Fraser Paper Repots Loss on 2Q
Friday, August 07, 2009
TORONTO, ONTARIO -- Fraser Papers Inc. ("Fraser Papers" or the "Company") today reported financial results for the second quarter ended July 4, 2009. The Company generated an EBITDA loss of $9.9 million in the second quarter compared to an EBITDA loss of $10.6 million in the first quarter.
The loss (after interest, depreciation and income taxes) in the second quarter was $8.0 million or $0.16 per share compared to a loss of $18.1 million or $0.36 per share in the first quarter. During the second quarter, the Company recorded a net gain of $12.5 million from unwinding its foreign exchange hedging program.
On June 18, 2009, citing continued operating losses, weak markets for pulp and lumber, impending debt repayments and significant pension funding obligations, the Company and its subsidiaries filed for creditor protection under the Companies Creditors Arrangement Act ("CCAA") in Canada and Chapter 15 of the U.S. Bankruptcy Code.
- Despite substantial downtime and challenging market conditions, generated $0.7 million in EBITDA in the paper business reflecting higher net selling prices from sales of specialty papers and lower input costs compared to the second quarter of 2008.
- Improved product mix with specialty paper grades making up 82% of the Company's paper sales volumes compared to 79% in the first quarter of 2009.
- Reduced inventories by $29.8 million by taking substantial market downtime across the Company's operations.
- Discontinued the Company's foreign exchange hedging program generating a gain of $12.5 million.
- Subsequent to the quarter end, received final approval in respect of up to $44 million in debtor-in-possession financing and an extension of creditor protection obtained under CCAA and Chapter 15 to October 16, 2009.
"With the support of our major stakeholders, we have secured adequate debtor-in-possession financing and we are now in the process of developing a restructuring proposal for consideration by our creditors," said Peter Gordon, CEO of Fraser Papers. "Our objective is to emerge with a sustainable and profitable specialty papers business. A key first step will be to reach satisfactory resolution to our labour and energy issues at our Edmundston operation."
MARKET UPDATE AND OPERATING RESULTS
Market conditions in the North American paper industry were negatively impacted by the weak economy. Estimated demand across all printing and writing grades has fallen 36% in the first half of 2009 compared to 2008. Demand for uncoated freesheet paper and uncoated groundwood papers are each off 23% year over year due to lower advertising spending and economic activity.
Paper shipments from the Company's two paper mills in Madawaska, Maine and Gorham, New Hampshire in the first half of 2009 were lower than 2008 levels by 15%. Fraser Papers' focus on specialty packaging and printing grades (which represent 82% of shipments in the quarter compared to 79% last quarter) has allowed the Company to target applications which are less sensitive to overall economic demand weakness. The Company also believes that more than half of the reduction in its paper shipments was lost to competitors who are benefiting from a temporary U.S. tax subsidy related to the production of black liquor at their U.S. based pulp operations. Certain of these competitors have not traditionally competed in uncoated paper markets.
Reference prices during the quarter were lower compared to the first quarter as commodity uncoated freesheet and groundwood paper prices fell by 6% and 4% respectively, in response to weaker demand and increased competition. Compared to the first six months of 2008 however, average uncoated freesheet prices are unchanged while average uncoated groundwood prices are higher by $40 per ton or 5% as this market segment appears to be in better balance.
Average mill nets on paper shipments were lower by only 1% compared to the first quarter and higher by 3% on a year-to-date basis compared to 2008.
The Company's paper operations recorded EBITDA of $0.7 million in the second quarter of 2009 compared to $1.7 million in the first quarter and negative $4.0 million in the second quarter of 2008. On a year-to-date basis, the Company generated EBITDA of $2.4 million from its paper operations compared to negative $10.8 million in 2008. The $13.2 million year-over-year improvement is due to improved selling prices, lower fibre costs and the benefit of a weaker Canadian dollar, partly offset by higher pension costs and the impact of market-related and maintenance downtime.
During the quarter, the Company took additional market-related downtime to match paper production with customer orders. Total downtime amounted to approximately 43,000 tons or 14% of production capacity. In addition, the Edmundston pulp and energy operation was shut for an annual maintenance outage on June 8, 2009. The cogeneration facility restarted on June 11, 2009 and the groundwood pulp mill restarted on June 15, 2009. The Company expects the sulphite mill to remain closed unless a new the collective bargaining agreement is reached at a vote to be held on August 6, 2009. In addition, the Company continues to seek lower its overall energy costs as a competitive advantage for its Edmundston and Madawaska operations.
On June 17, 2009, the Canadian Federal Government announced the "Pulp and Paper Green Transformation Program." This program will provide funding of up to $1 billion to pulp manufacturers who utilize black liquor as a fuel source in their manufacturing process. Companies receiving funding are required to invest those funds in capital expenditures that make improvements to the energy efficiency or environmental performance at any pulp and paper mill in Canada. While details around the program are still being developed, the Company expects that its Edmundston, New Brunswick and Thurso, Quebec pulp mills will be eligible to receive funding under this program.
Lower demand for commodity paper products has negatively impacted the demand for market pulp. Demand for northern bleached hardwood kraft ("NBHK") pulp fell by 20% in North America and 4% globally in the first half of 2009 compared to 2008 as the market remained oversupplied. Pulp pricing continued to fall during the second quarter as average benchmark prices dropped $62 per tonne or 10% compared to the first quarter. Late in the quarter, increased demand in Asian markets combined with a drop in global inventories, resulted in the first increase in benchmark price for hardwood pulp since early in 2008.
During the first half of the year, the Thurso pulp mill took 84 days market-related downtime representing 42% of manufacturing capacity. On June 6, 2009, the Company announced the indefinite shutdown of operations.
Shipments of NBHK pulp from the Company's pulp mill in Thurso, Quebec were 30% below first quarter levels. On a year-to-date basis, shipments are off 40%. Mill net selling prices fell in the quarter as U.S. based pulp mills continued producing into an oversupplied market in order to take advantage of a U.S. tax subsidy.
The Company's pulp operations generated negative EBITDA of $7.4 million in the quarter. On a year-to-date basis, the pulp mill generated negative EBITDA of $15.6 million compared to a breakeven result in 2008. The weaker earnings were due to lower selling prices and the impact of market-related downtime partly offset by the benefit of a weaker Canadian dollar.
Housing markets have continued depressed as new housing starts remained at historical lows. Weak demand has contributed to a continuation of low lumber prices. The relevant market price for lumber, delivered Boston basis, averaged $255 per Mfbm in the quarter, up 6% from the first quarter. These improved prices are still well below the variable production costs of many east coast lumbermills.
During the quarter, Fraser Papers operated its lumbermills at only 12% of capacity. As a result, the lumber operations generated negative EBITDA of $3.2 million in the quarter.
On June 18, 2009, Fraser Papers filed for creditor protection under the Companies' Creditors Arrangement Act ("CCAA") and Chapter 15 of the U.S. Bankruptcy Code in order to provide the Company with the necessary time to restructure its affairs and emerge with a sustainable and profitable specialty papers business. The Company is developing a reorganization plan to present to its creditors before the end of the existing stay period on October 16, 2009.
The Company has taken the following steps as part of its restructuring process:
- Secured up to $44 million in debtor-in-possession ("DIP") financing from its two secured lenders to fund operating requirements while in creditor protection.
- Secured an additional $9.0 million in financing to complete the modernization project at the Company's lumbermill in Plaster Rock, New Brunswick. The funding is being provided by the Government of New Brunswick under an existing loan facility and will be used to complete the installation of a wood-fired boiler, new kilns and upgraded sawline equipment. These upgrades are expected to make the lumbermill cost competitive with other mills in eastern Canada.
- Entered into discussions with the Ministry of Economic Development of the Quebec Government regarding a potential financing plan that would fund the re-start of the hardwood pulp mill in Thurso, Quebec.
- Completed a five year collective agreement with its unionized employees at the Thurso pulp mill, conditional upon receiving a financing commitment from the Quebec Government.
- Continued to manage its investment in working capital by reducing inventories by $29.8 million during the quarter.
- Following the indefinite closure of the majority of the Company's Canadian operations including the Thurso pulp mill, the Edmundston sulphite mill, and the two New Brunswick lumbermills, the Company determined to discontinue its Canadian dollar hedging program. On closing out these forward positions, the Company recorded a gain of $12.5 million on the hedging program.
The Company will continue to manage operating rates at its mills, matching production to customer orders and minimizing investment in working capital. Until economic activity in North America begins to improve markedly, demand for specialty papers is not expected to improve while commodity grades of paper are forecast to remain under pressure. Fraser Papers continues to develop new products supported by high levels of customer service and technical field support as part of a focused strategy to retain market share in competitive segments.
The market for market pulp, including NBHK, appears to be tightening as a number of producers have announced price increases for August. As a result of increased demand in Asia, world hardwood pulp inventories have been reduced to 38 days supply, about 9% above levels which indicate a well balanced market. The Company expects that pulp supply in North America will continue to be strong so long as U.S. producers continue to receive a tax subsidy for the production of black liquor in their pulp mills.
Lumber prices are not expected to improve over the balance of 2009 reflecting a continuation of weak conditions in the U.S. housing starts. The Company continues to evaluate the necessity to restart its lumber operations against chip requirements at its East Papers operations.
With adequate financing to support operations through the existing stay period, the Company is developing a restructuring plan to present to its creditors with the objective of emerging with a sustainable and profitable specialty papers business.