Cascades Q2 2024 Earnings Call Transcript

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August 8, 2024

There are 10 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 Second Quarter 20 24 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 Aitken, Director of Investor Relations for Cascade. Ms. Aitken, you may begin.

Speaker 1

Thank you, Sylvie. Good morning, everyone, and thank you for joining our Q2 2024 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 Hugues Simon, President and CEO and Alan Hogg, CFO. Also joining us for the question period at the end of the call are Charles Malo, President and COO of Containerboard Packaging Jerome Pournier, President and COO of Specialty Products segment and Jean David Tardif, President and COO of Tissue Papers and Luc Langevin, 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 in the investor presentation and the press release also include data that are not measures of performance under IFRS. Please refer to our Q2 2024 Investor Presentation for details.

Speaker 1

This presentation, along with our Q2 press release, can be found in the Investors section of our website. If you have any questions, please feel free to contact us after this session. I will now turn the call over to our CEO, Hugues Simon, who will begin with a review of our performance. Hugues?

Speaker 2

Thank you, Jennifer. Good morning, everyone. I'm pleased to be here today and look forward to having the opportunity to meet you in person in the near future. Beginning with a quick overview of our consolidated results, our 2nd quarter sales levels increased by 6% from Q1 and were essentially stable year over year. This performance was in line with our expectations.

Speaker 2

Volume, pricing and exchange rate drove the sequential improvement. Year over year sales mix and exchange rate were both tailwinds, while volume and pricing were headwinds. Consolidated EBITDA of $112,000,000 increased 9% from Q1, reflecting stronger pricing and favorable volume and mix, freight and energy costs. These were offset by higher raw material and production costs. Year over year consolidated EBITDA decreased 20%, mostly due to higher raw material costs and decrease in average selling prices.

Speaker 2

Our second quarter results also includes a CAD 5,000,000 one time compensation related to CEO transition. On the raw material side, highlighted on Slide 56, the 2nd quarter average index price for OCC increased 9% from Q1 and 134% year over year. The market for this material saw consistent demand domestically, including growing amounts needed for new recycled containerboard mills. We have no problem supplying our operations with good inventory management and internal in our internal supply network. We expect relatively stable market in the coming months.

Speaker 2

Average Q2 index prices for white recycled paper grades decreased 6% versus Q1 and 27% from last year. The market was balanced with readily available volumes and fibers translating into a small decrease in pricing in the quarter. Pulp prices were higher sequentially, up 18% in the case of softwood and 17% for hardwood. Year over year prices were also higher, up 12% 13% respectively. Our mills were adequately supplied throughout the period.

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 Containerboard, Q2 sales increased by 5% sequentially, reflecting higher selling prices and volume and better sales mix and exchange rate. Shipments increased 1% from Q1, driven by converted products. Sequentially, converting shipments increased 5.9% in Canada, slightly below the 6.2% increase in the Canadian market. U.

Speaker 2

S. Converting shipments decreased 2.1%, below the 3.3% U. S. Market increase, reflecting the sale of our Newtown facility during the quarter. Excluding that sale, U.

Speaker 2

S. Converting shipments increased 0.3% from Q1. EBITDA in Q2 was CAD60 1,000,000 or 10% on a margin basis. This represents a 20% increase from Q1. Results benefited from recent market price increases, offset by continued iron material costs.

Speaker 2

We also recorded a CAD4 1,000,000 R and D credit during the quarter. This was in line with the range we provided with our Q1 results, but nonetheless impacted by a prolongation of planned maintenance downtime at our Greenpac and Bear Island Mills. In total, the additional downtime reduced our production capacity by a further 8,000 short tons in the quarter. Year over year sales increased by 4% with benefit from higher volumes and more favorable sales mix and exchange rate, offsetting the impact from lower selling prices. EBITDA levels decreased by 38%, a reflection of the combined impact from lower pricing and higher raw materials.

Speaker 2

Year over year shipments increased by 4% in Q2, mostly driven by the new Bar Island volume. Converting shipments increased by 8% in Canada, outperforming the 6% increase in the Canadian market. U. S. Converting shipments increased 0.6%, slightly below the 1.1% U.

Speaker 2

S. Market increase. Excluding Newtown, U. S. Converting shipments increased 3.2% from the year ago period.

Speaker 2

Continuing with our packaging business, our Specialty Products division continued to deliver strong results. Q2 sales were up 4% from Q1 on improved selling price, sales mix, exchange rate and higher volume in plastic food packaging. EBITDA was up 4% or $2,000,000 from Q1 and the margin of 15.6% remains solid and unchanged from Q1. Year over year sales increased 2% in Q2 with exchange rate and higher selling prices in certain projects driving this growth. EBITDA improved by CAD2 1,000,000 to CAD26 1,000,000 as lower operating costs offset lower realized spreads due to higher raw material.

Speaker 2

Moving now to our tissue business. 2nd quarter sales increased 8% sequentially, largely due to volume increases of 16% in the OE from home market and 3% in the retail market, both of which reflect seasonality, new business gains and promotional activities. EBITDA of CAD54 1,000,000 increased 8% from Q1, driven by higher volume and lower transportation costs. These benefits were partially offset by higher raw material costs. Q2 margin of 13.6% remained stable with Q1 levels.

Speaker 2

Sales decreased 5% year over year, reflecting lower shipments levels. This was driven by a decrease in parent roll shipments following mill closures and higher internal consumption. As a result, the integration rate increasing to 94% from 83% in the year ago period. On the converting side, shipments increased by 3%, the result of a 4% decrease in away from home following plant closures, offset by a 9% increase in retail. The average selling price increased by 4%, driven by lower proportion of parent rolls in the sales mix and the beneficial exchange rate.

Speaker 2

Year over year EBITDA increased by CAD10 1,000,000 or 23%. This is the outcome of favorable product mix and lower production costs, the latter of which reflects the beneficial impact from recent plant closures. I will now pass the call to Alain, who will briefly discuss some of the financial highlights. Alain?

Speaker 3

Yes. Thank you, Hug, and good morning, everyone. Slides 13 14 illustrate the specific items recorded during the quarter. The main items that impacted EBITDA were EUR 10,000,000 of restructuring costs related to the closure of container borne and tissue that occurred over the last 12 months. Slide 15 and 16 illustrate the year over year and sequential variance of our Q2 adjusted earnings per share and the reconciliation with specific items that affected our quarterly results.

Speaker 3

As reported, Q2 net earnings per share was €0.01 This compared to net earnings per share of $0.22 last year and a net loss per share of 0 point 2 dollars in Q1. On an adjusted basis, net earnings per share were $0.08 in the current quarter. This compared to net earnings per share of $0.27 in last year's results and 0 in the Q1. Year over year, this variance mainly reflects lower EBITDA and higher financing and depreciation expenses, while sequential variance reflects higher EBITDA levels. As highlighted on Slide 17, 2nd quarter adjusted cash flow from operations was CAD95 1,000,000 down from CAD122 1,000,000 in the year ago period, but up CAD 49,000,000 sequentially.

Speaker 3

Adjusted cash flow used in the 2nd quarter improved year over year, largely reflecting the higher levels of capital investments associated with Bear Island in the year ago period. Sequentially, adjusted cash from operations also improved due to lower net financing expenses paid. Slide 18 provides detail about our capital investments. New investments in the 2nd quarter totaled $62,000,000 For 2024, our planned capital investments will be below our initial forecast of $175,000,000 Moving now to our net debt reconciliation as detailed on Slide 19. Sequentially our net debt increased by CAD 73,000,000 in the 2nd quarter.

Speaker 3

Despite higher cash flow pharma operations in Q2, net debt increased due to the exchange rate, our paid capital investments, leases renewal and a negative working capital volumes. We also disposed of some assets for $17,000,000 largely related to the Newtown Connect ticket converting facility in the 2nd quarter. Higher levels of net debt and lower EBITDA levels on an LTM basis increased leverage to 4.2 times at the end of Q2 from 3.8 times at the end of Q1. Financial ratios and information about maturities are detailed on Slide 20 and other information and analysis can be found on Slides 23 through 30 of the deck. I will now pass the call back to Erg, who will conclude with some brief comments and our near term outlook before we begin the question period.

Speaker 2

Hugues? Thank you, Alain. We've outlined our near term outlook on Slide 21 of the presentation. As a reminder, actual results may differ from this outlook in the event of movements in index pricing, both in terms of raw material costs and selling prices. Beginning with our packaging businesses, we expect future results to be stronger sequentially in containerboard.

Speaker 2

2 main factors are driving this outlook. The first is the benefit being realized as price increases continue to be implemented. The second is improved operational efficiency, following the important shutdowns in Q2 and good volumes given stronger seasonality. We expect raw material costs to continue to be a headwind for the business. We're planning approximately 11,000 short tons of maintenance scheduled downtime in the quarter.

Speaker 2

Results in the Specialty Products segments are expected to be stable sequentially. This reflects higher selling prices in certain product categories and gains from efficiency improvements. These sale wins are expected to offset any impact from higher production costs. Finally, we expect 3rd quarter results to be softer sequentially for our tissue business. While we anticipate stable volumes, this will be outweighed by higher raw material costs and less favorable sales mix.

Speaker 2

Looking further ahead, our outlook is positive as we have announced increase of up to 8.5 percent for Canadian retail tissue products and some U. S. Customers at the end of Q3. We also secured additional U. S.

Speaker 2

Retail business volume that will be starting in Q4. More broadly, we're focused on 4 main work streams. The first is the ongoing ramp up of the Bear Island facility. 2nd is solidifying efficiency improvements across all of our production facilities. 3rd is on further improving customer satisfaction levels with our partners and remaining the supplier of choice.

Speaker 2

And last, but certainly not least, is the diligent implementation of already announced price increases. We remain cautious giving the economy and persistent inflation and are committed to continuous operational improvement throughout our business, while remaining rigorous when it comes to capital allocation. Let me finish by saying that in my 8 weeks with Cascade, I've been very impressed with the passion and the commitment of every employee. People are dedicated and proud and doing everything they can to meet customers' expectation. To me clearly, the saying a company is its people, brings very true for Cascade and I'm looking forward for the next step as we continue to grow our company.

Speaker 2

And before I pass it to the operator, I want to thank the people around the table with me here. They made my life easy on this first call. Back to the operator. Thank you.

Operator

And your first question will be from Jonathan Goldman at Scotiabank. Please go ahead.

Speaker 4

Hi, good morning and thanks for taking my questions. Maybe just one on the industry generally. Could you discuss how containerboard end user demand trends have evolved since May?

Speaker 2

Yes, I'll let Shao take this question.

Speaker 5

Yes. So we see a general uptake due to the seasonal demand. But overall, the demand is pretty good in our sorry, Q3 demand right now is pretty solid.

Speaker 4

Solid relative to Q2 or as solid as Q2?

Speaker 5

Yes. Relative to Q2, yes.

Speaker 4

And it looks like another quarter where containerboard shipments outperformed the industry. Actually, it looks in my model like the 8th quarter in a row. What do you think is driving that outperformance?

Speaker 5

So basically, like we mentioned, we made some significant investments, strategic investments in our group, starting with Bear Island, but also on the converting. We made a major investment in Piscataway investment also in Central Canada and Ontario. So this also gave us some competitive advantage on the market and growth potential.

Speaker 4

Okay. That makes sense. And then I guess maybe switching to Bear Island. Can you give us a status update on the ramp of the facility and maybe specifically how the transition to using more mixed paper is going?

Speaker 5

So the Bear Island ramp up continues. We are now able to supply all the grades that we were supposed to do on that. They've been qualified to the customer, which is a very good news. So now we can provide to the customers on a regular basis £21 and over. And so we're working with our customers and potential future customers also to deploy that on the market.

Speaker 5

And on the ramp up and the use of the mixed ways, we're going gradually increasing the mix percentage, but we're doing so and making sure that the quality of the product is there. So we're balancing more mix, but at the same time monitoring the quality of our product to our customers.

Speaker 4

No, that's good to hear. Thanks for taking my questions. I'll turn over the line.

Speaker 6

Thank you.

Operator

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

Speaker 7

Hi, good morning. Hugh, I realize it's only been 8 weeks, but can you maybe speak to some of the potential areas that you expect to look to make changes to just given your operating background?

Speaker 2

Yes. Thank you. As you said, it's been 8 weeks. Clearly, as I said in the outlook, the Bear Island ramp up is going to be a focus to make sure that we go as fast as we can to get to capacity. Very satisfied with what we've seen so far.

Speaker 2

The next coming quarter is going to be really important as we have a good order file and we need this production to be coming as planned. The second one is on operational efficiencies to make sure that we capture all the potential efficiencies that we have with our current assets.

Speaker 7

Fair enough. Thanks. And just the last question for Alan. Just given the lower CapEx you're pointing to, how should we think about CapEx for 2025? And when you think about larger strategic projects for the business, what's kind of left other than maybe some more box plants over time?

Speaker 2

Yes. So, Amir, I'll take that question. And as Alun mentioned, we will be spending less than €175,000,000 in CapEx this year. We're currently doing a diligent work on how to allocate cash. So that will be coming in the coming months, but we'll be really focused on capital allocation to make sure that what we do with cash will add long term and sustainable value.

Speaker 2

So priority will remain debt reduction

Speaker 3

in the coming quarters for sure.

Speaker 7

Fair enough. Thanks. That's all I had. I'll turn it over.

Operator

Thank you. Next question will be from Kasia Kopetak at TD Cowen. Please go ahead.

Speaker 6

Hi, good morning, everyone. Kasia on the line. Maybe I'll just pick at that capital allocation thread a little more. You mentioned CapEx and debt reduction. Just curious around the deleveraging front, any preliminary thoughts on reducing that, not just via higher EBITDA, but actually reducing debt levels?

Speaker 3

Well, yes, there's some initiative ongoing in work with some working capital items, looking at everything on that. And there are some assets that we're looking to dispose following some closure in the recent quarters. But that's just as we did with Newtown in the Q2. So that may be other items to further reduce debt in a nominal dollar. But the objective remains to be under 3 times.

Speaker 3

So it's just delayed. But as Ed mentioned, rigorous capital allocation will get us there.

Speaker 6

I'm glad you mentioned that target. That was going to be my follow-up. But Alan, any sense of the order of magnitude on the working cap production and or asset disposals?

Speaker 3

Well, asset disposal, it can change rapidly. It's maybe too early to give you amounts, But it's and working cap, I think we are under 10% of sales. It's a slight improvement here and there, but we are pretty in good shape, but there's always opportunities. So couple of 1,000,000, but we don't have any amount to state at this time.

Speaker 6

Okay, got you. The June containerboard price hikes, how are those progressing? Do you expect to get the full hike? Any pushback from customers?

Speaker 5

I'm not going to be too specific on the price increase, but what I can tell you is we are still implementing the price increase. So there's some benefits in the Q2, but continue in Q3. So yes, we are diligently working with our customers to work with them and passing on the price increase.

Speaker 6

And just beyond the price hikes themselves, any prospects or other prospects rather for recouping margins in containerboard beyond price hikes and OCC release? And if you can get us a sense maybe of how much Bear Island has undermined margins to this point, that would be helpful.

Speaker 2

So as far as the improvement, as Alain and Shaul mentioned, some of it will come from for working cap. We have work streams on margin improvement and cost reduction in all of our businesses. And we're doing diligent work to track these changes with milestones that we have regularly. And on the specific mill with bar island, I'm not going to go specific on one mill, but Berayan is part of the process that I've just mentioned.

Speaker 6

Any numbers you can share around targets for how much margins can improve based on those efficiency and other streamlining measures you referred to?

Speaker 2

Yes. And we're not going to put any number at this point. But let me tell you that we're really working diligently to make sure that we cover back enough margins so that we can further reduce our debt level.

Speaker 6

Got you. Okay. Thanks a lot everyone. Appreciate it.

Operator

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

Speaker 8

Hi, good morning. Thanks for taking my questions. I think in your prepared remarks, you mentioned securing some additional U. S. Retail tissue volumes beginning in Q4.

Speaker 8

Can you maybe just provide a bit of color around how material the volumes associated with that new business should be?

Speaker 2

Yes. I'll let Jean David respond to that.

Speaker 5

Yes. Good morning, Nathu. It's a nice business. Honestly, it's slightly above 4,000,000 cases for a major retailer in U. S.

Speaker 5

So we're really pleased with those negotiation and discussion and the

Speaker 3

outcome. Okay.

Speaker 8

Thanks for that. Are you able to provide any more additional color around the mechanical break at Bear Island in the quarter?

Speaker 5

Yes. So basically, as you know, it's a ramp up paper mill. So the items there was a breakdown on the paper machine and the team worked diligently to ramp this up. But this is behind us right now. And it's not anything that will affect the future of the mill.

Speaker 8

Okay. Thanks. That's helpful. And then maybe last for me. I think earlier this year, you talked about relocating some tissue converting equipment from your operations in Oregon that are now closed elsewhere in your network.

Speaker 8

Could you maybe speak to how that's progressing and maybe where you are in that process?

Speaker 5

Yes. Those four lines are already running in our other The remaining 2 The remaining 2 are in ramp up and those 2 are for away from home market. So we still have some open capacity short term in the away from home. But overall, I would say that those line relocation went pretty well and are according to the plan.

Speaker 8

Okay. Thanks very much. That's all for me. I'll turn it back.

Operator

Thank you. And your next question will be from Zachary Envershed at National Bank Financial. Please go ahead.

Speaker 9

Good morning. It's actually Thomas calling in for Zach. Could you give us a little bit more color regarding the issue mix, consumer trade down?

Speaker 5

Yes, we see still private label going up. So if you look at Nielsen data for the last quarter, private label is gaining share again. In terms of trading down into the category, we see some, I will say, moderate trading, I will say. But I think the biggest uplift that we see is retail price going down at some retailers, some important retailer in U. S.

Speaker 5

That adjusted their share. So we see good uplift in volume for our own business and Retail U. S. Mainly.

Speaker 9

Okay. That's helpful. Thank you. And I'm sorry if I missed this, but given the mechanical issues at Bear Island, are we expecting to see a catch up in shipments in the Q3?

Speaker 5

Yes. So yes, the Q3 outlook is positive compared to the Q2. And this is a combination of market and also more visibility on our production.

Speaker 3

Yes, there'll be Alain, but also all the shutdown we took in Q2 are much larger than what we expect in Q3. So yes, we should see pickup in shipments.

Speaker 9

Perfect. That's helpful. Thank you, guys.

Operator

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

Speaker 2

All right. Well, in conclusion, thanks, everyone, for taking the time to attend our quarterly call. And we're looking forward to meet some of you in person in the near future.

Speaker 3

Thank you, everyone. Thank you.

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Key Takeaways

  • Consolidated Q2 sales rose 6% sequentially and were flat year-over-year, while EBITDA increased 9% QoQ to CAD 112 million but declined 20% YoY, reflecting higher raw material costs, lower selling prices and a CAD 5 million one-time CEO transition charge.
  • The Containerboard segment delivered a 5% QoQ sales gain and a 10% EBITDA margin (up 20% from Q1), with shipments outpacing the industry despite a 38% YoY EBITDA drop driven by lower prices and elevated input costs.
  • Specialty Products achieved a 4% QoQ rise in both sales and EBITDA with a steady 15.6% margin, while Tissue sales jumped 8% QoQ (volumes +16% away-from-home, +3% retail), lifting EBITDA by 8%, though Q3 tissue results are expected to soften on higher raw material costs.
  • Raw material pressures persist as OCC index prices climbed 9% QoQ (134% YoY) and pulp prices rose ~18% QoQ, even as white recycled grades eased; Cascade expects stable OCC markets and continues implementing price increases across segments.
  • Net debt increased CAD 73 million in Q2, pushing leverage to 4.2× LTM EBITDA; the company plans
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Earnings Conference Call
Cascades Q2 2024
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