Cascades Inc. ($CAS)

[Foreign Language] Good morning. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cascades' First Quarter 2026 Financial Results Conference Call. [Operator Instructions] I will now pass the call over to Jennifer Aitken, Director of Investor Relations for Cascades. Ms. Aitken, please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining our first quarter 2026 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 Q1 2026 investor presentation for details. This presentation, along with our first quarter press release, can be found in the Investors section of our website. If you have any questions, please feel free to contact us after the session. I will now turn the call over to our CEO, Hugues Simon, who will begin with the review of our Q1 performance. Hugues?

Thank you, Jennifer, and good morning, everyone. Overall, the first quarter was in line with our revised outlook, but was below the initial expectations we communicated with our Q4 results. As we discussed when we updated our outlook in mid-April, several factors outside initial assumptions contributed to this. The combination of severe weather disruptions across our platform, recent geopolitical events and a negative consumer confidence trend impacted our volumes and accelerated inflation. We also made reference to some execution inefficiencies. These included delays in onboarding new volumes and longer-than-planned annual maintenance downtime in packaging. Complexity within our logistics network was further compounded by a tight transportation market in both of our segments. These inefficiencies are temporary and are being addressed. Our ambitious strategic initiatives are focused on areas we control. The objective is to have a more resilient platform given an environment that will continue to be impacted by geopolitical uncertainties and extreme weather events. The speed with which we adapt to these type of macro changes is a priority, ensuring that our business is more agile will provide our customers with the best-in-class products and the best-in-class service. To this end, we're making significant progress from an operational standpoint, and I'm very pleased with what we've achieved so far. We had a solid quarter at Bear Island. Excluding annual planned maintenance downtime, the mill operated at 92% of its total production capacity in the first 4 months of 2026, including a record month in April in terms of speed, uptime and overall tonnage. At our Greenpac facility, we gained 5 percentage points on availability in the quarter versus 2025, and the first quarter production level was equivalent to an annual output of 575,000 tons, 6% above its initial design capacity. At our Pryor tissue facility, we improved production output by 17% in Q1 2026 and 23% in the month of April when compared to Q3 2025 levels, which was the starting point of our improvement plan in this facility. While these are just a few examples, my intent is to provide you with an idea of what we're doing in terms of things we can control. Aside from operation, strengthening our logistics network to be more efficient and agile, and accelerating onboarding of new volume gains we have secured with key customers in packaging, are other good examples. In Tissue, we are centered on improving productivity in our retail business to increase volume with our strategic customers. We continue to remain focused on our balance sheet, and our objective of proceeds from asset monetization is progressing well as demonstrated by the $91 million realized in the quarter. Raw material index prices increased marginally on a sequential basis but remained lower than the prior year period. The exception to this were hardwood pulp and eucalyptus, which increased 6% and 7% from Q1 of last year. Delivered cost of raw materials to our mills were further impacted by recent transportation disruptions and fuel cost increases. We provide an overview of average quarterly costs and trends on Slide 6 and 7. Moving now to the results of our business segments, which are highlighted on Slide 8 through 13 of the presentation. In Packaging, sales decreased 6% sequentially. This reflects lower volumes in corrugated and specialty products, driven by seasonality, macro volatility, business disposition and changes in customer mix and sales mix from our converted products. Excluding the box plant on the West Coast that was sold in the first quarter, box shipments decreased 5.7%, below the industry's comparable 3% decrease. First quarter adjusted EBITDA decreased 22% sequentially to $103 million. This was driven by lower volume and by important increases in operating costs, including logistics, chemical and energy. Repair and maintenance costs were also higher sequentially, reflecting planned maintenance outages. Year-over-year sales in this business decreased by 6%. This was driven by lower volumes that reflects the sales of a facility and a decrease in corrugated shipments due to softer demand. Higher selling prices and favorable mix partially offset these impacts. On the same basis, box shipments decreased 1.9%, slightly below the industry's comparable of 1.6% decrease. Adjusted EBITDA also decreased 6% year-over-year for the same reason I just explained. These impacts more than offset selling price and raw material cost tailwinds. Moving now to our Tissue segment. Sales decreased by 7% sequentially, reflecting usual seasonality. To this end, sequential shipments in the away-from-home market decreased 10%, while retail shipments decreased by 3%. Adjusted EBITDA of $33 million decreased 21% sequentially. This level was slightly below forecast due to higher operating costs following important cost pressure, most notably coming from transportation and fuel. Lower volumes were expected due to usual seasonality. These impacts were partially offset by benefits from lower raw material costs and higher selling prices. Year-over-year sales increased 4%. This was driven by an 11% increase in retail product shipments and a 6% increase in shipments of away-from-home, underscoring the growing traction of our commercial initiatives. Adjusted EBITDA decreased 11% from last year with benefits from raw material costs, volume and higher selling prices more than offset by operating cost headwinds. I'll now pass the call to Allan, who will briefly discuss some of the financial highlights. Allan?

Thank you, Hugues, and good morning, everyone. So let's start with the specific items recorded during the quarter, which impacted operating income by $34 million on Slides 14 and 15. The main items were gains totaling $49 million from the sale of assets in Canada, reflecting the company's ongoing optimization initiatives. There were also recorded in the first quarter, $8 million of impairment charges related to a previously closed facility in the U.S., $3 million of restructuring costs related to saving initiative, and lastly, a loss of $4 million on financial instruments. Slide 16 and 17 illustrate the year-over-year and sequential variance of our Q1 adjusted earnings per share and the reconciliation with the specific items that affected our quarterly results. As reported, Q1 net earnings per share were $0.38. This compared to net earnings per share of $0.07 last year and $0.37 per share in the previous quarter. On an adjusted basis, net earnings per share were $0.07 in the current quarter. This compared to net earnings per share of $0.13 last year and $0.40 in the fourth quarter of 2025. The year-over-year decrease was driven primarily by lower adjusted EBITDA in the current quarter. As highlighted on Slide 18, first quarter adjusted cash flow from operations was $59 million, slightly down from $62 million in the year ago period. This excludes cash flow proceeds from the sale of assets. Slide 19 provides detail about our capital investments, which for the first quarter totaled $28 million. For 2026, we expect CapEx to be in the range of approximately $150 million to $175 million. Moving now to our net debt reconciliation as detailed on Slide 20. Sequentially, net debt increased marginally by $5 million in the first quarter, mainly due to usual working capital requirements, a less favorable exchange rate on our U.S. denominated debt and lease renewals. Proceeds from business and asset disposal reduced debt levels by $91 million. Our leverage ratio was unchanged at 3.3x, and our available liquidity under our credit facility stood at $738 million at the end of the quarter. During the first quarter of 2026, we announced the sale of our Richmond facility, some equipment following the exit from the Honeycomb and Partition business segments and private forest lands. Total cash proceeds received of $91 million have gone towards debt repayment in the first quarter. Including this amount, we have generated total proceeds of $149 million from the sale of assets over the past 5 quarters. We continue to expect to achieve our $230 million targeted level by the end of the third quarter of 2026, slightly ahead of schedule. Financial ratios and information about maturities are detailed on Slide 21. Additional information and analysis can be found on Slides 25 through 33 of the presentation. I will now pass the call back to Hugues, who will conclude with some brief comments before we begin the question period.

Thank you, Allan. We provide our outlook for Q2 on Slide 22. We're expecting our consolidated results to be slightly lower sequentially. This is driven by a cautious outlook for volumes in our Packaging segment, reflecting the continued macro uncertainty, cost pressure and lower consumer confidence. Volumes in Tissue are forecasted to be higher following usual seasonal softness in Q1 and new retail volume with strategic customers. On the cost side, we currently expect logistics, chemicals and raw material cost levels to be higher across our business segments. Before opening the call to questions, I'd like to emphasize that while Q2 will be a period of margin pressure, we expect growing traction from ongoing initiatives to drive a stronger performance in the second half of the year. As the dynamic macroeconomic and geopolitical environment continues to put pressure on input costs and consumer sentiment, operational resiliency is paramount. Working in tandem with this is keeping the customer at the center of everything we do, from speed of execution to quality of service. Commercially, we're winning in the markets where we want to grow. Our sales teams are aligned and are delivering on the strategy. Our product offering is best-in-class, and our focus is to ensure that our execution is also best-in-class. We expect these actions, combined with the rollout of the net $50 price increase published by RISI and other pricing initiatives to realign results in the second half of the year towards our targeted annualized run rate of $600 million of adjusted EBITDA. We are also on track to achieve our objective of generating a total of $230 million of proceeds from asset sales by the end of the third quarter, slightly ahead of schedule. Our leverage ratio target of 2.5x to 3x remains unchanged, but may be difficult to achieve by year-end given expectation for the first half of 2026. We continue to prioritize debt reduction to reinforce financial flexibility and position the company for future growth opportunities. With that, we can now open the call to questions. Operator?

[Foreign Language] [Operator Instructions] And your first question comes from Ahmed Abdullah from National Bank of Canada.

Based on your commentary around the $600 million EBITDA run rate in the back half of the year, can you give us a bit more color on that? Are you expecting that peak recovery step up to be evenly distributed between Q3 and Q4? And are pricing actions fully sufficient to restore margins here? Or do you still need cost deflation to kind of hit that $600 million run rate?

Yes. Thank you for your question. So basically, what we're looking right now in the second quarter is a period of adjustment where we're implementing the $50 net that we discussed on the call with RISI. We're looking at geopolitical and cost pressure to continue. But with the implementation going back to a run rate of $600 million in the back half of the year, includes the $50 that's already announced and implemented with the RISI publication. It does not include any further pricing announcement. We've announced to our customers additional pricing in the month of May effective in June. So that's not part of this -- the $600 million. And we do expect cost pressure to continue in the remaining of the year as well, not to the peak level they've reached, if you look at fuel at $110 earlier this week and below that level today. But we expect those cost pressure to continue, so not to go back to the 2025 levels. So we're being very cautious with the costs. We're trying to push our suppliers as much as we can with pricing index that would look like fuel surcharge. So when fuel goes back down, our cost structure goes back down. But we remain very, very cautious given, like, the ever-changing tone between the U.S. and the Middle East and consumer confidence is impacted. So we're also being cautious on volume as well.

Okay. And just on that kind of pricing initiative, can you give us some color on some of the customer pushback or volume elasticity that you're seeing on these recent price increases you've announced, particularly in Packaging where volumes seem soft? Additionally, you had mentioned that fuel surcharges were being considered. How successful has that been in the industry? And at Cascades as well.

Yes. So we're -- it's not equal depending on the type of customers and if we split the Tissue with Packaging. If we focus here, based on your question on Packaging, we're pushing more on the price increase versus fuel in the big scheme of things with the implementation of the $50 that we just announced. We're very tight in rolls. So the implementation of the $50 is not an issue for us. And it's tight enough with additional inflation that we've announced an additional price increase effective in June. I'm not going to comment on this one. It was announced earlier this week. So it's very -- it's very preliminary. But when you look at the other files that we have in rolls, it's something that we feel is one necessary and that the market -- we're positive about the market reaction on that. From a box standpoint, you're right that, I mean, we've seen softness in box. We've had a difficult winter as far as extreme weather events here and there. We have a pretty late spring in many of the regions where we operate. If you remember, the -- most of the box making that we have is in Eastern Canada. So we are seeing some softness, but we are winning in the market, and we're gaining market share where we want to grow. Our focus is on the execution on onboarding those new volumes. When we talked about some execution improvements that we needed, a big focus for us is to accelerate onboarding of new customers, given the fact that we've secured those volume, we are in a soft market, but our product offering is good and customers want to grow with us. So that we have to do better. And I mean, we're improving rather quickly. If I had to give you comments today versus 1.5 months ago, I'm very pleased with the improvements that we're doing.

Your next question comes from Sean Steuart from TD Cowen.

A question on OCC costs. We've seen prices pick up so far this year. Can you give some context on the strength, appreciating it's off a low base? And any visibility on further pressure as we head into the summer?

Yes, great question. Recently, we saw a $5 roughly across the board where we have operation of increase in OCC. It was slightly more in the Western U.S., which does not have an impact for Cascades. Obviously, when box demand is lower, the generation of OCC is lower as well. So it's putting some cost pressure on people that are recycling boxes, which we are a big player in. So we have a good idea of the flavor of the cost impact on that part. But at the same time, the export of OCC in Asia is a lot lower as well. So more OCC remains into the U.S. We don't see a big push on additional pricing in OCC, although when we forecast the remaining of the year, we're being cautious. But what we're seeing now is that we had the low generation. That's not unusual early in the year, like the whole post-Christmas from end of January to April and May is soft. But we are counting on some seasonal pickup for the month of May to December on volume. Nothing more than usual, probably a bit less. So to see maybe some small changes in some pockets of different geography is possible, but no significant pressure on volume availability.

Okay. And I want to follow up on your comments with respect to relative tightness in the board market and I guess, a more cautious outlook on the corrugated box piece of it. A number of your U.S. peers have indicated line of sight on year-over-year box volumes starting to rebound in the second half of the year, some seemingly more optimistic than others. Any sense on how your box order book is shaping up if there's any reason for optimism some of your U.S. peers seem to think that there is?

I mean, when I look at what we're doing with our sales strategy, as I mentioned before, we're winning in markets we want to grow. We're winning. We're trying to push on more resilient volume that have less of an impact. So yes, I'm optimistic. From a financial standpoint, we remain cautious just given all the geopolitical that's going on around the world. We also have the USMCA that is coming for more discussions later in June and will probably last for most of the summer. We're not worried about it, but we look at consumer sentiment with all of the inflation that the consumer is seeing. We remain cautious, but we are ready and we'll be able to take any additional volume that the market will provide, if our assumptions are too pessimistic. So for us, really is we're making a plan so that the level of activity that we see in the economy today remains difficult, but we're ready for the uptick if and when that happens.

Okay. Understood. One last quick question for Allan. The debt maturity schedule, I guess, term loans expiring over the next year and then some senior notes in 2028. Can you give some perspective on how you're thinking about refinancing those maturities and what the current environment looks like for terms on that front?

Yes. The next maturity is in 2027, the term loan, which is part of our credit agreement. We are in discussion right now to defer that, to refinance that -- refinance the maturity. For now, there is no same condition, so we don't expect any negative condition. And the 2028, we'll look at our cash flow profile. We can call these bonds at par right now. We are not using our line of credit. And there's also a sale of assets that we want to target in our objectives. So all of this, we can call a portion of the bonds and then we'll look at, do we refinance or do we do other alternatives. So I think we have a couple of scenarios. We have flexibility. That's what we want to have. And we'll address that in the -- until the end of this year, we'll look at that closely.

Your next question comes from Hamir Patel from CIBC Capital Markets.

Hugues, I just want to ask more about the sort of $600 million run rate that you're pointing to being back at in the back half. Just trying to reconcile that. I mean in 2025, you did, call it, $575 million. You have this $100 million profitability program where you're targeting $200 million, the formal target is $100 million, and I think there is $30 million was achieved in '25. So you've got, call it, $70 million to go from there added to the $575 million. We've had the $50 net price hike on your sensitivity table, that's approximately $105 million. So that would seem to get you to around $750 million of EBITDA. And I know to an earlier question, you kind of pointed you're not assuming a material pickup in OCC prices. So just trying to bridge that $600 million to sort of $750 million delta. How much of that is weakness in Tissue versus 2025? And how much of it is some of these other cost buckets that you alluded to?

Yes. Thank you, Hamir. I mean when you look at headwinds versus tailwinds, we have a similar tracking of finance of the potential of the company when we execute everything well with some tailwinds. So definitely, the potential for us if we go back a year on productivity, we've made great improvement on productivity at Bear Island at Greenpac, and I talked about that in the call. The $100 million initiatives is progressing well. If you look at what we're doing today, various mills, we have 55 plants with over 280 initiatives on cost reduction. So what you're talking about on the $100 million, we're continuing to see some good traction on that. Obviously, in the first and second quarter, there's a lot of new reality with the geopolitical, the quick inflation on logistics, fuel and everything. So for us, the back of the year, we don't expect that to have perfect situation on all of the tailwinds. We're not also talking about the $50 -- the $60 increase that we announced this week going into effect in June. Our intent is really to provide for, like, more visibility. You go back 2 quarters ago, as a company, we're guiding just 1 quarter ahead. We made the decision to guide for the remaining of the year and to provide more visibility to our shareholders because we are -- we do have a clear road to what our potential is, plus or minus the tailwinds and the headwinds. So it's more to give like a perspective on the actions that we have, tactical actions short term that are happening right now and will continue to happen in the year, will get us back to basically where we were in the third and the fourth quarter of 2025. Looking back at Q3 and Q4 of '25, we were more on a pace of $615 million, $620 million with enough visibility to provide guidance for 12 months ahead or at least like for the remaining of the following year. We feel we're going to be back to that in a normal geopolitical context. But we don't see all of the headwinds being gone in the second half of the year. Inflation on fuel, I think we're in uncharted water as far as not only Cascades, to be quite honest, but the whole world. Our objective is to focus on what we control, being more proactive and building different platforms that are more resilient to those events because our conclusion is extreme weather, geopolitical will continue to impact any business in North America. So we need to be more resilient on it. But your math is not wrong. If we have tailwinds and everything else would go back to normal, our potential remains, and we're actually excited about that. But right now, we're focusing on the things we can control. And again, I know I'm repeating myself, but I want to bring people back to the great achievement that our Bear Island facility achieved. We're running at 92% for 4 months in average, and we're at 94% in the month of April alone. So we're making good progress. Greenpac is running at 106% rate capacity. So these things for us, when the market comes back to a more -- I don't like to call it normal, but let's call it, plus or minus normal, our potential remains great.

Okay, great, I agree. Hugues, just sort of 2 follow-ups there. One on that -- the $600 million plus. I appreciate that there could be additional tailwinds there. What is the sort of tissue EBITDA assumption that you see the Tissue business run rate being back to by year-end? And then just with respect to Bear Island, 94% looks like you're seeing some strong improvement there. But in terms of sort of the EBITDA potential of the mill, I'm guessing you don't think you're at 94% of the mill's potential. So maybe you could frame us where that is on its sort of expected full EBITDA contribution.

Yes. So 2 components, Hamir, to your question. If you look at -- go back 2 years with some of the great results that we've had in Tissue. This is there and better where we're going back. We've gained some significant market share in many of the customers that we deal with. We're really at the right place in Tissue as far as customer mix, the type of projects we have, the mix of retail versus away-from-home. We'll probably grow even more in retail because we can do some small investments that are within the $175 million of annual CapEx to even grow better. Our product is well accepted. So excited. So when you look back at the numbers or the period I referenced, you're in the high 190s and you could be in the $200 million. That's like a longer-term perspective, but not something that is at the current level of the last 2 quarter. As far as Bear Island, if you go back to our fourth quarter discussion and third quarter discussions, we're now turning to put some improvement initiatives on cost, chemical consumption, fiber loss. The type of fiber that we use, we went back to 100% OCC, not using mixed paper. We're still basically there. It's something we're looking at, looking at the cost benefit, I don't want to give back on any of the productivity. So from a profitability standpoint, we have quite a lot to go, but we're above the 50% mark. It will take time. Look at Greenpac, it took 13 years to go over the 106% of capacity. But there's no sign. I had the question in previous quarters, like is there any additional CapEx that we need at Bear Island to get to where we want to be? The answer is there's no CapEx over and above the $175 million that we have every year. There's stuff here and there that we'll do. But I would say that we're caught up at Bear Island. And what we're seeing today, we're in the improvements of -- we were making monthly shutdowns every 5 weeks. We're now up to every 6 weeks, and we're looking at ways to go at every 7 weeks. This will give us more production. We're at 100% of speed for all of the grades that we produce. The quality is accepted at all of our customers, we can actually displace between Greenpac and Bear Island. There's probably another $30, $40 a ton of cost improvement that we can do. So that gives you a perspective on additional profitability. And from a mix of linerboard and medium, it will depend on how we want to position ourselves with some of our key customers.

Yes. And Hugues, sorry, just on that $30 to $40 of cost improvement, that's -- I'm assuming that's without the mix -- without feedstock change, without running more mixed paper just on the current configuration.

Yes. Yes.

Okay. And when, like -- how long do you think it would take to get that $30 to $40? Is that 12 months or?

Yes. I mean I look at this as really continuous. We're turning the wheel. It should never stop. We pivoted one of our value to basically working hard to be better every day. So for us, the focus -- it's part of the 280 initiatives that we have. It's tracked by the mill on a continuous basis. For us, it's a never-ending process where the $30 to $40 will never get to 0. We still have initiatives at Greenpac, and that's really the mindset that the people are doing is how do we improve every day, understanding that we're at the tail of the start-up in Bear Island. So it won't take 5 years to get to the $30 and $40, but don't expect the full benefit of it this year.

[Operator Instructions] Your next question comes from Matthew McKellar from RBC Capital Markets.

You talked a bit about winning the business that you want to win in Packaging. Can you talk a bit about what that looks like, what kind of business you're targeting, what kind of business you're onboarding? I think there was a mention of targeting more resilient business. Could you just speak a bit more to what you're alluding to there, please?

Yes. We're going back to the right product with the right machine to the right customers, growing with a bit fewer customers, but go deeper with them with more market share. We've always stated that we need the right mix depending on the box plant that we have. We have box plants that are good for small volumes. So I mean we're not going to put big volume in those type of facilities. But where we have equipment in the customer base where we can go deeper with the relationship, we pushed on food and beverage, which given the state of the economy is more resilient than the things where the consumer has a decision to make and is really slowing down when there's extensive inflation in the market. So these are the type of example of what we're doing. Pushing on service, being able to have the right box. We're producing more lightweight at our Bear Island facility. So we're able to provide some box solutions that take less fiber. It's a good sustainable alternative, but it's also a good economical alternative as well.

Okay. And then last for me, apologies if I missed it. I think you've opened the door to some downside versus the original CapEx estimate for '26. Can you speak to what the swing factor is here?

Yes. No, I mean we don't need $175 million a year to maintain our assets. We have some quick payback projects we will continue to do. We have some would say, strategic, I call them tactical projects to bring or position ourselves differently. There's a margin there. And to be quite honest, with all of the inflation based on fuel, based on tightness in logistics, some projects that we could do this year will push them into the future without affecting that $175 million mark in the future. There's pressure on aluminum, there's pressure on steel with tariffs. So there are some of these things that pushing it 1 quarter, 2 quarters is not going to change what we do and it's not going to change the picture of how much cash we need in the future. So we're going to play with that. If you look at our results in Q1 and what we're looking at for Q2, managing our balance sheet is paramount for us. It's a priority. You look at a quarter like the first quarter, our debt level basically stayed the same. If you take out the variation of exchange rate, it actually went down. So we still have some room on the sales of assets. I think Allan positioned it well. We're going to reach the $230 million roughly a quarter ahead of schedule, understanding that with all those headwinds, our objective and priority to bring our debt level down to a level where we can now be in a position to grow is a priority. If we can't do it for 1 quarter or 2 on cash flow generation, we look at other alternatives, like working capital is things that we're looking at. The selling of assets without impacting our EBITDA generation is another one. We're trying to accelerate that. We've always said that when you want to sell for $230 million of these assets that are not providing additional EBITDA to the company, you need to work on more than that number. So that's -- we remain committed to look at every potential option. The forest land that we announced in the first quarter is a good example. If I went around and asked, a lot of people didn't even know we had forest land. It's -- it was a good investment back at the time, but do we need this to continue to generate EBITDA at our Cabano facility? The answer is no. Actually, we took the opportunity to partner with somebody that owns probably like many, many more land, much more land than what we had and to strengthen our access to fiber in that region. So we'll continue to do that, trying to partner with others to make us stronger.

Thank you. There are no further questions at this time. Mr. Simon, please continue.

Yes. Well, thank you all for the great question and the listening. I mean we are fully realized that Q1 is a tough quarter. I like our plan going into the second quarter. You always have a choice between trying to push price increases too fast to customers and lose market share. We're committed to our customers long term, and that's the way we're looking at this. And when we look at our plan, fully confident to go back on the $600 million more level for the second half of the year. Thank you very much.

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