Cascades Announces Third Quarter 2017 Results; Approaches target debt leverage ratio

KINGSEY FALLS, QC, Nov. 9, 2017 /PRNewswire/ - Cascades Inc. (TSX: CAS) reports its unaudited financial results for the three-month period ended September 30, 2017.

Q3 2017 Highlights

• Sales of $1,103 million
  (compared to $1,130 million in Q2 2017 (-2%) and $1,021 million in Q3 2016 (+8%))
• As reported⁴ (including specific items)
• Operating income of $51 million
  (compared to $48 million in Q2 2017 (+6%) and $50 million in Q3 2016 (+2%))
• Operating income before depreciation and amortization (OIBD)¹ of $104 million
  (compared to $104 million in Q2 2017 and $98 million in Q3 2016 (+6%))
• Net earnings per common share of $0.35
  (compared to net earnings of $2.70 in Q2 2017 and net earnings of $0.21 in Q3 2016)
• Adjusted (excluding specific items)¹
• Operating income of $53 million
  (compared to $51 million in Q2 2017 (+4%) and $55 million in Q3 2016 (-4%))
• OIBD of $106 million
  (compared to $107 million in Q2 2017 (-1%) and $103 million in Q3 2016 (+3%))
• Net earnings per common share of $0.20
  (compared to net earnings of $0.25 in Q2 2017 and net earnings of $0.32 in Q3 2016)
• Announced construction of a new US$80 million state of the art corrugated packaging plant in Piscataway, New Jersey.
• Announced the closure of our Maspeth, New York, packaging plant. Property put up for sale for US$72 million.
• Net debt² of $1,469 million as at September 30, 2017 (compared to $1,780 million as at June 30, 2017) and net debt to adjusted OIBD ratio² at 3.6x on a pro-forma basis³ (compared to 4.2x as at June 30, 2017 on a pro-forma basis³).

Mr. Mario Plourde, President and Chief Executive Officer, commented: "We delivered improvements in consolidated reported operating income year-over-year during the third quarter in what was a challenging environment, due to disruptions by the hurricanes and increasingly difficult market conditions in the tissue sector. Strategically, we are confident that the plan we are implementing step by step, and which is focused on improved profitability through increasing integration, modernizing our manufacturing facilities and improving logistics by optimizing our geographic footprint, will provide our business segments with the platform to more successfully execute in times of increased business headwinds.

Looking at the performance of our business sectors, our Containerboard segment increased both sales and operating income year-over-year during the third quarter. This reflects the consolidation of Greenpac results beginning in the second quarter, higher selling prices following the final deployment of announced price increases, and a more favourable sales mix. These benefits were partially offset by higher raw material prices year-over-year, and the foreign exchange impact related to the appreciation of the Canadian dollar. Results similarly reflect slightly lower volumes that are attributable to North American transport grid disturbances following inclement weather combined with short-term inefficiencies following the final deployment of our new centralized transportation processes.

The lower results generated by our Tissue segment during the quarter reflect several factors. Key among these were higher raw material prices, a less favourable sales mix, lower volumes due to additional capacity coming to the market, higher transportation costs, weather-related network disruptions, and a lower than anticipated contribution from the Oregon converting plant due to slower market penetration.

The European Boxboard segment performed well during the quarter, with year-over-year results reflecting the stronger economic environment, improvements in volumes and average selling prices coupled with lower maintenance and energy costs, the benefits of which more than offset the negative impact of higher raw material prices.  Finally, third quarter results from our Specialty Products segment declined slightly year-over-year. This reflects a lower contribution from recovery and recycling activities related to the appreciation of the Canadian dollar, higher raw material costs most notably resin, and slightly lower volumes, the effects of which were only partially offset by higher selling prices in industrial and consumer products.

At the corporate level, we are pleased with the progress of our internal transformation initiatives and ERP system implementation, which we expect will be finalized by the end of the year, as planned, after which we will turn our focus toward optimization. We are similarly pleased with the advancements made in our strategic plan, which include the solidifying of our Containerboard platform in the Northeastern US via the closure of our New York packaging plant and planned sale of the related property, and construction of a new state of the art containerboard converting facility in New Jersey. Finally, we have continued to make progress on our commitment to decrease our leverage ratio to within a range of 3.0x - 3.5x, which, when including results from Greenpac over the last 12 months, now stands at 3.6x on a pro-forma basis."

Financial Summary

Analysis of results for the three-month period ended September 30, 2017 (compared to the same period last year)

Sales of $1,103 million increased by $82 million or 8% compared to the same period last year, reflecting the consolidation of results from the Greenpac Mill beginning in the second quarter, improved pricing and sales mix in all four of the Corporation's business segments, and additional sales from recovery and recycling activities due to higher recycled fibre pricing. These benefits were partially offset by lower volumes in our North American operations, and the stronger Canadian dollar which resulted in a less favourable CAD/USD exchange rate.

Third quarter operating income stood at $51 million, a slight improvement from $50 million last year. This performance reflects the inclusion of Greenpac in the current quarter, price increases mainly in Containerboard, and lower Corporate activities costs related to lower stock-based compensation expense. These were offset by higher raw material costs, and higher production costs in Containerboard and Tissue, due to freight and logistics, and increased use of outside contracting. Specific items recorded in the current period (please refer to the ''Supplemental Information on Non-IFRS Measures'' section for more details) decreased operating income by $2 million. On an adjusted basis, third quarter operating income stood at $53 million, down slightly from $55 million in the prior year period.

The main specific items, before income taxes, that impacted our third quarter 2017 operating income and/or net earnings were:

• a $2 million impairment charge related to the revaluation of unused assets (operating income, net earnings)
• a $2 million restructuring cost related to severance expense following the announced planned closure of the New York Containerboard converting plant (operating income, net earnings)
• a $2 million unrealized gain on derivative financial instruments (operating income, net earnings)
• an $18 million gain on fair-value revaluation of our investment in Boralex prior to its sale (net earnings)
• an $8 million foreign exchange gain on long-term debt and financial instruments (net earnings)

For the third quarter of 2017, the Corporation posted net earnings of $33 million, or $0.35 per common share, compared to net earnings of $20 million, or $0.21 per common share in the same period of 2016. On an adjusted basis, the Corporation generated net earnings of $19 million during the third quarter of 2017, or $0.20 per common share, compared to net earnings of $30 million or $0.32 per common share in the same period of 2016. Please see the "Supplemental Information on Non-IFRS Measures" section for reconciliation of the amounts detailed above.

Near-Term Outlook

Discussing the outlook for Cascades, Mr. Plourde commented: "We are confident that the execution of our strategic plan will reinforce our business platform and our positioning within our two primary markets of packaging and tissue going forward. The North American landscape remains competitive in both segments, and demands that producers like Cascades enhance efficiency, productivity, innovation and pro-active execution to meet changing customer needs and challenging market conditions. This will be particularly true for our tissue segment in the near term as new capacity comes on-line. To this end, we believe that our focus on increasing our level of integration, upgrading our platform through targeted investments in state-of-the-art equipment and improving logistics by optimizing our geographic footprint will reinforce our platform and put us in a strong position for the future. 

Within the context of the seasonally slower fourth quarter, we expect near-term performance of our Containerboard division to benefit from the strong North American industry demand trends, the addition of Greenpac results, and impact of the liner and medium price increases as of the end of the third quarter. The most significant potential headwind for this segment remains raw material pricing, most notably OCC. While we anticipate pricing fluctuations to continue, we expect results in the fourth quarter to benefit from a lower average OCC price following the cumulative $65/st decrease in the index price over September to November. Our European Boxboard activities are expected to continue to benefit from positive trends in demand through the end of 2017, in addition to a more favourable geographic sales mix and the continued gradual roll-out of announced price increases. Our Specialty Products segment performance will reflect the variances in its recovery and recycling activities that mirror changes in market pricing, and continued positive momentum in its other packaging activities. Finally, near-term results from our Tissue activities are expected to remain under pressure as a result of a combination of higher raw material pricing, most notably virgin pulp, ongoing weakness in the hand towel jumbo roll market, and the seasonally weaker fall and winter season. The slower than anticipated ramp-up in sales levels at our new tissue converting operation in Oregon, due in part to the timing of customer bid processes, is also expected to dampen results in tissue over the upcoming quarters."

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 December 1, 2017, to shareholders of record at the close of business on November 22, 2017. This dividend is an "eligible dividend" as per the Income Tax Act (R.C.S. (1985), Canada). Cascades did not purchase any common shares for cancellation during the third quarter of 2017.

2017 Third Quarter Results Conference Call Details

Management will discuss the 2017 third quarter financial results during a conference call at 10:00 a.m. ET. The call can be accessed by dialing 1-888-231-8191 (international: 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 December 9, 2017 by dialing 1-855-859-2056, access code 95573278.

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 close to 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, 2016.

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 affected its operating results. We believe it is useful for readers to be aware of these items, as they provide additional information to measure the performance, compare the Corporation's results between periods and to assess operating results and liquidity, notwithstanding these specific items. Management believes these specific items are not necessarily reflective of the Corporation 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 cash available to us.

They include, but are not limited to, charges for (reversals of) impairment of assets, restructuring gains or costs, loss on refinancing of long-term debt, some deferred tax assets 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 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 operating activities with operating income and operating income before depreciation and amortization:

The following table reconciles cash flow from 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.