Business News
Fraser Papers Announces Financial Results for the First Quarter of 2009
Thursday 30. April 2009 - Fraser Papers Inc. (TSX:FPS) ("Fraser Papers" or the "Company") today reported financial results for the first quarter ended April 4, 2009.
The Company generated an EBITDA loss of $10.6 million in the first quarter compared to an EBITDA loss of $11.9 million in the first quarter of 2008. Improved results from the Company’s paper operations were offset by a sharp decline in the market for northern bleached hardwood kraft pulp and continuing low lumber prices. During the first quarter of 2009 the Company took substantial market-related downtime at each of its pulp, paper and lumber operations to reduce working capital.
The Company generated a loss (after interest, depreciation and income taxes) of $16.7 million or $0.33 per share in the first quarter compared to a loss of $19.1 million or $0.44 per share in the first quarter of 2008.
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HIGHLIGHTS
– Despite substantial downtime, generated $1.7 million in EBITDA in the
paper business reflecting higher net selling prices from sales of
specialty papers and lower input costs compared to the first quarter of
2008.
– Counter to a broad decline in paper demand for most grades across North
American markets, increased shipments of specialty paper grades by 11%
or 11,000 tons compared to the fourth quarter of 2008 and by 3% or 3,000
compared with the same period last year.
– Improved product mix with specialty paper grades making up 79% of the
Company’s sales volumes in 2009 compared to 70% in the first quarter of
2008.
– Added to existing currency hedge program with positions now representing
approximately 60% of 2009 and 30% 2010 exposure at an average forward
rate of $0.79.
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FINANCIAL SUMMARY
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Three Months Ended
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US$ MILLIONS, EXCEPT PER
SHARE AMOUNTS Apr 4, 2009 Dec 31, 2008 Mar 29, 2008
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EBITDA $ (10.6) $ (3.3) $ (11.9)
Loss $ (16.7) $ (15.9) $ (19.1)
Per share $ (0.33) $ (0.32) $ (0.44)
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“Despite weak economic activity that has translated into a broad decline in demand for most paper grades, shipments of our specialty products have performed better on a relative basis. We were able to improve our market share in a number of segments and continued to reduce our exposure to commodity papers,” said Peter Gordon, CEO of Fraser Papers. “While our paper products appear to be holding their own in very challenging market conditions and certain input costs have dropped from historic highs, our cost structure remains uncompetitive and we are not yet generating positive earnings. We need to continue to focus on lowering our fibre, power and labour costs and improving our productivity.”
RESULTS OF OPERATIONS
EBITDA in the first quarter of 2009 was a loss of $10.6 million, compared to an EBITDA loss of $3.3 million in the fourth quarter of 2008. The deterioration in operating results was due to continued demand weakness for the Company’s products and significant market-related downtime at each of the Company’s operations.
EBITDA in the current quarter improved modestly by $1.3 million compared to results from the first quarter of 2008. Lower oil prices and a weaker Canadian dollar provided $18 million of additional benefit on a year-over-year basis. This was offset by a $12 million impact from market-related shutdown, $2 million in lower pulp and lumber prices, and $4 million in increased pension expense.
MARKET UPDATE AND OPERATING RESULTS
During the first quarter of 2009, mill nets for the Company’s paper products fell modestly by an average of $21 per ton or 2% over the fourth quarter of 2008. Pricing for the Company’s specialty packaging and printing grades held well while prices for groundwood grades and commodity grades dropped. Increased competition from manufacturers switching to specialty groundwood grades and lower demand for commodity grades were the key reasons. Compared to the first quarter of 2008, mill net realizations have improved $39 per ton or 4% equal to $5.4 million of revenue.
Total paper shipments were up marginally from the fourth quarter of 2008 as the seasonal activity from the Company’s financial printing segment was partly offset by lower shipments of commodity papers. Total shipments of paper were down 9% compared to the first quarter of 2008 as the Company took extensive market-related downtime to lower finished goods inventories and generate additional cash from operations. During the quarter, Fraser Papers took downtime of 197 machine days at its mills in Madawaska, Maine and Gorham, New Hampshire, equivalent to approximately 23% of total manufacturing capacity as well as 11 days of downtime at its integrated pulp mill in Edmundston, New Brunswick. The Company continued to focus its production, product development and sales efforts on specialty packaging, printing and high-bright groundwood papers. These three specialty products accounted for 79% of shipments in the quarter as compared to 70% last year and 74% in the fourth quarter of 2008.
Shipments of northern bleached hardwood kraft pulp from the Company’s pulp mill in Thurso, Quebec were comparable to the fourth quarter of 2008 but down 31% from the first quarter of 2008. Weak demand for pulp, which began in 2008, continued in the quarter as paper producers announced widespread downtime and world hardwood pulp inventories grew to 47 days supply at March 31, 2009, well above the 35 days considered to represent a balanced market. As a result, the Company took 41 days of downtime at its market pulp mill in Thurso, Quebec to control inventories.
During the first quarter, a number of U.S. kraft pulp producers announced they had applied and received over $100 million in lucrative tax credits earned by using black liquor as a fuel source in their recovery boilers. These tax credits were intended to encourage the use of ethanol in motor vehicles, not to subsidize the traditional burning of organic residue in industrial processes like kraft pulping.
Commenting on these tax credits, Mr. Gordon noted: “This tax credit was never intended to apply to the pulp industry and will only serve to subsidize the production of kraft pulp in an oversupplied market at a cost to U.S. taxpayers in the billions of dollars. We have advised the Provincial and Federal governments that this tax loophole threatens the viability of non-U.S. based hardwood and softwood pulp mills, including our own in Thurso, Quebec and Edmundston, New Brunswick.”
During the first quarter, benchmark prices for NBHK pulp fell 17% or $119 per tonne compared to the fourth quarter of 2008 and 25% or $202 compared to the first quarter of 2008.
Lumber markets remained weak during the quarter as U.S. housing starts remained at historically low levels. Lumber prices continued to fall with the Boston delivered reference price averaging $240 per Mfbm compared to $276 in the fourth quarter of 2008. As a result of low prices and weak demand, the Company’s four lumbermills operated at 16% of capacity during the quarter. None of the four mills were in operation at the end of the quarter.
BUSINESS INITIATIVES
Fraser Papers focuses on producing specialty papers for a variety of packaging and printing applications. During the first quarter, Fraser Papers increased its shipments of specialty papers by 13% compared to the fourth quarter of 2008 and 3% compared to the first quarter of 2008, despite broader decline in paper demand. These increases were achieved as a result of product and market development initiatives in response to customer needs. During the first quarter of 2009, the Company launched six new grades. Approximately 27% of the products manufactured were developed in the previous 24 months, including specialty packaging applications for consumable products and quick service applications.
During the quarter the Company invested CAD$4.6 million in the Plaster Rock lumbermill modernization. Total spending to date on the CAD$17.5 million project is CAD$7.3 million. The project includes the installation of a biomass boiler which will displace the use of oil as a fuel source and lumbermill modernization equipment which will improve production efficiencies and lower costs at the mill. The project is expected to be complete during the summer of 2009 and is being financed primarily through a term loan provided by the Government of New Brunswick.
The Company has hedged approximately 50% of its historical Canadian dollar cost exposure to reduce the impact that foreign exchange could have on its cost structure. The Company’s hedging program resulted in an effective exchange rate of CAD$1.00 equals US$0.799 for Canadian dollar-denominated costs compared to a published rate of CAD$1.00 equals US$0.803.
CASH FLOW AND LIQUIDITY
The Company generated free cash flow of $18.6 million during the quarter due to the reduction of inventories and accounts receivable. As a result, the Company was able to repay $18.1 million owing under its revolving credit facility.
During the quarter the Company received notice that its application to extend the amortization period of its pension deficit funding from five years to ten years had been granted by the Superintendent of Pensions in New Brunswick. As a result, the Company has been able to reduce its pension funding in the quarter by approximately $1 million relative to the scheduled funding levels. Actuarial reports scheduled to be filed in the third quarter of 2009 are expected to result in an increase in this amount in the fourth quarter. The Company noted that its pension and other employee benefit obligations are material and are expected require approximately $32.3 million in funding over the next 12 months.
The Company has $25 million under a one year term loan coming due in September and is currently pursuing its refinancing options. The Company will need the support of shareholders to refinance this debt, which is guaranteed by the Company’s largest shareholder.
OUTLOOK
The Company expects a challenging business environment for the foreseeable future due to the recession in the North American economy and continued tightness in the credit markets. Business activity continues sluggish and this has translated into weaker demand for certain paper grades, smaller order files and weaker pricing later in the quarter. Specialty packaging volumes are expected to remain steady as the Company has successfully increased share in a number of areas while developing new products to penetrate others. Demand for specialty printing and high bright groundwood papers is expected to see a seasonal slowdown through the second and third quarters of the year. The Company is committed to minimizing its investment in working capital and will balance production, inventories and customer orders.
World hardwood pulp inventories have increased to unsustainable levels and oversupply is being artificially encouraged by a direct tax subsidy provided to U.S. producers that is estimated to amount to several billion dollars in 2009. The Company, along with other Canadian producers, have asked the Canadian Government for a remedy, including equal tax treatment. Without a satisfactory outcome the Company’s two pulp mills are significantly disadvantaged and at risk.
While there are indications that the pace of decline in the U.S. housing market has slowed, there are no clear signs of a recovery. As a result, lumber prices are expected to remain depressed for the balance of 2009. The Company will continue evaluating the lumber mill operations against the chip requirements of its East Papers operations.
The labour agreements at the Company’s Thurso and Edmundston pulp mills expire on April 30 and June 30 respectively. A third labour agreement at the Madawaska paper mill expires on October 31. The Company expects that it will have to achieve significant modifications to these agreements in order to ensure these operations are competitive in the future.
The Company will require additional financing during 2009 to fund its operations, pension fund obligations and the maturity of the $25 million term loan facility in September. Given the challenging conditions in the credit markets, the Company has begun discussions with a number of its stakeholders including its major shareholder, its lenders, unionized employees, provincial and state governments and material suppliers to identify opportunities to meet these obligations.