Verso Corporation
Q2 2015 Earnings Call Transcript

Published: 11 Aug 2015

[Operator:]

Good day, and welcome to the Verso Corporation Second Quarter 2015 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Chief Executive Officer, David Paterson. Please go ahead sir.

[David Paterson:]

Thank you. Good morning and thank you for joining Verso’s second quarter 2015 earnings conference call. Joining me on this call today is our Treasurer, Tim Nusbaum and our Vice President and Chief Accounting Officer, Bob Wilhelm. I would like to remind everyone that in the course of the call in order to give you a better understanding of our performance, we will be making certain forward-looking statements. These forward-looking statements are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize or should underlying assumptions or estimates prove incorrect, actual results may vary materially from management’s expectations. If you would like further information regarding the various risks and uncertainties associated with our business, please refer to our SEC filings which are posted on our website, versoco.com under the Investor Relations tab. So let me open by saying thank you for being on today’s call and following our first quarter call, we received a lot of feedback which is appreciated in terms of the quality of our disclosures and the subjects that you are interested in hearing us discuss. We have tried to incorporate a lot of that feedback into our second quarter disclosure when we look forward to your comments on how we can improve our disclosure going forward. So, beginning on Page 3, let’s talk about the second Q, obviously substantially better than the first Q and substantially better than the previous year’s second quarter. EBITDA of $80 million, a significant increase over 2Q on a pro forma basis of $65 million in the second Q of 2014. We did face volume headwinds during the quarter and we’ll touch on that throughout the presentation, most notably our Coated freesheet volumes were down substantially year-over-year and that is an issue as we go forward. On the pricing side, we did see improvement year-over-year but slightly down quarter-over-quarter. I would comment that on the – from first to second Q we did implement price improvements those were flowing into the market in the first half of the quarter and then really mid-quarter into the end we saw volume and pricing starting to come off. On the synergy side, our synergies are running well ahead of our original forecast and we’ll spend some time talking about that. In terms of synergies savings to-date realized in terms of Verso's run rate $41 million, we’ll identify those for you and our second quarter run rate was 61%. I believe during the first quarter call, we’ve said, we’d be at 50% or so, so we are running ahead of our own view of second quarter and we’ll talk about the third quarter and the balance of the year. We did see a significant increase in our inventory levels and that was in line with what the industry experienced based on the industry data and as part of our actions that increased the inventories late in the quarter. We started taking market-related downtime associated with our mill outages and that will continue into the third quarter. We’ll touch on that and the impact of that market-related downtime was $3 million to EBITDA in the quarter. Turning to Page 4. We just show you graphically this information in terms of volume, you can see the decline in volume. You see the revenue decline. On the EBITDA side, improvement in EBITDA year-over-year and quarter-over-quarter and on the margin side, margin improvement, substantial margin improvement year-over-year and quarter-over-quarter mostly driven by cost improvement, little bit of price, but mostly cost improvement and we’ll talk about that in subsequent slides. On 5, we try to give you sort of a view of Verso’s relative performance to the industry, based on industry available statistics. You can see on the left-hand side of the chart, the shipments for – in North America were down 6% Verso’s shipments were down 5.2%. the right-hand side of the chart, we try to remind people that the – statistically, the number is down 9.5% from an industry shipment point of view, but the Bucksport Mill was closed by Verso in the fourth quarter last year. Statistically, that capacity is still in the numbers. So if you take Bucksport out, industry shipments were down 1.5, we were down 5.4. I would point out that – and we can touch in this in a second that, on the Coated groundwood side, we’ve seen a significant increase in the imports. So, the conclusion we’ve reached that while the Bucksport tons that went out of the market were picked up by importers into North America. On 6, we look at this issue of imports and man of you ask questions about this. So we try to lay out the two issues. One is FX and for us, there are three primary producing countries are zones that we compete with. The Eurozone, clearly, we evolve and find what’s going on in euro, that will affect from – predominantly the Coated groundwood grades. The Canadian dollar is decreasing that affects Coated groundwood’s super calendar grades, market pulp and the Korean Won, we put on there is that’s weakened but not substantially compared to some of the others, but it has weakened and we are seeing more increased activity from Korea in the Coated free sheet business predominantly on the West Coast. So, just wanted to highlight those three currency issues. Statistically, you can see, we’ve got the seesaw effect, particularly in Coated freesheet a much lower export activity and on the Coated groundwood side, much higher import activity. So, that in conjunction with weaker than expected demand resulted in inventory build and ultimately some down time in our system in the second quarter. On 7, let’s look at financial performance. You can see the sales dollars, operating income for the quarter, the loss position, EBITDA we’ve touched on the adjustments to EBITDA to get to $80 million in the margin. I would point out, in the Appendix to our filing or these slides, is a section starting on page 24 to 27 that separates NewPage numbers from Verso Corp. numbers and that’s available to you in this deck. We are not going to speak to it directly. I am sure you’ll have questions on it later, but we have provided an information for a NewPage . On 8, we did a bridge. As you can see price on a year-over-year basis, price up slightly, volume is down, the impact of market downtime and then, improvements, primarily input prices which are really tied to energy and show up in the form of direct energy spend as well as chemical spend and other cost which are really reductions in SG&A, year-over-year. On 9, we look forward to quarter. You can see the first quarter numbers. Slight decline in price, significant hit on volume, impact to market downtime quarter-over-quarter and then, as I think many of you focused in on the first quarter call, we had a first quarter of tough operations both on the energy and operating issues inside the paper mills. We’ve had a substantially much better quarter, both on energy as well as overall operations in that big bucket of $38 million and then input prices and other costs, input price is mainly the same issue being energy-driven and other cost being SG&A. So, substantial improvement in operations in the second quarter as we anticipated. On 10, it’s our traditional slide which we try to enhance, give more context to about the big input cost sectors and we use the check system to show magnitude. So, if you look at chemicals versus second quarter of 2014, a big improvement in chemical pricing and that should continue. The one thing that I would say on chemicals and energy is that we had not anticipated the continued decline in raw energy prices through the balance this year. So, as we see crude trading down, that’s a potential improvement for us for the second half of the year versus our forecast. On the wood/fiber side, you can see the significant year-over-year impact, negative impact of wood/fiber. I would say that, we are starting to see that moderate. We’ve been saying that improvement in wood pricing probably will occur in 2016. That looks to be lining up for that as our inventories in our most sensitive markets are improving. We’ve had a decent harvest season. We have the ability to start managing the price relationship on wood better going forward. So, I would still say that’s a 2016 improvement for us and the second half of this year is moderating versus a year ago. On 11, let’s look at liquidity and net debt. In terms of total liquidity, we entered the quarter with 187, I would point to the lower left chart, biggest change in liquidity was a reduction in availability as our receivable balances declined as volume declined during the quarter and that was more that – it was not offset by the increase in inventories in terms of the availability lines on net reduction of availability. And then, on the LC line, we see a $10 million reduction there and that’s related to a landfill issue in Wisconsin that net-net we had to increase our letter of credit to cover that landfill obligation in one of the new phase facilities. So, that’s the quarter ending liquidity position and again, in the section and the appendix on the NewPage , you’ll see a separation on some of these liquidity issues for NewPage versus the total corporation. On 12, we’ve looked at the cash position. Some of you have asked for this and where sources and uses of cash, obviously the quarter-over-quarter cash was flat. You see the restructuring and integration charges, the working capital which is primarily inventory builds, pension expense, capital spend during the quarter. Interest expense which is primarily, it is the NewPage interest note payments in the second quarter and then a paydown of the revolver to make the cash flat quarter-over-quarter. 13, this is a new chart for us. But I think we’ve talked about this, but we wanted to give you a representation of the maturity schedule for both the NewPage and the Verso corporate debt, point out in 2016, both sides of the capital structure have a maturity, 2017 and 2018 the maturities are in the NewPage debt instrument and the paydown of that as per the agreements and the 2019 is clearly a major hurdle for us and what we really have to spend in the next year or so getting ready to deal with. So, just a reminder again of not any significant debt maturities prior to 2019. Okay, let’s turn to 14 and talk about synergies and again, there are lot of questions coming out of the first quarter call. We’ve tried to expand the reporting on synergies and provide more clarity in terms of the synergies. So, many of you asked about the original January 2014 bank presentation and how that was lining up with our experience. So we put that information back up on the board. And then our projection at that time for the second quarter. Actual is the third column. You can see the actual 41 is substantially above what we had estimated over a year ago and the cost coming in quite significantly lower. And most of the cost improvement is really related to our estimates to the time of the severance expenses, which were coming in lower, mainly due to the fact that both companies weren’t filling up in positions prior to the closure and the merger. So there weren’t as many severance expenses related to SG&A reductions. In terms of the run rate through the second quarter, you can see, we are looking at 107 which drives a 61% number. As we go through the third quarter, we continue to see similar performance in terms of saying they are ahead of the curves and staying bringing more cash down the bottom-line and I am sure there will be questions about that going forward. But, on this page, we just wanted to lay out for you – for your request what the original estimate is, where we think we are and where are those dollars are coming from. 15, again, many questions about synergies and how they flow and where they come from. So here we try to graphically show that $41 million are realized savings to-date and where they came from. So the smallest bar there on the bottom is synergies that have been recorded in the Verso entity. Those are primarily driven by operational improvements and sourcing improvements. The green stack or the next up from the bottom is similarly ops and sourcing improvements inside of the NewPage asset base. And top bar, the red bar is what gives the most questions typically is the shared services agreement, which is essentially the delta between the historical SG&A cost of running legacy NewPage and the SG&A reductions we have achieved to-date within the NewPage entity and that entire bar of $41 million is the synergies and those synergies transfer to Verso. So that shows you how they are flowing, where they are coming from, how they stack up and hopefully gives you a better feel for the synergy issues. On 16, we’ll spend a minute about R-Gap and I put this in here because we continue to get both questions verbally as well as people writing that R-Gap isn’t real R-Gap it’s somehow not a sustainable process and we just wanted to spend a minute and there is a further slide on R-Gap in the appendix for your reading. But, just give you an example, and what we do in R-Gap. And so, we’ve talked about the technique we use and how we proceed and how we set the targets and how we monitor ourselves. But essentially, this example says that we can improve the first quality production off this machine number 14 at Wisconsin Rapids. That’s a significant cost improvement, cost savings for us in the range of $6 million. I would point out several things that this slide tells us. One is that, R-Gap to us is owned by the operations people at the mill side. It is not a corporate initiative. So, this is – the folks at Wisconsin Rapid on that machine taking ownership of improvement as performance being measured against that. Then, it leads to a series of discussions amongst the operating crews of how to continue the process even beyond this. And clearly, we think this methodology of ownership at the local level on the machine floor level is the way to drive sustainable change. This is an example where this is not an expensive thing to execute. This is all about changing the waivers on the machine and changing the way we operate the machine. It is real. It is demonstratable. It’s happening across the system everyday. There are hundreds of these initiatives ongoing across the eight mill system that makes up Verso and we believe this methodology – because primarily it’s owned by the operators it’s sustainable. So, we are real big believers in the R-Gap process and methodology and just wanted to spend a second trying some clarity and give an example that I think is pretty easy to follow. Okay, on 17, outlook for the third quarter. We are going to say, we are going to be at a 75% run rate at the end of the third quarter. Hopefully, we’ll beat that. We are ahead of schedule both in terms of run rate and delivering real savings to the bottom-line. We still see, we see volumes increasing on a seasonal basis as it’s normal, but it’s coming off a pretty low volume level on the second quarter. So we haven’t seen any volume recovery off at this point in the second quarter. But we see this is now the effect coming in into the third, largely due that as well as the import issue that we discussed. We are in the process of taking 75,000 tons of market-related downtime across our system that has been ongoing in July and August. The way we are doing it primarily is, I think you all know, we have major maintenance outages scheduled through the summer months into the fall and we are doing two things there, one we’re in the case where we need to extend the number of days to eliminate tons. So we don’t go up and down. We are just staying on little bit longer, but also historically, we had consumed market pulp during these outages to make paper once the paper machine maintenances were done typically your recovery have maintenance outages on your paper machines. We’ve not done that this year. So we are not consuming market pulp to make paper while the rest of the mill was down. And that has two effects, obviously it reduces the number of tons you make, but also those tons of our cost, because that’s the most expensive way really to make a ton of paper. So our cost position should be much better on those tons we have. During the third Q, we have two significant outages, Wisconsin Rapids, and our Luke, Maryland mill. I think Wisconsin Rapids is complete and Luke is in the process now. We believe pricing reflect for the second quarter, input prices should be relatively flat though again I think there is an opportunity due to the energy situation we may see chemicals and all energy-related expenses continue to trend down. And of course, during the quarter, we got the ruling out of the US government on the SC, Subsidy Case, and I would say we are evaluating to see what the impact of that is. Clearly, the Canadian producers and all cases, I believe were appealing that process is ongoing but while the appeals are going, the duties are being collected. So, that’s an issue to watch. So, operator, with that, we’ll turn it over to questions to the group.

[Operator:]

[Operator Instructions] Our first question is from Bruce Klein. Your line is open.

[Bruce Klein:]

Hi guys. Just wondering on the NewPage on the appendix, what the EBITDA figure states? Is it 37 remain our figure and then you said you see adjustment, but I guess, if I look at the non-guarantor sub of the 10-Q it seems to imply, I think it’s a different figure and I was trying to reconcile the two?

[David Paterson:]

I’ll turn it over to our team here.

[Bob Wilhelm:]

Sure, this is Bob Wilhelm. Page 25 in the appendix does show the three month or Q2 adjusted EBITDA for the NewPage side at $37 million. If we have follow-up questions relating back to the Q, we probably should take that separately offline.

[Bruce Klein:]

And what is – it says see GAAP directed EBITDA reconciliation. Where would I get that? Is that’s the consolidated press release or is that somewhere else?

[Bob Wilhelm:]

We do not provide a full reconciliation of the NewPage side component of that.

[Bruce Klein:]

Okay. And then, I guess, secondly, I think the Q has – you guys NewPage provided a secured loan to Verso of $60 million bucks. What is the…

[David Paterson:]

That’ the size of the facility that we needed it.

[Bruce Klein:]

Right, and what was drawn?

[David Paterson:]

Well, in the Q, we said the current balance is $29 million.

[Bruce Klein:]

Okay, and what is that secured by?

[David Paterson:]

The hydro assets at the Androscoggin, Maine which were unencumbered assets.

[Bruce Klein:]

Okay. And, is there expected to be more inter-company loans or beyond that facility?

[David Paterson:]

Well that facility is there. Our intention is to pay it back, pay it down as our seasonal cash flows improve along with our seasonal improvement in the third and fourth quarters. So, that’s how we see it.

[Bruce Klein:]

Okay. And then the working capital, is that expected to be a source in the third quarter and fourth quarter?

[David Paterson:]

Well, let’s see, I mean, we are clearly taking significant amount of market downtime and that’s to address the inventory levels which consume – which was the negative driver of working capital. So, yes, that would be our intent.

[Bruce Klein:]

Okay, I’ll pass it on. Thanks guys.

[David Paterson:]

Thanks, Bruce.

[Operator:]

Our next question is from Bill Hoffmann. Your line is open.

[Bill Hoffmann:]

Yes, thanks. Dave, could you just a little bit more about market conditions? I mean, 75,000 tons of downtime seems to be a lot in the quarter. So I want to get a sense of – do you feel like that it’s balancing the market and two also, maybe how to think about that from a Verso assets versus NewPage and to the cost absorption hit from all that downtime?

[David Paterson:]

Okay, well, I guess, I would answer first by saying that, we were not trying to fix the market. We are trying to deal with what we see our order book looking like in the third quarter and our inventory levels going into the quarter. And we really set it up, so at the year, there is a true seasonality to the order book and the working capital associated with the order book. And so, as we look at the end of the year, we typically build inventories starting, Thanksgiving through the first quarter. We’ve talked a lot about that. So we don’t want to go into that seasonally slow period with our inventories and to get that done, the most cost-effective way for us to take market-related downtime is when we are down through our annual maintenance outages and those tend to occur between, June, July, August and September and maybe one in October. So, to us, it’s a cost and market issue and we are really focused on that year-end working capital number and knowing that the period December through really April is typically pretty slow. So, we have to do it, we want to do it in a most cost-effective way which means you do it when you are going to have any way for maintenance and not take a mill down twice in a year. So that’s our rationale for doing it. I think the market is unclear whether we’ve had a significant structural decline in consumption based on one quarter’s data in the second quarter and we can’t – we are not going to sit there and wait to see which way it’s going to go. So we are going to act. So that would be my answer.

[Bill Hoffmann:]

Thanks, and then, just as you look at the – sort of your order books today, through July, I mean, typically you should be seeing normal seasonal uptick. How would you characterize this year’s seasonal pull?

[David Paterson:]

Well, the seasonality factor is still there. It’s just coming off a disappointing second quarter volume level. So, I think I said in my opening comments, we didn’t – we haven’t seen that that loss demand in the second quarter re-appear but we are coming off the seasonality effect is there just off of a lower base. It’s the way I would describe it.

[Bill Hoffmann:]

Okay, and then, in the second quarter specifically, it looks like the operating income number especially with – for the pulp side of the business was lower. Was anything going on there? How you guys are operating the business?

[David Paterson:]

Not really, guys, any comments there?

[Bob Wilhelm:]

Yes, this is Bob Wilhelm. Looking comparatively between Q1 and Q2, pulp prices is kind of relatively flat there, but year-over-year, we have seen a decline. Pulp prices come down which would affect the profitability of the pulp segment.

[David Paterson:]

Right, but there is nothing, I mean we are trying to maximize pulp production across our system and we’ve had a pretty good operating quarter. So, nothing unusual I think we would say.

[Bill Hoffmann:]

Okay, and then, just from a pure liquidity standpoint, obviously, a lot of the coupons were due, call it to July, August, timeframe here. And you look at sort of where the liquidity is. Can you talk about where your liquidity is today? We know that you are through that period.

[David Paterson:]

Tim, do you want to?

[Tim Nusbaum:]

Yes, well, we met those obligations mid-July, 1st of August using the cash flow within the company and our revolving credit facilities. Liquidity obviously is tighter reported in the second quartet, but at a natural low.

[David Paterson:]

Well, I think, we’ve been saying all along seasonally, for Verso, because of the semi-annual interest payments and I mean, off the traditionally weaker first and second quarters of July, August is typically our tightest liquidity period and that’s repeated itself not surprisingly, we just paid out $120 million bucks, right Tim, of interest payments in two weeks.

[Tim Nusbaum:]

Right.

[David Paterson:]

And, now we are into our seasonally stronger cash flow periods and we’ll build the back up like we always do.

[Bill Hoffmann:]

Yes, I know that’s good. And then, any thoughts on working capital released between through the middle of the year and year-end from a pure cash flow standpoint?

[David Paterson:]

Well, again, I think that was the question that Bruce asked, but typically we will harvest cash late into the fourth quarter and then as we consume cash again as we make that semi-annual interest payment in Jan, Feb and we go into our seasonally slow period. So that pattern is repeating itself and working capital tends to decline basically through November and then it really depends how soft the winter months are.

[Bill Hoffmann:]

Okay, thanks, Dave and just last question.

[David Paterson:]

Sure.

[Bill Hoffmann:]

Just from an asset standpoint, given where you are, looking at sort of the volumes in the market, any thoughts on further rationalization of your own capacity heading into next year?

[David Paterson:]

Well, I think, we look at that all the time and we look at which assets are viable and which aren’t and that’s a constant process with us. So, yes, we are looking at that.

[Bill Hoffmann:]

Okay, thank you. Good luck.

[David Paterson:]

Thank you.

[Operator:]

Our next question is from Richard Kus. Your line is open.

[Richard Kus:]

Hey good morning, Dave.

[David Paterson:]

Good morning.

[Richard Kus:]

So, on synergies, just to be clear on what you are presenting on slide 15 there, is the right way to read this that over the first six months of the year, you guys realized $41 million in the P&L and it looks like the light green bar that’s what stayed and is recorded in the NewPage entity’s EBITDA, the dark green is in Verso and then the red is recorded at NewPage but then effectively, canceled out on a transfer to Verso.

[David Paterson:]

My guys are shaking their heads, yes. So, the way to read it.

[Richard Kus:]

Okay, that red bar, what is the value of that as of June versus March?

[David Paterson:]

The absolute value?

[Richard Kus:]

Yes, I am curious what amount of synergies are transferred from NewPage to verso in Q2, versus Q1?

[David Paterson:]

Well, I know the size of the green and the red bar is $36 million for that ending number, right?

[Bob Wilhelm:]

That’s right. So, this is Bob Wilhelm again. A little bit of information for you there. For the synergy pass between NewPage and Verso, that was around $2 million in March – in the month of March and it’s in the $4 million range in the month of June, just to show the indication of the change. The assay or shared service agreement flows moved also, but both of those are closer to four in both periods with June being a little higher than March.

[Richard Kus:]

And, as you think about downtime, the 75,000 tons, does that include the impact of the maintenance outages at Wisconsin Rapids and Luke’s?

[David Paterson:]

Well, the way we calculate it is, again, historically, we would have dry fiber some of the paper machines during the outages to make tons. So the answer is, yes, but we are making – I am sorry, I have to be clear. Normally, we are reducing tons while the mill was partially down and getting ready to come back up and using pulp to do that. We’ve decided not to do that. So it’s entirely cold outage. So that would be a market downtime and then, as necessary we are adding days to the total outage to reach that 75 and it’s spread across the mills as they occur, as they take their outages.

[Richard Kus:]

Okay. I think I understand. And what do you expect the total EBITDA impact from those outages to be? I think you had said $3 million in Q2?

[David Paterson:]

No, it’s about the same ratio, so, I mean, I would say $20 million bucks or so.

[Richard Kus:]

Okay, got it.

[David Paterson:]

From an EBITDA, yes.

[Richard Kus:]

Right, and then how much maintenance cost that you have in Q2?

[David Paterson:]

Guys, so it’s what…

[Bob Wilhelm:]

Yes, we had about $12 million of maintenance cost in Q2.

[Richard Kus:]

Okay, got it. From a – I guess, a strategic standpoint, did you guys see any negative impacts on volume from the separation of your brands from those that were sold to Catalyst over the course of Q2? And are you seeing that now? I am just curious from a volume standpoint, now that guys know who is selling what paper.

[David Paterson:]

Well, I think there was a transition period there particularly on the brand names that caused a little bit of confusion, remember and we – as part of the transaction, Catalyst acquired several traditional brands names and so there was a little bit of confusion there. I would say, it was a problem. It wasn’t a significant cause of the volume issued, the net volume for the industry didn’t changed, just there was some period of orders were flowing to Catalyst that maybe that customer wanted our brand but they ordered the old brand. So, but that was not significant.

[Richard Kus:]

Okay, understood. And then lastly, from me, on the inter-company loan, how much EBITDA did those hydropower assets do?

[David Paterson:]

We’ve never identified that and we really wanted – it’s really the basis of the loan. Tim, jump in here, what - we’ve had independent valuations of hydro assets on those in the past. We’ve used these hydro assets to secure other short-term financings and so it’s really the basis where we think the market value of the assets are.

[Tim Nusbaum:]

I think that’s a fair answer Dave. We had appraisal was done of the assets, so, when we get an external revolver, on the Verso side, over a year ago. And so we’ve continued to view as holding that value.

[Richard Kus:]

Okay, and did you guys consider actually using a bank to make that loan instead of NewPage ?

[David Paterson:]

Certainly an option, it’s not one we thought was necessary to pursue at this time.

[Richard Kus:]

Okay, thanks very much.

[David Paterson:]

Thank you.

[Operator:]

Our next question is from Kevin Cohen. Your line is open.

[Kevin Cohen:]

Good morning. Thanks for taking the questions. I guess, first in terms of meeting the cash obligations over the next 12 months, I guess, what price factors that contemplate? And does that assume that the $20 per ton price decrease reported by VC is the kind of the first and last move in pricing done at least or any thoughts on that as well?

[David Paterson:]

Well, I think we’ve taken a fairly conservative view going forward on the market conditions over the next 12 months and that’s part and partial is why we made the decision and it takes so much market downtime rather than build more inventory, which tends to have a negative impact on pricing decisions. So that’s our reaction to that. I think, and that’s a way we would intend to operate going forward. I think, pricing needs to be seen which way it goes. I mean, clearly, as a producer, we don’t want to see any further price declines but hope the market will determine that.

[Kevin Cohen:]

Great and then in terms of servicing value on the hydro front, clearly, the company did sell in Verso side, I guess, is there any thoughts of doing some of the NewPage side for the hydro assets there? Or is that sort of a plan B?

[David Paterson:]

Well, hydro and then, Tim can jump in again. Hydro access on the NewPage assets in Wisconsin are pretty small, I think.

[Tim Nusbaum:]

Well, yes, but they are also a part of Witco which is a non-guarantor element of the NewPage structure. And also, Regulated Utilities. I think there is less opportunity there than exists on the Verso side.

[David Paterson:]

Right, so, yes, but you are right. We have two sets of power assets in each company side and they have different issues associated with them. But we think, from a pure market point of view, the hydro asset at Androscoggin are the best assets to look at, I guess, be the way to say it.

[Kevin Cohen:]

Great. Thanks a lot.

[Operator:]

Our next question is from Matthew Sandschafer. Your line is open.

[Matthew Sandschafer:]

Hi guys. I wanted to just try to clarify the conversation about the synergy transfer. Should I look at this chart on Slide 15 and say, okay, 14 less two 12 million that’s how much was transferred from Verso - or from NewPage to Verso in the first quarter. The $36 million is cited on the – in the bar in June, $36 million plus $12 million that $24 million is how much was transferred into the EBITDA calculation?

[Bob Wilhelm:]

This is Bob Wilhelm. Let me just comment a little bit on that. So first off, all savings accrue to Verso, whether they’re seen in the Verso entity or part of the synergy invoice for part of the surplus payment. The full amount ends up going to Verso. As far as cash movements go, yes, you’ll see both of these elements in that – as far as flowing to Verso from NewPage . We do have a table in the 10-Q that condensed consolidating note that does show operating income and expenses appropriate to each, the size the NewPage side or the Verso side. And that centrally reflects the cash movement between the two for synergies and shared services. Through the first quarter that was around $12 million and through the end of the second quarter, that’s around $36 million. So it just ties that back to the Q for you.

[Matthew Sandschafer:]

And that 36 is a 1H number, not just a 2Q number?

[Bob Wilhelm:]

Yes.

[David Paterson:]

It’s a cumulative number.

[Bob Wilhelm:]

Yes, that’s correct.

[Matthew Sandschafer:]

Just wanted to make sure. Thank you.

[David Paterson:]

I wish it was a 1H number, sorry.

[Operator:]

Our next question is from Andrew Thal [Ph]. Your line is open.

[Unidentified Analyst:]

Hi, I mean, it’s a little bit of a follow-up on Matt’s question, but I want to confirm that the transfers that NewPage makes to Verso, does that deducted from NewPage ’s operating cash flow right?

[Bob Wilhelm:]

They are actual cash flows out of the NewPage entity, yes.

[Unidentified Analyst:]

And they are in the operating cash flow?

[Bob Wilhelm:]

Yes.

[Unidentified Analyst:]

Thank you.

[David Paterson:]

Okay.

[Operator:]

Our next question is from Howard Bryerman. Your line is open.

[Howard Bryerman:]

Thank you. Dave, I was just looking at the margins which were pretty impressive. How should we look at the margins going forward in the third and fourth quarters? Just is this the sustainable run rate?

[David Paterson:]

Well, I think, I mean, the margins comprise of two – as well have two major components, price and operating cost, typically, our operating cost will be in good shape through the warm – until the cold weather months hits in the north and remembering that particularly in Maine, we traditionally suffered a huge energy hit in the State of Maine in the winter months. So, I think from a cost position, we are in good shape. Pricing is a couple of colors of indicated maybe problematic, but that again is why we’ve sort of taken these steps to reduce our finished good inventories and tried to manage our working capital closer. So, yes, I think they are sustainable. They should barring some significant price decline they should actually improve up until the cold weather months and then we just hang on in the cold weather months.

[Howard Bryerman:]

Okay, and then, just coming back to synergies, this is probably my own inability to grasp. This run rate…

[David Paterson:]

Wait, tell us how we can explain it better, that’s what we are looking for?

[Howard Bryerman:]

No, no, no, it’s just probably – but, this $41 million in the P&L to-date, so, what can we expect – I believe in the first quarter we went through this, what can we expect full year in the P&L? I think that the number was 80 – close to $80 million is, does that still holds or is that a little better than that at this point?

[David Paterson:]

Well, I think we are comfortable. We indicated sort of $80 million on the call and we are comfortable with that. But of course, we are tracking, we’ve been tracking above our own internal forecast. So, we’ll have one more update on our synergies.

[Howard Bryerman:]

Sort of 175, sort of the remaining $95 million if you will, comes through in 2016, when in the first half throughout the year, I mean originally if you – I think your forecast was between 12 and 18 months or something among those lines?

[David Paterson:]

But we use an 18 month forecast and so that would take us out basically to July of next year, remember we didn’t close until January of this year. So, and we still feel good about that and again this is maybe a little bit of the run rate versus the realized question, but, the run rate is indicative of momentum and the cash follows the momentum. So as we keep accelerating towards full realization of the 175 and run rate the cash follows and it looks to have about a quarter lag on it as we seem to ramp up and remembering, at least the simple way I think about is, think about SG&A or headcount as people leave the company, we book that expense when they leave, when you book the savings on a monthly basis. So every month that headcount has been reduced, that accumulates in the synergy number. And we’ve made a lot of progress both in the SG&A area and that we are starting to see a lot of momentum in the operations area. So each month passes we get that momentum building into the cash realized column. So, I guess, I don’t have a specific answer because it’s based on performance, but management feels very strongly that that we are going to deliver on the synergy, deliver on the cash and that it’s today after five months or now and I guess, seven months into it and we are tracking above our own internal forecast and feel good about that.

[Howard Bryerman:]

Okay and if I may, just one more about liquidity, obviously, there is an interest payment coming up in January and then I am looking at your chart here that shows maturities in 2016. As you go through your internal forecasting, is there any reason to believe that you will not be able to meet these obligations through 2016? I am trying to build a runway. You’ve done an excellent job so far just trying to understand that there is plenty of runway in front of you in terms of turning the ship here if you will?

[David Paterson:]

Well, the two, I mean, I’ll give you my view. The two critical factors for Verso are to achieve the synergies and bring those synergies to the bottom-line and then, what will the market do over the next – let’s call it forecast. So, I think, we’ve talked about synergy and hopefully, you sense management’s certainty around the synergy targets and execution in the market side I think, as demonstrated by our decisions on operating – internal operating rates and how we are going to run the system that we’re really focused on the marketplace and those two factors are what will provide the liquidity to meet our obligations and that’s our business plan.

[Howard Bryerman:]

Okay, so then in conclusion, Dave, I’d just like to say, thank you so much for all the information that you’ve provided. I think you guys have made a tremendous leap forward in terms of listening to everyone’s requests and despite the concentration on a lot of the negatives or the challenges I think you guys doing a great job and I am not a big fan of saying congratulations, but congratulations on doing a great job and look forward to you to continue.

[David Paterson:]

Thanks, Howard and again, to all participants, we are still listened, so we can improve reporting within our ability. We certainly look forward to doing that in the future as well. So thanks, Howard.

[Howard Bryerman:]

Okay.

[Operator:]

Our next question is from Shaun Kelly. Your line is open.

[Shaun Kelly:]

I too have a question on slide 15 and I am just trying to…

[David Paterson:]

That’s a popular slide.

[Shaun Kelly:]

Yes, it’s – so I heard, $36 million has been paid over for synergies. Is this one-time benefit over to Verso or let’s say you are flat on synergies a year from now? Would you pay another $36 million over a year from now?

[David Paterson:]

No, it’s not an – it is an earned synergy, I guess is – we have to demonstrate it, we have to document it, we have to show that – and so it’s not, I mean, in theory, that 40, that $36 million could stay at $36 million if we don’t generate anymore synergies. So there is no guarantee of a payment. It has to be demonstrated, right. We have to earn it.

[Shaun Kelly:]

Okay, so if there is…

[David Paterson:]

Shaun, Tim wants to…

[Tim Nusbaum:]

I mean, but, they represent reductions in SG&A as well as reductions in operating costs at the NewPage facilities to the extent the reductions continue, these payments will continue which mirror the reduction that have occurred and are continuing.

[David Paterson:]

But based on actual performance.

[Shaun Kelly:]

Okay, so if there is no additional synergy achieved, there is no additional cash flow going for that particular saving?

[David Paterson:]

Right, yes, it has to be a real achieved cost reduction in the rules that we’ve all set up and the rules we are following internally.

[Shaun Kelly:]

Okay, and so when you – for reporting purposes, when you invoice NewPage for that synergy, that invoices it’s not going to be – so, EBITDA is going to be reduced by whatever that invoice amount is for your compliance purposes, correct?

[David Paterson:]

Well, EBITDA is reduced only to the extent that savings have been realized and EBITDA increased as a result of the savings. So you think about on the NewPage side, you had savings which improve the EBITDA and then you had synergy payments which reduced EBITDA into net neutral to EBITDA for NewPage ’s perspective to increase to EBITDA from Verso’s perspective. It goes back to the principles that synergies are achieved only because of the transaction of putting the two companies together and that’s the basis. So, without the transaction, the argument is the synergies wouldn’t have been realized. Therefore, I mean, that’s the logic of it. But Tim says the right way, it’s a zero sum gain in terms of NewPage EBITDA versus its historical NewPage .

[Shaun Kelly:]

Okay, and then, the steering committee for the agreement, has there been any material movement of production from Verso mills to NewPage mills or vice versa? Is there, any comment on that on how you’ve moved production around?

[David Paterson:]

Well, the comment I would make is, part of the synergies are trying to move orders to the lowest freight location or the most efficient paper machine. But, in terms of absolute volumes, no, there is no sort of – we would move Verso – traditional Verso orders to a NewPage mill and we move the other way to optimize the system. But not, net-net in terms of the absolute number of tons moved from one to the other, it’s immaterial. It’s all about the mix of tons and the freight locations we ship those tons from remembering that, your freight is the synergy to us, so and we pay the freight, so we can shorten the distance by moving an order that you saw in – say, moving it to Luke Maryland, because we save freight. That’s a good decision for the company.

[Shaun Kelly:]

Okay, and then, one last thing, like Howard said, this is a lot better reporting. Really appreciate that and a suggestion from me would be, if you could lay out in a slide, the money back and forth between Verso and NewPage . So, then a company loan, the synergies invoiced, that sort of things, just to help us see how the money is being transferred back and forth. I know it’s – it sounds like it’s buried in one of the filings, but, it’d just be nice to have it summarized like you’ve done some of this other stuff it’d be a nice step forward for the next quarter, if you could do that.

[David Paterson:]

Next call, we’ll look at it, but remembering some of it is, lot of it’s driven by synergies, some of it’s driven by the terms of the agreement and one-time transfers and some of it’s this – I’ll call it, ability to do inter-company loans. So it’s going to be a moving target depending on what – we’ll give you, I guess, we’ll have to give me a time period, right and then a quarter or something like that.

[Shaun Kelly:]

Yes, it just be helpful, you can obviously sense everyone’s questions around liquidity and trying to figure out how the money is flowing back and forth. So really appreciate those things for what you’ve done this quarter.

[David Paterson:]

Thank you.

[Operator:]

And we will take our final question from Thomas Howard. Your line is open.

[Unidentified Analyst:]

Hi, good morning.

[David Paterson:]

Good morning.

[Unidentified Analyst:]

At the risk of being a little too technical. In the NewPage term loan credit agreement, what cost exactly allows you to make that inter-company loans from NewPage Corp to the verso? I don’t think, that like permitted investments curve out?

[David Paterson:]

It is a permitted investment basket.

[Unidentified Analyst:]

And there is more room under that permitted investment basket if you may to…

[David Paterson:]

I think that basket…

[Unidentified Analyst:]

Pursuing similar transactions?

[David Paterson:]

Yes, the basket, the general baskets are $150 million, if there was a mean we would extend the loan to that amount. I mean, but that if the general basket, the loan is capped at – if we are – because we set up between the two companies’ capped in 60. Because that’s a control level relative to the asset valuations for and that’s secured by the hydro assets and we thought that was a fair market valuation based on historical views of the asset.

[Unidentified Analyst:]

Right, and then, just to confirm, you have additional capacity to actually raise unsecured debt at NewPage , if you were to need liquid you set for some type of currencies?

[Bob Wilhelm:]

There are a number of baskets in there, so.

[Unidentified Analyst:]

And this norm wouldn’t kind of get to those baskets?

[Bob Wilhelm:]

I am sorry.

[David Paterson:]

He is asking, those $60 million loan we kind of get surpassed.

[Bob Wilhelm:]

It has no impacts in those baskets.

[David Paterson:]

It’s not debt on NewPage is booked to finance it.

[Unidentified Analyst:]

Understood, understood. And just – I know, you’ve getting some good disclosure on how you would split up the pro forma LTM adjusted EBITDA. It looks roughly like 210 out of NewPage and the remainder out of Verso and it looks like that’s - is it giving Verso the credit for those realized synergy savings. I was curious, how that number would look if you were trying to get to the NewPage EBITDA that was used for the maintenance covenant, the leverage covenant in the NewPage term loan? It’s probably a very different calculation. That’s my understanding.

[David Paterson:]

The maintenance covenant on the term loan would be similar.

[Unidentified Analyst:]

Okay.

[David Paterson:]

Also, when we include the productivity, as well as the unrealized synergies – excuse me, synergies weren’t part of that, but at the productivity element, we’ll go to that calculation as well.

[Unidentified Analyst:]

Okay. I guess, from what’s been disclosed, it looks like that test us around four times and you have approximately 900 million from the NewPage currently? I was just curious, do you expect to remain sustained pro forma compliance with that test?

[David Paterson:]

Well, I think the maintenance covenant is 3.9 at this point. And we do expect to be in compliance this quarter.

[Unidentified Analyst:]

All right. And just to confirm, I apologize. Yes, this is my last question, I am looking at the pro forma – pardon me, the consolidating disclosure in the second quarter Q versus first quarter Q and it looks like, call it $67 million payments from subsidiaries received by the parent and out of guarantors..

[David Paterson:]

Where are we looking at?

[Unidentified Analyst:]

Actually, I just convinced myself. So my initial interpretations I am correct. I’ll follow-up with that.

[David Paterson:]

Yes, follow-up, we are available for follow-ups. So, thank you.

[Unidentified Analyst:]

Understood. All right. Thank you very much.

[David Paterson:]

Great.

[Operator:]

I would now like to turn the call back to over Mr. David Paterson for any closing remarks.

[David Paterson:]

Well, thank you all for participating and your interest in Verso. We will do the normal – if you need a follow-up call, please contact us. Again, your input in terms of trying to enhance the disclosure was very helpful. Hopefully, we’ve met a lot of your concerns. We are willing to continue to try to improving it and enhance the disclosure where practicable for us and we look forward to discussing the company with you after the third quarter. So thank you very much.

[Operator:]

This does conclude today’s program. You may now disconnect at any time.

[Bob Wilhelm:]

Thanks.

[David Paterson:]

Thanks.