Good morning. My name is Joelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cascades Third 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 Cascades. Ms. Aitken, you may begin your conference.
Thank you, Operator. Good morning, everyone, and thank you for joining our Third 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 Allan Hogg, CFO. Before turning over the call, 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 Q3 2025 investor presentation for details.
This presentation, along with our Third 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 over the call to our CEO, Hugues Simon, who will begin with a review of our Q3 performance. Hugues?
Thank you, Jennifer, and good morning, everyone. Our third quarter performance was stronger than our projections. This was driven by improved volumes, higher average selling prices, and lower production costs in both businesses. This reflects the growing momentum achieved by our profitability initiatives. Volume showed steady positive momentum in the quarter. In packaging, the flexibility of our operating platform enabled us to capture volume above our forecast. We continue to remain laser-focused on our balance sheet, allocating free cash flow to reduce our debt. Consolidated EBITDA of CAD 159 million increased 16% from Q2. As I mentioned, this was driven by stronger performance in both of our businesses due to higher volume, higher selling price, and lower production costs. Year-over-year consolidated EBITDA increased 14%. Results in both businesses benefited from stronger pricing and favorable raw material costs. These offset higher operating costs and lower utilization rate in packaging.
We provide a breakdown of the impact of these factors sequentially and year-over-year on slide five. Trends continue to be favorable on raw material input costs. We provide an overview of raw material average, quarterly costs, and trends on slides six and seven. Moving now to the results of our businesses, which are highlighted on slides eight through 13 of the presentation. Beginning with packaging, our second-quarter sales increased 4% sequentially. This reflects stronger volume and improved average selling prices. Demand levels exceeded our cautious outlook, with September in particular coming in stronger than expected. We provide bulk shipments data for Cascades and the industry on slides eight and nine. Q3 EBITDA increased by 14% sequentially to CAD 136 million. This was driven by higher volumes and selling prices. EBITDA margins improved to 17.1% from 15.6% in Q2.
Results in this business have begun capturing benefits from our improved operating cost structure and profitability initiatives. The closure of our Niagara Falls facility went well, and production was transitioned to other operating units ahead of schedule. Similarly, we had a strong quarter at Bear Island, and we are pleased with the sequential progress. Production increased 24% to just over 102,000 tons. The mill ran at 90% of our targeted ramp-up curve and 88% of its total production capacity in the quarter. We have continued to see this positive operational pace in October, and we are forecasting a strong end of 2025. We remain committed to closing the gap by year-end. Our employees at Bear Island are driving this momentum, and we'd like to thank them for their hard work and incredible focus. Year-over-year sales increased by 3%.
This reflected higher selling prices and favorable exchange rates, which offset lower volume due to plant closures and softer demand as a result of economic headwinds. EBITDA increased 16% from last year, driven by higher selling prices and lower raw material costs. Margins improved to 17.1% from 15.1% last year. Moving now to our tissue business. Third-quarter sales increased 5% sequentially on stronger volumes. Converted product shipments increased 6% in both away-from-home and retail tissue markets. EBITDA of CAD 46 million increased 21% from Q2, as benefits from volume, mix, and lower operating costs mitigated slightly higher raw material costs related to a higher proportion of virgin fiber. Sales increased 6% from last year. This reflected stronger volumes and higher average selling price. Shipments increased 5% year-over-year, with a 7% increase in retail and a 1% increase in away-from-home.
Year-over-year EBITDA increased by CAD 3 million, reflecting higher volume, higher average selling price, and lower material costs. These were partially offset by higher operating costs due to plant maintenance. We continue to focus on our prior Oklahoma mill. We are building a strong foundation to accelerate efficiency improvements. We have started to see benefits in October, and are confident that this trend will continue through Q4. Also, our recent investments in Kingsley Falls and Grand Bay facilities are delivering good results. I'll now pass the call over to Allan, who will briefly discuss some of the financial highlights. Allan?
Thank you, Hugues, and good morning, everyone. Let's start with the specific items recorded during the quarter, which impacted operating income by CAD 12 million on slides 14 and 15. The main items were CAD 10 million for an environmental provision related to a closure in 2024 of a plant in Canada and CAD 6 million of restructuring charges, mainly related to the closure of the Niagara Falls mill. In addition, there was also a CAD 4 million gain on derivative financial instruments. Slides 16 and 17 illustrate the year-over-year and sequential variance of our Q3 adjusted earnings per share and the reconciliation with the specific items that affected our quarterly results. As reported, Q3 net earnings per share were CAD 0.29. This compared to net earnings per share of CAD 0.01 last year and a net loss of CAD 0.03 per share in Q2.
On an adjusted basis, net earnings per share were CAD 0.38 in the current quarter. This compared to net earnings per share of CAD 0.27 last year and CAD 0.19 in the second quarter of 2025. These increases were both driven by stronger adjusted EBITDA in the current quarter. As highlighted on slide 18, third quarter adjusted cash flow from operations was CAD 137 million, up from CAD 86 million in the year-ago period and CAD 101 million in Q2. Adjusted cash flow generated in the second quarter improved year-over-year, mainly reflecting stronger operating results and lower financing expense. Capital investments and dividends paid to minority interests were largely unchanged. Sequentially, the increase in levels of adjusted cash flow generated reflects stronger operating results and lower amounts of dividends paid to minority interests, net of higher financing expense paid. Slide 19 provides details about capital investments.
New investments for the third quarter totaled CAD 30 million, bringing the year-to-date level to CAD 91 million. For 2025, we expect CapEx to total approximately CAD 140 million, slightly lower than the CAD 150 million stated at the end of Q2. Moving now to our net debt reconciliation, as detailed on slide 20. Sequentially, net debt decreased by CAD 81 million in the third quarter, mainly due to stronger cash flow from operation and a reversal in working capital requirements. Less favorable exchange rate on our U.S.-denominated debt increased debt levels by CAD 42 million. Our leverage ratio decreased to 3.6 times from 3.8 times at the end of the second quarter. Our available liquidity under our credit facility stood at CAD 630 million at the end of the third quarter. We also announced that we've completed the sale of the flexible packaging operation on October 8. The CAD 31 million.
Of cash proceeds have gone towards debt repayment in the fourth quarter. Including this amount, total proceeds from asset sales amount to CAD 57 million this year. Financial ratios and information about maturities are detailed on slide 21, and other information and analysis can be found on slides 26-34 of the deck. I will now pass the call back to Hugues, who will conclude with some brief comments before we begin the question period. Hugues?
Thank you, Allan. We provide our outlook for Q4 on slide 22. In packaging, raw material and selling price trends are anticipated to be favorable. However, we remain cautious regarding demand levels due to unusual post-Thanksgiving seasonality and continued macro uncertainty. To this end, we are currently forecasting packaging results to be in the range of stable to 10% below Q3 levels. This is driven by an expected 5% decrease in volumes, mainly in December. Tissue results are expected to strengthen sequentially, with lower raw material and maintenance costs. Corporate costs are expected to be stable. However, share-based compensation costs are expected to be higher given the recent increase in our share price. Before opening the call to questions, I would like to provide an update on our strategic priorities for 2025 and 2026.
First, our plan to monetize redundant assets is progressing well, and we are increasing our target to CAD 120 million by June 2026 from the CAD 80 million disclosed previously. Lastly, our culture of excellence focus is starting to show benefits and have helped mitigate the impact from headwinds. On slide 24, we provide a few examples of what has been done and our current areas of focus. Looking at our most recent quarter, our initiatives contributed approximately CAD 10 million to our results sequentially. We are on track to achieve our CAD 100 million objective of run rate profitability improvements by the end of 2026. With that, we can now open the call to questions. Operator?
[Foreign Language] Thank you. If you would like to ask a question, simply press star then the one on your telephone keypad. If you would like to withdraw your question, please press star 2. Again, if you have a question, please press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Hamir Patel with CIBC Capital Markets. Your line is now open.
Hi, good morning. Congrats on the strong quarter. Hugues, I wanted to ask about the profitability improvement objectives there, the CAD 100 million by the end of 2026. You mentioned you captured CAD 10 million in Q3. How much have you captured cumulatively to date? The sort of longer-term goalpost of over CAD 200 million, what do you see as the timeline of achieving that?
Yeah, thank you for your question, Hamir. If you look at what we've done so far this year, the first two quarters of the year was mostly focused on building the foundation to drive improvements. We really started to see some good benefits in the third quarter. We are building momentum. As we stated on the second quarter, we're really looking at a net run rate of CAD 100 million by the end of the last quarter of 2026. We expect the momentum to continue. I won't say on a straight curve. Most of it has to be achieved before the fourth quarter. It's not all going to happen at the end of 2026. We expect some momentum to be building over the next three quarters. We're focusing on twice the amount because obviously there are some headwinds.
You look at the uncertainty in the market today. There is a volume impact. That drove some of our decisions in the third quarter to shut down our Niagara Falls facility. We were able to redistribute the customer mix, focus on liner board versus medium, and look at profitability on a per-hour basis, putting the right product on the right machine for the right customer. That momentum is going to continue to build. Obviously, the focus is to get it as fast as we can.
Great. Thanks. That's helpful. Allan, with respect to the CapEx budget for 2026, CAD 175 million, what are the sort of larger projects that drive the increase there?
Our team are just planning for that. There is no, I would say, major strategic, but maybe a bit more investment this year to continue to improve where we need to improve, improve quality, reduce our costs. There is nothing, I would say, like a major addition to what we have. That is what we have on the table right now. Yeah.
Okay, great. Just the last question I had, and maybe this is for Hugues. Just with respect to what you're seeing in the recovered paper market. Do you feel OCC prices are bottoming here? What are you seeing in your local markets?
Yeah, I mean, we just had the latest publication going down CAD 5 here and CAD 10 in the Southeast yesterday. I mean, we're getting to a point. It's a low number. We're really tracking the percentage of people that are doing the recycling. We're also tracking the quality of the product that we're getting. Sometimes when pricing deteriorates, you see an impact on quality. That's something that we pay very, very close attention to. There's also more of a headwind for people to export out of North America. In the meantime, we're also seeing with the shutdown in the U.S. a lower recovery rate or a lower generation of OCC as well, as consumers have reduced their spending.
Per region, we're tracking the balance of all that, making sure that our strategy provides for the low generation that we'll typically get as well after Christmas and match that with our operating rate. Overall, for the next quarter, we see that as if you do the summation of everything I just mentioned, it's a positive trend for us. Paying close attention to the volume generated.
Yeah, fair enough. That's all I had. I'll pass it over. Thanks.
Your next question comes from Sean Steuart with TD Cowen. Your line is now open.
Thanks. Good morning, everyone. Congrats on a solid result. Hugues, a number of the U.S. packaging comps have provided cautious 2026 guidance with respect to the volumes and margins. Do you have enough visibility in your order file, maybe past the fourth quarter, to really comment on expectations, I suppose, on the volume side to start with for your packaging business in 2026?
Thank you for your question, Sean. I mean, the visibility, I mean, we typically guide one quarter ahead. All the economic uncertainty right now gives a bit more of a, it's a bit muddy out there for 2026. If you look back over the last few quarters, we've been very cautious on the guidance. And we've also been cautious on volumes that we put in our operating plan. The key here for us is really we want to be able to capture any uptake in demand. And we've been able to do that in the third quarter. We are able to do that right now in the fourth quarter. You look at the fourth quarter, our. The biggest uncertainty is post-Thanksgiving, given the U.S. shutdown and how much money the U.S. consumer had to spend.
It's going to be the same reality until we see more stability in the economy. We'll be ready to capture any uptake. We're really focusing right now on partnering with customers that are more resilient, that do not see too much of a drop, that are using basic products. We have our mix in Canada and in the West that does behave differently than the U.S. It's very busy in our Western operation. It's very busy in Ontario as well. Quebec is probably the one that is the most difficult market, given the type of businesses and the type of product that we produce. We're working on that as well on a per-region basis to partner with the most resilient customers. As far as visibility, I mean, we'll continue to be cautious. We're not going to be over-optimistic.
We'll make sure that we have a quick turnaround time to capture any available business over and above our forecast.
Thanks for that detail. Second question for Allan. The increase in the asset sales target to CAD 120 million, is that incremental just exclusively the addition of the flexible packaging divestiture? Further to that, can you give us a sense of any associated EBITDA tied to these initiatives, i.e., how much are you giving up as you sell these assets down?
No, it's not necessarily linked to the flexible packaging transaction. As we go, we continue to evaluate what we have. We see that there are maybe new opportunities that are coming on the table. That is why we feel comfortable to increase this target. In terms of EBITDA contributions, it's nothing, I would say, nothing major. As for flexible, they are approximately CAD 5 million -CAD 6 million a year. That is nothing significant. We continue to progress. We might have new opportunities in the future, and some might just be not achievable. That is why we are comfortable with the level we have right now.
Okay, thanks very much. I'll pass it over.
Your next question comes from Matthew McKellar with RBC Capital Markets. Your line is now open.
Good morning. Thanks for taking my question. Just reflecting back on some of the presentation materials around the time you were constructing Bear Island, would suggest there could still be pretty substantial incremental EBITDA to unlock as Bear Island ramps up from, I guess, 88% in Q3 to the full potential of the facility. Recognizing that price input cost spreads and operating costs have evolved over time, how would you think about the incremental EBITDA Bear Island running full would generate compared to what you did in Q3? Thanks.
Yeah, thank you, Matt, for that question. If you look at the last six months, we saw consistent improvement from an operating rate standpoint or operating efficiencies. We're now to a point where we're at 90% of our ramp-up curve, but also at 80% of the capacity of the mill. We will continue to push on that to get to the 100%. We have now started to look at usage, so cost components, whether it's chemical, all the materials that we use, yield. This is going to be a main focus for the next 6-12 months, is how do we get benefits from both operating efficiencies and usage, so cost structure. We do not disclose profitability per mill, but there are still enough benefits to capture between where we are today versus where we want to be. That remains our number one priority on packaging.
Thanks. Would that 6-12 month timeline align with when you would expect to essentially hit the full run rate profitability of the mill?
From an efficiency standpoint, we expect by the end of next year to be at the same. You're never at 100% of the capacity all the time, but we'd be running at the equivalent from an operating standpoint of our Greenpac operation. Our cost initiative, I want to say that it's going to take 24 months to get to a full where we are. That being said, we always reassess that, right? Sometimes we're somewhere, and then we feel we can get better. That's a bit of the mindset that we've put in place with our excellence initiatives, where we always want to have over CAD 100 million in the pipeline of improvement so that we can take care of headwinds, inflation, and other cost components that we have less controls on.
Thanks very much. I'll turn it back.
Again, if you would like to ask a question, please press star then the number one on your telephone keypad. Your next question comes from Nathan Po with National Bank Capital Markets . Your line is now open.
Good morning, everyone. Thanks for taking my question and congrats on the quarter. I want to ask about your packaging segment because EBITDA came in above expectations this quarter. Were there any one-time incremental volumes that contributed to this? Can you describe whether those are more permanent volumes or temporary, given you mentioned you're ready to capture any incremental uptake?
Yeah, no. So there's no one-time incremental volume that we don't feel that are going to come back. We are going to have this normal seasonality. Sorry, on the fourth quarter. Now, I mean, we have the economic uncertainties in both Canada and the U.S., to be quite honest, mostly post-Thanksgiving. We saw good traction, more than expected in September. That continued throughout the month of October. We're not really seeing much of a slowdown to date right now in November. We know that from a season standpoint, it is going to slow down. You look at the accumulation of negative news for the North American consumers, we want to be cautious. If you look at our guidance, we took 5% off in volume for the fourth quarter.
It was not front-loaded, but I mean, back-loaded in the second part of the quarter, given Thanksgiving and Christmas. That being said, we're continuing to work on customer mix, the right product at the right place on the right machine, and improved mix of liner board versus medium because there is a significant difference in the profitability between the two products. Really pushing to have a more resilient volume base, which will enable us to plan better and look long-term ahead with more stable volumes.
Thank you. Appreciate the color. With the talk about the CapEx budget constraints and lowering that guidance and focus on debt repayments, I want to invert that a little. What needs to change in the environment in 2026 or even 2027 for you to revise that CapEx budget upwards or start investing for growth?
We have said for many quarters we want to be between the 2.5 and 3. We are at 3.6. We are making good progress. We are not announcing any significant CapEx for 2026. We have options. Our strategy is to really build different options in both packaging and tissue to see what has the best return for Cascades. I mean, we have started looking at what are our alternatives, and we will continue to do that. For now, we are going to continue our focus on debt repayment. We are making good progress. You are looking at our forecast at the end of Q4. We will make additional progress. In the third quarter results, that does not include the flexible packaging sale, which cash came in in the fourth quarter. We are pushing our CAD 80 million-CAD 120 million. We are really focused on the 2.5 to 3.
We're not waiting to get there to assess our options, but we want to maintain a good ratio so that we maintain flexibility in an environment that is ever-changing. A strong balance sheet will always give us more alternatives and put us more in a driver's seat versus a four-times ratio on debt.
Thank you. I'll turn it over.
Thank you, no further questions. At this time, Mr. Hugues, please continue.
Thank you, everyone, for your time. We're very satisfied with the quarter. Looking forward for the fourth quarter, and we'll try to maintain the trend. Thank you.