FGE.to - Fortress Paper (formerly FTP.to)

[jeffmori7]

A new interview with Chad :

 

http://www.bloomberg.com/video/fortress-paper-seeks-more-acquisitions-ceo-says-pWD5YAaZRk2GfG1kozzcsA.html

[tombgrt]

Thanks BRK7, lots of interesting information in the Whistler presentation.

LongTerm, great point. I didn't  know the answer but it looks like we may have part of it now. Thanks guys.

 

update: some numbers Chad gave in the Whistler presentation

commodity paper: $600-$900 a ton

Lowest quality passport paper: $6-7K/ton

Low grade banknote with few security features: $12-12K/ton

Euro 25-28K/ton

Swiss franc: just over $30K/ton

Durasafe: 45K/ton

 

So the potential for higher revenue/ton is there if they can get the right orders.

 

 

65K/ton now for their very best product. Very unlikely of course that this number is scalable (if they ever reach it...) but thought it was an interesting comment of Chad.

[valueinvesting101]

http://www.bloomberg.com/news/2012-08-07/cotton-harvest-in-india-set-to-tumble-as-dry-weather-hurts-crops.html

 

With lower cotton harvest in India and greater demand for soybean in US, cotton prices should be heading higher. That might have pushed FTP higher today.

[motownsf]

Just reported:

 

http://finance.yahoo.com/news/fortress-paper-announces-second-quarter-223200874.html

 

Haven't had time to read through with fine comb, but Specialty Papers run rate is beating what they said on last quarter's call--currently at $42m EBITDA run rate.  This is a very valuable business (worth way in excess of market cap and almost the value of the current EV in my opinion given LBO multiples.

 

Security Paper still struggling and uncertain when new order helps results.  Dissolving Pulp still having some technical issues.

 

 

[lessthaniv]

http://www.bloomberg.com/news/2012-08-07/cotton-harvest-in-india-set-to-tumble-as-dry-weather-hurts-crops.html

 

With lower cotton harvest in India and greater demand for soybean in US, cotton prices should be heading higher. That might have pushed FTP higher today.

 

China is the main importer. They are sitting on excess supply bought up to stablize prices. This may offset some of the drought issues.

[Liberty]

China is the main importer. They are sitting on excess supply bought up to stablize prices. This may offset some of the drought issues.

 

True, though ceteris paribus, a bad cotton harvest due to drought will always lead to higher cotton prices than a good harvest with no drought.

[tombgrt]

Just reported:

 

http://finance.yahoo.com/news/fortress-paper-announces-second-quarter-223200874.html

 

Haven't had time to read through with fine comb, but Specialty Papers run rate is beating what they said on last quarter's call--currently at $42m EBITDA run rate.  This is a very valuable business (worth way in excess of market cap and almost the value of the current EV in my opinion given LBO multiples.

 

Security Paper still struggling and uncertain when new order helps results.  Dissolving Pulp still having some technical issues.

 

 

 

As expected.

 

Could anyone take notes of tomorrow's CC? TIA!

[Liberty]

I'm still digesting all this, and it'll be interesting to get more details on the CC call tomorrow, but so far it seems about as I expected.

 

Thurso's was still in the 70%s for the quarter, and most of the profits come from the last percents because of the fixed costs, so it's not surprising it didn't generate much cash yet (also doesn't have cogen). All DP sold through Q3, which is good to hear, but would love to know pricing (probably will be discussed in the CC). Dresden seems to be doing extremely well, better than I expected. Good to hear that Landquart has started printing the big order in July (wish I knew when exactly in the month). Some work beginning at LSQ.

 

Next few quarters should be much more interesting.

[keerthiprasad]

a little more positive news on bank notes would've been nice.  Otherwise I'm just disappointed that thurso is still lagging.

[jjsto]

End result was in line with what I was thinking.  Will be interesting to see what the sp does tomorrow if that reflects other people's expectations.  Any idea why pulp shipments (tonnes) would be flat from q1 to q2?  I assumed the ramp up while not being reflected in the bottom line would at least show in the quarter to quarter shipment numbers.  I guess the interesting numbers will have to wait till q3/q4.

[jjsto]

Also, on that bloomberg article was chad saying he had some contracts for the new mill in place with a floor of $1,000?  or did that possibly apply to some of the thurso production as well?

[alertmeipp]

the quarter looks boring, lack of progress in DP is disappointing. I think that's the value driver going forward.

 

But the expectation was so low so we should do fine. 8)

[OptsyEagle]

Any idea why pulp shipments (tonnes) would be flat from q1 to q2?  I assumed the ramp up while not being reflected in the bottom line would at least show in the quarter to quarter shipment numbers.  I guess the interesting numbers will have to wait till q3/q4.

 

I believe the DP shipments in Q1 and Q2 are the minimum Fortress Paper has to deliver each quarter as per their contracts.  If they don't produce the amount of product within their contracts, they are required to purchase it on the spot market, for delivery to their customer.  They record this as pulp shipments.  They did this in Q1 and since their own costs were at about where the spot price was, it made very little difference.  What will be interesting is how much of the 35,000 tonne that they delivered in Q2, was produced at Thurso.  I believe this number will be increasing nicely to probably all of it.  I mean simple math says that if they produced at an average of 70% of 200,000 tonnes, divided by 4 quarters, you get 35,000 tonnes produced in Q2.  I forget how much they produced in Q1 but I know it was a lot less.

[Liberty]

Also, on that bloomberg article was chad saying he had some contracts for the new mill in place with a floor of $1,000?  or did that possibly apply to some of the thurso production as well?

 

I think maybe that's the viscose-based contract at thurso.. Viscose spot minus 1k, maybe with floor of 1k ? Not entirely sure.

[triedtestedand]

Who would have thought that wallpaper could be so lucrative, eh?  Obviously they are over-delivering in that segment, along with gains on sale of hydro assets, so no problems there. 

 

Two works in progress then ... Thurso and Landqart.

 

Thurso looks like will need another quarter to really show up in the numbers.  Am not ecstatic (but not totally surprised) that they didn't fully ramp up as of end-of-the-quarter, but trusting they are getting close on the technical finessing, and better they get it done now than have a back-pedal job to do later ... especially in a quarter where downstream market was weak.

 

That said, I am quite encouraged that the cost model is more-or-less proving itself out ... there was a quote early this year where they indicated that they are essentially an all-in breakeven operation at 70% utilization (or maybe a tad more) pre-cogen, and that's what this quarter showed (even with a number of optimizations still being worked on).  It also aligns with the back-of-the-napkin EBITDA analysis I posted on June 7th ... so that is reassuring.

 

Looking at pricing ... they generated $35M on 35K of volume, which with a simple division would mean $1000/ton.  This is low ... but am guessing that the quarter includes some discounting, etc. for early non-spec stuff, so probably need another quarter to prove things out better.

 

Note for Liberty, per your comments ... If I recall correctly the Q1/12 pulp volumes included residual regular pulp that had been produced pre-transition, had been bought back in Q4/11 for some reason, and then resold in Q1/12, so that would fudge the #'s for that quarter (i.e. mix of dissolving and regular pulp) ... also remember that they have one contract with min price of $1200/ton, and a couple of others with base price of $1000/ton, but that these contracts (per a remark at the AGM) do NOT force FTP to buy spot dissolving to cover contracts, so I think all the pulp volumes are their own.

 

One last thought, looking at the market going forward ... besides the comments on cotton pricing, viscose utilization is also ramping back up (see attached graph), and further, ccfgroup.com indicated a few days ago that spot prices for DP are ramping up a bit from the $1000/ton they've been at the past mont or two.

 

The one nagging worry I have from the quarter is Landqart ... even with the material order reinstatement, the language in the release includes a number of if/whens/earliests/etc ... and they produced less this quarter than last (even though it wasn't much in either quarter) ... so hopefully a) they start recognizing material revenue from the order this quarter, and b) they start securing more new orders ... I'm also confused about other "delayed orders" that were alluded to in the release.

[triedtestedand]

A couple of other tidbits that point in an encouraging direction:

 

a) Lenzing cellulose doing well, looking at acquisitions:

 

  http://www.reuters.com/article/2012/08/07/lenzing-ceo-idUSL6E8J72OR20120807

 

b) Rayonier reports strong results for it's cellulose segment:

 

  http://www.marketwatch.com/story/rayonier-reports-strong-second-quarter-2012-results-2012-07-26

 

c) Sappi reports strong results for it's cellulose segment:

 

  http://www.digitaljournal.com/pr/823713

[OptsyEagle]

 

Note for Liberty, per your comments ... If I recall correctly the Q1/12 pulp volumes included residual regular pulp that had been produced pre-transition, had been bought back in Q4/11 for some reason, and then resold in Q1/12, so that would fudge the #'s for that quarter (i.e. mix of dissolving and regular pulp) ... also remember that they have one contract with min price of $1200/ton, and a couple of others with base price of $1000/ton, but that these contracts (per a remark at the AGM) do NOT force FTP to buy spot dissolving to cover contracts, so I think all the pulp volumes are their own.

 

Those comments were mine and I do seem to recall that question on the conference call.  I also remember that there were some residuals from Q4 that were resold but I also seem to recall that they bought some pulp for resale as well.  This is all from memory and it was news to me at the time and perhaps I was mistaken, but that what I seem to recall that they did. 

 

It seems logical that their customers might have wanted some assurance that the pulp would be available to them.  They were contracting for it back when Thurso still had dust on all their equipment.  Anyway, maybe they will touch upon it during this CC.

[OptsyEagle]

  Generated $10.5 M EBITDA from Dresden, lost $ 0.7M at Thurso and $ 6.2M at Landqart.  Corp costs were $1.3M for a combined EBITDA of minus $2.3 M.

 

- Dresden doing very well.  Above expectations.  Order book very healthy with great visibility to end of 2012.  Dresden's market share continues to grow and they currently have greater then 50% market share.  Plant maintenance took place for 10 days and will end Aug. 9th.  This will result in higher production rates and cost efficiciencies, going forward.

 

- Landquart had another difficult quarter due to low volumes.  The significant order received in Q2 has started up in the middle of July.  They expect a Q3 EBITDA loss at Landquart but nowhere near what it was in Q2.  With significant order, it allows much larger profitability on any new orders that they receive, while allowing them to run at the break even level until then.  This significant order should run until mid 2013.

 

- Thurso ramp up continuing along.  Produced at 70% of mill capacity in Q2 and 75% for June.  Had a few down days to address one time equipment issues. 90% of the time the plant was producing at above design capacity.  They have produced at over 100% of design capacity for the last 10 to 11 days but do expect more down days in the future.  For example, they had a couple of down days in July due to a pipe that required replacement and assume going forward there will be more days like this, but still fully confident that the plant can produce to design capacity and that they will get there.  When producing to capacity, they expect their costs to come in, post-cogen, delivered to China in the low $700 per tonne range.  They have allocated an additional $5 million for maintenance for the next two years,  to address any one time equipment issues they identify during ramp up.  This brings annual planned maintence investment to around $14 million at Thurso.

 

- Contracts at Thurso holding up fine.  Majority of their pulp is going to their largest customer with the $1000 floor price, with the rest going to the other with the $1200 floor.  95% of pulp produced was on spec.  Amount sold that was off spec was only in the 100s of tonnes.  Very, very little.

 

Current DP spot price at $1,030 and is believed to by at a cycle low.  Many Asian competitors have idled their plants due to their higher costs.

 

- Co-gen moving along.  Currently at 58% efficiency.  Completion expected late Q4, 2012.

 

- Fortress Optical Features has opened for business on Aug. 8th in Thurso.  Very promising interest in product at this stage.

 

- LSQ.  When up and running with Thurso, expect to produce over 450,000 tonnes of dissolving pulp.  Engineering and design have commenced at LSQ and no issues have been identified.  Conversion should be complete at the end of 2013 with commercial production starting in 2014.

 

- Still reviewing future opportunities for acquisitions.  They are a growing company.  Future acquisitions will be a little more difficult, since they already have a very stringent list of requirements before they would make any acquisition, but currently they need to deal with a couple of other realities.  Current share price is so low they cannot look at issuing equity at these prices to fund a new acquisition.  Current balance sheet has an amount of debt that if more were issued may cause some concerns for the company and share price.  Chad joked that if he can do an acquisition without issuing debt or equity he would be glad to do it.  Ha, ha.  He did indicate, however, that if they did find an acquisition candidate that was such a no-brainer as LSQ was, he would attempt to buy it with a call option structure, as opposed to an out and out acquisition.  Not expecting any new acquisitions this year.

 

- Received $14 million tax refund in July that is now sitting in the bank.

 

 

Anyways, thats about what I saw.  Continuous improvement, in pretty much all divisions and they now have plenty of cash to convert their recent acquisitions and fund daily operations.

 

 

[triedtestedand]

Conf call notes (supplemental to info from press release and results documents) ... you will see they are pretty much the same as OptsyEagle's notes:

 

Dresden

- order book remains 6-7 weeks ... as strong as last quarter

- market share still >50%, despite higher growth rates for market at large

- gave example of increase in market share in Russia & Ukraine

- staying ahead of competition w new products, competitive intel

- mill down for 10days for mtnc and upgrades, will be back online Aug 9th

- improvements post-upgrade will yield 56K tonnes capacity for 2012, which is above guidance, along w lower energy use

- no FOREX worries ... 95% of sales in EUROS

 

Landqart

- material order reinstatement status

    - started printing in mid-July, first shipment sent

    - it will basically fill the first paper machine for the next 12 months

    - it is breakeven business, but allowing focus for second paper machine sales to be on higher value orders

- sales

  - good order intake and visibility into 2013 ... have secured repeat orders, but also new orders from Africa, Asia, LA

  - Q4 has # of large tenders, which have now been pre-qualified for, but which also will be fiercely contested

  - still have market over-capacity which will contain margins, but market starting to soak it up

  - Durasafe ... have a second order secured from a different central bank; also progress on other opportunities

- margin

  - Q3 will still be -'ve EBITDA, but way down (no # given), trending towards breakeven or better for Q4?

- non-core land sale

  - appear to be still working on rezoning, but seem to have support of local officials

  - may realize 10% to 15% of sales ($5M to $10M ... maybe more?) in this calendar year, with rest next year

 

Thurso

- pricing

  - spot averaged $1030; supply/demand in balance; think are at cycle lows

  - yes, the collars on contracted volumes have been tested, but they are holding

- opex

  - moving to budgeted levels (which are at 725-750 per ton landed costs post-COGEN)

  - sounds like new plant investments mostly working well ... but that reliability issues mostly with legacy infrastructure

        - e.g. downtime in July ... 3 days due to broken water pipe and erosion ... also had to re-align dryer

        - have increased mtnc budget for this year and next by $5M for such unplanned items

- quality

  - 95% of DP is on-spec ... very low off spec sales amounts (in 100's of tonnes)

- reliability

  - last 10-11 days have been at 100%, but have to assume there will be other mtnc issues that crop up

 

Other

- have kept close eye on continuous digester technology (which could make it $40M+ cheaper for hardwood pulp mills to convert) still has significant issues ... the one plant in China that uses it has to switch over to paper production repeatedly to clear alkaline levels ...

- not looking at new equity or debt for any acquisitions ... any acquisitions would currently be funded internally (e.g. with longer transition times using existing cash flows, or buy asset on-the-cheap and keep it as a call-option until suitable, etc.)

 

Overall

- Dresden ... remains a no-brainer ... sounds likely to continue to out-perform

- Landqart ... felt more confident post-call ... my biggest worry was/is sales order (and mix/margin), and conf call details provided more reassurance than the press release that they are making progress

- Thurso ... on operations side, they sounded deliberately as wanting to manage expectations (as have obviously been snake-bitten in recent past ... so they did not want to provide a specific utilization % target for Q3, except to say they continue to make progress ... i.e. better than last quarter). That said, it sounds like they have good team of problem solvers who don't want to claim victory until they have an extended run of continuous use (e.g. a month or more?) ... and on the sale/pricing side, it sounds like their contracts have scraped off a bottom without breaching

 

 

[tombgrt]

Thank you guys, great job.

 

More reassuring than the press release, but it's a CC of course. Doesn't seem they are overconfident tho.

Somewhat bugged with floor on biggest DP contract but at least it holds. Better safe than sorry. Better than expected news on Landqart and reliability in the last 10 days for Thurso sounds good as well.

[Liberty]

You guys beat me to it, my notes are pretty similar. Thanks for sharing!

[OptsyEagle]

a) Lenzing cellulose doing well, looking at acquisitions:

 

  http://www.reuters.com/article/2012/08/07/lenzing-ceo-idUSL6E8J72OR20120807

 

What do you think?  With Fortress Paper trading at a market cap of $225 million with all the cash and financing it needs to bring both mills into full production, is it safe to assume these guys have at least looked at a buyout.  For the love of god, they could sell Dresden for $225 million (5.6 x EBITDA) and they would get everything else for free.

 

Obviously it would take more then $15 per share to get the company but it is amazing at what prices people will sell their stock for.

[triedtestedand]

Re Lenzing  ... I had the same fleeting thought. 

 

Chad would likely want a good price for his shares (or some other platinum plated parachute), otherwise Lenzing could still go hostile and just aim for 50%+1.  That said, another obstacle is the debs ... they come due in a change of control situation, and not sure if other debt has any similar string attached. And with various Quebec gov't entities involved, would there be a Fibrek minority shareholder nightmare redux?

[OptsyEagle]

Re Lenzing  ... I had the same fleeting thought. 

 

Chad would likely want a good price for his shares (or some other platinum plated parachute), otherwise Lenzing could still go hostile and just aim for 50%+1.  That said, another obstacle is the debs ... they come due in a change of control situation, and not sure if other debt has any similar string attached. And with various Quebec gov't entities involved, would there be a Fibrek minority shareholder nightmare redux?

 

I don't think they would worry about the debentures.  With the money Lenzing has in the bank, they would probably just pay them off and perhaps issue new debt at lower rates if they wanted to hold onto their cash.  Remember, all the cash for the debentures is currently just sitting in Fortress Paper's bank account, as we speak, along with about $50 Million more.

 

My main point here is that I doubt they will find any other acquisition cheaper then "free" which is what the Thurso and LSQ mills are currently valued at with todays stock price.  If you simply added $150 million dollars (less then what they would need to invest in converting one new mill and we have two) to the price it would allow for a $25 per share offering price.  I know I wouldn't tender to that price but seeing how it is about 66% above the current price, I would bet they could get a hostile deal through very close to it. 

 

Let's just hope they don't.

[triedtestedand]

Maybe we should hope they do ...

 

This yo-yo'ing is manic ... the stock is back down to where we were pre-earnings release, but now all the analysts have cut targets (although not ratings), to varying degrees:

 

http://www.dailypolitical.com/finance/stock-market/td-securities-sets-fortress-paper-price-target-at-17-00-ftp.htm

 

Those with access to such, can you post?