Cascades Inc. (CAS) 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 Cascades conference call. [Operator Instructions] And now I will pass the call over to Mario Plourde, President and CEO of Cascades. Mr. Plourde, you may begin.

Thank you. Good morning, everyone, and thank you for joining us today. Earlier today, we announced our fourth quarter results, which officially brings then to our last strategic plan. That plan has been three pillars: Modernize our operations, offer innovative products for our customers and provide [ endless ] value for our shareholders. And I am pleased on how we executed on that plan through a challenging business environment. Today, we will provide you with an overview of our refreshed strategic plan, our path forward. As a result of what we have done in the past, our focus is now on leveraging our stronger asset base and product portfolio to accelerate value creation. Joining me today for the question-and-answer period portion are Allan Hogg, CFO; as well as the President, Charles Malo, from the Containerboard Group; Jean-David Tardif from the Tissue Group; Luc Langevin for the Specialty Products Group. Over the course of this presentation, we will cover material across 3 broad topic area: An overview of where we came from, where we are today and where we are going. Please note that we have included disclaimer on Page 2 of this presentation and ask that you review them and keep them in mind throughout today's remarks. Please also note that this presentation is available on our website. With that, let's begin. Cascades of today is not a Cascades of yesterday, while we work the same routes, we are a different company from where we were 60 years ago, 10 years ago and even 2 years ago before COVID. I will explain what I meant by this over the next few slides. But first, I feel it is important to remind everyone that our core Cascades is all about sustainability. It is in our DNA. We were and still are a pioneer in manufacturing product from recycled materials. At Cascades, our manufacturing business was a natural extension of our recycling business. We are doing it before the circular economy concept even existed. And we have stayed true to our routes even though it was not always the simplest path forward. Our mission and vision for the company has never wavered. Our history is entered in sustainability, and we are solely focused on providing innovative solutions for our customers. Sustainability is essential from the beginning of the process through the end. And it is for this reason that our recovery operation remains strategic to our business. Over the years, we have built these operations, and we are proud to be a North American leader. In total, we have 18 recovery sites across Canada and the Northeast U.S., which supply us with approximately 0.5 million tons of recycled fiber annually. Why? Because recovered paper is our forest. It is our source of our raw material and our forest can grow as we grow. It allows us to better manage the quality of our input and provide us with better cost control versus the open market. More specifically on Slide 8, you will see that over the course of our last strategic plan, we have, first modernize our operation. we have invested over $1.5 billion over the past 5 years to strengthen our platform. This includes adding new converting facility in containerboard and Tissue as well as the acquisition of Orchid Paper, increasing our ownership in Greenpac Mill, buying the strategic Bear Island site and restructuring our Tissue platform. Second, innovative product development. We have a dedicated team that continue to push the innovation and development boundaries to design better packaging and hygiene product. We have introduced new products to reduce food waste and facilitate e-commerce. For example, we were the first North American to develop and successfully launch 100% recycled and recyclable thermoformed cardboard tray. We have embraced eco-design principle for our new product. Third, create value for our shareholders. In addition to modernizing our assets, we have ongoing margin improvement initiatives, production efficiency and reduced supply chain costs and all while optimizing our organizational structure. We have reduced our leverage ratio without compromising our capital program, including the strategic Bear Island project and generated $738 million of net proceeds from the sale of our equity interest in Boralex and Reno de Medici. As a result of these actions, we have returned close to $200 million to our shareholders over 5 years, tripling our annual dividend. On Slide 9, you will see that we have an asset base that has improved as a result of our investment and modernization initiatives. There is always more to do, but as I said earlier, Cascades is not the same. Long gone are the days where our operations platform is dominated by legacy assets from turnaround opportunities. Our company was largely built on an opportunistic M&A seeing value and potential in assets where others did not. This approach has evolved through the years in response to changing competitive and market conditions. The work we have completed over the past 10 years, I highlight exactly this. We have invested in state-of-the-art competitive equipment and well-capitalized strategic mill and converting plant and as a result, have significantly modernized our operation platform. However, through the last 5 years, we have also been impacted by the volatility of raw material prices. We operate in a highly volatile cost environment. Notwithstanding that volatility, our results speak for themselves. Slide 11 shows we have generated an annual sales growth rate of 5.7% over the last 10 years. Disciplined capital management and strategic actions have resulted in a stronger financial profile. And as per our commitment in our last strategic plan, we have significantly reduced our leverage. However in 2021, we were impacted by COVID pandemic. Prior to that, we had seen sustained profitability improvement in our packaging operation and constant production volume growth in Tissue. In 2021, our EBITDA was down by approximately $150 million, driven by the lowest contribution of our Tissue segment and lower containerboard results. These were driven by high operational cost and labor availability in tissue and higher logistics and labor costs as well as weather-related disruption in containerboard. Over the last 10 years, we have taken the numbers of action to reposition ourselves to adapt to needs. To do that, we have sometimes made the difficult choice to sell, dispose or close asset when necessary. We have made strategic acquisitions when we have seen an opportunity, and we have significantly modernized our asset base to our entire journey. Over the last 10 years, we have been busy. We have repositioned our operation with 17 closure, 11 divestiture, 15 strategic transaction and 4 new project. Before I go any further, we acknowledge that there is a lingering question concerning the tissue sector, and I want to address them directly. Cascades has 2 businesses: Containerboard and Specialty Products that have been performing very well, and one business tissue that has been facing significant challenge in the recent year. This situation is not unique to Cascades. We are aware of the view that calls for divestment of our tissue business. We conducted a comprehensive review of this subject and other as part of our strategic update, and we were supported by a leading management consulting firm in this process. The conclusion is that the separation of tissue business is not the optimal decision to create value for our shareholders in the near term. Our immediate priority is to execute on the comprehensive action plan that has been put in place to accelerate profitability improvement and strengthen our tissue business. And as we have always done, we will continue to assess our portfolio of businesses on a regular basis to ensure that we meet our strategic growth objectives and create value for our shareholders. I will tell you more about our plan for tissue sector in a few minutes, but first, let's cover where we are today with focus on our packaging business. Beginning on Slide 16. Cascades is a packaging solution provider with a focus on strategic scalable market in North America. We are well positioned for the future for the following 5 reasons: First, our operations are sustainable as we have spoken about and we'll continue to refer to this presentation. Sustainability is at our core and embedded throughout our operations. Second, the market for packaging in North America is growing, particularly in e-commerce, produce and [ shift to own ] meal kits. Third, we are aligned with industry trends in each of these markets, we offer cutting-edge innovative solutions. Four, with our focus on North America, our supply chain works in our favor given global issue. Finally, our eco-design products are aligned with customer expectations. All of which allow us to bring a unique value proposition to market. We are sustainable. With nearly 60 years of experience, we can both guide and support our customers in their specific journey to reduce their packaging and hygiene product footprint. Our co-innovation performance, in fact, many of our innovation were game-changer in their respective markets. We have the expertise and the customer focus to address their challenge and deliver on our promise to provide high-quality product and services. With that, I will -- we are the sixth largest containerboard producer in North America with steady annual sales growth of 5% over the last 5 years. In Canada, we have a leading market share. 86% of our capacity is utilizing recycled materials, and we have an integration rate of 73%. We develop creative and eco-friendly packaging solution from high-quality material with a relentless focus on our customer, providing them with expertise in fiber, logistics, design, sustainable development and quality. And with our focus on recovery, we are fully committed to the circular economy principle from input to output. Our objective is to secure 100% of our supply of secondary fiber and pulp through our world-class sustainable and fully integrated supply chain. We are focused on North America market, which offer good returns and attractive growth potential. As you can see here on Slide 20, the top 4 player accounts for 75% of market capacity. We have made strategic choice over the last 5 years that take into account potential risks and future opportunity, including growth in capacity change in consumer behavior, demand for eco-friendly products, change in the fiber market, e-commerce and shifting market dynamics. And we are well positioned with our operations in areas with high growth potential, including the U.S. Southeast, South and Midwest region. We have invested in production capacity to meet the need of wider sustainable containerboard with our Greenpac and Bear Island project. As you can see on Slide 21, our sales by market are aligned with industry growth trend, and we are focusing on this area by selecting market based on our capabilities, expertise and trend. Solution and expertise where we can add significant value, innovation, innovation strategy that meets the current and future needs of this market and potential for growth and profitability. Over the last few years, demand increased as consumers stayed at home and had product delivered directly to their doorstep. Growth categories include food particularly cook at home and other agricultural products. Consumer demand also continue to shift to more sustainable packaging and company had been looking to meet that demand with containerboard containing greater recycled content. At the same time, company were looking to reduce costs, and we saw an increased focus on lightweight containerboard option. As I just said, our plan is aligned to capitalize on market growth. As we see on Slide 23, the majority of the forecast growth is in e-commerce and distribution where we are well positioned. And to meet that growing demand, we have significant opportunity as a result of our ongoing investment in Bear Island mills. The chart in that slide provides you with an overview of our capacity ramp up, and we are pleased to announce that approximately 75% of the volume has now already been secured for the first 3 years of operations. We also expect some additional adjustment to the project cost as a result of inflation in the range of USD 25 million to USD 50 million. The total project cost is now expected to be between USD 425 million and USD 450 million. Despite these cost adjustments, we expect return to remain robust and in line with previous estimates and our start-up time line remain intact. This project will rapidly contribute to improving our cash flow generation and is in line with our strategy to expand our operations in the U.S. And for each of our focus markets, we have laid out our volume growth target for the period ending in 2024 as a part of our strategic plan. We will hit these targets through industry-leading innovation, targeted marketing, cross-channel sales strategy. And you can see on Slide 26, some of our key containerboard customers by category. We are focused on innovative design, including individual portion, easier opening receivable packaging. We see similar growth potential across all these industry and expect that to be reflected in our results going forward. On a final note, we are not only relying on the product, we have today to drive our results and performance in the future, we have a strong innovative pipeline focused on lighter paper that helps save on fiber and meet the demand for higher percentage of recycled material and high-performance products. The solution on this slide are an example of some of the innovative products from our business. We have a strategic plan aligned with the growth of our market, and we have a team of committed and engaged leaders. In closing, our action plan in the containerboard sector is to complete the start-up of the Bear Island, increase our integration with new converting capacity in the U.S., our plan is to build or acquire new converting facility between now and 2024, grow revenue to approximately $2.9 billion, generate an EBITDA margin of 19% to 21% by 2024, invest $325 million in 2022, of which the vast majority or $275 million is related to Bear Island. I will now turn to the Specialty Products beginning on Slide 30, a segment with strong synergy with containerboard. When we think of our operations, I know that a lot of the focus is on containerboard and Tissue segment. And it is important that I spend some time today highlighting our specialty packaging segment. Similar to containerboard, we want to first provide a high-level overview of our operations. 63% of our sales in this category are in the U.S. with the reminder in Canada and 66% of our sales is in consumer packaging. Sales and EBITDA have grown by 13% and 22%, respectively, over the 5 years. And we see on Slide 31 that North American demand for packaging continued to grow. We see consumer focus on health and wellness, driving demand for fresh food which drive our focus on innovation to keep food fresh to the end consumer. And I have alluded to this earlier, there is a significant demand in the meal kit and isothermal packaging market. In fact, just earlier this week, we've announced an expansion of our isothermal packaging platform in the Northwestern U.S. Other key growth drivers include regulation around use of single-use plastic or minimum recycled content standard and a significant shift to sustainable packaging, both areas where we are well positioned. Our sustainable packaging solutions are also aligned to growing market segment. We have provided the overall forecasted value of the submarket as well as forecasted growth in each. As you can see, there is tremendous opportunity. And to meet the need of those growing subsegments, we have a strong innovation pipeline. For example, 100% recycled PET and recyclable packaging in protein. Fresh to your door packaging through our innovative northbox, 100% recycled fiber and compostable for vegetable and enhanced protection and retail eggs packaging. Moving forward, our strategy is threefold: We are focused on strategic scalable market, our productions are developed according to recognized eco-design principle, we have distinctive design skill to make customer needs. On Slide 35, you will see our action plan for specialty products. Increase the pace of new sustainable product development in commercial launch, develop and grow our share of targeted market, invest $40 million in 2022 in state-of-the-art technology and automation to support sustainable sales growth, revenue of approximately $700 million by 2024 and an EBITDA margin target of 17% to 19%. I would now like to turn to our tissue business, beginning on Slide 37. Like I said at the beginning of this presentation, our immediate priority is to execute on our comprehensive action plan to accelerate profitability and strengthen our fundamental of our tissue business. But first, let's provide an overview of our operations. In 2021, we had sales of $1.3 billion and an integration rate of 74%. Our sales are spread between both retail and away-from-home and more heavily weighted toward private label than branded. A large majority of our products are made from recycled material, and we are the fourth largest producer in North America. In 2021, 64% of our volumes were in the U.S. and 32% in Canada. Our annual production capacity is more evenly split at 52% in Canada and 48% in the U.S. Our market segment includes both away-from-home and retail. For away-from-home customer, we are focused on growing our private-label offering and improving their economic versus national brand. For our retail customers, we want to help them grow their tissue business with the best-in-class offering. And we have a few examples of our customers in both segments here on Slide 39. On Slide 40, you will see the 5-year growth in various retail segments. As you can see on that slide, we are well positioned to growing category, particularly in club and mass merchants. We also outweigh the market in the dollar category, which is also seeing a healthy 5-year growth rate. We are also less exposed to the grocery chain segment in the U.S. But we have not sat and waited for sales. We have been taking action to strengthen our tissue platform through a series of decisions to rightsize and modernize. We closed 7 facilities, including 4 paper machine and 28 converting lines. We added 13 more modern converting line across 6 sites, and we moved 5 converting line across 3 sites. Each of these moves have positioned us to launch and execute on a profitability plan off a stronger asset base. From 2018 to the beginning of the pandemic, Cascades experienced significant sales growth of 39% in retail volume as well as growth in profitability. Our EBITDA margin has grown from about 2% to 10% prior to COVID, but the pandemic-driven volume fluctuation at their worst, resulted in a 34% drop in volume in the retail segment and a 38% decrease in the away-from-home space. Combined, with cost inflation and logistics, labor and supply chain challenge, the significant drop in demand impacted our profitability with margin dropping to 3% in 2021. Notwithstanding this challenge, our tissue assets are well capitalized. Between 2017 and 2020, we have made significant investment to modernize and restructure our assets on focus on volume and profitability improvement. This was then followed by industry headwinds leading to [indiscernible]. We have reduced costs and are now well positioned to launch our profit improvement plan. More specifically, you can see on Slide 44, the COVID-related impact on demands, operation, labor and logistics as well as higher input costs in 2021. At the same time, those were offset by the action I just spoke about, including plant closure and saving initiatives. Slide 45 shows the COVID impact on the broader tissue market, which demonstrates similar fluctuations. Away-from-home sales fell significantly and the retail segment was driven by panic buying that was quickly followed by a significant drop in demand as customer and consumer work through their high inventory. The industry faced an 11% drop in capacity and production during that time and Cascades was not immune. However, that is now turning slowly and the tissue market is positioned and expected to grow. Tissue capacity is expected to grow by 1.1% in 2022 and a further 0.3% in 2023. And we are well positioned to capitalize on this growth given our market share recent modernization effort and focus on sustainability and private label outlook. The execution of our plan is expected to result in an EBITDA of approximately $150 million by 2024 with a very limited CapEx. As a result of our plan and initiative, we expect growth in case sold to go from 57 million cases in 2021 to 75 million cases to 80 million cases by 2024. In 2022, we expect to sell 65 million cases to 70 million cases. We believe this is achievable. In fact, has been done before in 2020, we had 70 million cases sold. We already have 7 million case confirmed, putting us in our forecasted range. We believe we have further momentum with existing clients and the conversion of new sales opportunity. We will also ramp up our production capacity in a disciplined manner to match demand. From a financial outlook perspective, by 2024, our plan will grow our revenue by 16% to 18% in 2022 and an additional 7% to 9% by 2024, up from $1.3 billion today. Our EBITDA will grow from $27 million today to approximately $150 million in 2024. Our EBITDA margin will grow from -- will grow to 9% to 10% in 2024. And we will do that by maintaining our current CapEx rate of $35 million per year. This is possible because of the significant investment we made in the tissue business over the previous 5 years, and action we took during the pandemic to reposition this business. In other words, capital is already in the ground. How will we achieve this? Slide 48 detail our execution plan. It is made up of 4 lever revenue management. This includes volume increase in commercial activation. We are also applying a proactive analytical approach to determine pricing opportunity and optimization action based on capacity by regions, SKU and segment. Operational excellence, well, performing plants will see increased level of productivity. Plant located in the U.S. will engage in the rapid turnaround to optimize performance, logistics optimization, continuous improvement initiative for planning and alignment and continued focusing on reducing cost, waste in the system, cost control initiatives in our operation and procurement processes. Finally, to ensure the success of the program, we have dedicated team for stream and initiatives supported our tissue team throughout this process with temporary additional resources with solid experience to accelerate progress. So in summary, the key success factor for this business include leverage our well-invested asset based on limited CapEx to $35 million annually through 2024; focus on production execution and efficiency, particularly in our U.S. operations; strengthen commercial strategy to drive value; achieve 2024 revenue of $1.7 billion and generate a 2024 EBITDA margin of 9% to 10%.and then business expertise and market intelligence to drive performance. Given all of the above today, I am pleased to present our new consolidated strategic target for 2024 on Slide 51. Over the last 5 years, we have made significant investment in our operations, and as a result, we have a strong base of assets to work from. Beyond Bear Island, we do not foresee any significant investment of that magnitude in the near term. Rather, we will be focused on free cash flow generation. As a result, we will maintain significant financial flexibility, for example, for a tuck-in acquisition or other strategic investment. Our target for Cascades are as follows: revenue over $5 billion in 2024, EBITDA margin of 11% to 13% in 2022, growing to 13% to 15% in 2024, CapEx of $415 million in 2022, of which $275 million will be invested in Bear Island ahead of its December '22 startup. For the following 2 years, we expect investment of approximately 4% of revenue. In terms of free cash flow, we are targeting a level of 9% to 11% of revenue once the Bear Island project has been completed. We are maintaining our current dividend and NCIB level for 2022 and will review annually thereafter. Net debt to EBITDA is expected to come in between 2.5 to 3x by the end of 2022, dropping to 2 to 2.5x by the end of 2024. We are confident that this plan is achievable given the strategic initiative that we have just laid out. I would now like to offer some closing comments. I started the presentation today by focusing on our history in sustainability. And today, we continue to be recognized for this work. We have been ranked as the 18th most sustainable corporation in the world according to Corporate Knights. We are also first in the world in the packaging category. We have also been named as 1 of the 100 best employers in Canada and have achieved AA rating in the MSCI ESG rating assessment. Our customers recognize our effort as well. Walmart has awarded us with Giga Guru for our leadership and reducing green gas emission. While these accomplishments are meaningful, our works continue. Moving forward, we are building on our past. Not only have we focused on our own efforts, but we also support our customers in reducing their footprint to our value-added eco-friendly products and services. We know the end customer is demanding for a more sustainable future, for our customers doing business with a sustainable partner like Cascades, [ it is a must ]. In that regard, we are the right place at the right time. Our ESG strategy is aligned with the UN Sustainable Development Goals. We have aggressive green gas emission reduction target and we are committed to ensure that all of our packaging will be recyclable, compostable or reusable by 2030. In our Sustainability Action Plan, you will find our target and incentives to achieve our ambition goals across 4 main categories: respect the planet, solution-driven, community-minded and people-focused. On Slide 55, I would like to outline our priorities: deliver on our tissue profitability plan, complete the Bear Island startup, continue to grow our sustainable packaging business with U.S. capacity expansion, deliver on our Sustainability Action Plan, win the talent war through recruitment, training and development. Before I move to the Q&A, I would just like to thank the entire Cascades team for their efforts to put this plan together. With that, I will now turn back to operator, to begin the question-and-answer period.

[Foreign Language] [Operator Instructions] And your first question will be from Mark Wilde at BMO.

I just want to thank you guys for all the work you have done over the last decade. It has been impressive. But if I just step back and if you step back, isn't there an argument here for really focusing your capital on your best-return businesses rather than trying to kind of spread capital across all of these different segments? I mean it seems to me, if you step back, the market rewards has kind of both scale and focus. And in terms of scale, you're significantly smaller than the bigger companies you're trying to compete with, particularly in containerboard, but also to some degree in tissue.

Well, Mark, if you listen to our presentation, you noticed that the investment in Tissue are going to be limited in the coming years. We have done substantial work in the last 3, 4 years to reposition Tissue. The subpart of that is we've done that into a pandemic situation, where we did not capitalize the value of those investments. And we think now, with where we are positioned, with the quality of the assets we have and the renewed thing we have, we can certainly improve the profitability of the Tissue Group. So -- and to our evaluation, we've done a total analysis of the different options we have. And as we speak today, the best option for us to create value for our shareholder is really to deliver on our profitable plan for Tissue.

Okay. And just one other kind of related just observation, Mario. I mean it seems to me, as the guy who's watched the sector for a long time, if you look over the last 10 or 20 years, you've got privately held peers who compete with you in these different segments like Pratt in the containerboard business, big, very efficient recycled mills, increasingly a North American-wide footprint; First Quality over the last 15 years in the tissue market; Ranpak in specialty packaging. You've got a lot of examples of companies that just focused on particular niches here and have actually grown in a very impressive fashion. Any thoughts around that?

Well, Mark, you know us for quite a while now, and I hope you can appreciate where we're coming from. Were born from an entrepreneur mindset, and we were developed through a lot of opportunistic M&A and a lot of different fields of activity. If you look at our portfolio in the last 10 years, how much streamline was done and how much improvement we've done, I think we're advancing into this mindset and reflecting. But at the same time, we're trying to be practical and investing wisely, and we do to reposition in the segment we decided to play in. So we keep -- we will keep on evaluating the best path forward to create value for our shareholders as we've done in the past. Recently, you must have noticed that we exited our equity portion in Boralex, at the same thing as Reno de Medici. So we're not afraid of taking difficult action. But at this time, for us, the best avenue going forward it to -- for creating value is honestly to work on the profitability plan for tissue.

Okay. Just one other question around Tissue. I'm just curious about sort of 2 trends that seem like they are headwinds. One is that we've seen, particularly in the private label market to be moving away from kind of standard-grade products, where you have a big position, to more kind of premium and ultra-premium. This is what people like Clearwater and First Quality have been doing. The other issue I wonder about is just the continued shrinkage in the printing and writing paper market and what that means for you just in terms of raw material supply for good-quality recycled fiber to make recycled tissue. So it seems like both of these are kind of challenges for the business over the next few years. Can you address that?

Well, you're totally right. We see -- as you see, the generation of SOP going down. Especially with the pandemic and office being closed, it certainly put more pressure on supply. We do look at other alternatives. We are evaluating different fiber-based products to compensate for that. But fundamentally, we are a recycle company. We know our origins is in recycling, and we are converting recycled materials. So we do all in our best to keep that trend and make sure that we can offer a very, very sustainable product to the market. People feel the climate change, people want the environment to change, and we're a very sustainable company offering a product that is sustainable. So it is a vision we have. It is a vision we're pushing forward. So we think the customer will appreciate that.

Okay. And just in terms of the kind of shift in the market from standard more of the TAD-type products, the premium and the ultra-premium?

I missed question, Mark, I'm sorry. It was the first question about the shift in moving in the...

The private label market. Yes, from kind of standard grade to kind of more the premium and the ultra-premium that comes off of all these TAD machines that are being installed.

Yes. I can take it, Mark, Jean-David. So honestly, I know I understand that a lot of investment has been done on TAD, but the premium is also a growing market in which we are playing. So conventional machine like the one we have can be really competitive, making good premium products. And this is where we have grown over the last few years. And if you look at our market segments, it shows that we're with the right partners, so we'll grow, also. Even if there's major investment in that market, the private label itself is growing faster than before. So we believe there is room for us to continue to evolve and grow in this market.

Next question is from Sean Steuart at TD Securities.

I want to thank you for all the work that goes into this presentation. It's a very good deck. Lots of detail. A couple questions. I want to follow up on Mark's question about capital allocation and specifically on your specialty packaging business, which has delivered good results for you. You highlighted really strong growth potential. And I think the reference was to $40 million in incremental CapEx, to build that out organically. And that still seems like a modest amount relative to the growth potential in that industry. And hoping you can speak to longer-term investment in that business, and does M&A fit into that plan potentially for specialty packaging? How should we think about the longer-term investment plan there?

The $40 million we referred to is only for 2022. Obviously, the productivity portfolio that the specialty product is presenting to market right now, we feel we will dedicate more CapEx to reposition this group. The demand for the different products they have to offer to market is really important at the moment. So we definitely will put more capital. But the $40 million was only for 2022. You have to appreciate, though, that in this market is the assets are much smaller than containerboard or tissue where you have less paper machine. There's more converting line, which are much less capital-intensive and with the network. So $20 million, $30 million [indiscernible]

Okay. Second question I have is on Bear Island. And I think the reference was, despite the increase in the CapEx budget for the asset, you don't expect to give much away on project returns. But when I just ran some rough math from where we started with, with the budget to where we are now of, maybe up to $450 million, that would imply maybe a 4 percentage points reduction in unlevered returns for that project. Can you speak to financing costs there, your cost of debt for that asset specifically? I'm just trying to reconcile the guidance of not much pressure on project returns versus the increase in the CapEx budget. Allan, maybe if you can give us any context there?

I think that there's 2 items that need to be understood here. Compared to our initial in disclosure, we have accelerated the production volume. So it will bring cash flow more rapidly compared to our initial disclosure. And we have also updated the cash flow contribution in the deck that you have today, so compared to our initial guidance. So both together are leading to not a decline -- not to a decline in the return on that project, Sean.

And your next question will be from Hamir Patel at CIBC.

Again, I'd like to echo what the other speaker said about appreciating all the detail in this presentation. Mario, I wanted to ask about some of the inputs for the 2024 aspirations for containerboard. Could you speak to the pricing assumptions there? Is that building in the current ongoing spring containerboard price hike or is that based on prices prior to this hike?

Yes. Hamir, we have kept -- in everything we did in that plan, we have kept all the spreads stable, except for the improvement -- the margin improvement in the Tissue segment. So for all the others, we have not factored in future price increases or major cost increases in raw materials, stuff like that. So maybe Charles would want to add something. It's that...

Yes. So what we've done is we -- 2 points, as we kept the current, I would say, market conditions and what we see. So we haven't built in any potential spread improvement based on announced price increase.

Okay. And Charles, so what sort of OCC number then is embedded in that estimate?

The combined -- that's why we kept the spread with current conditions. So we haven't built any movement up and down, both on the OCC or the price. So basically, what we did is we used the same as, let's say, beginning of what current market conditions.

Next question will be from Zachary Evershed at National Bank Financial.

So just following up on Hamir's question on the assumptions in the 2024 targets. Am I correct in thinking that you guys haven't really allocated a cushion or a margin of safety for unforeseen downside surprises in selling and input prices into your margin targets?

Yes. We have not -- you're right, we have kept other spreads stable when we did it at the end of last year, yes. You're right.

Okay. And then moving to a different topic entirely. Could you tell us how you think about capital allocation between buybacks, the dividend and debt repayment? Obviously, you have a debt target for the short and medium term. So maybe tell us about your thoughts on buybacks versus dividend.

Yes. Well, this has to be discussed further with our Board members after the year 2022. That's what is our final presentation. We'll have to review the choice between the 2. But first, our priority always will be to manage our balance sheet and keep the leverage in good shape in order to continue our strategic action, if necessary.

And then just a last one on capital allocation. I'm assuming none of the revenue growth targets include any assumptions for acquisitions, but are you considering allocating capital to any of the segments for M&A growth? And could you rank them for us?

Well, that's why we said that free cash flow, our target, our free cash flow, it's done with base CapEx, let's say, or 4% of revenue. So additional free cash flow and balance sheet availability can be used, you're right, to do M&A or to do more strategic project in the future. So that's how we look at it. But again, as we mentioned earlier in our objective of adding capacity in the U.S. in containerboard on the converting side, it might be done through M&A or building facilities. So we have options there, and we'll evaluate them once they come.

And for Tissue and Specialty Products, any inclination to spend in those segments as well?

Well, Tissue, it will be limited for the next 3 years at $35 million. And in Specialty, we'll evaluate, and M&A is always an option in Specialty as well.

And your next question will be from Benoit Laprade, Scotiabank.

And again, I would echo my thanks and congratulations for all the disclosure. A quick one for me on Tissue. I'm not sure if it's Allan or Jean-David who want to take it. If memory serves me well, your EBITDA targets longer term in the past was more in the 15% range. And now in this presentation, I see 9% to 10%. Is it because 15% is delayed beyond 2024? Or has something else changed in the underlying assumptions in the market and you now assume that 10% is pretty much the run rate going forward?

I think, Benoit, before pandemic, the target of 15% was achievable. It was done a few years back. But now I think we just need to go step-by-step in tissue. And with a 3-year plan, 10% is something we feel achievable, but there's a lot of pressure on cost in tissue compared to maybe the other because as raw materials keep going up, and maybe that's why we have not cited in any positive momentum or break in terms of raw material costs here. We've maintained that. But obviously, if in the future, let's say, white paper grades would fall back to maybe more historical prices, obviously, that would be a big contributor to the margin. But that's not how we did our plan. But yes.

Okay. If I may with a follow-up. Can you refresh our memory in terms of what is your raw material, I guess, diet today on the fiber side, say, waste papers versus virgin? And I have to assume that even at those elevated SOP prices, it's still much cheaper to use SOP than revert back to more virgin pulp.

So Benoit, indeed you had it on the one slide. It's 25% virgin pulp, 25% OCC and 50% virgin sold as those paper, roughly. So it's 75% recycled total, 25% virgin. And yes, even if the SOP prices is really high, it's still today more favorable versus pulp.

[Operator Instructions] And your next question will be from Mark Wilde at BMO.

Just a couple of follow-ons. Can you give us a sense of whether there are any incremental kind of cost reduction efforts in the assumptions?

There isn't Tissue. And in other business, there's -- we have a yearly target, there are some, but nothing as major as in Tissue right now.

Okay. And then can you also just talk about the potential for sales of nonoperating assets, for sales of maybe joint venture stakes? I was very struck yesterday by the announcement around [ Cascades ] Sonoco. That's a very interesting business. It seems like it's got good growth potential, but it's basically a box board coating business. And you're really not in the box board or the folding carton market after the restructuring you've done over the last 10 years. So I just -- I wonder whether there's an opportunity to just -- to make some difficult choices and potentially sell some businesses that might have good runway, but also might give you additional capital to deploy in your core businesses?

Yes. Mark, this is Luc Langevin from Specialty Products Group. Historically, Cascades Sonoco was built as the major supplier of the paper mill industry. And with the decline of the paper mill and printing and writing business, we worked hard to define a new destination for this group. And it became pretty obvious early that we wanted to develop alternative sustainable coating for the food processing, food service businesses. And they actually are integration between Cascades Sonoco and Cascades. Cascades Sonoco, most of the development we're doing, for example, in the protein and the fruit and vegetables, all the trades we're developing, even the food -- the isothermal distribution is using technology that's been developed by Cascades Sonoco. So -- and our intent actually is not to sell this business, but actually to leverage the great technologies we have developed with this venture and speed up with the -- with our growth in the food processing sector and food service.

Okay. And any other kind of just joint ventures or other businesses that might be candidates for capital reallocation?

That's the only one we have. We really have a meaningful size, and we don't have any other venture, I guess. So Sonoco is really the one.

Yes. Okay. All right. Again, to be clear, I think that's a very interesting business and very interesting runway. I'm just a bit concerned about sort of how it ties into the overall portfolio.

Well, as you know, we've been working at this recipe for, say, over 10 years. And when we committed the investment of this coating line we have down south in the U.S., I don't think there was many people in the industry betting on that. And I think now we do have something. We have a patented coating. And now the market needs for those type of products is there. So honestly, we've been working hard at that and now it seems to be really taking off.

There are no further questions at this time. Mr. Plourde, please continue.

Thank you, everyone, for being on the line today. I hope you appreciate our new strat plan for 2022 and 2024. And many of you, I guess, we'll be meeting on the one-on-one call this afternoon. So thank you for being present on the call. Thank you.

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