Q2 2021 Cascades Inc Earnings Call
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Morning, My name is Sylvie and I will be your conference operator today at this time I would like to welcome everyone to Cascades second quarter 2021 financial results Conference call. All lines are currently in a listen only mode. After the Speakers' remarks, there will be a question and answer session I will now pass the call to Jennifer Aitken director of Investor.
And your relations with cash Cat Mis and can you may begin.
Thank you operator, good morning, everyone and thank you for joining our second quarter 2021conference 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 masking and absorbed president and CEO and Allan Hogg CFO.
Also joining us for the question and answer period at the end of the call are shall Melo, President and COO of containerboard packaging net sales bank, president and COO of specialty products and so on that is that this president and C O O of tissue papers.
Before I turn the call over to my colleagues and I would like to highlight that certain statements made during this call will discuss historical and forward looking matters.
Accuracy of these statements are subject to risk factors that can have a material impact on actual results. These risks are listed in our public filings. These.
These statements the Investor presentation and the press release also include data that are not measures of performance under Ifr S. C.
Please refer to our Q2.2021 investor presentation for details.
This presentation, along with our second quarter press release can be found and 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 Matthew.
Yeah.
Thank you Jennifer and good morning, everyone.
Before discussing our Q2 performance I would like to remind everyone that European box board resolved, our north shown as discontinued operations. Following the monetization of our 57, 6% equity interest in.
And the low the mid you see announced in July finished.
The move reflects our commitment to create long term value for cash cap and our shareholder by focusing on strengthening the competitive positioning.
Our north American packaging and tissue businesses and debt.
Transaction is expected to close in Q3 and.
Improving our financial profile and flexibility, while also simplifying our investment thesis and communication with the financial community.
We will not be commenting on their second quarter financial performance and invite you took on his decade low directly with any questions.
So this and we are very pleased to be announcing a 60% increase and our annual dividend debt would be effective with the September 2nd payment.
This increased our yield to approximately 3% and this is driven by our stronger financial profile and our confidence and the outlook of our operational performance and our businesses and long term free cash flow generation capacity.
Moving now to our second quarter performance result were below expectation.
With the shortfall driven by soft industry wide demand and tissue and general and from initial rate pressure on raw material and some production costs.
In the case of our packaging segment, good volumes and selling price increase partially offset these headwinds.
On a consolidated basis second quarter sales levels decreased 6% from the year ago period, but increased 1% from Q1 while.
While adjusted EBITDA decreased by 31% and 20% respectively.
Slide 4 and 5 provide quarterly information for each of our business segment and I will provide additional details about the performance of each of our business segment and a few minutes.
On the raw materials side I'd like to end on slide 6 the Q2 average index price for OCC decreased 7% year over year, but was 23% higher than Q1, however, when considering the all in blended cost of OCC it increased 11% year over.
A year and 19% sequentially, giving upward pressure on transportation and premium paid to supplier.
This reflects the domestic demand levels, driven by strong containerboard production level and response to pandemic buying patterns and export activities.
Average index prices for S&P White recycled paper grade rose, notably on sequential basis in Q2.
Increasing 23%, but were down 26% compared to the prior year on.
On the Virgin pulp side, our door than softwood pulp prices, both increased year over year and sequentially and Q2.
Hardwood pulp index registered an increase of 45% year over year, and 25% sequentially, while softwood pulp prices rose, 38% and 23% respectively.
Moving now to some brief comments on the results of each of our business segments highlighted on page 7 through 9 of the presentation.
Beginning with the sequential performance.
<unk> segment generated a slight 1% decrease and sales in Q2.
Higher selling prices and volume were offset by less favorable FX and mix.
Capacity utilization decreased by 1%, reflecting higher planned maintenance downtime, while our integration rate remain stable.
Converting shipment decreased by 2% and millions of square feet underperforming, the 1% increase and the Canadian market and a 2.7% increase registered in the U S. A market for the period.
As planned we modernize our Ontario, converting platform and transfer volume from other facility during the quarter.
And the resulting in a negative impact on converting shipments during the period.
The impact of this and.
Associated trends transition and startup costs was approximately $5 million in the second quarter rent.
Ramp up of the equipment is progressing well with benefits expected to begin at the end of Q3.
Q2, adjusted EBITDA of $100 million or 21% on a margin basis was 8 million or 7% below Q1 levels.
<unk> benefited from solid sales and all your average selling price.
However, these were offset by other raw material and production costs and slightly lower volume related to plant downtime and less favorable exchange rate.
Year over year sales increase and 9% driven by higher selling price and volume, partially offset by the impact of higher raw material costs and a less favorable ethics.
Converting shipment increased 7.4% this was slightly below the Canadian and the U S market, which increased 8.6% and 8.2% respectively.
Adjusted EBITDA increased 6% year over year.
Our tissue business at the difficult second quarter sales increased 2% sequentially as higher volume offset the impact of less favorable FX and market mix.
Sales decreased 30% year over year as volume decrease from the elevated COVID-19 related level last year.
Adjusted Q2, EBITDA of $1 million was well below both the prior quarter and last year for the same reason.
Positioning and the long term.
Specialty products segment generated solid Q2 results sequentially and year over year.
Sequentially Q2 sales increased 7% as higher volume offset the impact of a less favorable FX.
The EBITDA was stable at $18 million with or your sales mitigating the negative impact of higher raw material cost and FX.
When compared to the prior year Q2 sales increased by $11 million or 9% with better volume pricing and mix more than offsetting the less favorable exchange rates.
Adjusted EBITDA level increased by 1 million year over year with IR sales.
Setting the negative FX impact and the <unk>.
Raw material and and production costs.
I will now pass the call to Alan who will discuss the main highlights of our financial performance Island and.
Mario and good morning, everyone. So before discussing cash flow results and as I mentioned earlier.
Earlier, I would like to highlight debt following the sale of our equity position and relative <unk> results from the European market. What segment on are presented as discontinued with adjustments made to results retrospectively.
And we provide relevant details regarding the change to financials constitute results on slide 10.
At this transaction is expected to close and the third quarter.
Looking now and overview of our key Kpis on slide 11, our second quarter shipments increased by 9000 short tons or 2% from Q1.
This was driven by a 12% increase and tissue offset by a slight decrease of 1% and containerboard in the period.
The second quarter capacity utilization rate of 90% was stable with the prior year period and decreased.
2% from the first quarter levels.
Average working capital came in at 10, 3% of sales stable with Q1 and down slightly from last year.
And while constantly and third return on assets stood at 11, 3% down from 12%.
Cash and $12.3 and Q1.
Moving now to sales and <unk> paid on slides 12, and 13 year over year Q2 sales decreased by $64 million or 6%.
As we have already highlighted during this call and this was driven by the important volume decrease and tissue.
Unfavorable exchange rate also impacting sales levels for all of our business segment.
Higher volume and better pricing and sales and mix were beneficial factors for our packaging segment.
Higher raw material prices benefited external sales from a recovery and recycling operations.
On a sequential basis second quarter sales increased by $14 million or 1%, largely reflecting higher volumes and tissue and specialty products.
These were partially offset by a less favorable exchange rate impact in addition to sales mix and tissue.
Moving now to operating income and adjusted EBITDA as highlighted on slide 14, Q2, adjusted EBITDA of $98 million decreased $45 million from the prior year level.
The decrease was due to day lower results from the tissue segment sequentially Q2, adjusted EBITDA decreased by 24 million national amongst by <unk>. This was driven by the weaker tissue performance as we have previously discussed and slightly softer results in containerboard.
Our quarterly results continued to benefit from from our margin improvement initiative with our objective of improving our EBITDA margin by 1% for the second consecutive year when compared to our baseline year of 2019.
On that basis, we have realized approximately $100 million and the first 6 months and every initiative that we have implemented contribute to mitigate current market headwinds and cost inflation and also improving the execution of our business process.
Slide 16, and 17 illustrate the specific items recorded during the quarter. The main items worth mentioning are a total of $6 million of impairment and restructuring charges recorded and tissue segment related to restructuring and profitability improvement initiative.
<unk> 5 million unrealized loss on financial instruments, and a $3 million foreign exchange gain on long term debt and financial instruments.
Slide 18, and 19 illustrate the year over year and sequential volume from our Q2 adjusted earnings per share.
As reported earnings per share were <unk> and the second quarter compared to earnings per share of <unk> 57 last year. Both periods included specific guidance.
On an adjusted basis EPS decreased by 54 cents compared to last year's results.
Lower operating results from the tissue segment and lower earnings from discontinued operations on our European Box Board segment.
Were the main driver of this environments.
On an adjusted basis sequential second quarter EPS decreased 22 per share from Q1.
Last year.
As highlighted on slide 22nd quarter, adjusted cash flow from operations decreased by $36 million year over year to $89 million and adjusted free cash flow level decreased by $70 million year over year.
This reflected lower operating results and higher Capex, and cure, including Nevada, and project, which is well underway and going as planned.
Moving now to our net debt free consternation on slide 21, our net debt increased by $53 million and Q2, reflecting lower cash flow levels higher capex and working capital requirements.
Our leverage ratio of 2.9 times is up from $2.5 at the end of 2020.
And the first quarter, reflecting lower adjusted EBITDA levels net debt as shown is adjusted to reflect the discontinued operations figures, but has not been adjusted to reflect a $461 million expected net proceeds from the monetization of our equity position in revenue diminished.
Taking this into account leverage would be down to 2.5 times on a pro forma basis.
Financial ratios and information about maturities are detailed on slide 22.
Slide 23 provides detail on our capital plans for 2021 day remain unchanged at.
And at approximately 400 to $425.425 million considering the adjustment for discontinued operation.
This includes $2.250 million of investment associated with our balance conversion project cash.
Capital expenditures net of disposal total $59 million, and Q2 and $133 million year to date, including approximately $55 million for bag.
We remain focused on managing our cash flow and debt profile with the objective of keeping our leverage ratio within a range of $2 price of 3 times why do we execute our balance project.
At the end of the second quarter, we had cash and revolver availability close to $1 billion.
Additionally, as we said earlier, we will look we will also look at optimizing our debt portfolio by reducing permanent debt outstanding and 1 of the revenue diminished transaction closes and the third quarter.
And if you will now conclude the call with some brief comments before we begin the question period.
Thank you Ed.
Details regarding on near term outlook can be found on slide 24 of the presentation. As a reminder, this outlook is based on what we are seeing to date and may change and the coming months, giving the dynamic and often unpredictable nature of the ongoing circumstances.
And the near term outlook for the containerboard segment is positive with results expected to improve both sequentially and year over year dimmed.
Demand remains solid in both the manufacturing and converting side and results will benefit from the rollout of the announced price increases.
Typically the second price increase should be largely in place by the end of Q3, while the third price increase began to be implemented in mid July.
And these factor are expected to offset higher raw material prices and continued the upward pressure on production costs.
Results for the tissue segment are expected to improve sequentially volumes are expected to increase from with Ramon category with the reopening of the economy.
Demand for the consumer retail product is also expected to improve as we are seeing the stabilization of the inventory level at retailers and positive momentum being achieved by our sales team.
While Ed wins, and productions and raw material costs remain internal initiatives and pricing improvement and will support results going forward.
As the high single digit price increase announced for consumer and wafer a moment tissue product and North America will begin to take effect in debt at the end of the third quarter.
We are expecting steady sequential results from the specialty product segment. This reflect stable volume and a higher average selling price offsetting higher raw material and production costs year over year result are expected to increase reflecting improvements in both volume and selling price.
Moving now to raw material domestic demand remained robust for OCC in the second quarter and export prices remain high with limited container availability and port congestion, we maintained good inventory levels and finished the quarter well supplied.
The confinement measure and Ontario, and led to a more muted seasonal upswing and generation levels.
And typically seen in the second quarter.
Our inventory levels were <unk> b and <unk> grades are good and despite the recent increase demand related to the ire of wafer model tissue product. There is adequate material available to meet our current needs. However, the combination of the greater over from 1 related to the men's and.
Hi, Virgin pulp prices as put more pressure on the current market condition and Thats supported recent price adjustments.
On the Virgin pulp side market condition for and be SK begins to relax and the second half of Q2 with a first price decrease.
More recently and BHG and you kind of just prices have also achieved at lateral <unk>.
Generally speaking, we would know debt logistical challenge continue to complicate material movement.
And impact the market dynamics overall.
That said our mill continued to be well supported things to our long term supplier relation and prudent and Ventura strategy.
With that we will now be happy to answer your questions operator.
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Thank you.
If you would like to ask a question simply press Star then the number 1 on your telephone keypad and if you would like to withdraw your question. Please press Star then number 2.
If you have a question. Please press star 1 on your telephone keypads, and we will pause just a moment to compile the Q&A roster.
And your first question will be from EMEA and <unk>.
CIBC. Please go ahead.
Hi, good morning.
Mario and I wanted to start on the raw materials side, just given the strong.
On the containerboard demand and all of the capacity adds that are coming are our recycle grade.
Do you think the current OCC prices, maybe represent a new normal for OCC going forward.
Okay.
Amir This is Luca will and so that long.
And the Mouthful, we were seeing an increase and the index and the month of July.
But I think they were.
And as this situation with particularly in the sense that people were first of all we living with a lot of logistics issues at this moment, we create some other level of insecurity and general.
The northeast, where we have more presence we also had to dealt with.
A low generation and on <unk> as a result of the.
Of the existing confinement measures that was there. So we have to deal with the non typical generation from the third of the year and then willingness of a buffet from 1 to increased inventory levels of raw materials for.
The beginning of the month of July where we have long weekends, and both Canada and Europe, if I look and the month of July and we have the personal and <unk>, we have significantly increased our inventories and all our mills and we had no no challenge.
Getting supply with.
At this moment so.
I cannot speak to low the index will be published I think today or tomorrow, but for us the month of July its efficacy.
And different than the market.
And we're seeing in May and June.
And with when you look at the export business export market people, well, it's not really that whatsapp and <unk>.
There is also.
The reduction of OCC consumption in China has not been fully offset by the other Asia and consumption. So mainly the domestic demand is driving this maybe tycho market condition at this moment so a little.
We'll see.
And for Us.
So we think we can do way more stable low market at this moment if I.
And just add the Amira and its menu ecommerce has certainly changed the pattern buying other consumer and we see a portion of this OCC going now to residential and being lost and the mix. So obviously this is creating a little bit of a pressure theres less OCC available from the REIT.
Rail market and its probably a new normal because we don't think that this e-commerce pattern will change.
Other element, we have seen also that might impact that and the.
And the mirv, there's been some labor shortage issues, creating challenges for these mark to.
Sort of paper and get the paper out of the quality that the market has a need.
And with the Btu programs in place. Obviously this is not this is not helping so we know that some of our suppliers is challenged with Wedbush lately with with labor and the <unk>. So long answer yes, sorry.
And sorry for that congrats from.
And something simple.
Okay great.
Thanks for that and click on that and Mario.
Charles I wanted to ask you about day.
On the containerboard side.
On the e-commerce.
Ponant.
And the demand what are you seeing there have you seen any slowdown at all and if you could just remind us what percent of your overall business.
You'd estimate is ecommerce.
Okay. So I'll start I'll start with the percentage.
The direct sales to e-commerce.
And we evaluate around 15%, 10% to 15% of our overall.
But again I just want to remind people that there is a lot of.
Yes.
Packaging and the boxes that we don't necessarily know where they are going to end up. So for instance, if we sell to.
Different product people are sending different product and different.
Way up distribution and some could go to e-commerce, So we feel debt.
Debt, even though we're about 15% overall.
And it's probably more than that of the overall.
Of our product that is going to.
Supply chain through e-commerce.
When we look at the demand right now.
We are well positioned.
2 to increase by the way our presence on the e-commerce with Deloitte and large format. We have developed a specialty on debt and we see debt.
And that the growth is still there.
We don't think it's going to stay the way that it was on the last few years because.
And.
The growth was exponential, but there's still very good potential and growth.
And the ecommerce and the upcoming and the reason why we are seeing this.
Is there some habits like Mario mentioned with the OCC.
Ordering from.
Home.
Is there to stay.
And even after the Covid.
So we are still seeing seeing growth.
On a faster than the average growth on the market so higher than double digits.
Okay, great. Thanks, Thanks Charles.
All I had I'll turn it over.
Thank you next question will be from Sean Stewart of TD. Please go ahead.
Thanks, Good morning.
A question for John on the tissue segment.
Yes.
The deep part of the issue this quarter.
Suspect was mix and related downtime.
Can you comment on the pace that you expect net.
Next on the retail side will start to normalize over the next few quarters.
And where you still curtailing some of the converting capacity into the third quarter for that segment.
Good morning, Sean.
So.
Right now what I can say is the our inventory back to the targeted level as of July. So I think we've been pretty hard on reducing the inventory and the second quarter. So.
We will still have curtailment, because we have open capacity versus the total low.
And we have we see we anticipate about 10 and 12% growth for Q3 versus Q2 in terms of volume, but you are right that.
Second quarter was really affected by the product mix. So we've sold.
If you look at the <unk> market data on the retail side and market cap went down by 7%, but our sales went down by 17%.
But on the away from on site.
<unk> went down by went up by 3 and we went up by 17. So we gained we gained share on the away from on site as market is reopening, but we kind of lost some ground on the retail side, that's the major impact on the product mix.
And incentive price.
And so for curtailment on on third quarter 2 to your second question.
We have to remember that we're ramping up new lines as well. So we're capacity is increasing month after month as we speak.
Because of the investment that we've made over the last 12 months. So we're going to continue to monitor and adjust the curtailing vs. The ramp up of those new lines.
Okay, Thanks for that detail.
Now that helps it sounds like this is going to be a few quarters to normalize on on mix.
Second question is on Bear Island and.
And.
It seems like your budget for the project has been relatively stable and.
We've seen all sorts of cost inflation steel and otherwise and.
Recent months.
Can you comment on how locked in that budget is your ability to secure.
And the component pieces before inflation started to perk up and.
How comfortable are you with that budget.
Yes. This is Charles so as.
As we speak right now you mentioned.
The places where we.
We have the most of the inflation that we see.
Whereas it's deal I, just want to remind debt.
We are not building.
And you and.
And you're building.
Wondered percent, where we bought.
Our paper mill that already had some on building around so we are making improvements.
But this is not the highest portion of the overall budget.
So even though steel is going up.
It does not have.
On a major a major impact on the overall projects so as we speak today.
With the contingency that we have built and the project.
And the range of what we have announced further project. There is increase on steel like you mentioned and also other materials.
Labor also for the for the project.
But.
And as we speak right now we are in line with what we have debt presented.
Okay.
Okay. Thanks for that that's all I have for now.
Yes.
Thank you once again, if you would like to ask a question. Please press star followed by 1 on your telephone keypad and.
And your next question will be from Zachary <unk> of National Bank. Please go ahead.
Morning, everyone.
I was hoping you could give us a little bit of color on your containerboard backlog in terms of the number of weeks of sales you have.
Okay. So.
Just going to 2.
The way that we evaluate the backlog right now we're still busy.
So I can say that we are booked up for on the containerboard, we take orders for weeks and advanced So we're fully ramped up.
But in addition to that with the customers that we have and the integration that we have.
We are booked till the end of the year, meaning that we know that.
Our customers.
And the demand and where the tons are going to be.
Customer were to come to us today and say.
Outside customers of the current debt, we have and I would like to have volume.
We can make some exception, but very difficult. So we can say that we are we are plan to.
To be booked as we speak.
Yes.
That's interesting thanks, and given that you are booked up and not really in need of new clients at the moment are you, making any changes to your sales force your compensation.
Now 1 thing that I want to say is we are still looking for.
And our customers because we are also developing business for our new paper mill that is coming on.
And so this is 1 thing that we're working on.
On the on the development business.
And so we are still looking at developing and we're not changing any compensation or anything like that debt.
And that would make any impact or significant impact.
Got you thanks.
And then the Capex guidance is about $50 million lower than previously is that spending that you have eliminated from the budget or pushed into next year.
Is that grade was it was mainly the renewal.
The reclassification of we limited the European Bogs Mod segment. So we are still on the same pace given the big chunk that is related to bear island.
Of course makes sense and that's all I had I'll turn it over.
Thank you next question will be from Paul Quinn with RBC. Please go ahead.
Yes, thanks, very much and congratulations on the sale of arena.
Just had a question on tissue.
U S competitor that reported yesterday and they are.
Eric tissue shipments bottomed out in April and now, it's consistent with sort of consumer purchases debt bottomed out.
And March according to the IRI data and shipments to retailers it bottomed out in April and according to <unk>. So just wondering why you're it's kind of delayed 2 months or or actual shipments and.
Did you see shipments and the lowest level of shipments earlier in the quarter.
Good morning, Paul.
And our serve bottom in May.
So the lowest month was may which is youre right, whether a month or 2 behind.
We have an important customer.
Modular change and made which impacted the sales of debt months specifically.
1 thing also that were more impacted on the on the retail side.
If you remember last year there was.
Again, if you look at just market really there was a lot more important to the U S and less exports. So there is a lot of remaining brand and that we can call that are on the shelf still.
And on.
And our market share as opposed to some other competitors are more on the value segment. So if you look at the.
Private label sales are doing good.
The trends are good, but specifically now we see that the value segment of the private label is more effective and the ultra premium.
So.
Again, we have a few good program with some customer on sustainable programmable or eco friendly product and.
And this Mark just segment and was really affected by all the remaining grant and bamboo items from Asia and other stuff and so I think thats why we are slightly behind but we believe that this will get back and balance in the coming months as this those products are getting out of this.
Systems.
And we are really at.
And I believe and a good position because of the investment that was done the cost structure that has improved but also the fact that.
We haven't lost any customer so its just the supply chain and balance and we'll see that.
Given the situation that we are known.
Okay. That's helpful and just on the Bear Island, and you've made some progress on the off take agreements any more work to be done there.
Yes, we have right now secured about 50.
And 50% of the.
The overall.
But we are still working.
There's going to be a ramp up on the on the paper mill.
So our team is still working.
2 to develop some.
On new customers also on.
The future years also with following the ramp up on the paper mill. So we still have we're going to start.
In December 2022.
And so our goal is that by that time to be able to secure more than what we have today, so I would say that.
Things are progressing well.
The type of product that we have.
Is it well and demand so our timing is good and so we have we're seeing good progress on that line.
Alright, okay.
And that's why.
Thank you.
There are no further questions at this time on Mr. <unk>. Please continue.
Thank you everyone for being on the line looking forward to talk to you at the in Q3 in the meantime for those who go on vacation and I Hope you have a very nice vacation. Thank you very much.
Maxie Mackenzie misuse Hello, Mr and <unk> will provide a cushing.
Thank you ladies and gentlemen, this concludes today's conference call.
And now disconnect your lines.
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