Verso Corporation
Q3 2016 Earnings Call Transcript
Published:
- Operator:
- Good day, and welcome to Verso Corporation's Third Quarter 2016 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 reply of this call will be available on the Investors page of Verso's Web site after 5
- Tim Nusbaum:
- Thank you, and good afternoon. The third quarter 2016 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 will refer to during the call are available on the Investors page of Verso's Web site at www.versoco.com. Joining me for the call today are members of Verso's office of the chief executive, including Allen Campbell, our Senior Vice President and Chief Financial Officer; Mike Weinhold, Senior Vice President of Sales, Marketing and Product Development; Adam St. John, Senior Vice President of Manufacturing; and Peter Kesser, Senior Vice President and General Counsel. Mike and Al will be covering the formal parts, the first-page material. 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 will 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 expectations. If you would like further information regarding various risks and uncertainties associated with our business, please refer to our SEC filings there posted on our Web site versoco.com under the Investor tab. At this point I'd like to turn it over to Mike Weinhold.
- Mike Weinhold:
- Thanks Tim, good morning. I am Mike Weinhold, Senior Vice President of Sales, Marketing and Product Development. This morning Verso announced three major initiatives that we believe will have a positive impact on the performance of our company going forward. We will be consolidating our two office location into one corporate headquarters in Miamisburg, Ohio. We will realize SG&A synergies from this move, but more importantly it will provide the added benefit of having all corporate and business lead functions together in one location. We are aligning into two strategic business units, Specialty Paper and Graphic Paper. This move will provide greater focus, responsiveness and accountability. Each business unit will have P&L responsibility and we will develop and implement strategy for responding to this specific market conditions and the unique customer requirements of this business segment. Last we have established a goal to reduce our overhead expenses by at least 10% compared to 2016, an initiative that will be positive and we believe will address some of the competitive environments we are dealing with. Next slide, as all of you are aware, we are operating in a difficult market environment. Imports continue to find the North America and U.S. markets attractive, FX continues to favor import in North America. We are experiencing a continued secular decline in some of our core segments. Many suppliers are targeting growth in a more commoditized specialty market in an attempt to chase and improve margins and key market indicators are challenged. However, turning to slide seven, despite these challenges, Verso has made and continues to make significant gains in crucial areas that are additive to our financial performance. We experienced the seasonal surge in our business volumes as we move through Q3. We continue to do a very good job in managing our finished goods inventory levels. We have announced price prices on two of our product lines, coated groundwood and supercalendar paper, and we expect these announcements to be additive to our price realization in Q1 of 2017. We are selling more of the right products, driving positive mix improvement. We had excellent year-over-year growth in our digital print grades, [indiscernible] points grades, which are sold both in the commercial print segment as well as the packaging end used markets and our MG Specialty grade manufactured at both Stevens Point and A5 machine in Androscoggin. Specific to A5, we are developing new products and customer for the A5 Specialty Paper line, and we expect a $10 million plus EBIDTA contribution from this asset in 2017. With that, I would like to turn the call over to Allen Campbell.
- Allen Campbell:
- Thanks, Mike. We intend to file our Q this afternoon. In our reports, you will notice significant fresh start accounting influences of our reporting schedules and also this presentation. Moving to page nine, we wanted to highlight our financial business results for the third quarter and year-to-date. During the quarter, Verso emerged from the restructuring proceedings, which significantly improved capital structure. At the end of the third quarter, we had strong liquidity at $177 million total. We paid substantially all our reorganization-related payments, and we also made our first amortization payment on our term loan, $4.4 took place at the last day of the quarter. The company continued its improvement in safety with our total incident rate at 1.18. This is an improvement from 1.44 from prior year end. We will talk a little bit later about our impact on the quarter of major maintenance projects, but in the third quarter we had major outage cost at Wisconsin Rapids at $213 million [ph], Luke, Wickliffe and other mills too. One of those mills experienced significant issues returning to service, but its performance improved in the third quarter of the month and we see that continuing in the fourth quarter. On page 10, I just want to talk briefly about what's going on the balance sheet, but as you see here with the Q that's filed this evening. Adjusted asset, fixed asset value to drop from $1.7 billion to $1.1 billion, we wrote-off the debt and other items of about $2 billion, adjusted inventory to fair value, which would have impacted our accounting results for the quarter and we made pension liability, it did increase by $132 million and that was primarily driven by lower discount rate. On the P&L side, you will see some changes that we made. Number one as we move to a practice of expensing our major maintenance as occurred, so therefore our P&L will hit at the same time, our operations provide their maintenance whether provide their maintenance whether it's major or regular. What that means, we will see costs back in the third quarter, we have a large maintenance build hit the P&L as opposed to being spread over future periods. We also reclassify some costs between SG&A and costs to goods sold or costs to goods produce. Prior practice was to have most of the non-mill costs in SG&A, but looking at inventory practice, looking at what's going on throughout the manufacturing environment, we looked at certain pieces and made a -- took a position, whether we would be better reporting costs to goods sold, SG&A, three major areas driving that. Since manufacturing center of excellence, our purchasing or sourcing group, a portion of that is charged as COGS and then a portion of our IT systems and HR related to managing the people in the mills. So you will see a little bit of re-class in the third quarter and we will do that on a go forward basis. There were some one-time items, booked in the third quarter that fresh start requires, some inventory write up to fair value of $41 million and then we have some residual expenses related to the reorg. Moving forward to page 11, we show our P&L for the quarter. We are required to show it in two basis, the predecessor which is through the July 1 to July 14, period and successor from the 15 to end of the month. Well to make the comparison easier, we have added a delta column, the far right hand column of the table, that showed the difference between last year's third quarter and the numbers if you would add the predecessor and successor together, we would see that the difference in the column. For example, the first example sale for $782 million and the third quarter adding the two predecessor and successor period together we would get $675 million or sales decline of $1.02 million. And if you look down to the bottom, combined the EBIDTA will be $50 million for the quarter or 7.4%. So the decline of $34 million from last year to this year, the bottom right hand column, right hand side, you see the drivers, price in this period was down $38 million, driving more than the total difference that we had, offsetting that, you would see market downtime as a positive as we took some last time net debt with our volume minus $7 million, gives you about $6 million improvement in volume. Mix is stable as Mike talked about, where we are heading as a business. Raw material prices were down favorable by $9 million year-over-year, operations $6 million, and then the maintenance costs that we talked about, two things are going on, one is we have that heavy maintenance period as discussed earlier plus we changed our accounting policy to the expense items as they incur. The combination of those two items drove up our maintenance expense $18 million year-over-year. Other costs were down $5 million, the main driver that was the bonus accruals that we reversed in the third quarter of last year of $10 million, so that was $10 negative. On page 12, we add our key metrics in the top left hand side, you see our shipments, pulp down quite a bit, a lot of that is planned as we reduced our capacity and sales to the outside, so pulp is down 20, paper down 9, combined business down 10. Net selling price were down quite a bit on pulp at 12 and paper at 4. Production is down, we don't have our Wickliffe mill -- in Andro, so combined at 7% decline, inventory is down 5%, you see the year-to-date numbers over the far right. Highlights for the year-to-date numbers on page 13, same type format, sales if you add predecessor and successor together you will get a $1.955 billion from $371 less than the prior year. EBIDTA would be $136 million or 6.8% of sales. Biggest driver obviously is similar to what we talked about in the quarter, price down just under $100 million year-over-year for the nine months, volume unfavorable by 30, but mixed to stable by 25, market downtime, as we are more balanced to production demand and sales demand in 2016 it's approve $11 million year, raw material prices by $43 million, operations have done a good job improving their cost structure, payroll by $24 million. Maintenance is unfavorable by $29 million, two reasons are driving that the $18 million that I talked about in the third quarter plus the NewPage acquisition, we made that acquisition, we had some fresh start, purchase accounting entries on maintenance were the deferred maintenance were written-off and it took about a year before maintenance expenses caught up with the income statement. So, the fresh start -- I am sorry, the purchase accounting and the added level of maintenance drove that number by $29 million, the $17 million net favorable, primarily the pension went from favorable in 2015, unfavorable P&L we added 16 and the bonus reversal that I talked about in the third quarter of 2015 also contributed to that number. On page 14, I want to highlight that we have a strong cash flow, we try to take the noise out of the financial statements and in far right hand column, so through nine months, if we look at the line cash provided by or used in operating activities, there is $15 million that the business kicked off but in that number, we spent $15 million for cash reorg, $16 for restructuring, $8 for pre reorg work and $5 million of other non-recurring items. So there were $79 million of cash spent by the business and first nine months numbers, so if you add that back to the $15 million then add the $17 million cash interest that was paid during that same time period, you would have pro forma cash flows provided by operations of $111 million for nine months, CapEx was $55 million for the same time period, therefore pro forma free cash flow of $56 million. From that number, we were looking at an annual interest rate of about, $32 million, so if you take $32 million from the $56 million gives you about $24 million of excess cash flow and then if you add that whatever we expect, in the fourth quarter and generally fourth quarter is the positive cash contributor to the working capital et cetera. So we are projecting anywhere from $25 million to $40 million -- $30 million to $40 mobile plus of cash flow for the year on a pro forma basis in 2016. Turning to page 15, we wanted to highlight our liquidity, we have $177 million at the end of the September, driven by cash of $7 million and capacity in ABL of $170 million gives you the $177 million, bad debt is $325 million at the same time period, couple of items, we wanted to note that, we do not expect that excess cash flow payment in regard for the third quarter, so our amortization payment due at the end of the year was about $4.4 million and fixed costs, coverage ratio is well above minimum requirement. So we are in great position as far as net debt, as far as liquidity, cash position, we show you on page 16, that we have been able to beat our emergence forecast on liquidity, with the door line being actual liquidity playing the red line that we put in our emergence claim. Moving to page 17, we want to talk about guidance. We are reaffirming our prior guidance of $180 million to $190 million EBIDTA for the year. We project sales to be in the range of $625 million to $645 million for the fourth quarter, we talked about major maintenance in the third driving that number, so if you look at total routine and major, we expect to decline by $30 million to $35 million versus the third quarter. We expect to pay no cash taxes in the fourth, CapEx for the year was expected to be in $70 million to $75 million rang, we talked about the term debt, we paid in the last day of the year, we expect cash pension and OPEB funding to be $8 million in the fourth quarter. No additional excess cash flow and you will probably notice, the credit agreement to be amended should be out there, primarily related to the reorganization of the company legal entities and some administrative clean up. We showed a schedule at the bottom of our maintenance history. The first line is incurred, that's what we spent for major and regular maintenance in the mill by quarter. The bottom line reported that shows the amount that hit the P&L because during 2015 and through the predecessor period, we would take major maintenance projects tripled in our balance sheet as spread those over future periods, that's why you see a difference between reported and incurred. In the third quarter you see the same number and that's what we are going to be on a go forward basis. So you see some volatility in our maintenance, we will give you some information in order to work the models from that, for example, we will say in the fourth quarters to be $30 million to $35 million less than $76 million and then we will give you the numbers for 2017 on a later date, we will provide the conversion of that. So if you look at Verso, we are in a strong cash flow and liquidity position continues, we have been managing our CapEx and inventory very effectively, we do have additional opportunity and trade payables and our sourcing groups are working on that today. We continue to invest in our mills by doing the right things as far as our major maintenance; obviously it's going to impact our numbers in whichever quarter, if those periods are heavy. So we still have significant net improvement initiatives underway in RGAP, safety and some other areas. We are also underway renegotiating or negotiating our master labor agreement for several of our mills. We are also addressing market issues head on, you heard about our price increases on and super-calendar and coated groundwood, we also announced separate idling of the coated groundwood machine earlier in the month and that was related to our three machines and Andro. And it was a machine that was competition at coated groundwood market, that we took out, if we idle that it's the about 200,000 tons of production. We are also focusing the company as Mike mentioned, and what was announced earlier on the product lines, combining the headquarters and the business center, significant cost savings initiatives are going on and we are also capturing commercial opportunities in the A5 line at Andro, some excess capacity there and as Mike mentioned $10 million next year in that improvement and then digital and other products are growing. So where we like to, as we get ready to the ultimate question and answers, we would like to say that, Verso is well positioned from the reorganization, we β- despite all the activity around our major maintenance in one of our mills issues in the third quarter and came out with the pretty reasonable number and with lower maintenance in the fourth quarter sales will be down, we think that should give us reasonably strong quarter also. So that's why we are staying with our guidance that we issued earlier. So at this point, I would like to turn over the group for our questions and answers period, Angie?
- Operator:
- Thank you. [Operator Instructions] Our first question comes from Jonathan Jenson from Imperial Capital. Please go ahead.
- Jonathan Jenson:
- Hi, thank you for taking my question. So, just to get a better grip around liquidity, can you simply just delineate some of the levers you are pulling such as working capital, inventory reductions and other accruals that might be a positive for Q4 and going forward to help improve liquidity?
- Allen Campbell:
- Okay. Our inventories what's interesting right now is our production and our demand is pretty much balanced. Our inventory could go up a little bit or down a little bit, depending on shipments and production during the fourth quarter. So, as far as inventory, there is no major initiative that says we are going to drive it much lower than what you see today, but the opportunity we have is on the payable side. If you look at [ph] our financials, you'll see that our days payable are significantly under where it was well before we filed for bankruptcy and well below what it should be in the company. So that's an area that we hope to see some improvement in the fourth quarter. It may take a few more quarters yet to realize in the marketplace what we need to make happen.
- Jonathan Jenson:
- Okay, great andβ¦
- Allen Campbell:
- [Indiscernible] pay there as far as other than some traditional issues you are having around the receivables, we are happy with our days receivable number.
- Jonathan Jenson:
- Okay, I guess for quarter -- over the next quarter, just we shouldn't expect a huge reversal in working capital as the cash inflow?
- Allen Campbell:
- Well, we will have some positive as sales are lower in the fourth quarter than the third quarter. So, our net cash will go up as receivables decline. So yes, we have normal working improvement, but not a special initiative, I guess. So there are other payables.
- Jonathan Jenson:
- Okay, that makes sense, and just one more question. Can you just simply provide us some color on any price hikes that you are expecting for January and going forward into 2017?
- Allen Campbell:
- At this point we have the two that we talked about what's been announced, that's the only thing in from the marketplace. We are working through those with our customers and as we are working through that, how much we are going to relate, we don't at this point. We are confident we are going to realize some for both of them, but how much, we don't know, and the rest of the business with obviously whatever happens in the marketplace we have to deal with as we go forward. We are not in a position to announce anything.
- Jonathan Jenson:
- Okay, thank you very much.
- Allen Campbell:
- Sure.
- Operator:
- Next question comes from Mike Crawford from B. Riley & Co. Please go ahead.
- Mike Crawford:
- Thank you. From your deck, it looks like that the net debt is down to $325 million from I think, $2.8 billion pre-petition, and then your market cap I think is sub 200 million, which puts you at some kind of a severe discount to your comps. Can you explain why you think that this company -- trades when comps like Capstone or International Paper [indiscernible] couple of times FERC [ph] and maybe eight or nine times EBITDA?
- Allen Campbell:
- Well, I don't know of the magic answer, but there are several things that impact your numbers. The liquidity of the shares, they don't trade that much, so their liquidity is an issue. We have probably some overhang with our team loans, and then we have -- I think we are getting that penalty for coming out of reorganization. Those three things are going against us. I think as we perform well, as we get our story out, as with the market finds up what's going on, I think it would do nothing, but help the situation. We're as frustrated as anybody on the enterprise value as the math works, but I think liquidity has got major reason, and we're [indiscernible] first type thing, that's what our announcement today and with our earnings and as we look at every component and so I think that we should be able to do that.
- Mike Crawford:
- Okay, thanks. And then, I think you mentioned Q4 is seasonally below Q3, but is that your seasonally weakest quarter typically, or is there some pattern there that's discernible?
- Allen Campbell:
- Now, usually working capital [indiscernible]. On a apples-to-apples basis, it could be a lower-performing quarter. However, there's couple of things going on; number one, is we feel the main reason that's been going on is our maintenance. We spent a lot of money in the third quarter, for instance, 30 million plus less than that in the fourth quarter. So, our costs are going to be down when we look at the two. So that's going to offset the volume. So, if you look at the volume, you will get where our guidance projection was for the year, and you take a look where we're three quarters to get the feel for what the fourth quarter looks like for the company.
- Mike Crawford:
- Okay, great. Thank you.
- Allen Campbell:
- Sure.
- Operator:
- Next question comes from Hamed Khorsand from BWS Financial. Please go ahead.
- Hamed Khorsand:
- Hi, guys. First of all, Al, can you talk about how much of the benefit you've seen what the specialty paper announcements you had over the summer, you were taken to in-house to proceed the specialty paper? I guess how much traction are you seeing selling at yourself, instead of having a contract?
- Allen Campbell:
- We have -- we are at a position now we took over that line in Androscoggin. We had -- it was full by the prior owner that [indiscernible]. We think we have somewhere between 40% and 50% of capacity for today, and we intend to pull that forward, it's going to actually go into next year. Fill that, Mike Weinhold.
- Mike Weinhold:
- Yes, it's Mike Weinhold. We are actually above the 50% production capacity mark as we speak today and we continue to make progress and we expect within Q1 to be at 100% fill rates. We have new product launches that will be coming out relative to that line, and we continue to make progress with new customers and existing customers. So, we are very positive about what's going, and as we mentioned from an EBITDA accretive standpoint we expect to add $10 million in 2017. So, we think relative to prior ownership or having responsibility for sales, we are in a very good spot and its improving everyday.
- Hamed Khorsand:
- Okay. And [indiscernible] I mean, obviously specialty is still small. What's the strategy as far as growing that right now, especially now that you have someone in charge in that space, and what can you do with the machine [indiscernible] to go into specialty more so?
- Mike Weinhold:
- Again it's Mike Weinhold. We continue to look at growth within the specialty segment, and traditionally I think people would think of Steven's point as be in specialty business. We have more products sold today outside of Steven's point that we do within Steven's point. So we think there are opportunities in existing assets to continue to grow in specialty segment. And to your point, we are constantly looking at new markets and new segments that we might be able to take or lose certain assets into. We're very optimistic about with the existing assets, as an example, a [indiscernible] by and large if you were to go two or three years ago, that machine was all in the graphic interest printing paper space. It's now the lion share of it. It's in the specialty paper space. It's labeled, cut, and [indiscernible] and we expect that to grow on that machine. So there is additional capacity within the existing assets to grow our specialty business. So we are very optimistic about our growth potential.
- Hamed Khorsand:
- Okay. My last question is you guys made this announcement of the price increase in coated groundwood and then made a follow-up announcement to shutdown one of your machines. How much of the EBITDA impact did that have in 2017, and could you ramp specialty to offset that in 2017?
- Allen Campbell:
- Well, 2017 in general, we're trying to neutralize what the impact would be for that line, going down. So that's what we are trying to do.
- Hamed Khorsand:
- Okay, but it was already -- it wasn't greatly profitable. So I'm just trying what's -- obviously as the business reason for that?
- Allen Campbell:
- Very fair, very fair. It wasn't very profitable. However, did cover some fixed costs, so we're going to have to review some fixed costs to cover that loss production.
- Mike Weinhold:
- And I think it's important to understand that's a good portion of the product that was made [indiscernible] paper machine will be moved over to our Escanaba mill. So it has the effect of continuing to tighten within Verso, our capacity versus set up. So it would be added even it's actually moved over to a cost structure that's more favorable than Escanaba and it was one a paper machine in Andro. So that also added it.
- Hamed Khorsand:
- Okay, all right. Excuse me; one last one and then I'll give the floor. On the last call you guys mentioned that you have issues of customers as far as seeing to bankruptcy, has that alleviated or customers kind of invest now that -- bankruptcy?
- Mike Weinhold:
- Yes, absolutely. In fact I think we did a Yeoman's effort and job of attaining our customer and retaining our customer base through the bankruptcy process while we had some upset. By and large we did a great job of keeping them together and quite honestly growing in some circumstances. And so, coming up the other side, it's even a better story obviously, and we've had very favorable responses from not only existing customers, prior to bankruptcy filing enduring, but with new customers, as an example, our ability to go ahead and take over a five paper machine and do for all business within existing customers and add new customers. So I think it's definitely our story that's resonating within the customer base and those issues are small as they might have been are behind us.
- Hamed Khorsand:
- Okay, thank you.
- Allen Campbell:
- Sure.
- Operator:
- Our next question comes from [indiscernible] from KLF. Please go ahead.
- Unidentified Analyst:
- Hey, guys. This is [indiscernible]. Thanks for taking my question. First of all, I think you know, great job on the business motivation. We think that's going to help tremendously here, and I think that's probably the right way to go. Mike, I have a question for you, you mentioned some really positive sort of traction you guys are getting on the specialty side, and it sounds like you know, once you get that capacity filled up in Andro, you got additional EBITDA. If we look out a year or two down the road, given some of the investment opportunities, how do you [indiscernible] capital, where do you kind of see the optimal business mix of Verso, help us understand that a little bit more.
- Mike Weinhold:
- Well, I think at Verso that is one of the benefits that I see from an alignment from a strategic business unit standpoint. So you'll have leads within the strategic business units, understanding and directing strategy and growth plans towards each segment. And so, again I believe that there is still organic growth we have in the specialty business segment with our current asset base, but quite honestly I would be not surprised at all if there would be teed up at least potential for future growth outside of our existing asset base and specialty. I think that's definitely something that we would be looked at. So, again we are very optimistic about growth potential in that market space as you know, the growth rates in some of the segments we serve from a specialty standpoint are positive. With that said, I still think there is very strong potential in the graphic paper business. That's more around aligning our cost structure on continuing to serve the markets we serve very well, and growing in the high-margin products which by design with the temporary idling coming up on from A3 machine and the coated groundwood. We more and more are moving towards being a coated free sheet centric graphic papers business and there are some attractive margins within that segment and the actual declination of demand in coated free sheet has been far or less than in the mechanical ground with that. So I believe we are well-positioned in both market segments and both business units, and I would think that you will hear from the business leaders and IB one of them in the graphic paper side, strategies to improve both of those segments going forward.
- Unidentified Analyst:
- Michael, thank you. That was super-helpful. Sort of related to that question again, and Michael, when you talk about specialty, does the includes sort of the niche areas you guys have spoken about before, is that [indiscernible] as you think about broader sets of opportunities that you are looking at?
- Mike Weinhold:
- Yes, I think -- again, we got on our Web site, so if you want to go see the product segment that's in the specialty category, you certainly can do that. We've talked in terms of trying to grow in certain niche areas. Some of that falls directly into the specialty camp, some of that quite honestly falls over into the graphic paper side of the business. So, again, there is a niche on both sides to trying to offset some of the decline in demand and decline in margins we see and some of the core segments and growth in what would be new and expanding segments for those stuffs.
- Unidentified Analyst:
- Got it. Thank you. We will definitely take a look at the Web site and see the new organization. And then help me quantify, you said that you see a $10 million for EBITDA uplift once you get the mill Andro on specialty kind of at full capacity, I think. Can you help me understand how much that is in tons?
- Mike Weinhold:
- Yes, it's going to be at a full run rate. It's about 45,000 to 47,000 tons of capacity.
- Unidentified Analyst:
- 45 to 47?
- Mike Weinhold:
- Yes.
- Unidentified Analyst:
- Got it. And so that fill rate assumes 100% utilization, because you are growing, kind of assuming?
- Mike Weinhold:
- Well, yes, the production capacity of that asset would be something higher than that, but if the operating rates based on the product mix et cetera, we feel 50,000 ton production range is achievable annually.
- Unidentified Analyst:
- Got it. And I think you guys have shown a slide before we show that specialty market, I guess some more in the 24 sort of million ton range, is that kind of correct? And kind of where do you guys see yourself as in terms of share right now and where it could go to?
- Mike Weinhold:
- In the specialty segment, I think I want to talk in terms of the relative volume attributable to specialty as a percent of our business, which has been growing significantly year-over-year and it's in the 20% range now. It's very difficult to go ahead and take market shares within the specialty segment, because there are a wide variety of specialty products and it's sliced and diced differently than on the traditional graphic side, but we have -- we believe very good shares in a lot of those categories. We have a very broad product base in the specialty segment business. So we produce what is called MG, Machine Glow finished products, and we supplement those with a lot of the label papers out of Androscoggin, Escanaba, Luke. So, again I think we have a very broad product portfolio in totality, a very good position that grows every year and in certain segments very good market position.
- Unidentified Analyst:
- Got it. And I know I've taken a lot of times, so last set of questions for me, and then I will let someone else have it. For you, Mike, last one, what do you guys see, I guess if you look at specialty within Verso is the way you are looking at the business, where do you see specialty going to as hold Verso optimally and could you sort of explain to us the margin differential between your traditional business and specialty business?
- Allen Campbell:
- This is Allen. I will take the last part, which is in margin, if we look at our average, what we've stated is that specialty business was higher than our average margins. The groundwood and supercalendar lagged, and then coated paper was plus or minus depending on the product.
- Mike Weinhold:
- So, again I think from a growth standpoint, we can continue to show considerable growth within the existing asset base of the specialty machine and product. And so, going into 2017, I think that growth will be significant and obviously our full 85 will be a big part of that growth, and we still have capacity -- production capacity on the specialty side. Again, just from a margin standpoint, we have very good margin in a lot of the graphic papers business as well, and by design, we have shown a mixed improvement that we show in the slides and discussed earlier. That makes improvement come from both specialty and from the graphic side. So, the graphic business was challenged, we, I believe are doing very well in dealing with that challenge and continue to sell more of the higher margin coated free sheet products and grades versus on the lower margin grades.
- Unidentified Analyst:
- Got it. Thank you, guys, I appreciate all the questions, and best of luck. I will get in the queue.
- Mike Weinhold:
- Thanks.
- Allen Campbell:
- Thank you.
- Operator:
- Next question comes from Jack [indiscernible] Capital. Please go ahead.
- Unidentified Analyst:
- Hey, guys. Most of my questions have been asked, but I was wondering if you could break out the impact on cost of goods sold of the SG&A reclassification and inventory write-up in the quarter?
- Allen Campbell:
- Sure. What we did is we took out approximately $7 million out of our historical SG&A in the quarter, earned $7 million in cost of goods sold and a about a 1.5 million of that went into absorption of inventory.
- Unidentified Analyst:
- Okay.
- Allen Campbell:
- And write-up was about $41 million, it's P&L in the third quarter, and we adjusted for that, and then adjusted EBITDA.
- Unidentified Analyst:
- Great. I appreciate it, thanks a lot.
- Allen Campbell:
- Sure.
- Operator:
- The next question comes from Kerry Mangano from Wells Fargo Advisors. Please go ahead.
- Kerry Mangano:
- Hi, guys. Most of my stuff or questions had been answered, but could you just go back -- and tell me what was cash on hand, I didn't hear that, I guess, liquidity right now?
- Allen Campbell:
- 7 million.
- Kerry Mangano:
- How much?
- Allen Campbell:
- 7 million.
- Kerry Mangano:
- Okay.
- Allen Campbell:
- 7 million at 930, 170 available capacity for total 177 liquidity.
- Kerry Mangano:
- Okay. And then the CEO search, can you make any comments there?
- Allen Campbell:
- We are in the process. There has been [indiscernible] interviews are taking place. We expect to hear something shortly, but exact timing, I do not know.
- Kerry Mangano:
- Okay. And then this is more [indiscernible] and I know you may not be able to really answer, but it seems like you are doing a lot of heavy lifting right now, getting the house and order, making it -- it was -- I'm not saying it was ramshackle, but it wasn't the best estimate, but now starting to look a lot better. Would this be something that you do in order to make this asset more attractive to somebody else?
- Allen Campbell:
- We are doing it to make the asset attractive to ourselves and run this business better and stronger and that's the real reason we are doing it.
- Kerry Mangano:
- So, it's a long-term plan?
- Allen Campbell:
- That's correct.
- Kerry Mangano:
- Okay. Okay, thank you very much.
- Allen Campbell:
- Sure.
- Operator:
- Next question comes from [indiscernible] Capital. Please go ahead.
- Unidentified Analyst:
- Hi, thanks for taking the questions. In your press release, you mentioned targeting cost reductions. I think it's 10% of overhead; can you just quantify what that means in dollar terms hence I'm not exactly sure how much the SG&A's overhead is, especially in light of the recent re-categorization?
- Allen Campbell:
- Yes, and we are not just talking SG&A; we are talking overhead range of $180 million to $200 million in the business. So we're talking and targeting $18 million to $20 million.
- Unidentified Analyst:
- Okay. And any sense of what the cost might be to achieve that?
- Allen Campbell:
- No, we haven't laid out exact plans to [indiscernible] some of it's related to the consolidation, some of it maybe just the way we are organizing this. So, now at this point, we do not have a good estimate of what the cost to achieve might be.
- Unidentified Analyst:
- Okay. And then keeping that the asset base has been tricking a little bit over time, can you update us as to what normal CapEx might be going forward?
- Allen Campbell:
- Yes, if we look in the range of $55 million to $65 million, that's what we think, is the full maintenance for this business. If we like this year will spend in 75 because we have had some significant extra capital in one of our mills field force still putting in some SAP and centralized systems that drove that number up almost strategic efforts, so the customer will spend 55 to 65 on its front normal capital, normal mills expense in normal SG&A capital and then this year, we are spending another $10 million, $5 million to $10 million of the top side of that and that is driven by IT cost and some major capital going into our mills.
- Unidentified Analyst:
- Great, thank you that is helpful and can you likewise update us as to what the sort of normal pension payment going forward is or at least in the near and intermediate term?
- Allen Campbell:
- We're in the $35 million to $45 million - 40 ish million dollar range this year, next year that will go up a little bit, we will be calculating some more numbers but we are in the long-term on $40 million to $65 million, $45 million to $65 million range depending on the year and interest rates and returns we're looking at opportunities going forward in how we might be able to hold that back or limit that.
- Unidentified Analyst:
- Great and can you give us a little bit of additional industry color, Verso has obviously been shutting capacity relatively consistently over time in a lot of different places in product categories, is anybody else shutting capacity, anything else happening of note either in the U.S. or abroad that might impact Verso's product lines?
- Allen Campbell:
- We saw super calendar mill remain earlier in the year, we have seen some announcements in Europe, they are looking at their capacity, so we're watching that closely, there is not anything that has been announced that is directly competitive that we think is going to have meaningful difference to our markets as we sit here today. But as things going on [indiscernible] business going on in North America and in Europe that is likely to some capacity reductions.
- Allen Campbell:
- I think what's more important because we had on as we recognize the environment we're dealing with the recognize some of the secular demand decline and all of the other issues that I highlighted earlier in the presentation we've recognized important and currency and FX impact however we're choosing to go ahead deal that internally as were so planned our strategies and respond accordingly, I think we're doing good job with that and we understand with the environments delivering or bringing to their and were making decisions as the company to be able to navigate through those I think -- navigate through them very successfully.
- Unidentified Analyst:
- Great, thanks so much, appreciated.
- Operator:
- [Operator Instructions] next question comes from Michael [indiscernible]. Please go ahead.
- Unidentified Analyst:
- Hi, yes, thanks for taking the questions. Appreciate it. I understand the difference in employee numbers in Miami - interest could you go in a little bit more detail about the decision move headquarters.
- Allen Campbell:
- I can to, you hit on the bid one earlier on versus the new page, new page was headquartered in Ohio as we operated through the consolidation we had more office overhead SG&A etcetera administrated people located in Ohio the numbers would tend to say if you want to look at cost 260 people there, 60 some people here that's sort of ways to number one way or the other but it is if we need to get together one - or the other now its most important thing very strategic.
- Unidentified Analyst:
- Okay, have you received any indication, how many of the 60 local employees will make the move yet.
- Allen Campbell:
- We just started its going to take a little while to work through.
- Unidentified Analyst:
- Okay and I guess the last one when do you expect to be completely up in running with Miamisburg they of courseβ¦
- Allen Campbell:
- We are looking at sometime next year, we are on the firm date, where lot of it depends on the timing who goes together go etcetera and that's going to be the -- we have people both like this to be able to manage this things effectively there in the time period and we're working out, working individually with our people and what it means them and that's critical that we do that in the short term.
- Unidentified Speaker:
- And it's Mike [indiscernible] just to add a little clarification as 209 employees in the Miamisburg office and again and I think Allan said well you can't just count the impact and the positive impact that has on the business by having everybody in one location and we can start their process and we'll start that process beginning in January and so again buildings there, people are there so standing this up and moving through it and well its certainly will take time to work through all of it and we can be up in running fairly, quickly with the portion of the business already we located.
- Unidentified Analyst:
- Okay, thank you very much.
- Allen Campbell:
- Thanks.
- Operator:
- [Operator Instructions] next question comes from [indiscernible] ALJ capital. Please go ahead.
- Unidentified Analyst:
- Good afternoon guys. Most of my questions were answered but just had a couple follow up first off the with the two price increases obviously you noted, you're negotiating with customers, you don't know how much that you're going to realize but twin capacity shutdowns, improved utilization, if you to realize the 100% those price increases were the contribution to the from and EBITDA or cash flow perspective.
- Allen Campbell:
- I think if you would we announced, if you look at our last presentation that we had at the Deutsche bank conference that shows tons by super calendar so, there was a $50 increase announce the map you can imply some factor to the 50 times those and I would give you a number on super calendar on Brownwood I think we also showed a percent of total business on there, that was $40 in this multiplayer's announced $40 to I think you take those $2 that we talked about and then look at that presentation made at Deutsche Bank at the end of September where we have on our side, you should be able to do the first calculation.
- Unidentified Analyst:
- Okay. And there is no offset there for reduced mix idling and plant idling or mill idling I should say?
- Allen Campbell:
- Well, what we're doing as I mentioned earlier there is our plan is as we idle machine, we will take that it is low margin machine, so on that particular one we will take of that capacity, we cover that with overhead reduction, so we are seeing that is a loss, you could say that 200,000 tons out of that early groundwork probably the right ones will take 200,000 tons of the groundwork number you saw, then you can take that time to increase that [indiscernible] you are right.
- Unidentified Analyst:
- Great, I appreciate your clarification there. The timing for the $18 million to 20 million in overhead savings, it sounds we're not going to - go ahead please.
- Allen Campbell:
- Our announcements says it will relate some of that in 2017 and rest of the 2018.
- Unidentified Analyst:
- The rest of that will be in late 2018. Okay. Got it and then last one I probably get this quite right, when you are commenting on Slide 14 talking about the cash flow and you made a comment about fourth quarter, $30 million, I just wondered to see that I didn't quite catch the comment whom you compete it?
- Allen Campbell:
- What we're seeing is couple of things, $56 million is what we had on pro forma basis through September, we would expect normally the fourth quarter be a positive cash flow quarter, one other being more maintenance two being we have favorable, we have lower sales there before we drill down on receivables. Normally it is a cash generating quarter probably more than the if you take [indiscernible] six divide that by nine gives you an average and it is going to be simply higher than average normal in the fourth quarter. So you could add another 20-ish million dollars into the fourth quarter and then you subtract $32 million for interest cost, zero for cash taxes and you would think you have 40 some million dollars of positive cash flow on a pro forma basis.
- Unidentified Analyst:
- Perfect. Thanks.
- Allen Campbell:
- Sure.
- Operator:
- This concludes our question-and-answer session. I would like to turn the conference back over to Allen Campbell for any closing remarks.
- Allen Campbell:
- Okay, thank you Angie, and thank you to those of you who are on the call. We appreciate your interest in Verso. As we mentioned earlier, we think we are well-positioned going forward. We had a -- what we felt at this quarter just significant spending in our mills and our heavy maintenance et cetera. So, we appreciate your support, and we look forward to working with you over the future, and thanks a lot.
- Mike Weinhold:
- Thank you.
- Operator:
- Ladies and gentlemen, the conference is 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