Business News

Fraser Papers Announces First Quarter Financial Results

Thursday 01. May 2008 - Fraser Papers Inc. (TSX:FPS) ("Fraser Papers" or the "Company") today reported financial results for the first quarter ended March 29, 2008. The Company generated a net loss of $19.1 million or $0.44 per share. Input cost pressures and weak lumber markets offset continuing operating improvements and higher pricing realized in the Company's paper and pulp operations.

– Realized higher average prices from paper sales of 5% or $44 per ton over fourth quarter results and hardwood pulp increases of $12 per tonne or 2%. Additional revenue generation during the quarter was $7.4 million.

– Continued operational improvements added $9.5 million during the quarter, compared to the same quarter last year, but were offset by $10.1 million in increased fibre, energy and chemical prices and an $11.5 million impact from a higher Canadian dollar.

– Reduced debt with the closing of a $60 million rights offering to shareholders. The Company’s net debt to net debt plus equity ratio was lowered to 11% at quarter end.

– Subsequent to the quarter end, increased availability under the Company’s credit facilities with a $25 million expansion and a three-year extension to Fraser Papers’ existing $95 million working capital line.

“Similar to other producers in the sector, we continued to be challenged by cost pressures in the quarter,” said Peter Gordon, President and CEO of Fraser Papers. “We have shown improvement in a number of areas through energy efficiency, higher throughput in our paper and pulp operations, operating efficiency and reductions in fixed costs. Despite these accomplishments, rising input costs continue to outpace our operating initiatives. We believe that our efforts to improve our top line, reduce costs at our operations, pay down debt and increase our liquidity will ultimately be rewarded.”

RESULTS OF OPERATIONS

EBITDA in the first quarter of 2008 was a loss of $11.9 million, compared to an EBITDA loss of $17.3 million in the fourth quarter of 2007 when the Company took maintenance downtime at two operations for a total impact of $8.5 million. Excluding the impact of planned maintenance downtime in the fourth quarter, EBITDA in the first quarter was $3.1 million lower. The impact of increased prices for oil, purchased fibre and chemicals were only partly offset by increased selling prices for many of the Company’s paper and pulp products. Relative to the fourth quarter, the Company achieved price and mix improvement of $7.4 million, but cost increases related to uncontrollable inputs offset most of this benefit. The impact of foreign exchange on the Company’s Canadian operations during the quarter was modestly favorable compared to the fourth quarter as exchange rates averaged C$1.00 equals US$1.00 compared to C$1.00 equals US$1.02 in the fourth quarter. The Company realized a further improvement of C$1.00 equals US$0.98 for the quarter as a result of its cash flow hedging program.

Compared to results in the first quarter of 2007, the Company was negatively impacted by $10.1 million from higher costs for fibre, energy and chemicals. In addition, the rise in the Canadian dollar from C$1.00 equals US$0.85 added $11.5 million to costs due to the negative currency impact on the Company’s costs. These cost increases were partly offset by higher selling prices, improved fibre and energy usage and other cost reductions.

During the first quarter of 2008, realized prices for the Company’s paper products improved by $44 per ton or 5% over the fourth quarter of 2007 as the Company implemented price increases in most of its specialty printing and packaging segments. Commodity groundwood markets were strong reflecting supply tightness and allowing for better price realizations, albeit on lower volumes. Compared to the first quarter of 2007, average net selling prices for the Company’s paper products improved by $24 per ton or 2.5%.

Total paper shipments were 3% higher than the first quarter of 2007, despite reduced production capacity as a result of the permanent closure of two paper machines during 2007. The increase included a 28% increase in shipments of specialty packaging paper and a 32% increase in high-bright groundwood grades. Shipments of specialty printing grades were 27% lower reflecting the substitution of groundwood papers in traditional freesheet applications.

Shipments of northern bleached hardwood kraft pulp from the Company’s pulp mill in Thurso, Quebec increased 13% over the fourth quarter of 2007, when the mill took one week of downtime for annual maintenance. Shipments also improved 13% over the first quarter of 2007 as the Company’s pulp operations benefitted from improved production and strong demand. Pulp markets continued to be strong in the quarter as reference prices increased 16% over the first quarter of 2007, reflecting tight global supply and increased demand in Europe and Asia.

Lumber markets remained weak during the quarter reflecting the continued downturn in the U.S. housing market. Sales volumes were down 37% from fourth quarter levels and 40% from the first quarter of 2007 as the Company took significant downtime at three of its four sawmill operations. The Company’s mills in Plaster Rock and Juniper, New Brunswick were down for the entire quarter while the Company’s mill in Ashland, Maine was shut down for eight weeks. These three mills have combined annual capacity of 330 MMfbm.

BUSINESS INITIATIVES

Price and Product Mix Improvement

In response to rising input costs and other market influences, the Company implemented price increases across its paper product lines during the quarter resulting in an average increase of $44 per ton of paper, including the mix impact. The net impact over the fourth quarter was $6.7 million. Higher prices related to the Company’s sales of hardwood pulp of $12 per tonne provided an additional $0.7 million.

Market Focus and Competitive Advantage

Fraser Papers’ strategy focuses on innovation and the development of value-added products for niche paper segments that meet our customers’ needs. During the first quarter, the Company increased its shipments of specialty high-bright groundwood grades as well as specialty packaging papers. Shipments of packaging papers were focused on coated bag papers designed to replace plastic and foil. In addition, the Company increased shipments of its lightweight, treated sandwich wrap papers designed for quick service restaurants.

Margin Improvement and Cost Reduction

Cost input pressures have continued to impact all manufacturers, including Fraser Papers. Since the first quarter of 2007, benchmark prices for oil have increased 73%, the Canadian dollar has strengthened by 17% and fibre and chemical costs have increased by 6%. The combined negative effect of these factors on Fraser Papers’ results in the quarter was $21.6 million dollars, compared to the first quarter of 2007. Fraser Papers has implemented price increases for all of its pulp and paper products over the past year, but these price increases have not kept pace with cost escalation.

The Company continues to emphasize initiatives to reduce costs by reducing fixed costs, improving efficiencies and optimizing the use of raw materials. The Company believes these initiatives will position Fraser Papers to benefit when costs ease.

At the end of the first quarter, the Company completed the installation of a heat exchange system at its market pulp mill in Thurso, Quebec. The heat exchanger is currently performing at expectations and is expected to result in annual savings of approximately $1.4 million through the reduction in oil consumption.

In 2007, an oil fired boiler and turbine in Edmundston, New Brunswick was shut in conjunction with the permanent closure of two paper machines at the Company’s East Papers operations. In the first quarter of 2008, oil consumption at Edmundston was lower by 50,000 barrels resulting in quarterly savings of $3.9 million at today’s oil price. Full year savings are expected to exceed $5.0 million. In addition to the oil savings, fixed costs of $1.7 million were eliminated as a result of the paper machine closures.

The Company’s sawmills have been negatively impacted by a 61% drop in housing starts since peak levels in 2006. These sawmills have traditionally provided a strategic supply of economical woodchips to the Company’s East Papers operations. However, record low lumber prices have made running the sawmills uneconomic. Alternative woodchip procurement strategies have allowed the Company to temporarily close its sawmills during this period of low lumber prices.

Financing

On January 22, 2008, the Company completed the issue of 20.7 million common shares pursuant to a rights offering to its existing shareholders. Total proceeds of C$59.9 million were used to repay amounts outstanding under the Company’s revolving credit facility. In support of the rights offering, Brookfield Asset Management Inc. (TSX:BAM)(NYSE:BAM)(EURONEXT:BAMA) (“Brookfield”) purchased 18.8 million shares of the Company and, as a result, increased its holdings to approximately 70.5% of the total common shares outstanding.

Subsequent to the end of the quarter, the Company amended its existing revolving credit facility to extend the term of the facility and to increase maximum borrowings under the facility. Maximum borrowings under the facility have been increased to $115.0 million and the term of the facility has been extended three years to April 2011. The increased borrowing capacity is supported by a $25 million guarantee by Brookfield and provides the Company adequate liquidity to execute its 2008 business plan.

OUTLOOK

Consolidation and rationalization in the broader paper industry have contributed to a better balance between supply and demand fundamentals in the market. As a result, Fraser Papers experienced positive momentum for pricing of its paper products in the first quarter. While not yet able to offset significant increases in input costs, the Company anticipates additional price increases will be necessary to respond to these increased pressures. The Company continues to closely monitor the potential impact on overall sales volumes should the North American economy slow, as expected.

Markets for the Company’s northern bleached hardwood pulp remain firm with demand from Europe and Asia at high levels. Recent increases in global hardwood capacity appear to have been fully absorbed. A $20 per tonne price increase was announced for April 1, 2008 and appears to have been implemented.

Lumber prices are not expected to improve materially over the balance of the year, reflecting the severe downturn in the U.S. housing industry. Significant inventories of unsold homes continue to overhang the market. Operation of the Company’s four sawmills will be dependent on the availability of economic wood fibre to feed its Edmundston pulp mill and the requirement to process remaining log inventories.

During the quarter, Fraser Papers strengthened its balance sheet with $60 million in proceeds from a rights offering to its shareholders. The issue was backstopped by Brookfield, the Company’s largest shareholder. Subsequent to quarter end, the Company secured a $25 million expansion and a three-year extension to its credit facility. With a longer term and increased borrowing capacity provided by the recent financing, the Company’s management has the opportunity to focus on the key drivers of the business namely, energy, fibre, throughput and process efficiencies, to achieve further cost reduction at all its operations.