Fortress Paper Reports Second Quarter 2012 Results

Aug. 7, 2012 (Press Release) - Fortress Paper Ltd. reported 2012 second quarter EBITDA of $2.3 million. For the first quarter of 2012, EBITDA loss was $1.8 million and for the second quarter of 2011, EBITDA was $4.6 million.

Excluding corporate costs, the three business segments' combined EBITDA was $3.6 million in the 3 months ended June 30, 2012. The Specialty Papers Segment contributed $10.5 million EBITDA while the Dissolving Pulp Segment and the Security Paper Products Segment generated EBITDA losses of $0.7 million and $6.2 million, respectively. Corporate costs contributed to EBITDA loss in the amount of $1.3 million.

Net income for the second quarter of 2012 was $12.5 million or basic and diluted net income of $0.87 per share. In the prior quarter net loss was $10.5 million or diluted loss per share of $0.73. In the prior year comparative period, net income was $2.9 million or diluted net income per share of $0.19. The much improved current period result was primarily due to the gain realized on the sale of certain non-core assets in the Security Paper Products Segment (see "Management's Outlook").

Production of dissolving pulp commenced in early December 2011. Commercial production for accounting purposes, with the equipment operating as intended by management, began on March 18, 2012. After such date all sales and cost of sales have been included in the operating results. The Dissolving Pulp Segment improved operating results gradually throughout the quarter.

The Specialty Papers Segment continued its strong performance in the second quarter. Margins remain strong and the order log is healthy. Contributing to the positive results were continued production efficiency, relatively lower pulp prices, full utilization of the Company's new dry waste plant and strong sales tonnage and realized prices.

The Security Paper Products Segment experienced another difficult quarter. Unfortunately, the continued postponement of several major currencies has resulted in optimization challenges due to low volumes. As announced in June 2012, Landqart had a material banknote order reinstated, the benefits of which are expected to be realized in the second half of 2012 at the earliest. Although the Company continues to pursue opportunities with other customers, there can be no assurance that new orders will be secured nor certainty as to when or whether all remaining postponed orders will be reinstated.

MANAGEMENT'S OUTLOOK

Dissolving Pulp Segment
The Fortress Specialty Cellulose mill continued to ramp up dissolving pulp production during the second quarter of 2012 and achieved approximately 75% average capacity in June and 70% for the quarter. Previously it was anticipated that full capacity would be achieved by the end of June 2012; however, additional planned and unplanned downtime was incurred to address remaining process deficiencies.

All process areas have operated for extended periods at or above design levels and process efficiency and reliability continues to improve. The remaining issues to achieve full capacity center on pulp dryer causticising and optimization are now focal points for the mill team. The new digester plant is performing well.

Dissolving pulp quality continues to progress with further reductions in off-specification product in the second quarter of 2012. Currently, we remain fully sold through the third quarter.

With the completion of the Fortress Global Cellulose mill acquisition, Fortress plans to increase its overall dissolving pulp production capacity to approximately 450,000 metric tonnes per year. Detailed engineering and process design has commenced for the conversion to dissolving pulp. In addition, the site workforce is ramping up and commencing rebuilding work to bring the asset to full operational condition.

Specialty Papers Segment
Following the paper machine upgrade in 2011, production speed reached 450 m/min, as planned, which translated to an increased capacity of approximately 56,000 tonnes per year of non-woven wallpaper base at the Dresden mill. The Specialty Papers Segment has experienced a record first half of 2012 and is expected to continue generating positive returns as it maximizes this increased capacity.

Security Paper Products Segment
The unexpected delay in the production and delivery of a significant order that occurred in the fourth quarter of 2011 and continued into the first and second quarters of 2012 was reinstated in June 2012. The delay contributed to a temporary disruption in the production schedule and impacted results negatively in the first half of 2012. It is anticipated that this reinstated order will allow Landqart to better optimize the overall mill. Production for this order began in July 2012.

The Company continues to assess strategic options for this segment, including sales of non-core assets. In May 2012, the Landqart mill completed the sale of its hydropower assets and associated real estate with a Swiss utility company for proceeds of CHF 18 million. In order to maintain the supply of its operational power requirements, the Landqart mill concurrently entered into a long term power purchase agreement with the same utility company at competitive rates. Of the proceeds from the sale, CHF 4.9 million was included in restricted cash. It is anticipated that full amount will become unrestricted in the third quarter of 2012, of which, approximately CHF 3.1 will be allocated towards debt repayment with the remainder available to the Lanqart mill.

Significant Developments
Effective June 13, 2012, Fortress completed the acquisition, through its wholly owned subsidiary, Fortress Global, of the Fortress Global Cellulose mill from Domtar Inc., pursuant to which Fortress Global acquired the buildings, equipment and other ancillary property relating to the mill, including a 30 megawatt non-operating cogeneration facility, for a nominal purchase price and an agreement to make contributions pursuant to a trust agreement in escalating tranches over the next five years of an aggregate of $7.5 million and an additional contingent amount of $2.5 million only in the event of a permanent closing of the Fortress Global Cellulose mill in respect of environmental remediation costs.

Concurrent with the completion of the acquisition, the Company finalized a $132.4 million project financing loan with Investissement Quebec and a $25 million unsecured convertible debenture financing Fonds de Solidarite FTQ.

Fortress Paper operates internationally in three distinct business segments: dissolving pulp, specialty papers and security paper products. The Company operates its dissolving pulp business at the Fortress Specialty Cellulose mill located in Canada, which is also in the process of expanding into the renewable energy generation sector with the construction of a cogeneration facility. The Company is also seeking to expand its dissolving pulp capacity with the recent acquisition of the Fortress Global Cellulose mill located at Lebel-sur-Quevillon, Quebec, which the Company intends to convert into a dissolving pulp mill and re-start the cogeneration facility. The Company operates its specialty papers business at the Dresden mill located in Germany, where it is a leading international producer of specialty non-woven wallpaper base products. The Company operates its security paper products business at the Landqart mill located in Switzerland, where it produces banknote, passport, visa and other brand protection and security papers, and at its Fortress Optical Facility located in Canada, where it manufacturers optically variable thin film material.

SOURCE: Fortress Paper Ltd.