Verso Corporation
Q4 2016 Earnings Call Transcript

Published: 16 Mar 2017

[Operator:]

Good afternoon, and welcome to Verso Corporation's Fourth Quarter and Full Year 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 replay of this call will be available on the investors’ page of Verso's Web site after 5 PM Eastern Time today. At this time, I'd like to turn the presentation over to Verso Treasurer, Tim Nusbaum. Please go ahead.

[Tim Nusbaum:]

Thank you, Operator and good afternoon everybody. The fourth quarter and full year 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 refer to you during the call, are available on the investors’ page at Verso's Web site at www.versoco.com. Joining me today at present is Chris DiSantis, our Chief Executive Officer and Allan Campbell, our Senior Vice President and Chief Financial Officer. Also available is Mike Weinhold, Senior Vice President of Sales and Marketing and President of Graphic Paper. I'd like to remind everybody 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 of these or more of these risks or uncertainties materialize or should underlying assumptions or estimates prove incorrect, actual results may vary materially from management’s expectations. If you would like further information regarding various risks and uncertainties associated with our business, please refer to our SEC filings, which are posted on our Web site, versoco.com, under the Investor Relations tab. At this point, I’d like to turn the presentation over to Chris DiSantis.

[Chris DiSantis:]

Thank you, Tim and welcome everyone, joining us for the call this afternoon. Let me start off first by thanking our shareholders for supporting our merchants and setting Verso up to be competitive in our space. It's given us the essential flexibility we need to make good strategic decisions going forward. So, thanks again. Moving to slide five of the presentation, and I want to take a few minutes talk to you little bit about how I’ve been spending my time, my first 45 days at Verso. It’s really three things; one is immersing myself in the business; the second is trying to understand the ecosystem under which we’re operating; and the third thing is really thinking about evaluating all these potential path to value creation to the shareholders. So, as far as the immersion goes, it’s really about listening and learning and trying to take in everything that I possibly can with respect to the people in the organization, the processes, the products, what we made, who we sell it to, what our competitive advantages are and competitors and so forth. And really getting a historical download of all the things that have happened that are important in past and present and things and process as far as strategies and tactics and that sort of thing goes. And putting all that together into a comprehensive catalog and inventory of what all the upsides are, what all the risks are. So almost like a SWAT analysis. That’s a lot of notes and a lot of figuring out what the real economic drivers of the business are, trying to get smart on Verso and trying to get up the learning curve, as fast as I possibly can. So, with respect to understanding the ecosystem, the Company is operating within, that’s really important. It’s really important, because it’s about getting the right context for decision making. And the big part of that is starting with facing reality. So, facing reality is not about what we wish was happening in the markets, what we’d like to happen but what’s really the case; and that involves some looking in the mirror exercises and facing things for what they really are. Now, in assessing the external environment, I’ve spend a lot of time looking at our numbers. Over time, it’s been a lot of time looking at the market data and asking the important questions. So, just for instance, understanding things like what comes in the system has evaporated from demand decline versus what have we taken out as far as our overall strategy clearly understand the decline. But these kinds of things, they’re all quite essential elements to strategy development employment, because what the real rate decline is going forward has a huge impact on the strategy and how we proceed as a team and as a business. In thinking about these different path to value creation the first obvious one, which is a non-negotiable objective for the business, is optimization. So, that’s a very internally focused agenda about restructuring the Company and finding ways to do more with less in every aspect of business. The second piece about value creation is the capital investment side of it. So, prudently thinking about all the different uses for the capital that we have, as far as changing what we make; who we sell it to; investing the cash flow in the business back into the best return on capital opportunities. So we have a big budget every year and capital is a large asset base that needs to be maintained. So we have to pick our chops very carefully. And the last part is merger and acquisitions side of it. And when we look at merger and acquisition opportunities, we look at everything that avails itself in the market we’re not the only alternatives that are out there. But we are very mindful of real synergies, not PowerPoint synergies and we're very disciplined about how we think about valuation in this space. So, going on to slide six, I want to talk some about the macroeconomic environment. So the overall headwinds for the print and papers space has been consistently tough, and I expect that that trend is going to continue. So, imports have been on an upper trend in the U.S. market. And you can see that in the quantified in this chart below where you see it's pretty stark contrast there between things that have happened with like magazine ad pages that are down 12.8%, and you can see coated groundwood imports are up 8.7%. So, this tidal force of digitization has created this continuous decline over the last decade and for a lot of reasons, I think that secular decline has been underestimated in the market data. We're also seeing cost pressures expanding, so things like energy, latex, rail those costs are going up at the time when the prices are falling. That's driving, called a marginalization phenomenon with lower prices and higher costs. And fundamentally we saw the industry where capacity exceeds demand that imbalance leads competitors to buy for incremental tons, drive any extra tonnage if they can and also gives them strong incentive to move upstream into higher dollar per ton products. So, the specialty products, it's about 21% of Verso’s revenue last year, have been for growth potential. So, there is new volume that we've identified that we're targeting for certain mills. We see a lot opportunity in pressure sensitive in labels and in lease liner. And our customer service and our ability to innovate with new products is particularly strong so this things fuel our optimism for growth in these products in the future. So, on to slide seven, I think the number one external challenge that the business faces is with regard to the downward pricing pressure, and that trend continuing in the market. So, it's an obvious mathematical correlation here one-to-one between price and free cash flow. So, the economics of this and how it changes overtime is very important. Foreign exchange right now favors imports into North America. So, with the euro at $1.06 that's dramatically different from days when the euro was at say above 30. We're seeing extreme levels of competition in coated groundwood and see markets, and that has mitigated our ability to successfully realize any of those price increases that we announced in 2016. We’re seeing the import growth despite the duties that are in place on various international producers. And it does seem like there is an industry-wide inventory problem. So, this is another contributing factor, the problems they have with price, because we have competitors trying to manage their cash flows. And as they try to manage their cash flows, those are downward pricing pressure. However, I’ll say that in contrast to that that the outlook for pulp pricing on our third-party sales of pulp is indeed positive. They reduced demand that we’re seeing for tonnage, it creates real operating issues. So, paper mills are generally purpose to build for efficiency; they like to one wide open; they like to run 24/7. They are not start-stop operations that are highly flexible, and when you don’t do that when you don’t run them consistent like that -- it’s a challenge for the economic engine of those businesses. We’re seeing particular weakness in coated free sheets problem, and it is quite likely that we’re going to have to dial back production rates a little bit more than the demand to manage the investments that we’re making, that we have made an inventory. So we’ll be smart about that going forward. So, on the slide eight, this is really the important part is what we’re going to do about it. So what’s Verso’s response to these challenges? We have the wage more on cost and efficiency. I don’t know how else to put it other than in those terms. So, for example, our operational excellence program, which we call RGAP which is short hand for realization gap, it’s a highly effective competitive tool. And we have 640 in-process manufacturing initiatives right now, that’s not a type of 640 targeting $54 million in improvement this year. We’ve also got aggressive cost reductions plan to shed 10% of overhead as we previously announced; that’s an $18 million run rate of savings, we expect to achieve; entering into 2018 that includes, the cost savings associated with the headquarters consolidation. We expect continuation of gains in our OPEB expense of $3 million to $5 million in 2017. And we are planning counter measures against these supplier price increases that we’re seeing, that’s a critical part of the business. So, if you look at the past couple of years, there’ve been favorable input cost trends over the last two years, and that’s likely go away in 2017. But that doesn’t mean we’re just going to take the price increases, because the suppliers announced them, there will be countermeasures in play to deal with that, and mitigate those effects. We also have to pull hard on the mix management lever. So, we are going to spend our scares dollars disproportionately on the best lines and mills in terms of investments in people and capital, and trying to expedite that migration to the higher margin products. And we’ve also realigned our operating structure along product lines. That’s important because it sharpens our focus and our thinking, so we’re not just thinking about call center management that we’re thinking about profit thinking for the product lines that we sale. We've developed a lot of new products and new customers for our specialty business at several mills. And we might even get to a point where we need additional capacity at places like Steven's Point, which is a good problem to have. And we've made very good progress thus far filling A5 line. So on to slide nine, also in response to these conditions, we're going to be very prudent about the allocation of capital. So, after you make your payments for debt service and pension funding, and taxes, there are dollars left over and we view those dollars as precious. So, there is a high bar that's going to be in place for spending, going forward. So, we're going to apply an extraordinary level of scrutiny to those things, looking very carefully at our CapEx, looking at our outages, and being very smart about how we spend those dollars. And also not just being smart about it, but thinking very creatively, thinking in a very resourceful way that are we indeed getting the maximum possible return we can for every dollar of capital that we allocate back into the mills. But regardless of what those impacts are on profit of those investments, I can guarantee you that there are no compromises being made in anyway shape or form with respect to health, safety and environmental. We also have to continue to right-size the operations. So, we idled A3 temporarily in Androscoggin that took place in the first week of 2017 where we took 170,000 tons of production out of the system. And that represents we're looking at 2016 tonnage that represents 5.8% of the total ton sold in 2016. And the plan, going forward, to right-size the operations is that we need to role mill outages to conform to 2017 market demand, that's what we're going to do. We'll implement those changes quickly if we need to do that. But we're constantly evaluating the future with regard to the operating plans of every mill every line and every one of those mills, and keeping the cost inline and making sure the operating rates they make sense. And we can get batter at supply chain management. This is an area, it's going to be a big area of focus going forward, it's place where we definitely improve. So, on slide 10; we need to modify our thinking a little bit as an organization. So, it's not just about operator thinking, which is being truly great paper makers and being great operators, of the business. But I think our organizational thinking also needs to include investor thinking. So, it's about thinking like an operator and thinking like an expert, like an investor. And we've really got to get that wired into the organization. So, what does that mean? That means as we're making decisions day-to-day and running the business, and we're setting out on our strategies, we've got to have a very keen and very careful consideration of that. What does this mean in terms of return on invested capital? What does this mean on the implications of cash flow? What does this mean for the resultant value creation for the shareholder of the organization? And that really needs to permeate all of the important decisions that we make in the organization, and those decisions need to make sense in the context of the macroeconomic trends that the business is facing. So, there is, without a doubt, a lot of opportunity to reduce cost and optimize systems within this organization. But the external environment is very difficult. And what that lines up creating it did not fest itself in a treadmill type of fact, where you need to run very hard just to keep up with the decline that’s happening in the market. So, the fundamental question is what’s going to be the rate of change in Verso’s end market. So what is going to be the rate at which the market takes value away from the Company versus what’s going to be the rate of change in Verso’s net operating improvements that they will implement, and that’s the net of everything all added up in terms of what we’re doing with productivity and what we’re doing with cost reduction, and all those types of things. But the bottom line is that, as a team, we need to focus tenaciously on what we can control. And be very tenacious about going after cost, being very wise about capital allocation, and having very clear thinking and facing reality about what is the right strategic direction to take a company in. So, to define a path to a successful future, we’re really going to challenge everything. We’re going to challenge every operating assumption that the Company has been operating under, and we’re going to make great decisions, going forward. So, with that, I will turn over to our CFO, Allen Campbell.

[Allen Campbell:]

Thank you, Chris. Moving forward to page 12, we exceeded our guidance in the year with $203 million of adjusted EBITDA. The strong performance in our mills in the fourth quarter and our cost controls contributed significantly to this number. In addition, we’re able to recognize the $25 million gain on elimination of certain post retirement benefits. Our OPEB and pension liability has been reduced by $184 million since emergence. That was based on re-measurements; using higher discount rates that’s going to effect in the year; elimination of certain benefits, I mentioned earlier, pre-2012 retirees; and normal pension contributions. Our liquidity was strong. At year end, we had $163 million available, and we were able to reduce the term loan down to $211 million after paying $8.8 million of amortization. Our income statement showed for the quarter showed on page 13. You know the sales are down $110 million from the fourth quarter of prior year. Note that Woodcliff closure and our A2 pulp line closure in 2015 impacted the ’16 numbers, approximately $50 million in this time period. Down through the individual line items there is some items that impacted each one. I’ll hit on just briefly before we go on to the EBITDA numbers. Cost of products sold was down $126 million from the prior year on $110 million less in sales. There is $22 million of the OPEB gain is in the 2016 number. And then we also picked up additional $12 million from our SG&A to COGS reclass. On SG&A line you saw $53 million as reported in the predecessor time period in first quarter, and included about $10 million of one-time items that are adjusted down below. So, on apples-to-apples basis we spent $43 million in SG&A. And in 2016, without some of the credits we got, would about $28 million. So, we have a significant reduction in SG&A, and we’ll talk about that later in the presentation. On page 14, we walk the EBITDA to the adjusted EBITDA. By coincidence, both years were $66 million of EBITDA before adjustments. But in 2016, we had several cash and non-cash items that we adjusted back, so very traditional. If you look at the key items on this page, it primarily relates to the A3 idling and some restructuring costs related to our headquarter consolidation. If you look at gross margin on a -- and you pull out the OPEB gain, we would have been at 13.1% for the fourth quarter of '16 that would have played 12% in the quarter before. Moving ahead to page 15, this is a more pictorial description of the changes for the year; $61 million of net EBITDA from ’15; a big hit in 2016 is on price; following prior trends, it was across our grades. We had a positive mix during the quarter and a positive gain from having less market downtime. But we also had less volume, primarily related to the businesses that -- or the lines that we took down we mentioned earlier. Input costs continued to be favorable for us in the fourth quarter, as wood and pulp are exceeding the increases that we’re seeing in the energy and chemicals. Operations, the RGAP, that Chris mentioned earlier, has impacted our number significantly, an improvement of $25 million year-over-year. Maintenance slightly changed to $4 million. And then we have a line called other of four negative. There is a lot of activity going on there. We have significant SG&A gains that are offset by incentive payout. It was very low in 2015. We had a closer to normal payout in 2016. So, we have an increase in expenses in that. Pension went from income in 2015 to expense in ‘16 on accounting basis and with some higher logistics costs so that offset our reductions in SG&A. And then you can see we had $25 million gain on certain OPEB liabilities. Moving ahead to ’16, we summarized our tons on shipments and our selling prices. You see the quarter, on paper we’re down 10%, on pulp at 41%. Recall that we shut the A2 line, so we have significantly reduced our pulp production, and goes to the outside world. If you look at the year, we’re down 11% on volume. Remember that the Woodcliff had about 227,000 tons of production in the year before in 2015, and the capacity of 300 that we took out of our business. Below it shows our chart, we’re happy to see that our specialty business has increased. It’s up to 21% of our total revenue. Pulp has decreased as we've taken some capacity out, down to 4%. And the coated and uncoated graphics paper portion of our business stayed relatively solid at 75% year-over-year. Moving ahead to our full year operations, we start on page 17. You see that we have the format that’s required because of our emergence from restructuring reorganization. The predecessor period was 11 to July 14 and successor from July 15 to 31st. What we're able to show you is the delta in the far right hand column. If you were to look at the predecessor and successor tying periods and compare that to the prior year, you will see the delta sales were down 481. You would see significant movement in various line items in the P&L because of that going to defer to the next couple of pages to get into more detail. One item I want note on here is the deprecation, you'll see that we expect approximately $100 million of depreciation for the year, going forward. The page 18 shows the adjustments where walk down from where we were at 269 in 2015, and we're at 228 if you were add the two periods, a decline of 41. In this period you'll see if the traditional adjustments going from EBITDA to adjusted EBITDA. The fresh start adjustments, the large item on there, 46 and the successor period and about 3 in predecessor period; those are primarily non-cash items related to inventory revaluation, storerooms and other items that were required up on emergence. The restructuring costs in 2015 were primarily in Androscoggin, the NewPage acquisition cost and some bucks port related closure costs. In 2016, primarily relates to the capacity reductions, at the Woodcliff mill. A bridge is shown on page 19, the 269 that we have in 2016, '15 walking down to the 203 and then 228 number. Price impacted us virtually every quarter; starting heavy in the second; what happened in the industry and what we did to follow; down $126 million year-over-year. Again, we have positive mix, but unfavorable volumes; but slightly offset with the decreased market downtime as we match production with our sales in 2016. Input costs were favorable for us over this time period, same reasons; and energy was favorable during the year, start to turn a little bit in fourth quarter; pulp and wood were favorable the whole year; chemical started to increase from the second quarter on in our business. Operations created a significant contribution headed to us using their RGAP, driving substantial cost savings, in this case $38 million year-over-year. Maintenance was unfavorable by $26 million on the year-to-year basis; $18 million of that was related to the fresh start accounting or the purchase accounting, I should say, with the NewPage Acquisition. We had $18 million lower maintenance in our 2015 P&L that we would have had in a normal accounting period. And then we increased $8 million on our current practice on expense and maintenance as we go, that contributes to the $26 million decline. I want to call your attention to the other line. What we've done as a business is to tack our SG&A. From 2015 to 2016, we were able to reduce our SG&A cost by $27 million on a year-over-year basis. In this line, that was offset by some other items that we had; pension both from accounting credit in 2015 to an accounting P&L hit in 2016; that was $11 million swing year-over-year. We had extremely lower incentive payout, both in the mills and at the SG&A level in 2015. We had close to normal payout in 2016. That was a swing of $11 million negative. Logistics cost increased during this time period. And then we had some Woodcliff continuation costs that we had in 2016 that we didn’t have in 2015, and that was a negative $6 million. So, it tends to get varied in our numbers, the cost savings that we’re able to achieve. But we wanted to highlight this here and show you those cost savings are coming in. Unfortunately, in this time period, we also had some items going the other direction that offset that. Moving ahead to page 20, we felt very good about our liquidity, and our debt position. Liquidity ended the year at $163 million. You see what we’ve drawn down on our letter of credit, and your remaining capacity, $6 million of cash in the balance sheet. Our net debt stood at $317 million at year-end. And if you were to look at our -- if you take the noise out of our 2016 financials, you would see financial statement which show cash flow of about $98 million. And that’s in our appendix for you to look at. That $98 million will be what the business will need to cover cash interest, debt amortization and pension funding. So, it’s well in excess of those requirements. If you look at our debt covenants and excess cash flow, we’re well above anything that we need to be. Our maximum covenant is at 2.5-times total leverage, we’re at 1.4. We have minimum of fixed cost coverage ratio of 1, we’re at 2.2

[Chris DiSantis:]

Thank you, Allen. So, I'll share some final thoughts with you, just a few highlights. The Company does have a strong liquidity position, so we're happy with that. And our priority is clearly to pay down the term loan as rapidly as we possibly can. And, we think working capital will be a help in achieving that. We're targeting $20 million plus improvements, so we'll have close eye on the balance sheet. We have a market leading position in coated papers, and we need to capitalize on that. And to the extent we have to right-size the operation to whatever the market demand is, like we did with A3, we will continue to take those types of actions going forward. We have a meaningful growing position in specialty, we have nice broad product offering that gives us a lot of upside. And if you look at the cash flows that are coming off the mills, we still have robust cash flows coming off the mills. We have several low cost highly efficient world-class operations. And as we go forward here, the leadership team of the organization is 100% committed to proactively and aggressively managing costs. We've already got substantial cost savings achieved. There is more to come. But we've done a lot with RGAP in the past, that's going to continue to be a big benefit for us going forward. We have the headquarters consolidation as part of the 10% overhead reduction project. But regardless of what the market conditions are, we are going to aggressively go after the costs in the organization. There’re also commercial opportunity to capitalize on; so digital, specialty, other product lines, we do see upside; we'll go after those very hard. And at the end of the day, we will be preferred choice and we will serve our customers better than any competitor can in this marketplace. So, with that, I will turn it back over to our operator and open it up for questions.

[Operator:]

[Operator Instructions] Our first question comes from Kevin Cohen with Imperial Capital. Please go ahead.

[Kevin Cohen:]

Good afternoon, and thanks for the prepared comments and detailed slide deck, definitely very helpful. I guess when you look at the guidance on EBITDA year-over-year. Is there any underlying assumption as it relates to coated free sheet and groundwood pricing that goes into that if it's down by a certain percentages, or dollar per ton figure, for the full year?

[Chris DiSantis:]

We're not ready to say what we think the pricing will be, we just think, between the volume and pricing that will impact it.

[Mike Weinhold:]

Just a general view of the pressures that we’re seeing in the market, we think it’s safe to assume that it's going down. But we’re not ready to quantify a specific range out.

[Kevin Cohen:]

And then in terms of working capital for full year 2017, is there any specific objective or any range in that in terms of what might be able to be sourced from that?

[Chris DiSantis:]

We mentioned that we should be able to get more than $20 million from working capital, and that will come across the various pieces of working capital.

[Mike Weinhold:]

So we’ll look at every aspect of it, payables, inventory, receivables, but there’s some element of upside in each of those. So, we’re going to -- we’ll have internally objectives for all of them.

[Kevin Cohen:]

And then just couple of book keeping items, in terms of the ABL. Was that drawn or is it expected to be drawn, as it relates to making the payments on the term loan, the amortization and the excess cash flow payment?

[Chris DiSantis:]

The ABL goes up and down depending on our flow of cash. Some of it may or may not be used for the term loan at the time. It just depends on the flow in and out. But it’s not going to be exclusively used right now.

[Kevin Cohen:]

Then just the last, real quick question, I guess in the slides, one of them mentioned CapEx for the full year was $71 million, and I think another one was a slightly different number of $73 million. Which one should we rely upon?

[Chris DiSantis:]

There’s accounting difference between the two, one is an accounting number one is a cash flow one. I would use $71 million compared to the $50 million -- the $55 million to $65 million that we gave you.

[Kevin Cohen:]

So $71 million, that’s the cash number?

[Chris DiSantis:]

Yes.

[Operator:]

Our next question comes from Mike Crawford with B. Riley & Company. Please go ahead.

[Michael Crawford:]

How much, if any, of the $55 million to $65 million in CapEx for 2017 relates to conversion, let’s say, challenge capacity, like coated free sheets to specialty products where Verso might have more control of the future production economics?

[Chris DiSantis:]

Of the $55 million to $65 million, there's just a small amount related to the specialty business conversion, just a small amount.

[Michael Crawford:]

So is that strategic operational option that the Board has considered, and has decided against, or that’s a decision that's being deferred? Or what’s the status of that potential development?

[Chris DiSantis:]

Well, there are some things we’re specifically doing that’s going to add volume, that is we’re taking the A5 line and Andro line that we picked up from a business that we’re selling at cost. We’re now expanding product offerings on that line. So, we can do that with a small amount of capital and expand the utilization of that machine. We’re still continuing debottlenecks, Steven’s point, which will add some additional capacity. That is in the $55 million to $65 million number, and that’s in when we expect growth in that will be.

[Mike Weinhold:]

Chris, just come on recently and we’re going to continue with the strategy and what and when and how much.

[Chris DiSantis:]

Yes, and I’m taking the liberty of reevaluating all those priorities. I mean, of course, there's a deck of in-process and there's a deck of initiatives that are on the wish list to be implemented for the year. But like I said in my closing comments with regard to challenging everything, I’m going to be evaluating the assumptions of every single individual projects that’s on that list. And there’s quite a few on there. I mean there might be 100 different capital projects that make up that number. So, we’ll get through it and we’ll make good decisions.

[Operator:]

Our next question comes from Hamed Khorsand with BWS Financial. Please go ahead.

[Hamed Korsand:]

Can you just also clarify on, as far as the specialty paper as means of capacity, what kind of mix are you targeting for this year? In the past, you've been saying about 10% ramping or 15%?

[Mike Weinhold:]

Let me make sure I understand the question. Were you asking what percentage of our mix is going to be specialty going forward?

[Hamed Korsand:]

Correct. And as far as what are you targeting for this year, and then going forward, as far as the product mix?

[Mike Weinhold:]

Right now, specialty represents about 21% of the business, roughly. And we're going to look at that and figure out what can we do to increase the percentage of that. So, there is growth as expected in the specialty business that will naturally elevate that portion of the business as the graphics papers decline. But at the end of the day, we think mid to upper single-digits growth in the specialty business for this year is a likely outcome.

[Hamed Korsand:]

And then, as far as -- you've provide guidance for Q1, as far as -- start for fiscal year, as far as EBITDA being down year-over-year. Can you provide any color as for what you're expecting for free cash flow?

[Allen Campbell:]

Not at this point. We’ve tried to provide some guidance on CapEx, pension, cash taxes that should help you if you look at what were you think the market is going, that should help you get to a good cash flow number for us.

[Hamed Korsand:]

But you're giving such as wide degree right, just below 2016. I guess, you're leaving a lot of potential here open, I mean is -- why is it in preciseness?

[Allen Campbell:]

That's what we're prepared to do at this point, and we're continuing to evaluate what's the right strategy for Verso. And we're not in a position, at this point, we feel like to, provide more than this.

[Hamed Korsand:]

Then Chris, you’re new to the team here. What are you looking to accomplish as far as the gauge for yourself, going forward. Is it free cash flow growth, is it the stock price? What are you going to be looking at?

[Chris DiSantis:]

So, a lot of the metrics that we'll establish internally are going to be on things that we can control. So, there will be very specific targets for SG&A reduction. There will be very specific targets for what we want to achieve in productivity and RGAP. And there is going to be a list of things that are within our influence, and there is going to be a list of things that are outside of our influence. I mean, my job is to make sure, with regard to things that we can control and influence, that we just do a kickass job of managing those things. And I'm hoping that the operating environment, the external stuff that’s outside of our control, behaves in such a way that to support value creation as well. But the only thing that we can do is focus on the metrics that we can control. But investors’ thinking is going to be a big part of the business, going forward. So, it's not just about delivering good product on time, it's about looking at every decision that business makes every day, and thinking like a shareholder; what does this to for the economics and the ownerships, and trying to make the best decisions possible. So, investors’ thinking is going to permeate everything that we do.

[Hamed Korsand:]

So with that said, what are you guys targeting as far as the amortization of the term loan between now and the middle of the year?

[Allen Campbell:]

So we have a normal amortization that we have each quarter, and then the $9.8 million excess cash pay on March. So, due to normal amortization for two quarters, and take the $9.8 million that will put us in a position that we can consider what’s next step.

[Operator:]

Our next question comes from [indiscernible] [46.14] [Neil Mehra] with KLS. Please go ahead.

[Unidentified Analyst:]

The first one, I understand you’re not giving specific guidance on EBITDA. But if I look at some of the tailwinds you have in terms of RGAP, SG&A savings, or overhead and headquarter consolidation, and the lower pension expense. It’s pretty significant in terms of the uplift, which suggests if EBITDA is lower than 2016 that obviously, the operations are going to face some headwinds, which I understand. Do you see pricing being weaker than it was in ‘16?

[Chris DiSantis:]

Well, if you compare it to the entire year, it’s definitely weaker than ’16 as a whole. If you look at it relative to the fourth quarter, we’re expecting it kind of right now what we’re experiencing is flat to modestly down. But how that trend plays out the balance of the year, when you’re producing the kind of tonnage that we're producing, that has a huge impact on the bottom of the business.

[Unidentified Analyst:]

So, I understand that’s 4Q or 1Q versus 4Q is flat to slightly down. But that would imply for the rest of the year, given the broad EBITDA being lower and then some of the uplifts, you’re seeing additional pricing pressure of the year. Is what that would imply?

[Chris DiSantis:]

I think that’s right. But also keep in mind that when you think about 2016 pricing, don’t just think about the fourth quarter of 2016 pricing, you have to think about the average pricing for the year, the pricing beginning of the year…

[Unidentified Analyst:]

I’m looking at the entire year, not just the fourth quarter…

[Chris DiSantis:]

And then material costs are also the pressure that we’re seeing, yes. So, you’ve got volume moving against you, price against you, is some question mark around mix. And then you’ve got a couple of years of favorable input costs that are -- it’s going to move in the other direction; so input cost to be unfavorable. So, focusing then on controllables then you go the list of things that you’ve talked about. So you got a lot of RGAP, you got a lot of SG&A reduction, you got all these other good things that are happening. And question is how do they own that out?

[Unidentified Analyst:]

And then I guess I know you, at the very beginning, you made some marks around how you guys view the business or how you’re going to allocate capital appropriately and looking at cash flow return on capital. We agree with all those. We think that that should be a discipline for you guys for sure. And I know you’ve only been there for a few days. But how do you guys think about some of the projects that you have ahead of you where you can invest into shift the business to more growth and more margin accretive profile. And I’m sure you're working on that business plan with the Board. But when and if you have ideas ready, will you be able to communicate that better with investors, so we kind of know where this business is headed going forward?

[Mike Weinhold:]

It’s a good question. I think as strategy becomes clear, you’ll definitely hear more from us along those lines. We’re hesitant now because we need to go through some additional work and looking at various options. So, I can’t tell you definitive, but I would expect you would hear, obviously, more as it's crystallized.

[Chris DiSantis:]

Yes, I think on future calls, we’ll be able to give more details about the CapEx investment strategy.

[Unidentified Analyst:]

Chris, how far along, or I'm sure there was a two business plans that were kind of being evaluated, and hopefully you'll have your chance to review them and sign off or input as well. I mean how far along do you think you guys are in that process in terms of deciding on something or a few things and be able to communicate that with us?

[Chris DiSantis:]

You mean, when do I think we’ll be able to communicate that?

[Unidentified Analyst:]

Right.

[Chris DiSantis:]

I think on the next earnings call, we'll be able to give more color around the CapEx planning for the year and the types of projects. We'll be able to give you examples of projects that we're working on and how we expect that to influence the future economics of the Company.

[Unidentified Analyst:]

And then related to that is you guys mentioned M&A as well in your prepared remarks. Is that you looking to acquire and/or being sold to someone else? And what's the M&A thought process in general for you guys here?

[Allen Campbell:]

The general thought process is to just consider every option and alternative now available to the Company to create value. But there is nothing specific that we're doing or that I can communicate to you right now. That's far enough along to give you any color on this thing. So, I just want investors to know that it's a strategy for the business to consider that, like any other lever for value creation. But I don't have anything specific to communicate at this time.

[Unidentified Analyst:]

Then just last one from me, is you guys mentioned you have $98 million of free cash flow to deploy. I understand you have $9.8 million excess cash flows fee payment. Obviously, this term loan you have is somewhat under in terms of the amortization. What's the thought process around using some of that excess capital to pay that down and/or where you guys thinking in terms of the refinancing process as well?

[Allen Campbell:]

So, we're obviously thinking that the boredom thing for the Company is to pay it down and replace it as it makes sense. I think that's what we'll be looking at the next couple of quarters. As far as today, I think the market -- the timing is not right to go to market today, but a few quarters from now, we're hoping it to be different.

[Unidentified Analyst:]

The OPEB funding now down to $32 million, $36 million your previous guidance -- your last deck has high $50 million to $60 million going out for the out-years. Should we think that new $32 million is the new level? And where do you guys stand in terms of your negotiations with contracts and labors in terms of buyouts or renegotiation the pension in general for lower funding?

[Allen Campbell:]

On the first part, the industry returns the market returns, et cetera, for 2016 was stable for us, interest rate will stable for us. So, just in pension itself, it is going to be lower in '17 than we originally guided. We do think it will pop up into 2018 in the 50 plus or minus range. Positive things -- or the questions obviously going to be what happens with the business -- interest rates and asset returns. So yes, we improved our position for at least the year. And you'll see that what we've done at this OPEB, this is part of their working with our unions and versus our mills, and with our retirees, et cetera. So, the $25 million gain that we took in 2016 represents a $5 million cash savings on a go-forward. So you can say the $5 million is permanent, the rest of it was probably the difference between the $34 million and $50 plus or minus, would be timing. And we’re continuing to work with our unions and our mills and our workforce on efforts, but we don't have anything more to announce at this point.

[Operator:]

Our next question comes from Adam Ritzer with Pressprich. Please go ahead.

[Adam Ritzer:]

The last question you answered most of the things I had. But I just had a one or two things. I know you had some small assets that potentially could be sold. Has there been any progress on that, any thoughts on that, in terms of generating more cash?

[Chris DiSantis:]

The efforts are continuing and there’s nothing to announce at this point.

[Adam Ritzer:]

And the second question I had is in terms of your ForEx, at 106 in the euro where does that -- where would that have to get to before importers would not have such an economical advantage? Could you give us any level on that or any guidance on what that would have to go to?

[Chris DiSantis:]

No, I can’t really -- this is Chris. I can’t really say, because even if its returned back to those levels, there’s no telling what a competitor might do and what actions they might take. These are all independent decisions that only they can make. But you go from 130 to 106 you have a 20% type advantage, I mean, just in that shift. So it’s meaningful.

[Adam Ritzer:]

I mean the 20% is a big advantage. But it goes to 115, now the advantage is not as great, and you guys have talked about your plans; I don’t know, four out of five or five out of six being the low-cost plants in the industry. There’s got to be some advantage at a point in time, either to your importers or other companies out there. When do we see any kind of results from that?

[Chris DiSantis:]

I feel like I’d be speculating, if I give a specific number. But I can tell you that every penny helps when that exchange rate moves in our favor.

[Operator:]

Our next question comes from Sean Kelley with OFS Management. Please go ahead.

[Sean Kelley:]

Allen, what’s the rate maintenance CapEx number to think about, going forward?

[Allen Campbell:]

We have guided before somewhere around $50 million to $55 million is our base capital; and then anything above that, either new investment, special requirements, regulatory, or IT corporate and strategic investments. So that’s the general range that we would say for a baseline.

[Sean Kelley:]

And then with any of the assets you’ve taken offline since then, does that reduce at all or are you still stand by $50 million to $55 million?

[Allen Campbell:]

It could be a few million, but not a material amount.

[Sean Kelley:]

And then I heard you say that the pension funding requirements are going to step up again prior to approximately $50 million in ’18. Is that a good number you use for ‘19 and ‘20, or quite a bit of volatility in that?

[Allen Campbell:]

No, there is still volatility in it. But that would be a baseline to look [technical difficulty] step up a little bit from there.

[Sean Kelley:]

And then back to the input costs and the likelihood of them increasing this year, can you quantify that a bit? What we should be thinking about that? I think, in the presentation you showed $40 million to $50 million benefit this year from prior year.

[Allen Campbell:]

I wish that I could quantify it, but I can't, because it's a matter of negotiating positions, so there’s some negotiating. We also buy a lot of things that move with regard to underlying industries. Those industries could change overtime. So, we're clearly seeing upward pressure, but we haven't been able to put together a clear forecast of where all those things are going to shake out yet. That's all in process right now. But the point I wanted to make before is that my message very clearly to the organization is because the supplier announced that doesn't mean that they're getting it. But there is going to be quite a fight over those kind of things as they’re happening going forward.

[Sean Kelley:]

And then you mentioned the success you had on the SG&A cost offset by a number of items in '16. How much more runway do you guys have? I know you mentioned 10% overhead. But is there much left to take out? How should I think about that?

[Allen Campbell:]

Yes, there is still meaningful upside into it. So, I mean that's what we announced as a target; that's what we think is achievable; it's going to depend on the strategy of the business; it's going to depend on decline in the market; and strategically how we respond to that. So, there is a lot of variables that go into that. But I still think that there is, I still think, there is meaningful cost to take out of business and that will never stop. So regardless of the Company, whether going and going up sales or going sideways or going down, we’ll find money somewhere.

[Sean Kelley:]

And then, Allen, you said the timing isn't right to try to tackle the refi of the term loan. What needed to happen in the next couple of quarters to make the timing right?

[Allen Campbell:]

There is not -- we don't believe there is enough distance between when we went in the market last and today. So, we believe its timing; we believe it's the industry; and we'd like to be in a position where it's a competitive time period. So, it would be options for us to seek that then improve the rates and the terms. Lower than that but that’s [multiple speakers].

[Sean Kelley:]

I think Adam asked you about some smaller asset sales. Could you quantify the potential benefit or cash generation, and then maybe just provide a little bit of detail on what the small asset sales would be?

[Allen Campbell:]

Well, we have said in the past that we would close the Woodcliff mill. We’ll continue to look at options on selling that location. We have other type things that either in bits of pieces could be sold. The only real actual one we have would be the Woodcliff mill. But again, we're not in a position to announce anything.

[Mike Weinhold:]

Yes, that mill is actively been marketed. We don't have anything to report yet.

[Sean Kelley:]

There is no hide or assets or anything energy or anything like that left to spin out?

[Allen Campbell:]

There are some possibilities that we haven't started marketing.

[Chris DiSantis:]

We do have assets that are marketable. But we haven’t gone down that path yet.

[Operator:]

[Operator Instructions] Our next question comes from Zacary Sherman with Foxhill Capital Partners. Please go ahead.

[Zacary Sherman:]

I think you guys said earlier, you expect mid to upper single digits growth in your specialty business. I was wondering if you can just talk about some of the key drivers of that business. Thanks.

[Chris DiSantis:]

I’d like to turn that over to Mike Weinhold and give him a chance to give us some color on that.

[Mike Weinhold:]

And just to give a little background, if you think about flexible or specialty business, it’s really in three buckets; flexible packaging, technical and labeling converting, and we see great success on, what we call, the MG or machine glazed side of the specialty business, which is Steven’s point and the A5 asset in Androscoggin. So, we continue to grow in various products within those buckets on those assets; around the label side, release liner, technical papers, thermal base stocks, and there are some growth rates within these segments that are very positive in a marketplace. So, we continue to capitalize on that. Label papers, in general, we were seeing some pretty good activity; although, we’re also seeing some competitive activity in the cut and stack and pressure-sensitive side of the label business. So again, we’re going to continue to focus on the MG side and the technical aspects of release liner, as Chris mentioned earlier. And continue to hold our share on the papers that is active pressure sensitive.

[Operator:]

At this time, we have no further questions.

[Chris DiSantis:]

Okay. Thank you. It’s for the Company we appreciate your support and listening. And we look forward to talking to you in the future. Thank you.

[Mike Weinhold:]

Thank you, everyone.

[Operator:]

This conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.