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 Cascades First Quarter 2022 Financial Results Conference Call. Note that all lines are currently in a 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 Cascades. Ms. Aitken, you may begin.
Thank you, operator. Good morning, everyone, and thank you for joining our first quarter 2022 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. The speakers on today's call will be Mario Plourde, President and CEO, and Allan Hogg, CFO. Also joining us for the Q&A period at the end of the call are Charles Malo, President and COO of Containerboard Packaging, Luc Langevin, President and COO of Specialty Products, and Jean-David Tardif, President and COO of our Tissue Papers division. 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 2022 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 call us after the session. I will now turn the call over to our CEO. Mario?
Thank you, Jennifer, and good morning, everyone. I would like to begin this morning's call with some high-level comments before going into details of each of our businesses. The first quarter was challenging from a cost and execution standpoint. Combined, these factors negatively impacted consolidated first quarter Adjusted EBITDA by CAD 36 million sequentially and nearly CAD 150 million year-over-year. We are operating in a difficult macroeconomic environment, which is driving up costs for fuel, logistics, and raw materials. Notwithstanding this, internal initiatives on both pricing and mix offset these headwinds sequentially, but lagged year-over-year. The continued rollout of announced price increases in our business segment will close this gap beginning in Q2. In our tissue business, these are being expanded by extensive profitability initiatives currently underway, with benefits expected to be weighted to the back half of the year.
We highlight some key takeaway on slide three of our deck. Moving now to our financial results. On a consolidated basis, first quarter sales increased 10% year-over-year and were stable compared to the previous quarter. While Adjusted EBITDA decreased notably from prior year levels and by 6% sequentially from the reason I just mentioned. On the raw material side, highlighted on slide five and six, the Q1 average index price for OCC increased 77% year-over-year and decreased by 16% from Q4. Export level has been limited by port and container constraints, and the market is generally stable despite persistent transportation challenges and elevated cost to source our material within North America. Average index price for white recycled paper grade increased notably in Q1, up 109% year-over-year and 16% from Q4.
The impact of these cost headwinds can be seen in our tissue results this quarter, as this is the primary raw material for this business. On the virgin pulp side, the hardwood pulp index increased 27%, while softwood pulp index price rose 17% from last year level. Sequentially, both increased by 4%. Moving now to the results of each of our business segments, as highlighted on page seven. Through 14 of the presentation. Beginning with the sequential performance, sales and containerboard increased 6% in Q1. This was largely driven by higher selling price, partially offset by a less favorable sales mix. The 1% volume increase reflects the combination of a decrease of 1% in converted product and a 4% increase in parent roll shipment.
Sequentially, converting shipment decreased by 1% in millions of sq ft, in line with the 1% decrease in both the Canadian and the U.S. market for the period. On a per day basis, converting shipment decreased by 1.6% sequentially, outperforming the decrease of 5.2% in the Canadian market and 5.7% in the U.S. market. I would highlight that shipment levels were impacted as a result of challenges on transportation side. As you know, roughly 65% of our containerboard business is in Canada, where we have seen greater logistics headwinds in terms of availability. These constraints were also felt by some of our customers, preventing them from getting product out the door, which resulted in lower order.
Given this backup, we temporarily limited production at some of our operations, which impacted our shipments level and therefore top-line sales in the quarter. To put it simply, we could have shipped more product had transportation been available. Q1 Adjusted EBITDA of CAD 80 million or 15% on a margin basis was CAD 10 million or 14% above the Q4 levels. While an improvement, it is not where we want it to be. With cost inflation and freight limitation impacting profitability by CAD 17 million, muting the CAD 26 million pricing and mixed benefit in the quarter. Year-over-year, sales were also up by 6%, while Adjusted EBITDA decreased 26% due to the significant cost inflation already discussed. Notably, raw material costs had a CAD 31 million negative impact on profitability. This reflects that we are over 80% recycled, well above our containerboard peers.
Year-over-year, converting shipment decreased by 6% in millions of sq ft, underperforming the 1% decrease in the Canadian market and the 0.3% decrease in the U.S. market. On a per day basis, converting shipment were down 4.3%, below the 1.2% and 0.18% decrease in the Canadian and the U.S. market, respectively. Lower year-over-year volume reflects labor and transportation constraint at the beginning of 2022, and some customer account erosion related to profitability initiative. Before moving on to the specialty product segment, a quick update on the Bear Island project. The project remain on track from both a cost perspective in the mid-December startup. We currently have over 490 people on site, increasing to 725 by mid-June. We have received our first delivery of raw material.
We are very encouraged that 100% of the volume secured for 2023 and 75% is secure for the following two years. Our sales team continue to advance discussion to secure additional production offtake for the coming year. Specialty Products continued to generate solid results sequentially, with Q1 sales up 4% from the prior quarter. This reflected the implementation of price increases in response to cost inflation, the benefit of which offset a less favorable mix in the plastic segment and lower volume in the egg distribution sector from seasonally strong Q4. Adjusted EBITDA increased CAD 1 million sequentially as higher prices offset the impact of higher operating and transportation costs. When compared to the prior year, Q4 sales increased by CAD 35 million or 29%, while Adjusted EBITDA level increased by CAD 4 million as higher realized spread offset higher production costs.
Moving now to our tissue business. While expectations were for results to be stable sequentially, sales decreased 7% and our Adjusted EBITDA loss grew to CAD 17 million in the quarter. We fell short for two main reasons. As was the case for all of our businesses, cost inflation was a key factor. For our tissue business, this included not only logistics and energy, but also raw materials, which I touched on earlier. Combined, these elements had a - CAD 13 million sequential impact on profitability. The second element was a CAD 6 million impact due to the lower volume. While logistics and production constraints at the beginning of the year certainly contributed to this decrease, it is also the result of tactical and strategic decisions we are implementing to optimize our customer and production portfolio as part of the steps outlined in our profitability plan.
Year-over-year, first quarter sales increased 8% with the shipment and the average selling price up 7% and 1% respectively. Significantly, higher raw material costs combined with inflationary pressure on production, transportation, and energy costs impacted profitability level by CAD 47 million year-over-year. These were partially offset by better volume and better pricing and mix, which added CAD 10 million year-over-year. Moving now to slide 14 in the presentation. We have successfully implemented the January price increase in our away-from-home segment and expect benefit from the price increases announced in both markets in early 2022 to begin in Q2. Given this, first quarter result in our tissue business reflect full brunt of our cost inflation without any offsetting benefit from these increases being realized.
I would also add that we have just announced an additional price increases for away-from-home product effective July first to counter the high cost environment. Currently, we anticipate that cost inflation will result in approximately CAD 65 million dollars of additional headwinds from the level outlined in our strategic plan. We expect these to be offset by benefit from revenue management initiative announced, price increase, and other revenue and cost initiatives being rolled out. Notwithstanding this disappointing Q1 result, I am encouraged by the progress being made with our profitability plan. We are in the midst of executing extensive turnaround initiative, making adjustment when and where needed, and are optimistic that these efforts are equipping our tissue business to reach its objective of generating Adjusted EBITDA of CAD 60 million-CAD 80 million dollars in 2022.
Allan will now discuss the main highlight of our financial performance, after which I will conclude the presentation.
Yes. Thank you, Mario, and good morning. On slide 15 and 16, it illustrate the specific items recorded during the quarter. The main items that impacted operating income before depreciation were a CAD 7 million unrealized loss on financial instruments, a CAD 6 million gain on asset disposal in our Specialty Products Group, and a CAD 1 million of restructuring costs recorded in our Tissue Papers segment. Slide 17 and 18 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, loss per share were CAD 0.15 in the first quarter. This compared to earnings per share of CAD 0.22 last year and to CAD 1.04 in Q4 2021. Both periods included specific items.
On an adjusted basis, the loss per share of CAD 0.15 was CAD 0.44 below last year, results in CAD 0.06 lower than last quarter. This mainly reflects our lower operating performance. As highlighted on slide 19, the first quarter adjusted cash flow from operations decreased by CAD 58 million year-over-year and CAD 22.8 million, and adjusted free cash flow levels decreased by CAD 85 million year-over-year. This reflects lower operating results and higher net CapEx paid in the current period, largely associated with our Bear Island project. Slide 20 provide details about our capital investments. New capital expenditures total CAD 78 million, including CAD 57 million for the Bear Island project. After subtracting asset disposal and adding amounts that paid at the end of the year, net cash outflow amounted to CAD 96 million.
For 2022, we continue to expect total investments of CAD 450 million, which includes approximately $275 million for Bear Island. We expect the project to remain within the range of $425 million-$450 million, notwithstanding the current inflationary pressures on cost. Moving now to our net debt reconciliation on slide 21. Our net debt increased by CAD 198 million in Q1, reflecting the planned elevated capital program, lower profitability and higher working capital requirements in the period. Our leverage ratio of 4.8 x is up notably from 3.5 at the end of 2021, also reflecting higher capital investments and lower Adjusted EBITDA levels. When excluding cash investments made to date in the construction of Bear Island, our leverage ratio would stand at 3.9.
Financial ratios and information about maturities are in detail on slide 22. Sequential and year-over-year sales and EBITDA performance analysis can be found on slides 25 through 28 of the deck and historical index pricing on slides 29 and 30. Mario will conclude now the call with some brief comments before we begin the question period. Mario.
Thank you, Allan. We provide details regarding our near-term outlook on slide 23 of the presentation. I will remind you that this outlook is based on what we are seeing today and may change in the coming months. Our near-term outlook for Containerboard is for stronger sequential results, driven by lower average raw material pricing, benefits from the rollout of announced price increases and good seasonal demand. However, these tailwinds are expected to be partially muted by the continued inflationary pressure on operational and production costs. We are expecting continued positive momentum from the specialty product segment sequentially, with stable volume and favorable selling price trend expected to offset cost inflation pressure. As I mentioned during my earlier update on our strategic plans for tissue, we expect the extensive profitability initiative underway in this segment to generate growing benefit as they continue to be implemented.
At their root, these actions are targeting profitability levels that will help mitigate current cost headwinds and will generate improved financial performance sequentially in the second quarter. Let me finish by saying that cost inflation and constraints in logistics played an important part in our first quarter performance. In our execution, we'll need to continue improving within the context of the current business conditions. We are systematically addressing these factors across our operations, and important benefits will be realized over the coming months as our strategic plan continues to be implemented. We will now be pleased to answer your questions. Operator?
Merci. Si vous voulez poser une question, veuillez s'il vous plaît composer l'étoile suivi du un sur votre clavier téléphonique. Et si vous voulez retirer votre question, composez l'étoile suivi du deux. If you would like to ask a question, simply press star then number one on your telephone keypad. If you would like to withdraw your question, please press star then number two. Again, if you have a question, please press star followed by one on your touchtone phone. We will pause for just a brief moment to compile the Q&A roster. Your first question will be from Sean Steuart at TD Securities. Please go ahead.
Thanks. Good morning. Mario, a question on the tissue guidance and the commitment to the EBITDA guidance of CAD 60 million-CAD 80 million for this year. It looks like you're guiding to still, you know, improve sequential results in Q2, but still negative EBITDA. The implication is a rapid turnaround in the second half of the year, which is consistent with what you're talking about. I just wanna understand, though, these, you know, incremental profitability improvement initiatives, some of which are price hikes. These are above and beyond what you would have envisioned at the strategic review that you presented a few months ago. It just feels like an ambitious target through the second half of the year, given the struggles you've had of late.
Can you go into any further detail beyond price hikes, what you're expecting to see flow through to those results in the second half?
Hello, Sean. Yes, certainly, I can. You know, the inflationary pressure we get on many of our different raw material and cost throughout the operation and the speed of them are quite of a surprise for us. That's why we initiated another price increase to compensate for those inflationary costs. We basically have no choice to pass on those increased costs to our customer to protect our margins. It was not on the plan when we launched our plan in February, but with actual result of these inflationary, we have no choice to increase pricing.
At the same time, we're looking at many different options, you know, network optimization between where we're producing, where we'll be shipping, the numbers of SKU we'll be producing, and the numbers of customers we'll be shipping. All of these are being addressed in our action items as we speak today. You know, we're quite confident because as it doesn't show in Q1, we have those benefits in our plans, and we are quite confident to deliver on them for the second half of the year. We'll see results of that in Q2.
In addition, I may add, to this, also additional production output, volume output increase
As well, yep.
in the coming months. Yes.
Okay, thanks for that detail. My second question is on OCC. We've seen gradual declines in recent months. I would have thought maybe even a bit faster given lockdowns in China. Can you speak to the tension in the market? Is there just that much incremental competition for supply domestically with the new capacity starting up that it's tempering the pace of decline? What are your expectations for those costs into the summer?
Good morning, Sean. This is Luc Langevin. I will take your questions. To be frank and honest with you, we would have expected a more significant decline based on the reading we have of the market. Since the beginning of the year, typically, you know, the first quarter is a low generation season for OCC. Despite the low generation season, we have seen most of the mills having high inventory. I think what potentially have slowed down the decrease is probably more the logistic challenges we had at the beginning of the year that seems to be coming back to more normal now. That put a little bit more pressure and stress.
I think this is probably what could have limited the decrease of OCC, and we would believe that with the slow normalization of the logistics over the next few months, that we would see further maybe a more favorable market conditions for buyers. With regards to the startup of new mills, I think everybody already is active, and it doesn't put significant pressure on the market, and we don't have any. I would speak for our own startup. We have no challenge to meet the targets that we have planned for the buildup of inventory in provision of the startup of Bear Island.
Okay. Thanks for that detail, Luc. That's all I have for now. Thank you.
Thank you.
Your next question will be from Hamir Patel at CIBC. Please go ahead.
Hi. Good morning. First question I had was for Charles. Are you able to comment on how your box shipments have fared in Q2 to date and you know what you might be seeing in the e-commerce side of the business given tougher comps there?
Yeah, Hamir, the volume in Q2 from what we see, the start of Q2 is, we see the seasonal uptake, which is more normal than the COVID in Q1 last year, which is a good sign right now. On the e-commerce, the exposure that we have with the e-commerce, Q1 is good as we see. Mind you that Q4 was extremely busy, so it's more stabilized right now on the e-commerce side.
Great. Thanks, Charles. That
Our Q2 overall volume, we are benefiting from seasonal trend right now.
Okay. Fair enough. Charles, this morning, are you having any trouble getting starch, and are you seeing any further cost pressure there?
Yeah. The availability is still good. We have good agreement with suppliers. There is cost pressure, especially with what's going on in the world right now. On the availability side, we are comfortable with being able to supply our customers and with responding to our needs.
Okay, great. Thanks. That's helpful. Just the last question I had for Allan. You know, as a company that wants to grow its integration rates in containerboard in coming years, just given the high leverage at the moment, how do we think about the timing of, you know, when Cascades might look to construct additional box plants, and what kind of capital cost would that be?
Well, as we stated in our plan, it's something we would like to put forward before 2024. You know, to start something, depending on how we do it takes 12 to 24 months. It's something that we believe that at that time, with the Bear Island project being started and everything we're doing right now to improve profitability, we believe that our leverage will gradually come back to where we want it to be. We don't feel this is a problem right now. The level of investment, if we refer to Piscataway at something to CAD 80 million or a bit more right now with all the costs going up. Again, depending on how, what the size would be and how we do it, so it has to be finalized. That's what I can say right now.
Okay, great. Thanks, Allan. That's all I had. I'll turn over.
Thank you. Again, if you would like to ask a question, please press star then number one on your telephone keypad. Your next question will be from Zachary Evershed at National Bank Financial.
Good morning, everyone. Thanks for taking my questions.
Good morning.
With inflation running hot and interest rates rising, how do you feel right now about future containerboard demand against a likely pressured consumer?
Well, there is a more, I would say, more normal demand as we see right now than the, I would say, the Q1 and Q2 of 2021. The need to move goods are still there. Again, in our case, in Cascades, we are seeing right now the uptake from the seasonality. We kinda see the trends of the pre-COVID. At this point, unless the macroeconomic change drastically, we're still confident that there is going to be a good demand in 2022.
That's helpful. Thanks. Then we know that closure announcements have a much shorter lead time than capacity addition, so we may not have the full picture for the end of 2022 and 2023. If there is to be capacity rationalization in the industry, given how Cascades is positioned, with the quality of its asset base, would you see yourselves participating in that as well?
Well, as we said earlier, the investment that we've made allows then to improve our asset base. We've proven that with recent investment like Greenpac, the Piscataway. The same thing also with our Bear Island. It's hard to predict the moves that we are going to be making in 2023, 2024, but one thing I can say is Cascades is going to be better equipped to compete with the type of product that we are offering, recycle high performance. But if the market condition change drastically, like we've done in the past, we are going to take the proper decision to maximize the profitability and create value for Cascades.
That's good color. Thank you. One last one for me. Allan, you were saying that you do see a path down on the leverage ratio naturally, but at what point does your net debt-to-EBITDA ratio become a concern?
The increase in leverage is mainly driven by EBITDA, so that's our focus right now towards the end of the year and for next year. We feel that working on profitability initiative in tissue and having all these price increases being implemented will revert back rapidly to where we could be and will have sufficient leeway to complete that Bear Island project. For now, it's that the last two quarters were not great, we know that, but we expect that we're gonna get back on track in the near future.
Any commentary on covenants?
No, there's no debt to EBITDA in our bank covenant. It's only as we disclose an interest coverage ratio and a debt-to-capital. We have plenty of leeway right now on the bank covenants.
Thank you very much. I'll turn it over.
Thank you. Next question will be from Paul Quinn at RBC.
Yeah, thanks very much, Allan. Just a question on the tissue guidance at CAD 60-CAD 80 by the end of the year. I mean, you've guided for Q2 to be up over Q1 here, but I still suspect it'll be negative. You probably, you know, first half of the year, you'll be down sort of - 20, - 25. Does that imply that you're gonna be CAD 80, CAD 85 in the back half to get to the CAD 60-CAD 80?
Well, I would say, if you do the math, as you did, yes. Remember that we have just announced price increases yesterday, another price increases yesterday for July first. And as we illustrated in our deck, these are part of the initiative that have to be implemented. It includes that.
Yeah, and we're already, if I may add, Paul, sorry. We're really confident about the price increases. I think the market is able to absorb those increases. We've been happy with the increases that we've implemented so far for May first, and we believe that the others will go on as well. Your math is correct.
Okay. Just on a leverage question, you know, given these tough headwinds, and also the Bear Island spend, where do you expect that leverage to peak out at?
At the end of the year?
Sure.
For now we're within a range of 3%-3.5%. We stated 2.5%-3% in our plan, but maybe higher than that due to the slower first quarter.
Great. That's all I had. Thanks, guys. That's all.
Thank you.
Thank you. At this time, we have no further questions. Mr Plourde, please continue.
Thank you everyone for being on the call this morning, and looking forward to see you on the next call. Have a good day.
Thank you.
Thank you. Merci. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we ask that you please disconnect your line.