Verso Corporation
Q4 2020 Earnings Call Transcript

Published: 27 Feb 2021

[Operator:]

Good afternoon, and welcome to Verso Corporation's Fourth Quarter and Year-end 2020 Earnings Conference Call. Please also note this event is being recorded. A replay of this call will be available on the Investor page of Verso's Web site after 3

[Tim Nusbaum:]

Thank you, and good afternoon. The fourth quarter and year-end 2020 financial results for Verso Corporation were announced this morning before market opened. The earnings release as well as the set of slides to which we'll refer to during the call are available in the Investors section of Verso's website, www.versoco.com.

[Randy Nebel:]

Thank you, Tim. Good afternoon, everyone. Turning to Slide 4. 2020 was a challenging year for the global economy, our industry and Verso. In spite of those challenges, we have continued to make progress executing on our objective of aligning our graphic, web and sheet offerings to customer demand and improving the fundamentals of our business as we move into 2021. I am proud of the team's ability to make sure our customers are receiving the best products and uninterrupted service. Much of this work is not yet reflected in our EBITDA performance. Safety is a core value of Verso. We ended the year with a total incident rate of 0.91, which is a significant improvement over the 1.23 we posted in 2019. Our fundamental commitment is to keep our employees safe and healthy, and I am proud of the work the team has done and continues to do. We remain focused on cost management while maintaining high standards for our products and customer service. For example, on wood, which is a significant spend for the company, we have negotiated a reduction in the price of wood sourced for our Michigan mills. While the past year has been challenging, we are seeing more favorable supply/demand dynamics in the industry, which we believe creates a significant opportunity for Verso. North American demand exceeded capacity through the quarter. Sequentially, we saw revenues grow modestly to $314 million.

[Allen Campbell:]

Thank you, Randy. Turning to Page 8, we show our income statement for the fourth quarter. We delivered $9 million of adjusted EBITDA in a very challenging quarter. As you can see, operating income and net income were both negative for the quarter as we accelerated depreciation on our Duluth Mill and recognized a significant loss for the quarter on our idled and closed mills. Additionally, we took $13 million of downtime in the quarter to better position ourselves to enter '21. Average total price was down $66 a ton if we exclude the sold mills from prior year, while tons fell substantially. Sequentially, our tons were up slightly from the third quarter and paper was a higher mix of our total sales, causing our total average price to be up $3 a ton versus the prior quarter. Price seems to have bottomed out in the fourth quarter as we've also cleared some excess inventory related to our closed and idled mills. In a year where our revenues were impacted by COVID, we still managed to keep our SG&A costs close to 4% of sales as a result of all the initiatives we have had in place. On Page 9, we bridge our adjusted EBITDA from the fourth quarter of 2019 to the same quarter in 2020. Our 2019 results included $11 million of adjusted EBITDA related to our sold mills. Therefore, we pegged our remaining mills at $63 million in 2019. The slow business environment contributed $34 million of decline with price/mix of $19 million, an average price decline of $66 a ton. While we also took downtime to balance inventory, which was a swing of $12 million versus same quarter prior year.

[Randy Nebel:]

Thank you, Allen. In closing, I'd like to summarize a few key takeaways from year-end. Through difficult times, we've kept our people safe. That will continue to be our core value. As business conditions improved, we have been able to implement price increases across our product portfolio. We are a customer-focused business and are proud of our effort to deliver the highest-quality products and to strive to provide excellent customer service.

[Operator:]

Today's first question comes from Jeff Van Sinderen with B. Riley.

[Jeff Van Sinderen:]

Just wondering if you can speak more about the inventory picture and supply-demand picture in the broader marketplace, maybe how your price increases are being received in the marketplace in Q1, what we should look for order of magnitude in terms of volume and pricing in Q1? I know you're not going to give guidance, but just any color around that either year-over-year or sequentially? And then I know you've removed costs, but just wondering if there are further costs you can remove at this point?

[Randy Nebel:]

Okay. Thank you. So I'll try to hit everything. If I miss something, let me know. We pulled our inventory down significantly through the last 4 to 5 months of the year. We still have inventory to take out this year, and we'll get down to somewhere a little 200,000 ton range in our inventory. With that, we've been able to get out of some warehouses, and that certainly helps our cost position. Price increases have, I would say, 95% been implemented. Everything has gone well. Haven't -- I mean, customers certainly ask questions. But I think there's an understanding with the current demand and the current capacity and the inventory levels that these price increases were warranted. And again, they were across our entire portfolio, whether that's specialty pulp or coated freesheet and coated groundwood. The last question was, are there costs that continue to be taken out? And the answer is a very strong yes. We have started putting, I guess, movements in place in our mills, and we're starting to see the outcome of some of those, but that's going to take a while. If you have to spend a little bit of capital, it takes a while to get the equipment and then get it installed. So I expect by the end of the year, the run rate cost will be quite improved from where we are right now, mainly driven by the -- in the mills. So does that hit all your points?

[Jeff Van Sinderen:]

I think you got them all. And then I have another multipart question, if you can bear with me. Just wondering if you can speak more about your overall strategy to improve product offerings in 2021. I know you touched on that. And then are there any line conversions that you might be contemplating? Or is that pretty much not part of the plan this year? And then anything on downtime we should anticipate? And then maybe just -- obviously, a lot of capacity has exited the marketplace. Maybe you can just speak a little bit more to how you're thinking about the opportunity to gain market share, particularly in graphic.

[Randy Nebel:]

Okay. Again, if I miss something, come back to me. First off, we're trying to expand the range of grades that we produce on our existing machines. That includes -- we mentioned some capital investment we're in the final stages of evaluating, putting a new former on our number one machine at Escanaba, which will give it the ability to make, I guess, the more heavier cover stock grades. Right now, that machine struggles above a certain grade range, and this should get us up to be in that cover arena, which is a very well-priced arena and should be great for the productivity of the machine. We've also spent little pieces of money on vacuum, and again, to make higher weight sheets to get the water out of it and also to handle the sheet better on the machine and through the coater. We are doing similar things on Quinnesec 41. Again, we're at the point of being ready to ask for the capital, and that is to put a new former on Q41 and to also put a new headbox on Q41. The former is to allow that machine to go up and make heavier weights. And so the daisy chain is we take lightweights -- the lighter weights off E1 and move those to Q41, and we put the more heavyweights on Q41, that machine makes more production. And again, in a very well-priced part of the market. We're also putting a new headbox on. We haven't been pleased with the fundamental quality of our sheet out of Quinnesec to make sheets. It is a good sheet, was very good and well received in the web-based printing. But on sheet printing, we have to improve it, and we recognize that. And so we're moving forward with that project also. As we move Q41 up and weight, we can then take some of the lightweights off of it and put that on Escanaba 4. So it's a big daisy chain. But those are some of the things we're working on. And I'm sorry, repeat the rest of your question.

[Jeff Van Sinderen:]

Sure. Sure. No, I was just wondering if there's anything we should anticipate in terms of downtime this year? And then I guess just -- it sounds like you're really creating efficiency and you're upgrading the potential quality of the paper that you can supply. And I'm just wondering how you're thinking about taking market share, given all the capacity that's exited the marketplace.

[Randy Nebel:]

Okay. As far as downtime, we don't forecast that. But so far, it's looking pretty good. I guess that's all I can say. We're not going to project that at this time. We are doing our level best, as you just mentioned. We're improving quality. We're raising our range of capabilities. We're doing our level best to try to gain market share, focused mainly in the Midwest, which is a large market. It's right in our backyard. And we feel with our mills and how we can take cost out, we should have a very strong competitive edge because the shipping cost into Chicago is very little. So we're hoping to gain share there and then to the extent that we can build a moat around it so that we have a nice business there. But we're also trying to gain share in other areas that are freight logical for us.

[Operator:]

And our next question today comes from Hamed Khorsand with BWS Financial.

[Hamed Khorsand:]

Could you just describe the current demand dynamics in the industry? You were saying that's outstripping supply. Is that just a function of people spending more? Or is it just a function of the printers are now operating again because COVID shut them down?

[Randy Nebel:]

Well, it's a little bit of less capacity and the printers coming up out of the COVID depression that we are in. Certainly can't say that it's back to where it used to be, but it seems to be balancing and slowly inching up on one way or another. And that's pretty well across the -- whether it's graphics or specialty or pulp. Demand is I won't say strong, but it's okay.

[Hamed Khorsand:]

And have you seen a seasonal decline in Q1 like you have in previous years? Or is it just a sequential improvement so far?

[Randy Nebel:]

It's been just a sequential improvement, I guess. Q1 has got off to a good start.

[Hamed Khorsand:]

And how is this going to play out as you go into the peak period of the year as far as just having adequate supply and also potentially as far as pricing is concerned?

[Randy Nebel:]

Well, as far as supply, we hope to have our capability, some of the new ones in place, and that will give us a little more supply. But it's going to be a challenge. I think we're doing everything we can to get positioned and to make sure the inventory we have are in the right grades, but it's going to be a challenge, I believe. I don't -- we don't usually talk much about projected price increases, but we will -- if we have a chance, we'll probably try to increase the price.

[Hamed Khorsand:]

And let me ask it this way. I mean an industry trade group is projecting 2 to 3 price increases this year. I mean, is the environment that kind of situation where it's that tight?

[Randy Nebel:]

Well, that's their projection, and I hope they're right, but I really can't comment on how they came up with it. But again, we're having a good quarter, and we'll just have to see what the rest of the year brings.

[Hamed Khorsand:]

Okay. And then my last question is, in previous slides, you had mentioned that the 2 mills, Escanaba and Quinnesec, they were operating with margins quite higher than this past quarter. Is that purely a function of volume? And could you see that being higher this year given that you're running them at a higher utilization rate?

[Randy Nebel:]

I'll comment first, and then Allen can give you more details. But we talk about 66,000 tons of downtime last quarter. And the $13 million that I talked about was unabsorbed fixed cost, and that comes nowhere close to the true cost of taking big paper machines down and bringing them back up. So downtime severely inhibits your margins. It also -- and I hope we don't get really good at this, but you can get better at taking costs out when you go down, and we made good efforts. But we could not get a lot of the costs out that we -- to cover the downtime. But we're working on ways and if we ever have to do that in the future that we can get more cost out. So Allen, do you have anything to...

[Allen Campbell:]

Yes. I think if you look at where we would like to be is, if you run those 2 mills full, we're talked -- Randy talked about earlier about increasing the weights. We've talked about having a more mix of sheets business on those 2 mills versus what they traditionally make. So if you run them full, you've got the heavier weights, you've got a better mix of product and then you've got some programs to reduce costs and improve quality, those would give you some tailwinds to a higher margin number.

[Hamed Khorsand:]

And would that higher margin number be higher than what you've previously published? Or just purely higher than what you guys reported for Q4.

[Allen Campbell:]

Well, we reported on those 2 mills, we reported now 3 quarters' worth of margin. The last one, obviously, had almost a full year of COVID and some downtime. So we would say that would be -- we'd be disappointed to stay in that range. The first one we reported was more in the 300, 400 basis points higher than that, and that had a little bit of COVID impact in it. So I think your assumptions could be that without -- in a more traditional, better mix, you should be able to exceed those margins that we reported in prior quarters for those 2 mills.

[Operator:]

And our next question today comes from Adam Ritzer, a private investor.

[Unidentified Analyst:]

Just a follow-up question regarding the supply/demand characteristics. What is actual capacity now in the industry with all the capacity taken out?

[Allen Campbell:]

I'm sorry, Adam. Say that again.

[Unidentified Analyst:]

What do you think the capacity in the industry now is with the 360,000 tons taken out in 2020.

[Randy Nebel:]

It's roughly 2.5 million, 2.7 million tons, I believe.

[Allen Campbell:]

For coated.

[Randy Nebel:]

For coated, yes.

[Unidentified Analyst:]

Got it. Okay. So that -- so if you annualize the 640 that you gave as demand, that kind of gets you what you're thinking, then that demand exceeds supply. Is that the right way to look at it?

[Randy Nebel:]

Yes.

[Allen Campbell:]

Yes.

[Unidentified Analyst:]

Okay. Got it. That explains it. My other question is, based -- your guidance, I guess, gets you to somewhere above $100 million EBITDA in 2021. Could you like walk through Q4 results and how you get to above $100 million in 2021?

[Allen Campbell:]

We didn't do that, but you can see that, as you mentioned, you would back out -- you would add back the downtime, you would recognize the price increases that have been announced or anticipated and you overlay your cost structure, and I think you get there.

[Unidentified Analyst:]

Okay. Does that also include the additional margin from the sheeting strategy?

[Allen Campbell:]

That does. So the sheeting -- and yes, that's included in that walk that you just mentioned.

[Unidentified Analyst:]

Got it. And two other questions. The -- what do you think the run rate D&A is now?

[Allen Campbell:]

You know what, that's a good question. I don't have at hand because we're -- we just did one acceleration. Adam, let me look at that.

[Unidentified Analyst:]

Okay. That's fair. And in terms of SG&A, I know you did about $15 million in Q4, but you're also talking about 4% SG&A percentage of sales. Is the $15 million a good run rate to use? Or is there improvement upon that in 2021?

[Allen Campbell:]

We -- that should be kind of like the top, and we should keep modifying that a little bit as we go on during the year. So that -- you wouldn't take -- if you took it times 4, you should show an improvement from there for the year.

[Operator:]

And our next question today comes from Marty Lane with TCW.

[Jeremy Zhu:]

This is Jeremy Zhu. The first question is, with your product innovation, are you targeting any new market segments?

[Randy Nebel:]

I guess to say a new market segment, no, we're just expanding in the markets we're in, going to a broader range.

[Jeremy Zhu:]

Well, kind of servicing the current customer, not necessarily gaining new customers in other areas?

[Randy Nebel:]

Well, we hope to gain new customers with some of the new products, yes.

[Jeremy Zhu:]

Second question, when you monetize your inventory, the -- are you selling them at a gain from where you're carrying the inventory at or at a loss?

[Allen Campbell:]

We generally make -- we have some exceptions to that because we had some tails here and there on some of the mills we closed. But we carry our inventory at lower cost to market, so we shouldn't be taking a loss on any of it. It's just some one-off ones that maybe are in there, but that's it.

[Jeremy Zhu:]

Got it. What's the typical gain from what the -- where you're marketing it at? The carrying cost?

[Allen Campbell:]

I wouldn't -- we've changed the price on all of our products. It varies from a few dollars to several hundred dollars a ton.

[Operator:]

Our next question comes from Kevin Mason with .

[Unidentified Analyst:]

I had a couple of questions, just -- I'll kind of just tackle them individually. Just first wanted to clarify a little bit on the sheeting strategy. From what I understand, I know the Europeans historically have controlled a big chunk of that market. And does your strategy sort of dovetail with the Europeans, obviously, the huge shuts from store, et cetera, them pulling out of the market a little bit, does that open up room for you guys to sort of penetrate that sheeting market more? Is that a little bit behind that strategy? Or what's driving that?

[Randy Nebel:]

Well, that's a little bit of it. I think more -- again, more than that, I'll go back to what I talked about. We have some very good mills. And maybe a European supplier can compete with us on a cost basis on the East Coast. But in the Central U.S., we think we have a cost advantage, and we certainly have a service advantage. I mean if you're buying sheets from overseas, you're probably 90 days out from -- of cash being laid out. We're much better than that. So we just think we have a competitive advantage. And at some level, we're -- we haven't taken advantage of that. We think we can take advantage of that and gain share. As the price of shipping, ocean freight and some exchange rates have changed, that's even became more prevalent. So I think the current world is helping us a little bit with container shortages and stuff. But we think in the Central U.S., we can easily gain share.

[Allen Campbell:]

It's important to note that we are in the sheeting business with our Rapids mill, and we closed that mill. So we're continuing to support a business that we had before. And now we're changing the model where we can produce the rolls to be sheeted at Escanaba and Quinnesec. So that gives us additional products on 2 mills. So what we -- it's not a product we haven't made before, we've been in, we sold to customers. We're tweaking our product mix and our breadth. But it's a business we service, we've been in, and where it will be one for us going forward. So that's one point we wanted to know.

[Unidentified Analyst:]

Okay. Yes. A good point about the Wisconsin Rapids because that's true, you did a lot of the sheeted stuff up there. So obviously, you have to be able to step into that market. The other one that just -- was just a little puzzling, I guess, just looking through to the end markets and this -- the push more to some of the heavyweights. Like everyone you talk to, everyone seems to be talking lightweight, lightweight, lightweight, and yet you're moving into heavyweight. So what's sort of driving that market opportunity? Is there just shifts in sort of the end demand or something from other producers leaving that?

[Allen Campbell:]

It's an area that we didn't necessarily play in as much, but we did at Rapids. So we had heavyweights at Rapids. We did not at our other 2 mills as much. So now we have to bring their capabilities up to what Rapids did before. So it's more concentrating on what we have left versus what we did before.

[Unidentified Analyst:]

Yes. Perfect. Okay. So a lot of this is trying to step back into some of the markets and things you were able to address with the Wisconsin Mill. So one just final question just on -- I understand there was a price increase that was put out on the coated free grades yesterday, I think it was, that you guys announced to customers. Is that -- and that's covering just the web grades, it doesn't go on the sheet at this point?

[Randy Nebel:]

That's correct.

[Unidentified Analyst:]

Okay. And that's April 1, I guess, was the implementation of that?

[Randy Nebel:]

Yes.

[Operator:]

And ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

[Randy Nebel:]

Thank you, everyone, for your time and questions. We appreciate your support and look forward to speaking to you next quarter.

[Operator:]

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.