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Fortress Paper focuses on Thurso mill efficiencies

Aug. 9, 2016 – Fortress Paper Ltd. is continuing to focus on cost reductions, production improvement and power generation to improve margins at its Fortress Specialty Cellulose (FSC) mill in Thurso, Que.

The company reports that its Lean Six Sigma program, recently implemented at the FSC mill, resulted in both the elimination of the blockage issue experienced during the first quarter of 2016 and uptime improvements in the digester area of the mill. The Lean Six Sigma program will now focus on mill efficiency improvement for the winter months.

Fortress Paper reported 2016 second quarter operating EBITDA of $6.3 million, an increase of $5.2 million and $2.2 million over the previous quarter and prior year comparative period, respectively. The dissolving pulp segment generated operating EBITDA of $3.2 million and the security paper products segment generated EBITDA of $4.7 million. Corporate costs included in operating EBITDA were $1.6 million.

“Management is pleased to report another positive quarter of operating EBITDA, our best consolidated operating EBITDA result since the restart of Thurso after its conversion to a dissolving pulp mill,” CEO Yvon Pelletier said in a news release. “Overall results are much improved over the prior quarter and prior year. Although the second quarter results at Thurso were below management's expectations, the trend is positive and encouraging. Despite a decline in average realized US dissolving pulp prices and unfavourable US exchange rates in the second quarter compared to the first quarter, operating costs contributed to a much improved result. The costs were in the low $800 range for June and July with cogeneration revenues back on track for the third quarter. We look for continued improvements at the mill from our lean six sigma project teams, which are already improving costs and reliability at the mill. Landqart continues to meet management's expectations. The Landqart sale leaseback of land and building combined with the LSQ sale have provided for improved balance sheet flexibility to manage obligations and seek opportunities for growth."

Dissolving pulp segment generated operating EBITDA of $3.2 million for the quarter ended June 30, 2016 representing an increase of $1.9 million when compared to the first quarter of 2016. The results for the quarter ended June 30, 2016 were favourably impacted mainly by improvements in productivity. Operating EBITDA results for the second quarter of 2016 increased by $1.1 million compared to the second quarter of 2015. The results of the second quarter of 2016 compared to the second quarter of 2015 were impacted by higher dissolving pulp prices and favourable foreign exchange rates on sales. During the quarter ended June 30, 2016, the FSC mill sold 39,931 ADMT of dissolving pulp compared to 31,762 ADMT and 39,664 ADMT in the previous quarter and prior year comparative period, respectively.

Security paper products segment operating EBITDA was $2.9 million higher when compared to the first quarter of 2016 and $1.3 million higher compared to the second quarter of 2015. The Landqart mill sold 2,714 tonnes of security paper in the second quarter of 2016, compared to 2,655 and 2,745 tonnes of security paper sales in the first quarter of 2016 and second quarter of 2015, respectively. Security paper production includes banknotes, which result in varying degrees of costs and margins depending on the complexity of the security features included.

Fortress Paper completed the sale of its pulp mill and sawmill in Lebel-sur-Quévillon, Que., in July for $15.4 million. The asset purchase agreement included the sale of the buildings, equipment and other ancillary property relating to the non-operating pulp mill and sawmill, as well as the energy generation, connection and transmission plant and related equipment.

New director

The company also announced the addition of Ezra Gardner – co-founder and a partner of Varana Capital Partners, LP, a New York based investment partnership – to its Board of Directors.

Gardner was lead project manager and managing partner at KCPS/Omnium Capital Management, a $500 million asset management fund based in Tel Aviv, designed to develop the fund management industry in Israel. Gardner also held the position of head of equity proprietary trading within UBS' New York based Fundamental Investment Group and served as a member of the U.S. Trading Committee, where he managed a team of portfolio managers and support staff and over $1 billion of investments. Gardner also held roles at MSD Capital (Michael Dell's family office) and JP Morgan Investment Banking focusing on M&A and capital markets.

Outlook

Dissolving pulp segment

Dissolving pulp prices began improving in May 2016; yet still remain below trend pricing, which continues to impact results. However, management believes that improving market conditions, a relatively favourable foreign exchange rate to the US dollar and further anticipated improvements in production costs will add to the positive momentum at the FSC mill. The viscose staple fibre ("VSF") and rayon filament markets, which are key drivers in dissolving pulp demand, have experienced improved supply and demand balance and improved pricing since bottoming in 2015. The price of rayon filament has maintained consistent pricing in 2016, which is 7% above its 2015 lows. VSF prices in August 2016 are higher by approximately 21% over the prior year and approximately 32% from the 2016 low in January. The collective agreements with unionized employees at the FSC mill expired on April 30, 2016. Bargaining negotiations are completed and the union membership has voted in favour of the new collective agreement.

Security paper products segment

The Landqart mill continues to build on a strong order book for the remainder of 2016 and 2017, comprised of a mix of new and repeat orders. Results at the Landqart mill for the quarter ended June 30, 2016 were higher than the first quarter of 2016 and consistent with management expectations. A new piece of equipment for the finishing line has been ordered to eliminate the main bottleneck at the mill in order to increase finished product capacity by up to 15%, depending on product mix, by the third quarter of 2017. Capital expenditure for the project is estimated at CHF 4.0 million of which the majority is financed on favourable terms. During the second quarter of 2016, the Company entered into a sale and leaseback agreement for the sale of its land and buildings relating to its security paper business in the Security Paper Products Segment for the aggregate purchase price of CHF 44.5 million (approximately CDN $59 million), which completed in July 2016. The agreement provides for the leaseback to Landqart of such lands and buildings pursuant to a 20-year triple-net-lease, which is renewable for an additional two 10 year periods on the same terms and conditions with Landqart having certain repurchase rights.