BRITISH COLUMBIA

Fortress Paper says Thurso conversion ramping up after recent problems

03/12/2013 10:04 EDT | Updated 05/12/2013 05:12 EDT
Fortress Paper says it's making progress in ramping up production at its new dissolving cellulose pulp mill in Thurso, Que., but problems and low prices early in the first quarter could negatively affect its next quarterly results.

"Higher cost structure and lower revenues, obviously are not ideal but more importantl, I think is the trend which has transpired over the last two to three weeks, maybe even a month," CEO Chadwick Wasilenkoff said Tuesday during a conference call to discuss fourth-quarter and 2012 results.

"The stability of the equipment is good, production rates continue to improve and we're more or less back to our good operating rates that we experienced for parts of the fourth quarter."

Fortress beat expectations as it cut its fourth-quarter loss by more than half to $4 million on a nearly doubling of revenues due largely to a more than five-fold increase in pulp shipments and a strong performance in its European wallpaper business.

The Vancouver-based pulp and paper producer reported Monday evening that it lost 27 cents per share for the period ended Dec. 31, compared to a loss of 64 cents per share, or $9.2 million a year earlier.

Adjusting for foreign exchange fluctuations, Fortress Paper (TSX:FTP) lost $5.2 million or 36 cents per share, compared to a loss of $6.3 million or 44 cents per share in the prior year.

Analysts had expected Fortress would lose 69 cents per share in adjusted profits.

Revenues increased to $96.1 million from $49.5 million in the year-ago period as the company shipped 16.4 million tonnes of paper and nearly 47 million tonnes of pulp, up from 13 million and 8.2 million respectively a year earlier.

The Fortress specialty cellulose mill in Quebec began production of dissolving pulp in early December 2011. The mill has encountered various conversion issues and the impact of production on operating results will only begin this month.

Fortress said its co-generation project at the mill is nearing completion, with engineering and procurement completed and overall construction in the final stages. It expects power will begin to be delivered early in the second quarter with costs increasing by 10 to 20 per cent.

"The Fortress specialty cellulose mill continued to make significant progress in improving production rates and reducing costs in the fourth quarter of 2012. Dissolving pulp production volumes were at its highest level since the conversion," Wasilenkoff added.

The specialty papers segment had a strong performance in the fourth quarter and achieved record results in the 2012 fiscal year. The company believes market demand will continue to be strong in the coming years as the displacement of traditional paper-based wallpaper with non-woven wallpaper base appears to be progressing faster than originally anticipated.

The security paper products segment experienced another difficult quarter as overcapacity in the banknote paper market continued to erode prices and margins in 2012.

Paul Quinn of RBC Capital Markets said the Thurso ramp-up is progressive but "is still not where it needs to be."

The mill lost $3.5 million in pre-tax operating earnings (EBITDA), compared to a loss of $8 million in the third quarter. Pulp shipments increased 53 per cent from the prior quarter as the mill took planned and unplanned downtime in the prior quarter.

He said the overall results were "ahead of low expectations" due to strong performance from wallpapers, higher-than-expected shipments at Thurso, and continued cost pressure in banknotes.

Fortress has spent $225 million so far on the conversion of the mills including the co-generation facility.

The company expects dissolving pulp prices will remain under pressure as more industry capacity is added this year. The current price of US$940 per tonne is down 21 per cent from last year but up US$90 since hitting the bottom in mid-December.

Fortress has three multi-year supply agreements covering 78 per cent of Thurso's capacity.

Mark Kennedy at CIBC World Markets described the fourth-quarter results as favourable on "positive improvements" at Thurso.

"The wallpaper business continues with its track record of strong performance. The dissolving pulp operations showed positive improvements in ramping up the Thurso mill but dissolving pulp prices continued to soften in the fourth quarter."

For the full year, Fortress lost $20.9 million or $1.45 per share, compared to a loss of $19.2 million or $1.37 per share. On an adjusted basis, it lost $37.4 million or $2.60 per share, up from a loss of $20.6 million or $1.47 per share.

Sales increased to $314.4 million from $308.9 million in 2011.

On the Toronto Stock Exchange, its shares lost 57 cents or 5.89 per cent, at $9.10 in Tuesday afternoon trading.