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

[enoch01]

 

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.

 

That should be taken as a hint, unless you are a turnaround genius who sees something no one else in the market does.

 

They could decide to just wind it down.  It happens sometimes, like with Berkshire and their mills.  I confess I don't follow the company as well as others here, but didn't they get a lot of their current assets for very little money?

[lessthaniv]

This has been alluded to on this forum but it's worth a read. The following brief excerpt has been taken from Philip Fisher's book - Common Stocks and Uncommon Profits and other writings which was originally published in 1958. What's occurring with Fortress at the moment is by no means new. I should also note that this excerpt was taken from Part One - Chapter5 titled "When to Buy".

 

 

http://i728.photobucket.com/albums/ww289/MikeNCathy/fisher1_zpsd554df25.png

http://i728.photobucket.com/albums/ww289/MikeNCathy/fisher2_zpsc617b968.png

 

 

 

 

[nestorius]

Announced this morning - Buckeye Technologies to be acquired by Georgia-Pacific for ~$1.5 billion. 7.7x 2013 EBITDA in a "weak operating year". Seems like a decent comparable for FTP but others may have a more informed view.

[enoch01]

Thanks lessthaniv, good stuff.  I do hope it works out similarly for shareholders.

[OptsyEagle]

Announced this morning - Buckeye Technologies to be acquired by Georgia-Pacific for ~$1.5 billion. 7.7x 2013 EBITDA in a "weak operating year". Seems like a decent comparable for FTP but others may have a more informed view.

 

That's a wonderful price.  Now go calculate our EBITDA and let us know what final valuation you get.

 

Buckeye is not exactly comparable since I believe they are 100% specialty pulp.

[Edward]

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.

Superficially that's correct. However, even before Thurso it was well known that the company won't keep any business just for the sake of keeping it. The whole point of this company is buying assets cheap and selling them dear. They got it for 7.5M$ and sold a few years later for 210M$ while collecting operating profits along the way. I call that good business (I also tend to think the 20%+ margins of Dresden are not sustainable forever).

 

Also, of course you can only sell stable assets for good prices, and nothing else is currently stable.

 

Ever since they first announced their involvement in DP, it became primarily a DP company. There was no point in a market value of over 200M$ if the DP business is considered a total loss, and frankly investing just for the wallpaper business doesn't make much sense as well. It's just that the DP numbers are much bigger than the other two businesses for them to make a real difference in a few years (aside from a margin of safety perspective - today).

 

As I see it, to invest in this company you have to believe 3 things:

 

1. Management knows what they are doing.

 

2. They will do the right thing due to significant insider ownership.

 

2. The DP business will work out at some point.

[Edward]

This has been alluded to on this forum but it's worth a read. The following brief excerpt has been taken from Philip Fisher's book - Common Stocks and Uncommon Profits and other writings which was originally published in 1958. What's occurring with Fortress at the moment is by no means new. I should also note that this excerpt was taken from Part One - Chapter5 titled "When to Buy".

That's an excellent observation that fits in perfectly with this situation (IMO).

[Edward]

Buckeye is not exactly comparable since I believe they are 100% specialty pulp.

Half fluff, half specialty. (p.24):

http://www.bkitech.com/images/document/investorpresentation.pdf

[lessthaniv]

Announced this morning - Buckeye Technologies to be acquired by Georgia-Pacific for ~$1.5 billion. 7.7x 2013 EBITDA in a "weak operating year". Seems like a decent comparable for FTP but others may have a more informed view.

 

That's a wonderful price.  Now go calculate our EBITDA and let us know what final valuation you get.

 

Buckeye is not exactly comparable since I believe they are 100% specialty pulp.

 

In fairness OptsyEagle;

 

The practice of extrapolating current EBITDA numbers and then applying multiples to them during the peaks or troughs of cyclical businesses rarely provides an investor insight on intrinsic value. In both cases, it's probably wise for an investor to consider average EBITDA production over the course of a full cycle.

[lessthaniv]

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.

 

They got it for 7.5M$ and sold a few years later for 210M$ while collecting operating profits along the way. I call that good business (I also tend to think the 20%+ margins of Dresden are not sustainable forever).

 

Although the outcome is still favourable, Edward you must consider the capital expenditures they put forth to get that valuation. The picture is still  great but not quite as good as you describe.

[Edward]

Although the outcome is still favourable, Edward you must consider the capital expenditures they put forth to get that valuation. The picture is still  great but not quite as good as you describe.

Of course, I tried to be brief in my comment. I believe they invested something in the order of 50M$ in total to get it to where it is today but it was more than funded by operating profits along the way. Never mind exactly how you look at it, it's an amazing ROIC.

[jeffmori7]

 

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.

 

That should be taken as a hint, unless you are a turnaround genius who sees something no one else in the market does.

 

They could decide to just wind it down.  It happens sometimes, like with Berkshire and their mills.  I confess I don't follow the company as well as others here, but didn't they get a lot of their current assets for very little money?

 

You are right, and that is one of the main reason to like this stock, as we thought we had an incredible value-oriented management. But let's not forget that even if the asset are bought very chea, there is afterward a lot of capex to put into them to turn them into moneymaker, and so far, without probing results except for Dresden, which, incidentally, was just sold.

[Edward]

You are right, and that is one of the main reason to like this stock, as we thought we had an incredible value-oriented management. But let's not forget that even if the asset are bought very chea, there is afterward a lot of capex to put into them to turn them into moneymaker, and so far, without probing results except for Dresden, which, incidentally, was just sold.

I don't want to become the resident cheerleader here, but I thought their remarks about Landqart were interesting, especially in the last conference call. I recall Chad saying that except the currency and delayed order issues(both external), they think it is actually on track according to the original plan. I thought that considering the analyst resentment of the division for all the investments made and losses incurred, it might be why they haven't closed the doors. Because most managements probably would just to stem short term losses and look good.

 

I also think selling Dresden for that price was reasonable even if they didn't need the cash. The reason for those high margins is a temporary competitive advantage due to the small size of that market. It could easily revert to a 5% margin business in a few years when that market grows to a certain size, allowing a competitor to invest in some competitive machinery. It's a wallpaper substrate, not Apple products.

[Liberty]

VANCOUVER, BRITISH COLUMBIA--(Marketwired - April 30, 2013) - Fortress Paper Ltd. ("Fortress Paper" or the "Company") (TSX:FTP) is pleased to announce that it has successfully completed the sale of the Dresden Mill to Glatfelter Gernsbach GmbH & Co. KG, a subsidiary of P.H. Glatfelter Co., previously announced on March 13, 2013. The purchase price for the sale was EUR160 million (approximately CDN$212 million), subject to a post-closing working capital adjustment.

 

With the sale of the Dresden Mill, Fortress Paper no longer operates in the specialty papers (wallpaper base) industry.

[prunes]

http://fortresspaper.com/images/pdfs/releases/Press%20Release%20Q1%202013.pdf

 

FORTRESS PAPER ANNOUNCES FIRST QUARTER 2013 RESULTS

 

Vancouver, British Columbia, May 13, 2013 – Fortress Paper Ltd. (“Fortress Paper”, "we",

"our", "us" or the “Company”) reported 2013 first quarter EBITDA loss of $2.6 million.

Excluding corporate costs, combined EBITDA loss of the three business segments Fortress

operated in during the first quarter of 2013 was $0.3 million in the three months ended March 31,

2013. The recently discontinued Specialty Papers Segment contributed $10.5 million EBITDA,

while the Dissolving Pulp Segment and the Security Paper Products Segment generated EBITDA

losses of $8.7 million and $2.1 million, respectively. Corporate costs contributed to EBITDA

loss in the amount of $2.3 million.

 

Looks like the shutdown of Thurso during April was unplanned:

 

The Fortress Specialty Cellulose mill pulp production rates remained below management

expectations during the first quarter of 2013 as the mill faced on-going challenges with digester

and evaporator capacity issues. The mill recently completed a ten day maintenance shut down

that began in late April. We expect that the maintenance shut down will address issues in order

to improve production, generate stable operations and reduce production costs.

 

Cogen:

The cogeneration project continues in its commissioning and start-up phase. Power generation is expected by the end of the second quarter following the completion of testing and adjustments.

 

Regarding LSQ:

This results in additional cash requirements of $70-$100 million for working capital, including start-up costs, raw materials, inventory and various other items, to fund the entire FGC mill project and its operational ramp-up...

 

Due to changing economics and market conditions, there is no assurance that the FGC mill project will

proceed to completion as previously planned. The Company intends to report its decision regarding the strategic direction of the FGC mill early in the third quarter.

 

Who would have thought the one bit of bright news would be Landqart?

The mill is currently operating at full capacity. Estimated volumes to be produced and sold in 2013 are expected to be significantly higher than in 2012.

[OptsyEagle]

The numbers are in:

 

http://www.fortresspaper.com/images/pdfs/financials/Fortress%20Paper%20Q1%20FinancialsandMDA.pdf

 

As expected ... UGLY.  Over $20.6 million adjusted loss from continuing operations.  They just can't be doing that for too many more quarters, that's all I can say.  Nice improvement at Landqart but still losing money. Landqart lost $2.1 M EBITDA in Q1 vs a loss of $4.7M in Q4.  The big ugly is Thurso.  EBITDA loss of $8.7M vs $3.5M loss in Q4.  Sales of only 39,147 tonnes of DP vs 46,909 in Q4.  That drops them down to 78% of target capacity.

 

Co-gen to start selling electricity at the end of Q2 now, and they are re-reviewing LSQ.  They figure the start up cost for LSQ will now be around $250M and due to a slower ramp up, it will require another $70M to $100 million for additional working capital investment.  Do to this, they are not sure the plant will be a go.

 

The only other thing good I could see is that they didn't seem to burn through too much cash but that was mostly due to using up their inventory and taking on about $10 Million more in debt.

[triedtestedand]

Here's my $.005 worth (which used to be worth $.02, so caveat emptor) ... Maybe I'm deluding myself, but am thinking the following:

 

a) r.e. Thurso

 

At 78% utilization, lowest ever DP prices, quality issues, and no cogen ... they lose $8.7M in EBITDA.  Not good ... but feels kind of like a darkest before the dawn moment.  DP prices are back up $75 to $100 (worth up to $5M at full utilization), co-gen comes online this quarter (worth up to ~$5M at full utilization), quality and utilization improve by half even, say to 90% (worth $5M+), then add in some cost reductions (one thing I read online they've applied to switch to natural gas from oil, which should save non-trivial amount).  And no capex cost overruns going forward other than maintenance.

 

b) r.e. Landqart

 

At about 84% utilization (2.2tonnes shipped out of theoretical capacity of 2.5tonnes/qrtr) ... they lose $2.1M in EBITDA.  Not good ... but second quarter of sequential operational mprovement, with Swiss franc now off bottom of 1.20 Euros (at 1.24 Euros), improving mix that isn't reliant on single big order, another Durasafe order, and it looks they sold some more real-estate (about $3.6M worth).

 

 

c) r.e. LSQ

 

Larger capex forecast of $250M plus 70M+ working capital ... it would have been hard to expect costs to go down ... but way more realistic, setting expectations much better, looking at offsetting risk via partnerships ... or even doing something else now that's better for shareholder value, and language indicates they are not tied to project by dogma (unlike Tembec that's already pregnant with it's huge project).  Quebec government has their new/equivalent Plan Nord, so guessing they will not be against any flexibility options they try and dream up to get plant going again.  NBSK N America list price is itself now at $930/tonne (same/better than DP ironically), with several mills (e.g. Cloquet in Minnesota) transitioning to DP, so may be some opportunistic options to relax terms somehow with Domtar and the current 100K tonnes they are limited to producing?  Who knows ...

 

 

d) balance sheet

 

About $270M in total debt at end of the quarter, plus $30M in cash ... with somewhat offsetting current assets/current liabilities.

 

That said ... subtract the proceeds from Dresden ($210M) and you get 2 currently sub-performing (but improving) mills, an option on a third, and $30M in net debt (or more importantly dissected as ~$220M gross debt, with $190M of cash at the parent ... with $100M of debt that is non-recourse, $100M of debt that is convertible, and all of which has long maturity ... offset by lots of parent co cash, and so lots of flexibility with the cash, and the terms of the debt).

 

 

Presuming continued progress, key risks then start to revert strictly to macro (Chinese DP dumping, DP/VSF pricing, Swiss franc), with a wildcard on positive side of anything creative they dream up for LSQ.  Again, maybe I'm deluded, but I was more worried going into this earnings report than now coming out of it.  Operations (apart from Dresden) have definitely a weakness, but I must say they have shown ability (via Dresden, via Landqart hydro) to get some lumpy positives (Dare I say it sounds like, in miniature, Fairfax a few years back, with their ugly combined ratios offset by lumpy capital gains.)  We'll see though.

 

[no_free_lunch]

At least we should have higher prices this quarter. 

 

Although market prices for dissolving pulp improved in the first quarter of 2013, our sales in one quarter are typically secured by the end of the previous quarter.

 

..

 

The market price of dissolving pulp in China, as reported by China Chemical Fibers & Textiles Consultancy Group (CCF), a leading professional data analysis company relied upon in the dissolving pulp industry, improved from December lows of US$830-840 per air dried metric tonne (ADMT) to approximately US$930 per ADMT in February and March. Management believes that current depressed dissolving pulp prices are indicative of unusual market conditions and are not sustainable, as the global industry has been experiencing mill shutdowns and mills swinging capacity to produce paper pulps.

[OptsyEagle]

I will play the devils advocate here, since my patience has just about finished.  First of all, they never said what DP prices did in April and the first 2 weeks in May.  By my estimates the prices are back down to the upper $800s per tonne again.

 

2ndly on Triedtested's estimates.  They lost over $20 Million in the 1st quarter, from continuing operations.  8 more quarters of that and all the money from Dresden is gone.  In any event, your optimistic numbers still show a $10 Million loss or about  -$0.66  per share.  EBITDA is nice but it is not profit.  We still need to consider the interest on the debt and ongoing maintenance capital expenses. 

 

As for the quality.  In Q4 they got $762 per tonne for their pulp and in this quarter they only got $738 per tonne.  Those prices do not appear to exhibit any improvement in quality although I wouldn't say that it got any worse either.

 

Now Co-gen.  What happened to Peter Vinall's comment on a CC, that this thing was just a matter of hitting a switch.  I know that comment keeps coming back and sticking in my rear but this part of the operation is getting annoying.  Anyway, I will await the CC to hear what is causing the delay here.

 

Lastly.  LSQ.  If FTP was still confident that their costs will come in somewhere in the $750 per tonne range then with DP numbers in the $900 range, they would still make money.  In the $1,000 to $1,200 range they would make a lot of money.  Is it possible that they are seeing what I was starting to see a month or so, ago.  That their costs might be trending above $800 per tonne?

 

That is the glass half empty look at the quarter, if you ask me.  I decided to drink the other half ...and it was a big glass.

[OptsyEagle]

Not too much enlightenment from the CC, that we didn't get in the news release. 

 

Thurso's production problems in Q1 centered around a digester and evaporator.  The 10 day shut down appears to have resolved that issue.  The last 7 days, after starting back up, they seem to be running at mid 500 tonnes per day.  Yvon is confident that Thurso should be able to meet the capacity and cost targets, previously disclosed, within 15 to 18 months.  Co-gen to start producing power at end of Q2.  Chinese investigations still ongoing.  Questionaires were sent in by Fortress about 1.5 weeks ago.  DP pricing in Q2 should be a little better then Q1.  They are still concerned about DP pricing due to new capacity that will come online this year, although there have been reports of mill shut downs and swing capacity switching back to regular pulp.  VSF fibre pricing has weekened in April.  Finished goods inventory is minimal at the end of the quarter.

 

Landquart should show continuous improvements going forward, and they are working on their 2nd order of Durasafe.  New orders have also been received that will be produced in the 2nd half of this year.  They are about 70% through their large order they have been working on in the last couple of quarters and are preparing for competition on the reorder of it.  Of course they are still dealing with industry overcapacity, increased competition and a higher cost structure due to the very high Swiss Franc.

 

Dresden sale proceeds are in the bank.  $159 million Cdn. subject to small tax adjustment depending on whether they repatriate the money back to Canada or do something internationally with it.  In any case the highest tax estimate is a cost of another $10million but it can be as low as zero.  It all depends on what they do with the money.

 

LSQ.  Looking for strategic alternatives due to the higher cost estimate for it's start up.  Would like to partner with someone, since they feel it is just too big for them right now, considering their balance sheet and access to capital, etc.  They have invested $20 million to date in LSQ and they still feel that the project has good financial metrics.

 

When asked about share buybacks or convertible bond buybacks, they simply said that the company is nimble and will do whatever produces the maximum shareholder value.

 

That's about what I heard.

[prunes]

Looks like FTP is trading at the value of its cash assuming I haven't miscalculated.

[ECCO]

Looks like FTP is trading at the value of its cash assuming I haven't miscalculated.

 

You might be right. The problem is that they are burning that cash really fast.

[prunes]

Assuming the parent co has no obligations to Fortress Specialty / Global, they could fully take out the converts and the equity with cash on hand and declare bankruptcy if necessary at the DP subs.

[triedtestedand]

Company is seemingly worth more dead than alive.  For $6.20 or so today you get:

 

a) Holdco worth $81M net in cash  ($5.58/share)

          - assuming $190M cash ($13.10/share) at holdco - $109M in convertible debt

          - assuming current assets ~ current liabilities consistent across ops

 

b) Landqart worth? (PPE - <$10M debt)

 

c) Thurso worth?  (PPE - ~>$100M in non-recourse debt)

 

d) LSQ worth? (PPE - $0 debt)

 

 

Convertible debt stayed flat, moved up slightly today in light trading. ($40M due 2016 trading at 83% of par; $69M due 2019 trading at 71% of par)

[OptsyEagle]

Triedtested, your numbers are fine but I think you and I and the rest of us know that Fortress Paper is unlikely to walk away from Thurso and Landqart and it would be very difficult selling them right now.

 

So, that being said, your numbers are just numbers.  That was my main point, many posts ago, when I said I was not necessarily in favour of selling Dresden.  When Dresden was part of Fortress Paper, we could not help but have much more favourable quarterly reports in the future and more importantly, it put a floor in the share price.  In my opinion, that floor was around $7 a share.  The reason it was a floor was because you couldn't spend it.  Now that it is sold, we have a whole new situation.  The company stated on the CC that they expect the ramp up at Thurso to take another 15 to 18 months.  If you take the $20 million dollar loss from Q1 and you ramp it down, in each quarter, at any logical rate, for that amount of time, and then add up those losses, you will find that the $159 million Fortress received from Dresden, gets depleted quite significantly by then.

 

So, what we have now, is no floor.  I am not saying Dresden didn't need to be sold.  We needed the money, that was clear.  Unfortuneately, it changed the margin of safety quite a bit for the investors.

 

I apologize for getting so negative lately, but I am having significant doubts on the viability of this investment.  Luckily, due to the laws of math when it comes to bad investments, as they go down they become less significant in one's portfolio, so at this stage it doesn't really matter that much to me anymore.  I believe the only hope this investment has is that in the next year, DP prices rise above $1,200 per tonne and the Swiss franc drops by about 20%.  Since no one has any control over that, and those prices are currently headed in the opposite direction, I believe the outcome of this investment, right now, is about the same as going to the Casino and putting all your money on red for one more spin of the roulette wheel.

 

I don't blame Chad, he worked very hard and he lost much more then I did.  It was mostly just a lot of bad luck that accumulated at very bad times.  Maybe good luck will begin today. 

 

All of the above, is just my opinion.