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Edited Transcript of CAS.TO earnings conference call or presentation 9-May-19 12:30pm GMT

Q1 2019 Cascades Inc Earnings Call

KINGSEY FALLS Jun 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Cascades Inc earnings conference call or presentation Thursday, May 9, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Allan Hogg

Cascades Inc. - VP & CFO

* Charles Malo

Cascades Inc. - President & COO of Containerboard Packaging Group

* Jean-David Tardif

Cascades Inc. - President & COO of Tissue Group

* Jennifer Aitken

Cascades Inc. - Director of IR

* Luc Langevin

Cascades Inc. - President & COO of the Cascades Specialty Products Group

* Mario Plourde

Cascades Inc. - President, CEO & Non-Independent Director

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Conference Call Participants

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* Hamir Patel

CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Paper and Forest Products Analyst

* Hanbo Xiao

Desjardins Securities Inc., Research Division - Associate Analyst

* Mark William Wilde

BMO Capital Markets Equity Research - Senior Analyst

* Paul C. Quinn

RBC Capital Markets, LLC, Research Division - Analyst

* Sean Steuart

TD Securities Equity Research - Research Analyst

* Zachary Evershed

National Bank Financial, Inc., Research Division - Associate

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Presentation

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Operator [1]

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Good morning. My name is Jessa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cascade First Quarter 2019 Financial Results Conference Call. All lines are currently in listen-only mode. After the speaker's remarks, there will be a question-and-answer session.

I will now pass the call to Jennifer Aitken, Director of Investor Relations for Cascade. Ms. Aitken, you may begin your conference.

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Jennifer Aitken, Cascades Inc. - Director of IR [2]

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Thank you, operator. Good morning, everyone, and thank you for joining our first quarter 2019 financial results conference call. We will begin with an overview of our quarterly operational and financial results, followed by some concluding remarks, after which we will begin the question period.

Today's call will have a slightly different format from that of previous quarters in that the speakers this morning will be limited to Mario Plourde, President and CEO; and Allan Hogg, CFO. Charles Malo, President and COO of the Containerboard Packaging Group; Luc Langevin, President and COO of the Specialty Products Group; and Jean-David Tardif, President and COO of the Tissue Papers Group will also be joining us on the call and will be available to answer questions at the end of the call.

Before I turn the call over to my colleagues, I would like to highlight that Reno de Medici's interim report released on April 29, can be viewed on Reno's website. I would also note 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 accompanying Q1 2019 investor presentation for details. This presentation along with our press release can be found in the Investors section of our website.

I would like to remind the media and Internet users that they are in listen-only mode and can, therefore, only listen to the call. If you have any questions, please feel free to call us after the session.

I will now turn the call over. Allan?

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Allan Hogg, Cascades Inc. - VP & CFO [3]

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Yes. Thank you, Jennifer, and good morning, everyone. So before we discuss the details of our quarterly results, I will touch briefly on the impact of IFRS 16, the new accounting standard on leases that came into effect on January 1, 2019.

Slide 3 provides an overview of the impact. And as you can see the new standard impacted all of our business segments. The new standard increased our debt by $99 million as of January 1, and our EBITDA by $30 million on an annualized basis. There is no impact on our cash flow profile, and I would also note that financial figures were not restated historically as allowed by the standard.

I will now pass the call over to Mario, who will provide an overview of our first quarter results. Mario?

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Mario Plourde, Cascades Inc. - President, CEO & Non-Independent Director [4]

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Thank you, Allan, and good morning, everyone. Overall, we are pleased with first quarter results with all 4 of our business segments generating good results that were in line or above expectation. Specifically, our Containerboard and European Boxboard segment benefited from lower recycled fiber prices and a more favorable sales mix, while result in Europe also reflect the recent business acquisition.

Specialty Products similarly benefited from the recent business acquisition as well as generating improved results in the packaging subsegments. Combined, these benefit offset the negative impact of lower recycled fiber pricing on the recovery subsegment. Finally, we are pleased with the sequential performance of our Tissue Paper segment, where stronger results reflect higher selling prices, lower raw material prices and lower costs -- production costs and improved performance of our (inaudible) mills.

I will provide more color about the driving factor behind each of the segment result later in the call.

On an adjusted per share basis, we generated $0.14 in the first quarter. This compare to earnings per share of $0.13 in the first quarter of 2018, and breakeven in the previous quarter.

Again, on an adjusted basis, EBITDA of $135 million increased 29% over the last year and 19% from the fourth quarter. On a consolidated basis, our adjusted EBITDA margin reached 11% in Q1.

On the raw material side, the average Q1 index price for OCC brown paper grade was down by a significant 34% year-over-year and was down 10% compared to Q4. The average Q1 price for white recycled paper grade, which makes up for the large part of the raw material used in tissue decreased by 10% compared to Q4 levels, but remained 15% above prior year levels. On the virgin pulp side, both hardwood and softwood pulp prices were 3% below Q4 levels, but remained 10% to 12% higher than last year.

Allan will now discuss the main highlights of our first quarter financial performance, after which I will discuss our business segments. Allan?

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Allan Hogg, Cascades Inc. - VP & CFO [5]

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Yes. Thank you, Mario. We'll start with a quick overview of our key KPIs on Slide 9. Our first quarter shipments increased by 1.5% from Q4. This increase was driven by Boxboard Europe where shipments were up 14% sequentially due to its acquisition of the Barcelona mill last October. Shipment levels decreased in our North American operations, which is in line with usual seasonal changes in demand. Our first quarter capacity utilization rate of 91% increased by a marginal 1% sequentially and was 3% below last year. On a LTM basis, working capital came in at 10.4% of sales, while consolidated return on assets stood at 11%.

Moving now to sales, on Slides 10 and 11. On a year-over-year basis, first quarter sales increased by $132 million or 12%. This reflects the contribution from recent business acquisitions in Boxboard Europe and Specialty Products segments, in addition to improvements in pricing and sales mix and favorable exchange rate for our North American operations. Offsetting these benefits were lower volumes for all segments. Sequentially, Q1 sales increased by a modest $34 million or 3%, as the benefits of recent acquisitions and favorable sales mix in North America were offset by lower Containerboard and Tissue volumes.

Moving now to operating income and adjusted EBITDA. On Slide 12, Q1 adjusted EBITDA of $135 million increased $30 million from prior year levels. Results benefited from a stronger performance from our Containerboard and Specialty Products segment.

Mario will provide more detail regarding these performances in a few minutes.

Sequentially, Q1 adjusted EBITDA increased by $22 million as shown on Slide 13. This was largely the result of improved Tissue Papers and European Boxboard segments performances, which more than offset a lower contribution from Containerboard activities.

Slides 27 and 28 of the presentation provide details regarding operating income and EBITDA results for each segment on a year-over-year and sequential basis.

Slides 14 and 15 illustrate the year-over-year and sequential variance of our Q1 earnings per share, and that the reconciliation with the specific items that affected our results. As reported, earnings per share were $0.26 in the first quarter of 2019 compared to reported earnings per share of $0.65 last year.

Both periods included specific items. On an adjusted basis, earnings per share increased by $0.01 over last year results. High operating results were offset by higher depreciation and financing expenses.

The change in depreciation expense reflects 2018 business acquisitions and capital projects put in operations and the adoption of IFRS 16 standard for leases.

In addition, interest on other liabilities increased due to the put value of one of the partner in Greenpac, as explained on Page 14 and 15.

Slides 16 and 17 illustrate the specific items recorded during the quarter. Our first quarter results include a $10 million gain from the reversal of liabilities following White Birch termination of its lease on the Bear Island Virginia facility, and a combined $9 million gain on financial instruments and FX impact on long-term debt level.

We also recorded a total of $9 million of impairment charges and restructuring costs. Last year, we reported a $66 million gain related to the sale of the building and land of our New York Containerboard facility. First quarter adjusted cash flow from operations increased by $16 million over -- year-over-year to $85 million. Adjusted free cash flow was below prior year level as a result of the higher net CapEx paid in the current period and higher dividends paid to minority shareholders in Greenpac. Remember that Q1 2018 adjusted free cash flow included the proceeds from the sale of our New York facility.

Moving now to our debt reconciliation. Our net debt increased sequentially by 6% or $109 million in Q1. This reflects, once again, the impact of the adoption of IFRS 16 in the amount of $99 million. Change in working capital was negative as usual in Q1, but was offset by the currency impact on our U.S. denominated debt.

On a pro forma basis, to include our recent business acquisitions and the annualized impact of IFRS 16, our net debt leverage ratio stood at 3.4x at the end of the first quarter compared to 3.5x at the end of 2018.

This along with other financial ratios and information about maturities are detailed on Slide 20.

On Slide 21, we have detailed our capital investments during the first quarter on a segment-by-segment basis. Our expected CapEx plans for 2019 are also detailed on the slide and are still between $330 million and $400 million. As we have noted previously, the amount may vary depending on market conditions, the final approval of the Bear Island conversion project and the overall financial performance.

I will now hand the call back to Mario, who will discuss the highlights on each of our segments. You can find an analysis of the factors impacting performance in each of these segments on Slide 23 through 26 of the presentation, and near-term business consideration are shown on Slide 30. Mario?

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Mario Plourde, Cascades Inc. - President, CEO & Non-Independent Director [6]

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Thank you, Allan. The Containerboard segment generated first quarter EBITDA of $104 million, representing a margin of 23.6%. This compare to margins of 23.5% in Q4 and 18.3% last year. On a sequential basis, EBITDA decreased. This was largely driven by lower volumes, which was partially offset by lower OCC cost and higher average selling prices.

Our Canadian average selling price increased $10 per short ton from Q4 levels. This reflects stable pricing in Containerboard and a $25 per short ton increase in the average selling price of the converted products, which reflects a favorable sales mix in the quarter and a 1% depreciation in the Canadian dollar.

Our Q1 operating rate was 88%, down 5% sequentially with paper shipment decreasing 26,000 short ton to 342,000 short ton, reflecting the same trend as Q1 last year. External shipments decreased 12,000 short ton, which increased our integration rate by 1% to 59%.

Including sales to associated companies, integration decreased slightly to 71% from 73% in the previous quarter.

Shipment of converted product decreased 7% sequentially in millions of square feet, underperforming both Canadian and U.S. market by approximately 3%. I will -- I would note, however, that we outperformed the market in Q4, making our sequential performance lower. In the first quarter, we took approximately 7,000 short ton of scheduled maintenance downtime. We are cautiously optimistic for this segment in the near term, as more favorable OCC pricing and higher seasonal demand trends should help moderate the industry-wide demands and pricing headwinds.

On Slide 23, we have updated our downtime plan for 2019. The change reflects 3,000 short ton of downtime taken in the beginning of April to rebalance inventory. Finally, the Bear Island project is advancing well and we will provide details once plans have been finalized this summer.

The European Boxboard operation generated solid results in Q1, reflecting good efficiencies in our operations. Sales increased 13% compared to the last year. This reflects the acquisition of Barcelona Cartonboard, the benefit of which were partially offset by lower sales volume in the same plan basis and the 3% appreciation of the Canadian dollar.

On a year-over-year basis, the average Q1 selling price in recycled boxboard decreased by EUR 2 or 1%, and the average selling price of virgin boxboard increased by EUR 45 or 6%. EBITDA increased 4% from prior year levels, driven by lower raw material costs and the contribution of Barcelona. A lower average selling price in the appreciation of the Canadian dollar partially offset this benefit. On a sequential basis, the 14% sales increase largely reflects the addition of the mill in Spain and the usual evolution following seasonal softness in December.

Adjusted EBITDA increased by $9 million or 45% from Q4 levels, primarily as a result of better volumes, lower raw material cost and energy credit received during the period. Looking forward, synergy from our mill acquisition in Spain and stable raw material prices support our cautiously optimistic outlook given uncertainty in regards to volumes.

First quarter sales in the Specialty Products were $196 million, 14% above Q4, largely driven by the December 2018 acquisition in the Consumer Product market. Higher volumes in our packaging activities during the period were offset by lower sales in our recovery segment due to lower prices and volume. Q1 EBITDA of $12 million was 20% above Q4 2018 levels, with half of this increase driven by recent acquisitions.

The remainder of the increase reflects the improved performance in packaging subsegments, which more than offset reduced profitability in the recovered paper activity due to price erosion. The continued decline of the recovered paper prices have significantly impacted business unit profitability. Needless to say, these lower prices are very positive for Cascade's other operation.

Regarding the near-term outlook, the recent OCC price decrease continue to impact recovery result in April, and we are following the situation very closely as generation increase with seasonality.

Market conditions for white grade remain positive for buyers. We are managing inventory to meet our fiber needs and to prepare for the lower generation season coming in late Q2. Overall, near-term performance of the recovery segment is expected to continue to be negatively impacted by declines of recovered paper prices.

Stronger seasonal volume and spread in packaging activities should help offset this impact. We, therefore, expect improved year-over-year results from this group.

Moving now to the Tissue Group, where first quarter results highlight the progress we have begun to make in addressing operational performance. This business has been facing challenging market condition over the past 18 months. However, while both recycled and virgin white fiber remains elevated, they have begun to ease in recent months. Transportation costs have also stabilized, which has helped overall profitability.

Moreover, price increases announced in all markets during the second half of 2018 positively impacted first quarter results, partially offsetting fiber and transportation cost increases. In addition, we have begun to see positive results from our improved initiatives primarily in Oregon. First quarter results reflect these favorable trends with EBITDA totaling $9 million or 2.6% on a margin basis. This compare to a loss of $8 million in Q4.

That said, results remain below the $13 million EBITDA or 4% margin delivered -- generated last year. This is mainly due to higher white fiber cost both recycled and virgin as well as production cost increase, which have not been fully offset by price increase announced in 2018.

On the volume side, total shipment decreased by 2% year-over-year. Shipment of converted product grew by double digit compared to last year, registering an increase of 11% due to higher demand in our targeted market segment. However, external shipments of (inaudible) decreased by 29% compared to last year, mainly due to higher integration and strategic customer realignment. Volume level remains very positive for converted product, and this is mainly due to the long-term contract agreement with key strategic customer.

And as has been the case in the past, some additional subcontracting was required in the short-term basis to supply this volume, which has impacted profitability. Among other things, our capital investment plan is aimed at addressing this situation. In terms of pricing, the average selling price increased by 11% year-over-year. This reflected the previously announced price increases, the higher proportion of converted product in our overall shipment and the depreciation of the Canadian dollar.

On a sequential basis, our quarterly average selling price increased by 4% for the same reason. We announced another price increase during the first quarter of up to 8% (inaudible) segment across North America, effective June 1.

On an operational basis, higher raw material costs remain a headwind, as did a less favorable mix of white fiber used during the quarter. This negatively impact result by $14 million year-over-year. On a sequential basis, the decrease of white fiber and pulp prices positively impact our results by $4 million on a net basis.

We closed one of our operations, paper machine in Ontario, April 15, with the second scheduled to close, May 27. As mentioned on our previous call, this site produced 44,000 short ton of Tissue Paper annually, of which half was used internally. These ton will be sourced externally going forward. We expect near-term condition in the Tissue to remain challenging. That said, we are pleased with the progress in our operational effectiveness and remain positive for the coming quarter.

On the demand side, we are now entering the peak season for many of our markets. In addition, recent easing of white fiber prices, combined with an improved pricing environment and better logistic execution should certainly support profitability.

Before we open the call to questions, let me summarize by saying that we are pleased with our first quarter performance. All of our business segments generated solid results that were in line with or above expectation. The sequential improvement in Tissue is of particular note and we -- with the new structure in place, our outlook is positive for this segment.

Slide 30 of our presentation highlights outline near-term trend for our operations. Overall, we expect second quarter performance to benefit from positive seasonal demand and more favorable raw material pricing. More specifically, we also anticipate that our Containerboard segment will continue to contribute strongly to our performance. On the strategic side, we remain focused on successfully executing our capital investment plan and on continuing to improve our operational efficiency and productivity.

On that note, we will now be happy to answer your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Mark Wilde from Bank of Montreal.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [2]

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I have a few questions. First, I wondered, if you could just give us a little bit of color on how you're thinking about kind of the Bear Island project right now? I know you said you'd have more details this summer. But just given the softening that we're seeing in the Containerboard market, are you kind of rethinking timing or the premise of this project?

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Charles Malo, Cascades Inc. - President & COO of Containerboard Packaging Group [3]

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Mark, this is Charles. So we're keep doing the same as what we announced on the other prior calls. We are working on the final presentation to get the Board approval. We understand that there is a lot of discussion right now on the slower demand. But as we explained in the past, this is strategically a good project for Cascade. The location is well situated and -- for our growth and our positioning. So as we are right now, we are still on course to do the presentation before the end of the June, and we'll provide more information as we go.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [4]

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And Charles, does -- the fact that the mill is idle right now, does that pose any big issues?

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Charles Malo, Cascades Inc. - President & COO of Containerboard Packaging Group [5]

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There is actually -- we had planned for this when we did the negotiation with the White Birch group. So right now, what this is giving us is more flexibility to take our time to prepare the sites for our future conversion. So when you have more time like this, there is a lot of work that we can do like cleaning, all the testing that we had to do on the equipment were done prior to the machines being shut down. So we did work with the prior owner on that.

So as we see this right now is we can work on our schedule and have more flexibility. The financial impact of the deal, because the way that we have structured this, will be minimal for the Cascade. There is -- when we planned the acquisition, everything was built in the acquisition parts.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [6]

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Okay. All right. That's great. And then just toggling over to the Tissue business. There have been a couple of big developments recently, and I just -- I want to get your sense of how these had impacted your business, if at all.

We had the fire, which has basically taken out the Marcal Tissue mill. And then we've also got the bankruptcy of Orchids, which I think many people have been anticipating for some time. So I just wondered, if it's possible to talk about the impact of both of those on your Tissue business?

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Jean-David Tardif, Cascades Inc. - President & COO of Tissue Group [7]

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Mark, this is Jean-David. Yes, so the -- for sure, this is creating some jumbo roll availability in the market. So right now, we're looking at some opportunity. As Mario said, with the [current disclosure], there are some sourcing that we're going to do externally for some (inaudible) . And for Orchids we don't know what will happen at this moment, and we'll be looking at it carefully and follow the evolution of the market.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [8]

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Okay. And then just lastly, I wondered just these Boxboard business, if you could give us some sense of just what you're seeing in terms of kind of volume and throughput over Europe?

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Mario Plourde, Cascades Inc. - President, CEO & Non-Independent Director [9]

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Q1, so that's a little bit deflating as Q4. So in Q4, we saw a dip in the order intake about 7 days compared to the usual of 2018. So Q1 is at the same level right now. We're still equal to what we had in Q4. No big dip, no more than what we saw. So stable market right now in Europe.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [10]

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And how is pricing doing in Europe, just given that the recycle fiber prices have come down so much and you've got this fairly static economy over Europe?

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Mario Plourde, Cascades Inc. - President, CEO & Non-Independent Director [11]

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The pricing of waste paper has not come down as much as North America. So it has less of an impact on the recycle grade. On the virgin inside, as I just mentioned on the call, we had a price increase of EUR 45. So it's beneficial on our -- on that side. So the dynamic is a little different in Europe than it is in North America. We have not seen as much lower price of waste paper in Europe.

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Operator [12]

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Your next question comes from the line of Hamir Patel from CIBC Capital Markets.

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Hamir Patel, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Paper and Forest Products Analyst [13]

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Charles, I just wanted to follow up on that White Birch -- your White Birch comment. So what's the latest thinking if the project does go ahead? When is the earliest it would be in production?

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Charles Malo, Cascades Inc. - President & COO of Containerboard Packaging Group [14]

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We're sticking with the same amount at this point -- same day, sorry, when we talked about 2021 -- end of 2021 production.

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Hamir Patel, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Paper and Forest Products Analyst [15]

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Okay. Great. That's helpful. And I was just looking at the waterfall charts, and it looks like in Q1, I didn't see any reference to the benchmark price as a headwind. So was there any unusual mix in the quarter and maybe if you could speak to what sort of sequential decline you'd expect in Q2 on pricing?

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Charles Malo, Cascades Inc. - President & COO of Containerboard Packaging Group [16]

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I'm sorry. Can you just repeat the last part of your question?

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Hamir Patel, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Paper and Forest Products Analyst [17]

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Yes. So I mean, the benchmark obviously came off this year, but it doesn't look like that weighed on your Q1 numbers. So what was going on in the quarter on the mix side?

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Charles Malo, Cascades Inc. - President & COO of Containerboard Packaging Group [18]

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We did sell more converted products than we sold outside rolls, and that's why our pricing has a benefit or a benefit impact -- positive benefit impact.

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Hamir Patel, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Paper and Forest Products Analyst [19]

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Right. Okay. And then on the volume side, looks like the U.S. industry box shipments were down, I think, about 0.5% year-to-date, you guys were down 3%. So do you think you're losing market share or did Canadian industry demand fair worse than the U.S. in the first quarter?

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Charles Malo, Cascades Inc. - President & COO of Containerboard Packaging Group [20]

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No. If you look at -- if you look from first of all, year-over-year, our overall is about 1% lower from year-over-year. So I mean this is for us not significant at this point. When we look at the -- from Q4 to Q1, we did have a lower than the average -- when you look at the -- compared to our peers, but we did have a very good Q4, so which explains a bit of the gap that we have compared to the market. So we had -- when we look at Q4, we had about 3% more than the average of the market.

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Hamir Patel, CIBC Capital Markets, Research Division - Director of Institutional Equity Research & Paper and Forest Products Analyst [21]

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Okay. And Charles, can you update us what's your thinking on OCC for the balance of 2019?

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Charles Malo, Cascades Inc. - President & COO of Containerboard Packaging Group [22]

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I will let that question to Luc for the OCC.

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Luc Langevin, Cascades Inc. - President & COO of the Cascades Specialty Products Group [23]

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Hamir, the market now is pretty much the same it was since the beginning of the year. Meaning by this, we have very high supply, way above the demand, so we don't see any significant change in the price of OCC for the rest of the year with the current conditions that prevail.

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Operator [24]

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Your next question comes from the line of Sean Steuart from TD Securities.

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Sean Steuart, TD Securities Equity Research - Research Analyst [25]

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Congratulations on the better results. First question on Tissue. The 5% sequential improvement in price realizations, how much of that was the various second half of 2018 price increase initiatives? And how much of it was a better mix with higher integration rates and lower percentage of parent rolls? And following on that, how should we think about price realizations trending into the second, third quarters of the year?

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Charles Malo, Cascades Inc. - President & COO of Containerboard Packaging Group [26]

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It's tough to evaluate precisely, but I think it's probably half-and-half.

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Sean Steuart, TD Securities Equity Research - Research Analyst [27]

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Okay. And then beyond the away-from-home hike in June, can you just give us a rundown of where things stand for price increases on the retail side?

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Charles Malo, Cascades Inc. - President & COO of Containerboard Packaging Group [28]

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Well, the announcement was on away-from-home, June 1. And there is no -- as of today, there's no new price increase on the Consumer Product side.

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Sean Steuart, TD Securities Equity Research - Research Analyst [29]

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But I guess from the previous price increases, are those fully baked into the Q1 realizations? Or would you expect some follow-through in the second quarter?

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Charles Malo, Cascades Inc. - President & COO of Containerboard Packaging Group [30]

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There is still some follow-through to come in Q2.

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Sean Steuart, TD Securities Equity Research - Research Analyst [31]

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Okay. And second question on Bear Island. And I appreciate you'll have more to say in a few months probably. The initial budget that you gave to everyone, I suppose it was last July, in light of steel cost inflation, presumably just a lot of general capital cost inflation, are you still comfortable with that budget for the project going ahead?

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Mario Plourde, Cascades Inc. - President, CEO & Non-Independent Director [32]

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Yes. At this point, we're still in line. As we said, at that point, we went with the high-level budget that we presented, but we did give ourself some margin of maneuver in the amount that we said. So we're still in line with what we presented.

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Operator [33]

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Your next question comes from the line of Zachary Evershed from National Bank Financial.

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Zachary Evershed, National Bank Financial, Inc., Research Division - Associate [34]

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Great quarter, guys. Luc, with OCC cost (inaudible) maybe you could talk about how you view the specialty recovery segment's break-even point? And how or whether you plan to manage collection curtailment?

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Luc Langevin, Cascades Inc. - President & COO of the Cascades Specialty Products Group [35]

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Well, first of all, the price of OCC is actually very low, but the entire industry of recovery now is reviewing that the business practices and roles that are used to govern the industry. So what we see now in the Cascade is no different than the rest of the industry. It's that people are coming with service fee, surcharge to the generator for the service they provide.

So the revenues that are not coming from the selling of the OCC or the fiber will obviously have to come from somebody else, and that's going to be the generator. We need to understand that if this product is not going to the recovery facility, it's going to the landfill and there will be a charge. And in certain states and provinces, it's actually forbidden to send OCC to the landfill.

So it's -- what's going on now is a different way of approaching the business. Obviously, it's fairly recent because as you understand, we have seen -- we have observed a 40% decrease in pricing since the beginning of the year, so the industry now is making the right moves.

And so our objective is to get back to profitability with our recovery operation and the packaging segment is doing well, and we're getting into favorable quarters. So I would think that by probably the third quarter, we're going to be back on track with recovery. It's going to take a quarter to implement what we have to implement at least.

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Zachary Evershed, National Bank Financial, Inc., Research Division - Associate [36]

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That's helpful. And with OCC costs as low as they are, are you seeing pressure from customers looking for discounts versus, say, virgin linerboard prices?

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Jean-David Tardif, Cascades Inc. - President & COO of Tissue Group [37]

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We have in our product and we've been mentioning that the product that we have is a high-quality product. So right now, we're selling a product with the same characteristic almost as virgin. So we're still (inaudible) ourself for the characteristic that we're selling.

The article -- the second article that came -- or published did mention that there are right now spot deals. That there are some recycles that are being sold at different levels. But as we speak, we have long-term relation with our customers, and we're providing the service and the quality. So at this time, we're selling our high-value product on the market. So we're not seeing higher pressure for one type or the other product, as we speak.

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Zachary Evershed, National Bank Financial, Inc., Research Division - Associate [38]

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Thanks very much for clarifying. Last one for me. Given your reiterated capital expenditure budget, maybe you could talk a little bit about your other capital allocation priorities versus the NCIB and debt repayment?

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Allan Hogg, Cascades Inc. - VP & CFO [39]

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Well, as we always said, we always aim to have the free cash flow remaining after CapEx to reduce debt or to do some tuck-in acquisition as we did last year. So that debt is the priority along with our capital plan.

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Operator [40]

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Your next question comes from the line of Paul Quinn from RBC Capital Markets.

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Paul C. Quinn, RBC Capital Markets, LLC, Research Division - Analyst [41]

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Sorry if I repeat some questions here. I'm bouncing around, it's been a busy morning. But just decent turnaround in Tissue. Just wondering if the operational issues are behind you, or how you characterize that?

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Jean-David Tardif, Cascades Inc. - President & COO of Tissue Group [42]

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There's still some for sure that we need to challenge and work on, but we've made some changes in management in quite a few places and in the group. And we're really positive about the trend, right now and what's being accomplished, as we speak. But there's still for sure some challenge to overcome.

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Paul C. Quinn, RBC Capital Markets, LLC, Research Division - Analyst [43]

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Okay. And then just slipping over to Containerboard here. We've got a couple of the major guys taking market-related downtime and some of it's significant right now. Are you guys able to run -- just because you're a smaller percentage of the market, are you able to run flat through any kind of weakness going forward here?

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Jean-David Tardif, Cascades Inc. - President & COO of Tissue Group [44]

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We have -- we are seeing, like the rest of the industry, a slower pickup for seasonal demand. So we have in the second quarter [of the] month of April, we have taken some downtime about 3,000 tons as we speak. So we will make the decision -- the necessary decision to balance our inventory level and also our demand as we go. So we are seeing a slower demand or pickup -- seasonal demand like the rest of the market is seeing right now.

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Paul C. Quinn, RBC Capital Markets, LLC, Research Division - Analyst [45]

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Okay. So you're basically following the market trend?

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Charles Malo, Cascades Inc. - President & COO of Containerboard Packaging Group [46]

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We're managing -- yes, we're managing our own inventory levels and our demand. So yes, we are seeing about the same trend as the rest of the industry.

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Paul C. Quinn, RBC Capital Markets, LLC, Research Division - Analyst [47]

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Okay. And then just maybe a question to Luc on the recovery side. Yes, my understanding is that the recovery industry is really changing here. What is best practices that you guys see? Is that -- I mean, obviously in D.C. here we've got a different model than you've got in Quebec, and it seems to change by province and I have no idea what happens in the States. So maybe you could just outline what you'd like to see and whether we're moving towards that.

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Luc Langevin, Cascades Inc. - President & COO of the Cascades Specialty Products Group [48]

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Well, we benefited for numbers of years from the fact that a lot of the recovered material was going to Asia, and no significant effort in quality was done to improve the quality of what is collected and what is recovered.

I think the best practices that will have to be implemented is the effort of all the parties in the supply chain to improve quality. And because there is so much we can do -- could be done at the sorting, but the -- each individual, each citizen will have to do his part to improve the efficiency of the supply chain and encourage the recovery of the material.

Cascade is a company that has been promoting sustainability. We still believe that's the way to go. We can adjust spoil material that is readily available. We will encourage recovery. And as the corporate citizen, we're going to help. I know there are discussions with different part of government and associations, and we will be participating to this discussion to improve the efficiency of the supply chain. I think that's the biggest challenge we have in front of us.

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Operator [49]

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(Operator Instructions) Your next question comes from the line of Mark Wilde from Bank of Montreal.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [50]

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Yes, just wanted to come back to a couple of things. One on the OCC side. Do you guys have a ballpark estimate for what it costs to recover and process OCC?

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Luc Langevin, Cascades Inc. - President & COO of the Cascades Specialty Products Group [51]

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It's very difficult to say that because it really depends on where you pick up the material. Obviously, if you go and get the full truckloads of OCC in the back of a D.C. center, the price of the handling the material will be very low. If you have to pick up 2 bales in the back of a retailer, it's another cost.

And that's exactly the things we're looking at now, is trying to improve the logistics of all linked material, reviewing the [raw thing], putting in place some business rules about minimum quantity, frequency of pickup, so we can reduce that cost of collecting the material. But it can vary significantly from $10 to $55, $60 a ton to handle that.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [52]

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Okay. And I'm just curious, are you seeing any reduction in collection because of the way prices dropped?

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Luc Langevin, Cascades Inc. - President & COO of the Cascades Specialty Products Group [53]

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Not yet.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [54]

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Or the fact that [tipping rates] at a landfill are so high, is that kind of continuing to push stuff into the recycling stream?

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Luc Langevin, Cascades Inc. - President & COO of the Cascades Specialty Products Group [55]

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Well. I think there's a part of that (inaudible) which we send it to the landfill. A lot of companies also have sustainable program -- a sustainability program in their company, so they cannot just throw these recovered material in the -- at the landfill. And I think it's a little bit early now. But we haven't seen any significant drop yet on the volume we collect. Actually, the supply has been very good in recent month.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [56]

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Yes. And does this create like an opportunity for you right now as you think about Bear Island. I mean, you're in the middle of a big population center there near Washington, D.C., very close to Richmond. Would you be able to get some kind of favorable terms on kind of long-term offtake agreements from municipalities that are trying to figure out what they're going to do with all this waste?

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Luc Langevin, Cascades Inc. - President & COO of the Cascades Specialty Products Group [57]

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Yes. You're about right. I think -- thanks to the infrastructure that Cascade has in place. We think we could -- we will be opportunistic in the current difficult market condition. And yes, we think it's a plus for Cascade, overall, if we do the right things.

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Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [58]

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And I just finally, on this with recycling at Bear Island. Any thoughts about fiber mix? Because it seems like a lot of companies in the Containerboard industry, and I think about Pratt or maybe Kruger up at Three Rivers are using more and more mixed waste in the fiber mix. And is that part of your game plan at Bear Island?

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Mario Plourde, Cascades Inc. - President, CEO & Non-Independent Director [59]

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So it's a very good question. Thank you. Part of our planning right now is, we did send a team to visit a lot of paper mills. There is a new -- we had the luxury of starting our stock prep from scratch. As you know, we will have to add this up to the project. So in the planning, we have an option to maximize the use of different grades. So this is one of the big advantage of this project.

Long term, is we were going to have the flexibility to run with a lot higher mixed ways than what we're using right now in some of our older facilities due to the fact that we're in the design mode right now and we can use the new design to -- for the future.

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Operator [60]

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Your next question comes from the line of Hanbo Xiao from Desjardins.

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Hanbo Xiao, Desjardins Securities Inc., Research Division - Associate Analyst [61]

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It's Hanbo on for Keith. First on, just -- on a high level, wanted to get your thoughts on what's the potential impact from tariffs and the ongoing trade wars between the U.S. and China. What that -- how that impacts your business on a high level?

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Mario Plourde, Cascades Inc. - President, CEO & Non-Independent Director [62]

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Well, so far the only area where we see impact is when we're acquiring equipment coming from overseas. So obviously, this has put pressure on the cost of the equipment we acquired because steel is not or aluminum is not made in North America. For the rest of the business (inaudible) and we have plants in Canada and the U.S. and we're quite balanced in the volume we trade between the 2. So it has a minimal impact on our trading with the U.S. It's mostly with the equipment we acquire from abroad.

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Hanbo Xiao, Desjardins Securities Inc., Research Division - Associate Analyst [63]

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Okay. And just on the Containerboard outlook for second quarter '19, you're guiding for higher volumes year-over-year in 2Q. Just given the reduction in capacity utilization across the industry, what gives you confidence in that volume that increase year-over-year?

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Mario Plourde, Cascades Inc. - President, CEO & Non-Independent Director [64]

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We have 2 reasons to give you. First of all, our converting or internal demand trend that we're seeing right now. And also as I mentioned, we're seeing a bit delay in the seasonal pickup. So that's why we're seeing like this. And in addition, also, as you know, we have our new facility that we have in New Jersey, which is going to bring some better input for us. But we're cautiously on the uptake. So we did put the arrow up, but it's cautiously up.

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Operator [65]

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There are no further questions at this time. Mr. Plourde, I turn the call back to over to you.

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Mario Plourde, Cascades Inc. - President, CEO & Non-Independent Director [66]

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Thank you, operator. Thank you, everyone, for making the calls, and looking forward to meet you on the Q2 results. Thank you very much. Have a good day.

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Operator [67]

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(foreign language) Ladies and gentlemen, this concludes today's conference call. You may now disconnect.