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

[triedtestedand]

Optsy:

 

Regarding ...

 

"Colin.  Your numbers are almost exactly like mine.  So thanks for the confirmation.  The only difference is the cost of production.  You used $750 per tonne and I believe you got that from Fortress management's disclosures.  I delved into it a little deeper.  I took the revenue in Q4 ($35.7M) and added the EBITDA loss ($$3.5M) and divided that by the number of tonnes produced (43,800) and obtained a cost of production in Q4 of $896 per tonne, PLUS $120 shipping and commissions."

 

Check out alternative # crunching below, and let me know where holes are ...

 

INPUTS

DP Q4 revenue was $35.7M

DP Q4 EBITDA loss was -$3.5M

DP Q4 total sales volume was 46,900 tonnes (including 4,600 tonnes from inventory)

 

BASIC CALCS

DP Q4 inferred production volume was 42,300 tonnes (i.e. 46,900 - 4,600)*

DP Q4 revenue (net freight/etc) per sales tonne  was $761.19/tonne  (i.e. $35.7M/46,900)

 

* Was there specific inventory at end of Q4 noted in the financials?  I couldn't find it

 

 

PRODUCTION COST CALCULATION

DP Q4 revenue for produced sales volume was ~$32.2M  (i.e. $761.19/tonne x 42,300 tonnes)

DP Q4 pro-rata EBITDA for produced sales volumes was ~ -$3.15M (i.e. -$3.5M x 42,600/46,000)**

 

**Assumes inventory in stock had about the same cost of production, so would have similar proportion of EBITDA loss when sold and taken off the books. (Not sure this is valid ... it probably actually had a higher cost of production and thus carried higher proportion of EBITDA loss, as the Q3 production rate was lower than the Q4 production rate)

 

DP Q4 cost of production was $35.35M (i.e. $32.2M + $3.15M)

DP Q4 cost of production per produced tonne was $835.69 (i.e.  $35.35M/42,300 tonnes)

 

 

At a production rate of ~85% for the Q4 quarter, this kinda feels right to me. 

 

 

 

* Was there specific inventory at end of Q4 noted in the financials?  I couldn't find it

 

 

[BRK7]

 

Was there specific inventory at end of Q4 noted in the financials?  I couldn't find it

 

From 4Q MD&A:

 

The Fortress Specialty Cellulose mill continued to ramp up dissolving pulp production during the fourth quarter of 2012.

Although the mill is not yet at long term target rates, improved stable operations is allowing management to focus on

reducing costs. Inventory levels at year end were minimal and expected to remain low through the first quarter of 2013.

[OptsyEagle]

Tried. 

 

There was 1500 tonnes of finished pulp in inventory at the end of Q4.  Also the revenue for Q4 at Thurso was $35.7M and therefore their costs were $35.7 M plus the $3.5M loss or $39.2M.  There production of pulp should be the 46.9K sold, minus 4.6K from Q3, plus 1.5K left in inventory.  From all that you get a production in Q4 of 43.8 K tonnes.  So cost per tonne was $39.2M divided by 43.8K tonnes, which equals $895 per tonne ... plus $120 shipping and commissions. 

 

$1,015 per tonne, all in delivered to China, give or take a buck or two.

 

That is the math I was using.

 

 

[Steady77]

Tried. 

 

There was 1500 tonnes of finished pulp in inventory at the end of Q4.  Also the revenue for Q4 at Thurso was $35.7M and therefore their costs were $35.7 M plus the $3.5M loss or $39.2M.  There production of pulp should be the 46.9K sold, minus 4.6K from Q3, plus 1.5K left in inventory.  From all that you get a production in Q4 of 43.8 K tonnes.  So cost per tonne was $39.2M divided by 43.8K tonnes, which equals $895 per tonne ... plus $120 shipping and commissions. 

 

$1,015 per tonne, all in delivered to China, give or take a buck or two.

 

That is the math I was using.

 

 

 

Shouldn't we use tonnes sold if we are using costs from the income statement?  If so, the cost per tonne before shipping and commissions is $836.

[OptsyEagle]

This business comes down to what is the cost to produce a tonne of DP and that is then compared to what is the price it can be sold for.  If your costs are below the selling price you win and if they are not you lose.  So no, the cost of production is the important number.

 

Since they don't tell us what that number is yet we need to calculate it ourselves.  Since revenue minus costs equals profit, we just rejig the formula because revenue minus profit equals costs.  They obviously spent $3.5M more then the revenue they brought in, producing DP in Q4.

 

All the numbers are there.  All we don't know is exactly what they were spending money on in Q4 and whether any of it can be reduced or eliminated.  I am concerned about whether they will be able to produce 6200 tonnes more and spend less total money doing it, then they did in Q4.  We will know more in Q1.

[Steady77]

Sorry Optsy.  I should have clarified a little more.  I understand where the numbers are coming from including the fact that we are getting tonnes produced from tonnes sold and adjusting by the ending and beginning inventories.  But, I believe we are comparing apples to oranges when we use the cost from the income statement which is based on tonnes sold (not tonnes produced).  If we are using tonnes produced then we have to use the cost of production (not cost of sales).  This would require accounting for the cost in the beginning and ending inventories as well (just as we did for the tonnes calculation).

[OptsyEagle]

I am pretty sure that with GAAP accounting they do adjust for beginning and ending inventories, in each quarter.  If all they did was spend money on buying things for their inventories, then these expenses would not have increased the EBITDA loss and would not be in my calculations either.  Those values would still be on FTPs balance sheet as working capital.

 

By using revenue plus losses, we get the money that was expensed on producing the DP in that quarter.  If we used DP sold, then DP that was produced in the quarter before could make it's way into the calculations and skew things.

 

The other point I was making quite a few posts ago is not only do we want to know what the operating costs are but the ongoing maintenance and interest paid on the debt is also required to determine future profitability.  We shouldn't lose site of that either.

[Steady77]

We are getting closer to the point that I was trying to make.  I don't want to go on and on about it but it is an important calculation as you pointed out in a previous post. Let's just look at beginning inventory. It is on the q3 balance sheet.  It was produced in q3 not q4.  But it is in the costs for q4 because it was sold in q4.  So, to calculate production costs in q4 we have to subtract it from the cost calculation because the accountants using GAAP had to add it in even though those costs were not incurred in q4.  The opposite has to be done for ending inventory.  Those production costs have to be added to your calculation because those costs were incurred in q4 but are not included on the income statement (they are on the q4 balance sheet).  These adjustments will bring the cost per tonne before shipping and commissions from high $800s in your calculation to lower $800s.  They are working on driving out more costs to get to their mid 700s target.

[OptsyEagle]

The cost of the inventory DP, that was produced in Q3 and sold in Q4, was all expensed in Q3 not Q4.  That is why I subtracted it from the DP sold in Q4, to come up with just the DP that was produced and obviously expensed in Q4.  I added the 1500 tonnes of DP that remained in inventory at the end of Q4 because it was produced in Q4.  When I was done I just had the DP produced in Q4, which I think was 43,800 tonnes.

 

Now when I take the Q4 revenues and add the EBITDA loss, I come up with the Q4 expenses.  Revenue minus expenses equals profit/loss.  If I take the Q4 expenses, that obviously was used to produce DP and divide it by the DP produced in Q4, from above, I get my $895 plus shipping and commission.  That is the Q4 cost per tonne. 

 

 

[Steady77]

We agree on pretty much all points except one significant one.  The Q3 inventory is on the balance sheet.  It could NOT have gone through the income statement too (it cannot be in both places).  GAAP's matching principle requires that revenues and expenses be matched with each other.  Since the related revenue from the Q3 inventory is recorded in Q4 so is the related cost. 

 

Maybe an example may help clarify this matter for us.  Let's say for illustration purposes only that there 1,000 tonnes of DP was PRODUCED in Q3 that cost $800,000 but none was sold.  So, there is $800,000 in Q3 inventory (all 1,000 tonnes).  Let's also say that all of the Q3 inventory is sold in Q4 for $900,000.  In order to match those costs with the related revenue the $800,000 costs in Q3 inventory is recorded as a Q4 expense on the income statement in order to match with the $900,000 sales in Q4 to show a profit of $100,000.  IF all of the Q3 inventory was recorded as expense in Q3 it would show a $800,000 loss in Q3 and a $900,000 profit in Q4 which would not be correct.  In this example, there was no cost for the tonnes sold recorded on the income statment in Q3 as it was all held in inventory.  It cannot be an asset (inventory available for sale in the future) and an expense at the same time.  It is one or the other.  In this case it is an asset (inventory) held on the balance sheet.

 

You may be thinking of production costs as in cash outflows.  In the example above, it is recorded as cash out (&/or accounts payable) in Q3 because the production costs were actually incurred in Q3 but those costs are recorded as inventory on the balance sheet and does not yet hit the income statement as this production was not sold until a future quarter. 

 

Cash outflows and expenses which are recorded on the income statement are two different things and can be recorded in different quarters.  In the case of expenses held in inventory they often are.

 

I'm not sure if there is a better way to explain it.  Maybe a link to the related accounting principle may help:

 

http://www.accountingtools.com/matching-principle

[OptsyEagle]

Perhaps you are right.  It would be a complicated calculation trying to match both variable expenses and fixed expenses to a tonne of DP, but I agree, with my method they would need to have carried the 4600 tonnes of DP, that they had in inventory at the end of Q3, at $0 value on the balance sheet...and I doubt they did that.  They don't break down inventories in Q3 that well but they do in Q4.

 

Whatever those costs are that they carried it at on the balance sheet, it would have to be what they used to expense it, when they sold it later.  In Q4 they said they had 1500 tonne of DP in inventory and they also said that the value of "finished goods" in inventory were $13,602K.  So assuming finished goods is only DP waiting to ship, they are valuing them at $907 tonne and they haven't paid to ship them to China yet or paid the commissions, I would assume.

 

Anyway, thanks for clearing that up.  With your method the Q4 costs per tonne would work out to be $836 plus $120 for shipping and commissions.  It does beg the question that if this number was correct, why do they value the 1500 tonnes they had in inventory at Q4 end, at $907 per tonne.  Any ideas there? 

 

It seems the more you ask accounting to answer a question for you, the more questions you end up having.

[Steady77]

No problem.  Just trying to help us use the most accurate numbers we can for this type of analysis.  You did an excellent job on the calculation and it is definitely a worthwhile exercise.  To be honest, I didn't even think to try to attempt it. 

 

The lack of more detailed numbers causes difficulty in attempting such calculations.  Good question with regard to the ending inventory value.  The ending finished goods inventory would include all three mills so even if Dresden and Landqart has even some finished goods (I believe they would since at the 2009 year end these two mills had over $7 million - would be less than that level at 2012 year end) it will skew the calculation.

 

It will be interesting to see the results of the calculation for Q1.  Thanks for your calculations and analysis - it is much appreciated.

[Liberty]

Thanks guys, very interesting discussion these past few posts.

[triedtestedand]

Looks like Thurso will have a week of downtime for maintenance  Apr28 to May4.

 

http://www.syndicatbois.com/

 

22-04-2013 - Fermeture Fortress 1 semaine

Il n'y aura aucune réception de bois à l'usine Fortress Cellulose Spécialisée de Thurso durant la semaine d'entretien de l'usine du 28 avril au 4 mai 2013 inclusivement. Les réceptions reprendront le lundi 6 mai 2013 à compter de 7h00 am.

 

 

[BRK7]

a decent summary of the DP market/opportunity, with a specific focus on Sodra:

 

 

http://www.textileworld.com/Articles/2013/April/Web_issue/Focus_Dissoving_Pulp.html

 

 

[OptsyEagle]

Ah yeah, Dresden and Landqart would make up some of that finished goods number.  I will go with the $836 per tonne, since we cannot derive much from the inventory numbers. 

 

I still think it might be a bit of a struggle to get the costs down to $750 per tonne, even with the Co-gen, but they should be able to get it under $800, maybe even $775 so I won't quibble.

 

Thanks for the replies.

[colinwalt]

I second Liberty, very educational - Thx...

[jeffmori7]

Yes, thanks guys!

 

During this time, back under 7$ which means about 100M$market cap...

 

 

 

I'm curious to see if there could be a offer from a competitor now that Dresden is no longer part of the company...aside from Landquart, this is more and more an pure-play on DP...don't you think it is possible?

[OptsyEagle]

Looks like Thurso will have a week of downtime for maintenance  Apr28 to May4.

 

http://www.syndicatbois.com/

 

22-04-2013 - Fermeture Fortress 1 semaine

Il n'y aura aucune réception de bois à l'usine Fortress Cellulose Spécialisée de Thurso durant la semaine d'entretien de l'usine du 28 avril au 4 mai 2013 inclusivement. Les réceptions reprendront le lundi 6 mai 2013 à compter de 7h00 am.

 

Should this not be something that Fortress should announce in a news release.  I am not saying that it is overly material but it is material enough.  Does anyone know if this was mentioned before?

[Edward]

Should this not be something that Fortress should announce in a news release.  I am not saying that it is overly material but it is material enough.  Does anyone know if this was mentioned before?

Not if it was scheduled maintenance. I think they have two such weeks per year.

[OptsyEagle]

That's why I asked if anyone had heard of it before.  I would think that if it was scheduled that it would have been mentioned on the last conference call.  I don't recall hearing anything about it.

 

As I said, time wise it is not all that material, but if it is an unscheduled downtime, I would say that it pretty much tells us that they found another problem that they now need to fix.  If they found another problem to fix then it tells us that their production rate or quality is not currently fixed.  That tells me that not only is Q1 not going to show us much progress but now we have the possibility that Q2 may not move us to where we want to be either.

 

This is starting to get more then a little frustrating.  They have been producing DP now for 5 quarters, with Q2 being the 6th.

 

[Edward]

I would think that if it was scheduled that it would have been mentioned on the last conference call.

Any big plant in any industry has some kind of regular shut down for maintenance and I've never heard of a company mentioning "oh, by the way, we have some regular maintenance works in a month, like we had last year and every year before that". It's a bit ridiculous.

 

Unscheduled maintenance due to a real problem is another matter.

 

By the way, going over the discussion in this thread, I got the impression that the discourse went from "OMG, it's the next Buffett, must buy NAU!!!" to deep suspicion and disappointment - although basically nothing changed much over the last 2 years inside the company. Mostly outside factors like DP price and contract delays in Landqart, and somewhat expected problems(to me at least) in the Thurso ramp up. I'm just amazed by the manic - depressive swing in sentiment.

 

[OptsyEagle]

Any big plant in any industry has some kind of regular shut down for maintenance and I've never heard of a company mentioning "oh, by the way, we have some regular maintenance works in a month, like we had last year and every year before that".

 

Actually, they all do.  It allows the analysts and investors to adjust expectations for the given quarters.  Even the last time Fortress Paper did it, they mentioned it in the conference call ... or it was unscheduled and they explained it in the next conference call.

 

So I guess it is safe to say that no one else heard about this one in advance.  In any event, they did disclose that they are still working out the bugs.  I am sure some take a shutdown to fix.

[enoch01]

I would think that if it was scheduled that it would have been mentioned on the last conference call.

Any big plant in any industry has some kind of regular shut down for maintenance and I've never heard of a company mentioning "oh, by the way, we have some regular maintenance works in a month, like we had last year and every year before that". It's a bit ridiculous.

 

Unscheduled maintenance due to a real problem is another matter.

 

By the way, going over the discussion in this thread, I got the impression that the discourse went from "OMG, it's the next Buffett, must buy NAU!!!" to deep suspicion and disappointment - although basically nothing changed much over the last 2 years inside the company. Mostly outside factors like DP price and contract delays in Landqart, and somewhat expected problems(to me at least) in the Thurso ramp up. I'm just amazed by the manic - depressive swing in sentiment.

 

I don't think it's true that basically nothing changed.  They just sold their money maker, right?  Now it's more of a speculation what they will make in the future.  I would've thought they'd do the opposite - get rid of the problems and keep the gem.

[ECCO]

 

I would've thought they'd do the opposite - get rid of the problems and keep the gem.

 

Company in trouble usually do that as its quite easy to sell the money making division and nobody want to buy the losing money division.

 

If you can read french, you will find some interresting information here: www.syndicatbois.com as their production seem to slow down and they even said that FTP will take more time to pay the wood they received because of slowdown. Liquidity problem at Thurso?

 

But things should go well as Chad deserve a bonus for year 2012...  :o