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Fortress Global reports disappointing Q2 and an uncertain future

August 7, 2019 – After a disappointing 2019 second quarter, Fortress Global Enterprises Inc.’s latest financial report indicates it will need access to additional sources of liquidity from investors in order to continue operating.

The company cited an operating EBITDA loss of $9.5 million compared to operating EBITDA loss of $9.7 million in the previous quarter and operating EBITDA of $2.7 million in the prior year comparative period.

The dissolving pulp segment incurred operating EBITDA loss of $8.5 million. Development costs incurred in the bioproducts segment were $2.2 million, which was offset by $2.1 million of grants and funding. Corporate costs were $0.9 million in the second quarter of 2019.

“Due to a combination of factors, such as a lower realized sales price resulting from decreased dissolving pulp prices, an inventory write-down and production challenges coupled with an extended annual maintenance shutdown, operating results in the second quarter of 2019 were below management expectations,” says Giovanni Iadeluca, chief executive officer of Fortress Global Enterprises, in a release. “Current dissolving pulp prices remain well below pricing experienced over the past 10 years; however, management believes dissolving pulp prices should trend towards more normalized pricing in the short term.”

A total of 31,710 air dried metric tonnes (ADMT) of dissolving pulp was produced in the second quarter of 2019 and the Fortress Specialty Cellulose mill sold 33,585 ADMT of dissolving pulp in the same period, compared to sales of 31,232 ADMT and 39,882 ADMT of dissolving pulp in the previous quarter and prior year comparative period, respectively.

Going concern
During the quarter ended June 30, 2019, the company incurred losses of $61.2 million, including an impairment charge of $44.9 million and an inventory write-down of $3.6 million. The company had cash flows from operating activities of $0.5 million, and a working capital deficit of $10.2 million. 

According to the release, Fortress Global’s ability to continue as a going concern is dependent upon the company being successful in accessing additional sources of liquidity from lenders or investors until it is able to generate sufficient, sustainable cash flow from operations to meet its ongoing operating, financing and investing requirements. Active discussions with the company’s lenders are ongoing, as well as efforts to seek other sources of financing. However, there can be no assurance that the company will be successful in raising capital on acceptable terms if at all.

Dissolving pulp prices on a downturn
According to China Chemical Fiber Group, viscose staple fibre (VSF) capacity grew by approximately 740,000 tonnes per year in 2018, driving dissolving pulp demand, which is forecasted to continue to grow in 2019. Dissolving pulp prices in 2018 were relatively stable, with average weekly pricing up 3.6 per cent to $1,206 (US$931) per ADMT as compared to $1,167 (US$899) per ADMT in 2017.

The substantial increases in VSF capacity in 2018 contributed to softening of VSF pricing throughout 2018 and the first half of 2019 as mills struggled with inventory build-up as the new supply came online. The sharp decline in dissolving pulp pricing subsequent to the first quarter of 2019 is in contrast to the positive trend pricing experienced over the previous four years.

Current dissolving pulp prices are at their lowest level since the end of the 2009 recession. Fortress Global management says it believes this to be a result of a temporary disruption in market conditions as there has been no material change in the underlying supply and demand fundamentals. VSF demand is expected to continue to grow by over six per cent per year, driving dissolving pulp demand, which is forecasted to continue to be strong for the foreseeable future.

However, dissolving pulp pricing is currently impacted by VSF/rayon downstream market pricing and conditions, paper pulp market pricing influencing swing mills, general macro-economic uncertainties pertaining to the ongoing US/China trade issues and US$/RMB exchange rates.

“With support from our partners, the company believes it can endure the current market uncertainty in part caused by the trade dispute between China and the United States, which is impacting global trade,” says Iadeluca. “China represents approximately 65 per cent of the dissolving pulp market.”

Read the full Q2 2019 Fortress Global Enterprises financial report.