Cascades Inc. (CAS) Earnings Call Transcript

Mr. Chair, I second that motion.

Thank you, Allan. The motion has been duly made and seconded. Now you can click on the in favor or against button next to the advisory resolution accepting the company's approach to executive compensation. The next item on the agenda is the adoption of a resolution approving the replenishment of the share reserve for the company's stock option plan, all as described in the management proxy circular. I see that Michael wishes to make a motion to this effect.

Mr. Chair, I move the approval of a resolution for the purpose of approving the replenishment of the share reserve for the company's stock option plan.

Thank you, Mr. Guerra. Would Allan Hogg like to second the motion?

Mr. Chair, I second the motion.

Thank you, Allan. Now you can click on the for or against button next to the resolution approving the replenishment of the stock reserve for the company's stock option plan. The next item on the agenda is the proposal submitted by MEDAC and described in Appendix A of the proxy circular. After discussions with the company, MEDAC has agreed to withdraw its 3 proposals. They will, therefore, be presented, but no vote will be held on them. I will now ask the representative of MEDAC to present the 3 proposals. Mr. Willie Gagnon, you have the floor.

Yes. Hello, Mr. Chair. Can you hear me clearly?

Very good. Thank you. Go ahead.

Perfect. So as you just said, I am Willie Gagnon. I am a representative of MEDAC, who is a shareholder of the company. This year, we are proposing 3 things, and we have an agreement on all of these. We are very happy with the discussions that we had with the company. We had proposed the level of language proficiency be higher in companies. It's described in your proxy circular. And this is not the same for all companies that we have sent this proposal. We sent it to around 20 companies and not all the companies have agreed with us. We want to use you as an example to make our proposals in the future. And we want to mention that there are people who speak Italian, Turkish and Portuguese. That's wonderful. We believe that this is a favorable situation. And we do want to use your example to ask for the language proficiency to be such in all companies. So we also have the proposal about women in management, and we were already accepted. We are very happy with that, and we sent a proposal relative to the role of Human Resources and Compensation, and we wanted this to be reflected in the company's documentation that there's work to be done at this regard in terms of remunerating not only the management but others. And so the company has showed us that they are in favor of that, and so we're very happy about it. So once again, thank you, Mr. Chair, for the time you've given us, but not only right now, but throughout the year to discuss these issues.

Thank you, Mr. Gagnon, for your collaboration and to keep us up on all of your good suggestions. The Board of Directors has stated its position on the proposals in the solicitation circular and no vote is required on these 3 proposals. If you have not already done so, we invite you to vote on all of the items on the agenda, namely the election of directors, the appointment of the independent auditor, the approval of the advisory resolution accepting Cascade's approach to executive compensation and the approval of the resolution to replenish their share reserve for the company's stock option plan. I would like to remind you that shareholders who have already voted in advance, do not have to vote again and can simply ignore the online ballot. Once the electronic ballot is complete, the voting page will disappear, and your votes will be automatically recorded. We allow registered shareholders and proxies 1 minute to complete the electronic ballots. Once the voting is complete, I will ask the scrutineers to compile a report of the results of the voting on all agenda items. We will be back shortly for the results. Thank you for your patience. I would now like to invite Mr. Steve Gilbert from Computershare to read the scrutineer's report on the preliminary results of the vote.

Thank you, Mr. Chairman. You can hear me?

Yes.

All right. Thank you, Mr. Lemaire. With respect to the election of directors, I confirm that all 11 candidates were duly elected as Directors of the corporation. I'm also able to announce that the resolution regarding the appointment of PricewaterhouseCoopers as the corporation's independent auditors, the advisory resolution accepting Cascade's approach to executive compensation as well as the resolution approving the replenishment of the stock reserve for the corporation's stock option plan were all adopted. Thank you, Mr. Chairman.

Thank you, once again, Mr. Gilbert. I can confirm that the final results of the vote will be available on SEDAR as of tomorrow. I would now like to invite Mario Plourde, President and Chief Executive Officer, to take the floor.

Good morning to all of you. Thank you so much for joining us today. On behalf of the Cascades management team, I would like to thank our shareholders, our customers, our partners and the communities in which we operate for their elaboration throughout 2022. I would also like to thank our employees for their constant support in their immeasurable contribution to our success. Without a doubt, their hard work and dedication despite the challenges and uncertainties encountered in the past year has enabled Cascades to provide our customers with the essential products and solutions they need on a daily basis. The year 2022 has certainly been a difficult one, presenting us with a share of operational cost challenges. However, it was also encouraging in light of the significant progress we made on our strategic plan and the resilience we demonstrated throughout the year. On a consolidated basis, Cascades faced more than $475 million in additional costs in 2022. But through the implementation of significant countermeasures, we were able to offset more than $460 million of these costs. We still have work to do, especially in our tissue business where price increases take longer to implement and where material cost increases have been significant and sustained. However, we are encouraged by the progress we've made and continue to make in order to optimize Cascade's financial and operational performance. Amidst the challenging environment of this past year, we have also made significant progress on our Bear Island project, which we will talk about in a few minutes. Let me start with our sales performance in 2022. Cascade's sales totaled $4.5 billion, which represents a 13% increase over the 2021 levels. This increase is attributable to higher selling prices as well as a more favorable product mix and exchange rates. The company generated operating income of $33 million in 2022, down from $15 million in the previous year. Adjusted earnings before interest, taxes, depreciation and amortization or EBITDA adjusted was $376 million in 2022 and was 3% lower than the prior year. About -- on a margin basis, this represents 8.4% of sales in 2022 compared to 9.8% in 2021. As we've explained in our annual statements, this performance reflects significant inflationary pressure on costs throughout the past year in addition to slightly lower volumes across our business. These effects were offset by higher selling prices in all segments. This past year has been quite busy, and we've been successful in driving strategic investments across our business throughout the year. On a consolidated basis, we've invested $532 million in our property, plant and equipment, of which approximately 80% or $426 million was invested in the Containerboard segment. The lion's share of the investment in this segment was allocated to our strategic paper machine conversion project in Bear Island located in Virginia and where they have now started operations. In general, investments throughout the year were aimed at improving competitive positioning, productivity and long-term value creation. They also included investments in converting equipment in our tissue and specialty product businesses and the addition of recycled pulp capacity and improvements to the water treatment systems at our Kingsey Falls production facility. Let me now briefly discuss the results of each of our business segments. Our Containerboard segment performed well in 2022 with sales up 13% to reach $2.3 billion in 2022. This increase is largely the result of higher average selling prices as well as a favorable foreign exchange rate, the benefits of which also the impact of slightly lower volumes, EBITDA adjusted levels also increased year-over-year in '22 by 8% or $29 million to reach $401 million, while margins of 18% are slightly lower than those of 2021. We are pleased with how our business has performed in the highly inflationary environment of 2022. The inflationary macro environment increased the total planned investment for the large Bear Island projects to CAD 619 million or USD 525 million from the original project, which was CAD 475 million or USD 380 million. Construction of the project was completed at the end of March, and we produced the first roll of paper only a few days ago. Strategically, this facility will be very competitive with the production of high-quality 100% recycled, lightweight linerboard characteristics that are very well aligned with key market trends. It will be one of the most efficient facilities in our industry in North America complementing our Greenpac facility and further strengthening our Containerboard platform, both from a product and geographic perspective. The remaining investment in this project is expected to be $175 million in 2023, and we expect a positive EBITDA contribution in the second half of the year. Let's now turn to the highlights of our Specialty Products segment. This business segment continue to enjoy positive momentum in 2022 with sales up 19%. The EBITDA adjusted for this segment increased by 24% as higher selling prices and favorable foreign exchange rates more than offset the impact of inflationary cost pressures, although there was some slowdown in demand in the second half of the year, partly due to the avian flu outbreak. Results were supported by higher realized margins and strong demand for the sustainable packaging solutions produced in this segment. Finally, the results of our Tissue segment reflected a challenging environment. We were able to increase sales by 12% in 2022 as the beneficial impacts of selling price increases, product mix and more favorable exchange rates strengthened throughout the year in order to offset lower volumes. However, profitability levels in this segment were significantly affected by inflation in raw material, transportation, production and energy costs. Price increases have not countered these headwinds in 2022, but are expected to have a significant beneficent effect in 2023 when the annualized benefits of these measures will materialize. I will now turn the call over to Allan, who will provide some additional financial details for 2022 as well as an outline of our results for the first quarter of '23, which were released earlier this morning. Allan?

Thank you, Mario. Good morning, everyone. Thank you for joining us today. As Mario talked about the operational and financial highlights for 2022, my comments will focus on our key financial indicators from the past year, followed by a brief overview of our first quarter 2023 results that were released earlier this morning. In terms of our debt levels, the net debt increased by $615 million or 46% year-over-year in 2022. This reflects significant investments of $335 million in our Bear Island projects in 2022. Working capital requirements caused by cost inflation and selling price increases and the negative impact of foreign exchange rates of $111 million. These items were offset by cash flow generation from our lower operations 2022 and proceeds from the disposal of assets. We returned a total of $57 million to shareholders in 2022, reflecting $48 million in dividends and $9 million to share repurchases at the end of 2022. Cascade's dividend yield was 5.7%. Our debt ratio stood at 5.2x at the end of 2022, up from 3.5x at the end of 2021. This largely reflects the significant investments in our Bear Island project throughout the year in preparation for start-up and a weaker EBITDA performance in our Tissue Paper segment during the year. We expect to reverse this trend in 2023 as the Bear Island facility will ramp up production. Capital investments will decrease and profitability initiatives in our Tissue Paper segment gains momentum. We do not surely have any significant maturities until 2025. We had $265 million available on our credit facility as of March 31, 2023. And we expect our operations to generate good cash flow this year. To that end, we expect our cash flow to fully fund our capital needs in the coming year. Now let's turn to the Q1 '23 results, which were released earlier today. First quarter 2023 sales totaled $1.13 billion. This is flat compared to the fourth quarter 2022 levels and represents a 9% increase over the same period last year. Compared to the same period in 2022 sales level benefited from higher selling prices in all segments as well as favorable foreign exchange, higher volumes and Containerboard and better sales mix in Tissue. These factors were partially offset by lower volumes in Tissue and Specialty Products, a less favorable mix in Containerboard and a lower contribution from our recovery and recycling operations due to lower raw material prices. The decreases in raw material prices were favorable to all our business segments during the period. Average recycled board prices were down 6% from the fourth quarter and white recycled fiber prices were down 11%. We are pleased to note that prices for the various types of pulp have also begun to decrease by 4% and 5%, respectively, for the fourth quarter levels. Compared to the same period in 2022, however, white recycled fiber and pulp prices have increased between 8% and 16%. And recycled paperboard prices, on the other hand, fell 76% year-over-year. Let's now turn to our results for the first quarter. The company recorded a higher operating loss in this quarter, primarily resulting from write-downs related to certain U.S. assets in the amount of $152 million. However, from an operational perspective, we are off to a strong start this year. Consolidated adjusted EBITDA increased 121% or $76 million year-over-year with all 3 of our businesses contributing to the stronger results. Specifically, the year-over-year improvement reflects higher selling prices in all segments and lower raw material costs for our Packaging business. These benefits were offset by our production emerging, transportation costs as well as lower results from our recovery and recycling operations due to lower raw material prices. Let's now turn to the evolution of net debt in the first quarter. Cash flow from operations, a positive foreign exchange effect and proceeds from the disposal of assets, all benefited our net debt levels during that period. These disposal of assets all benefited our -- and these items were more than offset by working capital requirements in the current period in capital investments, primarily in our Bear Island projects, for which approximately $100 million was invested in the first quarter. Net debt increased by $104 million or 5% from December 31 levels, but our debt-to-capitalization ratio decreased to 4.6x due to higher profitability levels. My comments on the first quarter 2023 results are brief, so please refer to our quarterly investor presentation, press release and MD&A for more details. In addition, a replay of our quarterly conference call held earlier this morning is available on our website. Thank you for your attention. I will now turn the call over to Mario who will conclude on our outlook for 2023 and the update of our strategic plan. Mario?

Thank you, Allan. Before I turn to the update of our strategic plan, I would like to briefly discuss our outlook for 2023. As Allan pointed out in his discussion of the first quarter results, energy, logistics, labor and production supply cost levels have stabilized, although they do remain high. Raw material prices for our Tissue business have begun to decline, which will provide positive momentum for our business. Old corrugated container prices, or OCC, have increased from the historically low levels at the end of last year, and we expect them to increase slightly in 2023. Average containerboard selling prices fell slightly at the end of last year, and we expect prices to be relatively stable through 2024. However, I would add that if economic performance weakens, then downward pressure on containerboard selling prices could increase. These factors are offset by continued solid demand for packaging products and the recent start-up of our Bear Island project, which I mentioned earlier. As for Tissue, demand remains healthy for retail converted products, while we have seen some slowdown in the early year in the away-from-home categories. Overall, our outlook for the Tissue sector is positive for 2023. The segment's results will benefit from the full annualized benefits of announced price increases and other strategic initiatives implemented in 2022, lower raw material costs, as I just mentioned, and the repositioning of its operating platform that was announced in late April. Let me now briefly highlight the updated financial objectives of our 2022, 2024 strategic plan. We provided an update on this plan during our first quarter 2023, earlier this morning. And I invite you to listen to the replay of that call and read the accompanying materials for more detail. And you can access both documents on our website. As we discussed on our call this morning, we continue to have a goal of generating approximately $5.0 billion in revenue and adjusted EBITDA margin of between 12% and 14% in 2024. The goal of generating free cash flow levels between 9% and 10% of sales. After the completion of the Bear Island project remains unchanged as does our dividend payment. We have not renewed our normal course issuer bid. And with the completion of the Bear Island project, achieving our 2.0 to 2.5 debt to capitalization target becomes a priority. We will continue to be disciplined in managing our balance sheet and capital allocation plans and will limit capital investments to $175 million in 2024. Achieving this goal originally planned for the end of 2024 is delayed by 1 year. To reflect this, we have adjusted our 2024 target to 2.5 to 3x. We remain committed to achieving the goals of our strategic plan for the company, our employees, our customers and our shareholders. These actions also extend to our commitment to sustainability, which is at the heart of who we are and everything we do. We are immensely proud that this commitment continues to be recognized. According to the Corporate Knights Global 100 ranking, Cascades was recognized as the 20th most responsible company in the world, again ranking first in the containers and packaging category. We also received a AA rating in the MSCI ESG assessment for 2022. For a third consecutive year, Cascades was awarded the Bronze Parity Certification by women and garments. We were also named one of Canada's top 100 employers as well as being recognized as a top employer for new graduates. These recognitions are indicative of the actions we are taking, which are paying off. The results you see on the screen put us at the top of our industry. While our efforts are remarkable, we also want to extend them to our customers' operations, supporting them in their efforts to reduce their environmental footprint and by providing value-added green products and advice. Now more than ever, consumers are demanding that companies be responsible, and Cascades is a role model. Our ESG strategy is aligned with the UN's sustainable development goals. We have ambitious targets to reduce greenhouse gas emissions, and we remain committed to ensuring that all our packaging is recyclable, compostable or reusable by 2030, recognizing the growing importance of ESG data disclosure. Cascades is working to improve its collection and communication process to apply the same rigor as our financial data receives. This demonstrates the seriousness of our commitment. As it has been the case since our beginnings nearly 60 years ago, Cascades is and will remain a company devoted to the circular economy. Every day, our employees work to develop new products and reinvent ways of doing things to achieve the ultimate goal of innovation to create value for customers, always for the betterment of communities and for the planet. In the past year, this culture has led to innovations such as the Northbox XTEND, which enhances our line of insulated packaging solutions. The new 100% recyclable and recycled peat tray, a premium alternative to more difficult to recycle food packaging that helps reduce food waste through its unique design. The Ocean Northbox and alternative to nonrecycled packaging in the fishing industry contains a maximum of 65% recycled fiber and is also recyclable. We will continue to expand our offering in innovative green solutions, which is a true value-creation driver for Cascades, our customers and our shareholders. This willingness to push the limits is a credit to our employees. So day after day, they show their heart and soul and their dedication. Their talent is no longer in question because we hope to be able to count on their participation for a long time to come and because we want to find the best colleagues for them. We have developed and distributed our new employer brand over the past year, which has a signature entitled Respect Your Nature, reflecting our respect for both nature and our employees. This speaks to the human character of our company and the trust that we place in all our talent and the importance we place on developing their full potential. Once again, I would like to thank our employees for their undeniable contribution to our success. The past year has been one of the most challenging in our history. But I salute the resilience and ingenuity of our people who have enabled us to overcome the obstacles and keep us above the fray. With them, we feel confident about the future. The strategic initiatives and investments we have made over the past years have positioned Cascades to create value for the company and for all our stakeholders. We thank you for your attention today and for your continued support and confidence. We look forward to updating you on our progress throughout the year.

Great, Mario. Thank you. Thank you, Allan.

We're now at the question period. We will answer questions that any registered shareholder or duly-appointed proxy holder, which is to bring to the attention of this meeting. For each question received in the chat box, we will summarize the question and read aloud the name of the person who asked the question. And if applicable, the name of the entity that they represent. However, if you'd like to ask a question by phone, please take your phone number into the chat and submit or click on the submit button. We will receive an automated call from the system where you can listen to the live broadcast. You'll be able to ask your question when we invite you to do so. Allan, we do have a question by Mr. Willie Gagnon, who is for the movement of education and defense of shareholders. I will read Mr. Gagnon's question, which is as follows: to enable shareholders to be in a virtual meeting is a very good thing, but it's not having -- but not having anyone in person is a bad decision. We know there are sanitary measures now, and we have many meetings in person. So why not have a meeting in person? And when will you be having in-person meetings? So Allan, the floor is yours.

Thank you, Mr. Gagnon, for that question. Yes, the virtual format has become easier for most shareholders to attend. The pandemic is behind us. We hope so, at least. And we still have people who are reticent in terms of traveling to meetings. And so that with this new technology, it's become for us and not just for us, but for most organizations has become a very standard practice. Next year, in 2024, that will be our 60th anniversary. So at that point, we are considering having a hybrid meeting. But you'll be able to hear about our decisions in the future. Thank you, Mr. Gagnon.

There are no other questions. So if there are no other questions, we will now close the question period. We have used up all the time that we had to answer questions, so this concludes the question period of this meeting. Having exhausted all the subjects on the agenda, I declare the meeting closed adjourned. The journalist who would like to conduct individual interviews following the meeting are asked to contact Hugo D'Amours, Vice President of Communications, Public Affairs and Sustainable Development whose contact information appears on your screen. Thank you for your attention. Stay well, and see you next time, we have to report our great results. Have a nice day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]