Cascades Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 3, 2023

There are 13 speakers on the call.

Operator

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

Operator

I will now pass the call to Jennifer of Investor Relations for Cascades. Ms. Aitken, you may begin your conference.

Speaker 1

Thank you, Joelle. Good morning, everyone, and thank you for joining our Q2 2023 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. Also joining us for the question period at the end of the call will be Charles Malo, President and COO of Containerboard Packaging Jerome Pournier, newly appointed President and COO of the Specialty Products segment Jean David Tardif, President and COO of Tissue Papers and Luc Langevin in his new role as Senior VP of Corporate Services.

Speaker 1

Before I turn the call over to my colleagues, I would like to highlight that certain statements made during this call will discuss historical and forward looking matters. The accuracy of these statements is subject to risk factors that can have a material impact on actual results. These risks are listed in our public filings. These statements, the investor presentation and the press release also include data that are not measures of performance under IFRS. Please refer to our Q2 2023 investor presentation for details.

Speaker 1

This presentation along with our second press release can be found in the Investors section of our website. Finally, I would like to mention that Cascade will be hosting an Investor Day and Mill If you have any questions regarding this, 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. We are pleased with our Q2 consolidated results and with the performance of each of our business segments. On a constant basis, sales increased 4% year over year, while adjusted EBITDA of 141,000,000 rose 55% from the prior year. In both cases, results were driven by a stronger performance from our tissue paper segment that reflected pricing and strategic initiatives put in place over the past several quarters. More broadly, year over year top line growth benefited from a more favorable exchange rate for all of our businesses, higher volumes in containerboard and higher selling prices in tissue and specialty packaging.

Speaker 2

These were partially offset by lower selling prices in containerboard following the decrease in index prices. Year over year EBITDA improved was also driven by stronger tissue results. Sequentially, sales increased 3%. This was driven by higher volumes in all of our business segments, Most notably, tissue in a better sales mix in containerboard. FX was slightly negative for our business sequentially And the impact of lower index prices on the top line performance of our Packaging segment more than offset the benefit from higher pricing in tissue paper.

Speaker 2

EBITDA increased 5% sequentially. This was driven by improved volume and mix in all business segments and lower transportation, energy costs in the Tissue and Containerboard segments. Raw material costs and selling prices were headwinds for our packaging businesses, but were tailwinds for our tissue operation. Production costs were higher sequentially, mainly in containerboard, reflecting the commissioning and startup of the Bear Island Mill in the Q2. On the raw material side, highlighted on Slide 56, The Q2 average index price for OCC decreased 66% year over year, but increased 42% from Q1.

Speaker 2

The OCC market was relatively stable in the 2nd quarter with limited export activity and favorable seasonal fiber generation, albeit at the slower pace than recent year. Transportation costs have also continued to ease. We are not expecting a significant evolution in the market condition in the short term And our operations are well supplied. Average index prices for white recycled paper grades decreased 70% sequentially in Q2 and 22% from the prior year levels. We saw favorable market dynamics over the quarter and important index price reduction.

Speaker 2

Similar trends we're seeing with virgin pulp. There are dual pulp index decreased 16% sequentially and year over year, while softwood pulp index prices decreased 10% from Q1 and 13% year over year. Conditions have improved for virgin pulp following lower demands from Asia and improved logistic and new capacity, the latter of which should largely offset any potential impact from recent forest fire, announced market related downtime in the and wood chip shortage. Material is available and our mills are adequately supplied. I would remind you that Chart changes in index prices take a few weeks before the impact flows through our result as it relates to level of inventory.

Speaker 2

Moving now to the results of each of our business segments as highlighted on Page 7 through 12 of the presentation. Beginning with the sequential performance, sales in containerboard were stable in Q2. This reflects higher volumes and beneficial sales mix, offset by the impacts from lower average selling prices following the decrease in index pricing and the less favorable exchange rate. The 4% volume increase reflects a 1% increase in shipment of parrotrol and a 7% increase in converted product shipments. Sequentially, converting shipments increased by 5.5% in Canada, outperforming the 2.7% increase in the Canadian market.

Speaker 2

U. S. Converting shipments increased 13.8%, outperforming the 1.2% U. S. Market increase.

Speaker 2

Q2 adjusted EBITDA of 96,000,000 Our 17% on a margin basis was below the Q1 levels, which as a reminder include The final $7,000,000 insurance settlement from water effluent treatment issued in mid-twenty 21 at our Niagara Falls complex. Sequential Q2 EBITDA performance reflect lower selling prices and higher raw material costs following announced index price changes. These were partially offset by a more favorable sales mix and lower transportation and energy cost. I would also note that result also reflect that the Bear Island facility was a negative contributor to Our performance giving the mill is in ramping up. Year over year sales decreased marginally And EBITDA decreased by $3,000,000 with lower selling prices and higher production costs offsetting the beneficial impact from lower raw material, freight and energy costs.

Speaker 2

Year over year shipment increased by 5% in Q2, reflecting a 10% increase in external parent roll shipment and a 1% increase in converting shipments, mainly driven by higher volume in the U. S. Market. Specifically, converting shipment decreased by 0.6% in Canada year over year, outperforming the 2.8% decrease in the Canadian market. U.

Speaker 2

S. Converting shipment increased 9.6%, above the 7.9% U. S. Market decrease. Continuing with our Packaging business, Q2 sales levels in our Specialty Products segment increased by 2% sequentially.

Speaker 2

This reflects higher volume in the cardboard and plastic sub segment, partially offset by lower selling prices in our business and lower monopod volume. EBITDA decreased by $3,000,000 sequentially as higher overall volume benefit were more than offset by lower realized spread in all subsegments. When compared to the prior year, Q2 sales decreased by $4,000,000 or 2%, driven by softer volume in all business subsegment and lower selling prices in cardboard product related to decrease in index pricing. These were partially mitigated by a more favorable exchange rate and higher selling prices in the food packaging business. EBITDA level decreased by a marginal $1,000,000 to $24,000,000 in Q2 as benefit from higher realized spread were more than offset by the impact related to the lower volume and higher production costs.

Speaker 2

Moving now to our tissue business, which had a strongest performance since Q2 2020 that reflected benefits from commercial, operational and strategic initiatives. The repositioning of our tissue paper platform announced at the end of April progressed as planned in the Q2, with the closure completed as scheduled in June July. We anticipate that these decisions combined with the ongoing productivity optimization initiatives, which are also progressing as expected, will continue to strengthen the performance of our tissue paper business going forward. Sales increased 7% sequentially, driven by higher selling prices and stronger volume, which reflected ongoing profitability optimization initiative. Shipment increased 8% from Q1, reflecting a 7% increase in shipment of converted product and a 10% increase in parent roll shipments.

Speaker 2

Sequentially, EBITDA improved. Improvement was driven by benefit from higher volumes, lower raw material, freight and energy costs and improvement in selling prices. Year over year, sales rose 22% with pricing and sales mix initiative, a more favorable exchange rate and a slightly higher volume are contributing to the stronger performance. Q2 EBITDA of $44,000,000 compared to a loss of €8,000,000 in the prior year period. This year over year improvement was driven by higher selling prices and lower transportation costs, the benefit of which more than offset higher operation operating costs.

Speaker 2

Alon will now discuss the main highlights of our financial performance, after which I will discuss our new term outlook and conclude our presentation. Alain?

Speaker 3

Thank you, Mario, and good morning, everyone. So on Slide 13 and 14, we illustrate the specific items that were recorded during the quarter. The main items that impacted our EBITDA were $8,000,000 of impairment charges and restructuring costs in our tissue segment related to U. S. Assets.

Speaker 3

Slide 15 and 16 illustrate the year over year and sequential variance of our Q2 adjusted earnings per share and the reconciliation with the specific items that affected our quarterly results. As reported, Q2 net earnings per share were $0.22 This compared to net earnings per share of $0.10 last year and a net loss of $0.75 per share in Q1. On an adjusted basis, net earnings per share were $0.27 in the current quarter. This compared to net earnings per share of $0.10 in last year's results and net earnings per share of $0.32 in Q1. Year over year, this variance mainly reflects improved adjusted EBITDA, while sequential variance reflects higher financing expenses partially offset by higher adjusted EBITDA levels.

Speaker 3

As highlighted on Slide 17, 2nd quarter adjusted cash flow from operations increased by $41,000,000 year over year to $122,000,000 And adjusted cash flow levels improved by $52,000,000 year over year. This was driven by higher operating results and lower net CapEx paid in the Q2 of Slide 18 provides detail about our capital investments. Paid capital expenditures net of disposal and accounts payable variation totaled $241,000,000 in the 1st 6 months of 2023 $104,000,000 in Q2. For 2023, our planned capital investments of $325,000,000 have not changed. Moving now to our net debt reconciliation as detailed on Slide 19, our net debt increased by $6,000,000 in the 2nd quarter.

Speaker 3

This is a reflection Of the combined effects of our current investment in Bayerlin and usual working capital requirements, slightly exceeding cash from operating activities and favorable exchange rate. Our leverage ratio of 4.1x is down from 4.6% at the end of Q1. As we have mentioned in the past, we expect this leverage trend to continue with improved operating performance of White Tissue segment and ramp up of operations at the Bear Island facility. Financial ratios and information about maturities are detailed on Slide 20. Sequentially over year sales and EBITDA Performance analysis can be found on Slide 23 through 26 of the deck, cost of sales and SG and A detail on Slide 27 historical index pricing on Slides 2829.

Speaker 3

Mario will now conclude the call with some brief comments

Speaker 2

Thank you, Alan. We provide details regarding our near term outlook on Slide 21 of the presentation. As a reminder, this outlook is based on current forecast and expectation and may change in the coming weeks. Our near term outlook for Containerboard is for results to be stable sequentially. This reflects the ongoing ramp of the production levels at the Bear Island facility, slightly higher raw material costs, lower average selling price and slightly softer volume.

Speaker 2

Year over year performance is expected to be lower with the impact from cost inflation and lower Selling prices following recent index price decrease expected to offset benefit Stable results sequentially from the Specialty Products segment. This reflects usual seasonal volume, stable selling prices trend in raw material costs and capacity and efficiency improvement. Year over year results are also expected to be stable. Our outlook for tissue is for the Q3 results to slightly improve sequentially and to be significantly above prior year levels. This stronger outlook reflects a more favorable raw material prices, ongoing profitability and productivity optimization initiative and stable volume.

Speaker 2

Before wrapping up the call, we invite you to reach out to Jennifer directly for full details of our Bear Island Mill Tour and Investor Day on September 14, 2023. We look forward to seeing you then. With that, we can now open the calls to questions, operator.

Operator

Your first question comes from Amir Patel with CIBC Capital Markets. Please go ahead.

Speaker 4

Hi, good morning. Mario, are

Speaker 5

you able to give us

Speaker 4

an update as to what type of operating rate you're seeing at Bear Island today? And when do you expect The mill to be a positive contributor?

Speaker 2

The mill will probably be a positive contributor in the next Quarter. So starting in August, we'll probably see a breakeven or a little profitability. So Q2 and Q4 Quarter will be positive contributor.

Speaker 4

Okay, great. Thanks. That's helpful. And just a question for Charles. On the containerboard side, what it looks like you've been outperforming the market.

Speaker 4

The Canadian market looks like it's been faring better than the U. S. What do you think is driving the outperformance in Canada on both sides of the border?

Speaker 5

So when I look at the market, I'll talk about The destocking first. We think that most of the destocking is done. And when I look at or compare the Canadian market and the U. S, we always tend to see that over quarters, They're about equal and that's historically what we've seen. There is a bit of the difference right now, but we're going to keep our comments for maybe next quarter.

Speaker 5

When I look at our own performance compared to the market, the reason why we've been Outperforming the market is really related to the past investment that we made both in Canada and also in the U. S. So we did some strategic investment and now they're paying off. So this is positive for us.

Operator

Your next question comes from Sean Steuart with TD Securities. Please go ahead.

Speaker 6

Thanks. Good morning, everyone. Just want to follow-up on Hamir's question with respect to Bear Island. Can you tell us How much start up costs might have been expensed in the Q2 results? How much did the asset weigh On the EBITDA for that segment this quarter and is the expected ramp up curve changed at all from the guidance you would have given us a quarter ago?

Speaker 3

Well, first, Sean, I'll answer the first part of your question. We've decided not to provide the contribution Specifically for that mill, so going forward, we will not provide any details. But as we said in the text, it was a negative contributor In Q2, and that's how we want to So I'll let Charles maybe answer the following question.

Speaker 5

So just on the ramp up car curve, I mean, we have been delayed. But since the delay or after the delay, the ramp up is going in the right direction. As you know, when you look at a project of that size, what we're seeing or experiencing right now are normal glimpse. Also the learning curve for the employees, but we're seeing this as a positive start up. And we are on the positive side, we've been using internally the product we're producing in Bear Island.

Speaker 5

The results are very good, the quality of the paper. And also outside customers are using our paper and we're getting the same feedback. Now the stage where we are in is to add Some more products to engrave to our products and we are in the course of qualifying the product to our outside customers. So I would say that the ramp up is going in the right direction. But again, The delays that we saw are affecting our total volume for the year.

Speaker 6

Okay. Thanks for that detail. That's useful. Second question is on tissue. Congratulations on the strong rebound there.

Speaker 6

I guess, I'm just trying to understand, when I look at your results for the Q2 and annualized and you're seemingly Ahead of the target that you would have set for 2024. And I'm just Trying to understand what you can control with respect to the restructuring initiatives. What sort of incremental contribution from that segment can we expect Through the second half of this year and into 2024, I'm just trying to gauge the cadence of further gains in margins for that segment.

Speaker 7

Good morning, Jean. Jean Philippe. So we remain confident for the 2024 target and at moment we stay focused on the number we've committed to. There's still some uncertainty in the market when we talk about inflation away from our market, etcetera. So Yes, the market conditions are better.

Speaker 7

But at this moment, we're going to stay prudent on the guidance For next year, internally, I can tell you that things are going good. So we believe that this is sustainable. The performance that we're delivering in the 2nd quarter is going to stay. A lot of work has been done internally in terms of cost saving, efficiency improvement, etcetera. But at this moment, we'll see a better quarter ahead.

Speaker 7

But again, we remain focused on the Next year target that we committed to.

Speaker 6

Okay. Thanks very much everyone. That's all I have.

Operator

Your next question comes from Matthew McEller with Arbor.

Speaker 5

We are Being cautious with our numbers that we or the tendency that we show, I can tell you that what we're seeing at the beginning of the Q3 right now, The trend is good. But again, the economy, the uncertainty and there's also the seasonability Of the mix that we have, we've been seeing a lot of weather impact. So that's why we've been cautious in the volume. But right now, when we look at the July and the beginning of August, The trend seems to be positive side.

Speaker 8

Okay. Thanks. Next up, in your Specialty Products business, you mentioned that molded pulp results were weaker sequentially with operational challenges with some equipment. Can you provide a bit more color on what went on there? What the impact was in the quarter?

Speaker 8

And whether any impacts will persist into Q3?

Speaker 9

Thank you for the question, Matthew. In fact, for the moulded pulp, yes, we experienced some operational issues that slowdown our shipments. However, we're seeing, I would say, more positive trend in terms of 2, 3 and we're foreseeing to come back for Q4 in terms of volume because we as we mentioned in the text that We reduced the shipment by is on operational. However, we have a plant come back to our normal impact On Q4.

Speaker 3

So demand is really there. We just have to produce and make sure we are efficient.

Speaker 7

Yes, that's it.

Speaker 8

Okay. Thanks. And then last for me. I think you talked about expecting a stable market for old corrugated containers in Q3. With new recycled containerboard capacity entering the market and ramping up and assuming demand continues to trend modestly higher, do you expect stable commission beyond Q3?

Speaker 8

And are you at all concerned about the potential for rising OCC costs over the next 12 months?

Speaker 10

Hi, Matthew. This is Luc. I can answer these questions. Currently, I cannot For the long term, what the market will be because it's a global market, which is more impacted by sometime imports than the domestic demand. What I can say for now is that we are typically in a low seasonal season now, and we can really easily have access to UCC at this moment and support the solid ramp up of our Bear Island mill in the Southeast.

Speaker 10

So we have no challenge now to get the OCC we're looking for. And so for the moment, we There will be an additional new publication this Friday, but we don't see any change in the market conditions for the moment. It's not an issue for us for the supply side.

Operator

Your next question comes from Zachary Evershed with National Bank Financial. Please go ahead.

Speaker 11

Good morning, everyone. Congrats on the quarter.

Speaker 2

Thank you. Thank you. Thank you.

Speaker 11

So for Bear Island, can you tell us a bit about the quality of the paper coming out of that? You did say that you're happy with it. So does that mean that it's completely up to spec

Speaker 5

And thank you by the way for congratulation on the quarter. We're pretty happy about it. So the product right now is responding very well. So quality is as expected when we designed the mill. I mentioned that we are still in the qualification mode because when we start up, we start with Higher basis weight, easier product to do like medium from standard, I'm going to use that.

Speaker 5

So basically what we're doing right now in our ramp up mode, we're moving more the mix Towards higher performance grades like XT, high performance, lighter weight. So we are in that process right now. But the response for the quality of the product is very good. The finish of the sheet also is good. And when I look at where it is going, strategically, we have decided to build that paper mill to supply The new trends on the market, so meaning distribution, e commerce and the demand for customers that are looking also for performance paper, but lower basis weight and being able to provide some more performance papers.

Speaker 5

So Really, we build that for the new trends. And what we're seeing right now is it's going in that direction. So Our focus now, qualifying product. And this is really What we're doing right now working with our customers to improve or increase the number of grades available. But this is normal again in a ramp up mode for a paper mill.

Speaker 11

That's great color. Thanks. And then in terms of the overall market, You're not the only new capacity ramping up. What's the bidding environment like for placing paper and boxes?

Speaker 5

I'm sorry, can you just precise a bit more of the question?

Speaker 11

Yes. You're running into High level of competition when you're trying to secure I mean you guys did pre sell a lot of the Bear Island volumes, But are you seeing in the rest of the network a lot of competition on price?

Speaker 5

So I'm not going to comment on price. But just on the network that we have because we can offer, yes, Barrowan is a part of the overall that we have. So what we're doing right now, we invested in Bear Island to be very equipped to compete. So again, we have lighter weight. We have high performance both in the medium also and in liner.

Speaker 5

That are helping customers to be more competitive. So that's basically the approach that we have. We think that the more equipped we're going to be, better we can offer to our customers and better we're going to be able to compete and create value. So that's our goal.

Speaker 11

Thank you for that. And then just one last one for me. What are you hearing from your containerboard customers in terms of Demand recovery post destocking?

Speaker 5

So the our own customers we're seeing overall. So I think that from the information we get that people are pretty much balanced right now and we should be past The destocking phase that we saw in the end of 2022 and the beginning of 2023.

Speaker 11

Thank you very much. I'll turn it over.

Operator

Your next question comes from Frederic Tremblay with Please go ahead.

Speaker 12

Hi, good morning. Questions on tissue. What's your view on the outlook For selling prices and promotional activity in tissue, the reason for the question is essentially because I'm wondering if the pulp pricing that we've seen will eventually make its way into lower tissue prices or more aggressive promotional activity in the market?

Speaker 7

Good morning, Frederic. I won't comment on what will happen with pricing in the coming quarter for sure. But what I can tell you is that Overall, the market that we're playing with in terms of the private label and the assignment that we're playing it within the private label and also the customer mix that we have, I think we're well positioned to be in good shape for the coming quarters in terms of pricing and volume. Overall, we'll see how things will go, but working with customer, we're close to our customer, we have good customer base. We'll adjust this.

Speaker 7

We'll see where the market will go.

Operator

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

Speaker 2

Thank you, everyone, for

Operator

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.

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Key Takeaways

  • On a constant currency basis, Q2 sales rose 4% year-over-year and adjusted EBITDA jumped 55% to $141 million, driven primarily by pricing and strategic initiatives in the tissue paper segment.
  • Containerboard sales were stable sequentially with a 4% volume increase, but Q2 adjusted EBITDA margin fell to 17% due to index-linked price declines and startup costs at the Bear Island mill, which is expected to breakeven in Q3.
  • Specialty Products saw a 2% sequential sales increase but a $3 million EBITDA decline as higher volumes were offset by lower realized spreads and operational challenges in molded pulp.
  • The tissue paper segment delivered its strongest performance since Q2 2020, with sales up 22% year-over-year and Q2 EBITDA of $44 million versus an $8 million loss last year, reflecting higher prices, volume growth and productivity gains.
  • Second-quarter index prices for OCC fell 66% year-over-year (up 42% sequentially) and pulp costs declined, with markets remaining well-supplied and limited short-term raw material cost pressure expected.
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Earnings Conference Call
Cascades Q2 2023
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