset by higher production costs.

Speaker 2

Sequentially, sales increased 2.6%. This was driven by higher volume in containerboard and a more favorable mix in tissue paper. Selling prices were lower for both our containerboard and tissue paper segment. EBITDA increased 14% Sequentially, this was driven by improved volume in containerboard and tissue paper and lower overall production costs. Raw material prices were headwinds for our Packaging businesses, but were tailwinds for our tissue operation.

Speaker 2

On the raw material side, highlighted on Slide 56, the Q3 average index price for OCC decreased 46% year over year, Board increased 26% from Q2. The OCC market saw a more active export market in Q3 with increased volume to Asia leading to some pressure on pricing. Seasonal fiber generation remained good, albeit at a slower pace than recent year. We have had no problems supplying the needs of our operation, which have increased with the ramp up of Bear Island. Average Q3 index prices for white recycled paper grades decreased 22% sequentially and 42% from the prior year levels.

Speaker 2

We saw favorable market dynamics over Q3 with the index prices continuing to reduce but at a slower pace than previous quarter. Similar trend we're seeing with the virgin pulp. The hardwood pulp index decreased 20% sequentially and 37% year over year, while Softwood pulp index prices decreased 14% from Q2 and 28% year over year. Market condition has begun to reverse following more demand from China and a scheduled downtime and closure announced at multiple mills in North America. Notwithstanding these changes in the market condition, the material has been readily available for our mills.

Speaker 2

Near term market dynamics will be influenced by whether or not Asian market continues supporting both export activity and pricing. Moving now to the results of each of our business segments as highlighted on Page 7 through 12 of the presentation. Beginning with containerboard, sequentially, sales increased 6% in Q3. This reflects higher volume due to usual seasonality and the addition of the volume from Bear Island. These were partially offset by the impact from lower average selling prices related to the index exchanges and the less favorable sales mix given the greater weighting of the parent goal.

Speaker 2

The 8% increase in shipment reflects increases of 12% in parent rolls and 4% in converted product. Sequentially, converting shipment increased 4.3% in Canada, outperforming the 0.4% increase in the Canadian market. U. S. Converting shipment increased 1% above the 0.4% U.

Speaker 2

S. Market increase. Q3 adjusted EBITDA of $101,000,000 or 17% on a margin basis was 5% above the Q2 levels, reflecting higher volume and lower operating costs. These were partially offset by lower selling prices and higher raw material and transportation costs. The contribution of Bear Island improved sequentially, but is still a negative contributor to our performance, given the mill is ramping up.

Speaker 2

Year over year sales and EBITDA decreased by $2,000,000 with the impact of lower selling prices largely offset by higher volumes at the top line, while tailwind at the EBITDA level also include lower raw materials, energy and transportation costs. Year over year shipment increased by 10% in Q3, reflecting a 14% increase in external parent growth shipment largely related to the new Beranen volume and a 6% increase in converting shipment. Specifically, Converting shipment increased by 5.7% in Canada year over year, outperforming the 0.8% increase in the Canadian market. U. S.

Speaker 2

Converting shipment increased 9.5%, once again significantly outperforming the 4% of the U. S. Market decrease. Continuing with our Packaging business, Q3 sales and levels in our Specialty Products segment decreased by 4% sequentially, following lower volume in motor pulp and cardboard product. Production challenge in our motor pulp activity during the Quarter are now resolved and volume are expected to be back to normalized level in Q4.

Speaker 2

EBITDA decreased by EUR 3,000,000 sequentially, driven by lower realized spread in some subsegments, mainly due to product mix and lower volume. When compared to the prior year, Q3 sales decreased by $11,000,000 or 7%, driven by softer volume, primarily in cardboard and lower selling prices in almost all subsegments. These were partially mitigated by a more favorable exchange rate. EBITDA level decreased by €4,000,000 year over year to €21,000,000 in Q3 as benefit from higher realized spreads were more than set by the impact from lower volume and higher production costs. Moving now to our tissue business.

Speaker 2

We've generated a solid quarterly EBITDA margin of 14.5%. This strong performance reflects benefits from favorable raw material pricing and recent wide ranging commercial, operational and strategic initiatives that include the repositioning of this segment's operational platform. This repositioning include closure of several facilities, all of which Have now been completed. The decommissioning process is underway and on schedule with limited impact on our customer, thanks to good planning by our team and production being shipped to other plants. Moving now to results.

Speaker 2

Sales were stable sequentially, increasing 1%, which reflects 5% growth in converting site. This was partially offset by lower parent roll sales following the closure of our Saint Helens, Oregon Mill and higher integration within our own network. The average selling price increased by 1%, driven by the lower portion of parent growth in the sales mix. The benefit of this partially offset by a lower average selling price in converted products that reflects a less favorable mix and lower prices with some key customer due to contracted pricing model agreement. Approximately 50% of our retail volumes are linked to such agreement.

Speaker 2

Shipments were stable in Q2, reflecting a 5% increase in converted product and a 24% decrease in parent Roll following the closure of the Santenan Mill. Q3 EBITDA of €61,000,000 or €14,500,000 on a margin basis improved $17,000,000 or 39 percent from Q2. This increase was driven by benefit from lower raw material and freight and a decrease in fixed cost level following the plant closure. These were partially offset by lower selling prices for the converted product and Higher Energy Costs. Year over year, sales rose 10% with pricing and sales mix initiative and a more favorable exchange rate contributing to the stronger performance.

Speaker 2

EBITDA increased $57,000,000 from the prior year period. This was driven by higher selling prices, favorable sales mix and Lower Raw Material and Energy Costs. Alon will now discuss the main highlights of our financial performance. Alon?

Speaker 3

Thank you, Mario, and good morning, everyone. So on Slide 13 and 14, we illustrate the specific items recorded during the quarter. The items that affected EBITDA were $12,000,000 of impairment charges on U. S. Assets, restructuring costs related to closure of plants in the U.

Speaker 3

S. Slide 15 and 16 illustrate the year over year and sequential variance of our Q3 adjusted earnings per share and the reconciliation with the specific items that affected our quarterly results. As reported, Q3 net earnings per share were 0 point 3 $4 This compared to a net loss per share of 0 point net earnings per share of $0.22 in Q2 of this year. On an adjusted basis, net earnings per share were $0.44 in the current quarter. As compared to net earnings per share of $0.20 in last year's results and net earnings per share of $0.27 in Q2.

Speaker 3

Year over year, these volumes mainly reflect improved adjusted EBITDA, partially offset by higher financing expenses, while sequential variance also reflects a positive adjustment of income tax from prior years. As highlighted on Slide 17, 3rd quarter adjusted cash flow from operations increased by 53,000,000 year over year to $115,000,000 and adjusted cash flow levels improved by $96,000,000 year over year. This was driven by higher operating results and lower net CapEx paid in the Q3 of 2023. Slide 18 provides detail about our capital investments. New investments this year totaled 229,000,000 and paid capital expenditures net of disposal and accounts payable variation totaled $297,000,000 in the 1st 9 months of 2023, including $56,000,000 in Q3.

Speaker 3

For 2023, our planned capital investment of $325,000,000 have not changed. Moving now to our net debt reconciliation as detailed on Slide 19. Our net debt increased by $12,000,000 In the Q3, despite stronger cash flow, lower CapEx paid and positive working capital variance, exchange rate increased net debt by $47,000,000 during the quarter. Our leverage ratio of 3.8 times is down from 4.1 at the end of Q2 and 4.6 times at the end of Q1. As we have mentioned in the past, it includes the impact of the recent investment and ramp up of operations of the Bear Island's facility.

Speaker 3

Financial ratios and information about maturities are detailed on Slide 20 And our information and analysis can be found on Slides 23 through 29 of the deck. Mario will now conclude the call with some brief comments and our near term outlook before we begin the question period. Mario?

Speaker 2

Thank you, Alan. We provide details regarding our near outlook on Slide 21 of the presentation. As a reminder, this outlook is based on current forecast and expectation and may change. Our midterm outlook for Containerboard is for results to be softer sequentially. This reflects higher raw material costs and lower selling prices, both of which are linked to indexes, as you know.

Speaker 2

We also expect volume to decrease in Q4 due to the usual seasonal downswing in the period and a slight softening of demand due to the economic uncertainty. We expect to take Q4 last year. Year over year performance is expected to be lower due to the impact from cost inflation, lower selling prices, following index price decrease and higher raw material costs. More broadly, results will benefit from ongoing ramp up of the Bear Island. We are very pleased with the progress, which is on schedule, and our team is focused on ramping up production of Lightweight Grades.

Speaker 2

Results in the Specialty Products segment are expected to be stable sequentially year over year. This reflects usual seasonal volume, stable selling prices trend and raw material costs and capacity and efficiency improvement in several subsegments. Our outlook for tissue is for 4th quarter results to be stable sequentially, reflecting more favorable raw material and energy costs, benefit from profitability, productivity and net working optimization initiative and stable volume. These will be offset by slightly lower pricing connected to contracted input cost adjustment with customer. Results are forecast to be significantly above the prior year levels, driven by the same factor.

Speaker 2

Given the very strong results generated by our Tissue in Q3, some of you may be questioning whether our 24,000,000 EBITDA target for this business of between EUR 120,000,000 and EUR 100 and EUR 40,000,000 is too low. It is a fair question, given that annualizing our Q3 results would bring us well above this range. Let me address the question by saying that we are pleased that the wide ranging action put in place has positioned us to be tracking above of the high end of this range. Notwithstanding this and the fact that we are confident about the future performance of this business, We remain prudent giving some pricing pressure in the market following the recent drop in raw material costs. With that, we can open the call for questions.

Speaker 2

Operator?

Operator

Thank you. Thank you. And your first question will be from Sean Steuart at TD Securities. Please go ahead.

Speaker 4

Thank you. Good morning, everyone. Two questions. I'd like to start with containerboard markets and getting mixed messaging from a few sources. 3 Seas showing prices flat in October, the Bloomberg survey referenced prices Declining $20 to $30 a tonne across kraft and recycled grades.

Speaker 4

With choppy box data of late. Can you comment on what you're seeing in terms of price pressure in the containerboard market right now?

Speaker 5

So thank you, Sean, for the question. As you know, I'm not going to comment on the overall market. I can talk about what we're seeing. So we are still progressing on the developing business for our business and that's really related to the investment that we made in both of our Cascade So with the addition of our mill in Bear Island. So as we see right now, the pricing has Follow the index of what has followed the on the market, but we're still working with our customers to make sure that we Provide them with the right service.

Speaker 5

The fact also that we're providing lightweight solution is probably positive for Cascade.

Speaker 4

Thanks for that detail. And with Bear Island specifically, can you give us an indication of start up costs that were embedded in overall 3rd quarter EBITDA and what's the timing for the transition to positive EBITDA

Speaker 5

show. Okay. So we like Mario mentioned in the introduction, the T3 was still not positive overall. But the good news for us is in September, we were We broke the positive side, if I can say it like that, then we intend to continue that in T4 and ongoing.

Speaker 4

That's encouraging. Last question for me on tissue. The gains that Cascade saw in margins this quarter outpaced The industry or generally speaking, can you give updated comments on where the company stands Regarding attaining all the benefits through the various restructuring efforts you've rolled out in recent quarters, And I presume all the price increases are fully baked into your realizations at this point. But I guess the potential for further margin expansion, Absent fiber costs volatility and any further gains to be expected on that front?

Speaker 6

Yes. Good morning, Sean. Yes, we believe there is still potential. We just don't know about the market and What will happen with the virgin pulp and recycled fiber prices, but internally, I can say that we have A lot of opportunity and again network optimization, having the right product being produced at the right mill. Also in terms of integration, we're still buying a lot of jumbo roll internally, optimizing the trims with the converting lines that we have, etcetera.

Speaker 6

And there's an important initiative for cost reduction So we still foresee good improvement, good potential. But overall, what will happen with the market? So What will be the end result in terms of margin? It's tough to predict, but internally, I can say there's still a great opportunity to capture.

Speaker 4

Okay. Thanks very much for that detail. That's all I have.

Operator

Thank you. Next question will be from Hamir Patel at CIBC Capital Markets. Please go ahead.

Speaker 7

Hi, good morning. Alan, what are you planning for CapEx in 2024 and maybe if you could just update us on where you see your leverage ratios going by the end of next year?

Speaker 3

Well, Amir, we're keeping the same target as we disclosed in our strategic plan update, so at $175,000,000 for next year. So and we feel that our leverage should come within the target range we announced.

Speaker 7

Great. And Alan, how do you think about, just given Bear Island's ramping up well, the need to add additional converting capacity and timing of when that capital investment might follow.

Speaker 5

So I'm going to take that one, Amir. So the plan for us since we Started the Bear Island was first to make sure that we set up the mill to run well and follow the ramping up, which is the case right now. So the product is well received achieved by the market. So that was our first objective. To optimize the mill, it was also part of our Phase 1, which is being done right now and following path.

Speaker 5

Regarding the integration, I mentioned earlier that our Piscataway and our investment that we made in Ontario in the last two years, We still have room to integrate more volumes. So that's next step that we're doing. And for the rest of The integration, we are working and looking at projects, but We are going to look at the $175,000,000 that we set for capital investments and we'll follow that path. But the goal is still to Work on integration, increased that once we took the step that I just mentioned.

Speaker 7

Great. Thanks, Charles. That's all I had. I'll turn it over.

Operator

Thank you. Next question will be from Matthew McEller at RBC. Please go ahead.

Speaker 8

Hi, good morning. Thanks for taking my questions. I'd like to start here. So Tissue is running really well. You spoke to your target That business as it relates to 2024 as well as to your leverage targets.

Speaker 8

Just more broadly, how are you thinking about your level of confidence around some of those other 20 24 targets and anything you call out that seem either more or less achievable at this point?

Speaker 3

Well, what we can see, Matthew, at this time is that we are still comfortable even though we're facing some headwinds in our packaging business, but we have, as you saw, a strong tailwinds in tissue. So all in all, I think we're still comfortable, And I think we'll reconfirm everything in the next after the Q4. So but for now, we're still within the targeted objective we set to the market.

Speaker 8

Okay. Thanks for that. Shifting over, I think you mentioned some pricing pressure in tissue as part of your outlook in the prepared comments. Can you talk about what the latest is that you're seeing in that market?

Speaker 6

Yes, good morning. But right now, we're not seeing we're seeing pressure in As you know from the government against the retailers, so there's a lot of discussion around retail in Canada. We don't see much pressure elsewhere. I think people are waiting to see what will happen with the raw material pricing, pulp price, SOP pricing. So we're managing, as Marie mentioned, we have a pricing model in place with important customers also.

Speaker 6

So We believe we're kind of protected for an important part of the business, but we'll continue to work with our customers and follow the market

Speaker 5

in the coming quarters.

Speaker 8

Okay, that's helpful. Thanks. And then last for me, There was a comment on your molded pulp business that labor challenges limited shipments in the quarter, and I think you previously spoke about some operational issues there. Are you able to provide a bit more color on what happened and whether those challenges are persisting into Q4?

Speaker 9

Yes, good morning, Matthew. Jerome speaking. So in terms of moulded pulp, yes, we announced in Q for the Q2 that we had some operational issues continue part in Q3. However, as mentioned by Mario at the beginning, those operational issues are behind us, and we're forecasting Forcing a good Q4 for the multi pulp because the demand is still there.

Speaker 3

So investment has been made to stabilize and have stabilized production and out the desired output.

Speaker 8

Okay, thanks. That's all for me. I'll turn it back.

Operator

Thank you. Next question will be from Zachary Evershed at National Bank. Please go ahead.

Speaker 10

Thank you. Good morning, everyone, and congrats on the quarter.

Speaker 2

Thank you. Thank you. Thank you.

Speaker 10

As we're thinking about the sustainability of tissue margins, you did indicate that lower raw material costs contributed $15,000,000 to Tissue EBITDA and lower freight was another $1,000,000 Could you maybe comment about how much of that benefit you can backfill with operational improvement when or if pulp and freight tailwinds begin to fade.

Speaker 6

I don't have the exact number, but what I can tell you is, as we explained in our Investor Today in Virginia, the tissue business that we have now is much more resilient than it was years ago. So when you look at the platform that we have with 10 mills instead of 20, With fewer employees, fewer customers, fewer products, I think now we have a much better business that will go through the cycles in the coming years. So honestly, We won't see again issues as we saw in 2018 and 2022. I'm really confident that the market will be able the business will be able to follow typical market cycle as our with the investment also that were done, modernization, closure of older plants, etcetera.

Speaker 10

Thank you for that. And then could I get your view on the supply and demand dynamic in containerboard going into 2024, Given the announcement recent announcement of mill closures versus new capacity ramping up and what you're seeing on the ground in terms of consumer demand trends.

Speaker 5

Okay. So on the overall market, you all saw the published numbers of the additional capacity and also the closure. As we speak right now, I'm going to use what was published. There's With a 1, 1.4 growth on the market with the demand, the market in the mid to long term seems to be better the way we see it right now. And on our side, you're seeing that we're taking the steps to make sure that we're balancing also our inventory level based on the demand.

Speaker 5

So the other thing that I would add to this is Cascade of volume on the containerboard side that is Tier 1. So we're better equipped to compete. So I would just say that we are going to manage on our side based on the market condition. But The mid to long term seems to be looking good right now overall in the market.

Speaker 10

Good color. Thanks. And just one last one. You guys are outperforming box shipments in Canada and the U. S.

Speaker 10

Obviously, there's a contribution there from Bear Island. Is anything else lifting that?

Speaker 5

Well, the mainly when we look at The performance that we are doing compared to the market is really based on the Yes, we have been focusing our sales team on specific markets that are growing a bit faster than the average market right now. So Meaning like the ecom and the distribution, so which is helping us. 1 of the markets that is not doing as good for the time being just because of the economy is the industrial. So It's about 15% of our volumes overall. When we look at the market, our strategy has been to focus on faster growing market and staying up.

Speaker 5

But in addition to that, as I mentioned earlier, the growth is also coming largely because of the investment that we made in Gateway, which has been very good for Cascade. So it's usually well located and servicing also markets that are growing faster than the average. And the same thing also in our region in Ontario. When you look at the overall, the Ontario market is more than 50% of the overall market in Canada, and that's where we decided to make a major investment to align our capacity to service the market.

Speaker 10

Very helpful. Thanks. I'll turn it over.

Operator

Thank you. And your next question will be from Frederic Tremblay at Desjardins.

Speaker 11

Thank you. First, my condolences to the Cascade team following the passing of Mr. Lemaire.

Speaker 2

Thank you.

Speaker 11

Sorry if I missed it, but maybe as a follow-up to Last question there on containerboard. I'm just trying to figure out what would have been the shipment growth from your legacy operations if we Could the contribution from new capacity at Bear Island? Can you provide some comments on that?

Speaker 5

No, we're not going to comment on this since we have a we look at the overall network that we have. And this is what we're doing right now. And when we're making our decision of where the volume is going to be produced, we're Making our decision on what bring the most profitability to Cascade. So So again, we're seeing this as an overall, so we're not going to disclose any specific counting The old or new or facility or in the network.

Speaker 11

Okay, understood. Switching to tissue on the away from home. Just curious to get your thoughts on what you're seeing in that market right now and what are Your expectations as we sort of progressed in an uncertain economic environment, is that an area where You're seeing some weakness now or has it been fairly resilient so far?

Speaker 6

Good morning, Felix. So it's been table. Honestly, I think everybody is waiting to see what will happen. It's a big question mark for sure. One thing also we've done internally is that business Now represent onethree of our business versus almost 50%.

Speaker 6

So we gained some flexibility. So we're less at risk than we were towards away from home versus few years ago, first thing. The other thing is October was our best month for the year, so in terms of case shift. So I think overall, it shows that the market is still solid. But as I said earlier, I think we've picked the right customer.

Speaker 6

Also, as Charles mentioned, Having the right customer who are growing in those difficult period. And I think the mix of product that we have, which is not in the Ultra segment is also helping us. We're not really strong in the Office channel either. So it's also somewhere where we're gaining. So overall, I think We're still optimistic and positive about that business.

Speaker 6

But for sure, there's a lot of uncertainty, as you all know. But nobody knows exactly what will happen next year. But I think we are again Much better position to go through the coming quarters.

Speaker 11

Great. That's it for me. Thank you.

Operator

Thank you. There are no further questions at this time. Monsieur Plourde, please continue.

Speaker 2

Yes. Thank you, everyone, for being on the line this morning, and looking forward to talk to you with the Q4. Have a good day. Thank you.

Operator

Thank you, ladies and gentlemen. This does conclude today's conference. You may now disconnect your lines.

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Key Takeaways

  • Consolidated Q3: Cascade delivered strong Q3 results with record performance in the Tissue Paper segment, year-over-year top-line growth aided by higher containerboard volumes and favorable FX, plus lower raw material and energy costs.
  • Containerboard segment: Shipments rose 8% sequentially (parent rolls +12%, converted products +4%), EBITDA margin improved to 17%, and the Bear Island mill ramp-up is on schedule though still a negative contributor.
  • Specialty Products saw a 7% year-over-year sales decline and a €4 M EBITDA drop due to softer volumes and spreads, but operational issues in molded pulp are resolved and volumes are expected to normalize in Q4.
  • Tissue business: Achieved a 14.5% EBITDA margin in Q3 (up 39% sequentially and 186% year-over-year), driven by lower fiber and energy costs, completed plant closures, and commercial and operational efficiency initiatives.
  • Outlook for Q4 projects softer containerboard earnings on lower prices and seasonal demand, stable Specialty Products results, and continued strong tissue performance despite some pricing pressure, with a targeted leverage ratio below prior quarters.
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Earnings Conference Call
Cascades Q3 2023
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