Verso Corporation
Q3 2015 Earnings Call Transcript

Published: 16 Nov 2015

[Operator:]

Good morning and welcome to the Verso Corporation's Third Quarter 2015 Earnings Conference Call. All participants are in a listen-only-mode. There will be an opportunity for you to ask questions at the end of today's presentation. [Operator Instructions] Please note that this conference is being recorded. A replay of this call will be available on the investor’s page of Verso's website after 12 PM Eastern Time today. At this time, I would like to turn the presentation over to Mr. Tim Nusbaum. You may now begin.

[Tim Nusbaum:]

Good morning and thank you for joining Verso's third quarter 2015 earnings call. Representing Verso today on this call is President and Chief Executive Officer Dave Patterson and Allen Campbell, Senior Vice President and Chief Financial Officer. Before turning the call over to Dave, I'd like to remind everyone that in the course of this call, in order to give you a better understanding of our performance, we will make certain forward-looking statements. These forward-looking statements are subject to risk 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 various SEC filings which are posted on our website, Verso.com, under the investor relations tab. Dave.

[David Paterson:]

Thank you, Tim, and good morning to everyone on the call. Now let's talk about the third-quarter highlights to start. From an industry perspective, during the third quarter we saw coated freesheet shipments down 6.9% versus the previous year. On the coated ground wood side we saw shipments down 13.9%. On the SC paper side we saw them down 7.1%. From a pricing perspective, as reported by RISI, we saw pricing down 2% to 2.5% across the board. From a Verso perspective, our sales were $782 million, down 10% versus last year. Adjusted EBITDA was 10.7%. We announced during the quarter the idling of Wickliffe and the reconfiguration of our Androscoggin mill. We took planned downtime at Luke, Wisconsin Rapids, Wickliffe and Stevens Point totaling some 79,000 tons which significantly impacted our EBITDA because of unabsorbed fixed cost and related restarting expenses, and we achieved synergies to date of $82 million. Now let's touch on today's announcement concerning the potential restructuring and asset sales. Given our current liquidity position and projection of operating cash flows for the remainder of 2015 and 2016 we anticipate that we will not have the resources to fund our future cash obligations. So we have engaged PJT Partners to provide restructuring and transitional services, O'Melveny & Myers to provide legal advice and assistance. In addition, we're exploring several alternatives to improve our cash flow and liquidity. Included in these are potential asset sales of Stevens Point, the Androscoggin mill and its hydro assets, our Duluth facility and the recently idled Wickliffe facility are all under consideration. Now I'll turn it over to Allen.

[Allen Campbell:]

Thank you, Dave. Slide 5 shows key financial items comparing third quarter versus prior quarter and same quarter last year on a pro forma basis. Pro forma combines NewPage and Verso entities for last year and excludes those mills that are not part of the deal going forward. As Dave mentioned, our sales were down versus last year 10%, which about 9% was volume and 1% price. Adjusted EBITDA margin was up slightly over last quarter, but down from last year. Slide 6 walks adjusted EBITDA from third quarter 2014 to 2015. I'll point out the key items. Third quarter '14 adjusted EBITDA of $111 million, included $2 million of open positions that were not filled and are part of the $42 million of synergy savings for the third quarter of 2015. Our team's excellent progress on the integration helps offset some other issues in the quarter. Price and volume contributed $17 million of decline in the quarter, but a previously mentioned market downtime caused $19 million of unfavorable variances in the quarter. We experienced significant operations issues in the third quarter. The majority of the variances were in our Luke and Wisconsin Rapids mills where both had major difficulties following planned major maintenance outages, along with reliability issues during the period. Though we had a challenging quarter from a market and operations standpoint we still generated double-digit EBITDA margin. Turning to the next page, we show the same type of bridge for a year-to-date basis. The drivers are very consistent with the third quarter, as I mentioned before, with synergies being very strong, but offset by market downtime and volume and the operations issues from the third quarter that we talked about. Year-to-date our EBITDA is at $208 million. Our synergy is an area that we're pretty proud of. We had - our year-to-date savings are at $82 million, $48 million of that is in our SG&A numbers. Synergies are also being seen on our direct cost and R-GAP, which is our operations improvement program, which helped primarily in usage, labor and spending and cost of goods sold. Costs to achieve synergies has been at $16 million and we continue to expect that this to come in well below the original target. Slide 9 shows the direction of input price movements compared to last quarter and to pro forma third quarter '14. The story around input price has not changed versus prior year with wood up and chemicals and energy down. Compared to quarter two, we have some increase in chemical prices but wood has moved in a positive direction. In quarter three we experienced a significant reduction in liquidity as we decreased $115 million to $72 million in the quarter. Much of this decline was related to third quarter interest payments of $118 million. Earnings were not strong enough to offset the outflow. Net holdco that increased to $2.796 billion as we increased our revolver borrowings in the quarter. On slide 11 we show our change in cash. The interest of $118 million mentioned earlier was the largest outflow. Adjusted EBIT [ph] brought in $84 million positive, but you see usages in our working capital related to reduced accounts payable and accrued liabilities and also an increased accounts receivable more than offset our inventory decline we had in the period. We then use the revolver as shown to offset the negative cash flow. Turning to our last slide, give you an outlook for our fourth quarter. We're looking at prices to be down just slightly from the third quarter. We expect input prices to be relatively flat as also with the volumes third to the fourth quarter. We believe our synergies will maintain on schedule and we noted a couple of mills that have gone down. We've idled our Wickliffe mill as of November 2nd and our optimization at Androscoggin mill continues as A2 ceased production October 23rd. As we open up for questions please bear in mind that we are evaluating several alternatives to improve our cash flows and liquidity, as Dave mentioned earlier. We are not in a position to announce anything further as we are in the process and will need time to properly assess. We will now like to open the call up for questions.

[Operator:]

[Operator Instructions] The first question comes from Richard Kus of Jefferies. Please go ahead.

[Richard Kus:]

Hey, guys, a couple of questions for me. Can you talk a little bit about the pricing environment that you are seeing and whether or not you think the impact of imports on this market are - are you continuing to feel that, is that something that is stabilizing in here, and how do you see that impacting prices on a go-forward basis?

[David Paterson:]

Well, I think pricing - this is Dave Patterson. I think pricing will continue to be drifting downwards, as we indicated, through the fourth quarter and normally seasonally pricing drops off late in the year. Imports are a big part of that, particularly in coated ground wood where we have seen a very significant increase in coated ground wood imports. On our freesheet business I would say is more stable than our coated ground wood business in general, but pricing will follow its normal seasonal pattern we believe.

[Richard Kus:]

Okay. And then in terms of the potential asset sales that you guys are considering, how did you come to those assets? Is it a function of the fact that those are the ones where maybe your costs are a little bit higher and they are underutilized at least at this point in time or was it something else that you are thinking of?

[David Paterson:]

Well, I think we have looked at what our go forward business strategy would be and where -- what assets best lined up with that. And I think we also considered the fact that of course in the case of Wickliffe the mill has been shut down by us and we said when we made that announcement we'd look at selling it, so that has been out there. Duluth is our only SC mill, and the other two mills have a highly specialized customer mix and we thought they would attract a lot of interest based on their product portfolio and their customer mix.

[Richard Kus:]

I see. So presumably those were mills where you could maybe get the best price on that specialty business?

[David Paterson:]

I think the specialty business is something that people are looking at in general and those mills are heavily invested in specialty coated freesheets.

[Richard Kus:]

Got it. Thanks very much.

[David Paterson:]

Thank you.

[Operator:]

The next question comes from Kevin Cohen of Imperial Capital. Please go ahead.

[Kevin Cohen:]

Good morning. And thanks for taking the questions. I guess from a very high level standpoint, when you think about normalized EBITDA at each of the two credit silos, is there any sort of thought around that or anything that you could elaborate on, again from a high level standpoint, perhaps versus LTM or run rate at each of the two silos?

[Allen Campbell:]

Well, I don't think there is anything that we're putting in public domain at this point. I think you can look at our third quarter and look at the double-digit number. I think you have to discount what we had to do because of the marketplace with the market downtime we had to take. And then bringing the mills down - taking the mills down and bringing them back up sometime doesn't work as successfully as you would like. So, you could take a look at our third quarter and say from an operations standpoint there were a lot of one-offs, a lot of special events that are abnormal. You would think those would not go forward. So, you have a nice - a reasonable EBITDA in the third quarter but with some extraordinary expenses.

[Kevin Cohen:]

That’s helpful. And then looking at the NewPage terminal and in with respect to the leverage covenant, I guess do you foresee the Company remaining compliant with that covenant going forward?

[Allen Campbell:]

We were compliant in the third quarter; we are continuing to evaluate as we go from here.

[Kevin Cohen:]

Thanks a lot. Good luck.

[Allen Campbell:]

Thank you.

[David Paterson:]

Thank you.

[Operator:]

Your next question comes from Sean Kelly of OFS Management. Please go ahead.

[Sean Kelly:]

Thanks, guys. A couple corporate questions. Does the NewPage Corporation have an independent Board from Verso paper? Is there a separate Board here between the two entities?

[David Paterson:]

There is a legal entity with the Board but it is comprised of employees at this point in time.

[Sean Kelly:]

So in what situations could NewPage Corporation reject the shared services agreement? If there is a filing, if there is a payment default could NewPage reject SSA if they desire to, and who would be driving that decision?

[David Paterson:]

This is Dave Patterson again. As part of the hiring our advisors, both legal and restructuring advisors, we will get into those issues and many, many others. And we have just started that process.

[Sean Kelly:]

But in theory if it was prudent to do so under the NewPage Corporation….

[David Paterson:]

I prefer not to deal with theory. But we will - we retain professional advisors that are working for the company and we will get in - I'm sure we'll get into many of those issues.

[Sean Kelly:]

So, my read is they could and I would appreciate it if you could respond if you do not think they could either now or in a later filing.

[David Paterson:]

Well, I prefer to speak - discuss that and many other issues with the advisors we've hired. But, yes, I think that’s a legitimate question and it will be evaluated.

[Sean Kelly:]

And then what is Apollo doing in the background to support this name? How are they involved right now?

[David Paterson:]

Well, Apollo - there are four members of the Board from Apollo and Apollo is our largest individual shareholder, and they are acting in the best interest of the company through the Board.

[Sean Kelly:]

So when you say company would that be a - what entity?

[David Paterson:]

The Verso Corporation entity, which is where the Board sits.

[Sean Kelly:]

Okay. So one more time, at the NewPage Corporation level it is employees only that are sitting as board members there?

[David Paterson:]

Currently, yes. That’s a question that we are evaluating in terms of how do we adequately protect the interest of those - of that entity.

[Sean Kelly:]

And from your preliminary discussions, if there were a filing, could the two entities go in separately? Could Verso go in without the NewPage Corporation going in? Or would they have to go in together?

[David Paterson:]

We are evaluating all those options.

[Sean Kelly:]

But preliminarily what have you seen?

[David Paterson:]

I am not willing to discuss it at this time.

[Sean Kelly:]

Was there any additional cash flows between NewPage and Verso in the quarter? I know there was a loan that was -- and I haven't had a chance to get through the Q, but was there any money flow back and forth like we saw in the second quarter?

[Allen Campbell:]

No, it is just the typical activity.

[David Paterson:]

Nothing beyond the shared services agreement.

[Sean Kelly:]

Okay and final question for me. So, under the shared services agreement, if there is synergies achieved say from headcount reduction at the NewPage entity and that cost savings is achieved, that is immediately paid over to Verso. Come to 2016, if that same, say they removed some accounting staff - that same cost savings was in place, would there be an additional payment over to Verso or is it a one-time payment based upon the year in which the savings was achieved in my example headcount reduction?

[Allen Campbell:]

As the savings happen it passes back.

[Sean Kelly:]

So once you have locked in a lower cost in corporate, per se, you are not going to have a recurring payment every year because you have eliminated some accounting staff? Is that a correct statement?

[Allen Campbell:]

Shared services agreement, of which (inaudible) synergies is funding that. So the NewPage would be operating at a lower level of cost, so therefore that ability to operate lower cost is covered by the payments back to verso.

[Sean Kelly:]

So that is a recurring payment there…

[Allen Campbell:]

Correct.

[Sean Kelly:]

Okay, great. Thanks for the clarification and…

[Allen Campbell:]

Okay.

[Sean Kelly:]

Thank you.

[David Paterson:]

Thanks.

[Operator:]

[Operator Instructions] The next question comes from Jen Ganzi of NewMark Capital. Please go ahead.

[Jen Ganzi:]

Hey, guys.

[David Paterson:]

Morning.

[Jen Ganzi:]

Hey, guys, thanks. Good morning, guys. Thanks for taking my question. Just wondering in terms of I guess sort of the - when you said the operational issues you had in the quarter, could you just - it was $25 million. Could you just elaborate on that a little bit more? Was that just like bringing the down mills up like off-line and online again? Like just help me understand what sort of happened there.

[David Paterson:]

Well, with the two mills that Allen referenced, we found some issues that needed to be addressed once we had taken them down, so that was part of it. And then on the restart process we had difficult restarts at those two mills. So that showed up on the operating expense line. So, the other mills went down and came back up without any significant surprises, but those two mills particularly - was associated with the boilers at those facilities we found some issues that had to be addressed. We addressed them and then we had a difficult start-up. Allen, if you want to add anything.

[Allen Campbell:]

Yes, the other mills weren't quite as smooth, but they're much, much better and closer to what we expected. We did have some leakage at the other mills also.

[Jen Ganzi:]

And then which were the two mills that were problems again?

[Allen Campbell:]

Wisconsin Rapids was one and Luke was the other.

[Jen Ganzi:]

Okay, got you. And then in terms of the working capital usage this quarter, I mean, I always thought Q3 was working capital positive. I just want to understand like in terms of the cash flows for Q4, like do you expect that to reverse at all? How should we think about the Company's cash flow position for the fourth quarter?

[Allen Campbell:]

You look at the fourth quarter, our guidance said it will - volumes will be about the same, sales will be about the same. So you would think AR would be about the same, inventory as we look at production, it may be there or slightly up. Accounts payable is one we are watching a little closer. It is lower than we normally have and we hope to maintain at that level. So, all of that would tell you have roughly a wash all things being equal.

[Jen Ganzi:]

So basically working capital for Q4 would be more flattish?

[Allen Campbell:]

That is what our expectation would be, yes.

[Jen Ganzi:]

Okay and why was it so negative in Q3?

[Allen Campbell:]

A couple of things. We had - as we built back AR coming out of a lower period and had a stronger end of the quarter. Number two, we have had to adjust our payables a little bit in the process this last quarter. And so we have lost some days there.

[Jen Ganzi:]

Okay. And then in terms of just the I guess sort of industry trends, like in Q4, I mean are you seeing, you mentioned that you expect I guess similar volumes and pricing to kind of maybe be similar to I guess drifting down a bit. Do you see any sort of pickup towards the end of the year from any customers? Like maybe just give us a little bit more color on the market.

[David Paterson:]

This is Dave Patterson. We are seeing the normal seasonal pattern which says you have a pretty good October and November and then you fall off as you get closer to Christmas and that continues into the first quarter. So that is part of our forward view. I think the other color I would add is our expectations for 2016 are for continued weakness in demand. So that colors our outlook in terms of 2016. So, the short answer is we see the normal seasonal pattern but the base is continuing to erode and that is - the biggest concern to us is that erosion of the base.

[Jen Ganzi:]

Okay. And do you have any views on like what is causing that erosion? Like if there is -- like what do you see as the most significant factors there?

[David Paterson:]

Well, I think there is sort of the continued structural decline in demand for coated papers across the board. 2015 has been a much worse year than I think any of the forecasters have predicted within a magnitude sort of 2X to 3X worse. And of course we have with the strength of the US dollar, in particular related to coated mechanical grades. We've seen quite a significant increase in imports. And we don't think while the absolute amount of imports may not increase substantially next year, the rate of imports from their share will stay where it is or slightly go higher because - just backing up. The import effect really started in late second quarter through the second half. So, we will have a full year of that import effect for 2016, and we don't think that the dollar in the short term will weaken substantially, so we expect that volume to be in the marketplace. So again, that colors your view of what is possible in 2016 from a price and volume perspective.

[Jen Ganzi:]

Okay, and then in terms of the cost side?

[David Paterson:]

Well, I think the costs, I mean, there are two sort of fundamental drivers for us. I will call it the price of energy as it relates both to our consumption of energy mostly through transportation and also the price of chemicals. So, I think it will be a stable energy environment at these sort of levels through next year. And then probably the one positive is we are continuing to see what prices moderate across the board and that should continue for 2016. So, I would say the major input cost should be stable next year.

[Jen Ganzi:]

Okay. And I guess and are you assuming I guess, and I know it is too early to say that you have better utilization rate for '16 than you had for '15?

[Allen Campbell:]

It will help because we took some mills down and we talked about earlier Wickliffe and Andro, that will help balance production capability with market better.

[David Paterson:]

We have taken on an annualized basis said 430,000 tons and really the impact of those tons coming into the market was just occurring in the fourth quarter. So we will have a full year of those tons out of our system. So yes, the answer to your question is we would expect that, but again, from a forward view we think demand will continue to deteriorate both for structural reasons as well as the issue around imports.

[Jen Ganzi:]

Okay, got you. And then I guess my last question is just, maybe just talk a little bit - I mean you said your run rate of $102 million of synergies, do you still expect to hit the 175 even if you sell some of these mills? And that is it for me, thanks.

[Allen Campbell:]

The mill sales will hurt attaining the full amount on a ratio basis. We shouldn't have an issue at all, but there will be some numbers lost if we were to give up some of the mills.

[Jen Ganzi:]

Okay. And I am guessing any mill sales would be as part of the restructuring, not in advance of?

[David Paterson:]

It is part of the discussion that we are about to start with various groups.

[Jen Ganzi:]

Okay, so it would be part of like a holistic restructuring, not separate and distinct, in other words?

[David Paterson:]

It is part of our strategy, yes.

[Jen Ganzi:]

Okay. That is it for me. Thanks, guys.

[David Paterson:]

Thank you.

[Allen Campbell:]

Thank you.

[Operator:]

As there are no further questions at this time I would like to turn the conference back over to management for any closing remarks. Please go ahead.

[David Paterson:]

Okay. Again, thank you for participating in this morning's call. Allen and I and the teams are available if you have follow-up questions. Look forward to speaking with you again in the future. Thanks so much.

[Allen Campbell:]

Thank you.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.