Fortress Global Enterprises' (FTPLF) CEO Giovanni Iadeluca on Q1 2019 Results - Earnings Call Transcript

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About: Fortress Global Enterprises Inc. (FTPLF)
by: SA Transcripts
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Earning Call Audio

Fortress Global Enterprises, Inc. (OTCQX:FTPLF) Q1 2019 Earnings Conference Call May 15, 2019 9:00 AM ET

Company Participants

Kurt Loewen – Chief Financial Officer

Giovanni Iadeluca – Chief Executive Officer

Mark Kirby – Chief Executive Officer-Advanced Bioproducts

Conference Call Participants

Trevor Phillips – Private Investor

Scott Lackey – Dakota Asset Management

Justin Alley – Private Investor

Operator

Good morning, ladies and gentlemen. Welcome to Fortress Global Enterprises, Inc. Q1 2019 Earnings Conference Call. I would like to introduce Kurt Loewen. Please go ahead.

Kurt Loewen

Thank you, operator, and welcome to Fortress' first quarter 2019 conference call. With me today are Giovanni Iadeluca, our Chief Executive Officer; and Mark Kirby, the CEO of Fortress Advanced Bioproducts. Throughout the call, references may be made to slides of our presentation, which has been made available for reference through our website at www.fortressge.com under the Financials tab or you can request a copy at info@fortressge.com.

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 also make reference to operating EBITDA. For a definition of operating EBITDA and a reconciliation of net income or loss to operating EBITDA, please see the management's discussion and analysis available on SEDAR at www.sedar.com.

I will now pass the call over to Giovanni for an overview of the first quarter and Dissolving Pulp operation.

Giovanni Iadeluca

Thank you, Kurt, and good morning to everyone. For today's call, I will provide an overview of the first quarter and an update on the Dissolving Pulp segment, followed by Mark Kirby, who will provide an update on Fortress Advanced Bioproducts. Kurt Loewen will then provide some more detail on the financial results for the first quarter of 2019, and we will then open the call up for questions.

Please turn to Slide 3 in the presentation. Fortress Global reported 2019 first quarter operating loss of $9.7 million. The Dissolving Pulp segment incurred operating loss of $8.8 million. The company invested $800,000 in the Bioproducts segment, which was offset by grants and funding, and corporate costs were $900,000 in the first quarter of 2019.

As we move to Slides 4 and 5, mill stability continued to improve. However, due to a combination of factors, such as multiple and unusual region-wide electrical outages as well as extreme weather conditions in excess of normal seasonal patterns, operating results in the first quarter and April of 2019 did not carryforward the momentum from the prior year three quarters. However, as we begin the seasonally more productive months, we will be continuing our progress for the remainder of 2019.

Repairs and upgrades to the regional grid have been completed in response to the outages. As well, important cooking process knowledge was gained during the difficult first quarter which will ensure the winter issues are mitigated and throughput increased under diverse conditions. Looking mid to long term, with the support from our partners, we are finalizing plans to modernize the Fortress mill; diversify revenue streams by converting underutilized mill process streams into high-value bioproducts, such as xylitol; and more permanently improve the balance sheet.

Investissement Quebec has agreed in principle to grant additional deferrals subject to definitive documentation as the company and IQ work towards a longer-term multiyear moratorium on interest and principal and an extended term. The bioproducts demonstration plant project is a key component of our biorefinery vision. We will provide details of these important plans in the coming months.

Moving to Slide 6. Substantial recent increase in VF – VSF capacity has contributed to inventory buildup and softening of VSF pricing. Near-term dissolving pulp pricing will most likely continue to be impacted by VSF market pricing and paper pulp markets. A more positive pricing environment is expected in the second half of the year. In order to take advantage of this typically stronger pricing in the second half of the year going forward, we will move our annual shutdown to the second quarter from the fourth quarter to capitalize on this dynamic.

The shutdown has been reduced by a day as we were able to perform some maintenance during the powder – power outages in the first quarter. During the shutdown, we intend to complete modifications to the fifth digesters for the extraction of prehydrolysis liquor, an important step for the bioproducts demonstration plant project.

I will pass the call over to Mark now for some comments on Fortress Advanced Bioproducts.

Mark Kirby

Thanks, Giovanni. As outlined in Slide 7, with the signing of definitive contribution agreements with Sustainable Development Technologies Canada and with Natural Resources Canada for up to an aggregate of $20.4 million of nonrefundable grants, we expect to start receiving funding in the second quarter to offset demonstration project development costs. In addition, we continued negotiating with the Government of Quebec for $7 million of investment and loan funding previously committed to our bioproducts demonstration plant project. We anticipate that we will finalize these agreements in the coming months.

Moving to Slide 8. As noted previously, the bioproducts demonstration plant is the cornerstone of our bioproducts strategy. We undertook a detailed review of the demonstration plant design and product – project implementation plan, which has resulted in an expanded scope of the demonstration plant to demonstrate production of xylitol, animal feed, lignin and potentially other bioproducts. The project will utilize available hemicellulose and enable the FSC mills with increased dissolving pulp production due to reduced load of hemicellulose and other organics on the evaporators and recovery boiler. We achieved important milestones in the first quarter of 2019 by advancing engineering for our bioproducts demonstration plant and ordering key equipment required for tie-in to the FSC mill's fifth digester.

Now over to Kurt for a brief review of the financials.

Kurt Loewen

Thanks, Mark. Our cash balance at the end of the first quarter was $14.4 million, of which $8.1 million was restricted. Included in restricted cash was a $3.6 million deposit related to our $34 million secured loan with IAM Infrastructure Private Debt Fund loan and CAD 4.3 million or CHF 3.2 million in escrow as part of a holdback on the sale of the Security Paper Products segment back in late 2017. This is due to be released before the end of June 2019.

During the first quarter of 2019, we spent $2.9 million on CapEx and received $1.7 million of government grants. Financing costs also consumed net $0.4 million. Working capital provided cash of $4.4 million, which was more than offset by operating EBITDA loss results.

Moving to Slide 9. It presents an overview of SG&A expenses, which were $4.9 million in the first quarter of 2019 compared to $6.1 million in the fourth quarter of 2018, both of which include development costs related to Bioproducts segment. SG&A in this quarter is a more normalized quarter for corporate and FSC mill, which have typically been in the $5 million range. Over the next six to nine months, we anticipate Bioproducts segment to be cash neutral where development costs are generally offset by funding and grants as we realized in Q1.

On Slide 10, we have a schedule of our upcoming annual principal payments. Note that IQ amended its loan by deferring the quarterly principal payment due March 31, 2019 totaling $2.8 million which is now due at the end of the term December 31, 2026. The interest payable for the first quarter of 2019 has been capitalized and added to the outstanding debt. We continue to work collaboratively with IQ, who has agreed in principle, to grant additional deferrals subject to definitive documentation as the company and IQ work towards a longer-term multiyear moratorium on interest and principal and an extended term. Excluding this lender, the repayment schedule for 2019 would be $4 million instead of $12.4 million and in 2020 would be $3 million instead of $14.4 million.

Although there can be no assurances, Fortress believes that current cash, cash generated from operations, alternative financing arrangements, government financing grants and investments and other cash-generating initiatives should be sufficient to meet its debt service capital expenditure, project development and short-term working capital requirements.

I would now like to ask the operator to open the call for questions on our financial results.

Question-and-Answer Session

Operator

[Operator Instructions] First question comes from Trevor Phillips, Private Investor. Please go ahead.

Trevor Phillips

Hi, there. I'm just curious about some of these alternative cash-generating initiatives and your expectation for this quarter, specifically given that there's going to be a shutdown and pricing is weak. It seems you're – you have very little cash left on the balance sheet. So I'm wondering where this confidence stems from.

Kurt Loewen

I'll start with that one. It's Kurt here. Well, we believe we'll produce cash from operations for the remainder of the year, which will certainly help the balance sheet. Finalizing a multiyear arrangement with our large lenders mentioned will also help in this regard. On an annualized basis, that support – let's say, defers approximately $16 million to $17 million of cash that would have normally gone for debt that can be reinvested into the mill.

Just in the last nine months of 2018, we earned about $19 million in EBITDA at Thurso mill. And so we still believe we are – we can achieve a similar result this year even in a lower-pricing environment. Pricing is projected to improve over the second half of the year. And currently, the – we do have a weaker FX rate than we did last year, which certainly helped things as we look at the Canadian mill net that we received.

Trevor Phillips

And failing that, do you have other recourse in terms of assets to sell that you can discuss? Or – I'm just – it seems a little tenuous to rely on the next few quarters of cash flow to operate – to fund up cash for operations.

Operator

All right. Does that answer your question?

Trevor Phillips

Hello. Can you hear me?

Operator

Well, Trevor is still there. Are you there, Trevor?

Trevor Phillips

Yes. Can you hear me?

Giovanni Iadeluca

I can hear you. It’s Giovanni.

Trevor Phillips

Giovanni, I’m just wondering is there – I mean are we totally dependent on just the cash flow the next couple of quarters to float the balance sheet. I’ve been wondering if you have other recourse in terms of – I mean even if you got deferral from IQ indefinitely, you still have to pay the interest on the debentures and you still have to operate and fund CapEx and all that. So I mean do you have any saleable assets? Or would you – what is the contingency plan?

Giovanni Iadeluca

The assets that we have are strong assets and, if any, we could leverage them going forward, but we’re not considering selling any of the assets.

Trevor Phillips

Are you saying you have room – you have the ability to further borrow again in some of these assets?

Giovanni Iadeluca

We believe so.

Trevor Phillips

Can you discuss, ballpark, what kind of potential leverage you have there? Like…

Giovanni Iadeluca

We’ve got – I would prefer not to have that information out there right now. We’re working with some lenders.

Trevor Phillips

So this is an ongoing – something you’re looking at?

Giovanni Iadeluca

Yes. We are. Kurt, can you…

Kurt Loewen

Can I add one piece, too? We do have restricted cash coming available of $4 million coming up here shortly in addition to improving operations, obviously, which we have to realize.

Trevor Phillips

Okay. Thank you very much.

Operator

All right. Next question comes from Scott Lackey from Dakota Asset Management. Please go ahead.

Scott Lackey

Thank you. Good morning, Giovanni. So previously, you had said to me there was a fifth digester coming on stream this summer, that you would be disappointed if you didn’t get to 170,000 tonnes in 2019. I’m just wondering if this is still your view. Like can you catch up?

Giovanni Iadeluca

We will certainly try, but the first quarter did mortgage our 170,000 tonnes significantly. There’s been some great learnings that the team has responded with during the first quarter which will allow us to be able to get into some sprint speed as we get into our regular seasonal temperature. So the objective is to continue to aim for that amounts.

Scott Lackey

Okay. And in your commentary, you talked about important cooking process knowledge gained in the first quarter and that ensuring the winter issues will be mitigated. Does that mean that – what does that mean with reference to future first quarters?

Giovanni Iadeluca

We’ve – the team now has a much better understanding of root causes and chemistry with regards to cooking. And we’ll be able to deal with a high percentage of certainty with regards to colder weather. And as well as we get ourselves into a position to have a larger age chip file, we will be able to mitigate the lower throughput that we’ve seen this year and last year in the first quarters going forward.

Scott Lackey

So there’s still be some seasonality but less seasonality? Is that what you’re – the bottom line is?

Giovanni Iadeluca

A lot less. Yes. A lot less seasonality.

Scott Lackey

Okay. And then just with reference to the previous caller’s question, what’s the time line? Like when can we expect to see some actual information about balance sheet – a permanent balance sheet solution that you keep referring to in your commentaries?

Giovanni Iadeluca

I would expect that we will be able to conclude that in the second quarter of this year.

Scott Lackey

Okay. Thank you.

Operator

All right. Right now, we don’t have any further questions in the queue. [Operator Instructions] Next question comes from Justin Alley, Private Investor. Please go ahead.

Justin Alley

Yes. Thank you. Can you update us regarding the Chinese duty that was ongoing for the last five year? Is that really terminated?

Giovanni Iadeluca

This is Giovanni. Yes. It is terminated. As was – as per the expiry date, the – those duties affected the industry and certainly, Fortress in particular. At the outset, both ourselves and the industry were able to adjust and find different ways to mitigate the duty. And today, that duty is no longer effective.

Justin Alley

Okay. I believe it was like 13%. So is that going to improve your margin on every tonne of dissolving pulp?

Giovanni Iadeluca

No. It will not. We’ve been able to – years back, we’ve been able to find different ways to mitigate the 13% duty, and we were not affected by it. And today, we’ll be back to market pricing.

Justin Alley

Okay. Thank you.

Operator

All right. Next question comes from Trevor Phillips, Private Investor. Please go ahead.

Trevor Phillips

Hi. Can you give us a little more color around your plans for the xylitol plant and the timing? I’m kind of wondering, like how long does it take to test the technology to shore it up? And at what stage, assuming it works, do you have a potential licensing opportunity or revenue stream coming from that?

Giovanni Iadeluca

Mark, do you want to take that, please?

Mark Kirby

Yes. Our focus right now is on getting the demonstration plant built. And our timing on that is to be starting up in 2020. We have plans in our project to be operating that demonstration plant for up to 18 months. And during that time, we’ll be gathering data, validating information, et cetera. At that point, we will be in a position to make a decision as to how best to capitalize on that technology. Our primary plan is to move forward with a project at our mill, expand the capacity of that plant and generate positive EBITDA and revenues at that location. And then following that, look at licensing opportunities in – at other locations. But the main goal here is to demonstrate our ability to convert the mill into a biorefinery, generating additional products and additional revenues from the same chips coming in the front door.

Trevor Phillips

Okay. So now why wouldn’t you license it in the scenario where you’ve tested it and it works? Or do you need to shore it up and prove it at a full scale? Is that the issue to be able to…

Mark Kirby

Then we’re not going to rule out any opportunities that present themselves, but I think the big opportunity is generating the revenues and the margin at our locations and ensuring and enjoying the profits that come from that. But also, yes, you’re quite right. Generally, you get a higher license fees and a greater amount of revenue, the more thoroughly demonstrated and proven the technology is. So we insisted to take that with our commercial project operating at the Thurso location, we’ll be very well positioned to capitalize that on a – at the locations through either licensing or additional investment at other locations to – ourselves through joint ventures. But at this stage, we are – the first job we need to do is to demonstrate the technology, show the benefits, show the ability to generate additional revenue and margin. And then there will be various means that we can look to, to capitalize on that.

Trevor Phillips

Okay. And can you discuss at all the lawsuit that’s going on several years now with that supplier related to the Cogen facility? Is settling that in the near term a possible source of cash generation? Or is this – I mean you guys don’t talk about it. I’m just curious if this is still out there.

Kurt Loewen

It is still out there. It’s still preliminary. But certainly, we’ll explore all avenues with the – with that.

Trevor Phillips

Is the – when you say preliminary…

Kurt Loewen

Well, it hasn’t gone to court.

Trevor Phillips

It hasn’t gone to court. And do you have any time line?

Kurt Loewen

Yes. That’s in progress but expecting to know a court date by the end of the year. But it’s likely a court date would be sometime later next year, I would expect. It’s delayed to – it’s not certain for sure when that would happen, but it is expected to be in late 2020.

Trevor Phillips

Okay. And the damages you’re suing for is something about $15 million, if I’m correct?

Kurt Loewen

I can’t disclose that.

Trevor Phillips

Can’t disclose it. Okay. Thank you.

Operator

All right. Next, we have a subsequent question from Scott Lackey from Dakota Asset Management.

Scott Lackey

Yes. I just wonder, at what stage of maturity of the bioproduct project could you consider – like would it be a source of monetization? Like where could you raise money in a public offering? Or at what level of maturity of the project?

Giovanni Iadeluca

There’s several options as we’re moving forward. As Mark said, the first is to leverage our own facility. But there is interest in the technology. It’s a technology that is a low-cost technology. And one that provides interesting results, exciting results. So there’s definite options in terms of how we can monetize that, either, as Mark said, through licensing or through continued exploration of advancing that technology here at the facility.

Scott Lackey

You could raise capital with that as well, I presume.

Giovanni Iadeluca

Yes. We can.

Scott Lackey

Thank you.

Operator

All right. And that was the last question we currently had in the queue. [Operator Instructions] And we don’t seem to have any other questions at this time.

Giovanni Iadeluca

Great. So thank you, everyone, for your questions and your continued support. We look forward to updating you on the results in the near future. Have a great day.

Operator

Ladies and gentlemen, this concludes the Fortress Global Enterprises Inc. Q1 2019 earnings conference call. Thank you for your participation and have a nice day.