Q3 2022 Cascades Inc Earnings Call
We will begin with an overview of operational and financial results followed by some concluding remarks, after which we will begin the question period.
Speakers will be Matthew Gould, President and CEO and Allan Hogg CFO also joining us for the question period at the end of the call are Sheldon Melo, President and COO of containerboard packaging look large bank, president and COO of specialty products, and John <unk>, President and COO of tissue.
<unk>.
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 outlined in our public filings.
These statements the Investor presentation and the press release also include data that are not measure that performance under Ifr Ash. Please refer to our Q3 2022 investor presentation for details. This presentation along with their third 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 our CEO Mario.
Thank you Jennifer and good morning, everyone.
Our Q2 results met expectations.
We are satisfied with our improved sequential performance in light of unprecedented cost inflation and labor constraints, we faced during the year.
Companywide the price increases we have put in place mitigated the impact of persistent cost inflation quarter over quarter.
We provide a breakdown of the factors impacting our EBITDA level on slide three as the number of highlights however benefits from these and other initiatives like the impact of cost inflation year to date by $67 million, the lion's share of which are within our tissue segment.
Moving now to our financial results on a consolidated basis third quarter sales increased 14% year over year and 5% from Q2.
Adjusted EBITDA increased 4% from last year levels and 22% sequentially.
Flexing to sales price increases implemented in all our business segment and improved results in our tissue paper business driven by profitability initiatives.
On the raw material side highlighted on slide five and six the Q3 average index price for OCC decreased 33% year over year and 20% from Q2.
Reduced demand levels, following lower activity as containerboard mills and less export led to win access to fiber in all North American market. This resulted in the rapid decrease in pricing for this group during the quarter and all of our mills are well supplied.
Average index price for White recycled paper grade continued to increase in Q3.
A substantial 60% year over year and 7% from Q2.
As we have highlighted in the past these unrelenting cost headwinds had an important impact on our tissue results.
The same can be said about Virgin pulp hardwood pulp index increased 7% sequentially.
The softwood pulp index prices rose more mother at 3%.
Year over year. These indexes have increased by 23 and 17% respectively.
While the market remains challenging for the white fiber great with prices remaining high we have begun to see some easing in recent week in our meals are adequately supplied.
Moving now to the results of each of our business segment as highlighted on page seven through 14 of the presentation.
Beginning with the sequential performance sales in containerboard increased seven 5% in Q3. This was largely driven by higher selling price will more parent rolls and converted products higher volume levels and they've been official exchange rate.
The 2% volume increase reflect an 8% increase in shipments of parent rolls in a 1% decrease in converted product shipments sequentially converting shipment decreased by one 9% in Canada outperforming the three 1% decrease in the Canadian <unk>.
Market.
Converting shipment increased one 1% well above the three 8% U S market decrease.
On a per day basis, our total converting shipments were stable sequentially.
This outperformed the decrease of three 2% in the Canadian market and five 3% in the U S market.
Q3, adjusted EBITDA of $103 million or 73% on a margin basis was 4% above the Q2 levels.
This reflect benefits from higher selling price and.
Lower raw material cost offsetting higher energy costs and less favorable sales mix in the quarter.
Year over year sales increased by 17% driven by pricing and volume.
Adjusted EBITDA increased by 10% for the same reason I just mentioned.
Year over year shipment increased by 4%, reflecting a 9% increase in external parent roll shipments.
And the 1% decrease in total converting shipments mainly driven by lower volume in the Canadian market.
On a per day basis, our global converting shipment were also stable up performing the four 5% decrease in both the Canadian and the U S market.
Moving now to our Bear Island project.
We're continuing to make good progress during the quarter and we are preparing the commissioning of certain key equipment.
Despite the progress in the construction over the past three months the supply chain constrained that delayed certain construction milestones in Q2 continue in the current quarter.
As a result startup of the machine is now scheduled for Q1 2023.
Our multi year project of this magnitude is complex and the best of times and was made even more so by cost inflation and supply chain and labor constraint. We are focused on starting up the facility and ramping up production.
Giving this slightly modify timeline 'twenty 'twenty three production is expected to total 265000 short tons and adjusted EBITDA is forecast to be $20 million to $30 million U S. Dollar.
Under current market condition.
Total expected return for the project remains within our target and despite the project cost level.
Continuing with our packaging business Q3 sales levels in our specialty products segment were stable sequentially.
This reflected the implementation of price increases in response to cost inflation and the favorable exchange rate the benefit of which offset lower volume.
Adjusted EBITDA was also stable sequentially as higher selling prices mitigated the impact related to volume and sales mix as well as the higher production and energy class.
When compared to the prior year Q3 sales increased by 24 million or 17% and adjusted EBITDA levels increased by $8 million or 47% as higher realized spread more than counterbalanced, a slightly less favorable volume and sales mix and higher operating costs.
We are pleased with the performance trends of the specialty products business this year, which reinforced the progress being made towards meeting at.
That targeted margin range of 17% to 19% by 2024.
Moving now to our tissue business sales increased 12% sequentially in Q3, while adjusted EBITDA level improved 12 million two 4 million.
Topline growth was driven by pricing and sales mix initiative higher volume and favorable exchange rate sequentially improvement was largely driven by benefit generated by improvement selling prices offsetting higher costs for energy and raw material.
Year over year sales level rose, 11% with pricing and sales mix initiatives.
The impact from lower volume.
The EBITDA decreased $8 million year over year, mainly due to our your raw material costs offsetting benefits from our profit initiative.
We have provided an update on our tissue profitability plant initiative on slide 14.
The impact of rapid escalating costs in this business has been unrelenting and pronounced in 2022 and the financial performance of this business year to date clearly demonstrate the immediate effect that this <expletive>.
Add on result ahead of benefits being realized from corrective measures.
Pricing and other cost saving initiatives continue to be implemented to offset these headwinds and we are expected to generate additional positive upside in the fourth quarter throughout 2023.
To this end we are focusing.
Adjusted EBITDA.
8% to $12 million for this segment for the fourth quarter.
This outlook implies that the tissue segment, we have not achieved the objective of $25 million to $40 million of the adjusted EBITDA for the calendar year 2022.
Notwithstanding this we continue to expect that these initiatives will allow the tissue segment to deliver on its long term 2024 target.
Larry will now discuss the main highlights for our financial performance after which I will conclude our presentation.
Yes, Thank you Matthew and good morning.
Slides 15, and 16 illustrate the specific items recorded during the quarter. The main items that impacted operating income before depreciation.
A $14 million of impairment charges in our tissue segment related to the decision to permanently close the Memphis tissue meal that cease operation in 2020.
It also includes a 10 million foreign exchange loss on our long term debt and financial instruments at 3 million unrealized loss on financial instruments, and the $2 million of impairment charges in our containerboard segment.
Related to asset optimization initiative in Ontario.
Slide 17, and 18 illustrate the year over year sequential volumes of our Q3 adjusted earnings per share and a reconciliation with the specific items that affected our quarterly results as.
As reported Q3 net loss per share was <unk>.
This compared to net earnings per share of 30% since last year and 10 in Q2.
On an adjusted basis net earnings per share were <unk> 20 in the current quarter. This compared to a net loss per share of $1 70 in last year's results and net earnings per share of <unk> 10. In Q2. This volumes mainly reflects improve adjusted EBITDA and a reversal of tax assets in Canada in the third quarter of <unk>.
Last year.
As highlighted on slide 19 third quarter adjusted cash flow from operations decreased by $8 million year over year and $62 million.
And adjusted free cash flow levels decreased by $123 million year over year.
This reflects stable operating result in significantly higher net capex paid in the current period largely associated with our balance conversion projects.
Slide 20 provides a detail about our capital investments paid capital expenditures net of disposal total $121 million in Q3 and $333 million for the first nine months of this amount 83 million was invested in about on project in the third quarter and 202.
$8 million so far this year.
For 2022, our total capital investment forecast remains in a range of $450 million to $470 million, which includes $310 million.
$330 million for the balance approach.
Moving now to our net debt reconciliation as detailed on slide 21, our net debt increased by $299 million. In Q3. This is a reflection of the combined effect of our <unk> investment by island higher working capital requirements and unfavorable FX impact in the period.
Our leverage ratio of six two times is up from $5 four again of Q2.
As we have mentioned in the past we expect this leverage trend to reverse with improved operational performance and results and the startup of the operation of the island facility.
When excluding cash investments made to date in the custom construction of Ireland and its negative contribution to operating results.
Average ratio would stand.
Cemetery four nine times.
I would highlight that our bank agreement do not include the leverage ratio Covenant. This remains the case following the recent amendments to our existing credit facility that we announced on October 19.
Specifically, we increased our term loan by 100, <unk> hundred million to 260 million U S dollar and extended the maturity by two years to December 2027, concurrently we extended the revolving facility by one year to July 2026. These amendments.
<unk> reinforce our financial flexibility as we company.
<unk> project.
Financial ratios and information about maturities are detailed on slide 22 sequential and year over year sales and EBITDA performance analysis can be found on slide 25 through 28 of the deck and historical pricing on slide 29, and 30 module will conclude the call with some brief call.
Before we begin the questions.
Thank you Alan.
We provide details regarding our near term outlook on slide 23 of the presentation and we would remind you that this is based on what we are seeing today and may change in the coming weeks.
Our near term outlook for containerboard is for stable sequential result, with lower raw material costs are expected to offset the softer volume and.
Continue upward pressure on operational cost driven by inflation.
We have scheduled additional downtime totalling approximately 13000 short term on our machine to at our EMEA.
Paul facility to manage inventory level for corrugated medium.
This planned downtime followed the 18000 short term downtime already taken in Q3.
We also announced that we will be permanently shutting down the corrugator at our Belleville, Ontario facility in December .
This decision is part of the continuing optimization initiative, or Ontario asset base and strategically repositioned. The Belleville facility is a high volume graphic sheet plant by redeploying its corrugated product to our other units.
We are expecting a stable performance in our specialty products segment sequentially with steady volume and selling price trend expected to offset cost inflation pressure.
Our outlook for tissue is slightly improved sequential result in a stronger performance year over year.
The strategic initiatives, we are putting in place are meeting our expectation.
The exception of this is our productivity volume target, which continue to be in deer by labor availability and training.
That said, we continue to put in place additional action plan to correct, this and drive meaningful financial and operational benefit going forward.
This and our long term 24 target for this business remain unchanged with that we can now open the call to questions operator.
Messi.
It was in <unk>.
<unk> arms with SEBI telephonic.
Today with us.
Comparable.
Okay.
Thank you 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 one on your telephone keypad.
And your first question will be from Amir Patel CIBC. Please go ahead.
Good morning.
First Brian .
Charles could you comment on that in terms of the reduction in the Bear Island EBITDA contribution in 'twenty three how much of that reflected.
The lower production assumptions.
And how much was maybe adjustments you might have made to your price forecast.
Well go ahead John .
The new assumptions that we made is based on the startup and the ramp up mainly these are the assumption because for the rest.
When we look at the long term.
The.
Premises that we have announced on their projects. They is still the same so for the long term. So you will understand that we will not provide the details of the assumption yields.
As Sean mentioned the important point is it doesn't change the long term outlook on this.
Okay.
Fair enough.
Charles has been some commentary in the trade press about recycled.
Prices declining.
Is that is there.
That been your experience so far in your open market sales.
And then can you just remind us of your your.
Your box.
Prices tied to the Kraft liner benchmark for some of them tied to some recycled.
Pricing.
Okay. So you understand I'm.
Im not going to comment on specific on pricing, especially forward looking and things like that.
Can talk about what we're experiencing right now.
So the.
The grades that we're selling today.
<unk>.
Whether it's going to be bear island or green back.
Hi, great.
High performance so were we.
We don't follow with new indexes. So as you see in our results are as we speak right now our pricing has been maintaining.
As we know today.
Okay Fair enough and then just the final question I had for Alan just given the elevated leverage here or are there any covenants that that may be of concern.
You might be looking to renegotiate.
No. There is no concern on as I mentioned, there is no leverage ratio and our covenant package or there is nothing to worry about.
Okay, great. Thanks, that's all I had I'll get back in the queue.
Thank you. Thank you next question will be from Sean Stewart at TD Securities. Please go ahead.
Thank you good morning.
With respect to Q4 guidance.
Little surprised that tempered and I appreciate it.
Extra downtime plans and other cost inflation factors, but with OCC collapsing.
The extent that it has.
I guess, how much of that decline in OCC do you expect to see in Q4 or should we think of that as more of a first half of 2023 benefit.
For your margins.
So.
I just wanted to mention on the.
On the overall guidance for our results we are being cautious also.
Considering the.
The market condition today.
So we are not seeing the uptake that we usually see this time of the year for seasonal pickup.
So we're being part of this is yes, we're being cautious about the result, and when you look at the.
The impact of the OCC or.
Or the end of the fiber is about $44 million.
For sorry for.
The next year or what's the timeframe youre referencing their shelves.
Sequentially I mean sequentially. Okay. So that's a positive impact of OCC, obviously, but inflation continues on chemical and stuff like that but our cost cautious on the volume side of things okay.
Makes sense.
Alan any initial views on the 2023 Capex budget with Bear Island.
Complete.
Any any initial thoughts you can give us there.
Well it will be.
Capex will be limited for next year as the focus will be to complete.
<unk> projects. So there is nothing.
Nothing Big next year. So it will be very limited. So we are in the process of evaluating everything and with.
The business environment will be very cautious on this next year.
Got it.
Okay. That's all I have for now thank you.
Thank you next question will be from Paul Quinn.
VC capital markets. Please go ahead.
Yeah. Thanks. Thanks.
Follow up question on Bear Island.
That reduced volume, it's about 20% at the Erie.
Retail guidance, just wondering if the expected startup as at the end of Q1 as a result of that or is that when do you expect to start up in China.
We mentioned in our last call that we were still working towards the end of the year.
And we know today.
It's going to be in Q1.
So we're not going to say is it going to be in.
In January or February or provide the date, but we're aligned to do a good startup.
And it's going to be in Q1, one thing I can say is the.
At the peak of the.
The amount of people that we have on site. The work is progress progressing very well.
We have fiber on site.
The mechanical installation is going very well.
And we're focusing right now and we already started by the way to do some commissioning.
As we speak for certain area in the in the facility.
So we were confident now that we can.
Formalize a bit more.
To date in Q1.
One thing that I want to say also is.
That there is.
Less.
Unknown today than we had three or four.
Our goal.
The risks are lower.
We're getting closer to the date main components are being installed as we as we speak so that's why we're saying that now.
<unk> that is going to start in Q1, but.
We don't want to provide or any.
Fixed data on that.
Okay. Thanks, so much on that and then maybe just hasn't recovered paper.
I think you guys had commented in the past the sustainability of OCC prices down at this level is really not there.
What's your expectation.
Yes.
Through Q4 as for OTC as well as the SLP.
And though we don't see any significant change.
On the OCC side for sure until the end of the year.
Offers we own.
Generations.
And.
The demand remains stable.
Not very strong so there is an abundance of fiber in the market.
For <unk>, we've seen as we said earlier some easing of the market conditions.
Recently.
Hard to predict what's going to happen. We are looking also closely at what's going to happen on the Virgin Paul.
Which are directly.
In fact, the cost of.
Recycling rates, so I cannot really comment too.
Too many variables now with regards to merchant Paul.
Definitely.
Everybody sees traditional.
Volumes coming to the market, especially the hardwood.
By mid next year, so definitely the fundamentals.
Which should favor promote.
Some easing condition.
On the Virgin pulp ratio.
Okay, and then just over on tissue.
Can you remind me what the 2024 target is and then I was expecting.
On the guide higher Q4 estimate just wondering.
Do we need additional tissue price hikes at being able to get it.
Get to your year 'twenty target.
Well I will answer the first part of your question the target for tissue was $150 million of EBITDA.
In 2024.
I will let <unk> talk about.
What what needs to happen, but that's our target of 2024.
Yes.
The main driver for us.
Productivity.
So we're working really hard to increase productivity on the newer assets that we installed over the last two years and also the origins facilities that were ramping up.
Certainly more difficult than expected with all the challenges on labor.
And the support that we were able to provide and with parts and other technical support but the goal is to get back to 2022 target, which was 68 million cases or so.
As you can see we are going to finish the year about 60 million cases.
We should be able to go back to between to target.
Alright, Yes next year.
Alright, Thats all I had thank you Mike.
Thank you.
Again, if you would like to ask a question. Please press star followed by one on your telephone keypad.
And your next question is from Zachary Eversheds at National Bank Financial. Please go ahead.
Good morning, this is actually Nathan calling in for Zach Thanks for taking my question.
So first of all other than the challenging macro environment can you share some details on the tissue profitability progress and.
Maybe some things that should or could be done and that are not being properly executed.
There is a.
Lot of initiatives going on in tissue for sure pricing, we made a lot. This year, there's still a lot of.
Initiative under the table.
Spec.
Price increases et cetera again.
Productivity is the main driver is.
Really making more cases.
Going to be the driver for the coming months.
And by having productivity higher it will help the cost and the efficiency of the cost throughout the system.
That's a double check.
Okay, and now switching over to containerboard. Some contacts are saying about the retailer Destocking has continued up until now.
So on your end, what's the inventory situation looking like your retail customers.
So I would say that when.
When I mentioned that we don't see the necessarily the seasonal pickup that we usually see.
I would even say that we're more in the normal is it pre COVID-19 2019, so yes.
We are seeing that.
Some of our customers right now are readjusting the supply chain is.
<unk> is now picking up meaning that there is becoming a bit more normalized we see that trucking is a bit more available.
So we we know that some of our customers are adjusting and this is one of the reason that we believe that.
The the volume are being adjusted and we don't see the same pickup for this time of the <unk>.
At the same time of the year.
So overall there are some customers that are still <unk>.
Z in one thing.
Ending on which sector like the food and beverage is still.
Very good.
Industrial.
It seems to be a bit more in adjusting inventory at this point.
When we look also at the E com.
Growth is still a good four for us at this point.
Maybe one thing that I can add also with.
When you look at the performance.
Our growth.
Our commercial initiatives that we've put in place.
Since.
This year has been paying.
Paying off.
Also the investment that we made in certain regions.
Over the last two years.
Also we're benefiting cash Scott as we speak.
Alright, thanks for the color and just one last quick one in your presentation. It says that there is additional planned downtime.
Excluding the 18 K in Q3.
Or a certain way, we should be thinking about how the rest of that is spread out.
Mainly we've announced.
Debt.
Mainly focus on one.
Grades, which is right now medium in one of our.
Site, which is in the AGR falls when machine.
I mentioned in the past that we are taking actions to balance and watch our inventory level to service our customers.
So at this point.
We're planning to do.
Take additional downtime.
In one of our mainly in one of our machines.
And we will take the right decision.
In the future, but always keeping in mind that.
We also we also took the downtime at.
The last I would say performing well contributing machine to maximize the.
The profitability of the company.
Okay. Thanks, I'll turn it over.
Thank you.
And at this time there are no further questions I would like to turn the call to Mr. Perrault.
Thank you everyone for being with US. This morning and were looking forward to talk to you next quarter. So have a good weekend everyone. Thank you.
Thank you Missy ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we do ask that you. Please disconnect your lines.