Fortress Paper's (FTPLF) CEO Yvon Pelletier on Q1 2016 Results - Earnings Call Transcript

| About: Fortress Paper (FTPLF)

Fortress Paper Ltd. (OTC:FTPLF) Q1 2016 Earnings Conference Call May 17, 2016 12:00 PM ET

Executives

Yvon Pelletier – Chief Executive Officer

Kurt Loewen – Chief Financial Officer

Chad Wasilenkoff – Executive Chairman

Axel Wappler – Chief Executive Officer of Landqart

Analysts

Daryl Swetlishoff – Raymond James

Andrew Shapiro – Lawndale Capital Management

Mike Krueger – MPK Partners

Tom Bernard – Private Investor

Operator

Good morning, ladies and gentlemen. Welcome to the Fortress Paper Limited’s Q1 2016 Earnings Conference Call.

I’d like to introduce Kurt Loewen, CFO. Please go ahead.

Kurt Loewen

Thank you, operator and welcome to Fortress’ first quarter 2016 conference call. With me today are Yvon Pelletier, our Chief Executive Officer; Chad Wasilenkoff, our Executive Chairman, Axel Wappler, our CEO of Landqart. Yvon will provide an overview of our operating highlights and discuss both the Dissolving Pulp segment, followed by an update on the Security's Paper product segment financial. I will then present a brief summary of our financial results and balance sheet. Yvon will finish followed by questions from the floor.

Throughout the call, reference may be made to slides of a presentation, which has been made available for reference through our website at www.fortresspaper.com in the Investor Relations tab. 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 the conference call, management will make reference to operating EBITDA and adjusted net income or loss. For a definition of operating EBITDA, reconciliation of net income to operating EBITDA and calculation of adjusted net income or loss, please see the management’s discussion and analysis available on SEDAR at www.sedar.com.

Yvon, over to you.

Yvon Pelletier

Thanks, Kurt and good morning everyone. Although operating EBITDA was positive it was below our expectation, primarily due to our dissolving pulp operation, as efficiency was below management objectives.

We believe the dissolving pulp market outlook for 2016 will continue to be positive. Management continues to focus on cost reductions, production and power generation to improve margins at the FSC mill.

In the Security Paper Products Segment, our proprietary banknote substrate, Durasafe, achieved notable milestones that Axel will elaborate on further in a few minutes. Both segments continue to build on a strong order book.

Looking more closely at our consolidated results on Slide 3, you will see that the Fortress Paper reported 2016 first quarter operating EBITDA of $1.1 million, compared to EBITDA of $3.3 million in the previous quarter.

The Dissolving Pulp segment generated EBITDA of $1.3 million and the Security Paper product segment generated operating EBITDA of $1.8 million. Corporate costs included in EBITDA were $2 million.

Moving to Dissolving Pulp segment result on Slide 4, operating EBITDA was $1.3 million for the first quarter of 2016, representing a decrease of $0.2 million when compared to the fourth quarter of 2015.

The results of the first quarter of 2016 were negatively impacted by a ten day shutdown instigated by a blockage issue in the mill digester area. In addition, digester capacity was limited in order to maintain quality during winter months, an issue that the company has focused significant attention to resolve.

In the first quarter of 2016 the FSC mill production cost, including amortization of some of the shutdown costs and the positive impact of the cogeneration facility averaged C$1,032 or approximately US$754 per air dried metric tonne of dissolving pulp produced.

Average production costs were higher per air dried metric tonne compared to the fourth quarter of 2015, in part due to the blockage issue and subsequent ten day shutdown, digester capacity limitation, and increased energy and fiber cost. The fixed cost incurred during the shutdown add a negative impact on first quarter cost in the amount of $2.5 million or C$77 per air dried metric tonne.

On Slide 5, you will see the company sold 31,760 air dried metric tonnes of dissolving pulp in the first quarter of 2016 compared to 29,424 in the fourth quarter of 2015. The FSC mill held finished good inventory consisting of 32,054 air dried metric tonnes of dissolving pulp at the end of first quarter, similar to the previous quarter.

Dissolving Pulp supply expense a slight contraction in 2015 as Chinese mill ran at less than 50% capacity due to cost competitiveness and environmental pressure. US mills were similarly disadvantaged by rise in currency related costs resulting in some production switching to paper grade pulp.

Dissolving Pulp’s supply expansion is expected over the next years due mainly to swing mill capacity switching to dissolving pulp, as paper grade pulp price deteriorates and increase production in China at dissolving price improvements. Dissolving Pulp demand growth due to viscose staple fibre expansion and reduced cotton linter pulp availability is projected to absorb the supply expansion.

On Slide 6, the broader industry trends are mainly positive. The viscose staple fibre and rayon filament market which are key drivers in dissolving pulp demand have experienced improved supply and demand balance and improved pricing since bottoming in 2015.

The price of Rayon filament has maintained consistent price in 2016, which is 7% above the 2015 low. Viscose staple fibre price are currently about 17% above 2015 low and approximately 8% higher from the beginning of the year.

We expect consistent viscose staple fibre and dissolving pulp pricing through second quarter 2016, in part due to increasing demand in yarn and textile market. Dissolving pulp and viscose staple fibre price have increased by $20 per tonne and $150 per tonne respectively from their low in 2015 – 2016, sorry.

As management expects the dissolving pulp market to remain below long term trend pricing in the near term and low cotton and polyester pricing to continue to put pressure on all fibre pricing, the company's focus continue to be on ongoing cost reduction initiatives to position the mill further down the cost curve.

I will now pass it on to Axel for comments on the Security Paper Segment. Axel?

Axel Wappler

Thanks, Yvon. And good morning to everyone. On slide 7, the security product segment has operating EBITDA of $1.8 million compared to $3.9 million in the previous quarter due to primarily to product mix.

Management initiatives to improve results at the Landqart mill include the company's Lean Six Sigma program implemented in late 2013, which focuses on improving both mill efficiency and productivity and focus on developing proprietary Durasafe product.

Production of Durasafe for the substrate of the ninth series of the Swiss franc for the Swiss National Bank began in 2014 and will continue in 2016 and beyond. In April, 2016, the SN - Swiss National Bank issued the new 50 franc note printed on Durasafe, the first of six notes in the Swiss National Bank ninth series.

In March 2016, the National Bank of Kazakhstan 20,000 Tenge banknote produced with Fortress Paper's Durasafe banknote substrate was the recipient of the Regional Banknote of the Year award at the High Security Printing Europe conference.

[Indiscernible] of 2,655 tonnes for the quarter was a slight improvement over the previous quarter. The Landqart mill continues to build on our strong order book comprised of a mix and new and repeat orders. Security paper production includes banknote which resolved in varying degrees of cost and margins depending on the complexity of security features included.

Kurt will now moderate the financial review.

Kurt Loewen

Thanks, Axel. On Slide 9, you can see that sales are higher in both the fourth quarter of 2015, and the prior year compared this quarter. Sales orders and the order log in both segments continue to show strength.

Also on Slide 9, and as well 11, our available cash balance decreased from the prior quarter, the main uses of cash were CapEx impart due to the annual maintenance shutdown at the FSC mill, during the fourth quarter of 2015 and the ten day shut experienced during the first quarter of 2016 and a change in working cap during this quarter.

Slide 10 presents an overview of SG&A expenses which were $13.2 million for the first quarter of 2016. SG&A expenses were higher during the quarter due to legal and advisory cost related to the increased corporate activity, as well as a one time payroll adjustment at the Landqart mill, included in SG&A for the first quarter was 700,000 related to ongoing maintenance and other cost incurred at Fortress Global Cellulose, our non-operational Northern Québec Mill that we continue to evaluate options for.

On Slide 12, we have a schedule of our upcoming principal repayments. Based on our anticipated EBITDA growth, current cash - free cash flow conversion, working capital requirements and other cash generating initiatives, we believe we are positioned to service our debt, reduce our leverage and enhance our balance sheet metrics over the remainder of the year and beyond.

As of Friday, we have purchased stock 642,000 base value of our convertible debt due at the end of 2016 at an average price of 9,150.

Back to you, Yvon.

Yvon Pelletier

Thanks, Kurt. As we look beyond the first quarter, our two key area of focus remain, first, concentrating on improving the productivity and operational efficiency of our two our Thurso mill by continued implementation of the Lean Six Sigma Management Protocol which has already delivered proven result at our Landqart mill and will provide better execution of our strategic plan.

Second, strengthening our balance sheet in a strategic manner to enhance shareholder value, while preserving our financial flexibility to pursue value enhancing opportunities, this includes capitalizing on strategic options to monetize non-core assets such as the LSQ Mill.

In summary, we have experienced another challenging quarter but are confident in our prospect for the future. Look forward to realizing the up-sign in our business and unlocking the full potential of our very attractive assets.

Thank you for your time. These financial results and management discussion analysis are available on CEDAR at www.sedar.com. I will now ask the operator to open the call to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question comes from Daryl Swetlishoff from Raymond James. Please go ahead.

Daryl Swetlishoff

Thanks. Good morning, guys. I just had a couple of operational and macro questions Yvon. Beginning with the FSC mill cost, if we adjust for the shutdown cost, I get, you know, in the quarter costs were some where around US$750. What is your long-term goal here, what do you think you can get cost down to on a sustained basis?

Yvon Pelletier

Well, the – as we mentioned in the past, our objective remains to bring our cost down in the low 700 region and that goal we expect to be achieved by the end of 2017. So all our plans are to work towards that goal by the – by that period of time.

That’s in dollar Canadian per tonne, so if you then convert it in US it will be low 600.

Daryl Swetlishoff

Okay. And what do you – as you look at your, I mean, you've had a very long time now to examine FSC mill and using your experience before, what is the key issues right now with respect to the capital, is it organization, is it, where do you – where you're going to focus your time to get there?

Yvon Pelletier

Definitely the – our key focus has been and as I mentioned in the previous call, the issue we had in January which caused the blockage in our DP area had been an issue that was impacting the mill on a regular basis. We were planning to take care of that issue in May, during our semi-annual shot, unfortunately we had severe - more severe issue in January, so thank God we were planning on it, we're ready. We acted at that time and we're able to - I am pleased to report that the blockage issue that’s been an ongoing issue since the mill converted to DP is now behind us, based on the work that we – the corrective action we put in place in January.

So we've done a couple of things that have now stabilized the operation of the mill and now we're going continue to optimize the mill and bring it in the mid-80s, high-80s capacity utilization.

As you saw in our report, we still have some limitation in the winter time that we are currently working with outside party to resolve. We had some corrective actions we put in place in the fall that unfortunately didn’t result in positive – didn’t get positive result.

We've now got a third party working with us that I've seen similar issue in other company and that’s helping us to resolve. So we're having – we're more confident than ever now to be in a position to resolve that issue for the next winter.

Daryl Swetlishoff

Thanks for that. You mentioned that DP prices are currently below your view of long-term trend, given some of the changes you've seen in supply and demand, where would you peg long-term DP pricing over the next cycle, and not this year, next year, but just over the next cycle?

Yvon Pelletier

We – if you look at the – I mean, demand keeps improving year-over-year, capacity on the DP side is basically, right now the remaining new product available in the market is mainly from Swing Mill and as these mills get absorb in the market, which should be over the next 12 to 18 months, fully absorbed, we should see better pricing dynamic than we've seen in the last couple of years. There is still a good dynamic out there, pricing is maintaining at a decent level, but we expect to see better price in the medium term.

I mean, the long-term trend based on different forecaster, real estate would be in a thousand dollars would be more inline with a good supply and demand – that are tighter market if you want. We are not expecting, again, we're not expecting the price to get as high as we've seen in the past, but over a thousand dollars would be on real estate.

Daryl Swetlishoff

Okay. Last question, just I've seen the Durasafe franc note and it’s impressive, what sort of opportunities do you have to adjust to your product mix at Landqart mill, maybe this is a question for Axel, just to over time to shift, basically shift to mix to more Durasafe?

Yvon Pelletier

Axel, do you want to take that?

Axel Wappler

Sorry, on mute.

Yvon Pelletier

Chad, do you want to take that?

Chad Wasilenkoff

Sure. So I was just over in Switzerland at the Landqart mill all last week with Axel and sales team. We're getting very good feedback from multiple national banks. We've got I would say 30 or so on our top priority list, some of which are again doing trials and things like that.

There is also large Annual Bank Conference coming next week in Washington D.C. where the Swiss National Bank will be representing, they over 675 delegates and they typically like it keep it 50% from national banks, 50% suppliers, so very well attended, very important conference.

There is another security printer that has done a house note or a marketing note on Durasafe and they will be presenting that. So we are expecting to get some momentum now and as the Swiss National Bank have finalized their product and launched it. So the timing for this will be over the next several years. It is very long, slow sale cycle. Its very conservative industry, but don’t under estimate the importance of this Swiss National Banks finally being released and demonstrating innovative substrate we have.

Daryl Swetlishoff

Thanks for that Chad. That’s all I had. I'll turn it over.

Operator

All right. Next question comes from Andrew Shapiro from Lawndale Capital Management. Please go ahead.

Andrew Shapiro

Sorry, I was on mute there. What restructuring alternatives are you currently evaluating as the company approaches maturity on the various 2016, the 2017s and the 2019s, I mean, I see a bunch of cash, but its obviously not yet sufficient to satisfy the 2016s full obligation and we haven’t seen any announcement of transaction for I guess, its LSQ. Can you give us a little bit of insight as to the narrow down alternatives you are considering?

Yvon Pelletier

I'll ask Kurt to comment on that.

Kurt Loewen

Sure. A narrow down, the first you mentioned there was the LSQ which we continue to work on. It never comes sooner now, but we do anticipate positive outcome there. We're also working on – we've discussed in the past that they will restock possibility at Landqart, that continues to progress positively, that was amongst full interested parties, so those two are important.

However, with cash on hand and looking at – of course I need improved operations, but we do expect - fully expect to see improved operations with some decent margins and projecting out through the end of the year we do project that cash from operations, cash from banks managing inventories even better, few of these things we do anticipate that we'll have the cash available to pay the debt.

So these other items are important to allow from our balance sheet flexibility, those are the two I can point out, but we are working on other initiatives as well.

Andrew Shapiro

Okay. regarding diversifying Thurso out of China a bit more, you mentioned last call there were ongoing discussions with other agent markets, and there might be opportunities for development there in the near term.

Can you update us on that diversification goal and measures and if there are still ongoing conversations or steps that are happening?

Yvon Pelletier

Yes, the – Yvon, here. We are shipping on – I mean, hundred percent of pulp goes to Asia, shipment off by China are about you know, targets about 20%, 25% last quarter was slightly above that. And we are still having discussions with a new comer in the market and those discussions are ongoing and their plan hasn’t started yet.

So we'll see – I am meeting them, I am in China next week meeting some of these party, so discussion are ongoing. And then we maintain about 25% right now outside China.

Andrew Shapiro

All right. A follow up for getting little more clarification, you guys would be more in the nerve than what maybe we're seeing out there, is there any insight as to the timing or visibility for any modification of the MOFCOM tariffs on dissolving pulp.

And can you update us on the Canadian government efforts to progress, to get improvements or appeal of the tariffs. And lastly on the subject, do you have an insight and further progress on the WTO compliant on the China tariffs?

Yvon Pelletier

Yes, I think the – my comment will answer more all your three questions. The WTO process is progressing well. There was Canadian submission to the panel, panel is informed and panel is reviewing submission right now. Canada submitted their document, China has also submitted, Japan, Brazil, US and Europe have submitted.

And so there is a review process that’s ongoing. We're not expecting based on the complexity of the process, we're not expecting any news before mid-2017 on what would transpire from that panel review. But it’s progressing as per the time table that was presented to us.

Andrew Shapiro

Okay. And lastly, on Landqart, on the last call I think you spoke of pretty much a full backlog for 2016 and starting into 2017, your determination of the timing of nearer term projects would be influenced by the perspective margin of the - we'll call these interim projects, is that still kind of your backlog status and operating capacity issues with respect to Landqart.

And can you also discuss probably in detail, but details always enjoyed, but in general what RFPs Durasafe is in the running for and when you may be expecting decisions to be made on new Durasafe contract bids?

Yvon Pelletier

Okay. I'll ask – I don’t think Axel is back, what is the reason he is been disconnected. So I'll ask Chad maybe you want to comment as you were there last week?

Chad Wasilenkoff

Sure. Yes, the order book still is very, very good. There is multiple tenders going on on a regular basis and quite a few of them we're just not able to participate in due to short time - times of delivery that are required. So we're feeling very confident and healthy, way straight continues come down which freeze up more productive capacity for us.

We're trying to ensure we obviously leave some availability on our machines for next year, so hopefully see if any Durasafe transpire. Again it’s a very slow sale cycle, very conservative industry, again with multiple trials ongoing.

There are some tenders coming up, and we're not allowed to disclose means of national banks or things like that, but there are few trials coming up where people want to do the entire banknote substrate portfolio, meaning they would print the same note on our Durasafe product hopefully if they view it – that they would like it in a trial, regular cotton banknotes, as well as some of the polymer types of bank notes an things like that.

So its - within the end of the year we might be able to announce that we have some follow up order, no guarantee, obviously its - as always its out of our control, but again this final launch that was in waiting for Swiss National, the Swiss franc has been very, very important and it definitely obviously things up for us and materially increase the interest level.

Andrew Shapiro

Great. Lastly, in terms of getting the word out, non-deal roadshows, investor presentations, does management have any of that planned in the coming three to six months?

Yvon Pelletier

Chad, you want to comment on some – on the plan, because Chad is leading that process.

Chad Wasilenkoff

We still have a fairly good strong and robust institutional shareholder base, but given the liquidity we've had a couple of non-deal roadshows over the last I would say nine months or so and while we had interest that was very little follow up to at lack of liquidity. So again talking to institutions was they just couldn’t find themselves picking away this for material amount of time to get a meaningful position.

So we potentially then hired a new investor relations firm that specializes more on the retail level. So again our goal is to improve liquidity which we then feel open up the door to more institutional sales as sort of Phase II or second step.

So we do plan to do four, five different geographical regions for the Boston, New York Montreal down to Florida et cetera over the next five, six months again increase this awareness and we're now so confident about our story and where we're going and the improvements that are being made. So again it is part of our strategy to increase that overall awareness.

Andrew Shapiro

Okay. Great. And I guess at some point you actually get those slides up on your website that you referred to.

Chad Wasilenkoff

Which slide? Sorry.

Andrew Shapiro

The slideshow haven’t been available as you referred to, but I think they might help anyway. Thank you.

Chad Wasilenkoff

Okay. We'll make sure its up on the web later today.

Andrew Shapiro

Thank you.

Operator

All right. And the last question we currently have in the queue comes from Mike Krueger from MPK Partners. Please go ahead.

Mike Krueger

Hi. Good afternoon, gentlemen. Just have two things I want to ask about. First off, would you be able to give us the index price for the dissolving pulp in the quarter just roughly? Or CCF index price?

Yvon Pelletier

Yes, the CCF price was around 840 for the quarter.

Mike Krueger

Okay.

Yvon Pelletier

And it’s currently at 850.

Mike Krueger

Yes. Okay, great. Well, the reason I asked that is I take a look at the realize price that you guys have been getting over time and the difference between that and the index price, and in past quarters the difference in US dollars is been usually a little over a $100, which always I thought make sense to me because your reported revenue is starting that of transportation cost, if I am not mistaken and this quarter it seems like that difference is narrow, which is of course nice to see. And I am just wondering if you could comment on why it’s narrow then if you expect that to continue?

Yvon Pelletier

Yes, when we – like if I go back over the last couple of years, initially when we started the –we started to ship after the WTO process and there is no doubt that the delta price are realized price at this market, I'll tell you from a CCF its realized, the delta was in order of $35 to $40, we've been able with the continued developing the relationship and there is stability of operation and product performance and so on and so forth.

If I look in the last five quarter, four to five quarter, the delta is down to $20. So we've gained about $15, $20 from about year and a half two years ago from CCF to realized price. So that’s…

Mike Krueger

Okay…

Yvon Pelletier

There is again, there is variation from quarter-to-quarter, but overall we've gained some pricing power.

Mike Krueger

Okay. Thanks. The other question is could you – I mean, where the costs - the maintenance cost for LSQ are allocated, is that in the SG&A for Thurso

Mill or for the pulp segment excuse me?

Yvon Pelletier

Correct.

Mike Krueger

Okay. So another with that, 700,000 is part of the $13.2 million total SG&A?

Yvon Pelletier

Yes. Correct. And I mean it reduced the EBITDA of the Cellulose division, Specialty Cellulose division.

Mike Krueger

Right. Okay. Great, that’s it. Thanks very much.

Yvon Pelletier

You're welcome.

Operator

All right. And we currently don’t have any further questions in the queue - we just had somebody that queued up. Tom Bernard, who is a Private Investor. Please go ahead, Tom.

Tom Bernard

Investor.

Operator

Oh, I am sorry about that.

Tom Bernard

I am investigating the income statement. So my first question is could you please breakdown the $6.9 million in CapEx?

Kurt Loewen

Sure.

Yvon Pelletier

I will answer that question.

Kurt Loewen

Yes, significant portion of the cash, this is cash CapEx, so it’s on the cash flow statement that you see that number. That is coming from payments made on Q4 CapEx. So a lot of that was additions in Q4 that payment came out in Q1.

Tom Bernard

Right.

Kurt Loewen

You’ll see in Q1, a much smaller balance there for like additions, if you’re looking in the segmented earnings section or identify the CapEx for the quarter to 2.5 or there about.

Tom Bernard

Right.

Kurt Loewen

So that would be the difference there, the seven to the two would be carry-forward from the prior year.

Tom Bernard

Okay. And what - the MD&A mentions expected maintenance CapEx this year of five in Canada and three in Switzerland, what given what you’ve accomplished in the first quarter, what do you see is the CapEx, the cash CapEx for the rest of the year?

Kurt Loewen

While you’re correct those are sort of our standard amounts that we anticipate for the year, the $5 million and the $3 million that you referenced there and there are options being considered that could actually push out some of these expenditure beyond 2016. So it’s hard to give you an exact figure of what the number will be, but it can still be in that range.

Our recent shot – a certain amount was capitalized, but significant portion was also expensed. So it’s hard to give you that direct figure, but we still could be in that less than $5 million, but certainly not significantly less, but however saying and said that we can be significantly less if we push out and move forward with some initiatives, we could take that would conserve cash if need be.

Tom Bernard

The MD&As had five in Canada and three at Landqart for a total of eight, what would you say you could get below five on cash basis is that…

Kurt Loewen

That’s Thurso…

Tom Bernard

Okay.

Kurt Loewen

And Landqart, we managed tightly there and the three very little was incurred in Q1 and we managed that quite strictly as well. So it could be better than that as well.

Tom Bernard

Okay. But it could be in that high or mid-single digit cash requirements between now and 12/31?

Kurt Loewen

Yes, correct.

Tom Bernard

Okay, couple of questions on Landqart, can you – you mentioned multiple parties interested in the sale leaseback. Can you bracket the upfront numbers that they are talking about?

Kurt Loewen

No unfortunately we can’t, but it would significantly contribute and supports our initiatives to pay our debt as they come due.

Tom Bernard

Okay. And then can you give us an idea of the kind of issues that are dragging the negotiations out in particular if disappointing earnings and particularly the disappointing first quarter at Landqart is having an impact on negotiations?

Kurt Loewen

No I don’t think there is any impact there and this really is sale leasebacks are not a simple transaction. They are fairly complicated and it’s just taking time. There has really been no delay, maybe we anticipated sooner, but it’s going according to I guess, that plant is really, there has been no real hiccup.

Tom Bernard

What quarter do you expect some kind of announcement?

Kurt Loewen

Yes, we’re anticipating something through Q2 or early Q3.

Tom Bernard

Okay. And then on Landqart, we’ve done – you guys have done a great job bringing the restricted cash down and I’m just wondering if the liquidity situation coming up the year end and the disappointing results, particularly in the first quarter at Landqart might - if there is any risk that they affect the central banks or the bonding, you know, these restricted cash requirements where that wonderful trend could stall or potentially be reversed?

Kurt Loewen

We often talk about the Landqart businesses, a better business to look at it on a last 12 months – trailing 12 months to focus on one quarter, quarter one last year was around the same mark as this quarter and it does have a direct relationship to the product mix that’s going through the mill.

So we do see improved margins in the future on certain products that are going to produce higher EBITDA. So it’s not a disappointing quarter, it’s slightly lower than maybe internally we had anticipated, but not a disappointing quarter.

Tom Bernard

How is the mix look in the current quarter?

Kurt Loewen

Looks improved.

Tom Bernard

Okay.

Kurt Loewen

But I can’t give the guidance on that.

Tom Bernard

Okay. And then going back to the restructured cash, do you see this that this trend continuing or do you see counterparties potentially demanding cash as the 12/31 maturities approach?

Kurt Loewen

No what happens is certain tenders have the performance bond criteria and we need to work with the banks to provide that bonds and the banks require the collateral and they do and have been requiring cash. So I do anticipate restricted cash coming available in the back half of the year, similar to what came available in Q1.

Having said that, there are tenders that can come up from time to time that require performance bonds to be put up or bid bonds and we need to manage that accordingly with - if cash is required to secure that, we do need manage and consider what other options we have to provide collateral, which we have been successful out in the past, which is working with other entities just to provide security.

Tom Bernard

Right. But I guess my question is are these other entities that would provide a bond in lieu of cash or what’s not get concerned about 12/31/2016?

Kurt Loewen

I don’t think so; there hasn’t been an indication of any issue.

Tom Bernard

Okay. Great. And then that my last question is a kind of a - is more of a big picture question because you mention that the capacity utilization in China is under 50% and you can see that increasing as prices improved throughout the summer.

I keep reading all these articles about the Chinese government supporting money losing industries and perhaps even as they struggled, they get a fixed – percent whatever this year, increasing the subsidization of factories that are losing money, are you seeing any of that in the Chinese dissolving pulp factories that are shuttered or what not is that, is that even an issue?

Kurt Loewen

I mean, obviously a lot of the capacity came online in 2009, '10, '11 area, while there was significant price pressure on cotton and substitute and so on and so forth and the government getting concern of the time that they were going to have long, medium to long term issue with supplying their textile industry. Obviously after 2011, '12 this issue got resolved by the overall global dynamic supply and demand and new capacity come in line and taking pressure away from that.

So, we haven’t - again the government is shifting to a different industry. It’s a suspense, they are going into more services, investing in more services in their five year, ten year plan and they also don’t support some of the - which has been helpful for the DP to some extent, the dissolving pulp side is they don’t support the small polluting plant.

So there is capacity entering cotton linter pulp we thought we referred to regularly in our MD&A and our communication that have been shutting down and basically we’re seeing that to continue to the point that they won’t be basically non-existent in the commodity dissolving pulp and the viscose market on road so.

The ad supported significantly the industry, we're not seeing as much or that much support for a new plant in China. The other thing that’s coming up, it’s always been there from my point of view and it depends on the overall dynamic of - global dynamic is the cost of fibre and there is a new plant that’s starting in Indonesia in the paper pulp industry, that’s going to consume significant amount of fibre is starting in the end of this year.

And this is going to more likely pull the way from fibre that’s available for China, it is going to pull the way from the same supply. So it may - we may find that some of these mill and are making DP today will back up DP and go more in a paper because they can afford the fibre cost. So we follow that closely, what’s happening in the fibre market.

And so overall not as much, we don’t see the support that we've seen in the five, seven years ago for the industry and definitely it doesn’t - don’t see it in the linter pulp side which helps the overall dynamic and that’s why we feel relatively positive for the medium term.

Tom Bernard

Thank you very much.

Operator

All right. And we do have a subsequent question from Mike Krueger from MPK Partners. Please go ahead.

Mike Krueger

Yes. Hi, gentlemen. Just related to my question about SG&A, it looks like SG&A at Landqart was something like $7.5 million or $7.6 million in the quarter and I just wondered if you could talk about why it’s that elevated there and do you think that that will continue?

Yvon Pelletier

Yeah, there is a slight increase at Landqart and that was due to an item I pointed out, they are tied to payroll, which related to one time vacation accrual you have to pick up in quarter. So, I don’t expect that to continue of course, I expect to be reduce by approximately that amount and if you are looking at compared to Q4, Q4 was really quite low because of a pension item that we had in there. So we had to journal that, was reduced SG&A by a significant amount, so…

Mike Krueger

But are these related the Q4 and….

Yvon Pelletier

No, the two items are not related, the vacation accrual is an accounting journal that we had to pick up.

Mike Krueger

Okay. Okay, thanks for that. One small other question, when you say that in the MD&A that the average cost per ton of DP produced in the quarter was 1,033, does that include the 700 grant spent on the LSQ or did that exclude LSQ money?

Yvon Pelletier

That exclude, that’s not a part of that calculation.

Mike Krueger

Okay, great. Thank you very much.

Yvon Pelletier

Okay.

Operator

All right. And we currently don’t seem to have any further questions in the queue.

Yvon Pelletier

Okay. Thank you, Mike. I think, I’ll close it. I just want to make a small correction, we verified in the presentation was indeed on the website, so I’m not sure what’s the issue was. But I wanted to thanks everyone for their question and continued support. We look forward to updating you on our results in the near future. Thank you and have a good day.

Operator

Ladies and gentlemen this concludes the Fortress Paper Limited Q1 2016 earnings conference call. Thank you for your participation and have a nice day.

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