Q4 2021 Cascades Inc Earnings Call
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Good morning, My name is Sylvia and I will be your conference operator today at this time I would like to welcome everyone to Cascade fourth quarter 2021 financial results Conference call.
All lines are currently in listen only mode. After the Speakers' remarks, there will be a question and answer session.
And I would like to pass the call over to Jennifer Aitken director of Investor Relations for Cascades, Ms. Aitken you may begin.
Thank you Susie good morning, everyone and thank you for joining our fourth quarter 2021 conference call.
I will begin with an overview of our operational and financial results followed by some concluding remarks, after which we will begin the question period to.
The speakers on today's call will be Matthew tilt, President and CEO and Allan Hogg CFO .
Also joining us for the question at the period at the end of the call our shell Melo, President and COO of containerboard packaging Nucleons Bank, President and C O L a specialty products and Jonathan W.
President and CMO of tissue papers.
Before I turn the call over to my colleagues I would like to highlight that certain statements made during this call will discuss historical and forward looking matters.
The accuracy of these statements 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.
Please refer to our Q4 2021 investor presentation for details.
This presentation, along with our fourth quarter press release can also be found in the investors section of our website. If you have any questions. Please feel free to call us back to the session I will now turn the call over to our CEO . Thank you.
Thank you Jennifer and good morning, everyone.
Before going into details of each of our businesses. Let me begin by saying that in the fourth quarter was a challenging end to the year.
Let me be clear we are very disappointed with this performance our.
A powerful mix of wide ranging inflationary pressure on cost labor challenges and constrained in logistics and the supply chain led to our initial fourth quarter warning on December 22nd However.
However, there are in fact, continuing to escalate as the quarter progressed and we were subsequently made worse by lasting secondary effect of the flooding and the rail disruption in Western Canada.
And the fifth rise cheap right Omnicom cases in December .
The first of these factors significantly in fact, the cost and availability of transportation in Canada. The second lead to staffing shortage in several of our operations and both impacted production level and several of our facility.
As a result, we issue a second fourth quarter warranty at the end of January .
Moving now to our financial results on a consolidated basis fourth quarter sales were stable year over year and compared to the previous quarter, while adjusted EBITDA decreased notably in both cases.
Slide four and five provide quarterly information for each of our business segments.
On the raw materials side I liked it on slide six the Q4 average index price for OCC increased 108% to 3% year over year and.
<unk> was slightly higher than Q3.
As been the case throughout the year. These higher prices reflect elevated domestic demand driven by strong containerboard industry production levels average index prices for white recycled paper grade also rose in Q4.
Increasing a 103% year over year and 12% from Q3.
On the Virgin pulp side hardwood pulp index increased 45%, while the soft wood pulp index price rose, 29% from last year level subsequently bulk decreased by approximately 5%.
Moving now to the results of each of our business segment as highlighted on page seven through nine of the presentation.
Beginning with the with the sequential performance.
Sales in containerboard decreased marginally in Q4, this reflects lower volume, partially offset by a more favorable sales mix.
Benefits from price increases during the year.
The 2% volume decrease reflect decrease of 4% in parent roll and 1% in converted products.
Would I like that shipment levels were impacted by approximately 20000 short tons in Q4 as rail disruption in Western Canada made an already challenging transportation situation worse. This transport patient shortage combined with limited availability of labor.
As the Omicron variant escalated in December impacted production levels at several of our facility.
Converting shipments decreased by 1% in millions of square feet in line with the one 2% decrease in the Canadian market and the <unk>, 3% decrease registered in the U S market for the period.
On a per day basis, converting shipment increased by 4% slightly below both the Canadian and the U S market average, which work in the range of 5%.
Q4, adjusted EBITDA of $70 million or 13, 9% on a margin basis was 24 million or 26% below Q3 level. This reflected higher raw material costs, which also include that didnt bound freight costs as well as lower volume and all.
Logistics and operational costs due to the reason just discuss.
These impacts were partially offset by the continued rollout of price increases year over year sales were stable, while adjusted EBITDA decreased 36% due to many of the elements discussed.
It was a difficult quarter for our tissue business for the reason laid out earlier Sarah's were largely stable sequentially as a 2% increase in average selling price was offset by a 3% decrease in volume.
Pacifically parent roll shipments decreased by 16% while shipments of converted product increased by 1%.
This resulted in a 5% improvement in the integration right.
Shipment of away from home product were flat sequentially, while those retail converted product grew 3%.
Adjusted EBITDA decreased 18 million sequentially as sales mix benefits were offset by lower volume and are your raw material production supply logistics and energy costs year over year sales and adjusted EBITDA, both decrease reflecting many of the factor we.
Right.
Specialty product group continued to generate solid results sequentially Q4 sales increased 5% from the prior quarter as the implementation of price increases in response to cost inflation offset lower volume.
Adjusted EBITDA increased $4 million sequentially as higher pricing offset the impact of volume decrease and you're operating and SG&A costs.
When compared to the prior year Q4 sales increased by $28 million or 23%, while adjusted EBITDA level increased by $6 million at the high your realized spread upset your production costs.
The impact of logistic and omicron.
Also impacted the performance of this segment, however, strategic investment production innovation and commercial strategy implemented in recent years supported this segment, 23% year over year increase in adjusted EBITDA in 2021.
Alan will now discuss highlights of our financial performance either.
Thank you Mario and good morning, everyone.
As a quick reminder, and once again that resolves all of the European box both segments have been presented as discontinued.
As of the second quarter of 2021, following the sale of our equity position in railroad Medici.
Provide relevant details regarding the changes to financial concept of results on slide 10.
Looking at sales as detailed on slide 11, and 12 year over year Q4 sales decreased by $2 million.
This reflects favorable pricing and sales mix in our packaging businesses.
The benefits of these elements were offset by lower volumes.
In containerboard and tissue, we took to the factor that you discussed earlier.
An unfavorable exchange rate, which also impacted sales levels for all of our business segments.
On a sequential basis fourth quarter sales also decreased by $2 million as the impact from constraints and labor and transportation that were discussed earlier on volumes offset improved pricing and mix in all of our business segments.
Moving now to operating income and adjusted EBITDA as highlighted on slide 13, Q4, adjusted EBITDA of $62 million decreased $77 million from the prior year level. The decrease was due to lower volumes and higher raw material and operational costs as already discussed.
These were partially offset by stronger results in specialty products sequentially.
Sequentially Q4, adjusted EBITDA decreased by $45 million as shown on slide 14.
This decrease reflects all the elements, we have highlighted charter call so far.
Slides 15, and 16 illustrate the specific items recorded during the quarter. The mainline Timna I think it impacted operating income before depreciation that is worth mentioning is a total of $92 million of impairment charges and restructuring costs that were recorded in tissue reflecting that.
Current challenging results.
Other items also impacted our net results. These include a $20 million loss on the repurchase of senior notes depth in November and at $204 million net gain under say as our equity stake in Reno Dominion.
Slide 17, and 18 illustrate the year over year sequential volumes of our Q4 adjusted earnings per share and a reconciliation with the specific items that affected our results as reported earnings per share were $1.04 in the fourth quarter. This compares to earnings per share of <unk> 72 cents.
Last year.
Both periods included specific items on an adjusted basis the loss per share of <unk> 51 cents below last year's results. This mainly reflects our lower operating performance.
On an adjusted basis sequential fourth quarter EPS decreased <unk> <unk>.
<unk> per share from Q3 two.
2021 levels, which included a negative adjustment of tax assets totaling 19.
As highlighted on slide 19 fourth quarter adjusted cash flow farm operations decreased by $86 million year over year to $51 million and adjusted free cash flow levels also decreased significantly year over year.
This reflects lower operating results costs related to the repurchase of senior notes and higher net capex paid in the current period.
Moving now to our net debt to be constantly as shown on slide 20, our net debt decreased by $490 million in Q4, reflecting the $450 million of net proceeds from the sales of our European segment.
Our leverage ratio of three five times down from three eight at the end of the third quarter, despite lower adjusted EBITDA levels.
Leverage ratio includes the impact of the construction of the Maryland Containerboard mill when excluding the project cash investment to date, our leverage ratio would stand at three times.
Financial ratios and information about maturities are detailed on slide 22.
Slide 23 provides detail of our capital investments gross capital expenditures totaled 230 million, including 115 million U S. Dollar for the Bear Island project.
After subtracting assets disposal and amounts not paid at year end net cash outflow amounted to 233 million.
In 2022, we are now expecting total investment of $415 million, which includes approximately 275 million Canadian dollar of investment associated with our bear Island conversion project.
Inflation is also impacting project cost and in disregards barrel and there is no different.
After being increased from $380 million to $400 million U S. Dollar. The project investment is now expected to be in a range of 425 to 450 million U S. Dollar.
We continue to secure contractors installation contracts and contracts and payment terms agreements with suppliers.
Which has also resulted in cash outflow moving from 2022 to 2023.
Situation does not impact the expected startup date of December 2022.
Nigel will conclude the call with some brief comments before we begin the question Neil.
Thank you Adam.
Many of the factors discussed at continued to impact our performance at the start of 2022. However, we have begun to see positive signs of improvement in labor availability in the recent weeks.
Details regarding our near term outlook can be found on slide 24 of the presentation.
Given the dynamic nature of the current business circumstances, I would remind you that this outlook is based on what we are seeing to date and may change in the coming months.
Our near term outlook for containerboard is far stronger sequential results.
Despite the slow start in January demand remains good in both the manufacturing and the converting side, but our ability to continue to be challenging.
However, our expected results will benefit from lower raw material costs. This is expected to help offset the combined and signature refresher on operation and production costs.
Our Bear Island project is progressing as planned and sales commitment continued to be put in place.
As we mentioned in our Q3 calls Honda percent of production of year. One has been secured and we have now confirmed that we have commitments for approximately 75% of the total plant capacity for the first three years.
Result for the tissue segment will continue to be under pressure and are expected to remain flat sequentially.
This reflects persistent cost inflation for raw material and transportation.
And continued operational constraints in logistics and labor.
It is the case with many industrial company labor availability and recruitment remained a challenge.
This situation is limiting our ability to optimize our recent investment which lower our production efficiency as we continue to produce below optimal capacity.
This factor will be partially offset by benefits from announced price increases.
We have also announced additional price increase up to 12% in the retail and away from home products effective April and May respectively across North America.
Lastly, we are expecting continued positive momentum from the specialty products segment.
Moving now to raw material OCC was readily available throughout Q4, and we built a solid inventory level all of our operating side before year end.
Inventory levels are on target and we are prepared for the current low lower generation season.
Transportation continue to require a higher level of our attention.
Market conditions for S&P, and I grades as not improved since the last quarter.
Generation remain impacted by limited office building activity.
And an overall market that is showing a slow structural decrease more recently, we have seen increased purchasing activity from southern mills and your export activity to South America. This dynamic as led to sequential increase and this will be index price.
In the last few months.
Until.
Late December Virgin pulp conditions continued to be favorable however, the situation is reversed in the last few weeks.
The global pulp market has been impacted on the supply side by multiple in a pulp mill strike unplanned maintenance downtime and the force idling of mill due to the major transportation challenges.
In transit is very high and transportation continue to disrupt the supply chain, especially in Canada.
Several major producer of recently announced price increases for the month of February and March.
Let me finish by saying that without question business condition has been very challenging in recent quarter.
This was due to a variety of factors many of which we discussed during this call and many of which remain to date to this end, we have announced cost inflation driven price increases in most of our sub segment.
We look forward to sharing the path forward, we have outlined in our new strategic plan for 2022 'twenty when you for all of our calls with you. Later. This morning, we will now be pleased to answer your question and ask that they be limited to our Q4 results and full year results 2021.
Operator.
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Super really posing gift VC with Blake compensated, while Susan will quickly be telephonic.
Proposal <unk>.
If you would like to ask a question simply press Star then the number one on your telephone keypad and if you would like to withdraw. Your question. Please press Star then number two again if you have a question. Please press Star then one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
And your first question comes from Amit Patel at CIBC capital markets.
Hi, Good morning first question I had was for.
Charles.
On the containerboard side.
I know <unk> gathered announced some larger medium price hikes that some of your peers ended up falling with.
Are you realizing the full levels that you've announced so far this year.
So we have announced.
As you know the date or starting in March.
So we're still working on getting both of our announced price increases so.
<unk> $40 on medium additional to our $70 million.
So we have one thing on the Yemen.
On liner.
So the reason why we went with this is because of the.
The profitability level that we see in our facility between medium and liner.
So at this point, we're still working on getting these amounts.
It is probably going to be a challenge to get 100% of it but we're working with our customers to work towards.
<unk>.
Yeah.
Great. Thanks, Thanks, Charles that's helpful and I realized will.
Kind of delve into some of the outlook stuff on the on the subsequent call, but I was just wondering in terms of the spring containerboard hike.
Just given the cost inflation in recent months.
Based on the sort of current cost profile, how much of that price hike would you expect the kind of dropdown to the bottom line versus just make just.
Being eroded by the cost inflation that you've seen.
Okay. So I'm going to give you you can make the calculation of let's say $70070 on $1 5 million tons. So that's going to give you.
The price increase announced with the <unk>.
The way that the increase works.
On a year impact is probably about 50, 50% of that amount. So that's on the.
Plus site.
And you can apply the impact on transportation and other costs.
Like we made in our presentation. So we do have.
At 3% to $5 million.
Per month.
Exploitation and other cost inflation.
Okay. Thanks, Thanks, Charles It that's helpful and just a final question I had on the tissue side I'm.
I'm just wondering if you could perhaps I'd just clarify I know Mario mentioned in his prepared remarks, but the price hikes that you have underway in both consumer and away from home.
If you could just maybe run through.
What what is in the market today, the level of fee increases and the timing.
But you would expect that to flow through our results.
Good morning, So we announced 12% on both Mark just.
First for May 1st for away from home April 11, four retail right now and we have a strong justification to support those increases.
Wont comment on the value on the bottom line of those increases since we're negotiating with customer as we speak.
But we saw letters from competitors in the last two weeks that are also announcing similar price increase for the same data as well. So again, we are firmly convinced that these can move forward.
Great.
Is there also some element of that.
Perhaps D sheeting underway across your retail business this year or is any price gains.
Or any margin improvement coming from DSO sort of over the oil price price increases.
Yes, yes, there's many initiatives going on.
We are.
Working a lot to improve portfolio. So we're continuing skus rationalization as we started at the beginning of Pandemics or was never stuff.
Those initiatives same thing with customer portfolio as well and there is also the sheeting.
Jack or basis.
Jack adjustments with specific customer as well so.
There's many initiatives going on right now to improve margins.
Great.
Thats, all I had I'll turn it over thanks.
Thank you next question will be from Sean Stewart at TD Securities.
Thank you good morning.
A question on the tissue impairment charge.
Can you give us some context on any specific assets that were affected by this or is it a general provision across the segment.
Are there read throughs for your perspective on the long term earnings potential for for that segment.
Well.
Sean the impairment.
There are two categories of impairment that we took first one is on the intangible asset and goodwill. So that's for the tissue group as a whole are one of the business sentiment and has a smaller amount on a specific fixed.
Fixed asset but.
I won't mention which one but again, it's the rules of impairment are.
Different than maybe some that youll see on U S. GAAP founder Ifr S. It's much more restrictive.
But it doesn't.
<unk>.
Look our long term outlook on these assets we continue to.
To deploy our margin initiatives there so.
It's more accounting based in the long term outlook there.
Okay.
That's relatively encouraging.
The second question I have is.
I appreciate the general inflationary cost environment you're in.
My specific question on costs are you seeing.
Any easing in the shipping constraints that you faced in the fourth quarter, especially in Western Canada.
And the labor availability issues associated with that.
The omicron variant any easing.
At this stage on that front and just trying to get a perspective on how that feeds into your near to midterm outlook.
Sean will start.
With the the labor recruitment and availability are the people.
Honestly December was a very important and impacting the way we were operating so we had to find ways to do overtime even.
Ask retirees to come back to our plans to help us operate so it was a difficult period, but.
At last a little bit I would say in January now, we see the <unk> behind us we see people coming back.
Crude move even in the U S is a much easier now so hopefully within a quarter from now.
Labor activity of labor availability will be behind us I will leave Charles because for the transportation because <unk> is the most impacted with the transportation will even with the answer yes. So.
The situation with the transportation out west.
He is getting better.
We still have some some impact.
Mainly on the rail side and it's all across Santa debated with.
Still some.
On railcars out of stocks at ports on boats and.
So we figured that this situation will improve in Q1, but still have some impact till the end of Q1 at least.
But the transportation the rail has also been impacted.
In the in the U S. So we have two of our main I would say shipping wines.
That are affected by transportation and rail mainly.
One in.
Our major.
Our facility in Europe , where we have repackaged three paper machine.
And one also in the east.
Canada.
There are still impacted by the ripple effect of the out west So I know, it's a long answer.
It is improving in Q1, but theres still some ripple effect.
Two.
To us and mainly.
There is some limitation on our capacity to ship.
Trying to compensate the data every day.
But we have to ship, what we can't ship by rail.
We're trying to find some trucks to do it so the cost is going up and that's the that's the impact there is theres going to be less impact on the quantity shipped.
But there is still going to be a lot of pressure on cost.
For the quarter in Q1.
Thats excellent detail. Thank you Sheryl that's all I have.
Thank you next question will be from Mark Wilde at BMO.
Good morning, Mario Good morning, Alan.
Good morning.
Alan I wondered if you could help us just in general terms think about your expectations around price.
Price cost in 'twenty, two and then also to just confirm it it sounded like in containerboard.
It might be a wash this year, but you get about 50% of the price hike benefit, but you are seeing kind of $3 million to $5 million per month in cost can you confirm that.
Just maybe this is Sean.
So theres probably.
Plus I'm being cautiously I wanted to.
Give some numbers is probably a positive at the end of the year, but I wanted to be cautiously optimistic on this.
Okay for.
For the overall company.
Not for the containerboard, yes.
On the <unk>.
$70. The question was asked on $70 and then times, one 5 million <unk> by the way So and then when you look at the 30 <unk>.
Three to five of these costs are in Canadian. So there is there is a small potential positive or potential positive on a year basis.
Tissue market continue Theres continued increases on the raw material side. So that's would be more of a headwind in tissue and containerboard and specialty so.
But everyone is.
<unk> bye.
Transportation cost plus as John mentioned our railway.
It's more on the containerboard side than the others.
Okay and then in tissue can you just help us.
A lot of times there.
<unk> between sort of announced tissue price hikes and realized tissue price hikes and can you just give us any historical perspective on what you've typically been able to realize.
As a percent of the announcement Grace.
I don't think the past will be.
We'll guide to the future with this market I think we've been we've not been able to materialize most of those price increase in the past, but today the situation is different and with the inflation that were facing in the market condition I'm sure we're going to realize much more than what we realized in the past.
We used to realize the AST and three quarter of the announced pricing, but now we are familiar working on 100% of it and in fact, we are increasing even more than 12% on many categories. So there's many categories right now there are under allocation there is.
Really strong demand, especially on the away from home side.
So.
Overall, we are really working hard for the full 12% on both the bulk market.
Okay. That's encouraging and then finally just on possible to get a little bit of color on the increase in cost the bear Island project and whether at this point you think theres any more risk.
Upward cost Creek.
Okay.
Yes, so I can give you.
Maybe a bit of where we stand.
So.
In our range that we provided 425 to $4 50.
We built in.
Known increases from now till the end of the year So big.
A portion of the increases were steel concrete labor.
In all other causes and cost.
We plan from now until the end of the project. The other thing is we have about 80% of our contract that are now signed secured or agreed.
So this is <unk>.
Reducing the risks from now till the end so.
We feel pretty comfortable with the number that we've announced in the range.
So right now we're on the low end.
With contingencies, so we feel comfortable that extended beyond the $4 five to 450.
Okay, Alright, that's helpful I'll turn it over.
Again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
And your next question will be from Zachary <unk> National Bank.
Good morning, everyone.
Good morning, good morning.
I was hoping you could give us a bit more color on the pace of bear island investments in 2022, and 2023 and speak to your confidence on the December startup date.
Okay. So.
On 2022, I'm going to answer on this starting in.
Second part of your question I'm going to have to ask you again, but just on the starting date right now with all of the.
Yeah.
The team is working on making the date <expletive> .
Our schedule, we have to make a lot of adjustment, but still working.
We're hiring more people right now and our marginal occur.
We're making changes.
Based on the challenges that we're seeing but as we speak.
The date is still there.
Still holding for the end of December or so.
We made some commitment also with customers so really focusing on meeting that date.
What the team is accurate on your other question.
The layout of the investments you had a slide on the next deck at 11 o'clock, but it's about 210 million U S. In $2022 50 in 2023.
That's very helpful. Thanks.
And then one last one for me the tissue industry in North America is still pretty highly fragmented and some of your competitors have indicated they are working on consolidation there.
Are you active on that front as well or is your plate pretty full with bear island.
Thank you for your question, but if I may I would like to defer it for I'll call. It 11 will answer the questions.
Makes sense. Thank you very much I'll turn it over.
Thank you.
Thank you.
There are no further questions at this time Mr. Plourde. Please continue.
Thank you everyone for being on the call. This morning, and we are looking forward for presenting our Strat plan 22 24 at 11. So meet you at 11. Thank you.
Now.
MS Sue said atmosphere that Goldman Sachs.
We made no. Other question. Thank you ladies and gentlemen. This concludes today's conference and you may now disconnect.
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