Fraser Papers Reports Third Quarter Results

Oct 25, 2007 - Fraser Papers Inc. today reported financial results for the third quarter and year-to-date period ended September 29, 2007. The Company generated net earnings of $24.8 million or $0.84 per share during the third quarter. These results included a one-time gain on the sale of the Company's interest in Acadian Timber Income Fund ("Acadian") of $38.4 million (after tax, $1.08 per share), one-time restructuring charges related to machine closures previously announced of $3.7 million (after tax, $0.13 per share) and a one-time tax recovery of $13.8 million ($0.478 per share). Excluding the impact of these unusual items, Fraser Papers generated a net loss of $17.2 million, or $0.59 per share.

During the third quarter of 2007, Fraser Papers pursued a number of strategic initiatives:

  • Commenced energy efficiency initiatives at Edmundston, New Brunswick and Thurso, Quebec to lower overall energy costs and reduce greenhouse gas emissions. Anticipated reduction in oil consumption of 106,000 barrels per year or $5 million per year at current market prices.
  • Shut two uncoated freesheet paper machines, representing a combined capacity of 70,000 tons per year, and one off-machine coater at the East Papers operations in Madawaska, Maine. Anticipated cost reductions are approximately $10 million per year.
  • Announced an extended closure of 120 million board feet of annual lumber capacity at the Juniper, New Brunswick sawmill and secured replacement woodchips at lower cost.
  • Sold its interest in Acadian Timber Income Fund for proceeds of $38.4 million, using the proceeds to repay debt.

"Our third quarter was challenging, as we expected it would be. Unprecedented cost pressures from energy and fibre, combined with the significant surge in the strength of the Canadian dollar, continue to put pressure on our operating margins. While we were able to generate improvement in our operations to partially offset these, 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.

On a year-to-date basis, the Company generated a net loss of $22.9 million or $0.78 per share. Excluding a gain on the sale of the Company's interest in Acadian Timber Income Fund, restructuring charges related to paper machine closures of $16.5 million (after tax, $0.56 per share) and a one-time tax recovery, net loss for the nine months ended September 29, 2007 was $52.1 million. This represents a deterioration from the $32.3 million loss (excluding unusual items) in the first nine months of 2006. Unusual items in 2006 included a gain on the sale of the Company's New Brunswick timberlands of $71.0 million ($2.03 per share), losses related to the bankruptcy of an equity investee of $107.4 million ($3.39 per share) and the cost of closing a pulp mill of $50.3 million ($1.03 per share).

Fraser Papers generated an EBITDA loss of $5.6 million for the third quarter of 2007, compared to an EBITDA loss of $18.0 million in the second quarter. During the second quarter, the Company took planned maintenance outages at its integrated pulp mill in Edmundston, New Brunswick and its paper mill in Gorham, New Hampshire. These shuts negatively affected results by approximately $10.0 million. Excluding the impact of these shuts, EBITDA in the third quarter improved by $2.4 million compared to the second quarter. During the third quarter, the Company benefited from higher selling prices for pulp and lumber, while net realizations for paper were unchanged. These price increases, along with the benefits of improved throughput at the sawmills and pulp mill and more efficient use of fibre and energy, were partly offset by higher energy costs and the impact of the stronger Canadian dollar. The Canadian/US dollar exchange rate averaged C$1.00 equals US$ 0.96 in the third quarter compared to C$1.00 equals US$ 0.91 in the second quarter, while benchmark oil prices increased 12%. Energy, chemical, and foreign exchange increased manufacturing costs by $8 million, quarter over quarter.

On a year-to-date basis, the Company generated an EBITDA loss of $26.2 million, compared to an EBITDA loss of $7.5 million in 2006. The Company generated margin improvements of $14.6 million, compared to 2006, as a result of improved fibre and chemical utilization and improved product mix from continued sales and marketing efforts. Unfortunately, the impact of foreign exchange, and energy and chemical cost increases amounted to $16.9 million.

Results from the paper operations deteriorated $13.5 million dollars, relative to 2006, reflecting second quarter downtime and increased costs partly offset by margin improvements. Results from the Company's lumber operations were lower by $13.0 million on a year-to-date basis in 2007 as a result of very weak lumber markets and a stronger Canadian dollar. Year-to-date the Canadian/US dollar exchange rate averaged C$1.00 equals US$ 0.90, compared to C$1.00 equals US$ 0.88 in same period in 2006. Pulp operations improved by $10.3 million, reflecting the closure of the Berlin, New Hampshire pulp mill in April 2006, improved selling prices and margin improvements, partly offset by increased costs.

Total paper shipments were 13% lower than the second quarter due to the closure of two paper machines during the third quarter. Shipments of specialty printing papers were down 11% in the quarter due to seasonal factors and lower retail activity in the United States. On a year-to-date basis, specialty printing paper shipments were lower by 23%, reflecting increased substitution of specialty groundwood papers into traditional freesheet applications. Shipments of specialty packaging papers were 11% lower than the second quarter but have improved 26% compared to the first nine months of 2006. The Company's focus on lightweight and stain-resistant packaging have contributed to the increase.

Fraser Papers continues to reduce its production of lower margin, commodity freesheet papers while responding to market demands. For the nine months ended September 29, 2007, shipments of commodity freesheet papers have been reduced by 18%. Commodity freesheet shipments in 2007 include almost 13,000 tons of paper certified to the standards of the Forest Stewardship Council ("FSC"). The Gorham paper mill achieved FSC certification early in 2007.

During the second quarter of 2007, the Company announced the closure of an offline coater, reducing its exposure to the market for lightweight coated groundwood papers to focus on lightweight and specialty uncoated groundwood papers. Shipments of specialty groundwood papers were substantially unchanged from the second quarter but up significantly on a year-to-date basis as groundwood papers are being substituted for freesheet papers in a number of applications.

Shipments of northern bleached hardwood kraft pulp from the Company's pulp mill in Thurso, Quebec increased 3% over the second quarter as a result of continued strong pulp markets and higher shipments to third parties. Mill nets improved 4%, or $19 per tonne, reflecting announced price increases. Production costs were lower as improved efficiencies more than offset the impact of the strengthening Canadian dollar and increased oil costs.

Lumber markets remained weak with housing starts in 2007 approximately 19% below 2006 levels. Mill net realizations rose by $16 dollars per Mfbm during the third quarter, reflecting modest seasonal improvement. Over the past three months, the Company took no market-related downtime, compared to 47 MMfbm of equivalent downtime in the second quarter.


Market Focus and Competitive Advantage

During the third quarter, the Company closed two small, paper machines, representing 70,000 tons of annual manufacturing capacity, and successfully transitioned its specialty packaging and lightweight printing & writing paper grades to more efficient machines. These closures are expected to result in annualized benefits of approximately $10 million as the Company eliminates its highest cost, marginal inputs and re-establishes an optimal fibre balance at its East Papers operations.

During the third quarter, the Company announced the launch of Custom Snowcote®, a lightweight, filmcoated specialty print product. Custom Snowcote is targeting high opacity applications, including reference books and text books and represents one example of Fraser Papers' many product development initiatives with new and existing customers. The Company also continues to develop packaging papers to displace less environmentally-friendly options such as plastic or foil.

Fraser Papers remains responsive to the demands of its customers. The Company has begun shipping anti-microbial office file folder paper and continues to market its ability to provide customers with FSC certified book papers.

Margin Improvement and Cost Reduction

The Company has been negatively impacted by increasing input costs, weak lumber markets and a strengthening Canadian dollar relative to 2006. Cost reduction is essential to combating these negative effects.

In August 2007, the Company signed an agreement to install a heat recovery system at its market pulp mill in Thurso, Quebec. The heat exchange unit will produce thermal power that the Thurso operations will use to displace up to 10% of the fossil fuel it currently consumes at significant savings to the current cost of oil. In addition to lowering energy costs, the heat exchange unit will provide important environmental benefits, including reduced emissions of greenhouse gases.

During the third quarter, the company announced an extended shutdown at its Juniper sawmill of nine to eleven months. The sawmill was generating unsustainable cash losses due to weak lumber markets. The Company has secured an alternate supply of woodchips for its East Papers operations at a lower cost.

After a planned maintenance shutdown in the second quarter, the integrated pulp mill in Edmundston, New Brunswick improved production to design levels, producing up to 740 tons per day on a sustained basis. However, a number of operational difficulties contributed to intermittent downtime, resulting in average daily production over the quarter which was comparable to the first half of the year. Continued de-bottlenecking and optimization is expected to improve production in the fourth quarter. Each additional ton of pulp produced at Edmundston will displace market purchases of softwood kraft pulp at a current savings in excess of $200 per ton or $3 million on an annualized basis.

Long-Term Debt

During the third quarter of 2007, the Company repurchased for cancellation the remaining $84.0 million of its outstanding 8.75% Senior Notes, including $15.5 million of Notes that were held by the Company. The purchase was financed through a $50 million increase in the Company's revolving credit facility with its current lender. The Company announced today that its board of directors had approved extending the term of the $50 million bridge financing until January 31, 2008. Under the terms of the extension, prior to November 30, 2007, the Company is required to provide its lender with a plan to repay the $50 million. The Company is continuing to consider alternate financing sources to repay the $50 million.

Subsequent to the end of the third quarter, the Company closed the sale of its interest in Acadian Timber Income Fund. The proceeds of $38.4 million were used to repay amounts owing under the Company's working capital facility.


Unprecedented cost and currency exchange pressures continue to negatively impact results across the North American paper and forest products industry. Fraser Papers, with an integrated operating model that includes assets located in both Canada and the United States, has been negatively impacted by the confluence of a number of factors including an increase in the Canadian/US dollar exchange rate, rising oil and fibre costs, and a sharp decline in lumber prices. These have only been partially offset by improved prices for the Company's pulp and paper products.

Fraser Papers' strategy to lower costs and increase productivity is well underway. The rationalization of the highest cost manufacturing capacity at the Company's East Papers operations will improve the mill's competitive position and narrow the product mix toward higher margin opportunities. The focus on energy efficiency and conservation will improve costs as well as lower overall greenhouse gas emissions. Increased throughput from internal pulp operations will reduce purchases of higher priced market pulp. The Company estimates the combined annualized benefit of these initiatives at $19 million. In addition, during what is anticipated to be an extended period of weak lumber prices and a strong Canadian dollar, additional sources of chips are being sought as an alternative to operating Fraser Papers' Canadian sawmill facilities at significant cash operating losses.

The Company is focused on growing its position in niche segments of the broader North American paper market. Demand for specialty paper in food packaging applications is expected to remain stable as consumers continue to demonstrate a preference for lightweight, recyclable, paper-based products. With many broad and differing applications, demand for Fraser Papers' lightweight specialty print papers is well diversified and expected to remain stable. Continued growth in high bright groundwood papers is expected from the substitution for higher cost, traditional freesheet in certain publishing and print applications. The Company will continue to reduce its exposure to commodity freesheet markets. Industry-wide capacity rationalization is expected to keep commodity markets in better balance than in previous periods. Fraser Papers is able to offer FSC certified papers as a differentiated product within these segments.

List prices for northern bleached hardwood kraft pulp continue to improve. Delayed commissioning at greenfield sites, labour issues and pulp log constraints at a number of global market pulp mills has led to a tight market. The Company expects higher realizations from external sales of hardwood pulp to continue in the short term, subject to the continuing impact of the rising Canadian dollar on results at its Thurso, Quebec mill.

Fraser Papers has scheduled annual maintenance outages at the cogeneration facility in Edmundston, New Brunswick and the pulp mill in Thurso, Quebec during the fourth quarter. These outages are estimated to negatively impact EBITDA by $9 million in the fourth quarter, of which $6 million relates to maintenance expense with the balance related to lost production.

SOURCE: Fraser Papers

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