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 the Cascade Fourth Quarter 2024 Financial Results Conference Call. Note that 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 Aitken, Director of Investor Relations for Cascade. Please go

ahead, Ms. Aitken. Thank you, Sylvie. Good morning, everyone, and thank you for joining our Fourth 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 Hugues Simon, President and CEO, and Alan Hogg, CFO. Also joining us for the question period at the end of the call are Jean-David Tardif, Executive Vice President of Packaging, and Jérôme Parguet, Executive Vice President Tichy. 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 measured measures of performance under IFRS. Please refer to our Q4 2024 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, Hugues Simon, who will begin with a review of our Q4 performance. Hugues?

Thank you, Jennifer, and good morning, everyone. Our Fourth Quarter performance was in line with our expectations. Sales levels were stable versus Q3 and increased 6% year over year. Sequentially, favorable average selling prices and exchange rate upset softer seasonal volume and a slightly negative sales mix. Year over year, selling prices, volume, and exchange rates were all tailwinds in our packaging businesses. Consolidated EBITDA of $146 million increased 4% from Q3, mainly reflecting lower raw material cost in our container board segment. Year over year, Consolidated EBITDA increased 20% due to stronger contribution from our packaging activities. On the raw material side, I highlighted on slide 5 and 6, the Q4 average index price for OCC decreased 23% from Q3 and was stable year over year. Fiber availability was good with strong seasonal generation and low overall export activity, leading to a $20 per short term reduction in October and a further $5 reduction in November and December. We don't expect any major change in these market conditions in the coming months. The exception to this would be the potential disruption related to tariffs, which I will touch on later. Average Fourth Quarter index prices for white recycled paper grades decreased 7% from Q3 and 14% from last year. The market remained balanced, with readily available volumes of fibers translating into a small decrease in pricing in the quarter. We began to see tighter supply in late December on stronger demand from tissue mills, conditions that have continued into January, which led to a $10 increase recently. Bulk prices were lower sequentially, down 4% in the case of softwood and 12% for hardwood. Year over year prices remain higher, up 29% and 20% respectively. Market conditions improved in Q4, with an abundant supply of eucalyptus leading to decreases in index prices. We expect stable market conditions for these grades in the coming months. Softwood grades saw more stability in Q4, but continued concern about wood supply support for a more prudent market environment. Tons are readily available and our mills are well supplied. Lumber tariffs imposed in the future may impact Canadian pot mills and we're making necessary plans in the event this occurs. 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, Q4 sales were stable sequentially, with higher average selling prices upsetting lower seasonal volumes. Sequentially, shipments decreased 1% from Q3. This reflects a 1% decrease on the parent role side and a 2% decrease in shipment levels of converted products. Converting shipments decreased .7% in Canada, below the .7% decrease in the Canadian market. US converting shipments increased 3.7%, outperforming the .1% market decrease. EBITDA in Q4 was $104 million, or 17%, on a margin basis. This represents a 16% increase from Q3 and is the fourth consecutive EBITDA improvement. Results benefited from lower raw material costs, recent market price increases, and beneficial exchange rates. These benefits were partially offset by lower volumes. -over-year sales increased by 9%, with benefits from higher selling prices and volumes and more favorable exchange rates upsetting a sales mix impact. EBITDA levels increased 55% from a year ago period. -over-year shipments increased by 3% in Q4. This reflects an .5% increase in parent role shipments, reflecting the growing production at the Bear Island facility, and a .5% decrease in shipments of converted products. Converting shipments decreased by .5% in Canada, below the .8% increase in the Canadian market. US converting shipments decreased 1.4%, below the .2% US market decrease. Full year 2024 converting shipments increased .7% in Canada, slightly below the industry's 5.1%. In the US, shipments increased by 3.6%, outperforming the industry's .1% increase. The specialty product business continued to deliver solid results. Q4 sales increased 4% from Q3, on improved selling price, sales mix, and exchange rate. EBITDA was up 4% or 1 million from Q3, driven by higher realized spreads, and a margin of 16% remained solid. -over-year sales increased 9% in Q4, with higher selling prices in certain products, stronger volume, and a favorable exchange rate, driving this growth. EBITDA improved by 47% or 9 million on higher realized spreads. Moving now to our tissue business. Forkwater sales increased 1% sequentially, as higher average selling price offset lower seasonal volume. Converted product shipments decreased 2% in Away From Home and 1% in the retail market. EBITDA of $45 million increased 5% from Q3, and is in line with expectations, driven by selling prices and lower raw material costs. Sales also increased 1% -over-year. This reflected favorable exchange rate, offset by a slightly negative average selling price. Shipments were stable -over-year. On the converting side, shipments were stable, the results of a .8% increase in retail, and a .9% decrease in Away From Home. The average selling price increased by 1% -over-year, reflecting sales mix and the beneficial exchange rate. -over-year EBITDA decreased by 16 million, reflecting mainly the outcome of higher raw material costs. Corporate activities contribution was 11 million lower this quarter, compared to the third quarter due to an unfavorable exchange rate variation on working capital and treasury items, and higher costs related to health insurance for US employees. I'll now pass the call to Alan, who will briefly discuss some of the financial highlights.

Alan? Thank you, Uygh, and good morning everyone. Slide 12 and 13 illustrate specific items recorded during the quarter. The main items that impacted EBITDA were $8 million of restructuring costs and $55 million of employment charges, resulting from a previously closed plant in the US and from a decision to discontinue some production lines in the US. These were offset by a net gain of $8 million related to the disposition of assets. Slide 14 and 15 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 13 cents, this compared to a net loss of 57 cents per share last year and net earnings per share of 1 cent in Q3. On an adjusted basis, net earnings per share were 25 cents in the current quarter, this compared to net earnings per share of 5 cents in last year's results and 27 cents in the third quarter of this year. -over-year, these variance mainly reflects stronger EBITDA, while sequential variance reflects higher EBITDA levels offset by higher depreciation and amortization expense. As highlighted on slide 16, fourth quarter adjusted cash flow from operations was $129 million, up from $103 million in the year ago per year and from $86 million in Q3. Adjusted cash flow generated in the fourth quarter improved -over-year, largely reflecting stronger cash flow from operations and the higher level of capital investments in the year ago per year. Sequentially, adjusted cash flow generated increased with stronger cash flow from operations and lower financing expenses paid. Slide 17 provides detail about our capital investments. New investments for the full year total $148 million, slightly below the previously disclosed forecasted level of approximately $160 million. For 2025, we are forecasting approximately $175 million of capital expenditures. Moving now to our net debt reconciliation, as detailed on slide 18, sequentially our net debt increased by $57 million in the fourth quarter. This reflects a negative $114 million impact related to exchange rates. These agreements renewal our additions and paid capital investments. These were partially offset by positive impacts from cash flow from operations, working capital variances, and proceeds from the disposal of assets. Higher level of net debt and lower EBITDA levels on the full year basis increased leverage to 4.2 times. This compares to 4.3 times at the end of Q3 and 3.4 times at the end of 2023. Also note that on January 15, 2025, we repaid our Canadian senior notes coming to maturity with funds from our revolving facility. Also in January, we made some amendments to the delayed unsecured term loan facility put in place earlier this year to convert it to a $121 million U.S. dollar facility maturing in December 2026. Financial ratio and information about maturities are detailed on slide 21, and other information and analysis can be found on slides 23 through 30 of the deck. I will now pass the call back to Uygh who will conclude with some brief comments before we begin the question period.

Uygh? Thank you, Alain. CASCAD has always been driven to be transparent, a key part of which has included providing a near-term financial and operational outlook with quarterly results. Unfortunately, the high level of continued uncertainty surrounding the macroeconomic and political environment is such that we'll pause this practice for now. The risk of bilateral tariffs being implemented has the potential to have broader implications on the economy and is difficult to predict. While we will not be business specific details, we believe it's important to convey that we continue to expect that raw material prices will be a tailwind for our businesses in Q1, and we're currently seeing steady seasonal demand volumes. Before opening the call to questions, I'd like to elaborate on the potential impact that bilateral tariffs may have on our companies specifically, and the proactive measures that we're taking to prepare for their eventual possibility. Annually, we generate approximately 11% of our sales from products we make in Canada and sell into the US. Cross-border inter-company transfers, including raw material used in our operations, increase this tariff exposure to roughly 15% of our revenues. We've begun to implement a variety of initiatives to mitigate this risk. These include changes to our raw material sourcing, reallocating production where possible to minimize the need for cross-border transit and implementing commercial strategies with suppliers and our customers. In addition to these processes, we have in place to monitor and minimize the potential impacts on our operations. We also are actively engaging with governments, along with numerous other Canadian companies, who explore ways that Canadian manufacturers can maintain competitive positions. Notwithstanding the risk associated with the broader economic and political environment, we're sharing our strategic focus areas for the next 24 months on slide 20. The first of our three main priorities is to build and solidify a culture of excellence throughout the organization to drive sustainable profitability growth. The second focus area is on improving operational and commercial alignment, which includes optimizing our commercial approach and reinforcing our positioning as a partner of choice for our customers. The third and final cornerstone of this 24-month strategy is to prioritize the deployment of the resulting higher free cash flow levels towards debt reduction. We believe that by achieving these objectives over the next 24 months, we'll support the future growth of Cascades and create value for all of our shareholders. With that, we can now open the call to questions. Operator?

Thank you. If you would like to ask a question, please press star then number one on your telephone keypad. And if you would like to withdraw from the question queue, please press star then number two. Again, if you have a question, please press star then one on your telephone keypad. And your first question will be from Nikolai Gorbache at CIBC Capital Market. Please go ahead, Nikolai.

Hi, hope you're doing well. We recently saw International Paper announce a large container board mill closure. Do you expect to see any other high cost mills closing in additional capacity, exiting the market going forward?

Thank you for your question. We'll not comment what our competitions are doing, but it's something that we look at supply and demand all the time. And what we're seeing right now in our order file is steady given the seasonal volumes. That being said, the risk of tariff, we might see some different behaviors, but we're tracking that situation closely.

Okay, I see. I see. And on tariffs, in the scenario tariffs are implemented, do you see any demand destruction from Canadian customers? And so what do you see as a downside to industry box shipment volumes?

Well, when we look at Cascade specifically, basically like from liner board medium positioning, about two thirds of our raw production is in the US. But as you mentioned, the key risk is really slowdown of the economy in Canada. So then it's not material from Canada going to the US, but it's the Canadian economy overall. So that's definitely something that we're tracking because the slowdown of the economy will mean less shipments, every kind of products, whether it's shipped in the US or within Canada.

Okay, I see. Thank you. That's it for me.

Thank you. Next question will be from

Sean Stewart at TD Cowan. Please go ahead.

Thank you. Good morning. A few questions. You go want to revisit the tariff. Detail you've given and I'm wondering if you can give a little bit of nuance of the Canadian sales exposure to the US broken down between container board tissue and specialty packaging and I guess more broadly thoughts on your ability to pass tariffs on to customers and imagine that would differ across product lines, but any nuance commentary you can provide on that front?

Yeah, thank you for your question. We've been working on potential tariffs since the fourth quarter of 2024. I think some work streams will make sure that not only we 100% understand our exposure, but we start looking at alternatives. So between tissue packaging, we're not going to disclose any specific information, but it's something that we track and also a variety of activities to make sure that we mitigate those potential impacts. So it's a work stream we've been working for quite a while now. So we have a plan when the government of Canada also announced its first list of products that would be part of a potential reaction from Canada to the US. So it's something that is changing daily. The devil is in the details, but we have some pretty good action plans to mitigate as much as possible. Some of the products that we manufacture like tissue basic care products have a different behavior in a context of tariff. So the devil is really going to be in the details, but definitely a slowdown in the Kenyan economy is something that would have an impact on any companies in Canada.

Okay, thanks for that detail. Next question, there's mention in the strategic priorities of non-core asset sales, essentially targeting 80 million in proceeds this year. Can you give us a sense of what specific assets you're looking at as a part of that program?

Yeah, so without going too specifics because like for the sensitivity of some of the assets we're looking at, we're really looking at non-core, some of the real estate that we have that is not operating. So we're not looking at anything that has a significant impact on our operational cash flow generation. But really when you look at the portfolio of assets that we have, there are areas where we can monetize some of the assets, whether we continue to operate them in a different pattern is one option, but definitely trying to monetize to reduce our debt level.

And remember Sean, that we closed assets and tissue in the last couple of quarters, so these are part of this target.

Okay, last one for me, any updates on Bear Island ramp up your uptime targets being met? Any context you can give us on where we are with respect to operating rates there?

Yes, basically when we had the last discussion in the third quarter, we stated that we had a gap of 20% versus where we wanted to be. When we look at the month of October, November and December, all three months had improvements from previous month, with the month of December being roughly like basically covering half of that gap, so roughly between 10 and 11%. That being said, it's a startup, so I expect we'll continue to have some hiccups, but we're fixing stuff and we're fixing them permanently, so very pleased with the improvement in Q4. The plan is for the end of this year to meet our production target in 2025. Yeah, so I guess that's the update I can give you.

And half the gap, you know, closing half of the 20% gap, that doesn't mean getting to 90% operating rates, it means closing half the gap of where you plan to be at this point. Is that the right context?

Yes, exactly. With a ramp up curve happening throughout 2025. Got it. Okay,

that's all I have for now. Thanks

very much.

Welcome.

Next question will be

from Jonathan Goldman at Scotiabank. Please go ahead.

Hi, good morning and thanks for taking my questions. Hugh, in the release, I just want to clarify something in the prepared remarks as well. You noted you're currently seeing steady seasonal demand levels. Are you referring to year over year or quarter over quarter levels and is that across all of your segments?

Well, that's basically year over year from a seasonal standpoint, right, because some of the I mean, the one that there's some few exceptions, but overall, I mean, in packaging as a business, we're seeing pretty steady demand levels versus seasonality. So from last year, and tissue on the way from home, we see some movement between away from home and retail, which is very normal at this time of the year. But overall, it is pretty steady.

Interesting. And you did provide a lot of around tariffs and potential actions. But have you seen any change in customer behavior so far, whether that's pulling forward demand, stocking up, maybe dialing back demand, anything in that relations?

Yeah, it's great question. And it's something that the sales teams are looking at on a daily basis. Second, the biggest thing that we see so far is a lot of good discussion between our sales team and customers on together finding ways to mitigate any potential impact. I mean, it's a potential impact for cascade. But also, I mean, I think customers realize that a 25% tariff will mean that, you know, pricing will be somehow different. So they're looking at actions to mitigate on their part, to see whether they can, you know, move from one place to another and make sure that our trucks come back full this way. So there's a lot of discussions about trying to mitigate. And there's also a lot of discussions about alternatives outside of the US. I think with the political positioning in the US that we see, it's not just Canada, right? So it's other countries as well. So we really see customers overall trying to work with us to find some solution to mitigate.

Interesting. And maybe if I can squeeze one more in, maybe for you, Alan, on the working capital. I think we typically see a bigger release in Q4 than we saw this quarter. Are there any unusual dynamics there, maybe specifically around inventories or receivables?

No, no, there was no specific items that comes to mind. No, there was nothing. Inventory, for sure inventory are up at the end of the year. We produce well. Let's see, continue to board in the last couple of weeks of December. So obviously, inventory are higher at the end of the year.

Okay, perfect. Thanks for taking my questions.

Thank

you.

Next

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

Good morning. Thanks for taking my questions. I'd like to ask first about your efforts to mitigate the impacts of potential tariffs. You mentioned changes to raw material sourcing, reallocation of production to minimize inter-country shipping and adapting commercial strategies with your customers and suppliers. How much of what you mentioned here has already implemented today versus really just planning and actions you essentially plan to take should tariffs occur? And with that, how do you estimate the financial impact of those changes you made so far to be on the next couple of quarters, assuming that we ultimately do not see tariffs implemented?

Yeah, great question. We're not going to put some numbers into all of the actions that we're taking. As far as implementation, we're not pre-implementing anything that would have a negative cost forecast case, but we're getting ready so that the implementation phase would be as quick as possible. Understanding that is a threat of tariffs right now and the devil is going to be in the details. Depending, you know, what you read and when you read it, the number of products differs. So we're taking the worst case scenario to prepare, which means all of the products from Canada to the U.S. They're very specific actions and when we talk about, to give you an example, I mean our company is very integrated, you know, from the south part of Canada to the north part of the U.S. with operations in Ontario and in the northern U.S. So part of our -to-day logistics is to do some cross-border of some items. We have ways to mitigate that. We were doing that because it was the most efficient way with the actual rules, but if the rules change, I mean, there are many things that we can do to mitigate that. So we're getting ready for that. We're getting ready to make sure that if it means to have some approval of specification, we're ready for that. But as far as incurring significant additional costs, we're not doing that right now.

Okay, thanks for that, Keller. Next for me, just

focusing on a couple of items from your strategic priorities, maybe first around profitability, what kind of improvements can you ultimately achieve here? And I mean, through the productivity initiatives, optimizing your logistics and cost structure, and if we assume the threat of tariffs fade away, can we quantify what you aim to achieve here? And then second question would just be around the recalibration of your product offering. Was that a comment on both the packaging and tissue businesses? And again, how meaningful could this be for you financially?

Yeah, so I mean, we've took the position not to quantify whether we guide for the next quarter or some of the initiative. And I'm sure you understand because of all this unknown in the tariff. And I mean, the tariff is one thing, the impact on global economies in both US and Canada is probably what drives the, you know, the cascade not to put some specific numbers. You know, prior to those tariff discussions, I mean, we have internal numbers, we have specific targets to the workstream of what we're doing. But there's so much unknown in the economy right now that we felt wouldn't have much value to just throw a number out there. We're going to wait and see, you know, the bilateral discussions and negotiations between both Canada and the US. And when we'll feel that the stability is, you know, back and good enough so that our level of comfort with looking ahead is acceptable, then I mean, we'll go back to guiding. I think guiding is a, you know, it's a good thing. But right now, I mean, there's so much clouds on the sky that we're just going to pause on sharing some of the targets. But it doesn't mean that we don't have internal targets. As far as product lines that you talked about, if you recall, last quarter, we stopped producing some of the SKUs in the tissue. I mean, we're optimizing product offering based on what customers are looking for, making sure that we stay very close to what they need, because it does change at some point. So it's both for tissue and packaging. It's into the last part of your question. It is significant enough that it's a big component of our strategy is to optimize the assets that we have. To us, this is low capex cost and very fast return. So just to make sure that we organize in a very, very efficient way, the way we go to market, the way we produce and the way we prioritize our production runs, there's enough cash out there to make it a priority for Cascade for the next 24 months.

Great. Thanks very much for the help. I'll turn it back.

Thank you. Next question will be from Zachary Evershed at National Bank Financial. Please go ahead.

Good morning, everyone. Thanks for taking my questions.

Good morning.

Could you give us more color on what's driving the higher corporate costs,

please? I'll let Alan. Yeah,

well, as Ed mentioned in his comment, there was two items during the quarter, the exchange rate loss on the working capital and treasury items at the end of the year. So everything is centralized now. So we take all the variance in corporate. And there was additional costs for US health insurance for our US employees. So a couple of events that happened and unfortunate events. So we had to incur some additional costs in Q4. So

and no contribution from severance or layoffs or anything like that?

Contribution from severance? No, there was no couple of severance. It's all in specific items under restructuring.

That's helpful. Thanks. And then you also mentioned you'll come back to providing short term guidance once there's a little more certainty in the political outlook. Are you also going to release more specific details on the two year strategic plan?

Yes, we will for sure. That was the initial intent was to share more information that we're sharing today. But again, when we get more clarity, we'll come back to that.

Thank you. And just one last one on the packaging segment unification. Can you give us an update on the progress there and when we should expect benefits from cross selling, for example?

Very satisfied with what we're seeing so far. The benefits from all the reasoning behind putting the two businesses together, we're already seeing some of the results. It's something that I think quarter of a quarter for the next 24 months, we're going to see more and more. We've made some changes to some of the teams, whether it's in sales, in operation as well, making sure that we're more agile, that speed to decision is faster, and we really simplify our business model. So very happy with what I see so far. And I say that I already see some of the benefits.

That's great. Thank you. I'll turn it over.

Thank you. Again, if you would like to ask a question, please press star the number one on your telephone keypad. Next question will be from Frederick Tremblay at Desjardins. Please go ahead.

Thank you. Good morning. Just a question on capacity in tissue. We saw that it's approaching 100% and in Q4 it was 98%. I just wanted to get maybe your thoughts on potential for increasing that capacity over time, whether it's from internal efficiency gains or new equipment. How are you thinking about your demand and capacity to meet that demand in tissue?

Demand, as you said, demand is very strong. We've repositioned some assets in converting last year, so we're optimizing those. We have specific workstream on the paper machines as well to make sure that the output continues to improve. And it's exactly one of the... I'll circle back to our strategies, optimizing the assets that we have as a quick payback, low capex. And what you're asking on the tissue business is a good example of that. We're speeding up improvement of efficiencies, getting more out of every equipment. We're in a situation where for many of our product offering, the demand is very strong. So every time we can capitalize on producing more, we can sell it and we can sell it right away. So it's very positive, good outlook. It's a basic care product. So we're going to see some switch between away from home and retail, depending on economies. But we're producing both. So we're making sure that we build some flexibility to switch from one to the other when we can. And having more than usual discussions probably with customers gearing the potential credit tariffs. So making sure that we stay very close to our partners on that front as well.

That's great. Very helpful. And apologies if I missed it earlier, but did you comment on your thoughts on container board prices moving forward given the current context that we're in and the price increase that's been announced but not yet reflected in the industry index prices?

You didn't miss anything, but I will briefly comment first. As you know, the index coming out tomorrow, so we'll see what the results are. We're heavily based on index, but I mean, we've started to invoice on the non-index prices from our customers. So we'll wait and see and we'll comment once we see what the publication is tomorrow.

Great. That's all I had. Thanks for taking the question. Thank you.

Thank you. There are no further

questions at this time. Monsieur Simon, please proceed.

Well, thank you everyone for taking the time. As you know, these are pretty interesting times given all the actions between Canada and the U.S. and quite honestly the rest of the world. So we're going to continue as a company to strive for excellence, making sure that we make the best out of what we have and focus on our debt reduction. Thank you for the call. Thanks.

Merci. Mesdames et messieurs, cela met fin à la conférence 'aujourd'hui. Vous pouvez maintenant raccrocher. Thank you, ladies and gentlemen. This does conclude your conference call for today. You may now disconnect your lines.