Cascades Inc. (CAS) Earnings Call Transcript & Summary

Thank you.

Ladies and gentlemen, welcome to the first conference of the results of the second quarter of the Cascade. My name is Sylvie and I will be your caller today. All the lines are currently in listening mode. Following the comments from the speakers, there will be a question Good morning, my name is Sylvie and I will be your conference operator today. At this time, I would like to welcome everyone to Cascade's second quarter 2026 results conference call. All lines are currently in a listen-only mode. After the speaker's remarks, there will be a question and answer session. We'll now pass the call to Alan Hogg, CFO for Cascade. Please go ahead so you may begin.

Thank you, operator. Good morning, everyone, and thank you for joining our second 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 myself, Alan 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. The statements, the investor presentation, and the press release also include data that are not measures of performance under IFRS. Please refer to our Q2 2026 investor presentation for details. This presentation, along with our second 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 a review of our Q2 performance. Hugues?.

Thank you, Alan, and good morning, everyone. Our second quarter exceeded expectations, driven by stronger execution across our operations and lower than anticipated volume risk. We continue to focus on the areas within our control, strengthening the resilience of our platform in an environment that remains impacted by both macroeconomic and geopolitical uncertainty. Considering these challenges, I'm pleased with our performance in the second quarter, which reflects the disciplined execution of our strategy and the commitment of our teams across the organization. Both packaging and tissue delivered improved sequential performance in the second quarter, reflecting improved operational execution, stronger volumes, and the benefit of actions implemented earlier in the year. Our packaging segment profitability rebounded significantly, with EBITDA increasing 16% sequentially and margins returning above 15%, reflecting continued solid production and demand levels across our paper mill network, meaningful progress in onboarding new customers, and a more favorable economic environment than initially anticipated. Volumes tracked ahead of our forecasted assumptions contributed to stronger profitability in the quarter. We had record production levels in the quarter at GreenPak and at Bear Island, which operated at 95% of its total production capacity during the quarter. Our tissue segment also posted higher sales, stronger shipment volumes, and improved EBITDA despite ongoing cost inflation. Performance benefited from improved productivity and sales volume. At our prior facility, we continued to improve, achieving record production this quarter. We remain on track with our improvement plan discussed in Q3 2025. global market conditions remain mixed in both segments. The progress achieved during the quarter reinforces our confidence in the operational and commercial initiatives on the way across the organization. Raw material index prices for recycled fiber is increased by more than 10% sequentially, but remains slightly below the level seen in the same period last year. Hardwood pulp and eucalyptus costs also increase, rising by as much as 15% both sequentially and year over year. Delivered raw material costs to our mills were further impacted by recent transportation disruptions and higher fuel costs. We provided an overview of average quarterly costs and key trends on Sites 6 and 7. Moving now to the results of our business segments, which are highlighted on slide 8 through 13 of the presentation. Our packaging segment delivered a strong improvement in the second quarter as operational execution and market condition improved relative to the beginning of the year. increased to $772 million, up 8% sequentially, while adjusted EBITDA increased 16% to $120 million. As a result, EBITDA margin improved to 15.5% compared to 14.4% in the first quarter. Despite higher raw material and transportation costs, these results were driven by higher volumes and selling prices, improved manufacturing performance, and the benefit of commercial initiatives implemented across our packaging platform. Volume performance was encouraging. Total shipments increased 9% sequentially to 426,000 tons, with box shipment increasing 6% and external paper shipments increasing 11%. Including the box plan on the West Coast that was sold in the first quarter, box shipment increased 8.4% versus the industry increase of 5.5%. On a year-over-year basis, packaging demonstrated resilience despite a still uncertain macroeconomic environment. Sales increased 1% compared to the second quarter of 2025, while adjusted EBITDA remained essentially unchanged at $120 million. The over-year EBITDA margin remains stable at 15.5%, enlightening the strength of the business despite ongoing cost pressure and a competitive market environment. Total shipment increased modestly with stronger external paper volumes, offsetting slightly lower container board shipments, which include the impact of the sale of our West Coast box plant in Q1 2026. On a comparable asset basis, year-over-year box shipment increased 5.8%, surpassing the industry's top-notch. 2.4% increase. Results in tissue improved sequentially during the second quarter as volume growth, operational improvements, and a favorable business mix more than offset continued inflation in several operating cost categories. Sales increased to $409 million, up 7.6% from the first quarter, while adjusted EBITDA improved 6% to $35 million. The bid-down margin remains stable at 8.6%, reflecting higher sales volume contribution, which was offset by higher raw material and transportation costs. Shipment performance improved meaningfully during the quarter. Total shipments increased 7% sequentially to 121,000 tons. Retail volume increased 2%, while away-from-home volume increased 16%, benefiting from stronger demand and ongoing commercial initiatives. Compared with the second quarter of 2025, sales increased 4% while total shipments remained stable, supported by growth in both retail and away-from-home categories, which was offset by no external pay-per-haul sales in 2026. The over-year adjusted EBITDA declined by $3 million, with higher logistic costs, offsetting the positive impacts of volume, pricing, and cost initiatives. I'll now pass the call over to Alan, who will briefly discuss some of the financial highlights. Alan?.

Let's start with the specific items recorded during the quarter which impacted operating income by $5 million on slide 14 and 15. The main items consisted of gains from the sale of assets, restructuring costs related to cost-saving initiatives, and lastly, a loss of $6 million on financial instruments. Slide 16 and 17 illustrate the year-over-year and sequential variance of our Q2 adjusted earnings per share and the reconciliation with the specific items that affected our quarterly results. As reported, Q2 net earnings per share were $0.21. This compared to a net loss per share of $0.03 in December. period last year, and net earnings per share of 38 cents in the previous quarter. On an adjusted basis, net earnings per share were 24 cents in the current quarter. This compared to net earnings per share of 19 cents last year and 7 cents in the first quarter of 2026. The sequential and year-over-year increases were driven by higher adjusted EBITDA and lower financing expenses. offset by a higher depreciation expense. As highlighted on slide 18, second quarter adjusted cash flow farm operations was $123 million, up 22% from $101 million for the same period last year. Slide 19 provides detail of our capital investments, which for the first half of the year total $67 million. For 2026, our expected capex remains unchanged in the range of $150 to $175 million. Moving now to our net debt reconciliation as detailed on slide 20. Sequentially, net debt decreased modestly by $22 million in the second quarter, mainly due to higher operating cash flows from operations. The exchange rate impact increased our net debt by $36 million. Proceeds from business and asset disposal reduced debt by $5 million. Our leverage ratio was unchanged at 3.3 times, and our available liquidity under our credit facility stood at $737 million at the end of June. As part of our asset monetization strategy, on July 28, we completed the sale of the real estate at the closed recycling plant in Lachine, Quebec, for an amount of $9 million, bringing our total proceeds from business and asset disposal to $105 million in 2026. We are also updating the expected delivery timing of our objective from the end of the third quarter to early 2027. Although interest in the assets remains healthy, prevailing market conditions and the terms available for certain transactions have not align with our value expectations. In July 2026, we extended the maturities of the GreenPak and Cascades credit facilities by one year to 2029 and 2030, respectively. We also extended the maturity of our $260 million U.S. term loan, originally maturing in December 2027, to July 2031. These transactions were completed on the same financial terms. Financial ratios and information regarding maturities are detailed on slide 21. Additional information and analysis can be found on slides 25 through 33 of the presentation. With that, I will turn the call back to Hugues for a few closing remarks before we open the line for questions. Hugues?.

Thank you, Alan. Provide our outlook for Q3 on slide 22. Including the potential impact of the announced tariffs, we expect sequential improvement in our consolidated results. This is driven by seasonally higher volume and ongoing selling price increase initiatives in both packaging and tissue. Supported by our ongoing profitability improvement program, we now expect annual run rate adjusted EBITDA to exceed 600 million during the second half of 2026. The implementation of previously announced selling price increases in both packaging and tissue is progressing as planned. In packaging, demand for paper rolls remains very strong. this week we announced additional price increases of $110 per ton on liner board and white paper grades and $140 per ton on medium. These new prices will become effective on September 8th. We expect to begin seeing a positive impact from these increases in the fourth quarter of 2026. On July 20th, the US administration announced new tariffs on a number of products imported into the United States. are conducting an assessment of the potential impact on our operations. Based on information currently available, certain tissue and packaging products exported to the United States could be subject to the announced 50% tariff. While this represents a notable development, we believe the potential impact is manageable. As Assuming the tariff remains in effect as announced, and considering the benefits of our current mitigation plans, the financial impact will not represent more than 5% of our adjusted EBITDA run rate. In addition to the direct effect of this announcement, some customers whose products are subject to these tariffs may experience weaker demand or reduced production levels, which could affect volumes in certain segments. Based on current assessment and the mitigation actions underway, we remain confident in our ability to successfully manage these challenges. Confidence reflects the significant work completed over the past several quarters to make CASCAD a more resilient and agile organization. As we indicated last quarter, our focus has been on navigating near-term market pressures while advancing the initiatives that will strengthen our performance over time. During the quarter, we continue to make progress in improving operational and commercial execution and enhancing customer service levels. Our profitability improvement initiative continues to deliver results. Following the $30 million of benefits realized in 2025, we estimate that a further $25 million has been captured thus far in 2026. Our asset monetization objective is also progressing well, with $163 million realized against our $230 million target. Although some transactions are taking longer than anticipated, this reflects our disciplined approach to ensuring we maximize value from these asset sales. Finally, we continue to prioritize debt reduction to reinforce financial flexibility and position Cascade for future growth. With that, we'll now open the floor to questions. the line for questions. Operator?.

If you have a question, please ask the star followed by 1 on your phone. And if you want to remove your question, ask the star followed by 2. Thank you. If you would like to ask a question, simply press star then number 1 on your telephone keypad. If you would like to withdraw from the queue, please press star followed by 2. And if you have a question, please, again, if you have a question, please press star then 1 on your telephone keypad. One moment, please, while we compile the Q&A roster. And your first question will be from Hamed Abdallah at National Bank of Canada. Please go ahead.

Yes, good morning and thanks for taking my question. First thing would be the comment around the 3Q packaging EBITDA guidance of $135 to $140 million implies another sequential improvement here. Can you help us bridge what's going to be driving that in terms of volumes, volume of and the realization of the March-April price increases and how you're planning to offset some of the cost inflation that you're seeing?.

Yes, Ahmed, thank you for your question. So basically when you look at the third quarter for packaging, from a seasonality standpoint, I'll give you an example, like harvesting season in some of the regions where we have operation. We have a busier season in the third quarter. We are doing the price increases previously announced. If you remember, we had two and we had a minus 20 earlier in the year. So the net impact of that is going to help support supply. some of the additional profitability. And then we have some inflation costs. If you look even this week, we had the OCC prices moving up $5 in all of the regions where we operate. So when we take the global of that, we also take into account a slight volume risk from the economy. I mean, we're still in a... pretty unstable environment. But we feel that the second half of the year, so in the third quarter being a very strong one, will give us like a run rate that's going to support overall the company on over $600 million.

Okay, that's helpful. And you were clear in noting your expected impact from the tariffs if they stand at no more than 5% of adjusted EBITDA. Can you help us parse out how you get to that level? What's the actual full gross impact? How much netting you're expecting to do for mitigation? And what are some kind of the mitigation efforts that you've kind of considered against these.

Yes, great question. If you recall, last year we had a similar situation where there were tariffs on basically all of the products going from Canada to the United States. So back then we shared with the market that we were putting a task force together to make sure that we have a great understanding on the potential risk. Back then it was tariffs and it was counter-tariff. So this time our teams were pretty ready. We have a good plan on these things now. The devil is in the details on this potential tariff implementation later this month. Some of the tissue products, most of the products don't have tariffs on the 50% percent recent announcement. But they really went with tariff codes. So we really went back to all of the details and the products we ship. I'll give you an example for clarity. In URB, the small rows have tariffs, the big rows don't. So we really went in depth. in depth to see what the potential impact was. And then we looked at how we can switch production, you know, Canada to Canada, US to US. So the mitigation plan that we have is not something that's going to take six to 12 months to implement. It doesn't get implemented all the first week. But it's a rather quick implementation. As far as the growth versus the net, we're not sharing that information yet. But we're tracking really the details and what the U.S. administration wants to include, exclude, understanding that this is a couple of weeks from now and that may evolve over time.

AND IF I MAY ADD, IF IT DRAGS ON A LONGER TIME PERIOD, THERE'S A There's other initiatives that will certainly review and take action.

Okay, that's helpful. I'll pass the line. Thank you. Thank you.

Next question will be from Amir Patel at CIBC Capital Markets. Please go ahead.

Hi, good morning and congrats on a strong quarter. Hugo, it looked like you gained market share in Container Board in the quarter with the strong close to 6% shipment growth year over year. Can you comment on what you've been seeing in Q3 so far? And I know it sounded like you said you've announced 110 on Liner, 140 on Medium. Is there any reason why most of the pricing uplift would not drop to your bottom line? I know we had two earlier price increases. The first one was eaten up by cost inflation, but it seemed like the second one largely will benefit you. And it's looking like the third one will fully drop down to the bottom line, but any clarity you can provide there.

Well, I mean, there's a lot of moving parts in your question. First of all, when we look at the second quarter versus the first, if you recall in the first quarter, we had discussions on onboarding new customers. We really put lots of focus and the teams did a great job in making sure that we were able to do that. contracts that we already had in hands were well executed. So that's a good uplift on our box volume. So it's something that we'll continue to see. Then we depend on seasonality, which the third quarter is a good quarter for a cascade in the regions where we have open operations and customers. So we see so far a market that continues to show what we saw in Q2. That being said, I think we all know that these geopolitical might evolve from the cost inflation standpoint to your comment on inflation we're seeing a tailwind on fuel costs right now, which we didn't see during the whole second quarter. But that may change. So we're reviewing our strategy on delivering to our customers to make sure that we have more resilience and that we minimize the impact on that. on transportation costs as much as we can. Then I separate rolls versus boxes. We're extremely, extremely tight in rolls. The demand on rolls exceeds what we can ship. So that drove the latest price increase that we announced earlier this week. And as far as that, you know, do we see the full benefit or not the full benefit? We continue to push on our costs to go down. We saw this week OCC price going up $5. So that has an impact. But we also see fuel costs. So the net of that... that fourth quarter will be really a spread between, you know, what OCC price is doing. And OCC is not behaving the same way in all regions. So we don't expect like a big push on cost, on fiber and on fuel. Well, I will depend on the geopolitical situation around the globe.

Okay, no, fair enough, but I mean it seems like if this price hike goes through, it's a very significant tailwind for Cascade. So if you are then generating significantly higher free cash flow. next year, when you think about in that sort of environment, Are there other larger growth CapEx projects that might then advance? Just thinking about whether you need to increase your integration rate and container board or start to plan for more advanced tissue technology, just given some of the industry developments. Yes.

Yes, so what we've been sharing is we're really building a plan for optionality. What you just mentioned are a few of the options that we have. The focus remains on getting that debt level down to the 2.5 to 3. From the uplift on the cash flow generation that you talk about, I agree. I agree with your statement where there's more tailwinds with us right now than what we saw earlier this year. And, you know, if we go back to the first quarter, we had a pretty low cash flow generation in the first. We were confident to get back to the 600 million run rate in the second half. And now we're confident to exceed that. that and obviously that's before the implementation of the price increase that we announced this week.

Great. And Hugo, it looks like, I mean, Bear Island seems like it's basically running full from a volume standpoint now at 95%. Where is it on the profitability ramp up if it's 95% of production in terms of production? terms of sort of steady-steady, but how far along is it?.

Yes, I mean, a few comments on Bear Island, and there are probably a few employees on this call from Bear Island. First of all, great job from the Bear Island team. They went through significant changes in work and their great commitment. We ran at 95% for the full quarter, and our month of July was better than the average of the second quarter. Sorry, our month of July was even better. The focus is on cost. As you know, we don't share profitability per mil, but I can tell you that we're very pleased with the financial results of Bear Island right now.

Okay. That's helpful. Just a final question, Hugo, on the tissue side. I know there was an announcement of some new NTT technology coming to market. I know there's a bunch of older school TADs being built, and I think Kimberly Clark is doing some work on that. on some novel fiber technology. How do you think longer term about how you position your tissue business, especially.

especially in retail, to stay competitive? Yes. I mean, the work that's been done on Tissue for the last few years is really to position ourselves as a supplier of choice for the private brands. And it's working really well. We have a good reputation, good growth. That really gives us options in the future if we want to increase our capacity. Demand on these projects go with population growth. In North America, clearly, there's a break here on population growth, but we don't see that as being a long-term trend. You look at the age of assets within the industry versus the new projects, there's room for new projects in tissue. one of the options that we have as our death level goes down. Okay and just thinking about I know when you the the orchids, you know,.

when you think about technology-wise to compete with TAD, what would be your approach longer term?.

We think there's room for conventional tissue. And you look at the value proposition for the consumer, there's room for TAD for some specific products, but there's also room for conventional. So we are a conventional producer of tissue. We're good at it, so we'll continue to optimize that to remain the superfood. supplier of choice. We don't have in our cars right now 10 machines of equivalent technology.