Fortress Paper reports Q2 2017 results

Fortress Paper
August 22, 2017
By Fortress Paper
Aug. 22, 2017 - Fortress Paper reported 2017 second quarter operating EBITDA of $4.3 million, a decrease of $2.0 million relative to the comparative prior year period and a decrease of $3.2 million over the previous quarter.

The Dissolving Pulp Segment generated operating EBITDA of $3.5 million and the Security Paper Products Segment generated operating EBITDA of $2.8 million. Corporate costs included in operating EBITDA were $2.0 million.

Pursuant to the company’s normal course issuer bid (NCIB), the company repurchased 54,688 common shares for a total cost of $360,000 at an average price of $6.58 per share during the second quarter. It has the ability to purchase an additional 355,321 common shares under the NCIB.

Q2 2017 results by segment
Dissolving Pulp Segment
Dissolving Pulp Segment operating EBITDA was $3.5 million for the second quarter of 2017, representing an increase of $0.3 million over the prior year comparative period and a decrease of $4.8 million when compared to the first quarter of 2017. The results of the second quarter of 2017 were negatively impacted primarily by lower production rates, increased production costs and a decline in dissolving pulp prices. Production efficiency and costs were impacted by the operational challenges experienced in the chemical recovery area of the mill and a three day planned outage. Average production cost in the quarter was $991 per air dried metric tonne (ADMT) which is above target. Corrective measures and efficiency initiatives have been identified and scheduled to be completed during the annual October shutdown. The shutdown is planned to be extended a few days this year due to the incremental work required in connection with the fifth digester project. Ongoing initiatives to reduce operational costs are focused primarily in the following areas: improving productivity, reducing fuel consumption, increasing power generation, and reducing chemical costs. Separately, the fifth digester project is on time and on budget with an anticipated completion date at the end of the first quarter of 2018, and which is expected to result in an incremental annual production capacity increase of 8,500 ADMT in 2018 and 17,000 ADMT in 2019 compared to current production capacity. The Company sold 34,672 ADMT of dissolving pulp in the second quarter of 2017, down from 39,931 in the previous year comparative period.

Security Paper Products Segment
Security Paper Products Segment operating EBITDA was $2.8 million for the second quarter of 2017, representing a decrease of $1.0 million compared to the prior year comparative period, adjusted for $0.9 million of rent, and an increase of $1.3 million compared to the first quarter of 2017. The Landqart mill continues to implement new initiatives to improve efficiencies and profitability. The build-out and installation of the second finishing machine has been materially completed, is undergoing final testing and is on schedule to be fully operational before the end of the third quarter of 2017. The additional finishing machine is expected to de-bottle-neck the mill and provide more production flexibility. The Landqart mill sold 3,139 tonnes of security paper in the second quarter of 2017, compared to 2,714 tonnes in the prior year comparative period.

Management’s Outlook
Dissolving Pulp Segment
Over the last two months, viscose staple fibre (VSF) prices have recovered from recent weakness, returning to August 2016 levels. Dissolving pulp prices usually lag behind the VSF price, however management has seen recent price increases occurring. Management now believes that full year average dissolving pulp pricing will be comparable to 2016. Despite the weaker than expected second quarter financial results, management expects to achieve annual operating EBITDA similar to the prior year, subject to market factors such as dissolving pulp trend pricing and a stable Canadian dollar relative to the U.S. dollar.

Security Paper Products Segment
The Landqart mill has a full order book for 2017 and continues to build out its 2018 order book comprised of a mix of new and repeat orders including for Durasafe. Operating EBITDA at the Landqart mill for the quarter ended June 30, 2017, exceeded expectations due to a significant order shipping in the quarter originally planned for shipment in the third quarter of 2017. Operating EBITDA in the third quarter is expected to be lower when compared to the second quarter due to the aforementioned shipment and lower margin product mix.

As previously announced, Landqart received another Durasafe order in the second quarter, and based on multiple trials being conducted at various stages, management continues to anticipate additional Durasafe orders in the near, medium and long term.

Corporate and cash
Corporate expenses in the second quarter decreased by $0.3 million compared to the previous quarter to $2.0 million. Cash and restricted cash ended the second quarter at $58.5 million, up from $57.8 million at the end of the previous quarter.

Management remains pleased with this increased liquidity profile and believes that cash on hand and anticipated cash generated from operations and other initiatives will be sufficient to meet all debt obligations and to contribute to future business growth initiatives.

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