Cascades Inc., over promise and under deliver

In March 2019, I purchased Cascades Inc. (TSX:CAS) stock for the first time.

Back then, I didn’t read financial reports and was just chasing yield or buying stock because I liked the company.
In general, I was doing lots of stupid things. 🙂
The company is quite well-known; you can see the Cascades logo in lots of places: on food packaging, in public bathrooms, on cardboard boxes and etc. That was a good enough reason for me to buy their shares.
So, I’ve purchased some at a price of $8.36.
Cascades Inc. is a Canadian company. All the prices are in Canadian dollars unless otherwise specified.

Funny enough, I basically bought at the bottom and since then the stock has moved mostly up.
In August 2019, Cascades Inc. doubled the dividends from $0.04 to $0.08 a quarter, but since it didn’t lift the stock price and I didn’t read financial reports, somehow I got spooked and sold my stock at $11.99 in September 2019 for a nice 43% profit in just 6 months.
In hindsight, it was a bad decision because then COVID happened and CAS stock price went up to $18 in March 2021.

So, what has happened to Cascades Inc. since then?

• In October 2020, Cascades green-lights Bear Island project, a containerboard factory with a cost of US$380M (yeah, not really).
• In the middle of the huge construction, management decides to renew its Normal Course Issuer Bid, and they actually did buybacks.
  Cascades issued shares in 2020 and started to buy them back in 2021.
  If you have this extra cash for buybacks, why not put it into your Bear Island project to finish it faster?
  OK, it was a slightly profitable idea, because they had issued shares at around $16 (after transaction fees), and were buying them back in the $13-$16 range.
  But now, when the share price is below $9, there is, of course, no money for buybacks anymore. 🙄
  
  Source: CAS at CEO.CA
• On July 5, 2021 CAS sold their interest in the European cartonboard business, which was a good and well-timed decision, in my humble opinion.
• But then, in August 2021, Cascades raised dividends 50% to $0.12. An odd decision, considering that just a year ago they made an investment, “one of the largest in our Company’s history”, and started a project that supposed to be finished only in 2023.
  Has management mistakenly thought they were producing money rolls instead of toilet paper rolls?
  Well, I’ve got bad news for them:
  
  Bad news expressed visually. Should I sell this masterpiece as an NFT?

  Right now, dividends cost around $48M/year and are basically paid from shareholders’ pockets because the money for those payments is funded by debt, and this debt should be paid back (alone with accumulated interest), thus hurting future profits.
  Also, Mark Wilde from BMO was “curious” during the Q2’22 conference call about this recent raise:

  Mark Wilde
  Okay. All right. Then the last one for me, for either kind of Allan or Mario. Just curious, you made a significant move up just a while ago in your dividend. And with leverage going up right now, can you just — can you talk with us about how you think about the security of the dividend?

  Mario Plourde
  At the moment, we had not changed our position regarding the dividends. The forecast we see in terms of cash flow generation, and a set of inflation in our cost doesn’t guide us to move on the dividend right now. So we maintain the dividend at the same level.

  Mark Wilde
  Okay. And you’re comfortable with your ability to maintain that dividend is really what I’m asking?

  Mario Plourde
  Yes, we are.

• Speaking of debt. It is up significantly:
  

  Net debt of $1,712 million as of June 30, 2022 (compared with $1,549 million as of March 31, 2022). Net debt to adjusted OIBD ratio1 of 5.4x, up from 4.8x as of March 31, 2022.

• Bear Island‘s cost has been revised up (twice) to US$470M-US$485M from the initial US$380M, an extra US$100M, and they might not be able to finish it in December 2022, as planned before.
• Because of inflation, labour shortages, and logistics costs, the Tissue Papers segment is struggling to produce any profits. So their forecasted OIBD (whatever it is 😀 ) was reduced from $60M-$80M to $25M-$40M, basically cut in half.
• At the same time, managment has their 2022-2024 Master Plan and they promise to achieve all the targets. Yeah, right. Can’t predict what will happen in the current year, but see a bright future ahead till 2024.
  Again, some analysts expressed their concerns about the guidance during the Q2’22 conference call:

  Benoit Laprade
  Okay. And then but if I push that reasoning a little further, you’re still guiding for 2024 in the $150 million range, but Q4 annualized — and typically, Q4 is a weak seasonally speaking quarter. That kind of assumes that you’ll be slowing down from there, while you probably have some initiatives that should be improving the performance. So I’m just trying to reconcile the Q4 ’22 and the 2024 full year guidance at 150.

  Allan Hogg
  Exactly. If you do the math, you’re right, but we have kept our guidance for ’24 for now. It’s still a long way to go, but that’s why we remain confident that this target will be achieved. Maybe it will be so fast if you do that math, as you mentioned, but we’re maintaining that the target will be achieved. So it has to be proven because the next — the upside, as Jean-David is mentioning that we have in issue after all of these initiatives is that on the volume side, there’s still opportunity to drive improvement in volume and production volumes, so in sales so —

  …

  Mark Wilde
  I wanted to just start by following on Benoit’s question. I’m just curious about guidance generally. We’ve had a number of guidance cuts this year. Anything you can give us to increase confidence that we don’t have more to come here in the second half of the year?

  Allan Hogg
  Well, if I can start, if you only take that Tissue guidance we did in Q1, the difference with the guidance right now is mainly driven by continued increase in raw materials in addition to chemical and energy costs that were higher than our assumption when we did our last forecast and also slightly lower production output than expected.
  So these are the main drivers why we have reduced our guidance this time in Tissue and not in Q1 because in Q1, we had these assumptions at different levels. So that’s the reason between the two.
  So going forward, price increases, negotiations are being implemented and a very high level of probability of being done or achieved and going a bit further, as I explained, there’s potential of additional production output to be delivered in tissue. So that’s why remaining confident about the 2024 target.

• The good news is that production volume for Bear Island is secured at 100% for 2023 and 75% after that. As soon as they are done with construction, it will significantly reduce their capex and will hopefully bring lots of cash.
• Cascades is raising prices for its products, trying to catch up with inflation.
• While the company is struggling to make a profit and taking on more debt, management pays themselves a nice salary:
  
  Source: 2021 Cascades Inc. Management Circular

  Mario Plourde, CEO of Cascades Inc., has seen his total compensation go up almost 30% between 2019 and 2021. Others are doing even better.
  Good job on finally beating this nasty inflation!

• Btw, Cascades provides insulated boxes for Goodfood Market meal kits.

For several reasons, the situation with Cascades Inc. reminds me of NFI Group Inc. Both are struggling to make any profits because of inflation and shortages, but they are making big plans for the future and proudly burning cash on dividends.
The difference is that CAS‘s revenue keeps growing, while NFI can’t brag even about this right now.

So, Cascades Inc. seems to me like a turn-around story that might be attractive in late 2022 or early 2023 with an eye on the general state of the economy.

My opinion: WAIT, THEN BUY.
And not the other way around, like I just did! Couldn’t resist the urge and bought some shares at $9.50 a day before the Q2’22 earnings results.
Whether I read financial reports or not, I still keep doing stupid things. 🙁
At least everyone needs toilet paper and a cardboard box, so long term CAS should do just fine.