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

[AZ_Value]

Here's the number:

 

• Fortress Paper Ltd (FTP) price target cut to C$33 from C$43 at RBC

 

I'd be really curious to know how they get that number.

 

The timing for the downgrade has got to be just coincidence and they've been thinking about this for a while, because why in the world would RBC wait for Thurso to finally go live and then cut their target.

[Liberty]

The timing for the downgrade has got to be just coincidence and they've been thinking about this for a while, because why in the world would RBC wait for Thurso to finally go live and then cut their target.

 

I'm pretty sure their analyst was at the analyst day visit of Thurso last week. Doubt it's random.

 

If I was a conspiracy theory type, I'd say that they were trying to depress the price to allow some other party to load up... But who knows? Occam's razor says that it's probably just an analyst who sincerely believes that FTP is worth 33 based on some model. All I can do is disagree with it and buy more :)

[lessthaniv]

The timing for the downgrade has got to be just coincidence and they've been thinking about this for a while, because why in the world would RBC wait for Thurso to finally go live and then cut their target.

 

I'm pretty sure their analyst was at the analyst day visit of Thurso last week. Doubt it's random.

 

If I was a conspiracy theory type, I'd say that they were trying to depress the price to allow some other party to load up... But who knows? Occam's razor says that it's probably just an analyst who sincerely believes that FTP is worth 33 based on some model. All I can do is disagree with it and buy more :)

 

For the record, Neil Gilmer (sp?) updated his analysis today too. Target reduced to $55/share.

(Canaccord Genuity)

[AZ_Value]

 

 

 

AZ,

 

Here is some helpful info for you :

 

http://i728.photobucket.com/albums/ww289/MikeNCathy/Thurso.jpg

 

Notes:

 

Data: US$/MT with $1US = $.95 CAD

 

Pre Cogen Facility:

 

Cash Cost = $620

Shipping = $100

____________________________

Total Cost = $720

 

Post Cogen Facility:

 

Cash Cost = $620

Cogen Benefit = ($88)

Shipping = $100

____________________________

Total Cost = $632

 

Contracts are in place to sell 78% of Thurso’s output. Those contracts are structured as follows:

 

2 Contracts are 5yr deals at the spot price with a US$1200/mt Floor and a US$1600/mt Ceiling. These two contracts represent 42% of the output.

 

1 Contract is a 10yr contract and is based on the Rayon price. Rayon generally trades at a premium to cotton. The formula is (Rayon Price – US$1000). Historically, this formula has provided a $200/mt premium to the spot price used in the other contracts. This contract represents 36% of the output.

 

The remaining 22% would likely be sold at spot prices.

 

Thanks IV.

 

 

It remains to be seen whether Fortresses counter-parties will honour the previously established floor price contracts should the spot price remain below the floor for an extended period of time. (Porter's 5 Forces - Who has the bargaining power?).

 

Ya. This is exactly what I was hoping would be clarified a bit more in the near future.

All the points you guys are making make perfect sense and the fact that they were willing to sign such long term contracts with a mill that isn't yet functional speaks volumes but I don't know the industry well enough yet to know if for some reason the tables might get turned around and the buyers have enough bargaining power to force producers to accept spot prices all of the sudden.

 

 

 

[lessthaniv]

The VIC writeup on FTP in August mentioned regarding Dresden, "There are no public comps, but the company has reportedly received overtures at 7.0x EBITDA for this asset." Anyone have any thoughts on what would be considered a normalized EBITDA for Dresden in a sale?  The VIC writeup comes up with midpoint EBITDA of $30m at a discounted 5x EBITDA equaling $9.98/share.

 

I'm thinking 5x EBITDA is too cheap, personally. Here is what I've learned from my own analysis and what I've read from several industry analysts:

 

Dresden is a great little niche business. The total market for non-woven wall paper is currently around 80,000 MT/yr. The total wall paper base market is around 300,000 MT/yr. If you analyze the 10yr trend, you'll conclude that worldwide demand for non-woven wallpaper is steadily increasing at the expense of "old school" wall paper base. The overall market is relatively steady, however more and more consumers are shifting to non-woven wall paper due to the much improved value proposition it offers.

 

The Dresden mill has north of 50% market share in this niche arena. The mill is sold to capacity even with recent capacity improvements. According the company, more than 50,000 MT/yr of excess demand remains unfilled at this point and its estimated that by 2015/2016 the demand for non-woven will increase to 150,000 MT/yr. (They are not suggesting that the overall market will increase, just a continued move of existing demand to non-woven). They finished 2010 with C$19.5 of operating income. (Note 16 of 2010AR). Having a look at third quarter results we see they've done around $20M to date. (Note 14 of Q32011). So, I would suggest an estimate of around $25M. At your multipe of 5X the Dresden mill would provide about $8.75/share in value. But, I'm not so sure a 5X multiple is appropriate for a company in a growing niche market with greater than 50% market share and a very strong value proposition? Especially, considering the very low level of attributable debt. This business would be a great LBO candidate. Relatively stable EBITDA production with a fairly clear growth path and virtually no debt. I would suggest that a purchaser using an LBO structure could easily consider a higher multiple of 6X or 7X and still make a satisfactory return.

 

I suspect that the opportunity to find a LBO partner willing to pay a premium for a European business has spiralled down the drain for the time being. Hence, today's announcement in regards to Dresden didn't surprise me. They can continue to operate that segment profitably, grow the market share and perhaps revisit a sale down the road when better conditions prevail.

 

In terms of valuations perhaps taking the middle ground is justified for the time being.

 

 

[bathtime]

Thanks so much lessthaniv, that was a great analysis. Interesting point about an LBO.

 

The PR mention that a Dresden sale had been considered was a big positive for me. Indicates that Chad is willing to be creative in extracting value for the company. Proceeds from a Dresden sale may have facilitated financing for more DP mills, so perhaps the lack of a Dresden sale is a factor in more DP deals not having been completed.

[lessthaniv]

I wonder how much the last financing allocations have to do with the various analyst opinions?

 

Raymond James Ltd. 40%

Dundee Securities Corporation 20%

RBC Dominion Securities Inc. 15%

Cormark Securities Inc. 10%

TD Securities Inc.: 10%

Acumen Capital Finance Partners

Limited 5%

 

Canaccord Analyst didn't partake in the last syndicate and has a target of $55.

 

RBC/TD seems to have lower expectations and there involvement in the last financing was minimal. On the other hand Raymond/Dundee seem to carry higher valuations but are both making higher fees ....

 

Not that I'm cynical or anything?

[Liberty]

Thanks so much lessthaniv, that was a great analysis. Interesting point about an LBO.

 

The PR mention that a Dresden sale had been considered was a big positive for me. Indicates that Chad is willing to be creative in extracting value for the company. Proceeds from a Dresden sale may have facilitated financing for more DP mills, so perhaps the lack of a Dresden sale is a factor in more DP deals not having been completed.

 

I can't remember where I saw/heard that, but I think it was Chad who said it... I'm paraphrasing, but it basically amounted to: all of FTP's assets are always for sale at the right price. I don't think they're too sentimental about what they own. If someone is willing to overpay, they'll probably make a deal.

 

What I'm wondering, though, is what they would do if, say, in a few years they sold the whole DP division (let's say 3 DP mills) at a cyclical high for a couple billions. Would they try to invest it back into forestry? Would they turn into Fortress Holdings and look at other industries for deep value opportunities? Would they do a huge special dividend? Liquidate completely?

 

It's not an immediate concern, and it's pointless to count your chickens before they have hatched, but it's something I've been wondering about for a while.

[lessthaniv]

Thanks so much lessthaniv, that was a great analysis. Interesting point about an LBO.

 

The PR mention that a Dresden sale had been considered was a big positive for me. Indicates that Chad is willing to be creative in extracting value for the company. Proceeds from a Dresden sale may have facilitated financing for more DP mills, so perhaps the lack of a Dresden sale is a factor in more DP deals not having been completed.

 

I can't remember where I saw/heard that, but I think it was Chad who said it... I'm paraphrasing, but it basically amounted to: all of FTP's assets are always for sale at the right price. I don't think they're too sentimental about what they own. If someone is willing to overpay, they'll probably make a deal.

 

What I'm wondering, though, is what they would do if, say, in a few years they sold the whole DP division (let's say 3 DP mills) at a cyclical high for a couple billions. Would they try to invest it back into forestry? Would they turn into Fortress Holdings and look at other industries for deep value opportunities? Would they do a huge special dividend? Liquidate completely?

 

It's not an immediate concern, and it's pointless to count your chickens before they have hatched, but it's something I've been wondering about for a while.

 

Actually, I think that's very important. It's one of the things that draws me to this company. Given Chad's history of moving to and from various opportunities across multiple industries, I'd have a hard time believing that his long term goal is to end up a disolving pulp producer. The segments provide a great opportunity to surface shareholder value. I expected that Dresden/Landquart would be sold opportunistically to provide cash to invest into DP Production with the end goal of selling the DP producer to a Chinese Rayon producer. It appears for the time being that Dresden is not likely to be opportunistically sold. But, it could be spun out on its own. As could Landquart. By doing so, the opperations can be isolated and perhaps the value becomes clearer to a potential buyer? Lot's of options.

[Liberty]

I totally agree it's very important. What I meant is that I'm always careful not to fall into what some in the startup world call the 'maserati problem'.

 

ie. Two guys in an apartment start a business and they start by wondering where they're going to park the maseratis.

 

Best make the money first and then have these high-class problems :)

 

Personally, I expect Chad to stick around FTP for 4-6 years. It's going to take a few years to do all the acquisitions that he wants to do, and then convert them to DP, maybe build cogen, de-bottleneck, bio-refineries for even more added value, etc.. Then add to that a random amount of time for the world economy to get back in high gear and for DP demand to be high, for valuations to be high, etc.. And then at that point, when he's acquired all that he wants, everything is firing on all cylinders, and demand is in the upcycle, he'll probably sell and move on to an undervalued sector or wait for a bear market to buy into something else.

 

I'd love it if he did it with a public investment vehicle.. Maybe turning FTP into a kind of Leucadia. Sell everything, pay a huge special dividend but keep enough capital to start a new hunt, maybe change the name to Fortress Holdings, and then start again!

[bathtime]

FORTRESS PAPER ANNOUNCES $30 MILLION PUBLIC OFFERING OF CONVERTIBLE DEBENTURES

 

Fortress Paper Ltd. has entered into an agreement with a syndicate of underwriters led by Raymond James Ltd. and including Canaccord Genuity Corp., Dundee Securities Ltd., RBC Capital Markets, Scotia Capital Inc., TD Securities Inc., Cormark Securities Inc. and Acumen Capital Finance Partners Ltd. pursuant to which the underwriters will purchase $30 million principal amount of convertible unsecured subordinated debentures at a price of $1,000 per debenture. Fortress Paper has also granted the underwriters an over-allotment option to purchase up to an additional $4.5 million aggregate principal amount of debentures for a period of 30 days following closing to cover over-allotments.

 

The convertible debentures will mature on December 31, 2016 and will accrue interest at the rate of 6.50% per annum payable on a semi-annual basis. At the holder's option, the convertible debentures may be converted into common shares in the capital of Fortress Paper at any time up to the maturity date. The conversion price will be $37.50 for each common share, subject to adjustment in certain circumstances.

 

The convertible debentures will be direct, unsecured obligations of Fortress Paper, subordinated to other indebtedness of the Company for borrowed money and ranking equally with all other unsecured subordinated indebtedness.

 

The convertible debentures will not be redeemable before December 31, 2014. From December 31, 2014 through to maturity date, Fortress Paper may, at its option, redeem the convertible debentures, in whole or in part, at par plus accrued and unpaid interest provided that the volume weighted average trading price of the common shares of the Company on the Toronto Stock Exchange during a specified period prior to redemption is not less than 125% of the conversion price.

 

Subject to specified conditions, Fortress Paper will have the right to repay the outstanding principal amount of the convertible debentures, on maturity or redemption, through the issuance of common shares of the Company. Fortress Paper also has the option to satisfy its obligation to pay interest through the issuance and sale of additional common shares of the Company.

 

The net proceeds of the financing will be used for repayment of debt, the funding of capital expenditures relating to the Fortress Specialty Cellulose Mill, working capital and general corporate purposes.

 

The offering is scheduled to close on or about December 22, 2011 and is subject to certain conditions including, but not limited to, the receipt of all necessary approvals including the approval of the Toronto Stock Exchange.

 

A preliminary short-form prospectus will be filed with securities regulatory authorities in all provinces of Canada.

 

[lessthaniv]

Monday's press release:

 

During the past few months, Fortress Paper in its normal course has been reviewing each of its business divisions and assessing all options as part of its strategy to enhance shareholder value. As part of this continuing evaluation, management identified a potential divestiture opportunity relating to its non-woven wallpaper base division. Given the financial uncertainties and lack of financial confidence in the euro zone, Fortress Paper management decided not to pursue any divestiture option for the Dresden mill.

 

Wednesday's press release:

 

FORTRESS PAPER ANNOUNCES $30 MILLION PUBLIC OFFERING OF CONVERTIBLE DEBENTURES

 

 

This makes me wonder if FTP is getting closer to closing on one/two of the mills they've been talking about? They couldn't get a good enough price on the Dresden business because of the European markets and so they've decided to finance with the convertible?

 

When FFH issued their 2019 bond it was tighter credit markets but it was at 7.5%. Fortress is getting 6.5% with a convertible option. But the conversion price is a 42% premium. That bodes well for the syndicates aggregate view of intrinsic value.

 

But, if in fact these funds are to going to new acquisitions ... that output will have to valued and added to the picture.

 

 

 

[alertmeipp]

I am interested to buy the bond.. this is at 40 bucks not long ago.

[Liberty]

The government loans + grants + equity they sold a few months ago seemed to be quite enough for Thurso's DP conversion + cogen, so I wouldn't be surprised at all if this is the first sign of an acquisition. My first guess would be LSQ, as the mayor has said that 'a deal was almost done' for his city's mill and that he would probably have news before the end of December.

 

I think there's a small chance that they'll be announcing two acquisitions at the same time too, if they were looking at two mills in the same governmental jurisdiction and negotiated both in parallel.

[Liberty]

From 30 to 35m:

 

http://www.marketwire.com/press-release/fortress-paper-announces-increase-previously-announced-public-offering-convertible-debentures-tsx-ftp-1596271.htm

[lessthaniv]

Here is a link to see some pictures of LSQ:

 

http://francisvachon.photoshelter.com/gallery/Lebel-Sur-Quevillon-Quebec/G00007x7JgjjHvEs/P0000WRwaJVxqPHo

 

A comment on one of the pictures suggested that Domtar's Mill accounted for 70% of the jobs in LSQ. You can see by the topographic picture the entire town was built around the mill.

 

With 70% of the town's employment tied to this mill the mayor is obviously motivated. Hope that bodes well for FTP and it would be a great Christmas present for the town knowing the mill will be reopened.

 

Also, here is an old article from 1997. Domtar sunk $245M into the mill (which only ran for 8 years). Looks like some nice assets to be had. (Boiler, generator).

 

http://findarticles.com/p/articles/mi_m0EIN/is_1997_Sept_9/ai_19749164/

 

From Domtar's latest AR:

 

As of November 2005, our Lebel-sur-Quévillon pulp mill had an annual

production capacity of approximately 300,000 metric tons and employed approximately 425 employees. In addition, we announced the permanent closure of

our Lebel-sur-Quévillon sawmill, which had been indefinitely idled since 2006, at which time it employed approximately 140 employees.

 

[tombgrt]

Interesting company. Thanks for all the posts guys, extraordinary compilation of information. Haven't read everything yet but I'm trying to catch up.

 

Some things already popped out that I'd like to see answered if possible:

 

- I've read that Chad has negotiated contracts for the DP division for most of the production the next 5-10 years. But what about the cash cost? What does it consist of? Has it the possibility of inflating a lot? I doubt he hedged the material costs?

- Knowing the above, the uncertainty about the reliability of counterparties in the contracts, ... How can you get comfortable with projected cash flows?

- The Landqart mill transformed and expanded significantly this year. It is supposed to be in a niche market with high margins, yet it gets killed by currency price developments, commodity prices, lower demand and significant competition (for the Euro). How do you rhyme this? Seems like it is almost as lousy as any no-moat business. :x

- Also, the 10-Q report repeatedly speaks of a lot of 'new orders for 2012' for Landqart. Does anyone have specifics on this?

- How can it be that they supply more than half of total production in non-woven wallpaper? Seems like it has no barriers to entry and very nice profit margins atm. How can this last?

- I'm véry impressed by the capital allocations skills by Chad. But why in the world is doing all those presentations and interviews, acting like a salesman? Also, his compensation against market cap is somewhat excessive. He owns 17% of the shares, why would he need all those extra incentives? Just seems a bit much.

[Liberty]

Hey Tom,

 

I think a few of the answers you are looking for are elsewhere in this thread, but I'll do my best to answer your questions below.

 

 

- I've read that Chad has negotiated contracts for the DP division for most of the production the next 5-10 years. But what about the cash cost? What does it consist of? Has it the possibility of inflating a lot? I doubt he hedged the material costs?

 

I think the main cost is fiber, and supply came with the plant deal. They not only have access to the CAAF that Thurso had access to, but also to the CAAFs of two other closed down mills. Supply should be very secure and low cost. Apart from that, the cost of labour could go up, but the current union deal seems pretty good (15% below usual union rates, no past pensions liabilities, and new pension is defined contribution, not define benefits). Chemical costs could also go up, but I think that would impact other DP competitors too and wouldn't represent that big a % of total costs, though I can't say I know exactly what that % would be. Another potential problem is exchange rate, but that can go both ways...

 

- Knowing the above, the uncertainty about the reliability of counterparties in the contracts, ... How can you get comfortable with projected cash flows?

 

There are no guarantees for sure, but personally I've reached a pretty good level of confidence based on past track record and on how everything is structured. I think there's a pretty good margin of safety, so that helps, but a lot of the value in this company is management, so it all depends on how you feel about them.

 

- The Landqart mill transformed and expanded significantly this year. It is supposed to be in a niche market with high margins, yet it gets killed by currency price developments, commodity prices, lower demand and significant competition (for the Euro). How do you rhyme this? Seems like it is almost as lousy as any no-moat business. :x

 

I think the main problem this year was that many currencies delayed big printing jobs and that while the PM was being upgraded they missed some deals (Chad mentioned in passing that they weren't in the race for the new Canadian bills because of the machine rebuilding). That sucks, but the upside with delays is that what you lose now you still get later, and now that Landquart has been upgraded, margins should be better and they should be able to bid on bigger deals. Also, cotton prices are bad for landquart, but good for Thurso, so there's a kind of hedge there, and the Swiss Franc will probably come down once the EU crisis ends at some point.

 

- Also, the 10-Q report repeatedly speaks of a lot of 'new orders for 2012' for Landqart. Does anyone have specifics on this?

 

No, but it's a very secretive industry so we might never get much info about exactly what they are printing...

 

- How can it be that they supply more than half of total production in non-woven wallpaper? Seems like it has no barriers to entry and very nice profit margins atm. How can this last?

 

That's a good question. I'm not entirely sure, but that might explain why they tried to sell it. Buy an asset for peanuts, focus it on the highest margin product it can make, make multiple upgrades to gain economies of scale and become a low-cost producer, and when you've squeezed just about all the value out of the asset that you can, sell it. That seems to be the plan, but the EU troubles prevented a sale as per a recent press release.

 

I think structural problems in the industry are helping FTP keep its margins. I mean, Mercer owned those two plants and they could have done exactly what FTP did, but instead they produced all kinds of low margin products at both mills (robbing each of economies of scale), the papermachines weren't upgraded, etc. I think FTP's competitors are probably like that; lacking in capital allocation skills, and hesitant to make capex in businesses that are at cyclical lows.

 

- I'm véry impressed by the capital allocations skills by Chad. But why in the world is doing all those presentations and interviews, acting like a salesman?

 

As I said elsewhere in this thread:

 

I think some of it - like the password-protected St-Andrews thing - is just that with success comes more invitations to speak at conferences, and he probably expected only a few people to ever see it (we FTP stalkers aren't exactly average investors), and some of it - newspaper interviews - is probably to pressure politicians. If he has a higher public profile, it's easier to get the kinds of deals that he got for Thurso, which require government action to get the fiber rights, advantageous loans and grants, union deals, etc.

 

I also think that journalists probably like his story because he provides that unexpected twist that sells; he's a relatively young guy making money in a sector that everybody know is going badly, he's re-opening a mill and creating jobs in the forestry sector, etc..

 

 

Also, his compensation against market cap is somewhat excessive. He owns 17% of the shares, why would he need all those extra incentives? Just seems a bit much.

 

I agree that it's high against current market cap (though earlier this year the mkt cap was more than twice as big), but it is a multi-year deal, and after a few quarters of Thurso and maybe an acquisition or two, it might not seem nearly as big against mkt cap or cash flow. But we'll have to wait and see.

 

Personally, I don't mind too much as long as he keeps delivering. Exceptional management is worth paying extra.

[bathtime]

Thanks for the thoughtful analysis, tombgrt and Liberty.

[tombgrt]

Hey Tom,

 

I think a few of the answers you are looking for are elsewhere in this thread, but I'll do my best to answer your questions below.

 

 

Thanks for the reply Liberty, helped a lot in understanding FTP a little better. Seems like there is a serious margin of safety here and great potential. Wouldn't be suprised to see this turning out to be a great investment over time even when bought at IV at this point. Of course, that is no risk anyone should ever take.

 

I'm very curious as to what Chad's plans are for the long term, like 10 years from today. He has mentioned starting from scratch again at some point but I wouldn't mind him sticking with this one and creating a little Leucadia. He's 39 years old, a true contrarian, has great capital allocation skills, great work ethic (from what I can tell), ... 

 

Thanks for the thoughtful analysis, tombgrt and Liberty.

 

All praise to Liberty please, I just provided some questions I thought were relevant. Liberty is the brains here. ;)

[tombgrt]

Wasilenkoff may have worn suits in high school, but today he rarely wears a tie, even to his own board meetings; more likely, he sports Converse sneakers. His favourite toy is a Ferrari 360, but otherwise his instinct is bare bones, a beer-and-wings guy. The Fortress head office in North Vancouver sits atop a McDonald's and houses a mere five people (three of them accountants).

 

http://www.globeinvestor.com/servlet/story/GAM.20110325.ROBMAG_APRIL2011_P32_33_34_35_37/GIStory/currencies/

 

Q This is all good strategy, but how do you handle operations?

 

A Management is critical to everything I do. I’m not an expert in pulp, any more than I was in gold, uranium, or oil and gas. So I need those particular experts in the industries that I’m focusing on.

 

If you’re looking at industries that are out of favour, it’s easier to attract world-class management teams. Other people are laying people off on a regular basis, closing down mills and concentrating on cost-cutting. We bring more of an entrepreneurial flair, with growth initiatives, and we give people a lot of free reign. We manage our side of the process, but we rely on these industry experts as partners. After all, who am I to tell a guy how to run a mill? It’s the same story on the sales side.

 

We’re really a holding company. We’re the rainmakers. We find an asset in a downed industry, and put together those assets to work well together.

 

http://business.financialpost.com/2011/11/14/contrarian-investing/

 

 

I'm starting to like this guy.  8)

[Liberty]

- How can it be that they supply more than half of total production in non-woven wallpaper? Seems like it has no barriers to entry and very nice profit margins atm. How can this last?

 

I was re-listening to the St-andrews presentation (for like the 4th time) and noticed a few things that could explain Dresden's position:

 

According to Chad, their machine is 33% wider than that of their closest competitor, it is running twice as fast as the closest competitor (they've upgraded it 5 times since he acquired it), and they coat the paper online, while none of their competitors can do that.

 

If you add all of that together, it seems to add up to a pretty significant cost advantage. They even seem to have some pricing power, as Chad mentioned that they increased prices by 10% and they still have to turn orders away.

 

On top of that, they seem to have decent R&D, as they developed a thermally insulating wallpaper that might be hard to replicate by competitors.

 

And if you also add back in what I said previously (competitors might not be focusing on just one product, might not be willing to invest the required capital to upgrade, etc), I think there's a pretty decent competitive position, though I'm not sure I would call it a moat.

[lessthaniv]

- How can it be that they supply more than half of total production in non-woven wallpaper? Seems like it has no barriers to entry and very nice profit margins atm. How can this last?

 

I was re-listening to the St-andrews presentation (for like the 4th time) and noticed a few things that could explain Dresden's position:

 

According to Chad, their machine is 33% wider than that of their closest competitor, it is running twice as fast as the closest competitor (they've upgraded it 5 times since he acquired it), and they coat the paper online, while none of their competitors can do that.

 

If you add all of that together, it seems to add up to a pretty significant cost advantage.

 

On top of that, they seem to have decent R&D, as they developed a thermally insulating wallpaper that might be hard to replicate by competitors.

 

And if you also add back in what I said previously (competitors might not be focusing on just one product, might not be willing to invest the required capital to upgrade, etc), I think there's a pretty decent competitive position, though I'm not sure I would call it a moat.

 

Just running out the door but I'll comment later. Done some looking into this exact question.

[tombgrt]

- How can it be that they supply more than half of total production in non-woven wallpaper? Seems like it has no barriers to entry and very nice profit margins atm. How can this last?

 

I was re-listening to the St-andrews presentation (for like the 4th time) and noticed a few things that could explain Dresden's position:

 

According to Chad, their machine is 33% wider than that of their closest competitor, it is running twice as fast as the closest competitor (they've upgraded it 5 times since he acquired it), and they coat the paper online, while none of their competitors can do that.

 

If you add all of that together, it seems to add up to a pretty significant cost advantage.

 

On top of that, they seem to have decent R&D, as they developed a thermally insulating wallpaper that might be hard to replicate by competitors.

 

And if you also add back in what I said previously (competitors might not be focusing on just one product, might not be willing to invest the required capital to upgrade, etc), I think there's a pretty decent competitive position, though I'm not sure I would call it a moat.

 

Yes, you're right. I watched that presentation to and heard something about the wider machine and its speed but I guess I just didn't make the connection. ;x

 

I bought a small position today. If mr. market is stupid enough to sell me more at $24 or below, it will be hard to resist the temptation to load up the truck.

 

Just running out the door but I'll comment later. Done some looking into this exact question.

 

Great. Looking forward to it.

[lessthaniv]

Hi tombgrt,

 

RE: Competition for Dresden given the monopolistic market share;

 

Here is what I've learned about Dresden...

 

The global market for wallpaper base is about 300,000MT/annum. About 85,000 MT/annum currently comes in the form of non-woven wall paper base. I believe Dresden actually has north of 50% of this market (non-woven). The retail price tag of non-woven is about 2.5X the cost of traditional wallpaper base. Over the last ten years or so, it doesn't appear that the overall global market has grown however their is a clear shift occurring. The value proposition of non-woven (the fact you can peel it off vs. scrappers and heat guns) justifies the higher price point to consumers and is driving this long term transition trend.

 

The growth for Dresden in my mind will come from this continued transition. Some estimates that I've read suggest the 50% of the overall market will become non-woven by 2015/2016. Fortress is also implementing technology with their non-woven base to insulate walls by reflect heat back into a room. So, the value proposition is getting even stronger as they sell their product in  the colder climates of Eastern Europe.

 

If you analyse the Dresden Mill's output you'll note that in 2003 Dresden produced > 90% paper base and <10% non-woven. Dresden has been steadily transitioning their output to meet market demand. As of 2011 the mill is essentially 100% non-woven. So, as demand has increased it's been Dresden that's been quietly increasing supply to meet that demand.

 

Circling back to your question about competition. If we assume that over time 100% of old school wallpaper base will be replace by non-woven then we can conclude the non-woven segment will be 300,000 MT/annum. At the moment, that means that 220,000 MT/annum will be up for grabs. But the transition isn't occurring over night. More like 25,000MT/annum... So, any new entrant into this market has significant capital expenditures and only stands to gain a limited portion of a relatively small niche market. What's worse is they will only have that vest in pieces over time.  The economics of this type of project are ugly and hence it's just not worth it!

 

Hell, as Chad says their is 50,000MT of current excess demand that is currently not being served. The fact that this still exists tells you something about what the competition thinks about the project economics.

 

You can look at Ahlstrom Corp of Finland as an comp. This company is trying to break into the non-woven market. After several years and significant investments made to convert their assets to produce non-woven ... They really haven't had much success 

 

So, let's say the market for non-woven increases by 65,000 MT between now and 2015 to get to the 150,000MT target. That's about 20,000MT/annum on average. I don't think that's a big enough carrot to justify the cost and risk especially since the total market is likely limited to around 300,000MT longer term.

 

Dresden is in a sweet spot. I think Chad was perhaps trying to flog the business with the idea of encouraging an LBO. Dresden has low debt, stable cash flows, the ability to double in size. It would make a great business for an LBO structure. But, with the  weak credit markets in Europe perhaps now is not the time to entertain that possibility. So, you pull the business off the market and look to invest to capture some of that unserved demand and then look to flog it again down the road when the market conditions better support the LBO structure.

 

Hope that make sense. (Sorry for typos ... limited time today to hammer out this post).

 

Cheers,

 

<IV