Verso Corporation
Q1 2017 Earnings Call Transcript
Published:
- Operator:
- Good day, and welcome to Verso Corporation's First Quarter 2017 Earnings Conference Call. All participants are in 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 conference is being recorded. A replay of this call will be available on the Investors' page of Verso's website after 11 AM Eastern Time today. And at this time, I'd like to turn the presentation over to Verso Treasurer, Tim Nusbaum. Tim?
- Tim Nusbaum:
- Thank you, and good morning. The first quarter 2017 financial results for Verso Corporation were released on Monday, May 15. The 10-Q, today's press release, as well as the set of slides that we refer to you during this call, are available on the Investors' page at Verso's website www.versoco.com. Joining me on the call today is Chris DiSantis, Chief Executive Officer, Allan Campbell, Senior Vice President and Chief Financial Officer and Mike Weinhold, President of Graphic Papers. I'd like to remind everyone that in the course of the call in order to give you a better understanding of our performance, we'll make 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 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. Let me go ahead and get started with a macro level update on the business. So our first point to mention here is that the headwinds are accelerating for Graphic Papers. You'll hear me from time to time talk about a phenomenon that I called treadmill fact, and I’ll just take a second here to explain what that is. But it's basically the secular decline demand destruction that's happening in the Graphic Paper business that puts a certain amount of pressure in any given time period on price and volume. So it's phenomenon of having to run hard just to stay in place on the Graphic Business. So in the first quarter of 2017 our net sales were down 10.7% versus the same period in the prior year and only the fundamentals that are driving this or things like mobility, digitization, the rise of e-commerce, companies like Amazon, you pick it's access to high-speed Internet really driving fundamental changes the way you shop, and the way the companies advertise. And they are seeing that in a lot other retail data where in 2017 if expected they will be more retail store closures on 2017 than they were at 8 point even going back to the recession in 2008. And the way that those companies spend money's fundamentally changing. So with people like RadioShack, Payless, Unlimited, these other companies facing such difficulties, you can see statistics like what we summarized in this box on Page 4 of the presentation where you can see things like magazine ad pages down over 15% versus the same period last year. So for us those phenomenon manifest themselves in particular weakness in our coated free sheet business. Also if you look at our industry collectively right now, there's excess inventory with a supply base with customers put that together with the idling of A3 and the mix management project we had associated with that and you get some challenging sales numbers for the first quarter. Competition heightened and in the first quarter we see competitors are buying and fighting very much for those marginal tons that's where mills profit it made in the last few days of the month and we're seeing more and more competitors trying to move upstream into a higher price per ton products. So despite this pressure though, we expect to maintain a leading position. We've got a whole variety of initiatives I'm going to talk about the targeted panel growth, things like digital or other product lines. We have a variety of countermeasures in place to address these challenges. The downward price pressure continues so the vector is continuing to go in a negative direction if you look at graphic pricing for the first quarter of '17, average selling price per ton compared to the first quarter of '16 it's off about 3%. Imports continue to be the biggest problem, the largest threat to the business but it's very important to mention then with the euro going to $1.11, that certainly headed in the right direction. Our hope is very different. So the outlook for pulp pricing on third-party sales is quite positive. We've got a number of successive price increases there and we have good momentum with that business. On to the next slide, which is Slide 5, specialty products, 23% of our Q1 sales there is meaningful growth potential there. It's becoming more and more important part of the business going forward. When we flow to specialty, the product line, we're referring to all the especially products that we make across the whole system. When we talk about the specialty mills, we're principally talking about Stevens Point and in Andro. So we've got particular strength in machine glazed products. We launched the natural Kraft grades in the first quarter and we expect to continue to achieve significant gains at A5 in Androscoggin as we built up the pipeline there. So to give you some data as examples, we had 70 samples requested for A5, quoted 46 different customers, 147 different product combinations were bid, we got many trial roles that we provided, we're waiting on feedback on and we got several customer scale-ups that are imminent. And also the mix dynamics in the specialty business are very different than in graphic. Our average selling price per ton in this part of the business is actually up 2% if you compare it to the same quarter of '16. The Androscoggin specialty mills is also being evaluated for additional capital investment opportunities to support the continued upward growth trajectory of that business. So on to Page 6 of the presentation, we've given you an overview of the end markets but the key question is what are we doing about it and what we really need to do is to accelerate the rate of change in the business. So first thing is to focus on what you can control and really go after the cost side of the business. We have put together down in writing and rolled out a very detailed action-oriented tactical plan for the balance of 2017. That plan literally has hundreds of initiatives in it and the work is in process on those things right now and it's been embraced by the senior leadership team of the organization. Our operational excellence program, which we refer to as RGAP which is short for realizable gap, where that comes from is comparing where we're at with our metrics relative to world-class benchmarks identifying what those reasonable gaps are and putting projects in place to attack those gaps. So it's an effective countermeasure. We have 662 initiatives in process right now, targeting 55 million of net improvement in 2017 and that was after a variety of categories, so that after spending, that goes after productivity, it goes after reliability, it goes after yield and we only have 13% carryover from the prior year. So the vast majority of that is all fresh initiatives. Our cost reductions are going to exceed, the announced 10% SG&A overhead reduction goals for the full-year. We expect $25 million in savings to be realized in 2017. There will be about eight $2.5 million or so restructuring charge associated with that. Run rate of those savings will be $30 million plus as we exit '17 going into '18 and there is a lot of changes that led to changes. Changes in headcount, changes in reporting structure, rightsizing the business demand, but we really lapsed no stone unturned and challenged every cost category you possibly think of them and we're by no means done yet. So from a small stuff all the way to big items are being looked at, big items like our union contracts, which simply don't have long-term sustainable economics of them. So when you have falling prices and falling volumes on the majority of your business, you just can't have rising costs. The mathematics of that simply doesn't work and has to change. On to the next slide, Slide 7, we're also ambitiously going after the balance sheet to release sources of cash on there. So for instance on inventory there's considerable upside by reducing inventory. We think we can get north of $20 million out by the end of the year. More dollars would be expected to come out in 2018 and basically what we're doing is we're going to be taking some downtime. We're going to be synchronizing supply with demand, but really it's about fundamentally changing the whole systems. So we brought in some outside experts from Apex to help us run a formal project there and while we're working paper inventory out of the system, we’re going to be continuing to make pulp to mitigate the negative impact of profitability associated with taking downtime. On the payable side, we're going to be working with our suppliers to extend payment terms quite simply they'll either conform and go along with that in terms of extending terms for they won't be suppliers anymore. We're also looking at all of our production lines across the company and applying a heavy level of scrutiny to look for smart capital investment. So trying to answer the question are there capital investments that we can make from relatively small dollar amounts that have large returns on investment that start to fundamentally change what we make and who we sell it to. So we brought in some outside experts of successfully done conversions in the past to help with that project but really what we want to do is we want to reframe, reposition or so to figure out how we thrive in this dynamic changing marketplace that we have. We’re going to take the best ideas we’re going to put them into very well diligence detailed business cases and we’ll make choices from there, there is more to come on that on future calls. On Slide 8, the $25 million OPEB gain in 2016 so that $25 million is a one-time gain so that is behind us in 2016 but we do expect additional upside going forward that upside is estimated at $3.5 million in 2017. We’re really starting to fight back on input cost inflation, so a lot of surcharges are coming through, lot of our cost increases for suppliers primary problems I think like latex, titanium dioxide, if you look at it on net basis it’s about $24 million of headwind there even though we’re favorable in some categories like wood and some others. So we're just saying no to price increases and qualifying other sources if our suppliers aren’t going to work with us to compromise on that. Everyone who is supplier to Verso needs to recognize that they are all part of the same supply chain and need to show flexibility with us and those that do show flexibility and those who are reasonable in those negotiations are going to have long-term extended fruitful partnerships with the company and those that don't work with us. Information technology cost is a real challenge for the company associated with the architecture, the complicated architecture of the legacy systems we have. I expect that we will announce a new leader for IT within the next two to three weeks it’s a very large cost category for us. We’re going to be targeting the amount that we spend in outsourcing in particular as they considerable spend with third parties. But really what we need here is a future state defined that’s flexible, that’s cost efficient, creating a roadmap to getting there and work harshly to make it happen. So on to Slide 9, the bottom line here is that the treadmill affect of the graphic business, the erosion that’s happening there is accelerating. So in response to that we've heightened our sense of urgency to reduce cost, to reposition, restructure the company, to look at the balance sheet for sources of cash. And the good news I can tell you is that opportunity do abound so we have a target rich environment to go after a lot of value creating opportunities. The tactical plan for 2017 is done, so we know exactly what we need to execute this year. Now we’re putting our sites on the out years in 2018/2019 and beyond starting to find a strategy for the future and I’ll have more to say on that on future earnings calls but rest assured that we are considering every possible alternative. So we’re going to continue to exploit the efficiency of this extensive low cost mill system that we have and we’re going to capitalize on the markets receptivity to the specialty digital pulp products where we could pull really hard on those growth levels. So we’re going to be very decisive. We’re going to make bold moves, we’re going to be very tenacious in our efforts and work extremely hard and if I could leave you just one closing thought, one message from this call today is that we’re going to focus intensively on the things that we can influence and what we can control and the leadership of this company will think and take action like owners. So with that I'll now turn it over to our CFO, Allen Campbell.
- Allen Campbell:
- Thank you, Chris. Like to turn forward to Page 11. In addition to natural kraft launch that Chris mentioned, we launched brilliantly brighter, a better whiter sheet with improved print reproduction, an ideal TrueJet another introduction in the growing digital market. We’ve announced multiple price increases in pulp to-date which is improving a price from a low level from the last half of 2016. Unfortunately we’re not able to realize price increases and supercalendar, and coated groundwood that we previously announced last year. We did implement a single order entry management system called project fusion in January this is part of our continued consolidation and streamlining of the infrastructure of Verso. We idled our A3 machine in Andro this is a mill that move product into the coated groundwood market. Our results were impacted in the first quarter by unfavorable raw materials results significant increases in latex and other chemicals – able to offset some of that by favorable wood purchases. During the quarter we pay down approximately $12 million on the term loan. Page 12 we saw P&L for the quarter as it’s compared to the predecessor period same period last year sales were down 10.7% as volume and price drove lower revenue due to competitive market pressures and idling of our A3 machine. If you look at the SG&A line you’ll see some noise there because of the reporting period last year - but SG&A was lower by $6 million due to elimination of pre-reward related cost $7 million that was reclassified and part of our changes an accounting policies between periods and $1 million in lower spending. Depreciation is expected to be $9 million a month going forward. We took an extra $6 million charge in the first quarter due to A3 acceleration. Page 13, we walk down to our adjusted EBITDA for both periods as you can see our EBITDA went from $40 million last year to $26 million this year. The adjustments to 2017 are fairly standard and related primarily to ongoing costs that are liquid closed mill and primarily severance and restructuring cost beyond that. Prior year we had a lot of noise due to reorganization and asset sales. CapEx was pretty much flat year-over-year at 11 versus 10. Going forward to Page 14, we show the bridge walking at $40 million to the $26 million of adjusted EBITDA. The biggest hit was obviously in price and this is what was going on in the marketplace we had to react to. Our prices are down $23 million year-over-year. We are able to counter that with some of our GAAP lower maintenance spending, operation savings and lower corporate costs to the tune of $60 million in OpEx and $6 million in corporate costs. Our mix was very favorable as mentioned earlier we’re moving more into premium digital and specialty grades that mix is offsetting the volume decline we have been primarily in the – other graphics paper area. Market downtime it’s little higher than the first quarter of 2017 as we took some adjustments to inventory in that time and we see other costs were up for so that’s the bridge going from $40 million to the $26 million. I want to share some key metrics on page 15, we show the shipment in tons in paper down 10% year-over-year that involves primarily coated groundwood web and coated free sheet and the A3 that we talked about earlier that’s re-idled. Pulp was up 8,000 tons or 15% year-over-year. Selling prices on paper we're down and we talked about the pricing impact there, mix favorable base price is down also down significantly year-over-year but the first quarter of 2016 was our high point in pulp as the market prices declined through the year. And we are now above last year's prices in the current quarter and we expect that to improve as we go on. Paper production was down 10% driven by the idling of A3 machine some mix changes as we transferred some product around and some reliability issues. Page 16, we show our liquidity first quarter is traditionally a time where we use a lot of cash as our commercial rebates are paid out, working capital bills and some comp payments are made this continued in 2017. However remains strong liquidity $141 million for the period. Net debt remains very manageable at $350 million. Excess cash flow of payment was made at $7.3 million was paid out in March at the end of March of this year which was in addition to our normal amortization. Our total leverage ratio set to 1.65 well under the covenant maximum on 2.5. Moving forward to Page 17, we want to highlight our debt maturity schedule as you can see the majority of our debt is not due until 2021. Our term loan is due in October of that year we have $200 million of face value on the term loan, of course amortization is 4.4 and starting with the first quarter there is a excess cash flow sweep which is 75% of excess cash flow that go against the term loan. On ABL, we have committed facility up to $375 million final maturity date of July 2021. We’ve utilized $157 million as of March 31. In closing, we’d like to provide some guidance in the second quarter we're projecting sales in the range of $575 million to $595 million. We expect the price pressures to continue. We're projecting CapEx in the range of $13 million to $16 million and another thing we're doing in the second quarter is we’re moving our heavy maintenance up into the second quarter of 2017 by doing this that will allow us to take advantage of some spot business and customer flexibility as we would have machines available through the last half the higher selling season. So that isn’t change from prior years you'll see it in the LTM impact because in 2016 the high maintenance period was the third quarter we’re moving into the second quarter. So the LTMs will show an impact from that but we’ll put the company in a better position to take advantage of spot business going forward. For the full year, we’re expecting CapEx to be in the range of $55 million to $65 million. It will swing based on some conversion opportunities we may or may not be able to put into this year. We were down from $73 million in 2016, maintenance costs clearly we would be able to manage effectively. We expect to spend in the range of $210 million to $220 million in 2017 this is down from $235 million in 2016. We’re projecting SG&A to be in range of $110 million to $115 million for the year. Cash pension funding expected to be between $32 million and $36 million and cash taxes is expect to be less than $5 million for the year primarily state income and franchise taxes. At this point I like to return the call to the operator. Ryan, open the line for questions.
- Operator:
- [Operator Instructions] Our first question today comes from Hamed Khorsand with BWS Financial. Please go ahead.
- Hamed Khorsand:
- First if you could talk about converting inventory to cash, do you think you can convert enough inventory to cash so the maintenance expense in Q2 would not require to access your credit line?
- Allen Campbell:
- I would expect our credit line to be plus or minus the same level we saw in the first quarter because of activity going on maybe able to draw it down a little bit more.
- Hamed Khorsand:
- And then on pricing, if you could just talk a little bit more about what you're seeing there on q-over-q basis and what the revenue impact will be with the maintenance shutdown and what you can do with inventory to offset that shutdown?
- Allen Campbell:
- Yes, I’ll talk about pricing generally speaking and then I’ll take the inventory and the maintenance question but pricing generally speaking I mean it’s phenomenon that I talked about in my opening, is just you’ve got – supply that exceeds – I mean demand, supply exceeds demand, excess inventory in the market not only with us but with headers and with customers as a whole just naturally puts more and more pressure on prices. It’s a very difficult thing to forecast particularly with the euro it’s trying to improve in the right direction for us. So at any given time if you ask me kind of what’s going to happen with pricing my reaction is that it’s going to stay where it’s at until forces emerge us more powerful one. But I think if I was thinking about pricing for the balance of the year, the best guess I would add right now is the similar to what we have now - which is what we reported in the first quarter to perhaps down a little bit, because these forces are still there. But we’re hopeful with regard to what's happening with the euro - but maybe those trends could start to reverse, but it's very difficult thing to forecast.
- Chris DiSantis:
- And a question on inventory with the shutdown it will be able to convert inventory to cash as we sell out of stock to our customers the way we have down time so that would help from a cash standpoint to manage the extra maintenance spending.
- Hamed Khorsand:
- And if I could just ask you one final question, how quickly can we see European exports decline if the year euro hits $1.15?
- Chris DiSantis:
- It's a good question. I mean there's a big difference between $1.06 where we’re at for a while and a $1.15 and you could do the math on what that does in terms of a percentage price decrease for a European supplier selling into the U.S. market. I think at $1.15 its starts to make a difference but at the end of the day I mean the pricing is really a behavioral outcome. So I can't say what our competitors will do you - with pricing kind of irrespective of what happens with the euro. And certainly adds pressure to them from a pricing standpoint, but what they will do is that's completely up to them that their decision.
- Operator:
- The next question today comes from Andrew D'Silva with B. Riley. Please go ahead.
- Andrew D'Silva:
- Can you please maybe provide a product breakout as a percentage of revenue like you do in your 10-K and then while you’re digging that up maybe just discuss SG&A a little bit obviously big sequential uptick, I was just curious to any particular reason for that. And then your guidance implies that we should be seeing that downtick over the next few quarters should we just expect couple million dollar reduction every quarter is there going to be more dramatic change going to Q2?
- Allen Campbell:
- So let me make sure I understand your first question correctly which was just regard to the breakdown of revenue by product line?
- Andrew D'Silva:
- Exactly.
- Allen Campbell:
- Yes, I mean we could - I’ll give to you so overall on Slide 15 it’s broken down generically from 72% graphic, 23% specialty and 5% pulp, are you asking - we start to go product line by product line with - the way.
- Andrew D'Silva:
- What was printing paper for the period you usually break that out with coated and uncoated free sheets kind of lump together that’s printing paper that’s your biggest I guess product line that you list in your 10-K?
- Chris DiSantis:
- Yes Allen.
- Allen Campbell:
- Yes let me see what we have in the public domain and then see what I can help you with there.
- Chris DiSantis:
- At this time for the first quarter this is what we were showing which is the graphic, specialty and pulp split by revenue. I mean the majority of the graphic segment is what you're asking.
- Andrew D'Silva:
- Yes, I was just trying to figure out that coated groundwood versus coated free sheets and uncoated free sheets dynamic and how that will be shifting with the idling of A3 but we can discuss that offline if you want just may be.
- Chris DiSantis:
- Let's talk in general. I can give you generally speaking - one of the biggest contributor to the revenue decline in the first quarter was A3 idling which was coated groundwood product as part of the mix management project to exit lower margin product line, that's rapidly declining business with a lot of price pressure very difficult to keep the machines full. So if you’re looking at quarter-over-quarter revenue decline, I don’t have the exact math in front of me but that would be a substantial contributor to the revenue decline quarter-over-quarter is exiting that product line on A3 production and Androscoggin.
- Andrew D'Silva:
- And how about with SG&A question. Just trying to figure out the upticks for Q1 what was rationale there. And then when we start thinking about modeling out should we expect a pretty dramatic change from Q1 to Q2 or should be more gradual throughout the year couple million dollars per quarter to get your target for the year?
- Allen Campbell:
- Well you’ll see that the first quarter SG&A will be our highest quarter. We’ll see it tick down in the second and then relatively smaller tick down since the third and fourth. So you'll see a larger drop in the second quarter and we gave you a guidance of 1.10 to 1.15 so you can see where we were in the first quarter, it will drop more in the second and level out in the third and fourth. So slightly down, that make sense.
- Andrew D'Silva:
- Yes, absolutely. And then moving over to gross margins obviously compress relative to historical averages you mentioned pricing pressure - but it continues to be quite variable. Were there any other special items that might not continue in Q2, Q3 and Q4 that we should expect to increase margins, our gross margins the year goes on or are we looking this is a new norm?
- Allen Campbell:
- I don't think we’re necessary looking at this new norm. I think the second quarter will have some headwind regarding the higher maintenance spend that we’re going to have and the amount of downtimes that we will take. So there will be a tremendous pressure on gross margin in the second. Moving forward to the third and fourth you'll see - are some of more of our GAAP savings kick-in in the last half of the year so that improve it. Hopefully we'll see some tempering of our raw material input prices in that period but we don't know we’re still waiting. And then you'll also see our hope is that we’ll have relatively full production during that time period and some opportunities take advantage of market price. So it will be headwinds in the second we’ll have better tailwinds in the third and fourth.
- Andrew D'Silva:
- Was there a reason last year that you did the majority of your maintenance expenses in the back half the year, it seems like strategically - would have made more sense to follow the methodology you are this year. And then because of that should we expect the back half of the year to perhaps to be more fruitful this year than last year because you’re able to pick up on may be more variable opportunities that you weren’t in Q3 and Q4 of 2016?
- Allen Campbell:
- As far as the volume, we’re going to have the market issues but we’ll be able to respond better on incremental business here and there. We don't know - at what level that’s going to be able to offset it.
- Chris DiSantis:
- He is asking the question why did we do it the way we did last year I know why.
- Allen Campbell:
- Last year - it became an issue for the last two years it was the timing of the marketplace, it was what we're looking at and our forecast we were using recent data, we were anticipating higher volume, the imports came in higher than we expected, the market dropped faster than we expected. So therefore we had to react in the last half of the year. So we let the market do it to us more in prior year's maybe in this year we say we’re going to manage it the way we want to.
- Chris DiSantis:
- Yes to answer your question the second quarters more logical given the seasonal ramp up at the end of the year that’s why we’re doing it here.
- Andrew D'Silva:
- So last couple questions here just when we start thinking about adjusted EBITDA obviously you have various mills some of them are probably doing much better than the others. Can you kind of at least give us a sense of what the impact to EBITDA was from underperforming or unprofitable mills for the quarter so we kind of figure out what the value of the company might be in different scenarios in our internal models.
- Allen Campbell:
- We have not put in public domain profitability by mills.
- Andrew D'Silva:
- May be just lumping it together.
- Chris DiSantis:
- That's what we can position sometimes.
- Allen Campbell:
- We have given our performance data by mills so we prefer not to comment on profitability by mills at this time.
- Andrew D'Silva:
- Maybe more general and that just profitable mills or in general I don’t know how many you have just lump them together what would their EBIT have been for those mills combined not a mill-by-mill basis?
- Allen Campbell:
- I think there is some generality but I think we’re comfortable sharing – look at our average EBITDA and you look at our mills and what they produce and you look at the products they deliver so specialty products primarily Steven's Point good margin higher than average. If you look at Quinn which is one of our most people and third-party states one of the most productive mills in the world I would put that above average of margin. Then you start looking at some of the others that have a little bit left product offerings, a little bit more a different cost structure. And if you run into a couple of mills that are significantly below average and that’s driven one primarily by their product line and two by their complexity. And then so we’ll probably have two very profitable mills, we have two that aren’t so profitable and the rest are in the middle.
- Chris DiSantis:
- So generally speaking from a product line standpoint especially giving more profitable as the traditional graphic business and then as you look at the system of mills wouldn’t surprise you that our super calendar mill for difference or so on the Duluth, Minnesota is significantly less profitable than like Steven's Point or Quinn or some of the other companies. So but we have quite range, quite a diversity of profitability by mill in the system. So obviously that something that you look at from a strategic standpoint – now how do you allocate dollars how do you allocate capital investment what your strategy for the company as whole as well as things impacted.
- Andrew D'Silva:
- I guess maybe you can just answer it in this way if you were to remove the lower performing mills would your EBITDA be higher than it is right now?
- Allen Campbell:
- If we are able to take that better volume and move to other mills the answer is.
- Chris DiSantis:
- No, he is asking if you have seven mill systems and you take the three the lowest profit mill out of it as profit go up is that what he is asking?
- Allen Campbell:
- If we can get all the costs out you can make that happen however with fixed cost of the mill property, insurance, taxes that type of thing it’s not that easy to do.
- Chris DiSantis:
- I can answer like this I can say look there are products and mills that contribute negatively to profitability and we’re going to fix them. And if they don’t get fixed – if they can’t fixed themselves than the math will fixed it for him but we have to address some mill related issues and a lot of these tactical initiatives that I talked about focused on cost reduction. Our targeted at those lower performing mills to make sure that they contribute positively to the overall total.
- Andrew D'Silva:
- Absolutely and that’s a great segue and my last question obviously you gave a great outline of what you plan in 2017 is there any sort of deadline that we should expect for us to be able to hear about what you’re plans are to utilize that massive asset based perhaps better position other mills so you sell off some mills to better position you with other mills in more favorable demographic such as specialty paper is there any timeline where we should expect that decision be made there and maybe a little color on what you’re thinking at this point at least?
- Allen Campbell:
- I can’t give you a deadline and say this is a day on the calendar because basically in order to make those kind of decisions you have to thoroughly diligence all of your options. So I don’t want to put a date out there and says that by this date we’ll be announcing this or that and of course that’s a Board level decision, so it's going to take a little bit more time but not a lot of time. I don't see it as something that 2018 events, it’s something we're working ambitiously right now and when we have something to announce, we're going to announce it but that's you’re thinking about trying to do the best possible thing for the shareholder, you have to get all those cards out on the table sooner rather than later. So, we've done that and when we’re looking at all those options and I would expect one, I mean the next earnings call to be able to give more detail on the next earnings call after that further detail and that sort of thing. But I don't want to put a deadline out there that says when we're going to decide on that yet, it's when we have a strategy put together as management and present it to the board, the board approves it that is something that we can share with the investment community.
- Andrew D'Silva:
- But at a high level, it's probably fair to assume that this year sometime we should have some sort of answer as far as that kind of strategy goes.
- Allen Campbell:
- Yes I would think so.
- Operator:
- Our next question comes from [Matthew Stagger with Stone Lion]. Please go ahead.
- Unidentified Analyst:
- With regards to potential trade protection you have a new administration in Washington. Do you see this new administration do anything to protect sort of trade protections for our products?
- Allen Campbell:
- I mean it's really hard thing to comment on. We just - the way that we approach it is, we just focus on what we can control, so if the government, the administration winds up do in place that are probably for our business I mean absolutely we’ll take it but we don't put together a strategy and a business plan that's dependent on that. We hope for dividends that have happened and are good for the industry and good for our company but we're not as we set out our strategy and our tactics for operating the business every day, we’re not banking on anything happening.
- Unidentified Analyst:
- Do you think that the case could be made that there is a legitimate need or that there would be - there would be grounds for trade protection?
- Allen Campbell:
- Well there are variety of trade protections that are already in place, I mean you kind of got to go product by product and that is what I’m saying. But no I mean I don't have any comment on that. You talk about importers that are coming in from Europe and…
- Unidentified Analyst:
- Yes exactly, counter veiling duties or you would have I mean obviously tariffs et cetera?
- Allen Campbell:
- Yes I don’t have a comment on that other than to say that the exchange rates the last I mean year or so have been very, very favorable for the Europeans.
- Unidentified Analyst:
- And obviously I mean you had commented on this before but if you do have 10% move from here, positive manner for our company, I guess when would you start to see the benefits of that trickle through our let’s say revenues and profitability?
- Allen Campbell:
- Let’s say it is a major change in the Europe but that puts some pressure on Europeans but their pricing policies or their decisions and we have, we have no influence on that. So I would be completely speculating as to what a competitor might or might not do in response to changing exchange rates and it just won’t be appropriate for me to comment on what someone else’s strategy might be.
- Unidentified Analyst:
- I guess is there pre-buy I mean let’s say you had 10% move within a quarter directly would you see that benefit translate into Q4 or would you see it two quarters later or how should we think about the trickle through there?
- Allen Campbell:
- I mean it's really hard to say I mean because you know there are all kinds of contracts, I mean in this industry, I mean some are longer term contracts, some are I mean just go purchase order, purchase order. So I just feel like I would be speculating to guesstimate when a move in the Euro would change because it could have, it could have a big effect or no effect at all. I mean you can get major run in the Euro but competition decides do whatever they're going to do and anything which is would be speculating.
- Unidentified Analyst:
- Last question for me is on SG&A savings. You touched on the fact that there should be $25 million in 2017, I think you should run rate that would be $30 million in 2018 does that $25 million, does that account for costs that you're pushing into COGS? Should I think about that $25 million for 2017 as a net number?
- Allen Campbell:
- That’s a net save and SG&A overhead, yes.
- Chris DiSantis:
- So it is overhead and COGS.
- Allen Campbell:
- There is some of that $25 million include a little bit of COGS.
- Unidentified Analyst:
- It does. Okay, and then the amount and you talked about $30 million in 2018, I guess that was because COGS were taken on 2017 will start to see that in 2018?
- Allen Campbell:
- It’s a full year effect, so the reductions that we put in place some of them started early in the year, some of them are happening right now. So it’s basically, if you like annualized our fourth quarter run rate of savings and roll it as an exit rate into your pro forma 2018, that is the amount of annualized savings, realized savings this year of called 25 and an annual run rate of savings of 30 for 2018.
- Unidentified Analyst:
- Okay. And then do you expect that potentially your cost savings this summer could be conservative, you will actually do more or is there more opportunity for cost savings above and beyond?
- Allen Campbell:
- Yes there is more opportunity for cost savings, so we'll be getting at other categories and rolling out this in phases, so we'll be attacking more cost categories as the year goes on and of course in 2018, there will be a whole set of initiatives well some things I mentioned like information technology and some other areas they're a little bit, they're harder to get at as opposed to just sort of making it happen immediately. They require some structural changes and how we do business. So we're going to, we're going to be working all those things and I would expect on future earnings calls that you would be seeing additional savings announced for 2018 and beyond.
- Unidentified Analyst:
- Okay. I mean the cash cost of the cuts in SG&A that were taking I think you said there is a charge of $2.5 million, is that pretty representative of the cash cost will be for this year?
- Chris DiSantis:
- Yes correct.
- Operator:
- Next question today comes from [Michael Rabidan] with Nationwide. Please go ahead.
- Unidentified Analyst:
- Given the secular shifts and market shifts out there, have you seen any changes in seasonality to the businesses regarding operations and working capital? And secondly you mentioned working with suppliers how what's been the response so far from your supply base. And lastly I noticed there was a working capital use this quarter and a chunk of it was accrued liabilities, what exactly - can you give us little more detail of those liabilities as well as that more of a seasonal occurrence and that is it. Thanks.
- Chris DiSantis:
- Yes I will take the first two, so in terms of seasonality, I wouldn’t expect any change and I think you can sort of expect similar kind of rhythm to the business going forward with holiday season at the end of the year and that sort of thing. And then as far as suppliers go, this is a very fresh update in terms of negotiations with the suppliers, it's really just kicked off in the last few weeks and it's kind of what you would expected some of them are very flexible and reasonable and willing to work with us and there are a lot of new suppliers out there that we haven't done business before that are very excited do get an opportunity to us because we carry a lot of spend. But there are also some that that are taking a hard line and that was the ones that are going to start losing significant amounts of share in time, so it's been a mixed bag so far but to those suppliers out there that are willing to work for those and recognize the same supply chain and we need to work together to those that have been very creative with co-engineering government solutions to reduce costs of both companies. Just I will say thanks for them and thank you for the collaboration. And to those that have been very, very difficult they are going to see the revenue falling surprisingly fast. Allen, you want to take the last one?
- Allen Campbell:
- It's very seasonal for us other accruals that we play out in the first quarter, so there's two big buckets, one buckets are commercial rebates, we accrue against our customer and their volume buys through the year and we make the payments in the first quarter of the following year, so that's a significant number of that. And the other is more of a comp 401K bonus, gain sharing programs that we people are through the year and was paid out in the first quarter of the next year. So those are two big ticket items that we accrue during the year and pay out in the first quarter. Matt that happened that way for several years and so you'll see those numbers rebuild in the next three quarters.
- Operator:
- Our next question comes from [Stephen Frazer] a Private Investor. Please go ahead.
- Unidentified Analyst:
- Just kind of looking at your guys numbers and you guys obviously on accounting from [indiscernible] look equities at 17, what are you guys thinking about in terms of closing the gap between having 20% price to books and how do you evaluate the operating assets best used within operations were sticking action to monetize that?
- Chris DiSantis:
- Well I don’t have anything specific to announce and I could just give you philosophy. But philosophically speaking as it's a very rich balance sheet, these are some of the best assets in the world, it's one thing to see the numbers on paper, it's another to go and actually visit some of these mills, I mean they're incredibly impressive sites that would take a billion dollars, some of them a piece. I mean to sort of replicate I mean that asset if you were to if you would start from scratch. So all those business with lot of receivables, it’s got a lot of inventory but there's a lot of stretch there potentially in the payables to get this big balance sheet with a company and what do you do and philosophically, if you're thinking like an investor which is how we think, you have to either use those assets to generate cash flow and figure out I mean how do we get generate cash flow or how do I monetize these assets and convert them into cash. So all the things that we talked about in terms of tactical cost reduction initiatives, things to manage the mix, things to pull growth levers in specialty and those kinds of all these actions are trying to drive the right, so we have the assets there in great places in terms of access to water, energy, infrastructure, wood baskets we have good teams running them, we have to get those assets to generate cash flow and if we don't have a strategy to get a good return on capital and get those that generate cash flow then you have to look at other alternatives which is if we monetize those assets for cash. But looking at as an investor, I'm sure you guys build models, we build models too, what to do for value creation for the shareholders, we have to look at all those options and say what is the best thing that you could possibly do with this asset base for the owners of the company and that's how we think about it and I don't have I'm not at a point yet I wish I was or I could say this mill we’re doing this, this mill we’re doing this, we’re buying this, we’re selling that, that kind of thing for sale and diligent stage of analyzing all.
- Unidentified Analyst:
- Right but I guess just to clarify from what you said that is now part of internal discussions?
- Chris DiSantis:
- Yes.
- Unidentified Analyst:
- And then I guess final point just related you guys I haven't seen any indication that you guys are taking value impairment charge, is there any reason to believe that book value from maybe material over-statement of what could ultimately be realized or when sale and monetization?
- Chris DiSantis:
- No reason to believe that.
- Operator:
- And the next question comes from Frank Wrangel with Purchase Capital Management. Please go ahead.
- Frank Wrangel:
- You called out labor costs as something that you plan to address, it's wondering what percentage of COGS is labor currently and can you give us some idea of what the cadence of your union contracts because I saw from the disclosures that there is quite a bit of union labor there. What the schedule is for Union contracts and is there any scope to possibly do anything before these contracts mature?
- Chris DiSantis:
- You want to take the contracts?
- Mike Weinhold:
- Yes I will take the contract ones, and I will turn over to Allen to give you some of the math on labor costs. So referring to there, I mean the principal problems I mean if you look at labor costs per mill, it’s some of our union mills in terms of labor cost per ton. I mean it’s just too high and we've got certain rules in place, certain work practices that create certain amounts of premium costs that are just untenable. So we're having discussions at our group mill right now, we expect to be having discussions and be at the table soon with the Escanaba Mill and those are the two that we're focusing on right now. We do have some union contracts at the other mills but those are the two that are maybe getting the most attention in the months ahead.
- Frank Wrangel:
- It’s an open contract there in other words are you down to contract there to a certain expiry date or is it you’re just opening up before the contract expires according to its terms?
- Chris DiSantis:
- No it’s associated with expiry dates.
- Frank Wrangel:
- Okay. What was the labor as a percentage of COGS was about?
- Allen Campbell:
- We don't put it out but let me give you some ranges here, if you look at our manufacturing costs, our biggest piece is maintenance, we told you spend about $210 million to $220 million a year there converses our input costs are higher than that, so that will be our latex that would be or chemicals, that would be wood, pulp et cetera, that would be the next biggest bucket. So then if you look at labor just as a - we haven't put it out there but let me see if I can give you like magnitude you take, it’s a smaller piece but it's a material item that we have because we've inherited some very costly contracts over the years when the industry was at tail day. So we believe there is an opportunity to get $20 million to $40 million better performance on an annual basis just in labor. So we start looking at our targets to market that's the magnitude that we're talking about $20 million to $40 million a year as pretty good cost if that’s the number we can help kind of put that out there.
- Mike Weinhold:
- The challenge is that it takes negotiation I mean to achieve that and part of the problem too is reason that Allen has given you specific number is you’ve got a wide range of diversity across the mills, so it’s not only to give you a generic number on the company as a whole can be a little bit misleading because it varies dramatically in terms of labor cost per ton per mill and that's a combination of how that mill is structured, what products, alternate prices that mill is getting for those products, it has to do with the contracts, I mean that are in place. But if you look at a simple metric like labor cost per ton, we have to do something about the labor cost per ton that we have at Luke and Escanaba. It’s just where we’re at the whole industry.
- Allen Campbell:
- Nice round numbers, 10 to 15, 15 to let's say 15% plus or minus 15% of our production cost is in labor that excludes maintenance, that give you that maintenance number separately 2.10 and 2.20. And then you got 20% to 40% we think very achievable on an annual basis.
- Frank Wrangel:
- Okay. And you also called out IT costs as being an area where you've got some issues, why is IT such an issue for you guys, I mean I didn’t really understand?
- Chris DiSantis:
- So basically what happened when you know the business was spun out from IT years ago then there was a merger put together with NewPage basically two versions of SAP on that, so we're running right now on two versions of SAP and the challenge with SAP is it creates an incredibly high maintenance architecture from our standpoint and also SAP is a challenging system to use for our business based on just how we operate and what we make and what we sell. So long story short, you go through the entire architecture of IT here it's expensive because it designed to be expensive, it's not designed to be fast flexible cost-efficient system and all the modules and SAP that we typically, the reason you get and ERP system is so you can use all of the modules within ERP kind of seamlessly but a lot of the modules just not appropriate for our business so there's a lot of bolt-ons and then there is bolt-ons need to be maintained and they need to be integrated with the SAP infrastructure. So you have two versions of SAP that all these bolt-ons systems operating, it’s a very expensive way to manage a business from an IT standpoint. So I’m not ready to put out numbers yet on what potential savings could be there, still very likely be some investments that needs to be made and - if you stack our IT cost up against best-in-class there is definitely room for improvement.
- Frank Wrangel:
- Is this a two-year issue, three-year issue?
- Chris DiSantis:
- That's a great question so we need to figure out. There's definitely some cuts that we can make that are imminent - couple million bucks here and there but whether you take SAP out as a system and replace with something else that would be a multiyear project. It would have some considerable capital expense associated with it but it would also have some considerable savings. So we have to weigh all that out. But the strategy of the company – they're strict about IT but the strategy of the company comes first and then the strategy for IT comes second. So after we have a long-term strategy that we can announce for Verso as a whole then we'll be able to have an IT strategy for there not one before the other.
- Frank Wrangel:
- One last question on specialty grades, you were saying it’s around 20% of your business currently. What do you think it will be couple of years out I mean what mind of growth rate could we see in that?
- Chris DiSantis:
- It really depends on the strategy that we take for the business. So if we have - just sort of went with it as it is it's probably a middle single-digit growth business but that would be without really pulling hard on some levers and we’re doing an valuation internally right now at Androscoggin for instance where that growth could be substantially more but that would take some capital investment to achieve that. So it’s hard to give long-term projections right now for that business without having clarity on what the whole strategy for the company would be because they - everybody uses the same bank account here you know, what I mean. So we've got to figure out where to put those dollars.
- Frank Wrangel:
- But when you say single digits I mean single-digits are on top of the 20% or the 20% is growing as single digits?
- Chris DiSantis:
- That 20% - call it $0.5 billion or so of revenue for all the specialty lines across the business which is principally two mills Steven's Point and Androscoggin, I’m talking about that chunk of business growing at mid single-digit.
- Operator:
- Ladies and gentlemen, this concludes our question-and-answer session I’d like to turn the conference back over to Tim Nusbaum for any closing remarks.
- Tim Nusbaum:
- Thank you all very much for joining our conference call today. I think that concludes the call.
- Chris DiSantis:
- Thank you.
- Allen Campbell:
- Thank you everyone.
- Operator:
- And ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Other Verso Corporation earnings call transcripts:
- Q3 (2021) VRS earnings call transcript
- Q2 (2021) VRS earnings call transcript
- Q1 (2021) VRS earnings call transcript
- Q4 (2020) VRS earnings call transcript
- Q2 (2020) VRS earnings call transcript
- Q1 (2020) VRS earnings call transcript
- Q4 (2019) VRS earnings call transcript
- Q3 (2019) VRS earnings call transcript
- Q2 (2019) VRS earnings call transcript
- Q1 (2019) VRS earnings call transcript