Q2 2022 Cascades Inc Earnings Call

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Good afternoon. My name is sylvie and I will be your conference operator today.

At this time, I would like to welcome everyone to the cascat second quarter 2022 financial results conference.

All lines are currently in listen only mode.

After the speaker's remarks, there will be a question-and-answer session.

I will now pass the call to Jennifer AP, Director of Investor Relations for cascad. Miss apin, you may begin the conference.

Thank you good afternoon everyone and thank you for joining our second quarter 2022 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. periodtoday's speakds will be mio cled President and CEO and Allen hogg CFO .

Also joining us to the question period at the end of the call are shallal Malu, President and COO of containerboard packaging, N PJ, President and COO of specialty products, and Jean that deavid give, President and COO 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 is subject to risk factors that can have a material impact on actual results. These risks are listed in our public filings.

These statements, the investor presentation and the press release also include data that are not measures of performance under IFRS.

Please refer to our Q2 2020 -two investor presentation for details.

The presentation, along with a second 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 towards the EU Matthew.

Thank you Jennifer, and good afternoon everyone. Before discussing each of our business segment, let me begin by saying that we are pleased with our improved sequential performance.

The price increases we have put in place mitigated the impact of persistently higher costs. We provide a breakdown of the factors impacting our ambitidda levels on Slide three.

As these numbers I like. We are operating in a rapidly changing and challenging cost environment in which energy, logistic production supplies and certain raw material costs continue to increase.

Year-to-date, our initives do not fully offset the significant CIT win our operation have been facing, but we will continue to close the gap as important benefits are realized in the second half of the year, the most prominent of which are expected in our tissue segment.

Moving now to our financial results. On a consolidated basis, second quarter sales increased 17% year-over-year and 8% from Q1, while adjusted EBITDA decreased 7% from last year levels but improved 57% sequentially, reflecting the sales price increases implemented in all of our business segment.

On raw materials side, highlighted on Slide 5% 6, the Q1 average endindex price for OCC increased 34% year-over-year and decreased by 2% from Q1.

Increases in all generation of OCC, and. Lower export main supported availability, resulting in a slightly lower pricing trends sequentially.

Our Mills are well suppli and the market was generally stable in quntwo.

Average generx prices for white recycled pavor grade continue to increase in Q2, increasing 94% year-over-year and 14% from Q1. These cost headwinds are clearly reflected in our tissue results.

This is also the case on the Virgin Pulp side. The hardwood UL index increased 16% sequentially, while suofwood Pulp index price rose 14% year-over-year. These index increased by 17% and 9% respectively.

Notwithstanding the fact that the market remains challenging for whitefiber rad, with price remaining high, our Mills are adequately supply.

Moving now to the results of each of our business segment, as highlighted on Page seven to 14 of the presentation.

Beginning with the sequential performance, sales in the containerboard increased 7% in Q2. This was largely driven by higher selling prices and volume.

The 2% volume increase reflects a 2% increase in shipments of both converted product and ptrole. Sequentially converting shipments increase by 1% in millions of square feet, outperforming the flat performance in the Canadian market and the 0% increase in the? U's market.

On a birthly basis of our converting shipment increased by 5% sequentially following softer Q1 performance.

This outperformed the decrease of 0% in the Canadian market and a two 0% increase in the U's market.

Due to adjusted EBITDA of 99 million or 17% on a margin basis was $19 million or 24% above the Q1 levels. This reflects 36 million of higher selling prices and volume benefit and lower raw material costs, which successfully upset a 17 million impact from higher production and freight costs in the quarter.

Year-over-year sales increased by 14%, while adjusted D decreased by a marginal 1%.

In this case a more favorable exchange rate, and $71 million of benefit there is from selling price and mixed improvement were offset by 74 million of wier raw material production, freight and energy costs.

Year-over-year converting shipment decreased by 3% in millions of square fee.

This underperformed the 0% increase in the Canadian market and the 2% decrease in the? U's market.

On a birthday basis converting shipment were down 3% below the 0% increase and the 2% decrease in the Canadian and U's market respectively.

Lower year-over-year volume reflects a return to normalized level following elevated demand in the year-ago period. I would highlight that the converting shipments are 4% above second quarter 2020 levels.

Let me now provide provide you an update on the verarisland project. As we highlighted in our press release, cost inflation, continued constraint and labor and logistic for certain construction material has met that our team has add to be extremely adaptable day-to-dayate. The rising cost environment has increased total project cost to a range of 400 than 70 to 400 than 85 million U's dollarfrom fourhundred than 25 to 400 than five million U's previously.

Delivery constrained for certain construction material have also delayed progress of certain construction milestone, which may delay the startup to the first quarter of 2020. -three.

Our team is working with our contractor in order to meet the mid-December twent 22 plans. Start up dayate.

Despite this, we are pleased with the performance of the containerableard business this quarter, which benefited from good demand and our ability to drive commercial initiatives.

Specialty product continued to generate sudden results sequentially, with Q2 sales up 7% from the prior quarterthis reflect the implementation of price increases in response to cost inflation and favorable product mix in the plastic in the Cardboard segment.

Adjusted EBITDA increased trmitive dollar of 14% sequentially. Our higher prices and volume offset the impact of higher operating and transportation costs.

When compared to the prior year, Q2 sales increased by $34 million, or 28%, and adjusted that, the level increased by seven million or 39%.

As IR realized spread and increased volume asset, higher transportation and operating costs.

We are pleased with the performance of the specialty product business this quarter, the third consecutive quarter of increased EBITDA levels on both a year-over-year and a sequential basis. Ebitda has grown at a faster pace than sales, highlighting the progress being made to deliver a margin range of 17% to 19% by 20 and twenty-four.

Moving now to our ticksue business. Sales increased 7% sequentially in Q2, while adjusted EBITDA levels improved $9 million to a loss of $8 million.

Top line growth was driven by higher volume and pricing and sales mix initiatives, while sequential EBITDA improvement reflected $21 million of benefit generated by improved selling price, offset by inflationary headwinds on the production and raw material cost side.

Year-over-year sales level rose 15% and adjusted EBITDA decreased $9 million.

This reflect the 44 million positive contribution for higher average selling price and the impact that persisting increases on the cost side have had EBITDA.

Pricing and other cost saving initiatives continue to be implemented and we have stated in the past, these effort are expected to generate positive upside. That is, E weightated to the second half of 2000 and thousandy.

To this end, we have provided an update on our profitability plat initiative in our tissue paper segment on Slide fourteen and.

Giving the normal lag between curage and precedent, cost inflation and the timing that benefits are realized from the implementation of pricing initiatives we have now. We are now expecting of the tissue segment to generate 25 to fourty million dollars of EBITDA in the calendar year. 20.022 thousand. This downward division is largely due to timing. The impact of cost inflation is almost mediion, whereas pricing implementation takes time to be rolled out.

As to this, our sales volumes are lower than anticipated due to lower production output. Both of these area are being addressed by expensive initiatives currently underway, and I continue to be encouraged by the progress we are making in our profitability plan.

To this end. We continue to expect that these initives will allow the tissue segment to meet in 2024 target of $15 million of adjusted EBITDA.

Alan will now discuss the main highlight of our finidentcial performance and.

Yes thankinyou AR U, and good afternoon everyone. So a Slide 15 and 16 illustrate the specific items recorded during the quarter. The mean items that impacted operating income before depreciation were a four million gain on settlement of a supply agreement in our tissue segment and a three million FX loss on long-term debt and financial instruments.

Slide 17 and' 18 illustrate theyear-over-year and sequential volumies of our Q2, adjusted earnings per share and the reconciation with a specific items that affected our quarterly results.

As reported, net earnings per share wor 10 cents in the second quarter. This compared to net earnings per share two percents last year and a net lastss per share of 15 cents in Q1.

On an adjusted basis. Net earnings per share also 10 cents in the current quarter. This compared to a net loss per share of 15 cents in the first quarter of 2022 and their earnings per share of seven senses in last year's results.

Has highlighted on Slide 19, second quarter adjusted cash flow pharma operations decreased by eight million year-over-year to 81 million and adjusted free cash flow levels decreased by 59 million year-over-year. This reflects lower operating results and higher net CapEx paid in the current period, largely associated with our barrel and conversion project.

Sequentially: second quarter: adjusted cash F farm operations increased by 55 million and adjusted free cash flow level increased by thirty-six million.

This reflects improved operating results and lower net financing expenses, pay offset by higher net CapEx in the current period, driven again by hour by Allan projects.

Slide 20 provides details about our capital investments. Capital expenditures pay during the quarter total 116 million and total 212 million for the first six months. Of this amount, 145 million wasres for by Ireland.

For 2022, our total capital investment forecast has increased to a range of four 50 to four seven million Canadian dollarswith this increase driven by updated forecasted project cost for by island of between 310 and 33 million in Canadian dollar, as discussed earlier by mine.

Moving now to our net debt reconciliation. On Slide 21, our net debt increased by 160 to three million in Q2. This is a reflection of the combined effect of our current investment in ballin, higher working capital requirementsand unfavorable as fected back in the period. Our leverage ratio of five point four X is is up from four point eight at the end of qy-one and three point five at the end of two thousand and 21.

As we have mentioned in the past, we expect this leverage trend to reverse, with improved operational performance and results in the start-up of operations at the balin facility.

When excluding cash investment to date for bear and our leverage ratio would stand at four point three times.

I would highlight that our BA agreement do not include a leverage rationalio coven.

Financial ratios and information of our maturities are detailed on lide 22, and sequential and you-over-year PS and EBITDA performance analysis can be found on Slide 25 to to the 28 of the deck and historical index pricing on Slide 29 and 30. Mario will now conclude the call with some brief comments before we begin the question period. Mar you, Thank you A. we provide details regarding our near-term outlook on Slide 23 of the presentation. As always, this outlook is based on what we are seeing today and may change in the coming month.

Our datterm outlook for containerboard is for stable sequential results. Volume is forecasted to be stable despite some inventory rebalancing abserd with certain custommer. This, combined with higher production levels being achieved in up our other Mills, as led us to temporarily shutdown machine to at our neargaappals facility for minimum of five weeks to manage inventory level of our corrgated medium. The landdown time began in July and will tot at total approximately one thousand short over the coming months.

We are expecting continued positive momentum from the specialty product segments, sequentially with stable results reflecting good volume in favorable selling trend expected to offset cost inflation pressure and continued labor challenges in certain facility.

As I mentioned earlier, we expect the profitability action plan underway in the tissue segment to generate growing benefit as we continue to be implemented. We are at disappoint that the unprecedent escalation in cost and binding adjustment of certain pricing initiativesas reduced expected ebitdaavlevel for this business for the 2022 calendar years.

But we have remained optimistic about the capacity to drive meaningful improvement and the financial and operational performance of our tissue business.

To this end. Result in tissue are expected to revert to one of positive contributions beginning in Q3 and our long-term EBITDA target for 2024 for this business remain unchanged.

Let me finish by saying that, in terms of our primary raw material OCC, we are expecting positive trend on the pricing side, driven by softer export activity, lower demand level and good availability.

We will now be happy to insert all the questions operator.

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And your first question will be from amio Patel, that's, the I B, C capital markets.

I good morning.

My first question is on the containerbo side, Charles. There had been some reports in in the trade Magazine that castgad is planning to produce craft paper at bear island. So if you speak, you know more to what's led to that- perhaps shift in strategy, how we should think about product mix and how that would evolve and then also how that would impact the capacity of the facility.

Okay So thank you here for the question. I would not say a switch strategy. Maybe we did not at the beginning a specific on the possibility of the machine. This is a market that we see first potential with the replacement of plastic with reusable material and recyicable. The machine, because of the, the investment that we made, will be able to to produce the specific rate required to produce that. So are work sales. People are meeting customers right now and we developing product that we know that we will beable to produce on the machine and that's why we're starting to belowte this. That will give us more flexibility and a better offering of product for for our customers. We did say that the machine primarily, we built it to supply high performance, light weight recycle line Board, but the machine will also be able to produce some meeting and also being able to produce other product. So that's when we mentioned, and that's why we are looking marketts opportunities. At this point we are not going to put a volume ag on the mix because we're still meeting the customer on. So we'will give an update in the future on that.

Okay thanks charless, appreciate that. And is there any way to you know how would we think about I? I get the mix that still inflex that, but in ins far as you're running a portion of it as craft paper, how does that dynamic affect the capacity of the the mill?

And as I said at this point the volume would not be or it has not been determined. So you can consider that the total output of the mill would not change from what would be announced. Capacity would be for hundred and 65 thousand tonns per year. So.

Okay it. Thanks the the tepl one and just so. The last question I had was Ellen with respect to CapEx. Can you give an indication of how we should think about 2023, just given the you know inflation you're seeing and I imagine there's some portion of the bear island spend that that shows up in in 23 as well?

Yes exactly what we see right now with balland is approximately nteen million U's that is planned to be paid in 20 early two thousand and 20 three for the first part of the year and for the remaining of the business it will be kept at minimum. There's no major project on the go and as we said in our.

Start kind ofupdate in the February we want to limit at 4% of revenue. So as it might be adjusted down depending on our.

Financial profile. So there's only B and for now for next year.

Good great thanks I us. For now. I'll get back in the queue.

Thank you. Next question will be from the Zachary.

At National Bank financial.

Good afternoon, thanks. We're taking my questions. I just wanted to kick off with if maybe you could help us quantify the risks of a delayed startup at beare island. What do you think the probability the overunder is of going beyond schedule and what kind of cost I could cause you to incur?

Shall you want to take this one?

Yeah So.

The as we mentioned, we are still working towards making the dayate, or the December startup, is still achievable. Our team are working towards that. We have said that there are some delays in certain aspect and we mentioned them and are you explained that in effect? But if it slides into Q1, this point, from what we see, would not have a major impact or on the 2023 year. That's what you, your question is.

That's clear, thanks.

And then, in terms of the recent industry, talk about a customer inventory correction over the last few months and maybe continuing into the next quarter. Can you give color as what you've experienced TH far and how it's tracking into Q3 on the container Board side?

Yes So we have seeing with some of our customers correct on the inventory level. Our customers are seeing, or I think, the same issues that that we have, whether it's on labor not able to produce some of our customers are making adjustment of for the inventory. So we are seeing that and that's why, when we look at our three right now, our forecasting are looking or about stable compared to our Q2 and we're following that very closely. What we're right now is maybe slower beginning of the Q Q3 and then picking up wards the end of three that's why we or for flat and what we're expecting is that with the, that school and the season, our forecast we're expecting the demand to increase for three

That's helpphone link.

Than just one last of infor me switching gears to tissue here. Can you comment on any impact or possible impact from seasonality on the profitability initiatives in place and how the price hikes might flow through for the balance of 2020 -two?

yesgoodmorning exact we don't foresee any differences that will say in terms of seasonality versus the previous years. But I can say that the demand is pretty good. Right now limitation is really your ability to produdo those cases right now that demand in both markets that we from home in retail is pretty. Good. So.

We we should see improvement in tonnage or shipments for the next coming quarters.

What after the other?

I Al right. Thank you very much, will tturn over.

Thank you again. If you would like to ask a question, please press start the number one on your telephone key pad.

And your next question will be for Matthew mackeller at RBC Capital markets.

Thank taking my question in tissue, it sounds like price increases should start to show up again. Q3: So you'll get something closer to a full run rate to benefits in Q4. With that, you noted that you're expected performance in the segment to be slightly lower year-over-year. So with that should we expect operating income before depreciation in Q3 to be materially above breakeven? And then how should we think about the progression from Q3 to Q4 in that context?

Well I'll take that first out that agenda as it speaker. We have guided a bit lower than last year but we have not specified numbers, So last it was 12 million, So anything.

Close to that are slightly lower. So that's what we we can expect for Q3. So remaining caution because we.

Price of input costs are still very volatile. So remaining cautious but a lot of our price increase initiative and other initiative will continue to take place with that having a full run rate by year-end So.

That's why it would be that the second half of the year should be much better than the first one.

If I cannot also price increases that we announce in retail for August we're negotiating actual is and as you may no competitors announce. Also the later dates we netiating or to customer. But with.

wouldfeel that the full impact will be in Q4.

Morning on Q3.

As Alan said, we're prudent on the inflation level as well for the coming quarter.

ok great thanks.

Then it sounds like you're expecting somewhat lower OCC cost sequentially in Q3. Could you talk a bit about what you see is driving that trend and maybe talked to where you expect cost of trend to the balance of the year?

yesthis is Lu at you. We actually seen a switch in the market environment in June . Actually in early June , the early, the beginning of the second quarter, the market was more balanced But by by early June started to see a decrease in the demand and still strong generation and this situation has identplified, obviously in the month of July and we are in a situation we has a beg be an extent of offer in the market. We would have expected the correction and pricing from in the publicication in July is been sh, but I think now that the conditions we've seen in the market where we operate, clearly that elected going to be a correction.

Okay Thank very much. And then last on for me, just wanted to hit on the leverage as you work to complete their island, but you contend to, I guess let leverage got normaliz of CapEx papering off and results improving, given that you're not constrained by a debt, bitdabbased covenant.

Or would you consider taking any kind of action to accelerate thedelevering? And then, maybe as a follow-on, how should we think about capital allocation overall following its completion, in the context of, or comments that CapEx likely to be kept at a minimum?

Obviously CapEx will be managed and that profile or leverage will be baged first to make sure that we get back to our stated target of between three X once the balment project is up and running. So that will be the first priority in terms of capital allocation to adjust that balance sheet profile.

Before continuing to invest in strategic projects.

ok thanks, I'll turn it back.

Thank you. Next question is from cleic prly at this day.

Thank you. Have a couple of questions on the tissues segment. I was wondering if you're see some consumers switch to private label from branded product, if that's something that you're witnessing currently, and how do I manimpack your business given your product?

More to yes, the growth of private label just contin, year after year we achieved recently.

Highest level everve. So I think there's the acceptance of consummer really good. The quality of those private label is getting better and better, So I think we're well positioned, as you know.

More than 90% of our business at private label in the retail we're also well positioned with the customer mix that we have with the mass merchantand clubs. So I think.

Economic situation will only can be a positive for our tissue business also. The market segment that we're playing in in the private lavel is also very positive. Consumer are trading down because of financial.

Situations So all you know, I think it's presentitive.

Right makes sense. And then you commented earlier on some customers and continuuebo drawing down inventories. Can you comment on inventory level in the tissue retail and away from more marketts?

Good question UH.

I think the away from homean business is getting better at the previous level but we're in line with the.

Market improvements over.

Again as I said earlier it's really our ability to sort of customers like the demand is pretty good in both both market segments as we.

ok that's the F thing.

Thank you. Next question will be from benwali've had at Scotia bank.

Thank you. Good morning, everyone took quickone for me. Just wanted to go back to the earlier tissue question in terms of guidance.

If I'm not mistaken, we are at minus twenty-five.

After the first six months.

You're guiding to 25 to 40, which implies the second half in the 50 to 65 million range.

Which means that even if you would meet the 12 million from last year, that would imply a 38 to 52 million quarter for Q4. Am I missing something or that's what you're implying?

No buten, I think I would. We put a a slide- I think it's the Slide 14 in the deck- that illustrate. Illustrate that. So we see that there's a lot of positive benefit that our still to come true for next year and so there's a portion of that will come in in the last section of the year. So obviously all the cross 17 itiative will kick in more then the impact of Co, the inflation. So you're right, it's second half of the year be should be much better.

Okay and then. But if I pushed out reasoning a little further, you're stilled. Guiding for 2020 -four.

In the 16 million range but chewed four annualizede.

And typically Q4 is a weak, seasonally speaking quarter, that kind of assume that you'll be slowing down from there, while you probably have some initiatives that should be improving the performance man'm. I' just trying to reconcile that Q4 22 and get 2000 and twenty-fourth full year guid. That's fifty.

Exactly if you do them at you're right but we ask cappar guidance for 20 for for now. It's still long a long way to go. But that's why we'will remain confident that this target will be achieved. Maybe it will be sur passive if you do that not as you mentioned but we're maintaining that the target will will be achieved. So.

It has to be improven because the next up the upside as janleven is mentioning that we have in tissue. After all of these initives is that on the volume side there's still opportunity to drive improvement in volume and production volume. So in sales So.

Okay great, that's very helpful. Thank you very much. That's it for me ple, or.

Thank you. Next question will be from Mark wildde at bemo. Please go ahead.

thanksgood morning. I wanted to just start by following on Ben WA's question. I'm just curious about guidance generally. We've had a number of guidance cuts this year. Anything you can, you can give us to increase confidence that we don't have more to come here in the second half of the year.

Well if I can start, if you only take that tissue guidance we did in Q1, the difference with the guidance right now is mainly drivenby continued increase in raw materials, in addition to chemical and energy coars that were higher than assumption when we did our last forecast, and also slightly lower production output than expected. So these are the main drivers why we have reduced our guidance, this timing, tissue and nothing. Think Q1, because in Q1 we had these assumption at different levels So that that the reason between the 2- So going forward, price increases, negotiation are being implemented- than a very high level of probability of being done or achievedand. Going a bit further, as I explained, there's potential of additional production output.

To be delivered in tissue. So that's why remaining confident about the 2024 target.

Okay And if I could just say, is there any wiggle room, any kind of negative contingencies in the the guidance?

imeanwe' all see good things happening, But as have we also will have room for kind of any additional negative surprises.

Yes we still have inflation in orcoast and Mark and we anticipate that raw material will continue to go highre- Q3 and colleagues and IR after. So that's part of the assumption that we're taking.

That's why there's a, an tissue. We have stated a range.

Because it's continued de.

Risk from.

Okay right. The second thing I want to ask about is just that medim inventory overhang at Niagara falls can put any color around. What drove that?

Yes So yes, this is part of the. Our production has been pretty good in our system. What we have made, our inventory level has been higher than where we feel comfortable and, as we mentioned, we are seeing some of our customers are taking some some inventory adjustment which, by reple effect, is causing us the same and the same thing. So, or we took down the machine that was the contributing to our system. This is an I falls. We evaluate again that the, the adjustestment was about one thousand and ton. So on that the, the reasonion by behind our taking it first five weeks.

Yeah So it would it be your sense found that the you know medium market is, you know, imbalance at this point, and how you term it because you can, if I go back, for much of the last two years, medium has actually been the tighter side of the industry.

And if, if you're taking inventory downtime right now, it would suggest that that's no longer the case.

Well it is in a way, But as you know we have, we're very high on the medium when you compared well, all to our liner. So when you look at the adjustment that were made by our customers, it seems like the medium side was a bit more effective than the liner.

okayand then just turning to bear island in the potential delay into the first quarter, does that have any effect on the preselling that you had talked about in the past on that machine?

Now at this point we're still working towards the December starting date again. If it slides in into Q1 from what we see right now, we are going to be okay with the ramp-up all that we have and the inventory levels that we're going to go into Q1.

And we are working also with our customers to make sure that ll be able to service everybody. There is a slide in Q1. The potential is probably 10 tenens to 15 thousand on something like that, our worst, worst case scenario. So on the overall scheme of things will be- will be okay.

ok right then the last one for me, or either kind of allanor mar, just curious issue. You made a significant move up just a while ago in your dividend and with with leverage going up right now, can you just, can you talk with us about, you know how you think about the security at the dividend.

The moment, we have not changed our position regarding the dividends. The forecast we see in terms of cash flow generation and offset of inflation in our cost doesn't guide us to move on the dividend right now, So we maintain the dividend at the same level.

Okay you're comfortable in your ability to maintain that dividends. Really what I'm asking. Yes yes, we are.

Okay very good, I'll turn it a look.

Thank you. There are no further questions at this time. mrie plud, Please continue.

Thank you everyone to be on the line today and looking forward to talk to you for our Q3 results. Have a nice weekend.

Thank sure.

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

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