Good afternoon. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cascades Second Quarter 2022 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 Cascades. Ms. Aitken, you may begin the conference.
Thank you. Good afternoon, everyone, and thank you for joining our second 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. Today's speakers will be Mario Plourde, President and CEO, and Allan Hogg, CFO. Also joining us for the question period at the end of the call are Charles Malo, President and COO of Containerboard Packaging, Luc Langevin, President and COO of Specialty Products Group, and Jean-David Tardif, President and COO of Tissue Papers. 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 Q2 2022 investor presentation for details. The presentation, along with our second 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 afternoon, everyone. Before discussing each of our business segments, let me begin by saying that we are pleased with our improved sequential performance. The price increases we have put in place mitigated the impact of persistently higher costs. We provide a breakdown of the factors impacting our EBITDA levels on slide three. As these numbers highlight, we are operating in a rapidly changing and challenging cost environment in which energy, logistic, production supplies, and certain raw material costs continue to increase. Year-to-date, our initiatives do not fully offset the significant cost headwinds our operation has been facing. We'll continue to close the gap as important benefits are realized in the second half of the year, the most prominent of which are expected in our tissue segment.
Moving now to our financial results. On a consolidated basis, second quarter sales increased 17% year-over-year and 8% from Q1, while adjusted EBITDA decreased 7% from last year levels but improved 57% sequentially, reflecting the sales price increases implemented in all of our business segments. On the raw material side, highlighted on slides five and six, the Q1 average index price for OCC increased 34% year-over-year and decreased by 2% from Q1. Increased seasonal generation of OCC and lower export demand supported availability, resulting in a slightly lower pricing trend sequentially. Our mills are well supplied and the market was generally stable in Q2. Average index prices for white recycled paper grade continued to increase in Q2, increasing 94% year-over-year and 14% from Q1. These cost headwinds are clearly reflected in our tissue results.
This is also the case on the virgin pulp side. The hardwood pulp index increased 16% sequentially, while softwood pulp index price rose 14%. Year-over-year, these index increased by 17% and 9% respectively. Notwithstanding the fact that the market remains challenging for white fiber grades, with price remaining high, our mills are adequately supplied. 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 in the Containerboard increased 7% in Q2. This was largely driven by higher selling prices and volume. The 2% volume increase reflects a 2% increase in shipments of both converted product and parent roll.
Sequentially, converting shipments increased by 1.3% in millions of square feet, outperforming the flat performance in the Canadian market and the 0.5% increase in the U.S. market. On a per day basis, our converting shipment increased by 5.2% sequentially following softer Q1 performance. This outperformed the decrease of 0.1% in the Canadian market and 2.1% increase in the U.S. market. Q2 adjusted EBITDA of CAD 99 million or 17.4% on a margin basis was CAD 19 million or 24% above the Q1 levels. This reflects CAD 36 million of higher selling prices and volume benefit and lower raw material costs, which successfully offset a CAD 17 million impact from higher production and freight costs in the quarter.
Year-over-year, sales increased by 14%, while adjusted EBITDA decreased by a marginal 1%. In this case, a more favorable exchange rate and CAD 71 million of benefit derived from selling price and mix improvement were offset by CAD 74 million of higher raw material, production, freight, and energy costs. Year-over-year converting shipment decreased by 3.1% in millions of square feet. This underperformed the 0.3% increase in the Canadian market and the 2.4% decrease in the U.S. market. On a per day basis, converting shipments were down 3.3% below the 0.5% increase and the 2.4% decrease in the Canadian and U.S. market respectively. Lower year-over-year volume reflects a return to normalized level following elevated demand in the year-ago period. I would highlight that the converting shipments are 4% above second quarter 2020 levels.
Let me now provide you an update on the Bear Island project. As we highlighted in our press release, cost inflation continues. Constraints in labor and logistics for certain construction materials has meant that our team has had to be extremely adaptable day to day. The rising cost environment has increased total project cost to a range of $470 million-$485 million, from $425 million-$450 million previously. Delivery constraints for certain construction materials have also delayed progress of certain construction milestones, which may delay the startup to the first quarter of 2023. Our team is working with our contractor in order to meet the mid-December 2022 planned startup date.
Despite this, we are pleased with the performance of the Containerboard business this quarter, which benefited from good demand and our ability to drive commercial initiatives. Specialty Products continued to generate solid results sequentially with Q2 sales up 7% from the prior quarter. This reflects the implementation of price increases in response to cost inflation and favorable product mix in the plastic and the cardboard segment. Adjusted EBITDA increased CAD 3 million or 14% sequentially as our prices and volume offset the impact of higher operating and transportation costs. When compared to the prior year, Q2 sales increased by CAD 34 million or 28%, and adjusted EBITDA increased by CAD 7 million or 39% as higher realized spread and increased volume offset higher transportation and operating costs.
We are pleased with the performance of the specialty product business this quarter, the third consecutive quarter of increased EBITDA levels on both a year-over-year and a sequential basis. EBITDA has grown at a far faster pace than sales, highlighting the progress being made to deliver a margin range of 17%-19% by 2024. Moving now to our tissue business. Sales increased 7% sequentially in Q2, while adjusted EBITDA levels improved CAD 9 million to a loss of CAD 8 million. Top line growth was driven by higher volume and pricing and sales mix initiative. Sequential EBITDA improvement reflected CAD 21 million of benefit generated by improved selling price, offset by inflationary headwinds on the production and raw material cost side. Year-over-year sales level rose 15% and adjusted EBITDA decreased CAD 9 million.
This reflects the CAD 44 million positive contribution for higher average selling price and the impact that persistent increases on the cost side have had on EBITDA. Pricing and other cost-saving initiatives continue to be implemented, and we have stated in the past these efforts are expected to generate positive upside that is heavily weighted to the second half of 2022. To this end, we have provided an update on our profitability plan initiative in our tissue paper segment on slide 14. Given the normal lag between current unprecedented cost inflation and the timing that benefits are realized from the implementation of pricing initiatives, we are now expecting the tissue segment to generate CAD 25 million-CAD 40 million of EBITDA in the calendar year 2022. This downward revision is largely due to timing.
The impact of cost inflation is almost immediate, whereas pricing implementation takes time to be rolled out. Added to this, our sales volumes are lower than anticipated due to lower production output. Both of these areas are being addressed by extensive initiatives currently underway, and I continue to be encouraged by the progress we are making in our profitability plan. To this end, we continue to expect that these initiatives will allow the tissue segment to meet its 2024 target of CAD 150 million of adjusted EBITDA. Allan will now discuss the main highlight of our financial performance. Allan?
Yes. Thank you, Mario, and good afternoon, everyone. Slide 15 and 16 illustrate the specific items recorded during the quarter. The main items that impacted operating income before depreciation were a CAD 4 million gain on settlement of a supply agreement in our tissue segment and a CAD 3 million FX loss on long-term debt and financial instruments. Slide 17 and 18 illustrate the year-over-year and sequential variance of our Q2 adjusted earnings per share and the reconciliation with the specific items that affected our quarterly results. As reported, net earnings per share were CAD 0.10 in the second quarter. This compared to net earnings per share of CAD 0.02 last year and a net loss per share of CAD 0.15 in Q1. On an adjusted basis, net earnings per share were also CAD 0.10 in the current quarter.
This compared to a net loss per share of CAD 0.15 in the first quarter of 2022 and net earnings per share of CAD 0.07 in last year's results. As highlighted on slide 19, second quarter adjusted cash from operations decreased by CAD 8 million year-over-year to CAD 81 million, and adjusted free cash flow levels decreased by CAD 59 million year-over-year. This reflects lower operating results and higher net CapEx paid in the current period, largely associated with our Bear Island conversion project. Sequentially, second quarter adjusted cash from operations increased by CAD 55 million, and adjusted free cash flow level increased by CAD 36 million. This reflects improved operating results and lower net financing expenses paid, offset by higher net CapEx in the current period, driven again by our Bear Island project.
Slide 20 provides details about our capital investments. Capital expenditures paid during the quarter total CAD 160 million and total CAD 212 million for the first six months. Of this amount, CAD 145 million was for Bear Island. For 2022, our total capital investment forecast has increased to a range of CAD 450 million-CAD 470 million, with this increase driven by updated forecasted project costs for Bear Island of between CAD 310 million and CAD 330 million in Canadian dollars, as discussed earlier by Mario. Moving now to our net debt reconciliation on slide 21. Our net debt increased by CAD 163 million in Q2. This is a reflection of the combined effect of our current investment in Bear Island, higher working capital requirements, and unfavorable FX impact in the period.
Our leverage ratio of 5.4 x is up from 4.8x at the end of Q1 and 3.5x at the end of 2021. As we have mentioned in the past, we expect this leverage trend to reverse with improved operational performance and results in the startup of operations at the Bear Island facility. When excluding cash investment made to date for Bear Island, our leverage ratio would stand at 4.3 x. I would highlight that our bank agreement do not include a leverage ratio covenant. Financial ratios and information about maturities are detailed on slide 22, and sequential and year-over-year sales and EBITDA performance analysis can be found on slide 25 through the 28th of the deck and historical index pricing on slide 29 and 30.
Mario will now conclude 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. As always, 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 stable sequential results. Volume is forecasted to be stable despite some inventory rebalancing observed with certain customer. This, combined with higher production levels being achieved in our other mills, have led us to temporarily shut down machine two at our Niagara Falls facility for a minimum of five weeks to manage inventory level of our corrugated medium. The planned downtime began in July and will total approximately 10,000 short tons over the coming months.
We are expecting continued positive momentum from the specialty product segment sequentially, with stable results reflecting good volume and favorable selling trend expected to offset cost inflation pressure and continued labor challenge in certain facilities. As I mentioned earlier, we expect the profitability action plan underway in the tissue segment to generate growing benefit as they continue to be implemented. We are disappointed that the unprecedented escalation in cost and timing adjustment of certain pricing initiatives have reduced expected EBITDA levels for this business for the 2022 calendar years. We have remained optimistic about the capacity to drive meaningful improvement in the financial and operational performance of our tissue business. To this end, results in tissue are expected to revert to one of positive contributions beginning in Q3, and our long-term EBITDA target for 2024 for this business remain unchanged.
Let me finish by saying that in terms of our primary raw material, OCC. We are expecting positive trend on the pricing side, driven by softer export activity, lower demand level, and good availability. We will now be happy to answer all the questions. Operator?
Thank you. If you would like to ask a question, simply press star then number one on your telephone keypad. 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. Your first question will be from Hamir Patel at CIBC Capital Markets.
Hi. Good morning. My first question-
Good morning.
is on the Containerboard side. Charles, there'd been some reports in the trade magazine that Cascades was planning to produce kraft paper at Bear Island. If you speak, you know, more to what's led to that, perhaps shift in strategy, how we should think about product mix, and how that would evolve, and then also how that would impact the capacity of the facility.
Thank you, Hamir, for the question. I would not say a switch in strategy. Maybe we just did not at the beginning make specific on the possibility of the machine. This is a market that we see offers potential with the replacement of plastic with reusable material and recyclable. The machine, because of the investment that we made, we'll be able to produce the specific rates required to produce that. Our salespeople are meeting customers right now and we're developing a product that we know that we'll be able to produce on the machine. That's why we're starting to promote this.
That will give us more flexibility and a better offering of product for our customers. We did say that this machine primarily we built it to supply high performance, lightweight recycled linerboard. But the machine will also be able to produce some medium and also being able to produce other products. That's when we mentioned. That's why we are looking at market opportunities. At this point, we are not going to put a volume tag on the mix because we're still meeting with customers, and we'll give an update in the future on that.
Okay. Thanks, Charles. Appreciate that. Is there any way, you know, how would we think about, I, again, I get the mix is still in flux, but insofar as you're running a portion of it as kraft paper, how does that dynamic affect the capacity of the mill?
As I said, at this point, the volume would not be or it has not been determined. You can consider that the total output of the mill would not change from what would be announced. Capacity would be 465,000 tons per year.
Okay. Great. Thanks. That's helpful. Just the last question I had was, Allan, with respect to CapEx, can you give us an indication of how we should think about 2023 just given the, you know, inflation you're seeing? I imagine there's some portion of the Bear Island spend that shows up in 2023 as well.
Yeah, exactly. What we see right now with Bear Island is approximately $90 million that is planned to be paid in early 2023, for sure the first part of the year. For the remaining of the business, it will be kept at a minimum. There's no major project on the go. As we said in our strategic plan update end of February, we want to limit at 4% of revenue. It might be adjusted a bit down depending on our financial profile. There's only Bear Island for now for next year.
Okay, great. Thanks. That's all I had for now. I'll get back in the queue.
Thank you. Next question will be from Zachary Evershed at National Bank Financial.
Good afternoon. Thanks for taking my questions. I just wanted to kick off with if maybe you could help us quantify the risks of a delayed startup at Bear Island. What do you think the probability, the over-under is of going beyond schedule, and what kind of costs that could cause you to incur?
Charles, you wanna take this one?
Yeah. As we mentioned, we are still working towards making the December startup is still achievable. Our team are working towards that. We have said that there are some delays in certain aspect, and we mentioned them, and Mario explained that in his deck. If it slides into Q1, at this point, from what we see, it would not have a major impact on the 2023 year, if that's what your question is.
That's clear. Thanks. In terms of the recent industry talk about a customer inventory correction over the last few months, and maybe continuing into the next quarter. Can you give color as to what you've experienced thus far and how it's tracking into Q3 on the Containerboard side?
Yes. We have seen with some of our customers a correction on the inventory level. Our customers are seeing or having the same issues that we have whether it's on labor, also not able to produce. Some of our customers are making adjustments also for the inventory. We are seeing that, and that's why when we look at our Q3 right now, our forecasting are looking for about stable compared to our Q2. We're following that very closely. What we're seeing right now is maybe slower beginning of the Q3 and then picking up towards the end of Q3. That's why we're calling for flat.
What we're expecting is that with the back to school and the prep for the holiday season, our forecasts are we're expecting the demand to increase towards the end of Q3.
That's helpful. Thanks. Just one last one for me, switching gears to tissue here. Can you comment on any impact or possible impact from seasonality on the profitability initiatives in place, and how the price hikes might flow through for the balance of 2022?
Yeah. Good morning, Zach. We don't foresee any differences, I will say, in terms of seasonality versus the previous years, but I can say that the demand is pretty good. Right now, the limitation is really our ability to produce those cases. Right now, the demand in both markets, the work from home and retail is pretty good. We should see improvement in our tonnage or shipments for the next coming quarters, one after the other.
All right. Thank you very much. I'll turn it 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 Matthew McKellar at RBC Capital Markets.
Hi, thanks for taking my question. In tissue, it sounds like price increases should start to show up again Q3. You'll get something closer to a full run rate, benefits in Q4. With that, you noted that you're expecting performance in the segment to be slightly lower year-over-year. With that, should we expect operating income before depreciation in Q3 to be materially above break even? How should we think about the progression from Q3 to Q4 in that context?
Well, I'll take that first, and I'll let Jean-David speak. We have guided a bit lower than last year, but we have not specified any numbers. Last it was CAD 12 million, so anything close to that or slightly lower. That's what we can expect for Q3. Remaining cautious because prices of input costs are still very volatile, so remaining cautious. But a lot of our price increase initiative and other initiative will continue to take place with them having a full run rate by year-end. That's why we say that the second half of the year should be much better than the first one.
If I can add also, price increases that we announced in retail for August, we're negotiating actually. As you may know, competitors announced also later date, so we're negotiating with those customer, but we feel that the full impact will be in Q4 more than on Q3. Allan said, we're prudent on the inflation level as well for the coming quarter.
Okay, great. Thanks. It sounds like you're expecting somewhat lower OCC costs sequentially in Q3. Could you talk a bit about what you see as driving that trend and maybe talk to where you expect costs to trend through the balance of the year?
Yes. This is Luc. Matthew, we actually have seen a switch in the market environment in June, actually in early June. The beginning of the second quarter, we think the market was more balanced, but by early June, we started to see a decrease in the demand and still strong generation. This situation has amplified, obviously, in the month of July. We are in a situation now where there's definitely an excess of offer in the market. We would have expected the correction in pricing from the publication in July, it didn't show up.
I think now that the conditions we've seen in the market, where we operate, it clearly indicates that there likely going to be a correction.
Okay, thanks. Thanks very much. Last one for me. Just wanted to hit on the leverage as you work to complete Bear Island. Are you content to, I guess, let leverage kind of normalize with CapEx tapering off and results improving, given that you're not constrained by a debt-to-EBITDA-based covenant? Would you consider taking any kind of action to accelerate de-levering? Maybe as a follow-on, how should we think about capital allocation overall following its completion, in the context of your comments that CapEx likely to be kept at a minimum?
Yeah. Obviously, CapEx will be managed, and debt profile or leverage will be balanced first. To make sure that we get back to our stated target of between 2.5x and 3 x once the Bear Island project is up and running. That will be the first priority in terms of capital allocation to adjust that balance sheet profile before continuing to invest in strategic projects.
Okay, thanks. I'll turn it back.
Thank you. Next question is from Frédéric Tremblay at Desjardins.
Thank you. A couple questions on the tissue segment. I was wondering if you're seeing some consumers switch to, you know, private label from branded products, if that's something that you're witnessing currently and how that may impact your business, given your product mix.
Yeah. Good morning, Frédéric. Yes, the growth of private label just continues year after year. We achieved recently the highest level ever. I think the acceptance of consumer is really good. The quality of those private label is getting better and better. So I think we're well-positioned. As you know, more than 90% of our business is private label in the retail. We're also well-positioned with the customer mix that we have with the mass merch and the clubs. I think economic situation will only can be a positive for our tissue business. Also, the market segment that we're playing in the private label, is also maybe positive if consumer are trading down because of financial situation. All in all, I think it's positive.
Right. Makes sense. You commented earlier on, you know, some customers in Containerboard drawing down inventories. Can you comment on inventory levels in the tissue retail and away from home market?
Good question. I think the away from home business is getting better, not at the previous level, but we're in line with the market improvements. Again, as I said earlier, it's really our ability to serve those customers. Like, the demand is pretty good in both market segments as we see.
Okay. That's it for me. Thanks.
Thank you. Next question will be from Benoît Laprade at Scotiabank.
Thank you. Good morning, everyone. Just a quick one for me. Just wanted to go back to the earlier tissue question in terms of guidance. If I'm not mistaken, we are at CAD -25 million after the first six months. You're guiding to CAD 25 million-CAD 40 million, which implies the second half in the CAD 50 million-CAD 65 million range, which means that even if you would meet the CAD 12 million from last year, that would imply a CAD 38 million-CAD 52 million quarter for Q4. Am I missing something or is that what you're implying?
No, Benoît, I think we’ve put a slide, I think it’s slide 14 in the deck that illustrates that. We see that there’s a lot of positive benefit that are still to come through for next year. There’s a portion of that will come in in the last section of the year. Obviously all the profitability initiative will kick in more than the impact of the cost and the inflation. You’re right. It’s second half of the year should be much better.
Okay. If I push that reasoning a little further, you're still guiding for 2024 in the CAD 150 million range, but Q4 annualized, and typically Q4 is a weak, seasonally speaking quarter, that kind of assumes that you'll be slowing down from there while you probably have some initiatives that should be improving the performance. I'm just wanting to reconcile the Q4 2022 and the 2024 full year guidance at CAD 150 million.
Exactly. If you do the math, you're right. We have kept our guidance for 2024 for now. It's still a long way to go, but that's why we remain confident that this target will be achieved. Maybe it will be surpassed if you do that math as you mentioned, but we're maintaining that the target will be achieved. It has to be proven because the upside, as Jean-David is mentioning that we have in tissue after all of these initiatives is that on the volume side, there's still opportunity to drive improvement in volume, in production volume, so in sales.
Okay, great. That's very helpful. Thank you very much. That's it for me. I'll turn it over.
Thank you. Next question will be from Mark Wilde at BMO. Please go ahead.
Thanks. Good morning. I wanted to just start by following on Benoît's question. I'm just curious about guidance generally. We've had a number of guidance cuts this year. Anything you can give us to, you know, increase confidence that we don't have more to come here in the second half of the year?
Well, if I can start, if you only take that tissue guidance we did in Q1, the difference with the guidance right now is mainly driven by continued increase in raw materials, in addition to chemical and energy costs that were higher than our assumption when we did our last forecast and also slightly lower production output than expected. These are the main drivers why we have reduced our guidance this time in tissue and not in Q1, because in Q1 we had these assumptions at different levels. That's the reason between the two. Going forward, price increases, negotiations are being implemented and a very high level of probability of being done or achieved. Going a bit further, as I explained, there's potential of additional production output to be delivered in tissue.
That's why remaining confident about the 2024 target.
Okay. If I could just add, is there any wiggle room, any kind of negative contingencies in the guidance? I mean, we can all see good things happening, but have we also left room for kind of any additional negative surprises?
Yeah, we still have inflation in our cost, Mark, and we anticipate that raw material will continue to go higher in Q3 and probably even higher after. That's part of the assumption that we're taking.
That's why there's in tissue we have stated a range because it's continued risk.
Okay. All right. The second thing I wanted to ask about is just that medium inventory overhang at Niagara Falls. Can you put any color around what drove that?
Yes.
Hello?
Yes. This is part of our production has been pretty good in our systems. With what we have made, our inventory level has been higher than where we feel comfortable. As we mentioned, we are seeing some of our customers are taking some inventory adjustment, which by ripple effect is causing us the same thing. We took down the machine that was the least contributing to our system and this is in Niagara Falls. We evaluate again that the adjustment was about 10,000 tons. That's the reason behind our taking it first five weeks.
Would it be your sense now that the, you know, medium market is, you know, imbalanced at this point? How would you term it? Because, you know, if I go back for much of the last two years, medium has actually been the tighter side of the industry. If you're taking inventory downtime right now, it would suggest that that's no longer the case.
Well, it is in a way, but as you know, we're very high on the medium when you compare to our liner.
Mm-hmm.
When you look at the adjustments that were made by our customers, it seems like the medium side was a bit more affected than the liner.
Just turning to Bear Island and the, you know, potential delay into the first quarter. Does that have any effect on the pre-selling that you had talked about in the past on that machine?
No, at this point, we're still working towards the December starting date. Again, if it slides into Q1, from what we see right now, we are going to be okay with the ramp up that we have and the inventory levels that we're going to go into Q1. We are working also with our customers to make sure that we'll be able to service everybody. If there is a slide in Q1, the potential is probably 10,000, you know, 10,000 tons-15,000 tons, something like that. Worst case scenario. On the overall scheme of things, we'll be okay.
Okay. All right, the last one for me, for either kind of Allan or Mario. I'm just curious, you made a significant move up just a while ago in your dividend and with leverage going up right now. Can you just talk with us about, you know, how you think about the security of the dividend?
At the moment, we have not changed our position regarding the dividends. You know, the forecast we see in terms of cash flow generation and offset of inflation in our cost doesn't guide us to move on the dividends right now. We maintain the dividend at the same level.
Okay. You're comfortable in your ability to maintain that dividend is really what I'm asking?
Yes. Yes, we are.
Okay. Very good. I'll turn it over.
Thank you. There are no further questions at this time. Monsieur Plourde, please continue.
Thank you everyone to be on the line today and looking forward to talk to you for our Q3 results. Have a nice weekend.
Thank you.
Thank you. Merci. Thank you, ladies and gentlemen, this does conclude today's conference call.