Business News
Fraser Papers Announces Third Quarter Financial Results
Tuesday 04. November 2008 - Fraser Papers Inc. (TSX:FPS) ("Fraser Papers" or the "Company") today reported financial results for the third quarter and nine months ended September 27, 2008. The Company generated a net loss of $21.3 million or $0.42 per share in the third quarter. These results included the impact of planned maintenance outages at the Company's East Papers and Gorham operations, which negatively affected results by $5.3 million or $0.11 per share.
(All financial references are in U.S. dollars unless otherwise noted)
Fraser Papers Inc. (TSX:FPS) (“Fraser Papers” or the “Company”) today reported financial results for the third quarter and nine months ended September 27, 2008. The Company generated a net loss of $21.3 million or $0.42 per share in the third quarter. These results included the impact of planned maintenance outages at the Company’s East Papers and Gorham operations, which negatively affected results by $5.3 million or $0.11 per share.
For the nine months ended September 27, 2008, the Company generated a net loss of $56.0 million or $1.17 per share compared to a loss of $22.8 million or $0.78 per share in 2007. Results in 2007 included a gain of $32.1 million ($1.09 per share) on the sale of the Company’s interest in Acadian Timber Income Fund (TSX:ADN) and restructuring charges of $11.1 million ($0.37 per share) related to the permanent closure of two paper machines at the Company’s East Papers operations.
HIGHLIGHTS
– Realized higher net selling prices from sales of our specialty papers. Net selling prices for the quarter improved by $18 per ton or 8% compared to Q3 2007.
– Improved overall specialty paper shipments for the year-to-date period to 74% of total paper sales compared to 70% in 2007, including a 42% increase in shipments of high-bright groundwood papers.
– Lowered average cash operating costs at our paper operations despite sharply higher input costs, reflecting improved productivity and significant energy reduction efforts.
– Reduced annualized oil consumption on a year-to-date basis by 29% as a result of previously announced initiatives across all operations.
– Secured a $25 million one-year term loan on favourable economic terms in a challenging credit environment.
– Completed major outage at the Company’s core manufacturing operations, East Papers, which has resulted in a 12% improvement in production of lower cost, sulphite pulp for use in the paper mill.
FINANCIAL SUMMARY
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Three Months Ended Nine Months Ended
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US$MILLIONS, EXCEPT PER Sept 27, Sept 29, Sept 27, Sept 29,
SHARE AMOUNTS 2008 2007 2008 2007
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EBITDA $ (11.5) $ (5.2) $ (29.6) $ (24.7)
Earnings/(loss) $ (21.3) $ 24.7 $ (56.0) $ (22.8)
Per share $ (0.42) $ 0.84 $ (1.17) $ (0.78)
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“Our operating performance has continued to improve over the past twelve months. However, cost pressures have served to offset much of these improvements,” said Peter Gordon, President and CEO of Fraser Papers. “Over the past several weeks, we have seen prices for a number of our key commodity inputs decrease and a significant weakening of the Canadian dollar. We expect to benefit significantly in the coming quarters by these trends as cost pressures in our business subside from unprecedented levels.”
RESULTS OF OPERATIONS
EBITDA in the third quarter of 2008 was a loss of $11.5 million, compared to an EBITDA loss of $6.2 million in the second quarter of 2008. Third quarter results included $7.2 million related to planned outages at the recovery boiler and cogeneration facility at the Company’s East Papers operations and a regular maintenance outage at the Gorham, New Hampshire paper mill. Excluding the impact of the outages at East Papers, EBITDA improved by $1.9 million compared to the second quarter. Increased selling prices for paper and lumber products and improved operating efficiencies were only partly offset by higher costs for oil and chemicals.
EBITDA in the quarter was lower than the negative EBITDA of $5.2 million generated in the third quarter of 2007, primarily as a result of the downtime taken at the Company’s East Papers and Gorham operations. Excluding the impact of this downtime, EBITDA improved by $0.9 million. This improvement is significant in that the Company has implemented initiatives to increase selling prices, improve production and lower manufacturing costs, which have more than offset $11 million in cost inflation resulting from higher fibre, energy and chemical costs and the negative impact of the stronger Canadian dollar. For the nine months ended September 27, 2008, these inflationary cost pressures totaled $44 million compared to 2007.
MARKET UPDATE
During the third quarter of 2008, mill nets for the Company’s paper products improved an average of $18 per ton over the second quarter of 2008 and $76 per ton over the third quarter of 2007. On a year-to-date basis, net price realizations are $51 per ton higher than 2007. During the third quarter, net pricing for specialty packaging, specialty printing and high-bright groundwood grades improved by $25 to $35 per ton (or approximately 3%), compared to the second quarter, due to improved product mix and successful selling price increases. Since the fourth quarter of 2007, the Company has implemented price increases across most of its specialty product lines in response to unprecedented increases in input costs over the past number of years. Through the third quarter of 2008, these price increases have served to offset only 25% of the estimated impact of higher chemical, energy and fibre costs, combined with the impact of a stronger Canadian dollar.
Pricing for commodity freesheet papers also improved as benchmark prices increased 4% over the second quarter of 2008. Commodity groundwood markets continued to weaken due to reduced advertising, lower catalog circulation, fewer retail inserts printed and high inventories. As a result, net selling prices were reduced $72 per ton below the second quarter.
Total paper shipments were down 13% from the second quarter but were in line with shipments in the third quarter of 2007. Shipments of specialty printing and high-bright groundwood papers were seasonally lower compared to the second quarter, which includes the end of the financial printing season. Shipments of specialty packaging papers were lower due to seasonal slowdowns in certain grades and penetration of plastic packaging into the market for large pet food bags. Shipments of commodity papers were substantially unchanged from the second quarter but were 23% below the third quarter of 2007 as the Company continued to focus on growing its specialty paper market segments. On a year-to-date basis, shipments were unchanged from 2007 despite the permanent closure of two paper machines in the last half of 2007 and the temporary closure of two others. Shipments of commodity papers represented 19% of total shipments in 2008, down from 23% in 2007.
Shipments of northern bleached hardwood kraft pulp from the Company’s pulp mill in Thurso, Quebec were 22% below second quarter levels. Low woodchip inventories and resultant production slowdowns, as well as weaker demand in export markets, contributed to the reduction in shipments. Reference prices for hardwood pulp were substantially unchanged compared to the second quarter. Mill net realizations for hardwood pulp shipped from Thurso were 3% below second quarter levels due to higher freight costs resulting from increased shipments overseas.
Lumber markets remained weak during the quarter as U.S. housing starts continued at historically low levels due to weak demand. There was a modest improvement in lumber prices reflecting seasonal activity. The Company’s lumber shipments increased 28% compared to the second quarter as the Company operated the lumbermill in Plaster Rock, New Brunswick for the entire quarter and restarted the lumbermill in Juniper, New Brunswick during the last week of the quarter.
BUSINESS INITIATIVES
Market Focus and Competitive Advantage
Innovation and product development are an important part of Fraser Papers’ strategy. During 2008, the Company has increased its shipments of a number of paper grades used for retail food packaging and quick serve restaurant applications. These grades have been designed to replace less environmentally friendly alternatives. Current shipment levels represent a significant market share in certain of these grades.
Approximately 18% of the products manufactured in the first nine months of 2008 were developed in the past 24 months indicating the Company’s focus on innovation.
Margin Improvement and Cost Reduction
During the third quarter of 2008, the East Papers operations took 12 days of downtime at the sulphite pulp mill in Edmundston, New Brunswick in order to complete repairs and improve operating efficiency at the recovery boiler. Since restart, the sulphite mill has demonstrated a 12% increase in throughput with record daily production of 700 tons per day during the quarter. Increased internal sulphite pulp production reduces the requirement to purchase market pulp at a current savings of more than $200 per tonne of pulp.
In addition to the sulphite pulp mill outage, maintenance was completed on the Company’s 45 megawatt biomass cogeneration facility in Edmundston. The repairs were necessary in order to ensure the reliability of the boiler as the Company continues to focus on reducing its fossil fuel consumption. These repairs are in addition to the permanent closure of an oil fired boiler at the East Papers operations and the installation of a heat recovery system at the pulp mill in Thurso, Quebec. Oil consumption through the third quarter totaled 382,000 barrels, a reduction of 156,000 compared to 2007.
During the third quarter, the Company opportunistically restarted its lumbermills in New Brunswick to take advantage of a seasonal increase in lumber prices and to utilize existing log inventories. The operation of the lumbermills and improved lumber prices contributed to an improvement of $1.9 million in the results of the lumber operations compared to the second quarter of 2008. In addition, the Company has hedged the selling price of approximately 31% of its total forecasted lumber shipments in the fourth quarter at a price of approximately $330 per Mfbm (Delivered Boston SPF 2×4 #2& Btr).
The Company continues to improve its productivity levels despite significant capacity reductions taken over the past twelve months. Total paper production in 2008 is only 7% below 2007 levels despite the permanent closure of two paper machines at East Papers and the temporary closure of two machines at Gorham. Tons of production per day on the Company’s nine operating paper machines is up 6% compared to 2007. These improvements have been achieved by improving machine efficiencies, uptime and runnability, improving production scheduling and speeding up the paper machines. Excluding the costs associated with the maintenance outages, cash operating costs for paper improved marginally, despite increased input costs.
Fraser Papers is subject to market price fluctuations for many of its input costs and expects to benefit from recent reductions in world commodity prices. The Company consumes approximately 500,000 barrels of oil per year and has significant operations in Canada where it incurs Canadian dollar-denominated expenses of approximately CAD$360 million per year. In addition, the Company sells approximately 50,000 tonnes of market pulp per year (net of purchases).
In July 2008, the Company’s board of directors approved the $17.5 million modernization of the Company’s lumbermill located in Plaster Rock, New Brunswick. During the third quarter, the Company began placing orders for major equipment including the biomass boiler and new kilns. The construction work is expected to be completed by the third quarter of 2009.
Financing
In April 2008, the Company increased the maximum borrowings under its working capital facility to $115.0 million and extended the term to April 2011. In June 2008, the Company finalized a six-and-a-half-year CAD$40 million term loan facility with the province of New Brunswick to support its investment plans in the province. In September 2008, the Company finalized a one-year, $25 million term facility with a Canadian chartered bank. Each of these transactions was completed with the support of the Company’s largest shareholder.
OUTLOOK
Recent turmoil in financial markets has created a high degree of uncertainty worldwide. As governments continue to consider ways to provide assurances to lenders and borrowers alike, economic growth appears to be slowing. Demand for paper products is following this trend; however, it is expected that significant capacity reductions that have been announced or completed should allow for a relatively balanced relationship between supply and demand for paper products in the specific segments in which Fraser participates.
In the past few weeks, commodity markets appear to have peaked with prices coming off their historical highs. In addition, the U.S. dollar has strengthened against the Canadian dollar and the Euro. The Company expects to benefit significantly from this recent trend as cost pressures subside.
The specialty packaging markets are demanding more environmentally friendly packaging alternatives. Fraser Papers will continue to focus on innovation and product development in order to meet these emerging demands. Demand for specialty printing papers is uncertain at this time and will be impacted by a number of factors including: the lower number of publicly traded banking institutions; M&A activity in the financial sector; and, changes in securities and market regulation in the U.S. and elsewhere.
The markets for Fraser Papers’ northern bleached hardwood kraft pulp produced at the Thurso pulp mill have started to weaken. World pulp inventories are increasing and global demand has not rebounded following the seasonal summer slowdown. Recently announced closures at a number of North American hardwood kraft pulp mills are not expected to have a significant effect in the balance between supply and demand.
Despite a modest improvement in lumber prices during the third quarter, housing starts remain well below their peak levels and demand is not expected to improve in the near term. Fraser Papers will continue evaluating opportunities to secure low cost woodchips to the paper operations in weak lumber markets and will operate its lumbermills in support of its integrated paper operations.