Verso Corporation
Q4 2018 Earnings Call Transcript
Published:
- Operator:
- Good afternoon, and welcome to Verso Corporation’s Fourth Quarter and Full Year 2018 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. A replay of this call will be available on the investor page of Verso’s website after 3 PM Eastern Time today. At this time, I would like to turn the presentation over to Verso's Treasurer, Tim Nusbaum. Mr. Nusbaum, please go ahead.
- Tim Nusbaum:
- Thank you, and good afternoon. The fourth quarter and full year 2018 financial results for Verso Corporation were announced this morning before the market opened. The earnings release as well as the set of slides that we’ll refer to during the call, are available on the investors page of Verso’s website, www.versoco.com. Joining me on the call today is Chris Santis, Chief Executive Officer; Allen Campbell, Senior Vice President and Chief Financial Officer; and Mike Weinhold, President of Graphic and Specialty Papers. I would like to remind everyone that during the course of the call, 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, www.versoco.com, under the Investor tab. At this point, I’d like to turn the presentation over to Chris DiSantis.
- Chris DiSantis:
- Thank you Tim. Good afternoon everyone. I am on slide three of the deck. So 2018 was a fantastic year and we delivered on many fronts. Starting with EBITDA first, EBITDA grew from $134 million to $296 million on an adjusted basis, really nice increase there. We remain the market share leader with an estimated 49% of capacity in North America. Our Specialty business grew very nicely, up to 31% of our total revenue. And we've successfully converted the mix in such a way that two out of our seven mills are now 100% non graphic. So the Androscoggin Mill and Stevens Point Mill, making 100% specialty and packaging products. In 2017, we had no craft linerboard business. We successfully diversified in a low risk way into packaging papers even further. So net CapEx of $14 million, there was an $18 million project less $4 million that we received from the State of Maine at a technology grant and we now have 200,000 tons a year of virgin craft linerboard capacity. There were a variety of headwinds facing the business in 2017. We executed a number of countermeasures to respond to that and drive cash flow for the business. Some of those items included the implementation in 2018 of 745 unique operational initiatives under our operational Excellence Program that we call or RGAP, RGAP stands for realizable gap. It's a program that we use to close the gap between where we are now and world class performance for a variety of metrics in the mill. We achieve record quality results in 2018. It's the best year we've ever had in our history. With less than one complaint received from customers for every 1,000 tons delivered. We successfully redesigned our benefits program which generates some significant savings. We sold the Wickliffe mill for $16 million, which -- an additional benefit of saving several million dollars per year in carrying costs associated with the mill. And we successfully signed up a countervailing duty agreement with Canadian suppliers that generated $42 million in cash as part of that settlement associated with the other removal of super calendar duties. And I just want to remind everybody that, that mill sale and the countervailing duty settlement is not in our EBITDA numbers. In 2017 SG&A was 4.3%, 3.9% on an adjusted basis. You can see the appendix for the adjustments. We drove a leaner cost structure in SG&A in 2018, got some particularly good efficiencies in the Information Technology Group. And we finished up the year with 3.8% on a total basis, 3.2% SG&A on an adjusted basis. I expect we can build on these successes in 2019. Turning to page to 4, graphic papers represented 60% of our fourth quarter revenue. So on a percentage, as far as the pie chart is concerned that's the lowest percentage of graphic papers, the business has ever had and it's mixed. Operating rates in North America were strong for the year. However, they did begin to weaken in December. So for the year as a whole, 96% operating rate for both coated free sheet and coated groundwood. Global operating rates as a whole remained challenged. There were a variety of capacity conversions that happened in 2018 that we’ll see the full year impact of those in 2019 so that should help. And as far as the end market dynamics are concerned pretty typical in terms of demand erosion in coated free sheet and coated groundwood. We're down about 5% for the year in coated free sheet, down 7% in coated groundwood. Magazine ad pages were significantly worse than commercial print and catalogs. You can see the magazine ad page is down dramatically 17%. But one important thing for me to keep highlighting about magazine ad pages is that for a number of years, the company has been very proactively trying to reduce its exposure to that segment. And right now if you looked at our entire system, only about 8% of the total tons were the free sheet groundwood super calendar. If you all the applications, only about 8% of the tonnage winds up in a magazine application. The pricing environment was strong in 2018 with the number of increases that were implemented. The current pricing environment I would described as stable relative to the exit rate of 2018. The tightness in the market in 2018 created a supply void given all these capacity reductions, conversions and so forth. And you could see in the import numbers for coated free sheet and for coated groundwood was both up significantly. Imports filled a lot of that gap. Volume and order entry was very strong in '18. Recently we're starting to see some slowdown in the order entry activity. We would attribute that to general concerns about the economy globally. Inventory levels are higher now, than they were as we exited 2018. And we're seeing more and more signs of a tough retail environment going forward. So a lot of closures have been announced from Payless to [indiscernible], ShopCo and other stores. Turning to page 5 of the deck. So specialty papers, packaging and pulp collectively, everything outside of graphic was 40% of the total revenue of the business in the fourth quarter. That is the highest percentage of non-graphic business Verso has ever achieved. Market growth in those segments remains a strong for us. The drum beat that seems to continuously grow louder and louder, about the sentiment that’s anti-plastic in nature is creating more opportunities for us. It's creating opportunities for a lot of fiber based products. We see it particularly in the specialty business with respect to our food and bag products. Specialty paper saw price increases in 2018. There are lot of inflationary cost particularly around pulp that drove those necessary increases. There is some economic uncertainty right now that's clouding the short term outlook for pulp and packaging papers. But particularly and particularly with respect to China with what's going on there, but longer term, we're still bullish. I think the longer term fundamentals around fiber and those businesses are intact. The stronger dollars impacted exports, both on shipment and pricing perspective and container board was tight. In 2018, we expect it to ease a little bit as we are in 2019. Turning to page six of the deck, so we got a lot to be proud of. I’ll just give you some highlights here. Q4 2018 sales and adjusted EBITDA were way up versus prior year sales of 9%, adjusted EBITDA, up $31 million, margins were strong at 13.8% for the full year. Adjusted EBITDA is up 121% versus the prior year. We successfully retired the term loan completely, the third quarter of ‘18. We ended the year debt free with $26 million of cash on the balance sheet. We saw a swing to the good of 201 million in net income as we went from $30 million loss to a $171 million positive in 2018. And we successfully ramped up Androscoggin Mill number three machine into liner board. Primarily right now what we’re making on that is 26 to 25 pound basis way product. We’ve got over 70 customers qualified. So we’ve proven that we can do it. We can make quality products. And the machine can be flexed, which is a really important attribute of this asset. It’s the way that we see our business, because we’re in the business of converting fibers into customer solutions and doing it in such a way that makes customers happy and maximizes our cash flow per hour. So being able to flex gives us the ability to pick our shot. So we want to make liner board, we make liner board, if we want to softwood pulp, and roll that up, we could do that. If we want to make bleach, we want to make brown, we can go back and forth as needed. We grew the specialty paper business 12% over 2017, and the one thing I want to say about specialty is we define specialty in a pretty narrow way as far as the industry is concerned. So, it truly has to be non graphic for it to be specialty. So our specialty papers include technical label and packaging papers. You’ll see that term within the paper industry defined more loosely in other places. But this is truly a specialty product as distinct from graphic. We finished the year with an industry low SG&A sales of 3.8% on non-adjusted basis. As I mentioned before, really good progress in IT cost and then in benefits cost. Turning the page to 7 of the deck, so as we continue to work towards our 50-50 or better revision, which is getting to 50% specialty packaging and pulp the next few years, so few things to keep in mind. So we have a 3 million ton system, 2 million tons of it is graphic papers printing and writing exposure. Those are the tons that you need to be thoughtful as far as erosion is concerned. So if you think about 4% to 5% as kind of the typical annual erosion rate on primarily coated free sheet product, that’s most of what our systems is. You’ve got roughly a 90,000 ton challenge per year, and that’s without major capacity changes. So when I use numbers like that, I’m assuming that our rate of erosion that we feel in our business in Verso is the same as the market. Now we’re large percentage of the market, but that doesn’t necessarily mean that we would see that erosion rate. 2018 is good case to point there, depends on what happens in the rest of the industry as well. Now, we’re committed to be in the leader in the graphic papers and we’re committed to doing that in a way with strong operating rates. So to the extent that we have to balance supply and demand, we’re going to do that accordingly and make sure that we meet this challenge. There is variety of different long term interesting capital projects, that we’re looking for solve for that erosion, what I call the treadmill effect. The move is closer to the vision. And this investment strategy is very mindful of things not just like, how much money you’re going to invest, and how much money you’re going to get back, and what’s the percentage of return but really risk adjusting these various investment opportunities, in terms of probability of success, as we really have to make good bets here with our capital as we go forward. We're not ready to announce specific numbers or anything like that at this point. But I can give you a sense of the flavor, what are the types of things that we're looking at. So for instance, one thing we could do is we could speed up the specialty paper machine. So we have specialty assets. They have a certain amount of capacity associated with them. We would make the appropriate investment there just to make those machines run faster, create more tons, go out and sell those tons that helps the mix. Another thing we can do, which we've been doing, we'll continue to do is just keep the new product development machine rolling in such a way that we're able to introduce new specialty papers to displace graphic papers. That could be a very low investment way of doing it. We could expand the packaging paper capacity. So we have the ability to make SBS product, we have the ability to make kraft liner board right now. We could make investments to expand the capacity there to just physically produce more tons on those assets. And larger investments would be things like converting entirely graphic focused machines to add specialty to your packaging rates. But regardless of which investment strategy, we take to grow, we're committed to right size and capacity demand if we need to. So we have to invest a little money to balance supply and demand, interim capacity will do that as well. In addition to kind of transforming the mix one of the keys to being successful strategically is continuing to manage what I describe as the arbitrage between what do we sell our products for and what do we buy all of our raw material inputs for. So we spent a lot of money on chemicals, freight, wood, energy et cetera. We sell our products for a certain price. That spread is a really important driver of shareholder value. So we need to maximize that spread. We need to keep the machines full we need to run a better mix, a more sustainable mix for the long-term less susceptible to erosion. We have the right experience, the right tools and techniques to be able to take that and analyze it in such a way that we can maximize the cash flow per hour. You put all that stuff together and we've got the best numbers that we can possibly put up for the business given the circumstances. So with that, concluding the comments on strategy I'll turn over to our CFO, Allen Campbell for a financial update.
- Allen Campbell:
- Thank you, Chris. Turning to page 9, we highlight our selling prices and our shipments. Paper prices continue to be strong, up sequentially quarter-over-quarter by $11 a ton or up $89 a ton, same quarter last year versus this year 10%. Pulp up $60 a ton or 11%, down slightly from the third quarter as we -- as our sales in the fourth include some unbleach kraft pulp off of A3 which decrease the average selling price a little bit. As you can see volume was off 2% on a quarter-over-quarter basis prior year and pulp was up 15%, during that time period. Inventory was up 3%, up $13 million. Moving ahead to page 10, we highlight our income statement. Sales, as Chris mentioned, was $695 million for the quarter. We had a net income of $86 million. $86 million had a few special items, primarily the $22 million gain from the remaining amount of the Countervailing Duty settlement. If you take the adjustments out we would have been $1.90 per diluted share, up from $1.04 the prior year. As you can see, as Chris mentioned our SG&A remained well under control during this time period. Moving ahead to page 11, we show our bridge-to-adjusted EBITDA, starting with the $89 million of net income, adding back the traditional EBITDA adjustments and interest, $115 million reported. That included primarily the Countervailing Duty settlement gain of $22 million, I talked about earlier. There's a $1 million I wanted to point out that it rounds up to $1 million but our supposed re-org costs or final trustee fees related to a 2012 bankruptcy case. Those will not continue going forward. We also had $2 million of noncash equity during the period. That leaves us an adjusted EBITDA number of $96 million, up $31 million versus the prior year, same period and a nice margin of 13.8% for the quarter which was 11% for the year. Moving to the bridge on page 12, the 65 to the 96 are across the board and price increases contributed $65 million to the gain, slight volume decline of 3. We took just a small downtime in December, hit for a $1 million. Major maintenance was our timing and our schedule for the mills that we have, were up a little bit this year versus the prior year or $5 million. Inflation continues high in our Pulp area. Energy and chemical area, $23 million year-over-year, same quarter. And you see a small adjust favorable SG&A pickup and then on pension combination of pension OPAB and working capital is $3 million less quarter over prior year quarter. So gets you to the 96 as reported. Included one slide for the year, that walks a 134 to the 296 on page 13. $233 million delivered in the bottom line from price and mix of the business, volume slightly off at five. We ran very full for the year. So our downtime is 4 million favorable. Major maintenance was higher $16 million of expenses. Want to note is our Quinn mill has an outage every two years. So we took that outage in 2018. So year-over-year that maintenance major maintenance expenses were up $16 million, as we told you, they would be. Inflation, pulp, wood and chemicals, the energy that we talked about was a big hit for our business of $46 million and freight $23 million. The freight was heavier in first part of the year, little bit less at the end of the year. So we're encouraged by the flattening out even though it's at a fairly high rate. SG&A, as mentioned before, has been an area of concentration for us, improved the year-over-year by $8 million and our pension OPEB and workers comp we roll them all into one bucket, we were 7 million favorable year-over-year to get to the $296 million. As Chris mentioned, if you look at page 14, we highlight what went on with our cash flow bit in this business. But at the same time end of ‘17, we were $204 million in debt and the net debt to basis. We ended the year at 26 million in cash. So a huge swing during that time period. You look at the top right, how did we drive the money? Where did the -- what were sources or our uses? We generated $300 million from operations. We brought in $59 million from the Wickliffe sale and also the Countervailing Duties settlement. We brought in $359 million. We invested 69 million in CapEx, $43 million in cash to fund our pension, debt payments were $211 million in the time period. We incurred $17 million interest which includes a term loan prepayment fee of a $1 million and $16 million of cash interest. So our cash use total was $340 million driving a net change on our cash balance of $19 million. Our net unfunded pension ended the year at $428 million favorable from the prior year, we thought it'd be a little bit better than that. The earnings return, the marketplace wasn't very strong in December, and we saw a discount rate move against us at the end of December. So that’s typical what you're probably seeing in others in this industry. We’re able to manage our letters of credit down. We are also very successful in amending our ABL. That was in February. We've got -- we've improved the rates, we've improved flexibility. We will be able to do more than we were able to do in our prior ones, we're pretty proud of that. Moving ahead to page 15, we provide guidance for the next quarter. We're looking at sales to be in the $625 million to $640 range. And as Chris mentioned, some of the headwinds that we were seeing there in this first month or so, capital expenditures are expected to be in the $16 million to $20 million range, cash pension funding of $7 million to $9 million and we do not expect to pay any cash income taxes. What are we looking for the whole year? We are looking investing in our mills to improve the reliability spending a little bit extra in maintenance and CapEx for 2019. We're in the midst of a union negotiations and there will be a ratification both today so that we're looking at that and we expect our cash pension contributions in 2019 to equal to what they were in 2018. So that ends our guidance. We'd like to open on the line up for any questions.
- Operator:
- [Operator Instructions] Our first question today comes from Jeff Van Sinderen with B. Riley FBR. Please go ahead.
- Jeff Van Sinderen:
- Good morning, everybody. Maybe you can give us a little bit more on your thinking around the Q1 metrics. I know you provided revenue guidance. But if we're looking at roughly flattish revenues, what are you assuming on pricing and volume there, and maybe you can touch on, I guess what you're thinking about pricing and demand beyond Q1? And I guess I'm just trying to get a sense of if you feel the headwinds are increasing, is this year when you would expect headwinds to outpace tailwinds or do you think it could still be the opposite as it was last year? And then I guess just on Q1 I mean if you do run revenues in that range could your EBITDA be up? Start with that.
- Chris DiSantis:
- Well, first let me cover the pricing aspect of it. So the exit rate from 2018, we're looking at similar type numbers for the first quarter of 2019. So I think you can assume similarity there. There are perhaps there's some, even some upside potential. But I would assume kind of similar rates going forward. From a demand standpoint, when I mentioned, inventories, PNR, it's really system wide inventory. So looking at looking at customers, looking at what they have in their warehouse, those kinds of things. We're seeing that impact demand. It's too early to call the year, as far as demand is concerned, but we are seeing some softness in the first quarter, I mean there's going to be several contributors that. I mean that erosion of fact, in the business, hasn't gone away. So that's, that's still there. And that's why we need to have a strategy to deal with it. So there's always going to be that factor as we continue to manage the mix accordingly. The other factor's elevated prices, it can have a little bit more of an effect what I mean on demand, erosion prices certainly now, or power now and they have in the past. And then some system wide customer inventory that's kind of impacting softness. But I think it's too early, I mean in the year to sort of take that first quarter and project that going forward for the balance of the year.
- Jeff Van Sinderen:
- Okay. And then maybe if we can sort of turn to just to thinking about increasing your penetration and what I like to call new generation paper, the non-graphic paper. Can you talk a little bit more about some of the projects that you might undertake this year where I guess maybe what you're leaning toward doing in terms of growing I don't know, if it's going to be liner board or whatever, but maybe just touch on some of those and in terms of expansions or conversions.
- Chris DiSantis:
- Well, of the projects that I listed whether you're speeding up machines, whether you're doing a larger conversion project, whether you're doing a major capacity expansion, it wouldn't have that much of an effect on the mix in 2019 just given the lead time associated with execution and implementation this projects because you've got a complete engineering and I mean, all of your analysis and all your work and you've got equipment, you've got lead times and that kind of thing. So they won't have a big impact on mix. The lever for mix in any short term period is the other lever I talked about which is really just about substitution, where we've got some new specialty opportunity we're able to close on that opportunity and we're able to use the existing assets that we have with minor, I mean investment to be able to accommodate that product. And then we've also got the ability to flex capacity. So we have a lot, we have 2 million tons of graphic capacity, to the extent that does not match up with market demand, there are various things that we can do to adjust the capacity, to adjust the production in the system size that to the demand. So that could have affect mix similarly in a positive way where we have a higher percentage of specialty packaging and pulp to graphic.
- Jeff Van Sinderen:
- Okay. And then if I could squeeze one more. And I think there's been an exit in uncoated free sheet from the marketplace. And just wondering how you're thinking about that I mean. Would it make sense for you to lean more into uncoated free sheet or does that not make sense economically for you?
- Chris DiSantis:
- Well, the answer is it depends. So we've got very sophisticated analytics and a lot of experience around figuring out what can we run on these assets and what mix generates the highest I mean profitability per hour. And there are points at which uncoated, what I mean, like which kind of we’re talking about the total cost for us. Depending on what that product is, it might make sense at certain price levels to run more of that in our mix. And one thing, just to clarify, we do make uncoated product now. We don’t make a lot of that, but we make it now and we do have the ability to make more if the economics of the market warrants that.
- Jeff Van Sinderen:
- Okay, fair enough. Thanks for taking my question and I’ll take the rest offline.
- Chris DiSantis:
- Hey, Jeff. Thank you.
- Operator:
- The next question comes from Hamed Khorsand with BWS Financials.
- Hamed Khorsand:
- Hi, could you just talk about the inventory situation. Is it, are you taking a machine offline to address the increase in inventory? And could you also talk about what you’re doing with the increase in CapEx this quarter?
- Chris DiSantis:
- Well first, let me, at a high level just kind of how we approach inventory and then I’ll ask Mike Weinhold too, I can ask him to talk little bit more about system wide what’s happening with inventory. We don’t have anything to announce at this point, with respect to adjustments that we’re going to making from -- as far as taking a machine offline is concerned. But to the extent that the market is very tight, we know how to run the business in such a way to maximize the earnings of the company in the tight market. And to the extent of the markets get loose there are variety of levers that you could pull, longer terms. It’s all for the projects. I mean which I talked about, and that’s -- the erosion not going away. So that has to be dealt with one way or another. But short term there are levers that we can pull from a capacity standpoint to adjust and make sure the demand meets the supply. So there's always a counter measure. We just don’t kind of let things happen. I'll ask Mike to comment on the inventory more generally and the market.
- Michael Weinhold:
- Yes, thanks, Chris. So generally speaking we saw the slowdown as we entered Q4, 2018. We saw customer inventories as we got into Q1 of '19 elevated. And I think that’s kind of a fundamental aspect of price increases that were taking place throughout 2018. Customers in some cases buying ahead of that, waking up in 2019, Q1 with elevated inventory levels and a softening of the market. I think it's also important to understand in Q1 of ‘18, sequentially from the end of ‘17 we actually had obviously very robust operating rates and capacity closures that came out in Q4 '17. So the reserve of that is we were drawing our inventories down. In Q1 of '18, roughly paper inventories declined in our system by 5% to 7%. So when you look at comparatives of volume, Q1 of '18 to Q1 of '19, we had a kind of a reverse. We have inventory levels that are actually are elevating somewhat and we had a draw down last year. And so the inventory levels we believe are certainly manageable and we are managing them on our side and I think the question you asked earlier around downtime and/or taking the asset offline, we are committed to balancing supply with demand. And so we definitely keep a very short rein on our finish goods inventory levels and manage accordingly.
- Chris DiSantis:
- And Hamed you asked the question as well on CapEx, kind of why we are at where we are at some quarters? Just that we can take a look at for the whole year, one, we spend about $69 million in 2018. We have a major boiler work that we are going to do at one of our mills in 2019. That's going to add our capital by $18 million to $20 million for that. That's one of our main reasons for the step up capital spending. We want to make sure we have reliable mills. So we ran them full, most -- almost all last year. We want reliability and quality to up and we are investing this year a little bit more than we were in the past, but a lot of its just required work that we need on a boiler in one of our mills.
- Hamed Khorsand:
- So if I am looking at your operating rates and the guidance that you are providing, what kind of implications does this have, as far as EBITDA, given what you were producing in Q1 of last year. Right, I mean are we talking about the same kind of levels of EBITDA or are they -- because the operating rates are different, are they -- and pricing is high this year, is the EBITDA going to be more, is it going to be less. I mean it's kind of a change up here as far as the pace you are operating at.
- Chris DiSantis:
- I mean we feel, we still feel pretty good about the earnings, I mean outlook for the business because we got good pricing and pricing is economically just kind of, is one-to-one correlation of the EBITDA of the business and pricing is still good. So we feel good about the numbers.
- Hamed Khorsand:
- But if you’re talking about feeling good and this might be just the temporary Q1, this softness kind of thing, why haven’t you guys done anything beyond talking about reinvesting in the mills with, now that the balance sheet being stronger?
- Chris DiSantis:
- Why haven’t we said more?
- Hamed Khorsand:
- Yes, I mean business is.
- Chris DiSantis:
- Yes, well, here is the trick. All these projects stand on their own merits and they go through a very rigorous process. So we take capital allocation very seriously in the company. I mean these are bets that we are making with shareholder money. So we need to be very smart, very through, very cautious in all of those stuff and every single major one of these projects, even goes up to the board level, I mean for approval. Now we can’t really announce -- and sometimes projects, they could die a death at any point. I mean you could have something in early stages of concept that just gets crossed off the drawing board or you could be six months in the diligence on a project and something comes up, I mean from an engineering standpoint or there is a major change in market condition or something like that. And it doesn’t change then you don’t do it. So I am just being cautious on that. I don’t want to put a list of, what I mean, projects out there and start to put dollars and numbers and a ring about them, and then some of them just don’t come to pass. I think it will be -- it’s just kind of hard staff to model if you’re looking at the business and you every project, take the project out so. So, really we can’t announce what we’re going to do until it’s approved and we’re committed to doing it. And then at that point we can talk about timing and dollars and returns and that kind of thing
- Hamed Khorsand:
- You guys have been talking about this for over a year now, and all we seen is this A3 line come on and we have seen the balance sheet delever. So it’s been very slow process.
- Chris DiSantis:
- Right.
- Hamed Khorsand:
- I’m just trying to understand like why is it taking so slow to commit anything?
- Chris DiSantis:
- Well, I mean last year. We had bunch of things going on all simultaneously. So we were looking at projects but we're also looking at a variety of strategic alternatives and those kinds of things. So last year was a busy year looking at a lot of different I mean, things simultaneously and right now we're looking at we're looking at more projects and looking at them in a deeper way then we have in the past.
- Hamed Khorsand:
- And lastly is there -- your competitors having changed up a quite a bit this year with announced conversion conversions this year, and the next year. How does that mitigate your inventory issue in the channel, or does that increase it because now you have the run off where your competitors could just sell the tourists because they don't care because they'll eventually convert anyways.
- Michael Weinhold:
- Yes, it's Mike Weinhold. I think you just summed up, the kind of the two goal post in that question. So we do believe, and we see what you see from an analysis standpoint. So we do believe conversions are out there. There's equipment lead time that's embedded within those conversions. So to the extent those hit in what year, that's really the timing question. So again, we're committed to managing our inventory levels and doing what we can to keep those within manageable levels. But there certainly is a potential for inventory levels to increase on the supply side or on the customer side through actions of others that potentially will convert and as you put it will run their business accordingly after that conversion.
- Chris DiSantis:
- And there's a there's lead times associated with all these things. So a lot of assets have traded hands and it would be reasonable to conclude that there's going to be investments that will -- that would transfer those assets from producing print and writing grade type product, to packaging and pulp. I mean who knows I mean, what other companies will do, from a timing standpoint. But it looks like those events are probably more likely in 2020 than they are in 2019 just from the sheer lead time at what it takes to do things. But that's pure -- that's speculation.
- Hamed Khorsand:
- Thank you.
- Operator:
- [Operator Instructions] The next question comes from Joe Pratt with Stifel. Please go ahead.
- Joseph Pratt:
- Hi, Chris. On the last call. there was a discussion I believe about what to do with the free cash flow in 2019, do you want to comment on that as to what the alternatives are?
- Allen Campbell:
- Yes, so there's a variety of things. And I'm not in a position to announce anything specific, but in terms of allocation of capital, I mean, we're continuing to evaluate it. So there's a list of projects come in that are there, those projects and that capital that would be associated with those projects, those are not in the CapEx numbers that we talk about. So when we talk about, what the maintenance CapEx is for the year, and the op schedule, and what we spend in the first quarter, all of that capital associated with those various projects would be incremental. And as those projects are determined, we would be announcing those. We're going to continue to look at other options as well. When you have a delevered balance sheet, there's a lot of things that you could do from an M&A perspective. So one of the things that we're evaluating is there a way to transform that mix more quickly in such a way that we could go out and acquire I mean, another business. We would do that -- if we did that we would do that in a very disciplined way. There's nothing specific I have to announce there other than when your job is to allocate capital and build shareholder value and you have a delevered balance sheet. That's one of the things that you look at. And then the other thing is to the extent that you have I mean large amounts of excess cash you're not going to deploy them coming into the business or deploy them into mergers and acquisitions, there's the opportunity to return capital to shareholders through like buybacks and things like that. We've been asked about that a lot. And that's one of the things that we're evaluating. But we're not in a position to make an announcement at this point yet on what we're going to do there.
- Joseph Pratt:
- Okay. And last year, I think that the CapEx number was $69 million. Are you going to say -- are you saying and the fact that it's going to be a bigger number in 19?
- Allen Campbell:
- Yes.
- Joseph Pratt:
- And did you give a number or not.
- Allen Campbell:
- We didn’t give exact number what we said, are at that level, we're going to spend incremental $18 million to $20 million on a boiler capital project at one of our mills. So we're saying it's not in that range or little north of there.
- Chris DiSantis:
- Yes, so take that, have the boiler rebuilt and maintenance so likely maintenance level. We have a lot of discretion around these things. But we do think, it's wise to invest in the assets and make sure they're running well.
- Joseph Pratt:
- Okay. And what do you -- what's the total your outstanding unused lines of credit right now?
- Allen Campbell:
- At 12/31, it was over $300 million.
- Chris DiSantis:
- Right. We are -- we do use capital -- working capital in the first quarter. We have rebates with customers, we have our annual bonus payments and then we have traditional build of inventory ahead of the higher selling season. So you will see, we have as we were -- yes publish the K tomorrow, you'll see that we are using a little bit in the revolver in the first quarter and we expect that generally speaking and are used to working capital that way in the first half of the year.
- Allen Campbell:
- Yes. That's pretty typical.
- Joseph Pratt:
- Hey, lucky banker to have a unused line of credit encountering some use and no other funded debt.
- Allen Campbell:
- Right.
- Joseph Pratt:
- But what are the -- have you seen the Nine Dragons [ph] bought some catalyst properties converted them to container board. I think have you seen any more from foreign companies wanting to acquire U.S. either coated capacity or other capacity?
- Chris DiSantis:
- So just to clarify, so Nine Dragons bought the Biron Mill and bought the Rumford mill. It is very likely that they're going to be converting those mills to making packaging and pulp at some point. Because that's the business that they're in. But the timing of that is question mark only they know the timing of that. As far as other assets in North America, other than what's already happened. So we've got paper excellence with the catalyst mills on the West Coast with the Canada. That transactions gone through. You've got New-Indy, which is the behind them is the Kraft Group, which bought the Catawba Mill. We don't believe, I mean that they bought those manufacture to paper long-term but who knows when they'll do a conversion there. But as far as other assets I mean that are out there in North America to change hands, we don't have anything to share about that.
- Joseph Pratt:
- Okay. Thank you very much.
- Operator:
- Next question comes from Greg Weaver with Invicta Capital. Please go ahead.
- Gregory Weaver:
- Hi. Thanks for letting me ask a few here. With the union negotiations, you've mentioned them a couple of times is what's the range of outcomes there, I'm trying to decide is good or bad?
- Chris DiSantis:
- We view -- I mean, we view coming to agreement on a contract as a good result. Whenever you have a contract, I mean, they're things like economics in there, like wage increases and those kinds of things. But we want to have contracts in place, I mean with the various unions that are at our mills that are that are organized. We've been operating for a time, quite some time without contracts, that creates a level of, I mean uncertainty with the associates in the organization. I mean, we're all on the same team that we'd prefer not to have. So we would view the completion of a contract as a positive.
- Gregory Weaver:
- Okay, and just, I guess, help me understand a little bit at your current utilization rate. Can you give me a rough cut of your cost of goods, how it breaks between overhead and like direct materials direct labor?
- Allen Campbell:
- That's not something we do publish.
- Gregory Weaver:
- Yes, I'm just trying to figure back to Hamed question about what happens to your EBITDA when your utilization drops off?
- Allen Campbell:
- You can look back at '17 and '18 by quarter and you can look at the markets and our performance and then you can bring price up the current you can probably get a feel for that swing.
- Gregory Weaver:
- On an average what's the price increase then since say last year?
- Unidentified Company Representative:
- Well, for the quarter we were up 10% year-over-year on paper.
- Gregory Weaver:
- Okay, thank you very much.
- Chris DiSantis:
- Yes, I mean, you're going to have -- I mean you have softness, we expect some in the first quarter here from a shipment standpoint, but we're going to have price offsetting volume.
- Gregory Weaver:
- That's great. I got you.
- Chris DiSantis:
- Yes, the pricing side of it is -- from a -- just the economics of the business. I mean you have $2.7 billion of revenue we got 3 million tons system. Every point is lot of money to bottom line 1% of sales $27 million of EBITDA on an annualized basis. So it's something we watch very intensively.
- Gregory Weaver:
- And what's your sense of the discipline at this point given how much capacity has been taken off the line?
- Chris DiSantis:
- The only thing I'd say is what I said before the -- as far as the exit rates from 2018 are concerned we see stability in the first quarter.
- Gregory Weaver:
- And no one's cut any price.
- Chris DiSantis:
- I can't talk about what competitors I mean are doing from a pricing standpoint.
- Gregory Weaver:
- Okay. Thank you very much.
- Operator:
- Next question is a follow up from Hamed Khorsand with BWS. Please go ahead.
- Hamed Khorsand:
- Hi, just one more question. Could you just specifically just talk about what the right leverage is and how you will get there from a balance sheet standpoint would it be a dividends or buyback?
- Allen Campbell:
- So leverage of the business and then dividends or buyback is that your question?
- Hamed Khorsand:
- Yes.
- Allen Campbell:
- I mean first let's start with the leverage, I mean it really depends. I mean from an operator standpoint I mean you want to operate with much flexibility as you can particularly when you've got a cyclical business. like we can certainly know that that I have the number in mind. But prefer much lower levels or none at all for businesses I mean like this. And as far as dividends or buybacks are concerned, I mean generally the feedback that we've gotten from shareholders is that they prefer the buyback is being more tax efficient than dividends. And we understand the mathematics as how they're looking at it. But no I mean I don't have a target, I don't have a target leverage rate to business. I mean it really depends on the strategy, depending on which projects get done, how big they are and scope size and dollars, how long they take to implement. Because even if you had a big project, it took couple of years to implement doesn't necessarily mean that the earnings wouldn't cover the investment for that project. So there is the ability over several years to several projects. And depending on that how a company performs not even materially impact the debt status and liquidity of the company. So I don't have a target number to give you. And also it depends on, actually we did something from an M&A standpoint. We bought somebody or something and we would look at that with the banks to evaluate that based on the merits and the combination.
- Hamed Khorsand:
- Okay. Thank you.
- Chris DiSantis:
- Thanks.
- Operator:
- This concludes our question-and-answer session. I would now like to turn the conference back over to Allen Campbell for any closing remarks.
- Allen Campbell:
- Thank you Anita. I'd like thank each of you on the call for your interest in Verso. And this concludes our call at this time. Note that we intend to file our 10-K tomorrow for more additional details. Thank you very much.
- Operator:
- This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Other Verso Corporation earnings call transcripts:
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- Q1 (2021) VRS earnings call transcript
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