Cascades Inc.

Mesdames et messieurs, bienvenue à la téléconférence des résultats financiers du premier trimestre 2025 de Cascade. Je m'appelle Sylvie et je serai votre opératrice aujourd'hui. Toutes les lignes sont présentement en mode d'écoute seulement. Suite aux commentaires des dirigeants, il y aura une période de questions. 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 2025 Financial Results Conference Call. 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. Ms. Aitken, you may begin the conference.

Thank you, Operator. Good morning, everyone, and thank you for joining our first quarter 2025 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. Joining us for the question period at the end of the call are Jean-David Tarzif, Executive Vice President, Packaging, and Jérôme Parlier, Executive Vice President, Tissue. 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 2025 investor presentation for details. This presentation, along with our first 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 Q1 performance. Hugues?

Thank you, Jennifer, and good morning, everyone. I would like to begin with some brief general comments regarding our first quarter results. The business environment was more complex than usual, given the ambiguity regarding tariffs and trade policies around the world. This uncertainty led to a decrease in consumer confidence and demand levels in the second half of the quarter. These factors impacted our performance both in terms of sales volume and production costs. Given this context, sales levels decreased 5% from Q4 as lower volumes more than offset a favorable exchange rate and average selling prices. Year over year, Sales increased 4%, with selling prices and exchange rates fully offsetting a negative volume impact. Consolidated EBITDA of $125 million decreased 14% from Q4. This was driven by lower volumes and higher operational costs associated with lower production levels. Trade costs were also a slight headwind, as were the usual seasonally higher energy costs. These factors more than offset benefits from favorable raw material costs, exchange rate, and selling prices. Year-over-year consolidated EBITDA increased 21% as stronger pricing in our packaging activities offset lower volumes and higher energy and production costs across our businesses. We provide a financial breakdown of the impact of these factors sequentially and year-over-year on slide four. On the raw material side, highlighted on slides five and six, The Q1 average index price for OCC decreased by 6% from Q4, and it was 23% lower year over year. As expected, fiber availability was seasonally softer, and we consume inventories to limit market exposure. Our fiber availability has increased since mid-March, which supported stable index prices, followed by a $5 to $10 reduction, depending on region, earlier this week. Currently, we expect favorable pricing, in the coming months. Average Q1 index prices for white recycled paper grades increased 5% from Q4, but are 12% below last year levels. This reflected lower seasonal generation and higher export and domestic demand levels. We are expecting another slight increase in Q2 as mills build inventories ahead of lower generation levels in the summer months. Fault prices were relatively stable sequentially, up 4% in the case of softwood and down 2% for hardwood. Year-over-year prices were higher, up 22% and 4% respectively. The North American market was disrupted by the threat of tariffs on Canadian pulp, which led many U.S. customers to build stock ahead of the implementation of tariffs. Focus has since shifted to commercial tensions between China and the U.S., We would expect the softwood market to ease as producers, historically tied to the Chinese market, seek alternative domestic customers. Moving now to the results of our businesses, as highlighted on page 8 through 13 of the presentation. Following the 2024 combination of our container board and specialty product segments, these businesses are now presented as a combined packaging business. We have provided quarterly and annual legacy reporting comparatives Figures on slide 7. Beginning with packaging, our first quarter sales decreased 3% sequentially. This was driven entirely by lower volumes, partially offset by slight selling price and exchange rate benefits. As Q1 progressed, we saw a deterioration in demand levels as consumers and businesses became increasingly cautious in the face of growing tariff and trade uncertainty. To this end, we provide box shipment data for Cascade in the Canadian and U.S. industry on slide 8 and 9. Epidone Q1 was $109 million, a 17% decrease from Q4. Results benefited from lower raw material costs and the implementation of price increases. These were more than offset by the effect from lower volumes and the resulting higher operating cost levels. Year-over-year sales increased by 7%. with benefits from higher selling prices and more favorable exchange rates, more than offsetting a negative volume impact. Habitat levels increased 45% from a year-ago period, driven by higher selling prices. Lower raw material costs benefited manufacturing results by $10 million. This was partially offset by a corresponding $8 million impact from higher input costs related to a mix of products sold in our packaging distribution activities. the last of which were counterbalanced by higher selling prices. Lower volumes and higher operating costs partially offset these benefits. Moving now to our tissue business. First quarter sales decreased 8% sequentially as lower volumes fully offset slight benefits from higher average selling prices and favorable exchange rates. Converted product shipments in short tons decreased by 15% in away from home and 5% in the retail market. EBITDA of $37 million decreased 18% from Q4, driven by lower volumes, higher seasonal energy costs, and increased freight costs. Lower raw material costs partially offset these impacts. Sales were stable year-over-year, decreasing 1%. This reflected a more favorable exchange rate, offset by impacts from lower volumes and adverse selling price. Shipments decreased 4% year-over-year, with a 5% decrease in retail and a 3% decrease in away-from-home. Year-over-year EBITDA decreased by 13 million, reflecting lower volumes, higher operating and raw material costs, and lower selling prices. Our tissue volume decreased compared to both periods. Due to market uncertainty, some customers focused on reducing their inventory levels during the quarter. I would highlight that their volume decline in our retail business reflects the transition impact of our late 2024 strategic decision. to realign and diversify our product and customer portfolio. Additional volumes will be added in 2025 as this transition is completed. Corporate activities costs were $10 million lower this quarter compared to Q4. This reflects a foreign exchange loss in Q4 of last year and lower stock-based compensation expenses. I will now pass the call to Alan, who will briefly discuss some of the financial highlights. Alan?

Thank you, Hug, and good morning, everyone. So on slides 14 and 15, we illustrate the specific items recorded in the quarter, which impacted operating income by $6 million. The main items were $6 million of restructuring costs resulting from plan closures and organizational changes, in addition to a $4 million legal settlement cost. It was offset by a $4 million gain on derivatives financial instruments. Slide 16 and 17 illustrate the year-over-year and sequential variance of our Q1 adjusted earnings per share and the reconciliation with the specific items that affected our quarterly results. As reported, Q1 net earnings per share were 7 cents. This compared to a net loss per share of 20 cents last year and 13 cents in Q4. On an adjusted basis, net earnings per share were 13 cents in the current quarter, This compared to zero net earnings per share last year and 25 cents in the fourth quarter of 2024. Year over year, this variance mainly reflects stronger EBITDA, while sequential variance reflects lower EBITDA levels, offset by a lower depreciation and amortization expense. As highlighted on slide 18, first quarter adjusted cash flow farm operations was 62 million, up from 46 million in the year-ago period, but below the 129 million in Q4. Adjusted cash flow generated in the first quarter improved year-over-year, largely reflecting stronger cash flow from operation and the higher levels of capital investments in the year-ago period. Sequentially, adjusted cash flow generated decreased with lower cash flow from operations and higher financing expenses paid. Slide 19 provides detail about our capital investments. New investments for the first quarter total $24 million. For 2025, we continue to forecast approximately $175 million of capital expenditures. Moving now to our net debt reconciliation as detailed on slide 20. Sequentially, our net debt increased by $120 million in the first quarter. The main reason for the increase is our working capital requirements. Working capital always increases in the first quarter, but this year it was amplified by higher inventories at the end of the period due to softer volume, as explained earlier, and higher raw material. Higher levels of net debt and higher BIDA levels on an LTN basis maintain leverage at 4.2 times. Financial ratios and information about maturities are detailed on slide 21. And other information and analysis can be found on slides 25 through 32 of the deck. I will now pass the call back to Hug, who will conclude with some brief comments before we begin the question period.

Hug? Thank you, Alan. We have re-initiated near-term guidance this quarter, as our current view is that tariff discussions and levels within North America will evolve in a more measured way. We do, however, remain cautious regarding the impact that outgoing macro uncertainty may have on consumer demand levels. We provide our near-term outlook on slide 22. In packaging, we expect higher sequential results to be driven by higher average selling prices. At the end of April, an incident occurred at the third-party steam supplier for our Niagara Falls complex. Boat meals resumed production quickly but are currently limited to approximately 85% of their normal capacity. Our objective is to have these operations back to normal before the end of Q2. Given the current economic environment, we are focused on delivering high-quality products to our customers and will make needed production adjustments to align with changes in market conditions. We expect results to increase in tissue with higher volumes and pricing initiatives to offset the impact of higher raw material costs. Before opening the call to questions, I would like to briefly touch on our strategic priorities. We are pleased with the progress we're making on our commercial, operational, and supply chain excellence workstreams. On the commercial front, our focus is on the ongoing optimization of our product portfolio supported by a structured go-to-market approach with our customers. In our operation, sustained improvement programs targeting production efficiency continue to be implemented. Supporting both of these workstreams is seamless execution in our supply chain from sales and production planning to transportation and warehousing. In early April, we sold our closed-tissue facility in Waterford for $8 million. Other initiatives are ongoing, and we remain confident that we will be able to achieve our goal of $80 million from the monetization of non-strategic assets in the coming quarters. Lastly, we have put in place dedicated expertise at our Bear Island facility. We are making progress but continue to be behind our scheduled ramp-up objectives. We have also launched operational initiatives at our Plasma Tissue Plant to capitalize on current opportunities. Across our operations, we are focused on high-return initiatives including safety, efficiency, and supply chain improvements. With that, we can now open the call to questions. Operator?

Merci. Si vous désirez poser une question, veuillez s'il vous plaît composer l'étoile suivie du 1 sur votre clavier téléphonique. Si vous voulez vous retirer, composez If you would like to ask a question, simply press the star then number one on your telephone keypad. And if you would like to withdraw from the question queue, simply press star followed by two. Again, if you have a question, please press star then one on your telephone keypad. We will pause for just a brief moment to compile the Q&A roster. And your first question will be from Amir Patel at CIBC. Please go ahead.

Hi, good morning. Hugo, it looks like your box shipments in Q1 down 3.6% underperformed both the US and Canadian industry stats. And I guess that's despite Bear Island still ramping up. So maybe if you could speak to what drove the share loss and if there are any particular end markets that were particularly weak.

Thank you for the question, Amir. If you split the converted products between Canada and the U.S. and looking at our operation, roughly 75% of the converted products are coming from Canadian box plants. We did pretty well on the Canadian side, but lagging on the U.S. side. So when you combine the two together, we're 6% versus 5.8% in the industry, so pretty much in line. a slight decrease in the U.S., but still doing pretty good in Canada. We saw some reduction in some of our customers in Canada in the first quarter. Now, looking ahead, when we look at the business segment, where we like food, packaging, and industrial, we see more of a reduction in industrial, which is not the core business of what we do. So we remain confident that a reduction, if the business environment remains unknown, it's not going to be a significant one from where we are today.

And I may add that if you compare to last year over year, the gap is higher. Remember that we closed a couple of units last year, so that reflects that as well, year over year.

Right. Okay. Fair enough. Thanks for that. And then just thinking on a full year basis, given the weaker Q1 shipments, the Niagara disruptions you mentioned in Q2, and the slower ramp at Bear Island, how do you think about annual container board production? Because at this stage, it looks like it's tracking down year over year, but any visibility you can share there?

When you look at the tracking for the year, we'll be tracking up. We provide guidance for the second quarter. When you look at the guidance that we provided, we temper our visibility in Q2. We're remaining very cautious with the business environment. That being said, when you look at Q2, even for us, Q3 and Q4, we're being cautious. But if there's an uptick in demand, we're positioning ourselves so that we'll be able to capture that uptake.

Okay. And there was some commentary in Pub and Paper Week last week of some pockets of pricing weakness, particularly for medium. Are you seeing kind of similar pressure? And if you could just remind us what your mix of liner to medium is.

Yeah, so, I mean, all of the price increases that we announced earlier this year, they're implemented. Some of them are based on the index. Some of them are not. But they're all fully implemented by now. And looking ahead, we're going to adjust our production levels based on demand. So, we don't see any pressure on pricing reduction right now.

Okay, and then with Bear Island, where it's ramped right now, what's the sort of breakdown between liner and medium for the whole company?

Well, Jean-David, maybe you can answer that.

Yeah, I mean, we are aiming to the – technically, the 65-35, but that's approximately what we have.

But as Doug mentioned, we may adjust our production capacity accordingly.

We have good flexibility in Bear Island if we want to switch, but basically the focus now is we're looking at demand, we're getting ready if there's an uptick. When you look at our guiding for Q2, we basically removed the seasonal increase for the second quarter. That being said, if that comes in, we'll be able to capture the additional demand level. And as far as beryllium, we'll be able to maneuver between liner and medium, depending on demand and pricing levels.

Great. That's all I had.

I'll turn it over. Thanks.

Thank you. Next question will be from Sean Stewart at TD Cowen. Please go ahead.

Thanks. Good morning. Question on the tissue segment. It feels like the volume constraint, as we deal with the current economic reality, it's more pronounced pressure on the away-from-home side than retail. Can you give us a little bit more context on specific elements of that and how volumes or your order file, we have the guidance for Q2, but how you expect volumes to trend through the remainder of the year overall?

Yeah, great question. So when you look at tissue, basically, our split is roughly two-thirds, one-third with retail versus away from home. On the retail side, late in 2024, we did a strategic switch in some of the customer allocation. So we kind of have a little gap there, which is it's all implemented and in place. So we're very optimistic on the retail side, running at the full capacity of what we have. Now, on the other third in the away from home, what we saw early in the year is with the threat of tariff, I mean, you look at China, it's roughly 8% to 10% of the consumption in the U.S. A lot of the away from home, we saw a push from Asia to ship into the U.S. before tariff. So that created some inventory movement. We've also seen some of that in our retail as well, where people were cautious, not too sure where the economy was. And going forward, when you look at the, I mean, most of the tariffs are implemented right now for Asia. I mean, we're not pretending they're going to stay at the level they are today, but it is creating some opportunities with Canada and within the US for our own operation. to be a more stable and sustainable supplier. Those opportunities are not converted to actual business yet, but we're seeing more traction and more demand from away-from-home customers based on the stability that we can provide within Canada and the US. Okay, thanks for that context.

Question for Alan. The January 2026 note maturity, I imagine plans are underway to refinance that. Can you give us a sense of that process and any context on borrowing costs, what that could look like?

Yes, we had prepared ourselves last year for that. So we have ample liquidity right now to address that. However, we are considering other alternatives right now. to give us more flexibility and to limit the higher cost that borrowing would bring at this time compared to what we have in the notes of 2026. For sure that to renew that with any kind of product, it will be higher than the coupon we have right now. But we're looking at different alternatives right now.

Okay. All right. That's all I have for now. Thanks very much.

Thank you. Again, if you would like to ask a question, please press star then number one on your telephone keypad. And your next question will be from Matthew McKellar at RBC Capital Markets. Please go ahead.

Hi, good morning. Thanks for taking my questions. First for me, I was wondering if you could just provide a bit more color on the ramp up at Bear Island and how that's progressing relative to your targets. Could you help us understand if you made progress sequentially in terms of production levels and whether you're converging to your targeted ramp-up curve at this point?

Yeah, so basically, if we go back to Q4, we made significant improvement versus Q3, narrowing the gap between, because the ramp-up curve keeps going up. First quarter was difficult at Bear Island. When you look at where we want to be versus where we are, we're back to the roughly 20% of the target ramp-up line. So, we made some actions early in the year to provide additional technical support and internal help and remaining focused to catch up before the end of the year. We're seeing mail operating really well, but when we have a breakdown, it takes too much time to go back up. Quality, very good. Customers continue to accept GreenPak or Beryllium as a substitution. So, very pleased with the quality. Very pleased with the way the mill is running when it's running and the quality and the speed it's doing. But the efficiency, when it stops, it takes too much time. So, we're addressing that with some internal and external support right now.

great thanks for that color uh last for me uh you mentioned expecting favorable OCC pricing in the coming months can you maybe just provide a bit more detail around the conditions you're seeing in that market and what's informing your expectations on this front yeah uh basically i mean i'll focus on like uh northeast and southeast when you look at uh

Just the event that we have at our Niagara operation, it's about 300 tons a day of production, and we expect to be back before the end of the quarter. But when you look at that, it is just that reduction in demand in the region. So, we see that for the Northeast to be positive. Also, when you look at the availability, the level of inventory that we have, and also the ability to ship to Asia, we feel that there's still some positive tailwind for us on the UCC coast.

Okay, thanks very much for that detail. I'll pass it back.

Thank you. Next question will be from Jonathan Goldman at Scotiabank. Please go ahead.

Hi, good morning, team. Thanks for taking my questions. Just to clarify to start off, Hugues, did you say it was your expectation for container bore shipments to be up this year?

You're being up versus last year? Yeah, your shipments year-on-year comparison.

Yeah, so when we look at from now on until the end of the year, we're going flat, second quarter flat. And when I look at the economy right now, we're being very cautious, so not looking at any uptake from last year. That being said, and that may be a bit of the clarification that I need to do is, If there's an uptick in demand, we'll be able to capture it with the assets that we have because we'll be able to produce it and to ship it. But right now, what we're seeing is more stable. And in our guiding for Q2, we've put no seasonal upswing given the economic uncertainty.

Perfect. That's very clear. And are you able to quantify the impact of the outage to April's volumes or any way you want to talk about it?

Yeah, I mean... Do you mean the Niagara Falls complex?

Correct, or any other outages I'm missing?

900,000 a week. So we're looking at this on a day-by-day basis. So we're really pushing with our third-party partner to put that back in place. in full operation ASAP. Maybe a detail that could be of interest for people is that they also burn garbage from the city of New York. So there is a lot of support to restart these things ASAP.

Interesting. And then I guess one more for me. In container board or maybe in tissue as well, do you have a sense of where customer inventories are sitting, the levels? Are they above or below or in line with historical inventories that they usually keep on hand?

Yeah, I would say, I mean, globally flat. Some of the retail for tissue even went a bit down by the end of the third quarter, sorry, the first quarter. But overall, I would say it's pretty flat. There might be in the system a bit of import in the way from home tissue from China ahead of the tariffs. But we feel that's a short-term thing because we're already seeing some opportunities there to, as I mentioned before, as a more safe option within Canada and the U.S. for the American market.

Okay. And relative to historical levels, are the container board volumes and tissue volumes kind of in line with the amount of inventory people keep on hand?

We'll assess that to be in line, not higher.

Perfect. Thanks for the questions, guys. I'll get back into it.

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

Thank you. Good morning, everyone. Good morning. Morning.

You mentioned the opportunity to be that safe domestic supplier. What do you think it takes to turn that opportunity into traction on actual business? And if the tariffs on Asia are quickly dropped, Do you think that opportunity disappears?

Yeah, a great question. I mean, first of all, I would say it takes time. It will take some of the imports to go down a little bit. And no, I don't think that that goes away without the tariffs because this is so unpredictable, the business environment that we have right now. And it's ever-changing. The speed of change is quite amazing. We're even looking at that in our own operation because, I mean, we use thousands of suppliers for many things. And the importance of being able to rely on secure supply is critical for us. And it's also critical for many of our customer partners. So being close to home, being close to our customers, we feel that whether tariffs stay or not, it is an opportunity for us.

That's helpful. Thanks.

And then last quarter, we were talking about restructuring logistics to mitigate the impact of tariffs. Are those on hold at the moment? Obviously, you would have taken action on the ones that had little cost associated with them. How far advanced are you in your scenario modeling at this point and ready to pull the trigger on various actions?

Yeah.

So, I mean, in summary, we're on hold. It's interesting how these situations sometimes you find pockets of potential improvements that you can actually keep. We saw a bit of those. Not that it's significant, but it reminds everybody that we need to rethink the way we do business all the time. The big bucket there is on the raw material. We've done a lot of work on pulp supply and some of that's going to stick and it's going to stay because it's creating some more permanent financial opportunities for us. On the OCC side, I mean, we're ready for swaps to make sure that if ever a tariff would come back, we don't have to cross the border as much as you probably know. We have a lot of our operation in the New York State and some of our supply comes from Ontario. So we can do some swaps with other to avoid the border if that's necessary. And on the rolls, We can swap roles as well. We've qualified products, so that's a bit of additional cost in the first quarter. Nothing significant, but we're ready with some of our competitors to do a swap in roles as well to make sure that we reduce exposure to the border if necessary.

Very interesting. Thank you. And then you mentioned earlier that you weren't seeing much pressure on selling prices, if any at all. Could you give us your thoughts on IP's recent mill closure, the kind of downbeat commentary we're hearing from market participants, and how you square that with the supply-demand balance versus pricing?

I'm not going to comment on the competitors, but when we look at our system, what we do, I mean, if we see a reduction in the mill levels, we'll adjust accordingly. Just the fact that we'll be shaving roughly 300 tons a day in the Niagara complex for at least the month of May and maybe a bit into June. That's also volume. I mean, we sped up a bit of some of the maintenance shutdown because if it's quiet, we'll do some of that. But our intention is to reduce our working capital in the second quarter. Alan talked about our inventory levels that were up. If we step back a bit and go back to the fourth quarter, we ran our assets a bit more. Some of the Christmas usual downtime was reduced because at the time, the movement and the order file was a lot stronger. So, we'll make the necessary step to make sure that we put back our inventory in line and adjust accordingly after that if we see that demand levels are not at the level that we expect.

good color thanks i'll turn it over thank you and at this time mr simon we have no other questions registered please come and continue yes i'll let alan speak for a bit yes um good morning everyone so uh you saw that we provided the new segmented information with the packaging business so this reflects reflect how we are organized internally so The old container board now is the packaging group now consists of the old container board business, including also we added into that the URB business we had in specialty products. So you'll see that the volume reflects that right now. We have provided sales by product, mainly paper rolls, corrugated, and others. And we got a few comments this morning, and we will provide additional information about EBITDA. We will provide information with the paper and corrugated together and the line of others. So for Q1, the $109 million in packaging is split with $96 million for paper rolls and corrugated. We will not provide details on those. and 13 million for the other segment within packaging. So we will add this information into our investor presentation, and you'll see more information into our MD&E later today. So we will provide that for everyone to be able to assess the performance of our packaging business.

Thank you, Alan. I mean, the objective of this is also to make it more clear for people to do some guiding and going forward. So, looking forward for the calls with some of the analysts, and thank you for your time.

Thank you, sir. Merci, mesdames et messieurs. Cela met fin à la conférence d'aujourd'hui. Vous pouvez maintenant raccrocher. Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.