Business News
Fraser Papers Announces 2007 Financial Results
Thursday 07. February 2008 - Fraser Papers Inc. ("Fraser Papers" or the "Company") (TSX:FPS) today reported financial results for the fourth quarter and year ended December 31, 2007.
(All financial references are in U.S. dollars unless otherwise noted)
The Company generated a net loss of $20.8 million or $0.70 per share during the fourth quarter. The strength of the Canadian dollar, significant increases in input costs, weak lumber markets and maintenance and market-related downtime contributed to these results. However, during 2007, Fraser Papers completed a number of strategic initiatives that are expected to have a positive impact on the future performance of the Company.
– Shut two high cost, uncoated freesheet paper machines, representing a combined capacity of 70,000 tons per year at the East Papers operations in Madawaska, Maine resulting in anticipated cost reductions of approximately $10 million per year.
– Commenced energy efficiency initiatives at the Company’s East Papers operations to lower overall energy costs and reduce greenhouse gas emissions. Anticipated reduction in oil consumption of 136,000 barrels per year or $8 million per year.
– Completed a $10 million capital rebuild of the recovery boiler at the pulp mill in Edmundston, New Brunswick, removing a bottleneck in capacity and reducing reliance on more expensive, market pulp.
– Strengthened the Company’s balance sheet, reducing debt with proceeds from the $38.4 million sale of the Company’s interest in Acadian Timber Income Fund and proceeds of a C$59.9 million equity offering which closed subsequent to year end.
– Increased shipments of specialty packaging and groundwood papers by a combined 20% while reducing shipments of commodity grades by 16%.
– Continued its commitment to sustainable forest practices by achieving FSC certification at its mill in Gorham, New Hampshire and SFI certification at its paper mill in Madawaska, Maine.
– Announced an extended closure of 120 million board feet of annual lumber capacity due to market conditions at the Juniper, New Brunswick sawmill and secured replacement woodchips at lower cost.
“During 2007 we made significant progress toward the implementation of our strategy. We improved our product mix with higher volumes of specialty packaging and highbright groundwood paper and continued to provide outstanding quality and service to our customers. We made progress with the efficiency of our operations and reduced our energy consumption. However, continued increases in energy and fibre costs, combined with the strengthening Canadian dollar, continue to erode operating margins in the short term. While we were able to generate improvements in our operations to partially offset these cost increases, the full impact of many of the initiatives we have undertaken have yet to be realized,” said Peter Gordon, President and CEO of Fraser Papers. “We are confident that the actions undertaken in 2007 have positioned Fraser Papers to benefit from improved pricing and lower costs in 2008.”
FINANCIAL SUMMARY
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Three Months Ended Year Ended
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US$ MILLIONS, EXCEPT Dec 31, Dec 31, Dec 31, Dec 31,
PER SHARE AMOUNTS 2007 2006 2007 2006
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EBITDA $ (17.9) $ 0.3 $ (44.1) $ (7.2)
Earnings/(loss) $ (20.8) $ (11.0) $ (43.7) $ (113.8)
Per share $ (0.70) $ (0.40) $ (1.48) $ (3.86)
Loss (excluding
unusual items) $ (21.6) $ (15.3) $ (73.7) $ (24.2)
Per share $ (0.73) $ (0.54) $ (2.50) $ (0.82)
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For the year, the Company generated a net loss of $43.7 million or $1.48 per share. These results included a one-time gain on the sale of the Company’s interest in Acadian Timber Income Fund of $38.4 million (after tax, $1.08 per share); one-time restructuring charges related to machine closures of $15.9 million (after tax, $0.53 per share) and a one-time tax recovery of $13.8 million ($0.47 per share). Excluding the impact of these unusual items, Fraser Papers generated a net loss of $73.7 million, or $2.50 per share.
During 2006, the Company generated a $24.2 million loss (excluding unusual items). Unusual items in 2006 included a gain on the sale of the Company’s New Brunswick timberlands of $71.0 million ($2.00 per share), losses related to the bankruptcy of an equity investee of $111.4 million ($3.66 per share), costs of closing a pulp mill of $50.3 million ($1.71 per share) and anti-dumping duty refunds related to shipments of softwood lumber to the U.S. of $14.4 million ($0.33 per share).
EBITDA in the fourth quarter of 2007 was a loss of $17.9 million, compared to an EBITDA loss of $5.6 million in the third quarter. The Company took planned annual maintenance outages at its pulp mill in Thurso, Quebec and its cogeneration plant in Edmundston, New Brunswick. These outages negatively impacted operating results by $8.5 million. In addition, higher prices for oil and the impact of a stronger Canadian dollar increased costs by $5.5 million relative to the third quarter. The Canadian/U.S. dollar exchange rate averaged C$1.00 equals US$ 1.02 in the fourth quarter compared to C$1.00 equals US$ 0.96 in the second quarter, while benchmark oil prices increased 20%.
During the fourth quarter, mill nets for the Company’s paper products improved marginally as announced price increases for certain of the Company’s specialty packaging papers were not implemented until late in the quarter. Prices for commodity groundwood grades improved significantly due to strong demand. Benchmark pulp prices improved 6% compared to the third quarter as demand continued strong. Benchmark lumber prices were lower by 8% in the face of weak housing starts in the U.S.
2007 results include margin improvements of $22.9 million compared to 2006 as a result of reduced fixed costs, improved operating efficiencies and increased production and shipments of paper. Unfortunately, the impact of foreign exchange, and higher costs for fibre, energy and chemicals amounted to $48.7 million, more than offsetting the improvements.
EBITDA at the Company’s paper operations was $4.3 million lower than the third quarter. A planned maintenance outage at the East Papers cogeneration facility impacted results by $3.5 million. Higher prices for oil and fibre and the impact of the strong Canadian dollar were only partly offset by productivity improvements and lower oil usage. During the last two months of 2007, oil consumption at the Company’s East Paper operations was 64% below the comparable period in the fourth quarter of 2006.
Results from the Company’s lumber operations continued to be weak reflecting low prices and weak demand. Pulp operations results were below third quarter levels as the Company took its planned annual maintenance shut at its market pulp mill in Thurso, Quebec.
Total paper shipments improved 21% over the third quarter as the Company increased its volume of specialty packaging papers and began shipping to its financial print customers in preparation for the financial printing season. In particular, shipments of specialty packaging grades increased 12%, specialty printing papers increased by 12% and high-bright groundwood shipments improved 13%. In addition, the Company took advantage of strong markets for commodity groundwood grades and increased production and shipments. For the full year, total paper shipments were lower by 11% as a result of the permanent closure of two paper machines in the third quarter at the Company’s East Papers operations. However, consistent with the Company’s strategic focus, shipments increased by 7% for specialty packaging grades and 31% for specialty high-bright groundwood grades compared to 2006.
Mill net realizations for the Company’s paper products improved by as much as 6% for certain grades, in line with increases in benchmark commodity prices.
Shipments of northern bleached hardwood kraft pulp from the Company’s pulp mill in Thurso, Quebec fell 13% over the third quarter as a result of the planned maintenance shut taken in October. Continued strong pulp markets and higher shipments to third parties improved average mill net realizations by 4%, or $15 per tonne, reflecting tight global supply.
Lumber markets remained weak with housing starts in 2007 approximately 20% below 2006 levels. Mill net realizations were $25 dollars per Mfbm lower than the third quarter, reflecting continued deterioration in demand. The Company’s sawmills in Juniper and Plaster Rock, New Brunswick were shut for substantially the entire quarter. These two mills have combined annual capacity of 260 MMfbm.
BUSINESS INITIATIVES
Market Focus and Competitive Advantage
The Company continues to focus on product mix enhancement and development in response to customer demands. During the fourth quarter, the Company increased its capacity to produce higher brightness, specialty groundwood grades. These newly developed premium products have recently been qualified for applications which have traditionally utilized uncoated freesheet papers.
Product development initiatives were focused on technical label grades and environmentally friendly packaging applications which will replace plastic or foil. These initiatives provide the Company with a broad packaging platform of grease resistant and non-grease resistant grades which are being marketed in quick service restaurants, consumer and wholesale packaging applications and for industrial food service.
Financing
During the fourth quarter, the Company announced an issuance of common shares by way of a rights offering to shareholders. The offering was completed on January 22, 2008. 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. (“Brookfield”) (NYSE:BAM)(TSX:BAM) entered into a standby purchase agreement whereby Brookfield agreed to exercise its full allotment of rights and to purchase any shares not otherwise purchased by other shareholders. As a result, Brookfield purchased 18.8 million shares of the Company under the rights offering to hold approximately 70.5% of the total common shares outstanding.
OUTLOOK
Fraser Papers, like other Canadian forest product companies, is operating in a challenging business environment. During the fourth quarter of 2007, oil prices reached unprecedented highs, the Canadian dollar touched its strongest level ever, selling prices for lumber were at their lowest levels in twenty years and the availability of woodchips reached critical levels in New Brunswick as a result of sawmill closures. These and other factors have served to offset the positive strides made by Fraser Papers in 2007.
Management believes, however, that the positive efforts of the Company and its employees have positioned Fraser Papers to benefit significantly as these pressures ease. In addition, the broad trend of consolidations in the paper industry, are expected to improve the balance of supply and demand.
The closure of two higher cost paper machines in 2007 at the Company’s East Papers operations will allow the Company to lower cost and focus on growing its position in target niche segments. Specifically, the Company’s proven product development and lightweight coated and uncoated freesheet capabilities will provide opportunities for growth in food packaging applications as consumer preferences move toward “greener”, recyclable, paper-based products. Increased bleaching capabilities will allow the Company to enhance its position in specialty high-bright groundwood papers which are expected to displace higher cost, uncoated freesheet grades in certain applications.
The Company will continue to reduce its reliance on commodity freesheet and groundwood markets, however the Company’s manufacturing flexibility does allow for opportunistic participation in these markets.
During the fourth quarter, the Company announced price increases to its customers representing almost 50% of its anticipated 2008 paper shipments. Recent capacity reductions for a number of commodity and specialty grades appear to have brought better balance to the markets. The first quarter is traditionally a strong quarter for paper shipments due to the financial printing season and seasonal changes to food and consumer packaging design.
Market fundamentals for northern bleached hardwood kraft pulp continue to be strong. Recent greenfield start-ups and labour-related restarts appear to have been absorbed into the market as price increases have been announced for 2008. Recent concerns of an economic slowdown in U.S. markets, however, could soften paper demand in these markets.