U.S. Markets open in 32 mins

Edited Transcript of FTP.TO earnings conference call or presentation 12-Nov-19 2:00pm GMT

Q3 2019 Fortress Global Enterprises Inc Earnings Call

North Vancouver Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Fortress Global Enterprises Inc earnings conference call or presentation Tuesday, November 12, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Giovanni B. Iadeluca

Fortress Global Enterprises Inc. - President, CEO & Director

* Kent Smith

Fortress Global Enterprises Inc. - VP of Operations at Fortress Advanced Bioproducts

* Kurt Loewen

Fortress Global Enterprises Inc. - CFO

================================================================================

Conference Call Participants

================================================================================

* W. Scott Leckie

Takota Asset Management Inc. - Principal and Portfolio Manager

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen. Welcome to Fortress Global Enterprises Inc. Q3 2019 Earnings Conference Call.

I would like to introduce Kurt Loewen. Please go ahead.

--------------------------------------------------------------------------------

Kurt Loewen, Fortress Global Enterprises Inc. - CFO [2]

--------------------------------------------------------------------------------

Thank you, operator, and welcome to Fortress' Third Quarter 2019 Conference Call. With me today are Giovanni Iadeluca, our Chief Executive Officer; and Ken Smith, who leads our Bioproducts Segment.

During the call, management may make certain forward-looking statements that reflect the current views and/or expectations of Fortress with respect to its performance, business and future events. The forward-looking cautionary note contained in the MD&A is applicable for today's call.

During this conference call, management will also make reference to operating EBITDA. For a definition of operating EBITDA and a reconciliation to net income or loss to operating EBITDA, please see the management's discussion and analysis available on SEDAR at www.sedar.com.

I'll now pass the call on to Giovanni for an overview of the third quarter and Dissolving Pulp operation. Giovanni?

--------------------------------------------------------------------------------

Giovanni B. Iadeluca, Fortress Global Enterprises Inc. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Thanks, Kurt, and good morning, everyone. For today's call, I will provide an overview of the third quarter and an update on the Dissolving Pulp Segment, followed by Ken Smith, who will provide an update on Fortress Advanced Bioproducts. Kurt Loewen will then provide some more detail on the financial results for the fourth -- third quarter of 2019. We will then open the call up for questions.

Fortress Global reported 2019 third quarter operating loss of $7.2 million. The Dissolving Pulp Segment incurred an EBITDA loss of $6.4 million and the company invested $300,000 in the Bioproducts Segment, which was offset by $100,000 in grants, and funding and corporate costs were $600,000 in the second quarter -- third quarter of 2019.

As a result of lower realized sales price resulting from a softened demand for dissolving pulp, an inventory write-down and significantly reduced sales volume due to unusually low demand for dissolving pulp, operating results in the third quarter of 2019 were well below management expectations. Despite the significant headwinds in the dissolving pulp market, the Fortress Specialty Cellulose mill realized one of its better operational quarters from a dissolving pulp production and power generation perspective.

A total of 42,000 air dried metric tonnes of dissolving pulp was produced in the third quarter of 2019, the best quarterly performance since 2012. However, due to low demand, as just mentioned earlier, only 16,500 tonnes were sold. Revenues of $6.1 million were generated from the cogeneration facility in the third quarter, best-ever quarterly results. This compares favorably to revenue of $4.7 million in the quarter ended June 30, 2019, and revenues of $5.7 million in the third quarter last year.

As a result of the thorough evaluation of the operating economics of the FSC mill and the prevailing market conditions, the company determined to take market downtime on October 8, 2019. This market curtailment strategy will enable the company to focus its efforts on executing on the previously announced strategic initiative, which includes the consideration of various strategic and financing alternatives potentially available to the company, including a recapitalization, restructuring and/or business combination transaction as well as planning the optimized restart of the mill when dissolving pulp prices normalize.

The company has also proactively allocated resources to enable it to restart the FSC mill on an expedited basis in order to take advantage of any significant rebound in dissolving pulp pricing. Based on historic trends, the company continues to believe in the future pricing recovery and prospects for dissolving pulp as the market adjusts to currently volatile conditions.

I will pass over the call to Kent for some comments on FAB.

--------------------------------------------------------------------------------

Kent Smith, Fortress Global Enterprises Inc. - VP of Operations at Fortress Advanced Bioproducts [4]

--------------------------------------------------------------------------------

Thanks, Giovanni. We at Fortress Advanced Bioproducts continue to work to advance the planned xylitol and complementary bioproducts demonstration plant initiative this quarter. We are minimizing investments in the Bioproducts Segment while preserving funding commitments during the current uncertainty related to the dissolving pulp market. There can be no assurance that we will be able to continue to fund the Bioproducts Segment.

Now over to Kurt for a brief review of the financials.

--------------------------------------------------------------------------------

Kurt Loewen, Fortress Global Enterprises Inc. - CFO [5]

--------------------------------------------------------------------------------

Thanks, Kent. Our cash balance at the end of the third quarter was a $4.1 million, of which $0.3 million was from -- was restricted cash. During the 3 months ended September 30, 2019, $3.4 million in restricted cash was from the IAM Infrastructure Private Debt Fund loan. It was then released for the purpose of securing certain inventory.

SG&A expenses were $4.6 million for the third quarter, down from $5.2 million from the prior quarter. In accordance with the company's accounting policy, each asset or cash-generating unit is evaluated at each reporting date to determine whether there are any indicators of impairment. Management's impairment evaluation resulted in the identification of an impairment loss of $31.7 million at the FSC mill operations during the quarter ended September 30. Again, this is a reflection of the challenge we are facing with the dissolving pulp price.

The financial statements have been prepared under the historical cost convention, except for certain classes of property, plant and equipment. The financial statements have also been prepared on a going concern basis, which assumes that the company will be able to realize its assets and discharge its liabilities in the normal course of business.

Subsequent to quarter end, the company determined, after conducting the impairment analysis I just spoke about, that it was not in compliance with one of its financial covenants at the end of September 30. Accordingly, $120 million was recorded in current liabilities for the period ended September 30. However, a waiver for compliance -- from compliance with the applicable covenant through to the period ended December 31, was subsequently obtained from the lender, which reclassifies the $120 million as long-term debt after the receipt of the waiver. In addition, approvals for compliance with the terms and conditions from the lender of the $31.7 million secured loan has not been formally finalized in writing at the end of the quarter. Accordingly, $31.7 million was recorded in current debt for the period ended September 30.

We anticipate that based upon current dissolving pulp market prices, the market downtime being taken by the FSC mill and the working capital as of September 30, 2019, that the forecasted cash flows will not be sufficient to meet the company's obligation commitments and budgeted expenditures through September 30, 2020. As a result, there is significant uncertainty whether the company will continue as a going concern, and therefore whether it will realize the stated value of its assets and settle its liabilities and commitments in the normal course of business and at the amount stated in the financial statements. No adjustments have been made to the financials relating to the recoverability and reclassification of assets carrying amounts or the amounts and classification of liabilities that might be necessary should the consolidated entity not continue as a going concern, and these adjustments could be material.

Now back to Giovanni for some final remarks. Giovanni?

--------------------------------------------------------------------------------

Giovanni B. Iadeluca, Fortress Global Enterprises Inc. - President, CEO & Director [6]

--------------------------------------------------------------------------------

Thanks, Kurt. We have implemented measures to mitigate against the impact of the decline in dissolving pulp prices. On September 3, 2019, the company announced that its subsidiaries had entered into a financing agreement with their secured letter -- lenders or their affiliates providing for a senior secured credit facility in the amount of up to $50 million. The facility provided the company with supplemental liquidity to initial allow for uninterrupted operations in order to execute on its strategic initiative. To-date, the borrowers have drawn down an aggregate of $7 million under this facility.

We continue active discussions with our financial partners, including senior lenders, to secure the long-term financial liability of the company's business. While we continue to execute on our strategic initiative, no assurance can be provided that it will be successful, or that the amounts realized for its assets will equal the amounts reflected in the interim consolidated financial statements. There is also no assurance that the company will not be required or will not determine that it is in its best interest to file for any form of creditor protection proceeding imminently, or in the near future, whether or not in connection with any transaction.

Our ability to continue future operation and fund its planned activities is dependent on our ability to seek out proposals from existing and potential new stakeholders and to execute the strategic initiative.

I would now like to ask the operator to open the call for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question comes from [Roger Millet], who's a private investor.

--------------------------------------------------------------------------------

Unidentified Participant, [2]

--------------------------------------------------------------------------------

Yes. I'd like to know the current price of cellulose per tonne? And also what is the -- if there is a market options or futures, the puts for 3 months from now?

--------------------------------------------------------------------------------

Kurt Loewen, Fortress Global Enterprises Inc. - CFO [3]

--------------------------------------------------------------------------------

Giovanni, you might be on mute.

--------------------------------------------------------------------------------

Giovanni B. Iadeluca, Fortress Global Enterprises Inc. - President, CEO & Director [4]

--------------------------------------------------------------------------------

So the price of the dissolving pulp, the quoted price of dissolving pulp is in the low 600s. That's a reduction of over $300 over the past 12 months. That's in U.S. dollars.

--------------------------------------------------------------------------------

Kurt Loewen, Fortress Global Enterprises Inc. - CFO [5]

--------------------------------------------------------------------------------

And there is no futures. Or as -- no kind of futures market or forward pricing market.

--------------------------------------------------------------------------------

Unidentified Participant, [6]

--------------------------------------------------------------------------------

Hello, am I still on?

--------------------------------------------------------------------------------

Giovanni B. Iadeluca, Fortress Global Enterprises Inc. - President, CEO & Director [7]

--------------------------------------------------------------------------------

You're still on.

--------------------------------------------------------------------------------

Unidentified Participant, [8]

--------------------------------------------------------------------------------

Okay. So isn't there any hedging, something like that, that permits you to sort of assure certain prices down the future like 3 months from now or 6 months. Are there any possibilities of hedging that will let you know what is the future for the prices per tonne?

--------------------------------------------------------------------------------

Kurt Loewen, Fortress Global Enterprises Inc. - CFO [9]

--------------------------------------------------------------------------------

No. There is not.

--------------------------------------------------------------------------------

Giovanni B. Iadeluca, Fortress Global Enterprises Inc. - President, CEO & Director [10]

--------------------------------------------------------------------------------

There is not.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

Next question comes from [Peter Wong], who is a private investor.

--------------------------------------------------------------------------------

Unidentified Participant, [12]

--------------------------------------------------------------------------------

So just wanted to know, right now, just under your market curtailment strategy, what's the cash burn per month for the company?

--------------------------------------------------------------------------------

Kurt Loewen, Fortress Global Enterprises Inc. - CFO [13]

--------------------------------------------------------------------------------

Well, currently, we don't provide that information. It's not available, not publicly available. However, we are evaluating scenarios -- various scenarios to preserve cash burn or minimize cash burn and preserve cash as long as possible to endure the market downturn as we work with our lenders and pursue strategic initiatives.

--------------------------------------------------------------------------------

Unidentified Participant, [14]

--------------------------------------------------------------------------------

Okay. I imagine you guys have a skeleton crew right now at the mill?

--------------------------------------------------------------------------------

Giovanni B. Iadeluca, Fortress Global Enterprises Inc. - President, CEO & Director [15]

--------------------------------------------------------------------------------

We do, yes.

--------------------------------------------------------------------------------

Unidentified Participant, [16]

--------------------------------------------------------------------------------

Okay. And then the corporate overhead and interest payments and whatnot? What's the approximate time to restart? I know you guys said like you guys are trying to preserve the optionality, and in case that the price of the dissolved pulp turns quickly just wanted to know, like, possibly how long you guys think that you could get the mill restarted and what's the capital costs of the mill, if that were to happen?

--------------------------------------------------------------------------------

Giovanni B. Iadeluca, Fortress Global Enterprises Inc. - President, CEO & Director [17]

--------------------------------------------------------------------------------

There is no definitive timing, as it's quite difficult to be able to forecast market price movement. What we are doing is ensuring that we're safeguarding the assets, and we're maintaining the assets in a condition for an optimal and quick restart.

--------------------------------------------------------------------------------

Unidentified Participant, [18]

--------------------------------------------------------------------------------

Okay. And then sorry, last question. Obviously, production wise, I think you guys have mentioned that it's your best quarter since 2012. I think part of that had to do with the fifth digester being in operation. Just wanted to know if you guys have continued to operate as you had been in quarter 3, whether you see -- you would have seen any additional upside in future quarters to that correction number?

--------------------------------------------------------------------------------

Giovanni B. Iadeluca, Fortress Global Enterprises Inc. - President, CEO & Director [19]

--------------------------------------------------------------------------------

As you mentioned, the fifth digester was a great success in terms of construction and commissioning, and it has provided the upside that we expected. As well improved reliability has also factored in the additional tonnes. So we're confident that the assets are able to perform just as the market turns, and we can continue to operate.

--------------------------------------------------------------------------------

Unidentified Participant, [20]

--------------------------------------------------------------------------------

Sorry, just one follow-up question to that. With the fifth digester, what quartile of the cost curve do you guys see yourselves operating in?

--------------------------------------------------------------------------------

Giovanni B. Iadeluca, Fortress Global Enterprises Inc. - President, CEO & Director [21]

--------------------------------------------------------------------------------

Kurt?

--------------------------------------------------------------------------------

Kurt Loewen, Fortress Global Enterprises Inc. - CFO [22]

--------------------------------------------------------------------------------

Well, the target has always been to get to second quartile. There's a lot of things that still need to fall into place for that to happen. We are still not there. And it would still take some time to improve there. But if we're producing at over 40,000 tonnes on a quarter on a regular basis, ultimately, I believe we could get there, but there's obviously seasonality issues through to the quarter 4s, the quarter 1s that need to be improved significantly. So -- but that was always the target. But time is always the element there, when do you achieve it.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

And next we have subsequent question from [Roger Millet], who is a private investor.

--------------------------------------------------------------------------------

Unidentified Participant, [24]

--------------------------------------------------------------------------------

Please give me an idea of competition, the competitors. Have they started to cut off on their production? Are they, like, still going at 100%? Or are they acting a little like OPECs in the oil business? Is there some kind of a way to get rid of the surplus on the market so that the prices get back to normal?

--------------------------------------------------------------------------------

Giovanni B. Iadeluca, Fortress Global Enterprises Inc. - President, CEO & Director [25]

--------------------------------------------------------------------------------

Currently, there is close to 1 million tonnes, that is idle, of dissolving pulp across the world.

--------------------------------------------------------------------------------

Unidentified Participant, [26]

--------------------------------------------------------------------------------

Not clear for me. I don't understand exactly. Is this 1 million tonnes that

(technical difficulty)

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

I'm sorry, [Roger], can you please queue up again? (Operator Instructions) Go ahead, Roger .

--------------------------------------------------------------------------------

Unidentified Participant, [28]

--------------------------------------------------------------------------------

Listen, I don't understand exactly your terms. But I'd like to know if that 1 million tonnes is 1 million tonnes cut off, or is that the actual production? I'd like to know if the -- clearly, if the competitors have cut their production?

--------------------------------------------------------------------------------

Giovanni B. Iadeluca, Fortress Global Enterprises Inc. - President, CEO & Director [29]

--------------------------------------------------------------------------------

So that is correct, [Roger]. That is 1 million tonnes cut off, to use your terms, that are not producing right now.

--------------------------------------------------------------------------------

Unidentified Participant, [30]

--------------------------------------------------------------------------------

Okay. And the market -- the price is not going up?

--------------------------------------------------------------------------------

Giovanni B. Iadeluca, Fortress Global Enterprises Inc. - President, CEO & Director [31]

--------------------------------------------------------------------------------

Well, this has happened over the last month around the same period that we've decided to take market downtime. So in your previous comment, if there is any additional inventory or buildup of inventory, it will take some time for that inventory to be consumed and demand to pick up.

--------------------------------------------------------------------------------

Unidentified Participant, [32]

--------------------------------------------------------------------------------

Okay. Let's say, we're talking between friends. And just off the top of your head, the time consumed to get to a normal, are we talking about a month or, like, 3 months to get back to a normal price?

--------------------------------------------------------------------------------

Giovanni B. Iadeluca, Fortress Global Enterprises Inc. - President, CEO & Director [33]

--------------------------------------------------------------------------------

There isn't a visibility in the dissolving pulp market as there is in kraft market with regards to inventory buildup. So although we are talking among friends, any information would be speculative, and I'd prefer not to get into any speculation.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

All right. That was the last question we currently have in the queue.

--------------------------------------------------------------------------------

Giovanni B. Iadeluca, Fortress Global Enterprises Inc. - President, CEO & Director [35]

--------------------------------------------------------------------------------

So thank you for your questions and continued support.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

I'm sorry, we just had -- 2 more people are queued up. Did you want to take the questions or are we going to end?

--------------------------------------------------------------------------------

Kurt Loewen, Fortress Global Enterprises Inc. - CFO [37]

--------------------------------------------------------------------------------

Sure. Yes.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

Okay. So Scott Leckie from Takota Asset Management.

--------------------------------------------------------------------------------

W. Scott Leckie, Takota Asset Management Inc. - Principal and Portfolio Manager [39]

--------------------------------------------------------------------------------

I just wondered if you could give me an estimate about how many dollars have been contributed to Thurso, the Thurso mill over the years.

--------------------------------------------------------------------------------

Giovanni B. Iadeluca, Fortress Global Enterprises Inc. - President, CEO & Director [40]

--------------------------------------------------------------------------------

Kurt, I'll hand that over to you.

--------------------------------------------------------------------------------

Kurt Loewen, Fortress Global Enterprises Inc. - CFO [41]

--------------------------------------------------------------------------------

There is a significant number that has been funded over to Thurso over the years. It included, from the very beginning, from the conversion to a dissolving pulp mill, and in conjunction with that, a cogen. Those 2 combined for both of those CapEx projects alone are $125 million each, so approximately $250 million in CapEx just for that and then supporting operations over time on top of that, so a significant number above that.

--------------------------------------------------------------------------------

W. Scott Leckie, Takota Asset Management Inc. - Principal and Portfolio Manager [42]

--------------------------------------------------------------------------------

So what do we get to $400 million or $350 million? Or what would you estimate?

--------------------------------------------------------------------------------

Kurt Loewen, Fortress Global Enterprises Inc. - CFO [43]

--------------------------------------------------------------------------------

Yes. We get into that range, Scott.

--------------------------------------------------------------------------------

W. Scott Leckie, Takota Asset Management Inc. - Principal and Portfolio Manager [44]

--------------------------------------------------------------------------------

Okay. And of that $400 million, let's call it, what was the contribution of debt? So you actually loaned about $120 million, I think, thereabouts?

--------------------------------------------------------------------------------

Kurt Loewen, Fortress Global Enterprises Inc. - CFO [45]

--------------------------------------------------------------------------------

Sure. So what are you asking then? Because we've also had equity raises in the past. We had to break that down. I don't think this is the venue for breaking down -- the breakdown between equity, debt, through what was contributed to Thurso. In addition, we've also had the sale of our Dresden Mill in the past as well as the Landqart mill. Funds have come from there as well, from those assets that have been sold. So it's difficult to say dollar for dollar where every dollar has gone.

[

--------------------------------------------------------------------------------

W. Scott Leckie, Takota Asset Management Inc. - Principal and Portfolio Manager [46]

--------------------------------------------------------------------------------

I appreciate that. I'm just trying to get to approximately what the shareholders have either contributed or allowed in the way of transfer from, as you say, as the sale of another asset into the Thurso mill?

--------------------------------------------------------------------------------

Kurt Loewen, Fortress Global Enterprises Inc. - CFO [47]

--------------------------------------------------------------------------------

Okay. I don't have that with me, so I don't have that available off the top of my head.

--------------------------------------------------------------------------------

Operator [48]

--------------------------------------------------------------------------------

Next we have a question from [Robert Cattasal] from -- who's a private investor.

--------------------------------------------------------------------------------

Unidentified Participant, [49]

--------------------------------------------------------------------------------

Thinking from the viewpoint of the practical options available to the secure lenders, my understanding is that security is against primarily the Thurso mill. So you folks seem to be operating it quite efficiently right now. Would there be and is there any conceivable advantage to them acting on their security? Or is it going to be in their interest to keep you alive as long as possible, particularly since I suspect you're also a very, very large employer within the Thurso community?

--------------------------------------------------------------------------------

Giovanni B. Iadeluca, Fortress Global Enterprises Inc. - President, CEO & Director [50]

--------------------------------------------------------------------------------

Those are great questions. The -- what we've heard the press conference from Minister Fitzgibbon is exactly as you mentioned. The importance of the Thurso mill, not only as an employer in the region but also as its importance in the forestry ecosystem of the area. And whether it's lenders or anyone else, the realization comes from the mill operating continue to operate as there's an uptick in pricing.

--------------------------------------------------------------------------------

Operator [51]

--------------------------------------------------------------------------------

And the last question we currently have in the queue. (Operator Instructions) But the last question we currently have comes from [Peter Wong], who's also a private investor.

--------------------------------------------------------------------------------

Unidentified Participant, [52]

--------------------------------------------------------------------------------

Just wondering for the electricity sold under your cogen agreement, what would constitute a default under that agreement?

--------------------------------------------------------------------------------

Giovanni B. Iadeluca, Fortress Global Enterprises Inc. - President, CEO & Director [53]

--------------------------------------------------------------------------------

What I could say, [Peter], is that we're currently not under default and that the cogen is currently operating.

--------------------------------------------------------------------------------

Unidentified Participant, [54]

--------------------------------------------------------------------------------

Okay. Is it -- I'm just wondering, like, given the market curtailment, is it operating under, like, same conditions as past quarter? I would guess not, but I just wanted to confirm that with you.

--------------------------------------------------------------------------------

Giovanni B. Iadeluca, Fortress Global Enterprises Inc. - President, CEO & Director [55]

--------------------------------------------------------------------------------

It's operating to the limit that we are allowed per the agreement. So what we have in the agreement is that we operate the cogen to equal our usage of electricity. And that's what we are optimizing on a daily basis.

--------------------------------------------------------------------------------

Operator [56]

--------------------------------------------------------------------------------

All right. So as I said, that was the last question we currently have in the queue.

--------------------------------------------------------------------------------

Giovanni B. Iadeluca, Fortress Global Enterprises Inc. - President, CEO & Director [57]

--------------------------------------------------------------------------------

Okay. Well, thank you, operator, and thank you for everyone's questions and continued support. Financial results and management discussion and analysis are available on SEDAR at www.sedar.com.

--------------------------------------------------------------------------------

Operator [58]

--------------------------------------------------------------------------------

Ladies and gentlemen, this concludes the Fortress Global Enterprises Inc. Q3 2019 Earnings Conference Call. Thank you for your participation, and have a nice day.