Cascades Announces Results for the First Quarter of 2018; Strong containerboard fundamentals driving positive outlook for remainder of year

KINGSEY FALLS, QC, May 10, 2018 /CNW Telbec/ - Cascades Inc. (TSX: CAS) reports its unaudited financial results for the three-month period ended March 31, 2018.

Q1 2018 Highlights

• Sales of $1,098 million
  (compared to $1,082 million in Q4 2017 (+1%) and $1,006 million in Q1 2017 (+9%))
• As reported (including specific items)
• Operating income of $112 million
  (compared to $45 million in Q4 2017 (+149%) and $31 million in Q1 2017 (+261%))
• Operating income before depreciation and amortization (OIBD)¹ of $167 million
  (compared to $104 million in Q4 2017 (+61%) and $78 million in Q1 2017 (+114%))
• Net earnings per common share of $0.65
  (compared to net earnings of $0.60 in Q4 2017 and net earnings of $1.70 in Q1 2017)
• Adjusted (excluding specific items)²
• Operating income of $50 million
  (compared to $46 million in Q4 2017 (+9%) and $28 million in Q1 2017 (+79%))
• OIBD¹ of $105 million
  (compared to $105 million in Q4 2017 (stable) and $75 million in Q1 2017 (+40%))
• Net earnings per common share of $0.13
  (compared to net earnings of $0.14 in Q4 2017 and net earnings of $0.13 in Q1 2017)
• Net debt² of $1,534 million as at March 31, 2018 (compared to $1,522 million as at December 31, 2017) and net debt to adjusted OIBD ratio^2,3 at 3.6x.

Mr. Mario Plourde, President and Chief Executive Officer, commented: "Our consolidated first quarter performance improved both year-over-year and sequentially in terms of sales levels, shipments and operating income. Changes in raw material prices were positive on a consolidated basis both sequentially and year-over-year, while higher transportation costs negatively impacted profitability in our North American operations. 

Year-over-year, first quarter results were supported by a strong performance from our European boxboard subsidiary Reno de Medici, driven by strong market conditions, selling price improvement and lower raw material costs. The containerboard packaging division similarly generated stronger results, reflecting the April 2017 consolidation of the Greenpac Mill, strong industry fundamentals and higher average realized selling prices. As disclosed in early March, first quarter production levels in this segment were impacted by unplanned downtime at several mills at the beginning of the year, which resulted in a production shortfall of 15,000 short tons during the period. These production and mechanical issues were resolved before the end of the quarter. Results in the specialty products segment were below last year due to the lower recycled material prices, most notably OCC, which reduced sales in the recovery sub-segment. Finally, the tissue papers division increased shipments by 7% year-over-year within the ongoing context of challenging market conditions and market related downtime taken at the beginning of the year. Results in this segment, however, were impacted by lower average selling prices driven by increased competitiveness in several markets, higher raw material prices, and negative operating margin related to the Oregon converting facility that was started in the second quarter of 2017. 

On a sequential basis, consolidated first quarter results reflected improvements in capacity utilization, sales, and operating income. This was largely driven by a strong performance from the European boxboard division and was supported by a slight progress in tissue. Although production levels in containerboard reflected seasonally softer volumes and the downtime as described above, this division generated improvements in operating income and adjusted OIBD, reflecting higher realized average selling prices and lower raw material costs. Conversely, results from the specialty products segment decreased, due primarily to the impact of lower recycled paper pricing on the performance of its recovery activities.

On the strategic front, the construction of our new containerboard converting facility in NJ progressed on time and on budget, with start-up scheduled for the end of May. The containerboard division finalized the sale of the NY converting facility for US$72 million in January, and the acquisition of the 66.67% interest in the Italian boxboard processing company PAC Service S.p.A, was concluded by the European boxboard division at the beginning of the year. At the end of the first quarter, the leverage ratio stood at 3.6x¹, unchanged from the end of 2017."

Financial Summary

Analysis of results for the three-month period ended March 31, 2018 (compared to the same period last year)

Sales of $1,098 million increased by $92 million or 9% compared to the same period last year. This was driven by a 22% increase in the containerboard division, reflecting the Greenpac consolidation and higher average realized sales prices during the period, and a 17% sales increase in the European boxboard segment following implemented price increases and the January 2018 acquisition of PAC Service. These benefits were partially offset by lower sales in recovery activities attributable to the significant year-over-year decrease in raw material prices. Sales generated by the tissue segment were essentially unchanged compared to prior year levels, as the beneficial impact of higher volumes was offset by a less favourable product mix and weaker Canadian dollar - US dollar exchange rate.

First quarter operating income stood at $112 million, a notable improvement from the $31 million generated last year. This increase was largely driven by improvements in the containerboard segment, where results benefited from the consolidation of Greenpac, a higher average selling price and lower raw material costs. First quarter performance similarly reflected a higher contribution from the European boxboard segment, driven by strong industry fundamentals and lower raw material costs. Partially offsetting these benefits was a lower contribution from the specialty products division attributable to the impact of lower raw material prices on the performance of the recovery sub-segment, and a weaker tissue performance reflecting the more challenging marketplace and rising virgin pulp price. Higher amortization and depreciation expense as a result of business combinations and the Scappoose facility start-up also negatively impacted operating income compared to the prior year period. On an adjusted basis¹, first quarter operating income stood at $50 million, versus $28 million in the prior year.

The specific items, before income taxes, that impacted our first quarter 2018 operating income and/or net earnings were:

• a $4 million unrealized loss on financial instruments (operating income and net earnings).   
• a $66 million gain related to the sale of the Maspeth, NY containerboard converting facility (operating income and net earnings).  
• a $5 million gain on fair-value revaluation of investment related to the European boxboard acquisition of PAC Service (net earnings).
• a $1 million foreign exchange gain on long-term debt and financial instruments (net earnings).   

The Corporation generated net earnings of $61 million, or $0.65 per common share in the first quarter of 2018, versus net earnings of $161 million, or $1.70 per common share in the comparable period of 2017. On an adjusted basis¹, net earnings were $12 million, or $0.13 per common share, during the first three months of 2018, compared to net earnings of $12 million or $0.13 per common share in the same period of 2017.

Near-Term and Strategic Outlook

Discussing the outlook for Cascades, Mr. Plourde commented: "Our near term outlook is positive. The second quarter is seasonally favourable for all of our business segments, and we would expect sales levels to reflect as much. In the case of our containerboard segment, strong industry demand, lower raw material costs, and the gradual implementation of the announced price increases should provide significant support for performance in the coming months. Conversely, we expect profitability levels in our tissue paper division to remain under pressure as a result of the heightened competitive marketplace and rising raw material costs. While external factors remain challenging in this segment, we remain focused on managing inventory, growing sales levels in our targeted markets, incorporating lower cost materials in our production processes when possible, and increasing sales levels in our Oregon tissue converting facility where we continue to make positive and measurable progress. In Europe, underlying industry fundamentals suggest continued strength, raw material prices continue to be favourable, and both order backlog and order intake levels remain healthy. Operationally, we will concentrate on managing raw material costs and countering the trend of increasing transportation costs through optimization of our transport strategies.

Looking to the remainder of 2018, we are focused internally on the optimization of our new business platform, and monetizing the efficiency, productivity and cost-saving initiatives that have been implemented through the centralization of our administrative processes. At the corporate level, attention will be centered on the smooth and successful execution of the company's planned 2018 investment program focused on improving our tissue platform, reinforcing our operational efficiency and productivity with a view to enhancing profitability and maximizing cash flow generation, and maintaining our strategic capital allocation commitment to reduce leverage."

Dividend on common shares and normal course issuer bid

The Board of Directors of Cascades declared a quarterly dividend of $0.04 per common share to be paid on June 6, 2018, to shareholders of record at the close of business on May 23, 2018. This dividend is an "eligible dividend" as per the Income Tax Act (R.C.S. (1985), Canada). During the first quarter of 2018, Cascades purchased 435,580 common shares for cancellation at a weighted average price of $14.20.

2018 First Quarter Results Conference Call Details

Management will discuss the 2018 first quarter financial results during a conference call today at 8:30 a.m. EDT. The call can be accessed by dialing 1-888-231-8191 (international dial-in 1-647-427-7450). The conference call, including the investor presentation, will be broadcast live on the Cascades website (www.cascades.com under the "Investors" section). A replay of the call will be available on the Cascades website and may also be accessed by phone until June 10, 2018 by dialing 1-855-859-2056, access code 6789174.

Founded in 1964, Cascades produces, converts and markets packaging and tissue products that are composed mainly of recycled fibres. The Corporation employs 11,000 employees, who work in more than 90 units located in North America and Europe. With its management philosophy, half a century of experience in recycling, and continuous efforts in research and development as driving forces, Cascades continues to serve its clients with innovative products. Cascades' shares trade on the Toronto Stock Exchange, under the ticker symbol CAS. Certain statements in this release, including statements regarding future results and performance, are forward-looking statements (as such term is defined under the Private Securities Litigation Reform Act of 1995) based on current expectations. The accuracy of such statements is subject to a number of risks, uncertainties and assumptions that may cause actual results to differ materially from those projected, including, but not limited to, the effect of general economic conditions, decreases in demand for the Corporation's products, increases in raw material costs, fluctuations in selling prices and adverse changes in general market and industry conditions and other factors listed in the Corporation's Securities and Exchange Commission filings.

SEGMENTED INFORMATION

The Corporation analyzes the performance of its operating segments based on their operating income before depreciation and amortization, which is not a measure of performance under International Financial Reporting Standards (IFRS); however, the chief operating decision-maker (CODM) uses this performance measure to assess the operating performance of each reportable segment. Earnings for each segment are prepared on the same basis as those of the Corporation. Intersegment operations are recorded on the same basis as sales to third parties, which are at fair market value. The accounting policies of the reportable segments are the same as the Corporation's accounting policies described in its most recent audited consolidated financial statements for the year ended December 31, 2017.

The Corporation's operating segments are reported in a manner consistent with the internal reporting provided to the CODM. The Chief Executive Officer has authority for resource allocation and management of the Corporation's performance, and is therefore the CODM.

The Corporation's operations are managed in four segments: Containerboard, Boxboard Europe, Specialty Products (which constitutes the Corporation's Packaging Products) and Tissue Papers.

SUPPLEMENTAL INFORMATION ON NON-IFRS MEASURES

SPECIFIC ITEMS

The Corporation incurs some specific items that adversely or positively affect its operating results. We believe it is useful for readers to be aware of these items, as they provide additional information to measure performance, compare the Corporation's results between periods and assess operating results and liquidity, notwithstanding these specific items. Management believes these specific items are not necessarily reflective of the Corporation's underlying business operations in measuring and comparing its performance and analyzing future trends. Our definition of specific items may differ from those of other corporations, and some of them may arise in the future and may reduce the Corporation's available cash.

They include, but are not limited to, charges for (reversals of) impairment of assets, restructuring gains or costs, loss on refinancing and repurchase of long-term debt, some deferred tax asset provisions or reversals, premiums paid on long-term debt refinancing, gains or losses on the acquisition or sale of a business unit, gains or losses on the share of results of associates and joint ventures, unrealized gains or losses on derivative financial instruments that do not qualify for hedge accounting, unrealized gains or losses on interest rate swaps, foreign exchange gains or losses on long-term debt, specific items of discontinued operations and other significant items of an unusual, non-cash or non-recurring nature. 

RECONCILIATION OF NON-IFRS MEASURES

To provide more information for evaluating the Corporation's performance, the financial information included in this analysis contains certain data that are not performance measures under IFRS ("non-IFRS measures"), which are also calculated on an adjusted basis to exclude specific items. We believe that providing certain key performance measures and non-IFRS measures is useful to both management and investors as they provide additional information to measure the performance and financial position of the Corporation. It also increases the transparency and clarity of the financial information. The following non-IFRS measures are used in our financial disclosures:

• Operating income before depreciation and amortization (OIBD): Used to assess operating performance and contribution of each segment when excluding depreciation & amortization. OIBD is widely used by investors as a measure of a corporation's ability to incur and service debt and as an evaluation metric.
• Adjusted OIBD: Used to assess operating performance and contribution of each segment on a comparable basis.
• Adjusted operating income: Used to assess operating performance of each segment on a comparable basis.
• Adjusted net earnings: Used to assess the Corporation's consolidated financial performance on a comparable basis.
• Adjusted free cash flow: Used to assess the Corporation's capacity to generate cash flows to meet financial obligation and/or discretionary items such as share repurchase, dividend increase and strategic investments.
• Net debt to adjusted OIBD ratio: Used to measure the Corporation's credit performance and evaluate the financial leverage.
• Net debt to adjusted OIBD ratio on a pro-forma basis: Used to measure the Corporation's credit performance and evaluate the financial leverage on a comparable basis including significant business acquisitions and excluding significant business disposals, if any.

Non-IFRS measures are mainly derived from the consolidated financial statements but do not have meanings prescribed by IFRS. These measures have limitations as an analytical tool, and should not be considered on their own or as a substitute for an analysis of our results as reported under IFRS. In addition, our definitions of non-IFRS measures may differ from those of other corporations. Any such modification or reformulation may be significant.

The reconciliation of operating income (loss) to OIBD, to adjusted operating income (loss) and to adjusted OIBD by business segment is as follows:  

Net earnings, as per IFRS, is reconciled below with operating income, adjusted operating income and adjusted operating income before depreciation and amortization:

The following table reconciles net earnings and net earnings per common share, as per IFRS, with adjusted net earnings and adjusted net earnings per common share:

The following table reconciles cash flow from (used for) operating activities with operating income and operating income before depreciation and amortization:

The following table reconciles cash flow from (used for) operating activities with cash flow from operating activities (excluding changes in non-cash working capital components) and adjusted cash flow from operating activities. It also reconciles adjusted cash flow from operating activities to adjusted free cash flow, which is also calculated on a per common share basis:

The following table reconciles total debt and net debt with the ratio of net debt to adjusted operating income before depreciation and amortization (adjusted OIBD): 

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SOURCE Cascades Inc.