Cascades Drops Most in a Year on Spending, Drag From Weak Loonie

  • Paper-packaging maker projects C$185 million in 2016 spending
  • U.S. expansion efforts will constrain cash flow: CIBC analyst

Cascades Inc. headed for the biggest tumble since March 2015 after the Canadian paper-products company forecast a drag this year from foreign-exchange effects and higher capital spending as it expands its box-making operations.

Shares of Cascades, which makes boxes for Corn Flakes and Kraft Dinner, sank as much as 16 percent, and were down 11 percent to C$8.26 at 2:04 p.m. in Toronto, headed for the lowest close in five months. The slide extended declines for Cascades this year to more than 35 percent, on track for the worst since 2008.

The Kingsey Falls, Quebec-based company is projecting higher capital spending in 2016 of C$185 million, compared with C$165 million a year ago, partly due to the stronger U.S. dollar. Net debt at Cascades has also climbed to about C$1.7 billion, including C$359 million related to the cost of converting a lower Canadian dollar into greenbacks, the company said in the slideshow presentation.

“In the containerboard and tissue paper markets, we want to expand our converting operations south of the border,” said Mario Plourde, chief executive officer at Cascades, in the company’s fourth-quarter earnings release.

This expansion means the company’s debt levels will likely increase through 2019, constraining free cash flow as Cascades focuses on spending to expand operations, Hamir Patel, an analyst at CIBC World Markets, said in a March 13 note to clients.

Greenfield Plants

"With stiff competition for acquiring any good box plants that come to market, the more likely scenario for Cascades to achieve its integration goal and preserve its volumes would have to involve building greenfield box plants,” Patel said.

Cascades currently only has capacity to convert about 52 percent of its containerboard into boxes, short of the company’s goal of 80 to 85 percent, he said. The more likely strategy is to build new plants, the analyst said.

Based on the C$26 million Cascades spent on a new converter in Drummondville, Quebec, Patel figures the company needs to add as many as seven new facilities at a cost of more than C$190 million. To pay for this, Patel forecasts annual capital spending of about C$210 million a year for the next three years, reducing free cash flow to C$40 million in next year and C$10 million by 2018. The company said its free cash flow amounted to C$150 million in 2015.

Cascades also provided first-quarter outlook in a roadshow presentation for investors today with negative factors including a potential drop in prices in Europe for recycled boxboard materials.

The company reported fourth-quarter adjusted earnings of 23 Canadian cents a share March 11, short of consensus estimates for 32 cents.

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