Verso Corporation
Q3 2017 Earnings Call Transcript

Published:

  • Operator:
    Good morning, and welcome to Verso Corporation’s Third Quarter 2017 Earnings Conference Call. [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 12
  • Tim Nusbaum:
    Thank you, and good morning. The third quarter 2017 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 at www.versoco.com. Joining me today for today’s call is Chris DiSantis, Chief Executive Officer; Allen Campbell, Senior Vice President and Chief Financial Officer; and Mike Weinhold, President of Graphic Papers. I would like to remind everyone that in 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’d like further information regarding the various risks and uncertainties associated with our business, please refer to our SEC filings, which are posted on our website, versoco.com, under the Investors tab. At this point, I’d like to turn the presentation over to Chris DiSantis.
  • Chris DiSantis:
    Thank you, Tim, and good morning, everybody. I’m going to start on Page 3 of the deck here titled Macro Level Update. So let me start with a real high level on the market landscape. A lot has certainly changed in recent months. For one, we’ve seen approximately a 14% reduction in North American coated freesheet capacity. If you look at it, it’s a 4 million ton market. And capacity closures and conversions, for instance, include Appleton Coated and West Linn within the same month. So they announced the closure of 300,000 tons roughly at Appleton, 270,000 roughly at West Linn. UPM, their Blandin location noted that they were going to be taking down their number five machine by the end of the first quarter of ‘18. And some notable conversions include PCA’s Wallula number three line, conversion starting in the second quarter of next year, and Sappi’s Skowhegan Somerset conversion from their number one machine going to paperboard. So we’ve seen some real meaningful shift in the balance of supply and demand recently that’s tightened the market, and we now have a reversal of pricing trends. So price increases that were announced in the fourth quarter include; $40 a ton on both coated and uncoated freesheet; pulp NBHK at $54 a ton; and specialty, depending on the grade, $40 to $50 a ton. As far as the demand dynamics are concerned, we see those same trends. E-commerce continues strong growth. To the extent that there’s new retail, it’s not as print intensive. And the latest update is that there’ll be 9,000 retail stores to close across America in 2017, with big names like Toys "R" Us and LIMITED being the latest additions to that list. Magazine ad pages down significantly; same thing with catalog mailings. Commercial print had a little bit of growth. The imports are still gaining share in freesheet and groundwood, but the absolute value of those gains are down. And from an apparent consumption standpoint, coated freesheet, coated groundwood, down 6.3% and 5.4%, respectively. Flipping to the next page. Specialty products are at 22% of Verso year-to-date revenue. That’s up from 21% same period last year. Our coated machine-glazed products have now hit an all-time record level of tonnage. Uncoated machine-glazed continues to grow. And the number five machine at our Androscoggin Mill in Jay, Maine, exited the quarter at 100% utilization for the first time since Verso’s emergence. Continue to gain share in roll release liner, and we’re on pace for a full year forecasted growth of 43% in that product line, ‘17 to ‘16. Our product development pipeline is robust, particularly on the A5 machine, where we’re introducing a lot of new products. Stevens Point continues to be a machine of new product development with new launches. We’ve got new stuff coming out in release liner and an expanded face paper offering. Graphic products were 72% of Verso’s year-to-date revenue and pulp being the remaining 6%. Performance is improving in those segments. We got growth in digital products, growth in Productolith Pts for the laminates for the packaging market and other places. If you look at the pricing comparisons, our pricing is flat relative to the third quarter of the prior year, but it’s up 3% sequentially since the second quarter of ‘17, that’s a very important dynamic. Production is now back to normal. We have some significant maintenance and inventory downtime events and projects early in the year. And our strategy to do that to take the downtime early, reduce the inventory fast in the second quarter is now paying dividends in the back half of the year, as we expected. Web and SC continue to be challenging markets. And the operating rates of the mills, this is for graphics and specialty, actually, the operating rates of the mills are very strong thought the end of the year. So we are full. Flipping to the next page. I’ll give you some highlights from the third quarter. Allen will give you some more detail as we get into the financial section, but I’ll highlight a few things here. So safety performance is at an all-time record level. So if you look at our metrics for incidents and lost time, they are the best they’ve ever been. EBITDA -- adjusted EBITDA rebounded nicely in the third quarter from the second quarter to $47 million. And when you go through the bridge, just everything going in the right direction in terms of downtime, price, cost reduction, better operating performance, and we’re seeing a diminishing impact from inflation on raw materials. The cash flow performance in the third quarter was exceptional at $40 million. We did a great job on working capital. Took inventory down, again, by another $9 million, bringing the year-to-date reduction to $46 million. And the term loan balance, this is as of October 31, which is better than the number you’d see in the Q at the end of the third quarter, term loan balance currently is at $151 million. We were also able to increase liquidity in the third quarter to $180 million. We’re taking out some letters of credit and just real focused efforts across the whole system, being very intense about managing capital spending, managing the balance sheet. And actually the excess availability at the end of October is just over $200 million currently, and that number is growing. So the combination of being able to reduce debt, increase liquidity simultaneously, that’s a healthy combination for any company. Flipping to the next page to talk about conversions, strategic alternatives. So we continue to do our evaluation of low-capital conversions in the areas of lightweight liner, recycled medium and bag and SBS product line expansions that would get us into higher caliper grades in our products that would allow us to make more packaging-grade-type applications. And we’re deep into the evaluation process on this, and the plan is to make some decisions early next year, and we’re basically just going machine-by-machine throughout the whole system. But one thing I can tell you about projects, which is important, is there’s no "bet the company" type level investments being evaluated right now. So we’re being very careful about scrutinizing risk and reward and seeing which of these projects can we embark upon, get a nice return on capital and do it with relatively low levels of investment and risk. We’ve formally announced publicly the creation of the subcommittee of the board to evaluate strategic alternatives. That committee is being advised by Houlihan Lokey, an outside counsel. And they’re looking at holistically what’s the best thing to do with the company. To do that, you have to go mill-by-mill to work out that holistic evaluation of the whole business with the best thing for value creation. And when you go mill-by-mill, when you look at should this one be JVed, should this one be sold, should this one be kept and invested, the option set is different for each mill. And anytime you make one change at one mill because we’re operating a system, you wind up pushing tonnage around the whole system. So small changes can have big dependent effects on the whole system. So it’s a complicated evaluation, but we’ve made some very good progress there. And as far as strategic alternatives go, I won’t have any further comment on that topic. And looking forward, in summary, on the next slide. The fourth quarter has no planned downtime in it. Order book is strong. In this business, December can be a perennial wild card. But I can say right now, things look pretty good. We expect favorable pricing to continue. I won’t guide specifics on pricing and what we expect there, but I can tell you that this is a highly impactful driver of the profitability of this business, and we’re happy to see it finally restored to more reasonable levels. The raw material price inflation is coming down, but logistics are indeed highly impacted by what’s happened with the hurricane effect. If you look at just in terms of availability of trucking, the rates we have to pay, that kind of stuff’s going in the wrong direction. And just a comment about our supply base. We do expect our suppliers to continue to be supportive of our strategies as we continue to negotiate new terms, new conditions, new pricing levels for 2018 and beyond. But verso now has a leaner cost structure, the leanest that it’s ever had. Everything that we’ve done in terms of austerity and operational excellence and restructuring measures has worked, and we’re seeing the real benefits to the bottom line right now. And in our evaluation of public company comps, from an SG&A standpoint, looking at 10 different comps of companies out there, we’re actually the lowest and the leanest. We’ve retired a substantial amount of debt. So, $60 million of term loan year-to-date has been retired through 10/31, and we are now in the best liquidity position that we have seen since our emergence. So the last time we had an earnings call, I told you there are a lot of things in this business that you can’t control, and there are a lot of controllables, and that we are going to focus very intensively on what we can control, and that’s what we’ve done. So by being very ambitious in going after the balance sheet and managing the business aggression -- aggressively from an operational excellence standpoint, going after projects through all the mills, by commercially making the right decisions, we feel like we finally built some momentum back in the right direction, and we are better positioned for success as a company as a result of that. So with that, I will turn it over to our Chief Financial Officer, Allen Campbell, to talk you through the finances.
  • Allen Campbell:
    Thank you, Chris. I’d like to start on Page 9, and I’ll first go through sequentially how we’ve done on a quarter basis. And we’ll talk about this quarter versus -- the third quarter versus same quarter prior year. In addition to improving EBITDA to $47 million from a loss in the second quarter, we also delivered on value-creation initiatives. We improved accounts payable by $26 million; decreased inventory by $9 million; reduced net debt by $40 million; our term loan, we were able to reduce by $24 million while increasing liquidity by $9 million. Our trailing leverage ratios dropped from 1.99 to 1.78. And in addition, we’ve announced additional price increases in the quarter, as you can see that we’ve listed. Some of the challenges we continue to face is the secular issues around the dynamics of our industry. We will have to remarket our Wickliffe Mill as the buyer candidate did not complete the deal. So we’ll be working on that on a go-forward basis. And as mentioned, there’s been a lot of pressure on logistics, supply chain, freight rates related to the hurricane issues. Moving to Page 10, highlight some of the metrics. We show our total paper business and total pulp. Pulp’s up 11% versus -- in the third quarter of ‘17 versus same period in ‘16, while we’re off 10% on the paper side. Couple of key points over down on the pricing. $859 average ton versus $854, we’re up $5 a ton or 1% versus the prior year. And then pulp’s up $45 a ton or 9%. So that’s been positive to our performance for us. Inventory, another area that we’ve been continually to focus on, we’ve lowered our balance in the September of $399 million. That’s down $30 million from the same period last year. As you may recall, if you look at our volume, it was impacted significantly by our closure of our number three machine at Andro Mill. And I’ll go on to Page 11 to show our income statement. Accounting rules require that we report the predecessor and successor periods separately, but we are showing year-over-year change column that can help you compare the same periods. So the last column year-over-year is the difference between the two, first two columns and the third column. Sales were off $54 million for the third quarter, $57 million negative in volume but $3 million positive in price and mix. As you go through, there’s significantly impacted a lot of fresh-start emergence accounting issues significantly impacted the prior years. So I’ll just move forward to the EBITDA comparison on page 12. The third column walks down our net income of $4 million to adjusted EBITDA of $47 million. We’ve made normal add-backs in this process, and the largest one being the $4 million for restructuring, which is the remainder of some Wickliffe Mill restructuring and our headquarters consolidation. We finished the quarter with a very respectable 7.6% of sales on our adjusted EBITDA margin. We show the bridge in 13 to help understand the walk. We have $50 million in combined periods in 2016. The first one is a very important one, obviously, for us. We’ve had a trend the other way. And it stabilized, and we made some positive movements in the third quarter. Some competitors affected the business, and we’ve been able to pass along our cost increases to our customers. Volume was off $13 million from a profit standpoint; logistics, $2 million hit for the period. We had a little bit of downtime in product development delta of about $1 million year-over-year. We have some positive R-Gap cost-saving initiatives between the operations that reduced our operations cost by $5 million. We incurred $3 million extra input cost, primarily chemicals and some natural gas prices coming off some lows of the prior year. But a good point here to note is our $11 million improvement from our manufacturing and our SG&A areas from cost reduction initiatives we put in place in 2017. So that walks you to the $47 million that we had for the quarter. The volume was 69,000 tons lower, primarily driven by 33 tons less CFS, but 20,000 tons less coated groundwood volume, which is driven by our machine closure number three at Andro. Looking forward to Page 14, we show the year-to-date schedules, but I’ll not spend much time here because there’s a lot of noise in this with the restructuring going on. Sales for the nine months were $1.995 billion versus $1.822 billion for the nine months, a delta of $173 million, and we’ll talk about that in a little bit, slides coming up. As you go through, there’s a lot of noise in manufacturing and noise on SG&A, so we’ll try to pull those out for you later on. So I’ll just -- moving to Page 15. We show the normal walk in the third column there from a net income loss of $66 million in ‘17 to our $69 million EBITDA in nine months to date. The bridge in ‘16 walks through the process that a lot of that’s -- lots happened in this last quarter. We had $136 million EBITDA for the first nine months. We gave up $35 million in price mix. But as noted, we leveled that off in the third quarter. So all that came in the first six months of the year. Volume’s off $23 million from a EBITDA basis. Freight and logistics down $9 million. Operations improvement year-over-year is $13 million, but we made a significant effort reducing inventory, plus we’ve invested some product development time to support the rest of our business, and that cost us about $28 million in overhead fixed costs that were not absorbed year-over-year. Major maintenance, we had a heavy spending in 2016. We do not repeat as much in 2017. So that’s a year-to-date improvement of $12 million. We faced significant chemical price increases and a little bit on energy, which offset our favorable wood prices in the first nine months. But overall, it’s a $20 million hit. And as we mentioned, our continued initiatives in manufacturing SG&A overhead contributed $23 million improvement year-over-year, bringing us to $69 million EBITDA for the nine months. I’d like to point out on Page 17 our cash flow. In the first column, it walks the $47 million EBITDA down to our cash change of $40 million for the quarter. We spent $8 million in CapEx; $25 million came in positive working capital changes. We contributed $11 million to our pension, paid $8 million in cash interest and then $5 million in restructuring and some other things that we had in the third quarter. So net change of $40 million. We used that $40 million to pay $24 million down on the term loan, and we reduced the revolver by $16 million. That brings our net cash change for the year to $35 million for 9 months and puts us in a very strong position as we enter the fourth quarter. On Page 18, we wanted to highlight again the controllables, the area that Chris mentioned that we’ve been working hard on. We put a lot of effort in improving -- toward improving our cash flow, liquidity and our controllable cost area. Some key points. We’ve managed inventory down by $46 million. We’ve negotiated vendor terms, driving an increase in accounts payable of $52 million. We’ve reduced SG&A, and that’s just the SG&A line on the income statement on apples-to-apples basis by $14 million. We successfully negotiated lower level -- letter of credits in the amount of $36 million. Reduced our term loan balance by $60 million. We have improved overall liquidity by $29 million, and we’ve been able to reduce our cash conversion cycle from eight days from 77 down to 69. That’s highlighted on Page 19, where we stand from a liquidity and net debt basis. You can see on the liquidity in the top-left section, we’ve increased from June to September from $171 million to $180 million. That’s the $9 million we talked about earlier. You see letters of credit from June to September went down from $57 million to $55 million. We reduced additional $13 million in October. Net debt at 9/31 was $282 million, and our total leverage ratio 1.78, covenant maximum of 2.25 and fixed cost ratio is at 1.3 versus a minimum of 1.0. To note, voluntary term loan payment of $20 million we made on October 19. This wasn’t reflected in above numbers. That brings our term loan balance down to $151 million. In closing, I’d like to talk a little bit about guidance. We can see the fourth quarter sales improving versus the third quarter. We see gross profit going up due to operational performance improvement, no downtime and the price increases that we talked about. SG&A is going to be relatively flat to down. Input cost, roughly flat. Energy cost, maybe a little bit higher in the winter months. It depends on what we’re going to see in the November/December time frame in our northern plants. CapEx will continue -- this is the time we spend, the third and fourth quarter, at a higher run rate. We’re projecting spend of $15 million to $18 million in the fourth quarter, which will put us to $44 million to $44 million for the year. So at this point, I’d like to open it up for Q&A. I’d like to return it back to Rachel.
  • Operator:
    [Operator Instructions] The first question will come from Hamed Khorsand with BWS Financial. Please go ahead.
  • Hamed Khorsand:
    Just I want to -- first I’ll start with how long does this tightness continue as far as -- the -- now that capacity has been taken off and the amount of reduction you’re seeing in volumes, and do you have any ability to keep producing at 100% or higher from your nameplate capacity?
  • Chris DiSantis:
    Yes, so it’s the kind of thing where, at the end of the day, we’re still making graphic papers. So there’s still going to be a certain amount of market erosion that’s happening every year. And in order to really answer that question, you’d have to have a long-term outlook on what’s going to happen with those supply-demand dynamics. What I can say, and we don’t have a crystal ball, so I can’t look out years with that kind of dynamic. But as far as the next couple of quarters are concerned with what has been closed and what has announced to be closed and picking a reasonable rate of erosion in the graphic market, yes, I mean, it looks good. I mean, it looks like we’re pretty full for the next couple of quarters. Looking out beyond that, it’s more difficult. And also there’s another variable that comes into play, which is what’s going to happen with imports. And it could -- that at that scenario, it could loosen up or tighten up based on exchange rates and based on capacity decisions that are made overseas. So it’s inherently a difficult business to predict, but I can say right now, the fourth quarter, first quarter, I mean, looks pretty good.
  • Hamed Khorsand:
    So my next question was how much of the book right now is at spot, spot prices?
  • Chris DiSantis:
    You’re saying how much of our sales are variable in nature, such that price increases would happen quickly as opposed to longer-term contracts? Is that what you’re asking?
  • Hamed Khorsand:
    Well, specifically, in this quarter, given that there’s been so much events going on with your competitors closing, I’m assuming you’d landed new customers and so forth. So there’s got to be more spot activity now.
  • Chris DiSantis:
    Yes.
  • Mike Weinhold:
    Specifically, it varies certainly by product grouping. But on average, we have, I think it’s safe to say, roughly 50% of the business transacting in the spot market. And what is different about some of the application of these price increases is the timing of them, and they happened to coincide with timing for some of the program or contractual business negotiations for next year. So you get the positive effect of that as well. So it’s not just dependent on transactions in the spot market.
  • Hamed Khorsand:
    And my last question is how long before we see greater price impact? I mean, it was only 1% in Q3, and I think you’ve announced something in excess of 7% so far, accumulative. So we haven’t really seen any much of it.
  • Chris DiSantis:
    Well, I think you see -- I mean, correct me if I’m wrong, I got my guys here, but didn’t we see a 3% improvement sequentially quarter-over-quarter? Yes. So year-over-year, I mean -- so I described kind of what’s happened with price increases in the third quarter as being more restorative with regard to getting comps to next year. And what happens is, I mean, it phases in over time, but we can’t guide specifically how much of it we’re going to be realizing, but we can certainly talk about it in hindsight.
  • Operator:
    The next question comes from Andrew D’Silva with B Riley FBR.
  • Andrew D’Silva:
    Just a few follow-ups here. As far as the price increases that have been announced, particularly the July price increases on the coated lines, has that -- have you seen that stick at this point? Have you been able to actually get that price increase to pass-through to your customers? Or is it still in that transitive process at this point in time?
  • Mike Weinhold:
    We have had, I would say, very good success in pushing through the price increases and bringing those to the bottom line. I think it’s important to understand relative to the price data shown, we have price movement on certain grades. We don’t have price movement on all grades. So you have a dilutive effect on the total movement of the overall price for the business. But in those areas where we’ve announced increases in specific grade categories, we feel very good about the realization to date and continued realization as we move into next year.
  • Andrew D’Silva:
    Okay, great. And then just to confirm exactly what’s getting price increases currently in the fourth quarter, you’re also adding another $40 price increase atop the July quarter for all coated products, not just coated groundwood. And then on top of that, you’re seeing of various grades of paper and specialty make-up a $40 to $50 increase, correct, per ton?
  • Mike Weinhold:
    Yes. Just to clarify, on the coated freesheet sheets, there’s not an additional increase on the coated freesheet sheet side of the business. But you’re correct in the other assumption.
  • Andrew D’Silva:
    Okay. And then just moving over to specialty paper at the Andros Mill, I mean, previously, you guys were discussing positive EBITDA impact at that -- benefit of about $10 million, if that mill hit full capacity or that line hit full capacity; is that at full capacity? Is that what you were implying during your prepared remarks? And if so is that -- are you at EBITDA positive right now? And should we figure $10 million going forward?
  • Allen Campbell:
    We’re at EBITDA positive now. The $10 million was at full run rate for a full year. We -- it took us a little bit longer to get there than we originally had hoped, but we’re there now and have got positive momentum going from here. So with the third quarter on, we should have -- you go through four quarters. It’s going to be $10 million -- roughly $10 million better than we would before that.
  • Andrew D’Silva:
    Okay. And with those specialty grades of paper, are you seeing more stability in pricing from an erosion standpoint versus typical coated? I mean, is it a little bit more sticky product where you can control the pricing? And it’s probably, I’m assuming, a little bit more challenging to move over from one producer to another.
  • Chris DiSantis:
    Yes. I mean, it’s generally a stickier product that has less elasticity in the pricing. So yes, there are products that typically take a longer qualification process technically little bit more difficult to make. So yes, you tend to see less beta, less variability on the specialty side of business than you do in graphic.
  • Andrew D’Silva:
    Okay, great. And just a last question for me, and it just kind of revolves around the asset value of your company. Obviously, the book value is still meaningfully higher than the market cap is today. Are you guys seeing any additional hurdles, just from a macro market standpoint, in being able to sell mills if you were to want to? I mean looking at what happened to Appleton Coated, seemed like they had some problems trying to sell Wickliffe, you noted that you pulled it off. So that’s the kind of the first part of the question, is that landscape becoming more difficult to sell mills if you want to? And then back end of the question is, does it even make sense for you guys to sell mills at this point, as capacity has dropped so much more than I think anybody really thought, particularly in this quarter, now you look like you’re at 100% utilization. So does it even make sense at this point to consider that?
  • Chris DiSantis:
    Yes, I mean, it’s part of the complex analysis I said the strategic committee and the board have to evaluate in terms of what to do. I mean, I can just tell you generally speaking, if you have a mill that’s idled or basically been shuttered, that’s much harder to sell than a mill that’s operating and producing. And certainly, a mill that’s operating and producing, that’s profitable and building profit momentum is certainly one that’s easier to sell than one that’s going in the other direction. So -- but yes, we have to make that evaluation as a company. And as far as doing the right thing for the shareholders concerned, I mean, if anybody makes us offers we can’t refuse for any of the assets, there may be things that we’re going to be very seriously considering.
  • Mike Weinhold:
    And before we go to the next question -- it’s Mike Weinhold, just to clarify a data point I threw out earlier. When you look relative to all of the products we bring to market, our total exposure in the spot market with everything brought to bear is closer to 20% to 30%.
  • Operator:
    [Operator Instructions] The next question comes from Sean Kelley with OFS. Please go ahead.
  • Sean Kelley:
    Chris, I think you said this earlier, but as a percentage of total capacity, what did you estimate was removed by closures and conversions both in CFS as well as coated groundwood?
  • Chris DiSantis:
    14%. There’s some -- you can just Google search that. There are some articles out there that break that down mathematically.
  • Sean Kelley:
    And then what’s the update on the capacity Verso has both -- in North America for coated freesheet as well as groundwood? Of the total capacity, how much do you guys control?
  • Chris DiSantis:
    You mean how much -- how big is our total system?
  • Sean Kelley:
    Yes.
  • Chris DiSantis:
    Roughly 3 million ton system with 500,000 tons dedicated to specialty, 2.5 million dedicated to the other grades. So that 2.5 million would be freesheet, groundwood and SC.
  • Mike Weinhold:
    A little bit of pulp.
  • Operator:
    The next question comes from Neilay Mehta with KLS. Please go ahead.
  • Neilay Mehta:
    Just want to follow up on some of your guidance. If I’m looking at sort of the sales going up and some of the price increases you guys have announced and additional ones that might be coming through going into 4Q, how should we think about how each dollar price increase flows through to EBITDA, sort of what’s contribution margin? Because I see you guys are guiding gross profit. I’m trying to get a sense of where that could be for 4Q.
  • Chris DiSantis:
    Well, the business is very sensitive pricing. So you had roughly $2.5 billion run rate. So every point, which is roughly $8 a ton on average, maybe a little bit more than that. So every point is $25 million of EBITDA to the business. So every $8 a ton is roughly that. But there’s a lot of -- it’s a high beta business with a lot of puts and takes into it. So there’s things going on with input costs and you can’t just -- you can’t look at pricing in a vacuum because we’ve got mix changes and volume changes. So generally, the pricing dynamic is a good one for the business. It’s restoring it to more reasonable levels. But that’s not the -- it’s not the only variable moving in the equation as we go forward.
  • Neilay Mehta:
    Got it. Understood. I mean there’s a lot of puts and takes, too. The point I think last year 4Q you guys were similar sort of level of sales and I think your gross margin was $12.7 million if you sort of back out the $25 million gain on the pension issue that you guys gained on. So sales are kind of in that similar level now this year, per your guidance. You guys obviously have price increases. I think last year saw some benefits on the raw side. I don’t know how that looks going into 4Q on the input side. I think the only thing I picked up that you guys mentioned so far is I think some pressure from freight rates. So if I sort of think about the puts and takes, how -- what’s the negative impact from freight rates you think in the quarter? And then how are raw materials or input costs trending relative to a year ago?
  • Allen Campbell:
    We haven’t said exactly on freight and logistics. But if you look through the quarter, it’s going to be -- we expect the fourth quarter to be a little bit worse than the third quarter as far as the impact from that.
  • Neilay Mehta:
    On the freight side, is that...
  • Allen Campbell:
    Yes, freight side.
  • Chris DiSantis:
    Worse than the third.
  • Allen Campbell:
    A little bit worse than the third, yes.
  • Chris DiSantis:
    And then you asked about input cost.
  • Allen Campbell:
    And input cost, there’s just a wild card on energy because the transportation cost in the colder periods of time. But other than that, we’ve seen some abatement in most of the chemicals side. We’re still fighting one or two specific ones. So the rate of inflation is declining. It will still be higher than last year, but it will be not as high as before.
  • Chris DiSantis:
    Similar to the third quarter. I think most input costs, when we say flattening out, we’re talking about flattening out in terms of trending. So it’ll be able to stop some of the increases.
  • Allen Campbell:
    It’ll be higher than last year.
  • Chris DiSantis:
    Yes, so fourth quarter similar to third, but that’s up from prior year. And then freight costs would be going in the wrong direction. So costs definitely higher on those in the fourth quarter.
  • Neilay Mehta:
    What’s sort of the average freight cost per ton through your system?
  • Allen Campbell:
    Can we say that?
  • Chris DiSantis:
    I don’t know if we’ve ever disclosed that.
  • Allen Campbell:
    Yes, I don’t believe we have it out there in the public.
  • Neilay Mehta:
    Got it. That’s helpful. And then I think -- and then you just said also SG&A is down a little bit more, flat to down. How much more sort of cost savings you guys -- I think you have to take out or can take out on the SG&A side?
  • Chris DiSantis:
    Let me take that one. We hit that category really hard. We hit it hard for a couple of reasons. I mean, one, I wanted to get the austerity measures behind us. Those are the most difficult things to do within the company because I mean, the resources you’re cutting are the resources you need to get stuff done. So we need to get that done and get that restructuring behind us. And when you look at -- we’ve had some consultants do studies and we look at public company comps, the SG&A rate of the company relative to its size and scale is really excellent. I mean, it’s at a point now from a run rate standpoint, and you’ll see that in the fourth quarter and you’ll see it next year. It’s really top tier. There’s a lot of other costs in this business. So there’s a huge amount of focus that’s been put on in the $100 million of SG&A in a $2.5 billion company. So the focus going forward really needs to be much more on the supply chain and on operating well, call it the other 96% of the business. So I feel like it’s like we’ve done what a lot of what we could do on the SG&A, and there will still be projects and we still have cuts that we’re implementing continuous improvement. And -- but we might be adding resources in certain areas strategically, in certain groups, that kind of thing. So really, the focus from a cost standpoint going forward is going to be on the supply chain, the prices that we’re paying for all our suppliers and prices for logistics, the spend that we have at the mills. So expect a lot more focus going forward on the other 96% of the pie.
  • Neilay Mehta:
    And just sort of last couple ones from me quickly. What’s the capital spend for 4Q focused on? And then how should we think about capital spend kind of going forward? And then what was the issue at Wickliffe in terms of why the buyer backed out?
  • Chris DiSantis:
    So I’ll let -- I’ll take the one on Wickliffe and let Allen take the other on CapEx. So with regard to the Wickliffe. So the buyer didn’t back out. The right way to describe it would be that we had a buyer, and we thought we had a closing imminent and had all of our ducks in a row. And there are a variety of issues that came up as we got very close, I mean, to the closing date. And it’s nothing, they didn’t discover anything with the asset in terms of environmental or anything like that. It’s a clean site. The issue just came up with their own business plan and their own investors, and we don’t have transparency into that in terms of what happened. But we believed the transaction would go through, which is why I alluded to it last time. But right now, they’re still there. They’re still interested. They’re still working on it. But I think it would be prudent in the interest of the shareholders to expand the marketing for the mill and bring others in to make sure we get a deal and we get the best price possible.
  • Allen Campbell:
    And then on the capital side, if you look at our total spend we’re projecting for the year, it’s a $44 million to $47 million, and that’s in the range of our base maintenance. We had just a little bit in there of some IT investment and just a small amount of the product development, conversion testing, that type of thing that we have going on. What I would expect is that Verso and it’s -- today we’ll be in this $45 million plus or minus CapEx number for base CapEx. And then we may have incremental to that if you’re investing in IT or investing in any conversions. So this year, it’s pretty straightforward base mill capital spending.
  • Operator:
    The next question comes from Adam Ritzer with Pressprich.
  • Adam Ritzer:
    Just had a couple of questions here. Your cash pension cost, what do you think it’s going to end out of this year? And what would you think it might be for next year?
  • Chris DiSantis:
    You mean the cash funding?
  • Adam Ritzer:
    Yes.
  • Chris DiSantis:
    What we write a check for?
  • Adam Ritzer:
    Yes.
  • Allen Campbell:
    Yes. We look at what we’re funding this year. We’re spending about $34 million in cash. We expect that number to go up maybe $15 million from that number for the next year.
  • Adam Ritzer:
    So $50 million next year, roughly?
  • Allen Campbell:
    Yes.
  • Chris DiSantis:
    Roughly.
  • Adam Ritzer:
    Okay. In terms of your term loan, it looks like you guys paid down another $20 million in October. So it should be roughly $150 million. Do you think you’ll make further payments on that in Q4? And when might you try and refinance that? I think it’s what at like 11% or 12%?
  • Chris DiSantis:
    Yes.
  • Allen Campbell:
    While we have amortization payment coming end of the quarter, so that’s a little over $4 million, we’ll look at what happens with Wickliffe, with other opportunities we have, but at that point -- and then in March, we’ll have an excess cash flow payment that will be calculated with fourth quarter earnings. So there’ll be some significant pay down over the -- over December to March time period. Exactly how much it is will be -- is to be seen and based on what we’re able to do all with our cash flow and with our any mill sale we may have. The market -- we’re looking at opportunities. We think there’s opportunities there for us. It’s probably not open through the traditional bond or term loan funding yet, but we’re getting more optimistic as each quarter goes on.
  • Chris DiSantis:
    And we would probably -- I mean, if we -- it depends on the right size and dollar amount and kind of how much capital we need kind of a positive [indiscernible] business, but there are fixed asset financing options out there just based on the incredible asset values that exist at some of the prime mills that there are alternatives with fixed asset financing that would allow us to take out the term loan and take it out at lower rates with no covenants and that kind of thing. So there’s -- the more and more we pay it down, and particularly on the liquidity side, I mean, the more liquidity that we generate, the more optionality it gives us. I mean, look at our business with -- we’ve got $150 million of term loan and $200 million of liquidity. So it’s an interesting comparative. And we still think there’s cash flow to get off the balance sheet, and we also think that the basic fundamentals for the business here are improving. So we have a lot of good choices.
  • Adam Ritzer:
    Got it. So to summarize, more paydowns in December, more paydowns in March. You already said you’re going to have a good Q1. Maybe a Wickliffe sale, see where you stand and maybe at that point in time, look at other types of financing maybe mortgage debt on a plant, something like that?
  • Chris DiSantis:
    Yes, that’s one alternative. And of course, as I mentioned earlier, we’re looking at mill-by-mill strategies, which could affect that as well. So we have a strategic committee that’s evaluating a whole bunch of other permutations as well.
  • Adam Ritzer:
    Got it. And then my last question, I think going back to what you talked about spot pricing versus long-term contracts. First, you said it was 50-50. Then you came back and said spot’s maybe 20 to 30. I guess, what people are really trying to figure out is, you had a $40 increase in July, another $40 in October. At what point in time would we see, hopefully, close to all $80 of that reflected in what’s flowing through to all your customers as their contracts run off, when will we really see the full benefit of that $80 increase?
  • Mike Weinhold:
    Without giving specifics, what I would tell you is what alluded to earlier. I mean, we have the advantage of these price increases taking effect and being announced in a traditional period where some of those contractual contracts are being discussed and renewed for next year. So you have the implementation of those increases to the extent you negotiate those through coming into play. Certainly, some of it is now. Majority would be seen first of the year. And then with the exposure of 20% to 30% in the spot market, you tend to get that quicker. So we’re seeing that come through, and we expect to see that come through as we roll into next year.
  • Adam Ritzer:
    So -- I’m sorry, more like Q1, Q2 as the long-term contracts roll off, I guess, I don’t know if that’s on annual basis, January 1st, but you’re going to see more of the long-term stuff in Q1, Q2 type time frame. Is that maybe more accurate?
  • Mike Weinhold:
    Yes, that’s perfect.
  • Operator:
    Next is a follow-up question from Hamed Khorsand with BWS Financial. Please go ahead.
  • Hamed Khorsand:
    Just two more follow-ups here. One is could you just clarify, given the dynamics in the industry, are you expecting that volumes would actually on a net-net basis from last year be similar to the last year’s Q4 or higher than last year’s Q4? Could you just go into details about that?
  • Mike Weinhold:
    Well, we gave you a range on sales...
  • Chris DiSantis:
    When you say volume, you asking about tonnage, or you mean sales?
  • Hamed Khorsand:
    Yes, I’m asking about tonnage.
  • Mike Weinhold:
    Yes, we haven’t put anything out there. I think what we wanted to state was the sales number we put in our guidance, which includes, obviously, some freight. Remember, we will not have A3, that we produced on last year in the fourth quarter. We talked about some positive things. We talked about the specialty business in the Andro. It will run more tons in fourth quarter this year than last year. For the rest of it, it’s going to be close, plus or minus.
  • Chris DiSantis:
    So you have to -- so the -- and taking out the A3 line at Andro that officially came off-line, was it first week or 2nd of January? So A3 would be fully in December of last year. My guess is running wide open to build up some inventory and that kind of thing. So yes, the comparative would be you’d have to adjust for A3. And then of course, there’s pricing and mix numbers that come into it too. But my guess is that it could be down just because A3 is out from a tonnage standpoint.
  • Mike Weinhold:
    But netting all that out, general activity, I would characterize as more robust in this quarter as we end the year versus last year.
  • Chris DiSantis:
    Yes, for the rest...
  • Mike Weinhold:
    Positive movement for the business is definitely better.
  • Chris DiSantis:
    For the rest of the system, yes.
  • Hamed Khorsand:
    So what I’m trying to get to is that given the dynamics of the industry and the price increases that you’re expecting to go through, how comfortable would you be of gross margin hitting last year’s Q4 levels?
  • Allen Campbell:
    It’s in the ballpark. That’s what I can say.
  • Chris DiSantis:
    But we don’t want to guide specifically. But yes, we can say it’s in the ballpark.
  • Operator:
    This concludes our question-and-answer session and conference. Thank you for attending today’s presentation. You may now disconnect.