Cascades Inc. (APO) Earnings Call Transcript & Summary

[Foreign Language] 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 conference call. [Operator Instructions] And I would like to pass the call to Jennifer Aitken, Director of Investor Relations for Cascades. Ms. Aitken, you may now begin.

Thank you, operator. Good morning, everyone, and thank you for joining our conference call. We will begin with some brief comments from Mario Plourde, President and CEO; and Allan Hogg, CFO, after which we will begin the question period. Before I turn the call over to my colleagues, I would like to highlight that this morning's press release and accompanying presentation are available on our website. I would also note 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 and some information contained in the investor presentation and the press release may also include data that are not measures of performance under IFRS, which we detail in our public filings. 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. Thank you for joining us this morning. Earlier this morning, we announced that we have reached an agreement to sell our 57.6% equity interest in the Reno De Medici. As a result, Cascades will be exiting Europe after 35 years. The agreement upon transaction with Apollo Management Group is expected to close in the third quarter. The monetization of our RDM investment reflects our commitment to create long-term value for the company and our shareholders. Since combining our European boxboard platform with that of Reno de Medici in 2008, the group's operating footprint have been successfully streamlined, rationalized and modernized strategic steps that have reinforced its positioning as the second largest recycler, boxboard producer in Europe. More recently, the management team at RDM built and successfully implemented an important multiyear transformation program, which has generated important EBITDA margin improvement and reducing its financial leverage. Having successfully undertaken similar modernization initiative in our North American business platform in recent years, now is the right time for Cascades to monetize our equity stake and sharpen our focus on strengthening the competitive position of our North American packaging and tissue business. This transaction will improve our financial profile and flexibility while simplifying our investment thesis and communication with financial markets. I will now pass the call to Allan, who will provide more detail about the transaction. Allan?

Yes. Thank you, Mario, and good morning, everyone. So for the terms of the agreement, the transaction price has been set at EUR 1.45 per share, which will generate gross proceeds of EUR 315 million and a net cash inflow of approximately CAD 461 million for Cascades. There is no tax leakage as a result of this transaction. The price represents an enterprise value multiple of 6.9x the LTM numbers at the end of the first quarter, including the La Rochette mill operations of Reno. The important cash inflow that will come with the expected Q3 closing of the transaction will improve our financial flexibility and support both future growth and ongoing margin improvement in capital deployment initiatives such as our Bear Island project. While maintaining a prudent approach in our capital deployment, we will also look at optimizing our debt portfolio by reducing permanent debt outstanding. Similarly, shareholder return opportunities will be evaluated. This includes aligning our dividend return with the average of our industry and/or share buybacks through our normal course issuer bid. We have also provided an outline of RDM's operations on Slide 5, excluding their recent acquisitions and detailed the pro forma impact of the transaction on our previously released Q1 numbers on Slide 6. Of note, you can see that our EBITDA margin slightly increases and our net debt-to-EBITDA ratio is reduced by 10% to 2.26. Results and balance sheet items of Reno De Medici will be reclassified as discontinued operation in Q2 of this year and prior periods will be restated as well. So I will now hand the call back to Mario to conclude.

Thank you, Allan. Today's announcement signals the end of our 35 years journey in Europe. It is also an important milestone in our strategic action plan begun in 2016 that was focused on modernizing our operational platform and creating value throughout increasing profitability and improving our balance sheet, while continuing to focus on innovation and pushing our sustainable action and commitment even further. We would like to thank especially Michele Bianchi and the management team and all the RDM employees for their loyal and successful partnership over the years and look forward the following of their success in the year ahead. With that, we will now be happy to answer your questions. Operator?

[Foreign Language] [Operator Instructions] And your first question will be from Hamir Patel at CIBC.

Mario, could you speak to, on the slide where it talks about near-term use of proceeds, how do you think about the sort of relative opportunities? And so Allan, specifically on debt management, what opportunities do you see there? And Mario, in terms of opportunities to upgrade the packaging and tissue businesses, if you can share some more color on what those that could refer to?

Well, in terms of focus, Hamir, I guess we won't change the pattern we already established for quite a while. We'll be really focused on looking for opportunity in the market. And as we did in the last 4, 5 years, we now look for growth in packaging and in tissue in North America. In terms of debt, I will let Allan respond to your questions.

Yes. Well, Hamir, you can see also on the same slide our debt schedule information, and we'll look at what will be the most beneficial in terms of costs and savings and strategically looking at that in the coming weeks. And on top of what Mario said, also, for sure, we have our Bear Island project that is on the go and opportunities in the future, as we stated, to increase our integration rate and further have these tons in containerboard integrated into converting. So that would be the main area of focus going forward.

Okay. Great. And related to that, Mario, if you've decided to build another box plant, it's been a few years since you did the last one in New Jersey. Any sense as to what the capital cost is today for building a modern box plant in the U.S.? And if you could just give us an update on how much of Bear Island has been presold?

Right now, I would say that our estimation of a new box plant will be around $100 million. And competitors have announced recently, so you can refer to the their announcement. It really depends how much equipment you put into the plant. But if we're comparing with Piscataway, $100 million is quite in the ballpark. So far, in terms of presold tonnes from Bear Island, we're quite happy with the trend. As we speak now, we have about close to 50% of our capacity that is presold for a multiyear agreement. So we're in good shape, and the plant will be starting only 18 months from now. So I think we're in very good shape.

Next question will be from Sean Steuart at TD.

Congratulations on the initiative. Just following up on Hamir's question with regard to capital deployment and potential incremental returns of capital to shareholders. I think the wording was align your dividend yield with the sector average. And maybe I'm paraphrasing here, but would that mindset be closer to a 3% dividend yield versus your current 2%? And how do incremental share buybacks fit into the plan as well potentially?

Yes, Sean, the 3% to 3.5% would be a range that we would look at with that initiative. And share buyback will also be evaluated as we always did in the past. So we have all of these options in front of us, and this is what we would like to look in the coming weeks or months after closing, obviously.

Next question will be from Zach Evershed at National Bank. Hello, Zach, can you hear us? We cannot hear you. Getting no response, we will move to the next question from Paul Quinn at RBC.

Congratulations. I just wanted to know that 50% offtake on Bear Island or you're just about at that, what is your goal ultimately at that facility?

When we started the project initially, this was our goal. We were looking to have at least 50% of the capacity signed and sealed. And we're there now, so we're quite happy. We're right on target in terms of budget and the project advancement. So we're in a good shape right now in Bear Island.

Okay. And on the disposition of your interest in Reno, was there a process set up? Or did you have other bidders? Or was this something that Apollo came to you with?

Well, it was a confidential process, obviously. So a selective and confidential process.

Congratulations, finally got it done.

Thank you.

Thank you, Paul.

[Operator Instructions] Your next question is now from Zachary Evershed, National Bank.

I'm sorry, I got disconnected earlier. Apologies if this has already been asked, but does the inflow cash is getting affect the timing of investment in Bear Island at all?

Is that cash inflow will impact the timing of Bear Island?

Correct.

No, no. Bear Island was -- we said earlier that our cash flow will be sufficient to support Bear Island, and this transaction will not change in any way the Bear Island timing of the project, no.

Thank you. At this time, there are no further questions. Mr. Plourde, please continue.

All right. Thank you, everyone, for being on the line this morning. I think it was an important and waiting announce for the market. So it's done and looking forward to talk to you in the next quarter. Have a good day. Thank you.

Thank you.

[Foreign Language] Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.