Verso Corporation
Q1 2020 Earnings Call Transcript

Published: 11 May 2020

[Operator:]

Good morning, everybody. And welcome to Verso Corporation First Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today’s presentation. [Operator Instructions]Please note, this event is being recorded and a replay of this call will be available on the Investors page on Verso’s website after 11 a.m. Eastern Time today.At this time, I’d like turn the presentation over to the Verso’s Treasurer, Tim Nusbaum. Please go ahead, sir.

[Tim Nusbaum:]

Thank you and good morning. The first quarter 2020 financial results for Verso Corporation were announced this morning before the market opened. The earnings release, as well as the set of slides as we will refer to during the call are available on the Investor’s webpage at Verso’s website, www.versoco.com.Joining me on the call today is Adam St. John, Verso’s President and Chief Executive Officer; and Allen Campbell, Senior Vice President and Chief Financial Officer.I’d like to remind everyone that in the course of the call, in order to make -- in order to give you a better understanding of our performance, we will be making certain forward-looking statements. These forward-looking statements are subject to risks and uncertainties.Should one or more of these risks or uncertainties materialize or should underlying assumptions or estimates prove incorrect, actual results may vary materially from management’s expectations. If you would like further information regarding the various risks and uncertainties associated with our business, please refer to our SEC filings, which are posted on our website, versoco.com under the Investor tab.At this point, I’d like to hand the presentation over to Adam St. John.

[Adam St. John:]

Thank you, Tim. Good morning, everyone. We are definitely going through some unprecedented and uncertain times. So I’d like to start off by recognizing the leaders in our community and our company for helping us work through this terrible pandemic. I’d like to take the opportunity also to thank all the frontline workers dealing with this unfortunate situation for their obvious bravery, commitment and hard work. So thanks everybody.So let’s get started with slide three of the presentation. 2020 has been a definitely time of concern and disruption, with the sudden abrupt COVID-19 outbreak beginning in the first quarter. So for me, what comes to mind first is the health and safety of our employees. They have been doing an outstanding job running our mill operations, per state government guidelines and CDC and OSHA recommendations in a really safe and cost effective manner.We have implemented lots of different things in the mills to keep our folks safe. We have implemented frequent cleaning of work areas, social distancing. We supplied facemasks, install barriers where workers are working in close proximity like control rooms, labs and things like that, and we are also screening for symptoms. So lots of good work going on the mills to try to keep our people safe and healthy.I also appreciate our customers and suppliers working with us through pandemic situation. And I will note that we -- fortunately we haven’t had any supply issues, so much appreciated there. In addition, we have been quick to act in managing what we can control in product mix, which means product development efforts and our capital allocation in watching overall cost across the company, but we are really focused on managing our cash.Our financial position is strong. At the end of the first quarter, we had liquidity of $498 million through a combination of the proceeds of the sales of the two mills to Pixelle which closed in the first quarter and the funds available under ABL. All of these actions will certainly help us manage and conserve cash through this economic crisis.Now moving to slide four, for some results, the first quarter we had sales of $471 million within an adjusted EBITDA of $35 million, compared to sales of $639 million, with an adjusted EBITDA of $69 million for the first quarter of 2019.The first quarter 2020 results do include revenue of $59 million and adjusted EBITDA of $4 million from Androscoggin and Stevens Point up to the date of the sale, which took place on February 10th, so half of the quarter included Andro and Point.The Stevens Point and Androscoggin mills had a first quarter 2019 revenues of $131 million and an adjusted EBITDA of $5 million. So it’s important when looking at the comparison quarter-to-quarter to keep in mind that Luke was in the first quarter of 2019 and Stevens Point obviously ran half the quarter in 2020, so a large capacity difference there explaining the difference in revenue.Our graphic related products volume declined at a rate of 15% in the first quarter as compared to the first quarter in 2019. And as I already mentioned, there is no closure of the big part of that and our intentional ship to packaging grade at Duluth and the continued decline in the demand for our graphic products, which was further exasperated by the economic disruption of the pandemic at the end of the quarter.On the bright side, however, our specialty business and packaging pulp business remains solid with release liner up in volume. Packaging products continuing to grow as a result of the partial conversion at our Duluth facility, which was online a couple of months for the quarter as scheduled and also our market pulp sales remain sold out with a price increase now to the second quarter. So we have got the graphic business in decline but some really good news, some solid business to offset that decline with our specialty and packaging and pulp.Our mill operations teams had an excellent safety performance, despite the transactions that came with the pandemic. We had a TIR of 0.64 for the quarter, which is really a great number. I am sorry to report, however, that tragically there was a third-party contractor fatality at the Wisconsin Rapids Mill that is currently under investigation.We continue to have a strong focus on managing our cost, including maintaining our industry low SG&A expense as a percentage of sales. We continue to try to manage that around at the 4% range. During the first quarter we did repurchase $2.7 million or around 0.5% of our outstanding shares in a very limited window that we had available. We do expect to continue this effort in the second quarter and also expect to initiate a quarterly dividend of $0.10 a share.Now, turning to slide five in your deck. So in addition to what we have already mentioned, we quickly and continue to take steps to address the decline in business due to the COVID impact. We accelerated our announced workforce reduction to reduce our cost quickly, which included approximately 95 positions. These eliminations were necessary to right-size our SG&A after the Andro and Stevens Point sale. We are just implementing it ahead of time to accelerate the savings, so we take things up a little bit quicker.We are also turning over every stone with a focus on continuing to reduce our operating costs and other corporate costs. The mills have really done a nice job and stepped up with cost reduction efforts. So a lot a lot of work going on in the mills to reduce costs and conserve our cash.We trimmed our 2020 capital spend by $11 million. We started out at $56 million for the year, we are down to around $44 million -- $45 million to spend for the year and we will continue to manage capital aggressively with a high threshold, while maintaining the reliability at our facilities.We are also focused on managing our finished goods inventory levels and we will take the appropriate downtime to maintain supply and demand. The current plan is to take the necessary downtime to balance the demand in the second quarter, focusing on not increasing our inventory levels.Given the current environment, it’s extremely difficult to forecast the continuing impact of COVID-19 on our business. But when you apply industry forecast across versus the book of business, we could experience 40% decline in shipments for the second quarter versus prior year. Obviously, this will be fluid as we see how quickly the economy gets restarted.So as previously mentioned in the first quarter, we completed the sale of Androscoggin and Stevens Point to Pixelle. Following the sale, we did announce the authorization of $250 million to repurchase outstanding shares of the company funded by the proceeds from the Pixelle transaction, excuse me.Given the current state of the economy and volatility in the stock market, we believe it’s prudent course to conserve our liquidity and we will defer implementing a tender offer until there’s greater visibility to return to a more stable economic environment.We do believe executing a tender in this environment would be difficult at best. However, we have mentioned we will continue the repurchase activity in quarter two in addition to expecting to initiate a quarterly dividend of $0.10 a share and Allen will give a little more color on that during his presentation.Lastly, as I mentioned, our financial position remains strong. We are in a healthy place with our balance sheet and we have substantial liquidity. We are positioned extremely well to weather this crisis and have the ability to take advantage of opportunities that may arise. Again, our focus will be on keeping our folks safe and managing our cash during this pandemic.With that, I’m going to turn it over to Allen for a review of our finances in detail.

[Allen Campbell:]

Thank you, Adam. Turning to page seven, we provide some key metrics for the quarter. As noted, our first quarter includes partial quarter results for our two sold mills. In addition, we are fully operating our Luke Mill last year in the first quarter.As Adam noted, our sales were down in the quarter, excluding the sold mills we declined from $508 million to $412 million, as we are down significantly in graphic papers of Luke sales out, Willamette Falls mill’s restart on the West Coast, textbook delays and super calendar business declining significantly. Decline in volume drove the decline in adjusted EBITDA.We are continuing our efforts to improve our product mix as we move the percentage of our business to pulp, packaging and specialty on the current mill configuration from 24% last year to 26% this year.Our net income was driven primarily by the sale of Androscoggin and Stevens Point Mills, believe included a pro forma schedule to try to pull the noise out of the quarter to show on a run rate basis, we did have positive net income on the remaining four mills.On page eight, we show the items that we believe are in appropriate adjusted EBITDA for Verso. The calculated EBITDA was $103 million for the quarter, with the pretax gain on sale accounting for $88 million.In addition, we had $10 million of Luke cost, of which we add back $9 million adjusted -- adjustments for tank cleaning, waste water and other costs. We expect this cost to drop significantly going forward and we believe we are progressing on the sale of equipment and land there.We booked $4 million of severance in the quarter, primarily related to a reduction of overhead, related to matching our cost structure with a go forward four-mill operation. In addition, we had $4 million of costs in the quarter related to the contested proxy solicitation. The rest adjustments were relatively minor and typical.Turning to page nine, we bridge our year-over-year performance. Two things to note, the net impact of closing Luke improved our adjusted EBITDA by $4 million, but the sold mills made $5 million in the fourth quarter last year and $4 million for the partial period this quarter.Price mix was a large hit in the quarter with total average pricing down 11%. As we sell competitive actions around our product lines, together with intentional growth and recycled packaging grades, which are at a comparatively lower price point.Volume is down especially on coated freesheet and super calendar products, more than offsetting the extra times gain on packaging and release liner. In addition to the sales volume decline, we took some extra downtime around some small mill outages.On the positive side, input costs and freight cost are running more favorable. In addition, SG&A cost control continues to pay off for us and we did see a favorable improvement at a net pension P&L impact.Operations on this bridge shows slightly unfavorable. That was more than accounted for in a reduction in carrying cost of inventory, as we improved our operations and input cost over this time period.Moving forward to page 10, this is what we are focusing on this year, our cash and liquidity. We ended the first quarter at $498 million liquidity and $276 million of cash on the balance sheet. I want to spend a few minutes walking through our cash usage in the first quarter. Note that first quarter is always a seasonal use of cash for us. The $82 million use of working capital compares to $106 million used in the first quarter 2019.And looking at the individual items and changes from year-end 2019, the key drivers of this quarter’s change include, accounts receivables up $26 million. We had one major customer that had a $12 million swing in this period, $6 million earlier than expected payment in 2019, while likely paying $6 million this year. In addition, we saw several accounts will pay in March and April. We are working with our customers in managing this area going forward and we do not expect any major write-offs.Our inventory was up $24 million in the first quarter. We increased our raw materials in the quarter by $28 million as we built our wood inventories in the winter as we do every year ahead of the spring fall, which significantly hampers the movement of wood in the supply chain.Finished goods tons were up slightly, but the carrying value was lower this year due to lower manufacturing and purchasing costs, accounts payables down $18 million, this relates to timing of check grants and in-transit cash deltas, other amounts of $40 million, primarily seasonal impact of compensation programs and customer rebates, capital spending was $22 billion, we had a relatively busy end of the year last year in capital projects and we included carryover here of a net $12 million from last year into the first quarter.New spending on projects were $10 million. So that’s the $10 million plus the $12 million, the $22 million. Pension contribution was $8 million in the quarter, but we also adjusted a $4 million credit in the EBITDA number for a total of $12 million.We discussed the restructuring closure costs were related to the Luke Mill. We show the mill transition cash in our schedule, while other costs included proxy contest, severance share repurchase and other miscellaneous items.As Adam mentioned, we are focused on conserving our cash position through austerity measures, managing capital spend, deferred compensation and deferred payroll taxes as allowed by the CARES Act.On page 11, just the summary of what Adam mentioned and what we intend to do. We know the Board authorized up to $250,000 -- $1 million a share repurchase and we did some in a four-day window that we had in the first quarter where we purchased 205,000 shares.We expect to continue open market purchases when the trading window is open. We believe they will be able to be in the market throughout the projected open period and we could purchase depending on trading levels and price somewhere between $15 million and $25 million of shares. Given the unsettled market we believe it would not be good timing to initiate a formal tender offer. We expect to initiate previously discussed $0.10 a share dividend as Adam mentioned.With that, I’d like to return the call to the operator to open up the line for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question today will come from Jeff Van Sinderen of B. Riley. Please proceed with your question.

[Jeff Van Sinderen:]

Hi. Good morning, everyone. A couple of multi-part questions…

[Adam St. John:]

Hi.

[Jeff Van Sinderen:]

… if you don’t mind sharing with me. Can you speak a little more about how the progression of demand and pricing evolved in March and then into April with the onset of COVID and lockdown, maybe you can talk about graphic and specialty and pulp segment separately? And then if you could touch on how you are thinking about demand and pricing as the U.S. economy reopens? And then also what plans do you have the idle production at your facilities in Q2 if any? And maybe touch on our overall cost reduction efforts planned for Q2?

[Adam St. John:]

Sure. Yeah. We don’t normally guide on price, but I will tell you that we are seeing persistent downward pressure across all the graphic business due to the lack of demand. If you look at RISI’s prediction, they are predicting a 5% to 7% erosion in 2020. So that’s kind of all I can say on price.We are planning on idling production in the second quarter. We are going to try to balance our supply and demand. We are predicting 110,000 tons to 120,000 tons on the graphic side of things, really no downtime planned at all for our specialty pulp and packaging business. And what was the -- what was your last question?

[Allen Campbell:]

Cost reductions…

[Jeff Van Sinderen:]

Was just…

[Adam St. John:]

Cost reduction effort?

[Jeff Van Sinderen:]

Yeah.

[Adam St. John:]

Yeah. Yeah. So everything’s on the table. We have got an austerity plan, an integrated action plan that we are working through. Obviously most of it comes out of the mills. We are taking things out that we don’t deem is critical especially during our shutdowns. We are going to concentrate on doing all the regulatory requirements anything that would be a safety issue and we are obviously cutting non-essential spend everywhere throughout the mills, cutting back on operational type purchases and things like that. And we have got a pretty good list going in the millions of dollars that we feel like is going to help us to the situation.

[Jeff Van Sinderen:]

Okay. And then as a follow up to that, just given that specialty and pulp are trending relatively better. Can you speak more about what you are seeing in each of those segments, the plans to lean into that relative strength? And maybe how we should think about you potentially increasing capacity perhaps to kind of go after opportunities in specialty, which types of products and capital investment you are planning for that? And then just generally what opportunities you see that you might pursue during COVID?

[Adam St. John:]

Right. Our -- as I mentioned, our pulp business remains -- remain strong. So we -- any potential opportunity with -- if -- when we take downtime on the machine, obviously, we can make pulp on some of our machines, so we will take the opportunity to make more pulp and sell it to the market.Our specialty business is doing well, specifically our release liner of business on E3. So we are working and we have run some trials on some other machines with regard to that and we have had success with our release liner business. So we are ramping up that business.So those are the kind of things we are doing on the product development side of things. So those businesses are looking really good for us going forward. We don’t see any decline happening. So we are going to concentrate on moving as quickly as possible for as little as capital as possible to get into those markets a little bit deeper. We don’t plan on any significant capital. We are going to be very stingy with our capital through this period.

[Jeff Van Sinderen:]

Okay. Fair enough. Thanks for taking my questions and best of luck.

[Adam St. John:]

Thank you.

[Operator:]

Our next question will come from Hamed Khorsand of BWS Financial. Please proceed with your question.

[Hamed Khorsand:]

Hi. Good morning. Just on the pricing pressures that you are seeing, is that being driven by customers or is that being driven by competitors and you had one competitor noting they took market share when they reported last week?

[Adam St. John:]

Yeah. It’s a little bit of both. I mean, the pressure from the lack of demand obviously is there. But we do have competitors that are taking the approach to fill the machines up and going after price aggressively. So we have to react to that.

[Hamed Khorsand:]

Are you changing any of your sales tactics in Q2 just given because of COIVD and you guys your projections of 40% decline in shipments?

[Adam St. John:]

Yeah. We are taking an aggressive approach with our -- with sales. I mean, we are going to go after market share where we think we can get it. Obviously, the sales guys can’t get out on the road and do their normal kind of thing, but they are constantly working the phones and using technology to get out there and talk to customers.I would, probably, say, we have ramped up our efforts with regard to that speaking of customers more often, trying to get a feel for where they are at and making sure that we are there for them. Going forward we - I would say, we have seen a flattening of at least cancellations and starting to get some orders coming through. So we may be seeing a bottom to what’s been going on here.

[Hamed Khorsand:]

How much do you think the customer base is oversupplied right now just because their business got the impact by COVID-19 and how fast do you think the orders to ramp up once the economy gets going again?

[Adam St. John:]

Yeah. Jeez, if it’s -- if I can predict that I’d be really good. That’s a tough one. I don’t -- we don’t really have visibility with printer, what they have in inventory. So it’s hard for me to comment on that, I apologize.

[Hamed Khorsand:]

And then given the current circumstance business, would you still be free cash flow positive this year?

[Adam St. John:]

Absolutely.

[Hamed Khorsand:]

Okay. Thank you.

[Operator:]

Our next question will come from Hale Hoak of Hoak & Company. Please proceed with your question.

[Hale Hoak:]

Hi, guys. Good morning. Can you give a little more color around your capital expenditures, you said you reduce the plan by $11 million this year down to I think you said $44 million. How is the $44 million being spent? What are your current thoughts on -- what’s kind of maintenance CapEx versus growth CapEx? Thanks.

[Adam St. John:]

Yeah. No problem. The plan is to spend $10 million in quarter one, our heavy spend is in quarter two of $20 million and that’s really all driven by our mill outages, quarter three we spend -- we plan on another $11 million and then I believe in quarter four $5 million. We are really focused on just -- at this point, it’s just the maintenance capital items nothing extraordinary.

[Hale Hoak:]

Okay. Great.

[Adam St. John:]

We did spend the Duluth capital that we said we were going to spend in the first quarter, we spent about $5 million to convert the machine to some packaging products.

[Hale Hoak:]

And is that -- certainly, but is that hitting your return expectations?

[Adam St. John:]

Yes. It is.

[Hale Hoak:]

Great. Thank you.

[Adam St. John:]

Yeah.

[Operator:]

[Operator Instructions] Our next question will come from Adam Richer [ph], an individual shareholder. Please proceed with your question.

[Unidentified Analyst:]

Hi. Good morning. Thanks for taking my call. I had a question about your pension contribution. When you guys announced the sale of the mill, you said you are going to put in $54 million into the pension kind of upload the whole year. So could you explain if you are going to do that if you are not and I noticed you spent $12 million in the pension in Q1? So any more detail on what you are going to do with that?

[Allen Campbell:]

The $54 million is still placeholder that we have for the contribution. Our required contribution is a little bit less than that. So you will see in the Q what our required contribution is. But it’s our placeholder in that range for this year, yes, for cash...

[Unidentified Analyst:]

Okay.

[Allen Campbell:]

…contribution.

[Unidentified Analyst:]

Okay. So you are not going to have to put in the $50 million -- you are not -- you didn’t put in the $54 million at once. You are going to spend that roughly during the year?

[Allen Campbell:]

That’s correct. Larger payments in the third quarter.

[Unidentified Analyst:]

Got it. Okay. Thanks. And is the Duluth spend over now, was -- or you are only going to spend the $5 million to do the small converging or is there anything further to do with the Duluth?

[Adam St. John:]

Currently that’s the -- that’s what we are planning on spending. We are still evaluating the first phase of that and we will decide later whether we are going to continue to invest in that project.

[Unidentified Analyst:]

Got it. And what about industry-wide shutdown, have you seen any of your competitors shutting capacity either here in the U.S., I know in Europe there big close were coming, I guess, in Q3, Q4, anything further that happened lately?

[Adam St. John:]

Yeah. We have had a lot of competitors announce downtime. The last time I looked in a RISI report it was north of 750,000 tons of announced downtime and that that includes some downtime here.

[Unidentified Analyst:]

Okay. So who will you expect shutting? Anybody you could specifically mention?

[Adam St. John:]

No. I can’t mention that. I think it’s in their earnings report.

[Unidentified Analyst:]

Okay. But it’s globally 750,000 tons that you have -- and that you are hearing about so far?

[Adam St. John:]

Yeah. That’s something -- that’s what’s been announced.

[Unidentified Analyst:]

Right.

[Adam St. John:]

So far. Yeah.

[Unidentified Analyst:]

Okay. Great. Okay. Thanks very much. Appreciate it.

[Adam St. John:]

You bet.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Adam St. John for any closing remarks.

[Adam St. John:]

Yeah. Yeah. I said -- as I said before, we are definitely in uncertain and unprecedented times that are certainly having an impact on our business. However, our focus on capital allocation and lots of austerity measures will help us through the crisis. Our company’s liquidity remains strong and we intend to manage our cash and take care of the expectations of our employees, customers, employers and shareholders and the cash flow. Go ahead.

[Allen Campbell:]

Yeah. and…

[Adam St. John:]

Allen is going to close.

[Allen Campbell:]

There was a question earlier about that we expected the free cash flow this year and it will be challenged this year. So it’s one we are working on helping the earnings side and also helping the spending side, but it’s not obvious that we will be free cash flow positive. We wanted to crack that.

[Adam St. John:]

Okay. All right. Thanks. Have a great day.

[Operator:]

The conference is now concluded. Thank you very much for attending today’s presentation. You may now disconnect.