Q1 2022 Cascades Inc Earnings Call

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Speaker 2: Now Thank a two lea swe will come out o of the gu. Good morning, My name is phlv and I will be a conference operator today at this time. I would like to welcome everyone to the cascat first quarter 2020 two financial results conference call. Note that lines are currently in the listen only mode. After the speaker's remarks, there will be a question and answer session. I will now pass the call to Jennifer apcan, Director of Investor Relations for cascad. Ms apcan, you may begin. Thank you, operator. Good morning everyone and thank you for joining our first quarter twent thousand and twenty two 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. The speakers on today's call will be not clou President and C e? O and Allan HOG C also joining us for the Q and a period at the end of the call. Our shallll? U President and t? O o containable packaging.

Speaker 3: nucleon's vank, President and COO of specialty products. And Joan davdis, President and COO of our tissue papers division. 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.

Speaker 3: These statements, the investor presentation and the press release also include data that are not measures of performance under IFRS. Please refer to our Q1 2000 and twent-two investor presentation for details. This presentation, along with our first quarter press release, can be found in 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 to our ce W.

Speaker 4: Thank you Jennifer, and good morning everyone. I would like to begin this morning calls with some id-level comments before going into details of each of our businessesthe first quarter was a challenging from a cost and execution standpoint combined. These factors negatively impacted conidated first quarter adjusted EBITDA by 36 million sequentially and nearly 15 million year-over-year.

Speaker 4: We are operating in the difficult macroeconomic environment which is driving up cost for few logistic and raw material. Not with extending this and internal initiative on both pricing and mix upset these head wind sequentially, but a lag year-over-year. The continued rollout of announced price increases in our business segment will close this gap, beginning in Q2 in our tissue business. These are being exexpanded by extensive profitability initiatives currently underway, with benefits expected to be weighted to the back half of the year. We arehighlect some key takeaway on Slide three of our deckt.

Speaker 4: Moving out to our financial results on a compplated basis. First quarter sales increased 10% year-over-year and were stable compared to the previous quarter, while adjusted EBITDA decreased notably from prior year levels and by 6% sequentially, from the reason I adjust mentioned.

Speaker 4: On our material side, highlighted on Slide five and 6, the Q1 average price for OCC increased 77% over year and decreased by 16% from Q4.

Speaker 4: exort level at been limited by Fort and condeller constraint and the market is generally stable, despite persistent transportation challenges and edated cost to source our material with in North America.

Speaker 4: averogen price for white recycleed paper grade increased notably in Q1, up one hundred to 9% year-over-year and 16% from Q4.

Speaker 4: The impact of these gtoed wins can be seen in our tissue result this quarter, as this is the primary raw material for this business.

Speaker 4: On the virin volulk side, the harveing pop index increased fory-seven percent, while subqufood top index price drove 17% from last year level.

Speaker 4: Sequentially, both increase by 4%. Moving now to the results of each of our business segment, as I' like to obeage seven cent to 40 of the presentation.

Speaker 4: Beginning with the sequential performance, sales in convenerboard increased 6% in duo. This was largely driven by higher selling price, partially offset by a less favorable sales mix.

Speaker 4: The 1% volume increase reflects the combination of a decrease of 1% in converted product and a 4% increase in parent roll shipment.

Speaker 4: Sequentially converting shipment decreased by 1% in millions of square fee, in line with the 1% decrease in both the Canadian and the U's market for the period.

Speaker 4: On a perly basis, converting shipment decreased by 2% sequentially, outperforming the decrease of 5% in the Canadian market and 6% in the? U's market.

Speaker 4: I would highlight that shipment levels were impacted as a result of challenges on transportation side. As you know, roughly 65% of our containerable business is in Canada. Where we have been, we have seen greater logistic edwwin in terms of availability.

Speaker 4: These constraints were also feilled by some of our customer, preventing them from getting product out the door, which resulted in lower order. Given this backup, we temporarily limited production at some of our operations, which impacted our shipments level and therefore top line sales in the quarter. To put it simply, we could have shipped more product at transportation being available.

Speaker 4: Q1 adjusted EBITDA of $8 million or 15% on a margin basis, wasest one million or 14% above the Q4 levels.

Speaker 4: While an improvement, it is not where we wanted to be. Quick concentflation and freight limitation impacting profitability by 17 million, newing the 26 million pricing and mix benefits in the quarter.

Speaker 5: Year-over-year sales were also up by 6%, while adjusted bitda decreased 26% due to the significant cost inflation already discussed.

Speaker 4: Notably raw material cost as a $31 million negative impact on profitability. This reflects that we are over 80% recycle, well above our containerable peers.

Speaker 4: Year-over-year converting shipment decreased by 6% in millions of square feet on the performing the 1% decrease in the Canadian market and the pointer 3% decrease in the U's market.

Speaker 4: On a birday basis converting shipment were down 4% below the one point two and one point 8% decrease in the Canadian and the U's market respectively.

Speaker 4: Lower year-over-year volume reflects labor and transportation constraint at the beginning of 2022 and some customer account erosion related to profitability initiatives.

Speaker 4: Before moving on to the specialty products segment, a quick update on the varival project. The project remain on track from both a cost perspective in mid-December startup. We currently have over 490 people alongsite, increasing to 725 by mid-June.

Speaker 4: And we have received our first delivery of raw material. We are very encouraged that hundred percent of the volume secure for 20, 23 and 75% is secure for the following two years.

Speaker 4: Our sales team continued to advance discussion to secure additional production upstates for the coming year.

Speaker 4: Specialty product continued to generate solid results sequentially, with Q1 sales 4% from the prior waterar. This reflected the implementation of price increases in response to cost inflationthe benefit of which offset a less favorable mix in the plastic segment and lower volume in the ag distribution sector. From seasonally strong Q4, adjusted EBITDA increased one million sequentially as higher prices offset the impact of higher operating and transportation costswhen compared to the prior year, Q4 sales increased by 35 million or 29 percentwhile adjusted EBITDA level increased by four million dollar as higher realized spread offset higher production costsmoving out to our tissue business.

Speaker 4: While expectation were for result to be stable sequentially, sales decreased 7% and our adjusted ebitdll lastss grew to 17 million in the quarter. We felt short for two main reason, as was the case for all of our businesses. Cost inflation was a key factor.

Speaker 4: For a tissue business. This included not only logistic and energy, but also raw material, which I touch on earlier.

Speaker 4: Combined these element at the negative $13 million sequential impact on profitability.

Speaker 4: The second element was a $6 million impact due to the lower volume. While logistic and production constraint at the beginning of the year certainly contributed to this, decrease is also the result of tactical and strategic decision we are implementing to optimize our customer and production portfolio was part of the step outline in our profitability plan. Year-over-year first quarter sales increased 8%, with the shipment and the average selling price up 7% and 1% respectively.

Speaker 4: Significantly higher raw material costs combined with inflationary pressure on production, transportation and energy cost impacted profitability level by 47 million year-over-year.

Speaker 4: These were partially offset by better volume and better pricing and mix, which added $1 million year-over-year.

Speaker 4: Moving now to the Slide 14 in the presentationwe have successfully implemented implemented the generanuary price increase in our awayafverman segment and expect benefit from the price increases announced in both market in early 20- 20 due to the to begin in Q2. Given this first quarter result in our tissue business reflect full run of our cost inflation without any upsetting benefit from these increase increases being realized. I would also add that we have just announced an additional price increases for a wverman product effective July , first to counter the? I cost environment.currently. We anticipate that cost inflation will result in approximately $65 million of additional headwinds from the level offline. In our strategic plan we expect these to be upset by benefit from revenue management initiative and.

Speaker 6: Unrealized loss on financial instruments, a $6 million gain on asset disposal in our specialty product group and a $1 million of restructuring costs regcorded in our tissue segment.

Speaker 6: Slide 17 and eightineen illustrated the year-over-year and sequential variance of our Q1 adjusted earnings per share and the reconciliation with the specific items that affected our quarterly results.

Speaker 6: As reported loss per share were 15 cents in the first quarter. This compared to earnings per share of 22 cents last year and to a dollar and four cents in Q4 2021. both periods included specific items.

Speaker 6: On an adjusted basis, the last per share of 15 cents was 44 cents be last year results in six cents lower than last quarter. This mainly reflects our lower operating performance.

Speaker 6: As highlighted on Slide 19, the first quarter adjusted cash flow farm operations decreased by 58 millionyear-over-year and two to 28 million, and adjusted free cash flow levels decreased by 85 million year-over-year. This reflects lower operating result and higher net CapEx paid in the current period, largely associated with our be Island project.

Speaker 6: Slide 20 provide details about our capital investments. New capital expenditures total 78 million, including 57 million for the bellon project.

Speaker 6: After subtracting asset disposal and adding amounts that paid at the end of the year, net cash outflow amounted to 96 million doars.

Speaker 6: For 2022, we continue to expect total investments of 415 million, which includes approximately 275.000004 million bys.

Speaker 6: We expect the project to remain within the range of 425 to 45 million U's dollar, notwithstanding the current inflleationary pressures on costmoving. Now to our net debt reconcllation. On Slide 21, our net debt increased by 198 million in Q1, reflecting the plan elevated capital program, lower profitability and higher working capital requirements in the period.

Speaker 6: All leverage ratio of four point eight X is up, notably from three point high at the end of 2021, also reflecting higher capital investments and lower adjusted EBITDA levels. When excluding cash investments made to date in the constmction of Bay Island, all leverage ratio would stand at three point nine.

Speaker 6: Financial ratios and information about naturities. I detail on lide 22 sequential and year-over-year saves. Any bitda performance analysis can be foundiled on Slide 28, 25 through 28 of the debt and historical index pricing on Slide 29- 30 now. You will conclude now a call with some brief comments before we begin their question period nowio.

Speaker 4: Thank you, Adam. We provide details regarding our near-term outlook on Slide 23 of the presentation. I will remind you that this outlook is based on what we are seeing today, a any change in the coming month. Our near term outlook for containerboard is for stronger sequential results driven by lower average raw material pricing, benefits from the rollout of announced price increases and goods season no demand.

Speaker 4: However detailwinds are expected to be partially muted by the continued inflationary pressure on operational and production costs.

Speaker 4: We are expecting continueed positive momentum from the specialty products segments sequentially with stable volume and favorable selling price trend expected to assess cost inflation pressure.

Speaker 4: As I mentioned during my earlier update on our strategic planans for tissue, we expect the extensive profitability initives on the way in this segment to generate growing benefit as the continue to be implemented. These action, our targeting profitability level, will help mitigate current cost edwwinind and will generate an improved financial performance sequentially in the second quarteryet we finished by saying that cost inflation and constrained and logistics played an important part of our first quarter performancein. Our execution will need to continue improving within the context that the current business conditionwe are systematically addressing these factor across our operation. An important benefit will be realized over the coming months as our strategic plan continue to be implemented.

Speaker 4: We will be pleased to answer your question. Operator nextsee. superly POS casti, very CI plely. Composite it while C? v. So look a cvy telephoneonic. You superly PO castti. Composite it while C? v. if you would like to ask a question, simply press St And number one on your telephone keep pad. If you would like to withdraw your question, please press St And number two again. If you have a question, please press Star followed by one on your touchphone phone. We will pause for just a brief moment to compile the Q? rstter.

Speaker 1: And your first question will be from Sean Steuart at PD Securities. Please go ahead. Thanks, good morning, Mario. Question on the tissue guidance and the commitment to the bitda guidance of 60 to eight million for this year. It looks like your guiding is still improve sequential results and qy two that' still negative EBITDA.

Speaker 7: So the implication is a rapid turnaround in the secondhalf of the year, which is consistent with what you're talking about. I just I want to understand though, these incremental profitability improvement initiatives, some of which are price hikes. These are above and beyond what you would have en, visioned. That the strategic review that you presented a few months ago it just feels like an ambitious targets through the second half of the year, given the struggles you've had of late. Can you go into any further detail beyond price hikes? What you're expecting to see F through to those results in the second half?

Speaker 4: oanyes certainly I can'tthe inflationary pressure. We get on many of our different raw materialand costs throughout the operation and the speed of them our quite of a surprice for us. So that's why we we initiated. Another price increase the compensate for those inflationary costs. So we basically have no choice to pass on those increased costs to our customer to protect our margins. So it was not on the plan when we we launch our plan in February but we actual result of these inflationary. We have no choice to increased pricing. But at the same time we're looking at many different options network. Optimization between where we're producing where we'll be shipping. The numbers of squ will be producing and the numbers of customer will be shipping. So all of these are being addressed in our action items as we speak today. andwe we're quite confident because.

Speaker 8: Which sure we will have expected a more significant decline based on the reading we have of the market since the beginning of the year. I typically in the first quarter is a low generation season for OCC and despite the low generation season we have seen most of the meals at the I inveatterates.

Speaker 8: I think but potentially have slowed down the decrease is probably more the logistic challenges we had at the beginning of the year that seems to be coming back to more normal now that puts a little bit more pressure and stressi think. This is probably what could have limited the decrease of OCC and we would believe that with the normalization of the logistics.

Speaker 9: Slow normalization of the lshipcy over the next few months. That we would see. We would see further a a medium, more favorable market transitions for buyers. With regards to the startup of new meals, I think everybody already is active and it doesn't put significant pressure on the market. And we don't have any. I would see, for I would speak for for our own startup. We have new challenge to meet the targets that we have planned for: the buildup of inventory in provision of the startup of beokay. Thanks for that detail. That's all I happen now, Thank you.

Speaker 2: And your next question will be from. I mean a Patel C I B, C. Please go aheadigood morning. First question I was for Charles. You able to comment on higher your box shipments have fared in Q2 to date and you know what you might be seeing in the e commerce side of the business given tougher comps here. Yes, So here the the volume in Q2. From what we see the start of the Q2 is, we see seasonal update which is more normal than then the the COVID-19 in Q1 last year, So which is a good sign right now. On e commerce exporter, that we have with the e commerce the Q1 is is good, as we see. But mind you that Q4 was extremely busy.

Speaker 10: So it's more stabilized right now on the e-commerce side. Thank Charles, that is our Q2, but our Q2 overall volume. We are benefiting from seasonal term right now. Okay, fair up and Charles right, are you seeing any? You have any trouble getting starch and are you seeing any further cross pressure there?

Speaker 10: Yes So the availability is still good. So we have good agreement with with suppliers but there is a cost pressure, especially what's going on in the world right now. But But on the availability decide we are comfortable with we being able to supply our customers and with pont torers, great it. Thanks that that's helpfuling. Just last question I have for Allan as a company that wants to grow its integration rates in container Board in coming years. Just given the high leverage at the moment? How do we think about the timing of?

Speaker 11: When gas gad might look to construct additional box plans and what kind of capital cost would that would that bewell as we stated in our plan. It's something we would like to put forward before 2024 and you know to to start something depending on how we do with. It takes 12 to two 24 months. So it's something that we believe that at that time with the B Island project being started and everything we're doing right now to improve profitability. We believe that our leverage will will gradually come back to where we wanted to be. So we don't feel. This is a problem right now. So and the level of investment if we refer to scat away something to eight million or a bit more right. Now with all the cost going up so.

Speaker 6: And again, depending on what the size would be and how we do it. So it has to be to be finalized, but that's what I can say. Right nowaygreat Thank thanks, that. So that's all I had all turnover.

Speaker 2: Thank you again. If you would like to ask a question, Please P start in number one on your telephone key pad and your next question will be from Zachary ever shed at National Bank financial.

Speaker 11: Good morning everyone. Thanks for taking my questionsgoodmorning. With inflation running hot and interest rates rising, how do you feel right now about future container Board demand against a likely pressured consumer?

Speaker 1: Well there is more I would say more normal the demand as we see right now than I would say the.

Speaker 10: Q1 and Q2 20 20, one But the need to move goods are still there again in our case in in casasta we are seeing right now the case from the the seasonal Ity. So we kind of see the trends of precops COVID-19. So at this point, unless the macroeconomic change drastically, we're still confident that there is going to be a good demand in two thousand and 20.

Speaker 11: That simple thanks. And then we know that closure announcements have a much shorterlylead time than capacity addition. So we may not have the full picture for the end of 2000. twotwenttwo 2, twoy and 23. But if there is to be capacity rationalization in the industry, given how casastget is positioned with the quality of its asset base, would you see ourselves participating in that as well?

Speaker 10: Well as we said earlier, the investment that we've made our is than to improve our asset base. We've proven that with recent investment, like greenpack got away. The same thing also with the be ites. So it's hard to predict the moves that we are going to be making in 23, 24. but one thing I can say is Cascade is going to be better equipped to compete with the type of product that we are offering- recycle, high performance- but is the market that condition change drastically? Like we've done in the past, we are going to take the proper decision to to maximize a profitability and green value for for casastcapthat's good. Thank you, then. one lesson for me. alaner're saying that you do see a path down on the leverage ratio. Naturally, but at what point does your net tibita ratio become a concern?

Speaker 6: Well nowit's. The increase in net leverage is mainly driven by EBITDA, So that our focus right now towards the end of the year and for next year- So we feel that working on profitability initiative in tissue and having all these price increases being implemented- will revert back to rapidly to where we could be and will have sufficient the we to complete that bar on project. So for now it's the last two quarters. We're not great, we know that, but we expect that we're going to get back on track in the near future.

Speaker 11: Any commentary on covenants. No, there', S no, there's no debt to a bitid that in our bank covenants. So it's only as we disclose an interest coverage ratio and a debt to capsuital we have plenty of Lee will right now on the bank covenantsthank you very much t over.

Speaker 2: Thank you. Next question will be some Paul, when that R B, C? Yeah, Thank you, mytan. Just a question. And the tissue guidance at 60, 80 by the end of the year, having guided for Q2 to be to be up over Q1 yearthank see, since that it'll be negative. So you probably, you know, first half the year ll be down, sort of negative 20 make 20, five. Does that apply that you're going to be 80 80, five in the back half to get to the 60, 80? Well, I would say, if you do done that as we did yes, but remember that we have just announced price increases yesterday for another, price increases yesterday for July first. So, and that's illustrated in our dict, these are part of the initiative that have to be implemented. So the things will that.

Speaker 12: Yes and more if I may add also we we're very confident about the price increases. I think the market able to absor those increases. We've been happy with the increases that we've expleed so far for me first and we believe that the other will do on as well so.

Speaker 13: Your business correct okay, and then just it just going to leverage your question that getting these thoughtt headwinds and also the beare allance spend, we expect that leverage, to speak of it.

Speaker 1: At the end of the year sure.

Speaker 14: It for now within a range of three to three point five: we stated two point five to three in our plan, but may be higher than that due to the slower first quarter.

Speaker 15: That's all I had thanks co, that's what.

Speaker 2: Thank you and at this time we have no further questions. Mr pllode, Please continuethank you everyone for being on the call this morning and looking forward to see you on the next call. Have a good day, Thank you.

Speaker 2: Thank you, messy. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, Thank you for attending and at this time, we ask you to please disconnect your line.