Cascades Inc.

Good morning. My name is Sylvie and I will be your conference operator today. At this time, I would like to welcome everyone to Cascade First Quarter 2024 Financial Results Conference Call. At this time, all lines are currently in the listen-only mode. I will now pass the call to Jennifer Aitken, Director of Investor Relations for Cascade. Madam Aitken, you may begin.

Thank you, Sylvie. Good morning, everyone, and thank you for joining our first quarter 2024 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. Today's speakers will be Mario Ploude, President and CEO, and Alan Hogg, CFO. Also joining us for the question period at the end of the call are Charles Marleau, President and COO of Container Board Packaging, Jérôme Porlier, President and COO of Specialty Products, Jean-David Taroudis, 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 Q1 2024 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 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 consolidated results. First quarter sales levels decreased by roughly .5% sequentially year over year. This performance was in line with our expectations. Softer selling prices in all of our businesses were the main headwinds year over year, the effect of which were partially upset by a better sales mix in tissue, a stronger volume in our packaging businesses. Sequentially, sales mix, volume, and less favorable exchange rate were the main factor behind the lower sales. Consolidated EBITDA of 103 million decreased 23% from the prior year and 16% from Q4. This performance was in line with expectations given recent index pricing movement, the impact of which was most prominent for our container board business. To this end, lower pricing and higher raw material costs were the main drivers of our lower performance year over year and fully upset beneficial volume and mix in packaging, lower raw material costs in tissue, and lower operational costs on a consolidated basis. Sequentially, the combined impact of higher operational costs and less favorable volume in sales mix far outweighed slightly stronger pricing. On the raw material side, highlighted on slide 5 and 6, the Q1 average index price for OCC increased 206% year over year and 22% from Q4. The OCC market saw consistent strong demand, including growing amount needed for new recycled paper grade, the Q1 average index price for OCC was a significant increase in the demand for container board mail being ramped up and lower seasonal generation levels, which put upward pressure on pricing. We had no problems applying the needs of our operation with good inventory management. Average Q1 index prices for white recycled paper grade increased 2% sequentially, but were 36% below prior year levels. The market was relatively balanced with index prices not being significantly impacted by virgin pulp pricing movement. Pulp pricing was higher sequentially, up 10% in the case of softwood and 13% for hardwood. Year over year, however, prices for both softwood and hardwood pulp remain lower, down 14% and 20% respectively. Market conditions were impacted by a multiple factor including downtime and permanent closure in North America, a port strike and unplanned mail downtime in Finland, and reduced traffic and key shipping routes. Notwithstanding these, the market conditions, the material has been readily available for our mails. Moving now to the result of each of our business segments as highlighted on page 7 through 12 of the presentation. Beginning with container board, sequential sales decreased by a marginal 1% in Q1. This reflect lower selling prices following index change in November 2023 and a less favorable sales mix and exchange rate. These were partially offset by higher volumes with the 9% sequential increase in parent-owned shipments and 3% decrease in converted product shipments, both related to seasonality. As previously announced, we took 19,800 short-term maintenance and inventory management related downtime in the quarter. Sequentially, converting shipments decreased 3% in Canada below the .7% decrease in the Canadian market. U.S. converting shipments decreased .7% below the .3% in the U.S. market decrease. Q1 adjusted EBITDA of 50 million or 9% on the margin basis was 25% below Q4 levels and was in line with expectations. The decrease reflect the impact from higher operating energy and raw material costs. The Trentham-Papermill closure announced in February also had a negative impact on our first quarter results. The over-year sales also decreased by 1% with the impact of lower selling prices largely offset by higher volumes. EBITDA level decreased by 60%, a reflection of the combined impact from lower pricing and higher raw material and operational costs, including costs associated with the New Bear Island. These were partially offset by improved volume and a more favorable sales mix. The over-year shipment increased by 8% in Q1 largely related by the New Bear Island volume. Converting shipment increased by .4% in Canada, upperforming the .3% increase in the Canadian market. U.S. converting shipment increased 16.8%, once again significantly outperforming the 1.1 U.S. market decrease. Continuing with our packaging business, Q1 sales levels in our specialty product segment were stable sequentially as slightly lower volume and the impact from a less favorable exchange rate were offset by a better sales mix in the mobile business. EBITDA increased by 6 million sequentially, driven by higher spread in the plastic business and lower operational costs. These were partially offset by higher raw material costs in the cardboard segment. On a margin basis, the business Q1 margin was 15.6%. When compared to the prior year, Q1 sales were stable as the impact from lower selling prices in the cardboard subsegment was offset by benefit from higher volumes in the plastic business. EBITDA levels decreased by 2 million -over-year to 25 million in Q1 as the impact from lower selling prices in cardboard and higher recycled fiber were partially offset by benefits from lower resin and better volume in our plastic packaging activity. Moving now to our tissue business, Q1 sales in the segment decreased 6% sequentially, reflecting a 14% decrease in volume in the -from-home market that is attributable to usual seasonality and the impact from a less favorable exchange rate. First quarter EBITDA of 50 million decreased from Q4 levels, reflecting lower average selling prices due to contractual mechanism, higher raw material and maintenance costs and lower volume in the -from-home. Q1 margin of 13.6 remained solid but were below the .6% in the previous period. Sales decreased by 5% -over-year. This reflects a 7% reduction in shipment level, which was driven by a 65% decrease in shipments of parent rolls following mail closer and higher internal consumption as highlighted by this business integration rate increasing to 94% from 84% a year ago period. On the converting side, shipment decreased by 3%, the result of a 5% decrease in the -from-home following plant closer offset by an 8% increase in retail. The average selling price increased by 3% driven by the lower proportion of parent rolls in the sales mix, partially offset by a slightly lower average selling price due to contracted pricing model agreement and the less favorable exchange rate. -over-year, EBITDA was well above priority levels. This is the outcome of lower raw material, energy transportation and production costs, the last of which reflect benefits related to lower fixed cost level following plant closure. These tailwinds were partially offset by lower selling prices and a net negative volume and the sales mix effect. Alan will now discuss the main highlight of our financial performance. Alan?

Yes, 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 $28 million of restructuring costs related to the closure of plants, mainly container board and tissue that altered over the last 12 months. Slide 15 and 16 illustrate the -over-year sequential variance of our Q1 adjusted earnings per share and the reconciliation with specific items that affected our results. As reported, Q1 net loss per share was $0.20, this compared to a net loss per share of $0.75 last year and $0.57 in Q4 of 2023. On an adjusted basis, net results per share were $0 in the current quarter, this compared to net earnings per share of $0.32 in last year's results and net earnings per share of $0.05 in Q4. -over-year, this variance mainly reflects lower EBITDA and higher financing and depreciation expenses, while sequential variance reflects lower EBITDA levels. As highlighted on slide 17, Q1 adjusted cash flow from operations was $46 million, down from $90 million in the year-ago period and $103 million sequentially. Adjusted cash flow use in the Q1 improved -over-year, largely reflecting last year the lower capital investment associated with the Maryland project. Sequentially, adjusted cash flow from operations decreased due to lower EBITDA and higher net financing expenses paid in the first quarter. Slide 18 provides detail about our capital investments. New investment in the first quarter totaled $25 million. For 2024, our planned capital investment of $75 million has not changed. Moving now to our net debt reconciliation, sequentially our net debt increased by $138 million in the first quarter, reflecting a lower cash flow from operations, a $38 million negative impact from a less favorable exchange rate, $41 million in paid capital investments and a negative working capital variance, which is usual in the first quarter. Our leverage stands at 3.8 times at the end of Q1 from 3.4 times at the end of 2023. In mid-April, the company entered into a $175 million unsecured delayed drop term loan facility to manage upcoming maturities, notably the January 2025 Canadian dollar senior notes. In the event it is drawn upon, the new facility will mature on December 31, 2026 and will bear interest at a variable rate. Financial ratios and information about maturities are detailed on slide 20, and other information and analysis can be found on slides 23 through 30 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 details regarding our near-term outlook on slide 21 of the presentation. I would remind you that this outlook is based on current index pricing and our forecast and expectation as of today. Actual results may differ from this outlook in the event of movements in the index pricing, both in terms of raw material costs and selling prices. We have modified how we present our outlook to provide greater clarity. Starting with container board segments, we are expecting Q2 results to be stronger sequentially. In the current outlook, this reflects higher selling prices as the benefit from index pricing movement begins to flow through results and good volume giving stronger seasonal trends. Raw material costs remain elevated and will continue to be a headwind for the business. We are also planning approximately 27,000 short-term maintenance downtime in the quarter. This includes 11,000 short-term at GreenPak to align with major maintenance that is occurring at our steam supplier. To offset higher operational and raw material costs, which continue to rise and have not been fully mitigated by the partial recognition of the last increase, we have announced a $60 per ton increase for liner and an $80 per ton increase for medium effective June 3. Results in the specialty product segments are expected to be stable sequentially, reflecting higher selling prices in some business segments and efficiency improvement. Raw material costs are also expected to be a headwind for this business sequentially. Our outlook for tissue is for second quarter results to be stable with benefits from stronger volume largely offset by lower selling prices due to the timing effect of customer pricing agreement and higher raw material costs. Let me conclude by saying that we remain positive about the future performance of our businesses and our team continue to manage each of them with a view of driving profitability, efficiency, productivity in their competitive positioning. With that, we can now open the calls to question operators.

Thank you. Ladies and gentlemen, if you would like to ask a question, simply press star then number one on your telephone keypad. And if you would like to withdraw from the question queue, please press star followed by two. Again, if you have a question, please press star then number one on your telephone keypad. And your first question will be from Premier Patel at CIBC Capital Markets. Please

go ahead. Please unmute Amir. I'm sorry, not getting a response.

We will move to Sean Stewart at TD Cowan.

Thank you. Good morning, everyone. A couple of questions on container boards. Mario, wondering if you can comment on your thoughts on tension in the market right now. It doesn't seem like inventories are too low across the system ahead of the June price increase efforts. Your thoughts on an ability to pass through price hikes when it's a cost push exercise instead of a tight market induced initiative?

Well, considering the market, actually, you know, we saw, I would say, a slower beginning of the year this year. But as we speak, we see a pickup in demand in most of our business segments, most notably in the distribution and e-coms. So, you know, we're coming into a more active season with the possibility of a price increase. I would say the increase in cost in the business in general for the last 12 months certainly justified these price increase to go through, especially with the last price increase have not been reflected in the index. So, you know, I would say just the cost increase would justify that increase to go through. But difficult to us to predict because, you know, we don't control this. But that's my take on that.

Okay. Thanks for those thoughts. I also wanted to ask about integration rates in your container board segment. Any updated thoughts on the best approach to raise those integration rates going forward so you're not so exposed to parent roles? Organic versus M&A, any updated thoughts on options for your company on that front?

So, Sean, this is Sean. So, there's a few things. The first part for us is to maximize the use of our network that we have already installed. And you can see that we're making progress on that. And then, as Mario mentioned, the strategic markets that we decided to go after are paying up when you look at our growth compared to what's going on in the market being the EECOM and distribution. So, this is going in the right direction. So, just like that, this is the first step that we are focusing on. The fact that we also took some of the capacity closing down our non-efficient mill in Trenton also has an impact on our overall numbers. And, yes, we are looking now and looking at opportunity for our growth. But our first move was really to make sure that we would ramp up our bare-aland facility first and then working also on expanding our growth with acquisition or greenfield. We're looking at both.

Thanks, Charles, for that detail. That's all I have.

Thank you. Next question will be from Matthew McKellar at RBC Capital Markets. Please go ahead.

Hi. Good morning. Thanks for taking my questions. Maybe first, operating costs are called out as a factor for Container Board and Tissue in Q1, and you noted higher operational costs in Container Board as a factor for Q2. Could you give a bit more color on what you're seeing and where you're seeing the most pressure on costs today?

So, a few points. First of all, Q1 for Container Board. In Q1, the energy due to seasonality is always one that has a bit more pressure on our costs. But the other one which makes a lot of pressure on our overall costs right now is the Fiber, the OCC, which has a major impact on the overall operation. The other thing is we now have the full impact of the cost structure of the Bear Island, and we're still in ramp up as we speak.

On our side, Matthew, Jean-Lavette speaking for Tissue. Raw materials are definitely the most significant impact. As you see, virgin pulp prices increase month after month. But we see a decrease in the SOP last month, so that was good news for us. Maintenance costs were a little bit higher on Q1, but back under control for the coming quarters.

Great. Thanks for that color. Next, when you first announced the Bear Island conversion project, I think you were talking about ramping up operationally to about 80% within a year or so. Sounds like things are going well, but if you could confirm if that's roughly where you are today, that'd be helpful. And then if you could give us a sense too of where financial contribution is in terms of where you ultimately intend to end up, that would be helpful. I know you talked about being breakeven last quarter. Any sense of where you are today would be great.

Thanks. Matthew, we won't comment on specific contribution now, but you can imagine with market conditions, there's some impact on Bear Island. But I'll let Charles comment on the productivity and the volume side of it.

Yes, so we're still in line with our ramp up towards the end of the year. Like you mentioned, the percentage is still aligned with that. Actually, we're getting closer to this as we speak. That's why right now what we're doing is really, as you know, when we have a startup like this, the beginning is to qualify product, qualify to customers. And now we're in the stage of making sure that we optimize. So working on our consumables, looking at how can we improve our cost structures. So this is really what we are working on as we speak. To give the ramp up on the productivity and the quality of the product is really going according to what we have planned.

Great, thanks. And last one for me. Your sequential even the reconciliation for the last two quarters each noted lower results from recovery operations. Can you give us just a bit more detail on why results were lower each in the last couple of quarters?

Why the results are up, you mean?

Possibly I misunderstood, but on slide 27, I think I noted lower results from recovery operations.

Yes. Luke, do you want to comment on the overall condition in the recovery operations?

Yeah, well, the overall, you know, through the year of 2023, the situation improved because the margins improved in the recovery business. We're still slightly impacted by the volume as now, you know, as the generation has been slightly softer than it used to be in the first quarter of 2000, in the first quarter of 2024 versus the previous years, representing pretty much what the economy is currently. I don't know if it answers your questions.

So, Matthew, we improved over a year, but it was slightly lower. Exactly.

OK, thanks for the help. That's all for me. I'll turn it back. Thank you.

Thank you. Again, if you would like to ask a question, please press star and number one on the telephone keypad. And your next question will be from Zachary Evershed at National Bank. Please go ahead.

Thank you. Good morning, everyone, and congrats on the quarter.

Morning.

I was hoping you could give us a bit more detail on the customer pricing model in tissue, because it does look like pulp costs are increasing sequentially over the last two quarters, but you're getting some lower selling prices. So are those tied to SOP?

Yeah, it's tied to multiple indexes. It's SOP, virgin pulp, freight energy. Depending on the customer, there's different components. But most of the time it's on a six-month basis, so that's why there's a lag between increased decrease or adjustment. That's why we saw that effect lagging behind, I would say, the index prices.

Gotcha.

Thanks. And maybe we could add how much of the percentage we've said in the past. Right now we are

talking about 25 percent of the volume being tied to. Of the retail?

Of the retail. Mainly in retail?

Yeah. Tied with the

price change. Okay.

Gotcha. Thanks. And would you say your plans for the fiber mix at Bear Island have changed given movements in OCC and mixed costs?

I'm sorry, I missed the beginning of

the question.

Of the recipe in Bear Island. Is the plan changed? Yeah,

so we are in ramp up. So what we're doing right now, our first step was to produce the paper, so that's what we did, I would say, towards the end of the year in Q4, but beginning of this year in 2024, we are increasing the content of the mixed product at the mill, but we are cautious also on making sure that we produce the good quality and we have control on our product. But yes, the goal is to use the investment that we made at the mill, as you know, we can go up to an average of 60 percent, depending on what we produce, in mixed waste. So we're not at that stage right now, but we are going month after month, increasing the percentage to benefit because right now it does bring a benefit to the mill.

That's great. Thanks. Good color. I'll turn it over.

Thank you. At this time, there appears we have no further questions. Monsieur Proulx, please continue.

Thank you everyone for being on the call this morning. We wish you a nice rest of the week and hope to see you on the next call. Thank you very much.

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