Cascades Q2: The Mills Got Busier, but a 5% EBITDA Tariff Hit Is the Real Test

Q2 demand looks real, but the tariff hit changes the next test

Bottom line: Cascades showed a genuine operating rebound in Q2, but the stock now has to answer a harder question-can it preserve that improvement after Washington introduced a tariff hit of up to 5% of adjusted EBITDA?

The quarter shows better volumes and margins

On the surface, this looks like a business seeing more customer activity. Q2 sales reached CAD 1,219 million, operating income improved to CAD 58 million, and adjusted EBITDA rose to CAD 140 million. In packaging, the improvement was broad enough to see in operations, not just in headline numbers: shipments were up 9% sequentially, packaging EBITDA reached CAD 120 million, and the segment margin hit 15.5%.

Why bulls see a credible recovery

Bulls have a straightforward case. Management pointed to solid production and demand across the paper mill network, progress in onboarding new customers, and a business that now expects an annualized Adjusted EBITDA run rate above CAD 600 million in the second half of 2026. Put together, that suggests stronger usage, better pricing, and a platform that is regaining relevance rather than leaning on financial engineering.

Why bears still have a clean objection

Bears have one clear objection: the new U.S. tariff backdrop could affect certain tissue and packaging exports and could reduce adjusted EBITDA run rate by up to 5% after mitigation. That matters because Cascades does not need a perfect backdrop; it needs more stable margins.

So the call is simple: volume and pricing are improving, but policy risk is now the line in the sand.

Packaging is the clearest strength; tissue still has room to improve

Packaging activity is easy to verify

This is the part of the story you can test most confidently. Cascades posted record production at Greenback and Bear Island, with Bear Island operating at 95% of total capacity. In a mill business, that is as close as you get to a real-world demand check. Full mills usually mean real orders, not accounting polish.

The share-gain signal matters too. Comparable box shipments increased 5.8% year-over-year versus industry growth of 2.4%. That is a useful signal that Cascades is doing more than riding a firmer market; it is taking more than the category average.

Tissue is improving, but costs still matter

Tissue is getting better, not fixed. Tissue EBITDA increased 6% to CAD 35 million, so the direction is right. But the margin is still modest, which suggests costs continue to absorb much of the gain.

That is the clean split in the report. Packaging looks like a business with real traffic and share gains. Tissue is improving, but it still has more to prove.

Balance sheet looks sturdy enough to buy time

Liquidity is comfortable, but leverage is not trivial

Packaging can be as busy as it wants; the real question is whether the balance sheet can absorb tariff noise without derailing the recovery.

As of late August, Cascades carried net debt of $1,879 million and a net debt to EBITDA ratio of 3.3x, against $737 million available under its credit facility. That is strong enough to weather a messy quarter or two, but not strong enough to treat cost pressure lightly.

What matters next for financial flexibility

The reason that matters now is cost inflation and spending. Management said recycled fiber prices increasing over 10% sequentially and hardwood pulp/eucalyptus costs rising by as much as 15% are pressuring inputs, while 2026 capex is still targeted at a range of $150 million to $175 million. If demand softens in tariff-sensitive accounts while raw-material costs stay firm, the company still needs to fund the asset base without making leverage worse.

Watchlist

• If net debt stops drifting lower or leverage ticks up while tariffs bite, the recovery may be less durable than management hopes.
• If liquidity stays comfortable and capex remains disciplined, the balance sheet can do its job: buy time for the operating improvement to mature.

Pricing helps the case, but timing is the problem

The price increase is specific and potentially useful

Management did not just point to firmer markets in general. It cited new packaging price increases of CAD 110 per ton for linerboard and white paper and CAD 140 per ton for medium. Those increases are expected to start benefiting results in Q4, so investors are being asked to wait one more quarter before seeing whether pricing can outrun the noise.

The tariff overhang still matters most

The problem is timing. The tariff hit management flagged is up to 5% of Adjusted EBITDA run rate after mitigation, and it may also be accompanied by weaker demand among tariff-exposed customers. That is not a small rounding error. For a business that needs margin stability, it changes the debate.

So the real question is no longer whether demand improved. It is whether pricing bought enough time before policy and input costs started squeezing the spread again.

What would improve or weaken the setup

This still looks like a watch-now, buy-on-proof situation. The operating floor is improving: record production at Greenback and Bear Island, consolidated results to improve sequentially in Q3, and management's confidence in an annualized Adjusted EBITDA run rate above CAD 600 million in the second half of 2026. That is enough to keep Cascades on the screen, but not enough to chase blindly while the tariff impact and tissue story are still working themselves out.

What would make the setup better

• If Q3 confirms the expected sequential improvement, investors get evidence that the recovery is not a one-quarter move.
• If Q4 starts reflecting the packaging price increases, the story shifts from busier mills to better economics.
• If tissue keeps improving without a perfect backdrop, the business becomes easier to underwrite.

What would make it worse

• If the tariff impact lands closer to the company's upper estimate, the spread gets squeezed before pricing has fully contributed.
• If input-cost inflation stays elevated, Cascades will have less room to absorb the hit.

What would weaken the thesis

• Mill activity slips back after record production at Greenback and Bear Island.
• Pricing fails to stick or tariff mitigation proves less effective than expected.
• Tissue remains a drag for longer than implied by its current sequential improvement.

Verdict: keep Cascades in view, but wait for the next quarters to confirm that pricing and tariff mitigation can hold up.