Fortress' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar.11.14 | About: Fortress Paper (FTPLF)

Fortress Paper Ltd. (FTP.TO) Q4 2013 Results Earnings Conference Call March 11, 2014 12:00 PM ET

Executives

Kurt Loewen - Chief Financial Officer

Chad Wasilenkoff - Chief Executive Officer

Axel Wappler - CEO, Landqart

Yvon Pelletier - President, Dissolving Pulp Business

Analysts

Mark Kennedy - CIBC World Markets

Operator

Good day, ladies and gentlemen. Welcome to Fortress Paper Limited's Q4 2013 Earnings Conference Call. I would like to introduce Kurt Loewen. Please go ahead.

Kurt Loewen

Thank you, Operator. And welcome to Fortress' fourth quarter 2013 conference call. With me today are Chad Wasilenkoff, Chief Executive Officer; Axel Wappler, the CEO of Landqart; and Yvon Pelletier, the President of the Dissolving Pulp Business.

After I present a brief summary of our financial results for the fourth quarter, Axel will provide an update on operations at Landquart, followed by an update on the Dissolving Pulp Segment by Yvon. Chad will 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.

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

Fortress reported 2013 fourth quarter EBITDA loss of $9.4 million, the Dissolving Pulp segment generated EBITDA loss of $10.8 million and the Security Paper Products segment generated EBITDA of $2.7 million. Corporate costs contributed $1.3 million to EBITDA loss.

Included in the EBITDA loss for the fourth quarter of 2013 is an inventory fair market valuation allowance in the Dissolving Pulp segment of $3.7 million. Cash decreased by $40.9 million from the prior quarter, aside from the results, the net decrease in cash is also influence by an increase in finished goods inventory levels on hand at the end of the fourth quarter.

Inventory increased by approximately $19 million, mainly due to the decrease in the sales in the Pulp segment as a result of the challenges faced by the company in negotiating with customers in China in light of the interim MOFCOM duty.

Finished goods inventory levels at the end of the year included 27,500 tonnes of dissolving pulp and 8,500 tonnes of NBHK pulp. Subsequent to the year end 300,000 tonnes of the Dissolving Pulp back pile feeds were sold in nearly 7,000 tonnes of NBHK pulp inventory were sold.

In the fourth quarter of 2013, the planned and unplanned shutdowns, including market downtime impacted operating results by approximately $5.9 million. Property, plants and equipment decreased by $26.6 million. This is mainly due to the impairment of the assets of the Fortress Global Cellulose mill which was written down for accounting purposes as a result of the MOFCOM interim duty.

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

Axel Wappler

Thanks Kurt. The Landqart Mill currently had a strong order book consisting of a mix of new and repeat orders. In addition, the outlook on further opportunities for orders continues to be positive despite an ongoing competitive market for banknote tenders.

Key performance indicators such as waste rates and other efficiencies have improved throughout 2013 with more anticipated improvements in 2014. The Landqart Mill achieved over 8,000 tonnes of security paper sales which is significantly higher than each of the previous two years and approximately 4,600 tonnes of Security Paper sales were achieved.

EBITDA increased by $25.8 million in Security Paper Products segments from a $23.1 million EBITDA loss in 2012 to EBITDA of $2.7 million in 2013. Based on the current order book, it is expected that 2014 volumes will be comparable to 2013; however, product mix will vary. Yvon will now provide an update on the Dissolving Pulp segment.

Yvon Pelletier

Thank you Axel. Good morning everyone. Good afternoon. Dissolving Pulp segment experienced perfect storm in the fourth quarter of 2013. The preliminary anti-dumping duty was announced on November 6, 2013 by MOFCOM for Canadian, American and Brazilian company as you all know.

The interim duty presented a significant challenge in the company negotiation with customer based in China leading to a material decrease in sales and sales commitment. In addition, pipe failure and deficiency in pipe fitting in the digester area resulted in substantial production downtown.

The volatility and uncertainty in the short-term Dissolving Pulp market resulting from the imposition of the interim MOFCOM duty together with unfavorable market pricing for NBHK pulp led to the decision to take markets on time at the FSC Mill late December.

The market downtime of 10 weeks has been used to further implement operational improvement that we believe will decrease the overall cost structure as well as proactively focus on preventing -- preventive procedure to enhance mill reliability.

Restart procedures were initiated in early March 2014 producing NBHK Pulp. We’ll make -- continue to make strategic decision on whether to produce NBHK or Dissolving Pulp based on market condition and demand.

The Dissolving Pulp market remains challenging during the fourth quarter of 2014 due to continued excess supply. The average market price of Dissolving Pulp in China, as reported by China Chemical Fibers & Textiles Consultancy Group was approximately US$877 per air dried metric tonne.

Management believes that currently low Dissolving Pulp prices are indicative of unusual market condition and uncertainty relating to the final determination and impact of the MOFCOM investigation and are not sustainable in the long-term.

With new viscose capacity starting in China and overall increased demand for Dissolving Pulp, as well as the potential decline in supply in 2014 if the interim duty imposed by MOFCOM are not materially changed, market conditions should start to improve gradually in 2014.

The FSC mill operating efficiency during the fourth quarter of 2013 was negatively impacted by the planned major outage in October, the digester issue experienced in the December and the market downtime that was initiated late December.

Following the market downtime, the company expects to realize improved production efficiency and improvement from cost reduction initiatives. The FSC mill is also in the process of submitting a bid to Hydro Québec for a power supply agreement for an additional 5.2 megawatt of power to be produced at the cogeneration facility, which should result in significant incremental cost savings per year.

However, there is no assurance that the bid will be successful or that an agreement with Hydro Québec will be reached. The company is also evaluating different options to convert the lime kiln from oil to natural gas which would provide additional annual cost savings.

The company is evaluating the impact of the MOFCOM decision on the Fortress Global Cellulose mill project in Lebel-sur-Quevillon, Quebec. The company is also continuing the process of exploring strategic options for the FGC mill project to mitigate the financial risk, including alternative financing structures, joint ventures and partnership opportunities.

The upcoming MOFCOM final duty which is expected on April 6, 2014 will have a material impact on these decisions. Due to the changing economics and market conditions, there is no assurance that definitive investment arrangements will be concluded, or that the FGC mill project will proceed to completion as previously planned.

In October 2013, the FSC mill successfully completed the mandatory grid test for its cogeneration facility and was delivering power to Hydro Québec grid at the contracted commercial rate. The company expects to derive significant production cost savings as a result. During the quarter ended December 31, 2013, the company recognized $3 million in sales revenue from the generation of power at the cogeneration facility.

Now back to you, Chad.

Chad Wasilenkoff

Thanks, Yvon. One quick correction, it was in October 2013, the FSC mill successfully completed the mandatory grid test for the cogeneration.

So as of on and Axel had mentioned, we are seeing good progress at both of our operations. During the recent 10-week shut at Thurso, management has identified numerous items that seem to be responsible for the nagging reliability problems we’ve had at that mill. We remain confident but at the same time cautiously optimistic that the mill should finally start to achieve better operating results and more aggressive start to bring the cost structure in line with our expectations.

But we are focused on improving the costs, there still remains other challenges that are out of our control. The most important to these will be the MOFCOM duty and the current Dissolving Pulp price.

As an update on the duty, we still expect that the facts would dictate a lower or eliminated duty for our Thurso mill. The representatives from MOFCOM have completed their onsite visit and gave us the opportunity to demonstrate why their original calculation of the duty had missed several key parts, and thus we remain hopeful that these new items will be taken into consideration, and that a newly calculated duty which is less punitive will result. Of course, there is no assurance of this and we expect to find out the final duty, if any, on April 6th.

As for the Dissolving Pulp price, we need to get past the announcement of the final MOFCOM duty to be in a better position to forecast future DP pricing. The biggest impact on this will be what is the final duty imposed for the all others category in Canada, the U.S. and Brazil. If these duties remain at the very high rates they were announced in the preliminary duty, then we see encouraging signs that a material amount of previously announced new dissolved and pulp capacity won’t come to fruition. This should result in a continued tightening of the Dissolving Pulp market, which should also then further result in prices to continue decline in the latter part of 2014 and into 2015.

Of course, this duty on the all others in Canada has a very material impact on our LSQ mill and the future of that operation. While we continue to evaluate alternatives for this project, the alternatives are not looking all that attractive due to the non-production agreement imposed by the previous owner, which limits our [Audio Gap] and the Quebec government on the current $105 million debt instrument at Thurso.

Given the challenging times at that mill due to the MOFCOM duty and the poor Dissolving Pulp prices, we are working on various alternatives to try to work together and find ways to reduce the financial pressure that this debt can cause as we enter the period where we now need to start repaying the loan in the amount of approximately $16 million a year. While there is no assurance that any changes to the debt may results from our discussions, we remain hopeful that some solutions can be found.

I would also like to address the major topic and concern from the preliminary research reports that have come out this morning and late last night regarding our cash position. While the headline number for our cash position has dropped materially, I want to stress that a good portion of this is now in finished goods inventory and has been written down. We expect to convert this into sales and thus cash in due course.

When we look at concerns about ongoing cash trend from Thurso, we’d also like to state that based on our most recent internal estimates and projections concluded now after the 10-week shut, that we believe we'll have Thurso running at a breakeven run rate sometime in April of this year. This obviously has based on current dissolving pulp prices, current exchange rates and using the 13% duty being imposed by MOFCOM.

I would now ask the operator to open the call for questions.

Question-and-Answer Session

Operator

Perfect. (Operator Instructions) Okay, so we've got our first question from Mark Kennedy. Please go ahead Mark. Mark, your phone might be on mute.

Mark Kennedy - CIBC World Markets

Oh! Sorry, yeah, it was. Good morning, Chad. First of all, can you just -- do you have any expectation of timing in terms of resolution of these negotiations with investment Quebec whether it's principal deferment or whatever comes out of that?

Chad Wasilenkoff

Yeah. I mean, discussions are ongoing, obviously the upcoming election there in Quebec may cause some delays, but we'll continue to work on that. We would like to be reasonably confident that some solutions if any can be found should transpire in the April, May timeframe, of course it could be delayed further and again, that election is not helping but that’s -- so the timelines we are working on.

Mark Kennedy - CIBC World Markets

And I think you have a principal repayment scheduled before that, don't you?

Kurt Loewen

Yeah.

Chad Wasilenkoff

Yeah. Kurt, go ahead.

Kurt Loewen

Yeah. No we do in April, first we had a January principal deferred and April would be the first on that we would be paying down.

Mark Kennedy - CIBC World Markets

Right. So if negotiations are still ongoing, do you make that payment or what happens with that?

Kurt Loewen

That will be determined, as of now, I am going under the impression that I will be paying that.

Mark Kennedy - CIBC World Markets

Okay. And then on your Dissolving Pulp finished goods inventory, you're a little over 24,000 tonnes according to your numbers plus, well, I guess you really haven't produced any in this quarter. So what's the sales plan on that, do you think that's a Q2 liquidation or what do you think we're looking at?

Kurt Loewen

Some certainly looks to conclude this quarter towards -- within the next two weeks. And I would expect apportionment to April as well that I would assume it's obviously not definitive but certainly March, April is where the pulp should be sold.

Mark Kennedy - CIBC World Markets

Okay.

Chad Wasilenkoff

We have -- to give clarity on that, the pulp is committed to, we know where it's being shipped to the customer that will be receiving it. Prices are all determined. We don’t have the LCs yet so obviously we’re not going to release the pulp until those are in place. And then that’s what Kurt mentioned, it could happen imminently but we’re getting so close to the quarter end, like we cant say definitely where, most likely that if assuming that order goes through and everything stays on track, which quarter it might result in.

Mark Kennedy - CIBC World Markets

And you don’t expect any further write-downs than on your finished goods inventory?

Chad Wasilenkoff

Correct.

Mark Kennedy - CIBC World Markets

Okay. Thank you.

Operator

So there are no other questions at this time.

Chad Wasilenkoff

Give them a few more seconds, otherwise. Okay, if there are no other questions than these financial results and management discussion and analysis are available on SEDAR at www.sedar.com. Thank you for your time. I’ll now ask the operator to provide replay information.

Operator

Perfect. So the playback on demand number is 855-201-2300, and it’s going to prompt you for two pieces of information. The first one is the reference number for this conference which is 1150521 and the participant code which is 15086. I’ll just quickly repeat that. So the telephone number is 1-855-201-2300, reference number 1150521, our code 15086.

And ladies and gentlemen, this concludes the Fortress Paper Limited’s Q4 2013 earnings conference call. Thank you for your participation and have a great day.

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