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Fortress Paper Ltd. ("Fortress Paper" or the "Company") (TSX:FTP) reported 2011
fourth quarter EBITDA loss of $1.5 million. For the third quarter of 2011,
EBITDA loss was $0.8 million and for the fourth quarter of 2010, EBITDA was $3.6
million.
Fortress reported an adjusted net loss of $6.3 million, or diluted adjusted loss
per share of $0.44 for the fourth quarter of 2011 on sales of $49.5 million. In
the third quarter of 2011, the Company reported an adjusted net loss of $7.8
million or diluted adjusted loss per share of $0.54 on sales of $84.0 million
and for the fourth quarter of 2010 adjusted net loss of $1.7 million or diluted
loss per share of $0.14 on sales of $83.5 million.
The fourth quarter of 2011 re-defined the Pulp Segment as the Company
transitioned from a northern bleached hardwood kraft ("NBHK") and specialty pulp
producer to a dissolving pulp producer. Production of dissolving pulp commenced
in early December and the Company has since ramped up production to
approximately 72% of the planned capacity. Dissolving pulp sales are anticipated
to provide materially higher margins than previous NBHK and specialty pulp
sales.
The Wallpaper Base Segment continued its strong performance in the fourth
quarter and achieved record results in the 2011 fiscal year. Margins remain
strong and the order log is healthy. Overall, the global non-woven wallpaper
market experienced growth in traditional and emerging regions in 2011. Following
completion of upgrades to our paper machine in the summer of 2011, production
speed increased to 450 metres per minute, representing a theoretical capacity of
approximately 55,000 tonnes per year at the Dresden mill. Improvements in
production efficiency, reduced pulp prices, full utilization of the Company's
new dry waste plant, together with a slight increase in sales prices, resulted
in improved EBITDA margins.
The Security and Specialty Papers Segment experienced another challenging
quarter. Throughout 2011, product mix, high raw material prices, pricing
pressure, a strong Swiss currency, and less than optimal production efficiency
on the Landqart mill's paper machines contributed to a disappointing and
difficult fourth quarter of 2011. Industry over-capacity during 2011, due in
part to the postponement of several major currencies, was another factor that
impacted performance at the Landqart mill, however the Company expects that
banknote orders in 2012 will improve utilization and require the capacity of
both paper machines to meet demands through the last three quarters of the year.
Fortress reported EBITDA of $3.3 million for the year ended December 31, 2011,
compared to $25.9 million for the year ended December 31, 2010. Excluding
corporate costs, the three business segments' combined EBITDA was $11.1 million
and $31.1 million in the years ended December 31, 2011 and 2010, respectively.
Despite the economic challenges experienced in Europe during 2011, the Wallpaper
Base Segment was able to contribute a record $31.5 million EBITDA which was
significantly higher than the previous year at $22.7 million. The Security and
Specialty Papers Segment generated significant losses in 2011 ($23.1 million
EBITDA loss) compared to the prior year ($0.3 million EBITDA loss). The Pulp
Segment which commenced operating in mid-2010, generated approximately $2.8
million and $8.7 million EBITDA in the years ended December 31, 2011 and 2010,
respectively. Corporate costs contributed to EBITDA loss in the amount of $7.8
million in 2011 and $5.2 million in 2010.
Adjusted net loss for the year ended December 31, 2011 was $20.6 million or
($1.47) per share (diluted). Adjusted net income for the prior comparative
period was $8.2 million or $0.67 per share (diluted).
Management's Outlook
Dissolving Pulp Segment
Substantial progress is being made within the Company's expanding dissolving
pulp business. Since commencing production in December 2011, production has
ramped up steadily to a current average rate of 415 tonnes per day ("tpd"), or
approximately 72% of the planned capacity. The Company is aiming to achieve full
planned production capacity by the end of the second quarter of 2012. The
Company's dissolving pulp product is currently exceeding quality expectations
and meeting customer specifications.
Although the Company is still assessing and attempting to mitigate the impact of
previously disclosed issues that arose during the fourth quarter of 2011, the
schedule for the completion of the cogeneration project remains materially
on-time for the fourth quarter of 2012 in accordance with the Company's energy
delivery obligations. However, in the latter part of the first quarter of 2012,
the Company also reassessed the cogeneration project and identified certain
deficiencies in a previous estimate from an engineering firm and scope of work
adjustments necessary in order to commence delivery of power by this time.
Demand for dissolving pulp has historically been determined by the level of
economic growth and has been closely tied to overall business activity. As the
global economy slowed in late 2011, dissolving pulp prices weakened
substantially, dropping to approximately US$1,100 per tonne. A stronger than
expected demand for textiles in early 2012 saw a rebound of dissolving pulp
prices to approximately US$1,280 per tonne in February 2012 with prices
currently at approximately US$1,250 per tonne. The demand for dissolving pulp is
expected to increase as the demand for textile fibres increases with the
continued growth of the global population. Demand is also expected to be driven
by the development of new applications for dissolving pulp and an increased
focus on environmental awareness. The Company believes that favourable market
conditions exist for additional dissolving pulp capacity entering the market.
The Company's strategy is to expand its dissolving pulp segment and pursue
additional acquisitions and unique opportunities for conversion projects. See
"Subsequent Event".
Security Paper Products Segment
The outlook for the banknote industry remains generally positive with global
demand for banknotes growing at approximately 4% per annum. The key driver of
this growth continues to be the policies of central banks to upgrade the
security and quality of their banknotes more frequently, thereby increasing the
volumes of new notes that need to be printed. The growing automation of all
aspects of the cash cycle, be it through Automated Teller Machines (ATMs) that
dispense cash or the increased use of high speed banknote sorting equipment to
process and sort cash, stimulates demand by requiring the withdrawal of
increasing volumes of used banknotes from circulation and their replacement with
new banknotes.
The banknote paper segment of the market continues to share in this growth.
However, the continued overcapacity in this sector of the industry has led to
fierce competition and price pressure in the high volume tender markets. Raw
material prices (especially for cotton) have eased back from the acute levels
seen in the first half of last year and there has been less exchange rate
volatility since the intervention of the Swiss National Bank to set a ceiling
for the Swiss franc appreciation against the Euro. Although recent market
conditions have created difficulties for papermakers in general, Landqart
remains focused on its strategy of expanding its markets beyond Europe and
marketing its innovative proprietary technology to key customers. In 2011,
Landqart secured orders from new customers in Asia, Africa and Latin America. It
also completed the first production run of its new composite substrate,
Durasafe. Interest in Durasafe from central banks is encouraging and Landqart is
seeking to secure several new orders over the next 12 months.
An unexpected delay in the production and delivery of a significant order
occurred in the fourth quarter of 2011 which has continued into the first
quarter of 2012. Although this delay resulted in a temporary disruption in the
production schedule, the Company expects to be able to resume production and
deliveries in the second quarter.
The acquisition and integration of OTM has given Fortress a stake in the
important and high value security thread market. The Company's wholly owned
subsidiary, Fortress Optical Features Ltd. ("Fortress Optical") is currently
engaged in developing the next generation of OTM products while continuing to
produce OTM components for the colour shifting security thread market.
Fortress Optical will continue to work with preferred channel partners to
convert the OTM component into a finished thread with the aim to sell these
products into the banknote paper industry largely through its sister company,
Landqart. The OTM colour shifting technologies will allow Landqart to offer its
own highly secure and technically advanced security threads to its central bank
customers. This is an important step forward towards greater vertical
integration of the supply chain.
Specialty Papers Segment
The non-woven wallpaper market is expected to continue to grow at over 10% per
year. Growth drivers include substitution of standard paper-based wallpaper and
other types of wallcoverings with non-woven wallpaper in traditional and
emerging markets. The overall wallpaper market is expected to benefit from a
recovery in residential construction and remodeling.
Following the paper machine upgrade in 2010, production speed reached 450 m/min,
as planned, which translated to an increased capacity of approximately 55,000
tonnes per year of non-woven wallpaper base at the Dresden mill.
Significant Developments
Overall, 2011 was a year of significant transformation including the following
developments:
-- The successful conversion of the Fortress Specialty Cellulose mill from
a NBHK pulp producer to a dissolving pulp producer. Dissolving pulp
production is anticipated to provide materially higher margins relative
to NBHK pulp and specialty pulp previously produced at the mill.
-- Continued margin and market share growth in the non-woven wallpaper
market achieved by the Dresden mill.
-- Security paper capacity at the Landqart mill increased from 2,500 tonnes
to 10,000 tonnes. Significant headwinds were experienced in 2011 as this
new capacity became available at a time where there was a general
softening in the banknote industry and the postponement of several major
currencies.
In January 2011, Fortress completed the acquisition of the assets from the Bank
of Canada's Optical Security Material division which it now uses to produce OTM
contained in various banknotes. The Company paid a purchase price of $0.75
million for the assets and granted the Bank of Canada a royalty-free license to
use the intellectual property sold to the Company for Canadian banknote
applications. The assets have been relocated to the Fortress Optical Facility
which the Company built adjacent to its Fortress Specialty Cellulose mill in
Quebec.
The Company completed two bought deal short form prospectus offerings in 2011.
In February 2011, the Company completed an offering (the "2011 Share Offering")
of 1,112,050 of its common shares (including the exercise in full of the
underwriters' over-allotment option) at a price of $51.75 per share, resulting
in aggregate gross proceeds of $57.5 million. Proceeds of the 2011 Share
Offering were used to finance certain capital expenditures relating to the
Company's Fortress Specialty Cellulose mill and the construction of the Fortress
Optical Facility. In December 2011, the Company completed an offering (the "2011
Debenture Offering") of 6.50% convertible unsecured subordinated debentures,
including the exercise in full of the underwriters' over-allotment option,
resulting in aggregate gross proceeds of $40.25 million. The debentures are
listed and posted for trading on the Toronto Stock Exchange under the symbol
"FTP:DB". Holders of debentures may, at their option, convert debentures into
common shares at any time prior to maturity at a price of $37.50 per share. The
proceeds of the 2011 Debenture Offering were used to reduce outstanding
indebtedness, to fund costs arising from the Fortress Specialty Cellulose
project and for working capital and general corporate purposes.
Subsequent Event
Consistent with the Company's desire to grow its dissolving pulp segment, in
January 2012, the Company announced that it, through a wholly-owned subsidiary,
signed an asset purchase agreement ("APA") to acquire, together with 9109-3294
Quebec Inc. ("9109"), an affiliate of the Quebec Government, the assets relating
to a pulp mill situated in Lebel-sur-Quevillon, Quebec owned by Domtar Inc. (the
"LSQ Mill"), with the intent to convert the LSQ Mill into a dissolving pulp
operation. As part of the acquisition, the Company will acquire a 30-megawatt
non-operating cogeneration facility at the LSQ Mill, which it intends to restart
and is expected to result in material energy savings. In addition, a
cogeneration expansion project will increase power capabilities to 50 megawatts
of total power in respect of which the company is seeking a long-term power
supply agreement with Hydro Quebec which, once completed, is expected to provide
the necessary power required to operate the mill.
The closing of the APA is subject to various conditions, including (i) the
entering into of a collective agreement with the unionized employees of the LSQ
Mill, (ii) the entering into of a loan agreement with Investissement Quebec
("IQ") securing financing to implement the Company's proposed business plan at
the LSQ Mill, (iii) the parties to the APA entering into a trust agreement, (iv)
the entering into of satisfactory lease and other ownership and access
agreements with 9109, (v) finalizing satisfactory fibre supply arrangements with
the Quebec Government, and (vi) Domtar Inc. completing its agreement with the
City of Lebel-sur-Quevillon in respect of certain property taxes.
EBITDA is defined as net income before interest, income taxes, depreciation,
amortization, non-operating income and expenses and stock based compensation
which the Company considers to be a key performance indicator. Reference is also
made to adjusted net income (loss) (calculated as net income (loss) less
specific items affecting comparability with prior periods - for the full
calculation, see reconciliation included in the tables titled "Net Loss to
Adjusted Net Loss Reconciliation") and adjusted net income (loss) per share
(calculated as adjusted net income (loss) divided by the weighted average number
of shares outstanding in the period). EBITDA, adjusted net income (loss) and
adjusted net income (loss) per share are not generally accepted earnings
measures and should not be considered as an alternative to net income or cash
flows as determined in accordance with IFRS. As there is no standardized method
of calculating these measures, the Company's EBITDA, adjusted net income (loss)
and adjusted net income (loss) per share may not be directly comparable with
similarly titled measures used by other companies.
Selected Financial Information
The selected financial information presented herein is qualified in its entirety
by, and should be read in conjunction with, our audited consolidated financial
statements as at and for the year ended December 31, 2011 and the related notes
thereon and our Management's Discussion and Analysis ("MD&A") filed on SEDAR.
Three Months Ended December 31, 2011
(thousands of dollars, except shipments,
unaudited) Q4 2011 Q3 2011 Q4 2010
---------------------------------------------------------------------------
Sales 49,524 83,995 83,467
EBITDA(1) (1,491) (758) 3,647
Operating loss (5,607) (4,876) (10,399)
Net loss (9,171) (7,237) (12,790)
Adjusted net loss(2) (6,273) (7,762) (1,721)
Paper Shipments (tonnes) 13,035 13,383 15,406
Pulp Shipments (tonnes) 8,168 55,918 62,038
(1) See Net Loss to EBITDA Reconciliation.
(2) See Net Loss to Adjusted Net Loss Reconciliation available in the MD&A
Net income to EBITDA reconciliation:
(thousands of dollars, unaudited) Q4 2011 Q3 2011 Q4 2010
----------------------------------------------------------------------------
Net loss (9,171) (7,237) (12,790)
Income tax (388) 2,051 1,623
Foreign exchange loss (gain) 2,898 (526) 513
Interest expense 1,057 836 255
Amortization 3,793 3,668 3,062
Stock based compensation 320 450 5,984
Executive cash award - - 5,000
----------------------------------------------------------------------------
EBITDA (1,491) (758) 3,647
The Company
The Company was incorporated on May 30, 2006 under the laws of the Province of
British Columbia. In the 2011 fiscal year, Fortress operated internationally in
three distinct business segments: the Pulp Segment, Security and Specialty
Papers Segment and Wallpaper Base Segment. The Company operates its dissolving
pulp business at the Fortress Specialty Cellulose mill located in Canada which
is also in the process of expanding into the renewable energy generation sector
with the construction of a cogeneration facility. The Company operates its
wallpaper base business at the Dresden mill located in Germany, where it is a
leading international producer of specialty non-woven wallpaper base products.
The Company operates its security paper products business at the Landqart mill
located in Switzerland, where it produces banknote, passport, visa and other
brand protection and security papers, and at its Fortress Optical facility
located in Canada, where it manufactures optically variable thin film material
("OTM"). The segmentation of the Company's manufacturing operations is based on
a number of factors, including production, production processes, and economic
characteristics.
Conference Call
A conference call to discuss the financial results for the fourth quarter 2011
will be held on March 6, 2012 at 9:30 a.m. (PST). To attend the conference call,
please dial one of the following numbers:
North America: 1-855-353-9183
International: 1-403-532-5601
Participant pass code: 15086#
Conference Reference Number: 765945
A replay of the conference call will be available for 7 days. To access the
replay, listeners may dial 1-855-201-2300 from North America or 403-255-0697
International. The conference reference number is 765945 # and the participant
pass code to access the replay is 15086 #.
Forward-Looking Statements
Some information in this news release contains forward-looking statements that
reflect the current views and/or expectations of the Company with respect to its
performance, business and future events. The reader is cautioned that
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause actual results or events to differ materially from
those anticipated in such forward-looking statements including, without
limitation, those relating to damage to our reputation, competition, maintaining
our market position, marketability and price of our products, technology and
protection of our intellectual property, dependence on our major customers,
fluctuations in the price and supply of raw materials, fluctuations in foreign
exchange and other risk factors detailed in our filings with Canadian securities
regulatory authorities. These risks, as well as others, could cause actual
results and events to vary significantly. Fortress Paper Ltd. does not undertake
any obligation to release publicly any revisions for updating any voluntary
forward-looking statements.
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