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Executives

Kurt Loewen - Chief Financial Officer

Chad Wasilenkoff - Chairman, President and Chief Executive Officer

Axel Wappler - Chief Executive Officer, Security Paper Products Business

Yvon Pelletier - President, Dissolving Pulp Segment

Analysts

Marc Robinson - Cormark Securities Inc.

David Quezada - Raymond James

Mark Kennedy - CIBC World Markets

Fortress Paper Ltd. (FTP.TO) Q2 2013 Earnings Conference Call August 15, 2013 12:00 PM ET

Operator

Good day ladies and gentlemen and welcome to Fortress Paper Limited's Q2 2013 Earnings Conference Call. I would like to introduce Kurt Loewen. Please go ahead.

Kurt Loewen

Thank you, operator and welcome to Fortress' second quarter 2013 conference call. With me today are Chad Wasilenkoff, our Chief Executive Officer; Axel Wappler, the CEO of Landqart; Yvon Pelletier, the President of Dissolving Pulp business and Andre Boucher, the CEO of Fortress Specialty Cellulose.

The agenda today will begin with opening comments from Chad. I’ll then provide a brief summary of our financial results for the second quarter. Axel will then provide an update on operations at Landqart followed by an update on the Dissolving Pulp Segment by Yvon. Chad will then finish followed by questions from the floor.

During the call management may make certain forward-looking statements that reflect the current views and/or expectations of Fortress with respect to its performance business and future events. The forward-looking cautionary note contained in the MD&A is applicable for today’s call.

The Specialty Paper Segment was sold on April 30, 2013 accordingly references on this call to discontinued operations refer to the segment.

During this conference call management will make reference to EBITDA and adjusted net income or loss. For a definition of EBITDA and reconciliation of net income to EBITDA and calculation of adjusted net income please see the management's discussion and analysis available on SEDAR at www.sedar.com.

I will turn it over to the Chad.

Chad Wasilenkoff

Thanks. Welcome to our conference call this morning to update you on our financial results for the second quarter of 2013.

Fortress Paper Limited reported 2013 second quarter EBITDA loss of $4.9 million which includes $3.4 million EBITDA from the Dresden operations.

Net income including discontinued operations was $134.1 million or diluted earnings per share of $9.23. Included in discontinued operations is a $153.3 million gain on the sale of Dresden. Minor improvements in dissolving pulp prices in the prior quarter resulted in slightly higher realized prices reported for the dissolving pulp segment in the second quarter as realizations generally lagged the stock market by several months.

Cost of sales also improved more significantly after the 10 day planned maintenance shut-down in April. Excluding the 10 day planned maintenance shut-down costs of approximately $2.6 million, production costs per tonne have improved significantly compared to the previous quarter.

Improvement at the Security Paper Products Segment has continued from the first quarter to the second quarter of 2013. The mill experienced a second consecutive quarter with sales, volumes and revenues significantly higher relative to any comparative period in 2012 and 2011. The mill continues to seek to improve efficiencies and profitability.

The sale of Dresden mill was completed on April 30, 2013. Net proceeds received from the sale after closing working capital adjustments and the settlement of Dresden outstanding loans were approximately EUR120 million and is subject to further post-closing working capital and tax adjustments expected to be less than EUR5 million.

I’ll now turn the call back to Kurt to discuss other highlights from the income statement and balance sheet.

Kurt Loewen

Thanks Chad. Cash increased by $106.5 million from the prior quarter. The net increase in cash was primarily the result of the sale of the Dresden mill of course. Concurrent with the sale approximately EUR36 million of the associated long term debt was repaid. Including restricted cash we have cash balance of a $150 million at the end of the quarter.

In the second quarter the Specialty Paper Segment produced EBITDA $3.4 million; the Dissolving Pulp Segment was EBITDA negative of $6.4 million while the Security Segment generated $0.5 of positive EBITDA. Combined with the corporate EBITDA loss of $2.4 million we end up with our $4.9 million consolidated EBITDA loss.

I will turn the call over to Axel for an update on the Security Paper Products Segment.

Axel Wappler

Thank you Kurt. The Landqart Mill had a strong order book with orders currently exceeding budget levels. Also estimate the volumes produced at the mill today as being significantly higher than in 2012 and are expected to continue to be so for the remainder of 2013.

Landqart continues to be impacted by overcapacity in the banknote paper industry resulting in pressure on margins and pricing. Landqart currently has some available capacity to take advantage of anticipated new sales opportunities, as countries release tenders for bids towards the end of the year.

We’ve received a contract extension of additional banknotes to be produced on one of its important orders and has completed a second order for Durasafe, our new composite paper-polymer-paper substrate.

Interest in this product remains strong as we continue to improve and refine Durasafe. While we acknowledge the progress made at Landqart this year compared to prior year, efforts to improve operational at the firms continues and has to accelerate.

Now to continue I give the word to Yvon.

Yvon Pelletier

Thank you, Axel. Good morning everyone. I think Dissolving Pulp markets weakened during the second quarter of 2013 compared to the first quarter due to continued excess supply. Believe that the current depressed dissolving pulp prices are the result of unusual condition and are not sustainable. As the global dissolving pulp industry has been experiencing mill shutdown and mill swing capacity to produce paper pulp. We do expect that dissolving pulp price will recover as the excess supply is reduced and then redirected.

Also although depressed dissolving pulp price continue to impact Fortress Specialty Cellulose mill results. We expect to realize significant benefits from production improvements and cost reduction initiatives at the mill prior to the end of fiscal 2013.

Our Specialty Cellulose mill completed a ten day maintenance shutdown during the quarter which has resulted in improved production rate and digester throughput. Finished goods inventory levels at the end of the second quarter were minimal.

The cogeneration project start-up was delayed due to unexpected mechanical failure of the high pressure water pump and the back-up pump. The repaired pump was reinstalled and re-started mid-July and operated for 20 days before the shutdown due to pump failure. The back-up high pressure water pump was then installed on August 5th and the operation was again unsustainable due to inadequate repairs. We have placed an order with another supplier for a high pressure water pump which is expected to arrive in approximately four weeks for installation.

Despite this set-back we completed all major testing of equipment during the operating period, including 18 and 24 megawatt output testing. We anticipate completing the final 100 hour test as soon as the new pump is installed and tested. We also expect that the cogeneration facility will be delivering power to the Hydro Québec grid at the contractual rate shortly thereafter.

We are currently in the process of exploring strategic option to mitigate the financial risk on our Fortress Global Cellulose project. These options include alternative financial structure, joint venture and partnership opportunities. While the project economics continue to be attractive company will be comparing the Fortress Global Cellulose investment opportunity to other strategic options for shareholder value creation.

We are currently in discussion with prospective equity investors for the project and are in the process of discussing potential revised terms for project financing to provide greater flexibility and to report our decision regarding the strategic direction of the Fortress Global Cellulose project in the third quarter.

Now back to you Chad.

Chad Wasilenkoff

Thanks, Yvon. We are pleased that we continue to make progress in both our remaining core divisions. However, we fully recognize that there is still more work to be done. Recent changes in senior management had a very good impact in a short time period and we remain confident that even more meaningful contribution will come in the short term as they can implement their operational strategies.

As announced with our financials we have applied to the TSX for a normal course issuer bid of up to a total combined $15 million of our common shares and our two publicly traded convertible debentures. It is management’s view and the Board’s view that the current shareholder price and valuation represent a good opportunity to deploy some of the cash on our balance sheet.

As Yvon mentioned we continue to work on new financing structures to our LSQ Mill. We remain cautiously optimistic that a package with additional equity partners and debt lenders can be concluded in the coming months.

I’ll now ask the operator to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). First question is Marc Robinson of Cormark Securities Inc. Please go ahead Marc.

Marc Robinson - Cormark Securities Inc.

Hey, good afternoon and good morning. Just a quick question. When is the first repayment required on the IQ loan?

Kurt Loewen

Quarter one, 2014.

Marc Robinson - Cormark Securities Inc.

Sorry.

Kurt Loewen

Quarter one, 2014.

Marc Robinson - Cormark Securities Inc.

Okay. And then a question for Yvon. Looks your operating expense per metric tonne has come down nicely. So maybe you could provide a little bit color on what exactly has driven that and how things are going may be subsequent to quarter end? And any updated view you have on target cost per metric tonnes?

Yvon Pelletier

Well, definitely we’ve taken some decision in the last quarter to take some down time which as indicated in our documents has cost significant amount of money. But they are for the better long-term operation of the mill and in order to help us meet the goals set previously. So these progresses were made due to some of the significant changes we made during that shut down to allow better production but also to help reduce cost at the mill, and that is in variable cost and also absorption of [inaudible].

The mill continues to improve production. I mean there are -- we still have short-term issue even there. But we are continuing to making progress in operation and cost and you will continue to see this progress being made.

The key -- one of the key elements, as you all know, is the cogen facility. We expected the cogen facility to be up and running in May. Unfortunately we had those incidents that I can tell you I have got 30 year of experience in the industry and I talked to others and was involved directly or indirectly in start of a cogen facility, this is a first time I’ve seen such issues with high pressure water pump. And those are sophisticated piece of equipment but we’re dealing with, I believe a reputable company and very surprised to see that type of problem.

But I can tell you that we’ve taken action and we should see by the end of the quarter the cogen operating. And once the cogen is operating the mill will become cash positive and with the other progress we've made on absorption of $1.6 billion, variable cost reduction in the cogen facility we will see the mill in a much bigger cash generation.

So that’s -- and like I said during the last call we have prepared a plan with management and presented to the Board and the Board is comfortable with it, management is comfortable with it, we are planning to get the mill within the production and cost target that was projected at the beginning of the Fortress Specialty Cellulose plan.

Marc Robinson - Cormark Securities Inc.

Yvon maybe you could touch on shipping cost reduction by the end of year as well on project cogen, even the…

Yvon Pelletier

Some of the other element that -- we have seen minor improvement this quarter but we have very comprehensive logistic improvement plan that’s going to reduce the cost by about 25% compared to what it was at the beginning of the year and in millions of dollars we talk about $4 million to $5.5 million per year and that’s going to be fully in place by the end of September or early October.

So this is another area that we’ve looked. So basically we’re turning every rock to look at how we can improve the cost structure and there is a lot of good progress that are going to be materializing very shortly.

Marc Robinson - Cormark Securities Inc.

What were the shipping costs per tonne?

Kurt Loewen

Shipping and logistic this current year approximated $116 per tonne this quarter, and last quarter’s it's closer $120, so small improvement there but looking for bigger step towards the end of the year.

Marc Robinson - Cormark Securities Inc.

Okay, that’s great. Thanks very much.

Operator

Okay, our next question is from David Quezada of Raymond James. Please go ahead David.

David Quezada - Raymond James

Thanks, good morning guys. On the water pump issue, do you guys have any recourse against the suppliers of that equipment?

Yvon Pelletier

Well, we are currently looking at all our options against the current supplier. But I can tell you that my focus and the team's focus right now is to get the cogen facility up and running and then we’ll deal with the outside factor thereafter.

David Quezada - Raymond James

Okay, fair enough. And I guess just in general with regards to dissolving pulp outlook, we have seen fairly depressed prices for a fairly extended period now. Do you think is that your sense there any of the projects convergent or otherwise out there capacity increases, are people revisiting those, are they still going ahead?

Yvon Pelletier

The one that obviously were started last year that are starting currently obviously there are not, these are going. As far as the others coming in, in 2015 and 2016, there is some that are being pushed, some that are being questioned and currently being reviewed. So that’s they are definitely people that are reviewing all their options based on current market condition.

David Quezada - Raymond James

Okay, great. And then just one last sort of related question, is Prince Albert up and running yet, or are they still having issues there?

Yvon Pelletier

As far as I can tell the mill is only generating power right now and I don’t know of any timetable as far as that project is concerned and that’s probably one that way up in the air.

David Quezada - Raymond James

Okay, great. Thank you very much.

Operator

Our next question is from Mark Kennedy of CIBC. Please go ahead Mark.

Mark Kennedy - CIBC World Markets

Good morning. So, just coming back to the cogen for a minute, are there any penalties payable in the Hydro Québec for the sort of the month, for the quarter delay in getting it online?

Chad Wasilenkoff

Yeah, I will let…

Kurt Loewen

Yeah, it’s Kurt here. Yeah we have a monthly penalty for every month delay, I think at the beginning of the year we have -- I believe we addressed it; it's approximately $100,000 a month.

Mark Kennedy - CIBC World Markets

Okay, and obviously if you can have recourse on that I am sure you will? And then on, just on Q2 production or operating rates like I assumed that production was pretty close to shipments in Q2 is that a good assumption?

Kurt Loewen

Yes, it is.

Mark Kennedy - CIBC World Markets

Okay, and so if you adjust for the downtime then that would suggest your operating rates were in the high 80’s somewhere?

Kurt Loewen

Correct.

Mark Kennedy - CIBC World Markets

Okay, and so any targets you want to share for sort of Q3 or Q4 on the operating rate front.

Chad Wasilenkoff

I think Q3 should be very similar to Q2 or thereabouts. Again we’re continuing to make short term decisions to ensure the long term improvement. So that’s why I’m saying it should fairly similar to Q2 and we probably mention, we have in October our major annual October shut-down where we'll make further improvement to our operation and expect to see much better operation following that.

And like I said last call, the plan is earlier my plan is like mid-next year towards the end of 2014 the mill will be operating at its design level.

Mark Kennedy - CIBC World Markets

Okay. And how many days of that October shut, again if you can just remind us?

Chad Wasilenkoff

Planned for seven days.

Mark Kennedy - CIBC World Markets

Seven days, okay, great. And then just a comment on the quality of your Dissolving Pulp Yvon, how is that in the market place right now?

Yvon Pelletier

Well, I mean it’s we are manufacturing right now, the standard quality product for this commodity and that we’ve seen -- we had challenge in late Q4 and in Q1 and I can tell you in Q2 our quality was very good and we continue to make progress and meet customer expectation.

Mark Kennedy - CIBC World Markets

Okay, great. And then just finally one last question in terms of the specialty mill, any target there in terms of say order tonnage you would be targeting for 2014 at this point?

Chad Wasilenkoff

Axel?

Axel Wappler

Yes, as I already mentioned we had already following order from [inaudible] and of course in that respect we are kind of pushing that really forward to further orders for next year, but at the moment they are already confirmed.

Mark Kennedy - CIBC World Markets

Okay. So, no number you want to commit necessarily at this point then.

Axel Wappler

No, not at the moment because we are in the middle of tendering processes and we’re in middle of -- and at the moment there are some prospects out there but I cannot commit at that stage to any numbers.

Mark Kennedy - CIBC World Markets

Okay, great. Thanks so much. That's it.

Chad Wasilenkoff

Thank you, Mark.

Operator

Okay. Our next question is from Marc Robinson of Cormark Securities. Please go ahead Marc.

Marc Robinson - Cormark Securities

Thanks. Just a quick follow up, the repayment, I think you start Q1, 2014 as you said. What is the quarterly dollar amount?

Kurt Loewen

Approximately $4 million a quarter.

Marc Robinson - Cormark Securities Inc.

Okay. That’s it from me.

Operator

Sir, there are no other questions at this time.

Chad Wasilenkoff

Okay. I think that concludes the call. These financial results, the management's discussion and analysis are available on SEDAR at www.sedar.com. Thank you all for your time. I now ask the operator to provide replay information if he has it available. Thank you.

Operator

Okay. So if want to hear the recorded conference, I will just look up the number here bear with me, ladies and gentlemen. So it would 1-855-201-2300, call that number. The last two pieces of information. First piece will be the reference number for the conference which is 1048933 and then it will ask for your participant code that everyone knows, they dialed in with this. So one again that's 1-855-201-2300 with reference number 1048933 and the participant code you used to dial in.

So ladies and gentlemen this concludes the Fortress Paper Limited’s Q2 2013 earnings conference call. Thank you for your participation and have a great day.

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