Cascades Inc.

Good morning, my name is Julie and I will be your conference operator today. At this time, I would like to welcome everyone to the Cascades fourth quarter 2023 financial results conference call. A live video of the conference call will be available on the Cascades website. The lines are currently in the lesson only mode. After the speaker's remarks, there will be a question and then first session. I will now pass the call to Jennifer Etkin, Director of Investor Relations for Cascades. You may begin your conference.

Thank you, Julie. Good morning, everyone, and thank you for joining our fourth quarter 2023 conference call. We will begin with an overview of our operational and financial results conference call, followed by some concluding remarks, after which we will begin the question period. Today's speakers will be Mario Ploude, President and CEO, and Alan Hogg, CFO. Joining us for the question period at the end of the call will be Charles Malo, President and COO of Container Board Packaging, Jérôme Porriguet, President and COO of Specialty Products, Jean-David Pervif, President and COO of Tissue Papers, and Luc Langevin, Senior VP of Corporate Services. 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 Q4 2023 investor presentation for details. This presentation, along with our fourth quarter press release, can be found in the investor section of our website. If you have any questions, please feel free to contact us after the session. I will now turn the call over to our CEO. Mario?

Thank you, Jennifer, and good morning, everyone. Let me begin with a quick overview of our 2020-2022 and the 2020-2023 results. We have increased sales by 4% and 48% respectively from 2022 levels. We are pleased with this solid performance and the turnaround in our tissue business in particular, where a favorable market condition and our wide-ranging profitability initiative successfully repositioned this business operation and equipped it to generate an EBITDA of 182 million in the year. We finished the year with a slightly lower net debt levels, notwithstanding the significant investment made throughout the year in the Bear Island facility and improved our leverage to 3.4 times from 5.2 times last year. Moving now to our Q4 results. On a consolidated basis, sales were stable year over year. While adjusted EBITDA of 122 million rose 5% from the prior year. Pricing was a headwind for top-line performance, the effect of which were offset by stronger volume. Year over year EBITDA levels were also impacted by lower pricing, but this was mitigated by lower raw material production, energy and freight costs and better volume in our packaging businesses. Eventually, sales decreased 5% impacted by lower pricing in addition to lower volume, the effect of which more than offset benefit of a more favorable exchange rate. EBITDA decreased 24% from Q3 due to our container board performance, which was impacted by lower selling prices and volume and higher raw material costs. On the raw material side, highlighted on slide 5 and 6, the Q4 average index price for OCC increased 127%, 37% year over year and 41% from Q3. The OCC markets are consistent strong demand and lower seasonal generation levels, which resulted in tighter market dynamics and put upward pressure on pricing. We had no problems applying the needs of our operations with good inventory management. Average Q4 index prices for white recycled paper grades decreased 5% sequentially and 44% from the prior year levels. We began to see less favorable market dynamics over the quarter with index prices continuing to broadly mirror virgin pulp. Pricing for these fibers were slightly higher sequentially with price increase starting late in 2023. Year over year, however, prices for both hardwood and softwood pulp remain lower, down 33% and 25% respectively. Market condition reflects lower softwood pulp supply, following downtime and permanent closure in North America, and uncertainty around short-term Asian demand level and potential effect from the conflict in the Red Sea. Notwithstanding these, market condition, the material has been readily available for our mills. Moving now to the results of each of our business segments as highlighted on page 7 through 12 of the presentation. Beginning with container board, sequential sales decreased 5% in Q4. This reflects lower volume, driven by a 13% sequential decrease in paratrol shipments and a lower average selling prices. As previously announced, we took 19,000 short-term of maintenance downtime in the quarter and an additional 30,000 short-term of downtime giving seasonality and softer -of-year market condition. Sequentially, converting shipment increased .6% in Canada, slightly below the .9% increase in the Canadian market. US converting shipment increased 5.6%, well above the .2% US market decrease. Q4 adjusted a bit up 67 million or 12% on a margin basis, was 35% below Q3 levels, reflecting the impact from lower average selling prices and volume and higher raw material and production costs. -over-year sales decreased by 6 million with the impact of lower selling prices, offset by higher volume. It is the level decreased by 44% with the impact from the lower pricing and higher raw material and operational costs more than offsetting improved volume and lower energy costs. -over-year shipment increased by 10% in Q4, largely related to the new Bear Island volume. Converting shipment increased by .4% in Canada, outperforming the .6% increase in the Canadian market. US converting shipment increased 11.2%, once again significantly outperforming the .4% US market increase. Before moving on to the specialty product segment, I would like to add some color regarding the sequential performance of our container board segment. As we stated in our press release, Q4 results were below expectation. Converted product shipment remained solid, but usual seasonality and softer demand-impaired growth impacted results. Our low integration rate also impacted us this quarter following decrease in index pricing. OCC costs also continued to increase in the quarter, which, when coupled with the lower selling prices, put pressure on margin. With Bear Island ramping up and recent investment in our converting facility, our operating platform is more agile, more competitive, and better positioned regardless of the economic backdrop. And we are focused on generating benefits from its increased agility and market responsiveness. This contributes to our decision to permanently close three of our facilities, giving their future capital investment requirements, current market dynamics, and their higher level of operating costs due to the age of its equipment. Continuing with our packaging businesses, Q4 sales levels in our specialty product segment increased by 2% sequentially, reflecting higher volume in a multiple business and a more favorable exchange rate. EBITDA decreased by 2 million sequentially, driven by lower volume in sub-segment and higher year-end maintenance costs. Operating costs were slightly higher and realized spreads were stable. When compared to the prior year, Q4 sales were stable, decreasing 1 million, as the impact from lower selling prices was offset by benefit from higher volume. EBITDA level decreased by 1 million -over-year to 19 million in Q4, as the impact from lower selling prices and higher production costs were partially offset by lower raw material costs and beneficial volume and mix. Moving now to our tissue business, which generated a strong quarterly EBITDA margin of 15.6%. This performance was driven by better spread, but it also a testament to the benefit being realized from the wide-ranging initiative implemented over the recent quarter that involved repositioning of its operational platform, including closer up several facilities. To this end, sales decreased 8% sequentially. This reflects a 10% reduction in shipment levels, which was driven by a 3% decrease in shipment on a converting side and a 60% decrease in parent-roast shipment that itself reflects the closure of our St. Helene mill and higher integration rate of 94% in Q4. Shipments of converted -from-home and retail products decreased 7% and 1% respectively from Q3, both of which are an outcome of volume sold in Q3 from facilities that were recently closed. The average selling price increased by 3%, driven by the lower proportion of parent-roast in the sales mix and a favorable exchange rate. These benefits were partially offset by a slightly lower average selling price of converted product due to the contracted pricing model agreement. Q4 EBITDA of 61 million or .6% on a margin basis was tabled with Q3 level. This is the outcome of benefit related to lower fixed cost level following the plant closure, fully upsetting impact from a net negative volume and sales mix effect. -over-year, sales rose 2% with sales mix initiative, upsetting the impact from lower pricing and volume. It did increase 53 million from the prior year period. This was driven by lower production, raw material, freight and energy costs. Alan will now discuss the main highlight of our financial performance.

Thank you, Mario, and good morning everyone. So slide 13 and 14 illustrate the specific items recorded during the quarter. The main items that impacted EBITDA were 61 million of charges related to the container-borne announcement last week and other restructuring costs, mainly in tissue related closure of plants in the US. Slide 15 and 16 illustrate the -over-year and sequential variance of our Q4 adjusted earnings per share and the reconciliation with the specific items that affected our quarterly results. As reported, Q4 net loss per share was 57 cents. This compared to a net loss per share of 27 cents last year and net earnings per share of 34 cents in Q3 of this year. On an adjusted basis, net earnings per share were 5 cents in the current quarter. This compared to net earnings per share of 22 cents in last year's results and net earnings per share of 44 cents in Q3. -over-year, this variance mainly reflects improved EBITDA offset by higher financing and depreciation expenses and income tax variances, while sequential variance reflects lower EBITDA levels and income tax variance. As highlighted on slide 17, fourth quarter adjusted cash flow from operations was stable -over-year at 103 million and adjusted cash flow improved by 106 million from Q4 last year. This was driven by lower net capex paid in the current quarter following the completion of the balance project investments. Sequentially, fourth quarter adjusted cash flow from operations was stable and adjusted cash flow improved by 28 million from Q3, reflecting lower capex and dividends paid. Slide 18 provides details about our capital investments. New investments this year totaled 289 million and paid capital expenditures net of disposal and accounts payable variation totaled 343 million, of which 46 was in Q4. For 2024, our planned capital investments of 175 million have not changed. Moving now to our net debt reconciliation, as detailed on slide 19, our net debt decreased by 206 million in the fourth quarter, reflecting a stronger cash flow, a more favorable exchange rate, and a positive working capital variance. For the full year, as detailed on slide 20, net debt levels are down 84 million with benefits from our stronger cash flow and a positive working capital variance, which was reduced by capex associated with the balance investment and dividends paid in 2023. Note that in the fourth quarter, we entered into a non-recourse monthly receivables monetization facility. At the end of the year, we had 53 million used on the facility and the receivables were recognized from the balance sheet and reduced our net debt for the same amount. Our leverage ratio of 3.4 times is down from 5.2 times at the end of 2022, driven by a stronger annual EBITDA levels and factors that I just mentioned. Financial ratios and information about maturities are detailed on slide 21, and other information and analysis can be found on slides 24 through 31 of the deck. Mario will now conclude the call with some brief comments and our near-term outlook before we begin the question period. Mario?

Thank you, Alan. We provide detail regarding our near-term outlook on slide 22 of the presentation. As a reminder, this outlook is based on current forecasts and expectations and need change. Starting with container board segment, we are expecting a Q1 result to be lower both sequentially and year over year. This reflects higher raw material costs and lower selling prices, both of which are linked to index, as you know. Energy prices will also be at an endwind sequentially. Our production costs will be higher in Q1 as we expect to take approximately 18,000 short terms of downtime in the first quarter for maintenance and inventory management following the softer demand in Q4 of last year. In addition, the closure of our Trenton mill will remove approximately 36,000 short terms of capacity in Q1. Given our current contract agreement, we do not expect benefits from pricing initiative and recent index changes to be reflected in our Q1 result. These will begin in Q2 and be fully implemented by Q4, adding approximately 50 million to EBITDA level in 2024. Results in the specialty product segment are expected to be slightly stronger sequentially, reflecting stable selling prices trend and raw material costs and efficiency improvement in several subsegments. Year over year results are expected to be slightly softer. Our outlook for tissue is for first quarter results to be slightly softer sequentially, reflecting usual seasonality and higher raw material costs. These will be offset by ongoing benefits from profitability initiative. Results are forecast to be significantly above prior year levels, driven by this segment improved performance since the second half of 2022. To preempt question that I am sure you all have about our 2024 objective, we are pleased that we have successfully achieved the main business objectives set out in the plan, namely delivering significant profitability improvement in the tissue paper segment and a successful start up of the Bear Island Container Board facility. We will not be providing any additional details financial update going forward. However, regarding these objectives and giving existing market condition, most notably in Container Board, we currently expect to fall short of our 5 million consolidated sales objectives and attain the lower end of the target range for EBITDA and free cash flow. Given this, our leverage ratio at the end of 2024 is forecasted to be slightly higher than our target of between 2.5 to 3 times. Ongoing profitability improvement initiatives in all business segments and recent price increase announced in the Container Board segment will support our 2024 financial performance. That said, let me say the following. We are confident about the future performance of our businesses and as our recent initiative and announcement highlight, we will continue to manage each of them with a view of driving profitability, efficiency, productivity and their competitive positioning. Our current strategic plan ends in December of this year and we have begun the early process of outlining and analyzing our objectives for the year to come. With that, we can open the call to question operator.

Thank you. If you would like to ask a question, press the star and then the number 1 on your telephone keypad. If you would like to withdraw your question, please press the star and then the number 2. Again, if you have a question, please press star 1 on your telephone keypad. We'll pause for a moment to compile the Q&A roster. Your first question comes from Amir Patel from CIBC Capital Markets. Please go ahead.

Hi, good morning. Mario, you referenced some figures around the Container Board segment. How much of the $70 per ton price increase are you assuming is implemented? I know Pulp and Paper Week reflected $40 recently.

Charles, can you take this one?

So Amir, Charles, we are still, you know, we announced $1.10 on the medium and $70 on the liner and we are still continuing to work towards achieving this. Now, the Pulp and Paper recognized the index move by $60 on the medium and $40 on the liner. So when you look at our current parent roles and the contracts that we have, we figured that the average is about $50 and that's why we based the impact of $50 million for this year.

Okay, great. Thanks for that, Charles. If you think about where maybe run rate EBITDA and Container Board is at the end of the year, because obviously this sounds like the price hike full effects will only be felt by the end of the year and then there's the trend and rationalization. What type of annualized EBITDA would you expect out of Container Board by the end of 2024?

Well, Amir, this is not something we will disclose. We said that we will not be providing any more guidance for this year, so we will not disclose any number in that regards.

Okay, fair enough, Alan. And just a question on Bear Island. I know one of the objectives there was to be able to utilize significantly more mixed paper. How far along are you in that transition?

Yeah, so maybe just a point to cover Bear Island. First of all, we are above our ramp up production, which is very good news. Actually, we just announced that we're able to provide also to the market high performance recycled liner board 18 pounds and over, which is a very good news. This product has been qualified and it's running well, so this is going to add up to our portfolio or product that we're able to offer to the market. We also tested the percentage of mix that we're including, so we went up to 30%, which is not the maximum that we can use, but as we speak right now, this is what we were able to achieve in the ramp up process. So, we're just trying to make sure that we understand that we also want to make sure that we do it properly, making sure that we check the quality of the product and following the ramp up also.

Thanks. And so Charles, is your objective to eventually take that as high as 60%?

We can do a bit higher than that on the medium. We can go higher than that in the liner, but again, I don't want to give a number right now because we're still in the process to make sure that we provide good quality and ensure that the right ramp up of the machine. But we have the flexibility with the investment that we made to go a bit higher than 50%.

Fair enough. And just the last question I had, Mario, on the tissue side, we've seen one of your competitors Clearwater Paper launch a strategic alternatives review for their tissue business. Do you think that could perhaps lead to more industry consolidation in the tissue sector? And would Cascade be open to growing in tissue or conversely potentially selling into somebody looking to consolidate in that space?

Well, it opened the doors to it. I don't know who will present itself to this deal for our part. As we said in the past, you know, we won't be a participant in the consolidation because our focus right now was to deliver on our plan 2024 and reduce our leverage. So we have not changed our focus. It's a new dynamic in the market. We'll stay open and looking at what's moving on. But for the moment, we have not changed our focus.

Fair enough. Thanks, Mario. I'll turn it over. Thank you.

Your next question comes from Matthew McKellar from RBC Capital Markets. Please go ahead.

Hi, good morning. Thanks for taking my questions. First, for your container board outlook for Q1, could you maybe delineate between your expectations for shipments versus production levels given the desire to manage inventories you called out and maybe speak to your expectations for converted product shipments versus parent role shipments quarter over quarter?

Well, I can go higher level. Our volume will be higher in Q1 than Q4. But as we said in the press release, we'll produce a bit less to manage inventory. So that will incur some additional cost. But sales volume will be higher than Q4. And thanks. We don't give the split of boxers or parent role. But box, Shalu can complete. But box demand is still good. So

on the converting side, the demand is still solid. So the growth that we've been experiencing, we're still seeing the same trend right now. So this is the good news for following the investment that we made, both in the new facility and also in the Ontario region. We're still ramping up and keep developing new business.

Great. Thanks for that, Keller. Maybe to stick with container board. I know you're not going to provide any financial guidance here, but can you give us a sense of the magnitude of the benefits you should see from the closures of Trenton and the two converting facilities you announced earlier in February?

Well, Matthew, we have not disclosed that number, so it will be gradually in 2024. But as we mentioned, if volume that will be transferred in other facilities at a lower cost, so that should bring benefit. But we have not and we do not want to quantify the benefit of that. But you can imagine that there's a higher fixed cost structure in the mill we close. So that's an immediate benefit on each time that will be produced elsewhere. So

there's a this is a Charles. So fixed cost is one of the benefits more efficient. We're going to produce product in more efficient facility than what they're produced right now. And we're also looking at improving the overall network logistic aspects. So these are the three things that we're really focusing on right now on the benefits of the announced closure.

Okay, thanks very much. Last one for me, just switching over the tissue business. You noted the continuing benefits from profitability initiatives as part of the outlook for Q1. Can you remind us or give us a sense of how significant you expect the incremental benefits from these initiatives to be as we progress through 2024?

It's a little early to say, Matthew, Jean-Louis speaking. I think we just don't know what will happen with the raw material, what will happen with the pulp, what will happen with the recycled fiber prices. So it's difficult to predict the impact of the cost structure. So to guide a little bit more precisely 2024. But overall, I can tell you that we have still many initiatives on the table to continue to improve the bottom line and to compensate for those pressure from the open market. We have the four converting lines from Oregon that we are actually removing or reinstalling into our network that should give us a few million cases of additional capacity throughout the year. So that should also help us to compensate. So we're really confident to be above last year. That's it. I don't know if I answered your question.

That's helpful. Thanks very much. That's all from me. I'll turn it back.

Your next question comes from Cassia Kopisak from TD. Please go ahead.

Hi, good morning, everyone. Question on the Container Board price hike. I'm not withstanding that this is a cost led initiative to begin with. As you're going through your discussions with customers, is this one proving to be a little bit more difficult to implement versus prior rounds, just given some of the deconsolidation that we're seeing in the Container Board industry right now?

So a price increase is always a discussion between our customers and us. So we've done quite a few over the years. So I would say that every time we need to spend the time for them. You mentioned this one and you saw the input cost inflation, which our customers are seeing the same thing also. So this is the level of discussion we're having with them that in order to be a supplier for the long term and being able to reinvest in the business, that's why we're pushing for the increase. So we're working on implementing and that's the line that we're using. Costs are going up for everybody and we're talking about energy, chemicals, transportation, dough, the inflation has slowed down a bit. They're still there compared to two years ago. So this is the level of conversation we're having with our customers.

Okay, thanks for that. And just turning over to Bear Island, you provided a bit of commentary there already. Are you able to quantify the EBITDA contributions from Bear Island in Q4 and how that's trending now in 2024 and how you expect that to trend going forward? So

we're not going to disclose any numbers. The only thing we can say is that in Q4 it did achieve a breakeven for a quarter, and we expect that the mill will start contributing in 2024.

Okay, thank you. Last one for me. Last quarter, I believe you touched on possible tissue price hike pressure just due to government incentives. Is that something that went away or you saw more of that this quarter, or maybe just some commentary around tissue prices?

It went away, I will say, because of the inflation that continued and the pricing on pulp and recycled fiber that continued to increase. So honestly, we don't foresee major price concessions in the future, and I believe we can even see price increase at some point if things continue to go that way. The thing is we're going to continue to follow the market carefully as we want to protect our margin. Great,

thanks. I am going to sneak one final one in here just on recycled fiber prices. Do you have a midterm view of where they're heading and what is your inventory situation like right now?

Well, our inventories are pretty good actually. We obviously managed the closure of the mills and moved the tons around our network of mills. And we have to understand that this season is a typical low generation season, so it's not unusual to be in the conditions we are now with a low generation and a consistent demand. And so we do expect that over the next two weeks, typically in March, the generation will pick up and the market dynamic will move positively in terms of price of fibers. But we're currently in a situation where the demand is consistent, the domestic demand is consistent. We are in the lowest generation season and export is not currently a factor influencing the market at this moment. For OCC, I'm talking here.

Okay, thank you everyone.

Thank

you.

Again, if you'd like to ask a question, please press the star and then the number one on your telephone keypad. Your next question comes from Zachary Evershed from National Bank Financial. Please go ahead.

Good morning everyone. Good morning. It's been a bit of an issue in the past at times, but can you comment on any discrepancies between what you're seeing in terms of pricing in the market versus what Risi is reporting for either line of board or media?

I'm not going to comment on publication or market. The only thing, as I mentioned, we're working with our customers on our pricing, but I'm not going to comment on specific index compared to what the market is the actual over. I'm not going to go there.

Gotcha. And given your mix of integration and shipments, can you remind us of how the timing of how your contracts and container board interact with changes in the benchmark and how much of that business is adjusted automatically? Yeah,

so with the contracts on and we're talking right now, the what is the publication index move? There's, as I mentioned, we're still working on initiatives to implement what we have announced, which is higher than what the index has recognized. Okay. So in our system with the contracts, it's on a period of six months. So fully implemented by Q4 of 2024 roles, parent roles being faster within the two months. And then the rest of the contract that we have to take till the end of the year with the impact, as we mentioned, of approximately $50 million during

that period.

Thank you. And then it looks like your capex for the year came in below guidance. Can you give us any commentary on what's driving that? And will there be a catch up later?

Well, we, we manage our cash flow carefully. We had a, we were slightly above what we said last year due to the accounts payable variations on a cash basis were slightly higher, but lower on a gross basis. But to answer your question, no, there's no significant catch up. It will, we still have the envelope of 175 for 2024.

Thank you very much. I'll turn it over.

Thank you. There are no further questions at this time. Mr. Ploude, please continue.

All right. Thank you everyone for being on the call this morning and looking forward to talk to you on the next quarter. Have a good day, everyone. Thank you. Thank you.

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