Cascades' (CADNF) CEO Mario Plourde on Q2 2016 Results - Earnings Call Transcript

| About: Cascades Inc. (CADNF)

Cascades Inc (OTCPK:CADNF) Q2 2016 Earnings Conference Call August 5, 2016 10:00 AM ET

Executives

Jennifer Egan - Director, IR

Mario Plourde - President, CEO

Allan Hogg - VP, CFO

Charles Malo - President, COO, Containerboard Group

Luc Langevin - President, COO, Cascades Specialty Products Group

Jean Jobin - President, COO, Cascades Tissue Group

Analysts

Hamir Patel - CIBC Capital

Leon Aghazarian - National Bank Financial

Bill Hoffman - RBC Capital Markets

Sean Steuart - TD Securities

Operator

[Foreign Language]

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 Cascades Second Quarter 2016 Financial Results Conference Call. All lines are currently in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session.

I will now pass the call to Jennifer Egan, Director of Investor Relations for Cascades. Ms. Egan, you may begin.

Jennifer Egan

Thank you, operator. Good morning everyone and thank you for joining our 2016 second quarter conference call. During our call today, you will hear from Mario Plourde, our President and CEO; Allan Hogg, our CFO; Charles Malo, President and COO of our Containerboard Packaging Group; Luc Langevin, President and COO of our Specialty Products Group; and Jean Jobin, President and COO of our Tissue Papers Group. Mario will then discuss results from our Boxboard Europe Group followed by his concluding remarks, after which we will begin the question period.

Before I turn the call over to my colleagues, please note that the quarterly results of Reno De Medici were released on July 28 and can be reviewed on Reno's website. Also during this call, certain statements 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. 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 this session.

I will now turn the call over to our CEO, Mario.

Mario Plourde

Thank you, Jennifer, and good morning everyone. We continue to improve our results for the second quarter of 2016. All of our business segments improved their performance both on a sequential and year-over-year basis, with the one exception being Europe.

When we exclude specific items, we generated a consolidated EBITDA of $112 million, a 9% increase compared to last year. Our second quarter earnings per share of $0.38, which again excludes specific item, represent a 50% improvement over 2015 results.

Shipments were marginally lower compared to last year due to a reduction of 19,000 ton in Europe, the effect of which were mostly offset by the increased volume in North America operation.

On a sequential basis, EBITDA increased by $6 million to $112 million, which translate into a margin of 11.2% for the quarter while the fare [ph] slightly decreased by $5 million. The year-over-year increase in EBITDA was largely driven by the strong performance of our Tissue Paper Group which increased its EBITDA contribution by 70%.

In addition our Containerboard Packaging and Specialty Product Groups successfully increased our EBITDA by 9% and 14% respectively. While result in Europe were slightly weaker due to the lower sales.

We made important announcement regarding our strategic initiative this quarter. The first was in our Containerboard Packaging Group which successfully acquired a corrugated packaging plant in Connecticut. Their move strengthened our position in the Northeast United States by increasing our converting capacity, while also providing us with the platform to execute our longer term strategy of upgrading our asset base and growing our presence in this area.

Our Tissue Product Group also announced plans to build a new converting plant in Oregon that will house state-of-the-art converting line slate to begin operation -- operating at the end of the first quarter of next year.

This new facility will be integrated with our nearby tissue plants providing secure offtake of this operation and increase our overall integration rate in tissue.

On the KPI front, our capacity utilization rate is lower than the previous quarter due to lower manufacturing shipments mainly from European operation. Higher converting shipment offset this decrease.

Looking at raw material cost, the index for brown paper grades increase on both an annual and sequential basis, while the white fiber price index decreased year-over-year.

I will not let my colleague provide you more specific and detailed information, starting with Allan and I will be back later on to discuss the European operation and the outlook. Allan?

Allan Hogg

Thank you, Mario, and good morning everyone. I will refer to slide deck can be accessed on our website.

So, I'll start with -- on slide 11 and 12. So, on a year-over-year basis, second quarter sales increased 5% to almost $1 million, driven by a combination of a favorable exchange rate and higher average selling prices in our Containerboard Packaging segment, which were partially offset by lower volume in Europe.

Sequentially, sales remained stable on a consolidated basis, while the Tissue Group benefited from higher volume, which were partly offset by lower average selling prices. Our Boxboard Europe was negatively impacted by lower demand.

Despite the strengthening of the Canadian dollar which had a negative impact on all of our groups, Containerboard Packaging and Specialty Product sales also improved during the quarter.

As highlighted on slide 13, our Q2 EBITDA of $112 million was up 9% compared to last year, a result of positive effects coming from higher average selling prices, lower energy costs, and favorable exchange rates. Partially offsetting these effects were higher corporate costs.

Sequentially on slide 14 and as Mario mentioned our second quarter EBITDA increased by 6 million driven by higher volume and lower energy costs. However, lower average selling prices resulting from an unfavorable sales mix in our Tissue segments and higher corporate cost negatively impacted our quarterly results compared to Q1.

A word on our corporate costs, which are showing an important year-over-year and sequential increase. These variations include share based compensation expenses, losses on forward exchange contracts, and costs related to the implementation and startup of different shared service activities and our ERP platform. Also in 2016, our results included an insurance revenue of $2 million related to prior period events.

Slide 15 and 16 of the presentation illustrate the volumes of our Q2 EPS and the details of the specific items that affected our quarterly results, both on a year-over-year and sequential basis.

Compared to last year our second quarter EPS excluding specific items increased to $0.38 compared to $0.25. This reflects improved operating results in addition to lower interest expense, increased contributions from our JVs investments and lower non-controlling interest.

Slide 17 of the presentation illustrate that we have some specific items in the quarter. We recorded unrealized gains on financial instruments and a gain on the sale of equipment and customer lease of our Auburn mill facility that was closed early in July.

We also incurred restructuring and impairment charge in relation to the closure of the Auburn plant and some converting activities in Tissue. We also incurred costs related to the reorganization of our European operations.

All-in-all as shown on slide 18, specific items had an impact of 1 million on net earnings during the quarter.

On slide 19, cash flow from operations showed a solid progression and amounted to $116 million during the second quarter of 2016. Capital expenditures including capital lease payments totaled $53 million in Q2 and our free cash flow amounted to $59 million during the quarter.

Looking at the reconciliation of our debt, as I just mentioned, cash flow from operations were strong during the quarter and were partly used for CapEx payments and usual little working capital investments required during this time of the year.

Also following its refinancing, Greenpac make payments totaling $10 million to Cascades relating to a bridge loan and management fee.

Continuing to slide 21 of the presentation, we also highlight relevant credit ratios as of June 30th. To this end, we are pleased to report that we have continued to deliver on our commitment to improve our net debt to EBITDA multiple which decreased from 3.8 to 3.6 times at the end of June. I would also note that total available funds on our revolving credit facility currently stands at over 500 million even after our July interest payments.

Moving onto slide 22, we detail our quarterly EBITDA margin and leverage ratio when taking into account the consolidation of our partly-owned subsidiaries and joint ventures and associates on a proportionate basis.

Last, but not least, on slide 23; we have also included for the first time some financial information on Greenpac. These are the full numbers of Greenpac and not only our proportionate share.

So, I thank you for attention, I will now pass the call to Charles to discuss the results of our Containerboard Packaging Group.

Charles Malo

Good morning everyone and thank you, Allan. During the second quarter of 2016, the Containerboard Packaging Group shipments reached 284,000 short-term -- tons which represent a 3% sequential increase. The higher volume for Q2 largely steams [ph] from increased converting activities with shipments up 7% sequentially.

This performance was in line with the 7% increase in the Canadian market and outperformed the 5% increase seen in the U.S. market. Our manufacturing sector operating rate remained stable at 93%.

External paper shipments decreased by 3% in Q2, while our integration rate with our 100% [ph] owned box plant increased by 1% to 52% during the second quarter. Including paper sold to our associated company, our second quarter integration rate increased to 69% from 64% in the previous quarter.

On the pricing front, our average selling price decreased by $11 per ton on a sequential basis. Our result benefited from a favorable product mix during the quarter with sales of Corrugated Product 2% higher than sales of paper rolls. Our Canadian selling price was impacted by 7% or $0.09 increase in the Canadian dollar compared Q1.

Accordingly, our average Containerboard Canadian selling price decreased by 8% while our Corrugated Product selling price decreased by marginal 1%, following the price increase announced at the end of February 2016.

When excluding the impact of foreign exchange, our average selling price increased by 6% when including the impact of the more favorable product mix.

With regards to profitability, the Containerboard Group generated an EBITDA of $60 million during the second quarter 2016. This represents a 9% or 5 million increase on a sequential and year-over-year.

As a percentage of sales the Container Group generated solid Q2 EBITDA margin of 17%. Our improved results were driven by higher average selling price excluding the impact of foreign exchange and a 7,000 ton increase in shipment with respect to -- respectively added 5 million and 2 million to Q2 results.

Similarly lower Energy administration cost contributed an addition of $1 million to EBITDA during the three months. Partially offsetting these benefits were $1 million increase in raw material costs and a negative $2 million net impact on a result -- as a result of foreign exchange variation.

On May 31st, we announced the acquisition of the converting asset located in Newton Connecticut from U.S. based Rand-Whitney in exchange for some of our Thompson Connecticut facility assets. This transaction will have optimized our U.S. Northeast region and is in line with the strategy we employ in recent years to our operation in Ontario and Quebec. This acquisition had no impact in our second quarter results as the transition only began in June.

With regard to the short-term outlook, we expect demand in the third quarter to improve as a result of normal seasonal demand variation. Despite the increase in value of Canadian dollars in recent weeks, we expect our results to continue to benefit from the overall weakness of the Canadian dollar.

Finally, a word on the performance of the Greenpac Mill. During the second quarter of 2016, Greenpac produced 119,000 short ton of linerboard. Notably Cascade proportional share of Greenpac's net earnings excluding specific items decreased to $3 million or $0.03 per share during Q2 from $4 million or $0.04 per share in the previous quarter.

This shortfall is mainly explained by lower selling price and higher raw material cost. The Greenpac x-degrades now represents over 82% of the total production of the mill, up from 35% in Q1, an indication of the positive market reception for this value-added product.

We were very pleased that we successful refinanced the Greenpac debt in Q2. The terms of the new deal cut our interest rate by 50% and restructures the payment schedule with the final payments is 5% at the end of five-year term.

Accordingly, this gives Greenpac more financial flexibility during time of unfavorable market conditions or to pay dividends to its shareholders.

Thank you for your attention. I will now ask to Mario to provide you with some overview of the Boxboard activities in Europe. Mario?

Mario Plourde

Thank you, Charles. The first half of the year has seen another inflow trend in Europe that is below last year, both in recycled and virgin [ph] board markets. In Canadian dollars, sales increased by 5 million to 197 million in the second quarter. This was the result of several factors.

Firstly shipment were down by 7% or 19,000 ton, primarily as a result of a 13-day stop at our German mills to permit the rebuilding of the portion of the board machine and a quality issue of one of our Italian mills. And secondly, our average price decreased by €12 due to a higher volume of oversea sales and the impact of the currency in the U.K. markets.

Second quarter EBITDA decreased by $2 million compared to last year and total $17 million for the three months period with the decrease primarily due to the lower sales. We completed the reorganization of our European structures during the second quarter with the transfer of the [Indiscernible] virgin board mills to renew the [Indiscernible]. This added $2 million impact on our financial statement, but no impact on our balance sheet since both were fully consolidated prior to this transaction.

Looking ahead and certainty is prevailing following the recent events in many parts of Europe. Order inflow level remains lower than last year, level of recycled fiber prices are currently slightly higher due to export activity. And lastly, on a positive note, I'm pleased to report that our recruitment process to find a new CEO is going well.

I thank you and now will ask Luc to provide you with the overviews and performance of the Specialty Products Group. Luc?

Luc Langevin

Thank you, Mario. Good morning, everyone. I'm pleased to report the Specialty Products Group improved its year-over-year results for fourth consecutive quarter.

Sales increased in all business segments during the quarter to reach $157 million, representing a 5% sequential increase over the $149 million generated in Q1. This improvement is essentially due to higher shipments in all segments, the benefit of which were only partially offset by a less favorable exchange rate during the quarter.

We completed our quarter with an EBITDA of $60 [ph] million, up 14% compared to Q1. Despite the negative exchange rate, impact on our P&L, our results improved thanks to higher volumes and to the large extent to the typical, favorable seasonality in our business. These improved results also represent a 14% increase compared to the same quarter last year.

On June 22nd, we announced the permanent shutdown of our de-inked mill in Auburn, Maine. This facility has been negatively impacted by the rapid erosion of the printing and lighting paper market and the overall deterioration of market conditions for the ink part.

Production at the mill seized on July 3rd, most of the equipment has been sold and is currently being dismantled and the building and land will be put for sale.

Looking more specifically, at our soft segment, EBITDA of our Industrial Packaging segment was in line with the first quarter. Higher volumes were offset by an unfavorable exchange rate and a less favorable product mix during the quarter.

The EBITDA of our consumer products packaging segment remained steady. Higher seasonal demand and better productivity helped to overcome a less favorable exchange rate and higher fixed cost during the quarter.

Finally, the EBITDA of the recovery and recycling segment improved by $2 million over the previous quarter. We benefited from higher recycle paper generation during the period and improved spreads due to a slight improvement in market conditions. Our production costs also benefited from higher activity.

Looking forward, we remain positive for the near future with stable market conditions in our industrial and consumer products packaging segment, thanks in part to higher seasonal demand.

Our recovery segment is expected to continue to benefit from recent spread widening and we do not expect significant variation in currency or risen prices.

Thank you for your attention. I will now ask Jean to present the result of the Tissue Papers Group.

Jean Jobin

Thank you, Luc. Good morning everyone. I'm pleased to report that Tissue Group delivered good second quarter 2016 results, the fifth quarter in a row that we have successfully improved our performance on a year-over-year basis.

Q2 EBITDA was $39 million or 12.3% on a margin basis, which represents a significant improvement compared to the same period last year when we generated a margin of 7.8% on an EBITDA of $23 million.

On a sequential basis, Q2 results were 17% above Q1 EBITDA of $34 million and corresponding margin of 10.5%. The traditionally positive seasonal market variability contributed to our solid second quarter results. The summer season started strong and our consolidated shipments increased 10% above the first quarter of the year.

More specifically, parent roll shipment increased 23% and are converted product shipment increased 6%, reflecting typical strong customer demand seasonality. Moreover, we generated a new record this quarter in terms of shipment in June; a very positive indication as we enter what is the highest customer demand season.

In terms of pricing, our average second quarter selling price decreased 8% on a sequential basis largely due to the strength of the Canadian dollar and a combination of parent roll market price reduction and a lower proportion of converted products sold during the current quarter.

These impacts were partially offset by the Canadian market price increase that was fully realized by the end of the quarter. The combination of higher shipment partially offset by the lower average selling price just discussed translated into a 1% sales increase on a sequential basis.

On an operational basis, we continue to improve our productivity during the second quarter, most notably in our three most recent major investments in [Indiscernible] Wagram and Oregon.

Our energy costs remained low in the second quarter, while recycle fiber costs increased slightly compared to the first quarter. Our inventory level has started to decrease which is a normal trend for this time of the year. Finally, we are moving forward nicely, we are West Coast project that we announced on June 16th, and I'm pleased to note that we broke ground at the end of the quarter.

Looking ahead, we are anticipating a good third quarter thanks to the current positive volume trends experience in the first half of the summer season and our improved operational efficiencies.

Thank you. I will now turn back the call to Mario for the conclusion. Mario?

Mario Plourde

Thank you, Jean. Our team continued to implement their plan to improve their efficiencies. We expect this effort to translate into a good operational performance through the end of 2016, even if we anticipate that our results will be impacted by the recent price increases in the cost of recycled fiber and the seasonal impact on volume in the fourth quarter. Also, we continue to expect our Packaging Group to deliver a good performance through the third quarter, which is a seasonally strong period for these operations.

In regard to our Tissue Group, we anticipate that sales effort and cost reduction initiative would translate into a solid performance through the seasonally strong third quarter.

In Europe, we expect market conditions to remain soft and order intake to continue to lag last year level. The recycle paper market continued to experience strong demand in North America mainly due to the export activity and we are expecting some small residual price increases in the brown grades to take place during Q3 as a result of the Q2 index price increase.

Demand for white grades remains good and with the material generation being soft we may also experience a small price increases. However, we continue to be able to successfully fulfill all of our material input need and our team remained focused in establishing and negotiating favorable terms with all of our supplier.

That being said, we do not expect to match the record performance achieved in the third quarter last year, but we will continue to carefully manage our financial situation in order to direct a significant portion of our free cash flow to debt reduction, which is normally the case in the second half of the year.

I will now open the line for questions. Operator?

Question-and-Answer Session

Operator

[Foreign Language]

Thank you. [Operator Instructions]

Your first question comes from the line of Hamir Patel from CIBC. Please go ahead.

Hamir Patel

Hi, good morning. I have a couple questions on our Containerboard side, your realizations that you listed in U.S. dollar terms it look like they were flattish year-over-year and that seems surprisingly strong to me just when I kind of compare against some of the other U.S. peers that have reported results? And then also the recent benchmarks, just trying to understand what has driven that price outperformance?

I mean I realized the integration rates increased a bit over the period, but it doesn't look like its dramatically different and it looks like you're pointing to stable prices in Q3, so just curious if you have any thoughts on what's driven that pricing outperformance?

Charles Malo

Well two -- maybe two comments on that, this is Charles Malo speaking. The volumes certainly with a contributor to our result and also our Canadian sales performed because we were able that we spoke in the past that we announced a price increase in our converted product, which helped the overall average selling price for group.

Hamir Patel

Right. Okay, that’s helpful. And I appreciate the increased disclosure on Greenpac. I kind of I went back into the pricing of that specific mill, it looks like it's been tracking a bit lower than that some of the recycled figures that get quoted in the Pulp and Paper Week, but the at the same time of the cost has been bit lower than I was expecting. With XP becomes a bigger proportion of the mill, do you think there is an opportunity to actually raise the price of -- that you've been charging to XP relative to the regular recycled product?

Charles Malo

Okay. I'm not going to comment on the specific on the pricing for the mill, but there is two things I can add, our intent is to keep promoting our high value because XP is a high value recycle grade and that’s how it's been promoted on the market.

We still have room by the way to increase that the output of the mill because we're not a capacity, still have some work to do on the efficiency and again, further improve our cost structure. But the -- there is some room to improve the quantity and also the acceptance on the market.

Hamir Patel

Fair enough. Thanks. That's helpful. And where do you see that XP mix sort of stabilizing at?

Charles Malo

We're right now between 80% and 82%, so right now achieved 82% for the last quarter and we have an objective overall and trying to be around 85% of the output.

Hamir Patel

Okay. Thanks. I just had a one final question on the Tissue business. Jean you referenced I guess high [Indiscernible] by the end Q3 and I think on the prior conference call, it look like it was going to come in at around 5%, just curious what the scale of the hike ended up being when it got fully implemented?

Jean Jobin

The Canadian increase pricing, remember it was -- okay, yes, so we had announced if you remember two different price increases in Canada. One of the away-from-home was 5% in the beginning of June and in the consumer product market, we have also announced a price increase that was going between 5% and 6.5% depending of the audited the channel in the carry-go we were having.

So, both of them away-from-home. As you know it's longer to implement and it takes hey very often six to nine months, but all customer had their increase. So, -- but the contract as soon as the renew -- we renewed the price increase.

And the CP, it's all in place from that late April to late May. So, it's only a part of it is realized during this quarter, but the Q3 will have full impact on the CP side.

Hamir Patel

Okay. And was that CP hike in Canada generally followed by most of the major producers?

Jean Jobin

Honestly, we are mostly in private label, so it's tough to know what they're doing. So, I don't really know what they did on their side.

Hamir Patel

Okay. Fair enough. That's all I had. I'll turn it over. Thanks.

Operator

Your next question comes from the line of Leon Aghazarian from National Bank Financial. Please go ahead.

Leon Aghazarian

Hi, good morning everyone. My first question is regarding the corporate expense, I appreciate the color you provided Allan on the breakdown there. Could you just walk us through little bit what you see is as a normalized run rate going forward, because it seems to me that some of the components -- the share-based comp and some of the other factors there can be there on a recurring basis. I'm just trying to get your sense on what you see as a run rate going forward.

Allan Hogg

Well, shared base comp, a portion of it -- all of it is based on the share price. So if share price continue to fluctuate, it will be up and down. But as we mentioned, may be a few calls ago, we continue to have some cost related to our internal transformation and debt is approximately $3 million to $5 million a quarter of expense, depending on the pace of our activities.

So, Q2 and Q3 are normally a very busy activities a for a distance formation and so, maybe in the -- I would say, if you want to run a model, maybe use $15 million a quarter of negative contribution. So, that's what I can say, but also in there, we have some corporate activity in generating transportation that we do some activities outside of the company. So, that also may bring some additional profitability, but depends.

Leon Aghazarian

That's very helpful. Thank you. My second question is regarding the price of the recycle fiber, I mean as you mentioned there was quite pretty important increases in OCC prices in the quarter. I'm just trying to get your view on what you believe is the main cause of that and what you feel is the outlook? And ultimately the timing of the impact on that for Cascades' business?

Mario Plourde

Well, as you noticed, Q2, it was a little of surprise for us the height of the increase. What drove the increase is mainly in our opinion export market because when we were looking at the activity levels in the market, we're fulfilling all our orders right now. We have no problem whatsoever to find materials. So, it's basically the export driving the increase. The impact will probably be split between Q2 and Q3 for OCC.

And what's our view till the end of the year, honestly, right now, we can fulfill as I said all our orders. So, on this export picks-up, we should not see a major change in Q3 and Q4. And Q4 normally for OCC, its high generation period. So, sometimes we see a decrease in pricing.

Leon Aghazarian

Okay. Fair enough. And the final one from me would be, you mentioned in your outlook portion that your Q3 2016 performance isn’t expected to match record Q3 2015. Can you just give us a quick kind of view as to what do you think the main culprit will be there? I mean is it from the price of the OCC that the major factor there? Or would it read related to the other issues? Thank you.

Mario Plourde

There's mainly two things that will drive that is the European situation right now where we're, as I mentioned, affected by the economic environment. It's not really positive at the moment. So, we're going to be affected by that as we also are will incur all the price reduction that we saw in the Containerboard.

In my view, those are the two main reasons that will not be meeting the 2015 results. So, other than that, orders are remaining strong. The business is going well. So, those two reasons, in my view, will be the main reason.

Leon Aghazarian

Thank you very much.

Operator

Your next question comes from the line of Bill Hoffman from RBC Capital Markets. Please go ahead.

Bill Hoffman

Thanks. Just a quick question on the Tissue side. The project got going on West, can you just tell us what your integration rate you think is going to be on the Tissue side and what might be your ultimate target there?

Jean Jobin

Well, when we will produce at the rhythm that we expect to produce by the end of next year, if we are able to sell all of that, this was increase our overall integration rate for Tissue by 8% to 8.5%.

Bill Hoffman

To what total?

Jean Jobin

To approximately -- normally, at the time of the year, we are at 70% or so, that will increase let's say to 78%, 79% to that level.

Bill Hoffman

Okay. And is that kind of the balance you want to keep in a business?

Jean Jobin

No, we want to go higher than that. My short-term goal is to go at 85% working strong on that and that's why we want to develop the our tissue converting asset.

Bill Hoffman

And would you get there potentially my making acquisitions or are there any assets available to do that?

Jean Jobin

I don't know. We always look at any opportunity, but it's too -- that would be just giving an answer for an answer. So, I don't know at this point. We know we want to build something else in the near future, but in couple years from now, we'll see in the meantime.

Bill Hoffman

Great. Thanks. And then just a sort of broader question. As you approach this net leverage of 3 to 3.5 times, what's sort of the next strategic step? You're focused on moving into a dividend or being more aggressive for acquisitions, or what might be thought?

Allan Hogg

Allan speaking, I think we'll continue to remain discipline. However, we'll -- I believe we'll continue to invest in our portfolio of assets to increase either integration or reduce cost. So that will be to focus even if we get to our targeted level.

But, again, it will give us more flexibility, but do we need to continue to improve our asset base.

Bill Hoffman

Great. Thank you.

Operator

[Operator Instructions]

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

Sean Steuart

Thanks. Good morning everyone. Just one question. The balance sheet is improving pretty quickly here as your earnings base and free cash flow base improves, how do you guys think about the Boralex investment now? I'm thinking not so much from a deleveraging standpoint, but from a valuation arbitrage standpoint, the stocks had a very good run. Any thoughts you can give us on that net investment.

Mario Plourde

I will not give you specific, but what I can say is our patience and in our view was working while and as we always do, we will look at all of our asset and investment and trade to monitor the situation and make the best call to maximize the value for the corporations. But so far, we feel that our patience was worthwhile to hang on to the title.

Sean Steuart

Can't argue that. The rest of my questions have been answered. Thanks guys.

Operator

Your next question comes from the line of Hamir Patel from CIBC Capital. Please go ahead.

Hamir Patel

Thanks. Allan I just had a few follow-ups. Could you update us on your CapEx expectations for 2016 and any thoughts on how that might change in 2017?

Allan Hogg

The CapEx level as we mentioned prior -- before is $185 million, we're in line with this target. We're tracking it regularly. There's no other amount or tactics that would be add or subtraction in that amount. So, we're in line.

Hamir Patel

Okay. And for next year sort of arrow up or arrow down on that?

Allan Hogg

We're not there yet; budget session will be starting sometimes at the end of August, September. So we're not there yet. So, can't comment on that, 2017.

Hamir Patel

Okay. Fair enough. And then just I guess your partners in Greenpac clearly more comfortable now with having worked that financial metrics out there. Do you think there's a potential maybe the next 12 months or so to actually change the structure of that agreement. So, from accounting perspective, you could actually consolidate Greenpac?

Mario Plourde

Now, we're -- at this point, we're happy with information that we're providing to the market and we're not seeing any changes in that. And we're also happy with the partnership that we have with the Greenpac people.

Allan Hogg

So, on the accounting side, there's no expected change to be able to consolidate, no.

Hamir Patel

Okay. Fair enough. That's all I had. Thank you.

Operator

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

Mario Plourde

Thank you very much everyone for being with us this morning and I wish you a very nice summer. Thank you.

Operator

[Foreign Language]

Thank you ladies and gentlemen; this concludes today's conference call. You may now disconnect.

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