Fortress Paper Posts First Quarter Loss on Soft Pricing for Dissolving Pulp

May 13, 2013 - Fortress Paper Ltd. ("Fortress Paper", "we", "our", "us" or the "Company") reported 2013 first quarter EBITDA loss of $2.6 million. Excluding corporate costs, combined EBITDA loss of the three business segments Fortress operated in during the first quarter of 2013 was $0.3 million in the three months ended March 31, 2013. The recently discontinued Specialty Papers Segment contributed $10.5 million EBITDA, while the Dissolving Pulp Segment and the Security Paper Products Segment generated EBITDA losses of $8.7 million and $2.1 million, respectively. Corporate costs contributed to EBITDA loss in the amount of $2.3 million.

Fortress reported a net loss (including discontinued operations) of $12.4 million, or diluted loss per share of $0.85 for the first quarter of 2013 on sales of $99.7 million. In the fourth quarter of 2012, the Company reported a net loss of $4.2 million or diluted loss per share of $0.29 on sales of $96.1 million, and for the first quarter of 2012 net loss of $10.7 million or diluted loss per share of $0.75 on sales of $61.4 million.

The Fortress Specialty Cellulose mill is still considered to be in ramp up mode working towards full capacity and operating efficiencies. Although market prices for dissolving pulp improved in the first quarter of 2013, our sales in one quarter are typically secured by the end of the previous quarter. The combination of the lower realized dissolving pulp prices and challenges experienced at the mill contributed to disappointing results in the first quarter of 2013.

The Security Paper Products Segment had its best quarterly result in the past two years. Metrics continue to improve as the Landqart mill experienced its highest sales volumes and revenues relative to any comparative period in 2012 and 2011. However, less than favourable conditions, including impacts on our business as a result of the strength of the Swiss franc against the Euro, overcapacity in the banknote paper industry and increased competition for orders continue to adversely impact the results of the Security Paper Products Segment.

The Specialty Papers Segment, which has been discontinued with the sale of the Dresden mill in April 2013, had a strong first quarter. See "Significant Developments" for an update on the sale of the Dresden mill.

MANAGEMENT'S OUTLOOK

Dissolving Pulp Segment
Dissolving pulp markets improved during the first quarter of 2013 but remain challenging due to continued excess supply. The market price of dissolving pulp in China, as reported by China Chemical Fibers & Textiles Consultancy Group (CCF), a leading professional data analysis company relied upon in the dissolving pulp industry, improved from December lows of US$830-840 per air dried metric tonne (ADMT) to approximately US$930 per ADMT in February and March. Management believes that current depressed dissolving pulp prices are indicative of unusual market conditions and are not sustainable, as the global industry has been experiencing mill shutdowns and mills swinging capacity to produce paper pulps. We expect that dissolving pulp prices will remain under pressure until new expected capacity is absorbed.

Viscose staple fibre demand in China has been stable in the first quarter of 2013 as operating rates remain healthy, although fibre prices weakened at the end of March. Cotton prices remained relatively stable in China during the first quarter of 2013. However, when compared to 2011, cotton prices still remain low which could lead to possible cotton crop plantation reductions in 2013. Cotton reserve management, particularly in China, may affect future cotton pricing.

The Fortress Specialty Cellulose mill pulp production rates remained below management expectations during the first quarter of 2013 as the mill faced on-going challenges with digester and evaporator capacity issues. The mill recently completed a ten day maintenance shut down that began in late April. We expect that the maintenance shut down will address issues in order to improve production, generate stable operations and reduce production costs. Finished goods inventory levels at the end of the first quarter were minimal.

The cogeneration project continues in its commissioning and start-up phase. Power generation is expected by the end of the second quarter following the completion of testing and adjustments.

Although depressed dissolving pulp prices have impacted the Fortress Specialty Cellulose mill results, the Company is continuing the implementation of its comprehensive "Operating Excellence" program designed to improve overall efficiency and productivity. In parallel, we have commenced an aggressive cost reduction program. In the third quarter of 2013 we expect to realize significant benefits from production improvements, cost reduction initiatives and the cogeneration facility. In addition the Company has strengthened mill management and with new leadership expects to make material progress towards targets over the remainder of the year.

The Fortress Global Cellulose ("FGC") mill project continues to advance. Engineering design for the conversion to produce dissolving pulp is near completion with an updated capital expenditure estimate of $250 million plus or minus 10%. A comprehensive review of the overall project is ongoing. We have incorporated learnings from our Thurso capital projects including a more gradual ramp-up curve. This results in additional cash requirements of $70-$100 million for working capital, including start-up costs, raw materials, inventory and various other items, to fund the entire FGC mill project and its operational ramp-up. As a result, the Company is evaluating options for different sources of funds to cover increased budgeted capital expenditures and provide ramp-up working capital. Final budgeted costs and financial models are being further refined.

The Company is currently in the process of exploring strategic options to mitigate the financial risk, including alternative financing structures, joint ventures and partnership opportunities. While the project economics continue to be attractive, the Company will be comparing the FGC mill investment opportunity to other strategic options for shareholder value creation. Due to changing economics and market conditions, there is no assurance that the FGC mill project will proceed to completion as previously planned. The Company intends to report its decision regarding the strategic direction of the FGC mill early in the third quarter.

Security Paper Products Segment
The Security Paper Products Segment continues to be adversely impacted by a strong Swiss franc relative to the Euro and overcapacity in the industry resulting in fierce competition for tenders. Despite these difficulties, the Landqart mill has a strong order book with good visibility well into the second half of the year. The mill is currently operating at full capacity. Estimated volumes to be produced and sold in 2013 are expected to be significantly higher than in 2012. Landqart is now producing its second order of its new composite paper-polymer-paper substrate DurasafeŽ and is pursuing several more sales opportunities for this new product. This second order of DurasafeŽ includes security threads from Fortress Paper's optical thin film division. The Landqart mill has also been awarded paper orders in several new markets during the first quarter of 2013. These orders are expected to be produced and delivered later this year.

The Landqart mill has substantially completed the majority of the production of its largest banknote order and has delivered over 70% of its contract volume. The Landqart mill is continuing its efforts to enter into new markets to diversify its customer base in preparation for the completion of this contract. The Company is confident that it will continue to meet its sales target through a combination of repeat orders in established markets together with new business. Landqart has improved operational results systematically over the past two quarters and management anticipates this trend to continue through the second quarter of 2013.

SIGNIFICANT DEVELOPMENTS

Sale of the Dresden Mill
In March 2013, the Company and its wholly owned subsidiary, Fortress Security Papers AG ("FSP"), entered into a share purchase agreement (the "Share Purchase Agreement") with Glatfelter Gernsbach GmbH & Co. KG ("Glatfelter Gernsbach") and its parent, P.H. Glatfelter Co. ("Glatfelter"), pursuant to which FSP agreed to sell all of the shares of its wholly owned subsidiary, Dresden Papier GmbH ("Dresden"), to Glatfelter Gernsbach for an aggregate purchase price of EUR160 million (approximately CDN$213 million), subject to a working capital adjustment. Pursuant to the terms of the Share Purchase Agreement, the Company agreed to guarantee the obligations of FSP and Glatfelter agreed to guarantee the obligations of Glatfelter Gernsbach thereunder.

The sale of the Dresden mill completed on April 30, 2013. Net proceeds received from the sale, after closing working capital adjustments and the settlement of Dresden's outstanding loans, guarantees and factoring arrangements with Commerzbank AG and CommerzFactoring GmbH, as applicable, were approximately EUR120 million (approximately $159 million), which is subject to post closing working capital and tax adjustments.

With the sale of the Dresden mill, the Company no longer operates in the Specialty Papers (wallpaper base) industry.

For additional information, visit: www.fortresspaper.com

SOURCE: Fortress Paper Ltd.