Verso Corporation
Q4 2008 Earnings Call Transcript
Published:
- Operator:
- Please standby we are about to begin. Good day everyone and welcome to the fourth quarter 2008 conference call for Verso Paper Corporation. Today’s call is being recorded. At this time, I would like to turn the call over to Bob Mundy, Senior Vice President and Chief Financial Officer. Please go ahead sir.
- Robert P. Mundy:
- Thanks Tamara. Good morning and thank you for joining Verso Paper's fourth quarter 2008 earnings conference call. Representing Verso today on this call is President and Chief Executive Officer, Mike Jackson and myself, Bob Mundy, Senior Vice President and Chief Financial Officer. Before we get started with our fourth quarter review, 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 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 Annual Report, which has been posted to our website versopaper.com under the Investor Relations tab. We'll begin if you go to slide three, starting with an overview of our fourth quarter results. Adjusted EBITDA for the quarter was $32 million, versus $65 million in the fourth quarter of 2007. This decline is a result of the difficult economic conditions that exists globally and its impact on our customers demand for our products. The recessions impact on ad spending and magazine and catalog circulation coupled with the inventory build-up that occurred earlier in the year had a significant impact on the consumption of coated paper during the fourth quarter of 2008, down about 30% versus a very strong demand situation that exist in the fourth quarter of 2007. As we mentioned during our last call, we did take just under 80,000 tons of market related downtime in order to balance supply with demand and as a result brought our coated groundwood inventories down from last quarter by about 12,000 tons. Although, this downtime is the prudent business decision from a cash perspective in times such as this it does come at a cost to our reported EBITDA. We were able to keep coated prices about flat versus the previous quarter and they were up 17% versus last year. Although, input prices remain very high year-over-year versus last quarter, overall they were about $2 million lower, which is a very good sign and we believe this trend will continue to improve throughout 2009. On slide four, you will see some key year-over-year and sequential comparisons due to the seasonal nature our business, fourth quarter numbers will normally be down versus the seasonally strong third quarter. Although obviously this quarter was down more than normal due to the unprecedented economic conditions we are all facing. As I just mentioned we believe we are doing a very good job on the pricing front as prices were virtually flat with the third quarter. However, due to the extremely weak demand conditions and the steps we must take to manage this situation from a cash perspective, the impact of fourth quarter EBITDA was significant. Including a loss margin on volume in addition to the unabsorbed fixed cost related to the downtime this totaled just under $30 million versus the fourth quarter of 2007. Going to slide five, this reflects our gross margin at about 14% and our adjusted EBITDA margin at 9% both of which reflected significant impact of our market downtime. On slide six, you note that prices, paper, energy and distribution costs were down sequentially we certainly had a neighbor say that for a while and while our chemical and wood prices were still a bit higher than last quarter. Overall they are both beginning to head down. In total input prices were down about $2 million versus the third quarter. Although, we expect to continue to see this trend throughout 2009, we will not slow down on our efforts to help reduce material prices and costs both through our R-GAP program and other initiatives focused at reducing our usage of materials, how we buy materials and substituting alternative material types used in making our products. Turning to slide seven, you will see a bridge that reflects the key components of the change in adjusted EBITDA between fourth quarter of 2007 and the fourth quarter of 2008. As I mentioned earlier, the drop in market demand impacted volume by about $12 million and almost 80,000 tons of market downtime resulted in $16 million of unabsorbed fixed cost. However, we have held onto significant improvements in sales price and mix, which are up almost $50 million versus last year and our manufacturing operations contributed about $13 million year-over-year through efforts from our R-GAP program and other material usage reductions. Input prices and freight are still very high relative to last year, but as I said are now headed in the right direction. Moving onto slide eight, in summary the fourth quarter of 2008 was significantly impacted by very challenging economic conditions. This is reflected in our adjusted EBITDA in the areas of volume and unabsorbed costs. However, we were able to maintain our sales price realizations versus last quarter the overall prices were paid for our key inputs are trending down and we continue to drive operational improvements from our R-GAP program as well as other key initiatives around workforce development, maintenance efficiency, and material usage. I will now turn it over to Mike Jackson for comments around our full year results and the outlook for the first quarter of 2009.
- Michael A. Jackson:
- Thank you Bob and good morning everyone. We are on slide nine by the way, in spite of challenging economic environment Verso saw in total significant improvements in 2008 over 2007 and I like to review some of those improvements as a testament to really the foundation that we put in place to withstand not only the current situation today, but future conditions EBITDA was up over 31% or almost $57 million in spite of significant downtime for the year, which totaled 87,000 tons and a $164 million of addition wood, fiber, energy, and raw material cost. Adjusted net income year-over-year was up $69 million and our R-GAP process delivered another $34 million of operating improvement. You can see that full year adjusted EBITDA margin showed a 22% improvement. If you move to slide 10, full year 2008 results versus 2007 show paper volumes down 7% and coated prices up 17%. Full year revenue and adjusted EBITDA as already mentioned improved a $159 million and $57 million respectively over 2007 levels. If you move to slide 11, this slide covers our full year variance year-over-year and I'd like to add just a little more depth to the numbers on the page. As mentioned EBITDA improved by over 30% and this was delivered in spite of those unprecedented increases in energy, chemicals, wood, and transportation, which I just mentioned added up to $164 million, over 2007 levels. Our working capital improved another 16% from excellent 2007 levels to 3.6% of net revenue. This number truly reinforces the work that we have undertaken to manage both our inventory and our entire supply chain. Through our efforts to focus on usage and energy of materials at our mill sites and as importantly assign appropriate resources to this, we've been able to reduce consumption by $39 million from 2006 levels. Our organizational simplicity really allows us to accomplish this. We have fewer levels of management and that results the ability to make decisions quickly and execute projects with more speed than ever before and I believe that our suppliers would support that comment. And in today's environment this is more critical than ever. As Bob mentioned, our performance in R-Gap, our controllable manufacturing costs continues to drive improvement in 2008 and we see continued opportunities for the foreseeable future. In spite of in 2008, two major cold mill outages we still delivered that $34 million number that I talked about. Our performance record for 2008 showed favorable improvement in following areas. Cash flow margin, EBITDA margin, cost of goods sold as a percent of net sales, net asset turnover, net PP&E turnover and as importantly cash conversion cycles. Our safety performance was the best in our history, which included by the way both the Champion in the IP days. This as many of you on the call know has a direct positive correlation as it relates to workers compensation cost. On the environmental front, we completed ISO 14001 certification at all of our mills, which really is a risk management mitigator for our business. We were also able to obtain certification and FSC Chain of Custody for the lands that we purchase wood from and our main mills were lead participants in the Regional Greenhouse Gas Initiative in Maine. We managed our capital expense to the committed 2008 number with again the focus to improve our energy, quality, and usage of materials. Capital spend for 2008 was a little over 59% of depreciation. In spite of delivering in excess of $214 million of price and mix improvement, we were able to successfully maintain our share although I will admit that we were challenged in the fourth quarter to maintain both market share in price. On the SG&A front, as a percent of sales, it remains at excellent benchmark levels and we position ourselves even further with decisions and execution to deal with the current economy so that we are well positioned when the economy recovers. Although, we were still in the process of building the company, we have 3.5% less people on our payroll in 2008 than we did from our baseline in 2007 and this trend will continue into 2009 as well. As already mentioned, we took aggressive positions throughout the year to manage supply and demand and at the same time we moved one of our machines in Maine away from coated groundwood to wood to a scale specialty machine. All of these accomplishments took place in the year our company went public, in what was clearly unprecedented economic times. Although, there is no doubt in my mind there are areas of opportunity and improvement, our organization demonstrated the ability to stay focused, delivered on the things that we could control and exhibited the discipline in the state of course in spite of continuing extraordinary marketplace pressure, which we'll talk about in our outlook for the first quarter. If you move to slide 12, at the end of December our liquidity stood at a $180 million, we did draw down from our revolver during the time that number of financial institutions were in financial crisis in order to add the cash available if necessary. This in our view was a very prudent decision and you can see that our net debt in specific ratios on the page are good they're all in proper perspective. This first lien ratio was at 0.95 and the covenant is paying a 3.25. If you move to slide 13 this is our covered maturity schedule and as you can see we have no near term payments. And although by the way not on this page, let me just kind of mention that we carry no pension liability forward as a new company and that is not an issue for Verso. Before we move onto Q&A, I likely you to turn to slide 14 and let me give you a little bit of a view of the first quarter of 2009. I would like to point out that the fact that coated groundwood and then coated freesheet are the most sensitive grades to economic conditions. Historically, they have had immediate and high velocity swings related to business conditions. The snap back in demand can be up significant, as evidenced by the last three recessions. In coated groundwood alone, our quarterly snap back based on history would be in the 100,000 to 200,000 ton or on a yearly basis 400,000 to 800,000 tons. This obviously will not be the case in Q1 as volumes will be down sequentially and year-over-year. And as many know, we announced downtime of a 100,000 tons and this will have a significant impact on first quarter EBITDA, but we must take care of our cash and just as a point here is that when you think about fourth quarter results and what Bob went over, we are so committed in that quarter to takeout a little over 30% of our coated groundwood production. And that’s a significant amount, but the commitment was again to conserve our cash and to make sure that our price stayed at the level that it was going into the fourth quarter. And I think we have accomplished that. We do expect to see a declined price as pressure persists, but we continue based on what I just said with the 100,000 tons to balance our supply system to mitigate as best as we can this pressure. Relative to the cost side of our business, we do expect input prices as Bob mentioned to continue downward throughout 2009, but they really vary depending on the item, wood is an area that will show improvement as inventory levels have worked through and latex, which is a large buy for us by the way in the last few weeks has shown improvement as well after an unprecedented price run up to the November and December high. That will take a few weeks for us to work through until the price impact is felt. Claim by the way, which is another significant raw material cost for us has not changed very much and I think everybody knows the situation as it relates to the energy cost. R-GAP, we will continue to focus on material and energy usage, clearly however if your machines are not running due to downtime, the pace of improvement is muted, but we have a number of projects in the pipeline that overtime will bring savings and that has been and will continue to be given, we have a lot of people that ask us about the ability to continue driving significant improvement in the bottom line and we have outlined over the next couple of years, 100s of projects that will continue to deliver those results. Lastly, I wanted to mention some of things that we are doing to fight through this economic situation. We froze salaries, we have a headcount freeze, we have significantly cut back on 2009 potential incentive plans for all employees, we are suspending our dividend pay out for the quarter, our CapEx has been cut significantly, our depreciation by the way is a $135 million a year and will be a target that is a little less than 37% of depreciation. And we've already said against a very low SG&A level some very aggressive targets. Without a lot of public sense here and I have already mentioned this, but I think its worth mentioning again. At the end of the 2008, we had 3.5% less employees then at the end of 2007. As mentioned we expect to continue progress in this area, based on our workforce planning efforts and expanding our computed based skill training and knowledge. Our people today and you can see it in our numbers for the year are continuing to take on more responsibility and our units per employee will continue decline. As previously mentioned, we've had initiatives relative to maintenance in workforce planning that will continue to drive improvements as volumes return to a reasonable level. Our sales and customer service teams are very engaged in new product and new customer growth opportunities as customers make their marketing plans and decisions for the future I think the key point here is you can't save your way to prosperity, growing revenue and providing superior customer service in these times and in this environment is critical. And lastly should the economy move downwards, we have identified steps we can take and will take should conditions merit that. So, with that operator, Bob and I would be happy to answer questions.
- Operator:
- Thank you. (Operator Instructions). We will take our first question from Bruce Klein with Credit Suisse.
- Bruce Klein:
- This slide had the downtime and volume impact 4Q versus 4Q '07, could you help us what it was versus the 3Q '08?
- Michael A. Jackson:
- Hey Bruce. The first part of your question didn’t come through could you repeat that?
- Bruce Klein:
- Yeah. What's the downtime and the volume impact separately in 4Q versus 3Q?
- Michael A. Jackson:
- In the third Q, we had about, I think about 16,000 tons of downtime and in the fourth quarter we had 60,000 tons.
- Bruce Klein:
- I meant the impact on EBITDA I think you gave us the impact year-over-year, but I don't think you gave it sequentially, or was I mistaken?
- Michael A. Jackson:
- We had Bruce, we had the total combined between the volume loss and the downtime equated to almost 30 million in total.
- Robert P. Mundy:
- Yeah. But sequentially the downtime, the unabsorbed cost impact was about 13 million.
- Bruce Klein:
- Okay. So, that's 13 million, I'm sorry downtime 4Q versus 3Q, and then I'm assuming $17 million would be the volume impact sequentially?
- Robert P. Mundy:
- That’s about pretty close.
- Bruce Klein:
- Okay. That's helpful. And then I guess the cost inputs I guess on your chart, okay when you said $2 million that was sequential correct?
- Robert P. Mundy:
- Yes.
- Bruce Klein:
- That was 4Q versus 3Q?
- Robert P. Mundy:
- Yeah.
- Bruce Klein:
- I guess in chemicals, I guess the two that didn't go down I guess sequentially, chemicals and wood cost, can you give us a little more color it sounded like, wood cost should they be down 1Q versus 4Q and same with chemicals or are they just trending down, so the average might not get us there or could you help us with that?
- Robert P. Mundy:
- Well you said 1Q versus 4Q, I think the, overall I think they will be trending down they weren't down 4Q versus the third quarter, as I mentioned, but I think we expect to see that been down sequentially in the first quarter.
- Michael A. Jackson:
- Yeah Bruce. A lot of that has to do with the particular chemical as well as we try to describe in the opening call latex is a large buy of ours as well as clay and latex went up very, very high to the November, December timeframe, but we are beginning to see some relief on that and clay has been clearly neutral.
- Bruce Klein:
- Okay. And then, well I will say, I will turn over the energy alternative incentive payment, that was $30 million in Androscoggin in February I think I read in your K. What was the, is the banks acquired that might go back to them or what do you, what’s the intention to do with the money and do the banks require it?
- Robert P. Mundy:
- Well I think like we stated in the K, Bruce that’s so a complicated that the rules around that regulations are, complex we are working through that, obviously we thought it noteworthy even though it's a subsequent, it wasn't a fourth quarter item that we received, all that's noteworthy to, say mention it, but we are working through those details right now Bruce in the first quarter.
- Bruce Klein:
- So, it's not clear the banks require it?
- Robert P. Mundy:
- Well, we are just, we are evaluating how we use the proceeds, how the proceeds were recorded and we will clear that up here in next several weeks?
- Bruce Klein:
- And I guess the when is that, I guess I wasn't clear, anyway but the release said you expect to file the claim in the first quarter or you expect to receive a potential payment in the first quarter I was confused?
- Robert P. Mundy:
- No, it says that we expect to receive a similar payment in the first quarter.
- Bruce Klein:
- Okay, similar amount of payment/
- Robert P. Mundy:
- Yes.
- Bruce Klein:
- Okay. And the other two, am I getting that right, the other two mills, are those the similar type of opportunity, so if you get a 30 check from Androscoggin and similar in Quinnesec are the other two mills opportunity in that size or its back differently so that that's not accurate?
- Robert P. Mundy:
- That’s, no that would not be accurate, it just depends on the infrastructure of the particular mills and, the things that we are trying to do in the energy arena and its really just those two mills that we have sort of setup to do this.
- Bruce Klein:
- Okay. I guess the case is that depending on the quality of fuel, the payments could be material is that sort of capture what you got it Androscoggin plus Quinnesec plus others or is that all sort of the material part caught my eye and I am also wondering if that's incremental maybe I am missing something or we got with it or…
- Robert P. Mundy:
- Well, like we say, what we said in the K was that these, what we received was relative to the operations that we were conducting in the fourth quarter of '08 relative to our alternative energy capabilities. And obviously we will continue to go down that path in 2009, but as we said in the Q that, there is no guarantee that this would continue or that the guidelines won't change or that, there is no guarantee we will continue to qualify, but that is our intention.
- Bruce Klein:
- Okay. I will pass it on. Thanks guys.
- Robert P. Mundy:
- All right Bruce.
- Operator:
- We will go next to Taylor Oden, JPMorgan.
- Taylor Oden:
- Good morning, I am curious as you talked to your customer in each of your key end markets, catalogs, magazines, I guess in group in certain commercial print together, what our customers in each of these segments saying in terms of the help of their business and any sense for where we might be in the print advertising cycle?
- Michael A. Jackson:
- Yeah. We had obviously numerous discussions with all of our customers and clearly I think its I don't want to say, wait and see but that's fundamentally what it is I mean, they need to be very cautious with their money being very cautious is where they spend it, but one thing that has been clear that's come out with our customers is and I think I mentioned it a bit as it relates to Verso as well is you've got to think even in these times, how do you think about growing your business or at least sustaining your business and I think a lot of the advertisers, a lot of our customers are going through that thought process and, the fact that they got to advertise to distinguish themselves from someone else. They have got to advertise eventually to promote growth, and those are the things that they're really wrestling with. I think this is going to be a difficult first quarter, but I do feel that, people will being to see that you've got to distinguish yourself in the marketplace and there is very few ways to do that beyond advertising and beyond having a good quality product. The other thing would be that the catalogers and this has been very, very clear there is an undeniable connection between catalogs and the Internet sales, if you have a book in your hand, it's about 50% more liable, more of the point that you would order something if you had a catalog and if you didn’t and that's so undeniable that the catalogers realize the still the importance of print on paper. So, I think it's just going through a thought process here recognizing the economy, it's not going to be obviously a terrific first quarter, but I think people are going to begin to look at their business model and if they've got one click out of a thousand what type of return is that versus somebody that gets a catalog and actually gets online and orders the product. And I think that's what they are struggling with right now, but I’m positive about long-term how this thing will unfold.
- Taylor Oden:
- Great thanks. You mentioned a little bit about the difficulty maintaining share particularly, I think towards the end of the quarter, are you seeing more tonnage coming into the U.S. from offshore or is that more that you're being undercut a little bit on price by domestic competitors and maybe if you could just talk about your outlook for trade flows in 2009 recorded?
- Michael A. Jackson:
- Let me start with the imports first, we have not seen and this is the year-over-year comment I mean clearly imports are down significantly down from last year. A little less so on the freesheet side, than groundwood. So, in other words the coated freesheet has been a little bit stronger from imports on the sheet side than has been coated groundwood. But in each case year-over-year sequentially significantly down to the point that it was probably 15 to 22% depending on the grade and we don't make sheet as you know, so that does not have an impact on us. Going into 2009, and this is kind of an interesting piece here because if you go back 17 or 18 months ago the euro was at probably 125 at that point in time, which was considered high then and then of course it went up to 150 and now it's back into that 120, 125 category. So, it's still high, so we've not seen significant impact certainly from Europe as it relates to groundwood. Going forward, I honestly think that with the production that they have taken down in Europe and the issues that they have in Europe they've got to really tend to their own laundry so to speak I think, they have got to make sure that they are delivering results to their shareholders. And note that you can do that by dumping products into the U.S. So, that's kind of my view how I think about 2009.
- Taylor Oden:
- And then so it was more a little bit of price competition that was….
- Michael A. Jackson:
- I think that, when you, to go away from the imports and let's talk about the domestic situation, I mean we were aggressive and that has been part of our strategy around our inventory. And I think you could see that we certainly held price there were some spot business particularly on the coated freesheet side that we did not participate in and that is more of a spot business than is the groundwood business, and that if I would say that we were hurt anywhere is probably in that arena.
- Taylor Oden:
- Gotcha. Okay. And then did you give CapEx guidance for 2009?
- Michael A. Jackson:
- Yes. Well, it will be $50 million, which is about 37%, 38% of depreciation. It will be about $31 million from down from last year.
- Taylor Oden:
- Okay. Thanks very much.
- Michael A. Jackson:
- You bet.
- Operator:
- We will go next to Mark Wilde, Deutsche Bank.
- Mark Wilde:
- Good morning, Mike. Good morning Bob.
- Robert P. Mundy:
- Good morning.
- Michael A. Jackson:
- Hi Mark.
- Mark Wilde:
- Bob or Mike I wonder if you can give us, just a help us a little bit on price, if we were to look at kind of where you stand right now versus that fourth quarter average, where would price be?
- Robert P. Mundy:
- You mean going..
- Mark Wilde:
- Just kind of try to kind of set some kind of metric for where we may end up in the first quarter here?
- Michael A. Jackson:
- Mark I think I said in my comments that we will see price fall.
- Mark Wilde:
- Right.
- Michael A. Jackson:
- And as to where at what level, I certainly can't comment on that I would just say from a trend perspective it will be down.
- Mark Wilde:
- I mean Mike, there have been some like some big drops reported in the trade papers, but I am never really sure whether that's kind of an accurate metric for your business?
- Michael A. Jackson:
- Yeah. Well Mark we have not and I think we have referred to this in the past, we have not seen that type of drop. I'm not saying, it's not out there, but we certainly have not seen it in our numbers and I guess that's probably all I can say.
- Mark Wilde:
- Okay. Next question on the cost, I mean it sounded like from what you said there maybe a few things like latex, with actually just kind of a quarter-to-quarter average basis may still to be up a bit, but you are going to be down on some other things. Can you help us on that front?
- Robert P. Mundy:
- Well, Mark latex as Mike said, latex and caustic, a little bit of, in clay, those were the things obviously we used the most stuff, which drive our overall chemical cost, but as we indicated, we started to see some moderation late in the year, we are seeing somethings around starch and chlorate that are, that look favorable to us. So, that's why we are saying that, in the first quarter we expect overall those cost to be down. Even though we (dealt) with pockets of things around, that are still high, but overall, chemical cost we expect to be down.
- Mark Wilde:
- Okay. And on the wood side, are the mill outages, I guess Androscoggin has been kind of up and down, I don't know whether that really winds up being in the same wood basket with you in the upper peninsula, you have got, another mill outage in Maine, which was announced today, is that having an effect on your fiber cost?
- Robert P. Mundy:
- Yes it is, it's sort of, we have the obviously the issue with the housing market and the impact that has on chips and so forth and residual chips and reduced logging activity, but on the other hand because of the amount of downtime being taken in our industry, it sot of balances that out a bit and so we again we, we like where our wood inventory levels are right now and so we feel like we have that will be reflected favorably in our wood cost numbers in the next several months.
- Mark Wilde:
- Okay. Bob can you talk in all about credit issues and we are seeing a lot of distress in the printing and publishing industry, and I just wondered, you make some general comments and also what you tend to take in terms of losses or either reserves for potential losses?
- Robert P. Mundy:
- Yeah. Well, obviously I am speaking Mark through the fourth quarter and, we have a very good credit position in my view, we did not take any losses in the fourth quarter. The only thing we did do is we pumped up our general reserve a bit, just for the point you're making because some of the weakness with some of our end-use customers, you don’t know what might be out there. We don’t have anything specifically to note, but we did bump up the general reserve, I think that was a prudent thing to do, because of the weakness in the economy, but we – our DSO was very, very strong and we keep a very close eye on what’s going on with our customers and as of now we feel pretty good.
- Mark Wilde:
- Okay. And then Mike, you talked about sort of the lift you usually see when the economy starts to come back, but I wonder with magazines like U.S. News reducing the number of issues they put out Newsweek being downsized, what's you read on sort of the structural changes here versus just the cyclical?
- Michael A. Jackson:
- Yeah. Mark that's obviously a critical question and we have tried to take a look at, okay, what is the I mean as you try to look through this what is the impact of inventory, what has that been, what is the impact of the recession and significant recession, and what's the impact of product substitution and what is the impact of, I don't think its a secular change at this point in time, but clearly people are thinking, rethinking their business model and, I don't want to put a percent on that, because I think we're still trying to really understand what will come back, but when you think about our major publishers I mean that is fundamentally their business and kind of interest we [enough] that, between 2003 Mark to 2007 I don't have the early data yet, but readership 18 and over improved. And I guess secondly I would say that the magazine business, the advertising was one of only three channels to grow from an advertising perspective in that same period of time. So, but there will be changes Mark its just I'm not sure how deep they maybe, but there certainly will be changes, but I believe then the next question is what happens to capacity, and I think that’s the critical component, because ever since we launched Verso, we have always talked about this is a supply situation its not a demand situation.
- Mark Wilde:
- Are you guys looking at any other supply moves right now is that kind of on the table?
- Michael A. Jackson:
- Its constantly on the table Mark, yes we look at that everyday now, we have a pretty good management process to deal with this in our management system, but today you've got to stay on top of this game everyday and we will continue to monitor that.
- Mark Wilde:
- Okay. And then last question Mike, could you just give us an update on where you stand with kind of the New York Stock Exchange right now?
- Michael A. Jackson:
- Yeah, you bet. We have submitted our plan, we did that last week, actually tomorrow Bob and I will we don’t have to do this, but we are going to do this, we are going to sit down with two of the key people there, we take them through our plan, Bob and I are very positive about where we are in the paper business, and what we've got as a company and that I am just positive about that. So, it will be in their hands and they have a lot of companies that they are dealing with right now Mark, and they normally had said that they wanted to get back to us by mid-March and I would guess that they would probably extend that out a bit, but the answer to your question we have submitted our plan.
- Mark Wilde:
- Okay. All right very good thanks Mike.
- Michael A. Jackson:
- Okay. Thank you, Mark.
- Operator:
- We will take our next question from [Sandy Burns], Sterne Agee.
- Sandy Burns:
- Hi good morning.
- Michael A. Jackson:
- Good morning.
- Sandy Burns:
- I was wondering in terms of the downtime you gave us a number for the first half, since we're, over two-thirds complete with the first quarter, could you maybe give us a sense on what it's looking like in this first quarter?
- Robert P. Mundy:
- In the first quarter, yeah I mean it's pretty weak as Mike has indicated and we, our customers would continue to have conversations with them and what they're seeing in their outlook and, but as we indicated its weak and we foresee that lasting for the next few months anyway.
- Sandy Burns:
- Right. No, I mean, I guess in terms of the downtime tonnage, I guess it was 75,000 in 4Q you said 1000 for the first half, I mean is it fair to assume that you'll have at least the same amount of downtime in 1Q as you did in 4Q?
- Robert P. Mundy:
- Yeah, probably, a bit more possibly.
- Sandy Burns:
- Okay, great. And it seems like you've done an excellent job so far in mitigating the cost of the downtime, would anything change in the first quarter as the downtime volume increases somewhat close to that 100,000-ton level?
- Robert P. Mundy:
- Yeah, I think, our ability to get cost out during a time when your machines are down is we're always improving upon that and I think, we continue to make additional improvements, since, unfortunate we've done we did a lot of it in the fourth quarter and I don't see being good at it, but that's not the right way to put it, but obviously we're finding all of the pockets of cost that we possibly can to eliminate and eliminate the cash outlook.
- Sandy Burns:
- Okay. And then in terms of some of the cost benefits you expect in 2009, in terms of energy, do you have any significant amount of hedges that may mitigate the benefit you'd see from the collapse in energy cost?
- Robert P. Mundy:
- Yeah. We do have a hedging program that where we have, we made some, set some numbers that in 2008 that obviously were at higher levels than what we are seeing today. So, yeah that will limit some of the benefit from what we currently see in the energy market.
- Sandy Burns:
- Do you have like an amount of how much of your energy is hedged in 2009 and at exactly what prices?
- Robert P. Mundy:
- Yeah, we don’t have anything going beyond 2009, we certainly don’t have 100% of our volume hedged, but we don’t really disclose how much of that is hedged.
- Sandy Burns:
- Okay, fair enough. And then lastly just kind of follow on some of the other questions about the demand environment, as you are speaking to your customers any sense on where they are in their de-stocking plan, I mean obviously there is no real incentive to increase their inventories right now, but any sense on where they are in de-stocking if they are now ordering just based on their sell-through or are they still in their de-stocking programs as well?
- Michael A. Jackson:
- Yeah. I think it depends by grade if let me see if I can give you a little perspective if you look at coated groundwood, the latest numbers showed and this is in the whole supply chain, showed a little under 700,000 tons from a high in September of '08 of about 860,000 tons. So, that's a pretty significant drop, the key here though is that demand fell so rapidly that in both cases the days on hand are still high obviously. So, I guess the point is that they certainly are working through their inventory particularly on the coated groundwood side, on the coated freesheet side it's a little bit different, where coated freesheet did grow to about 800,000 tons, by the way put that in perspective we went back to the middle of 2005 there was like a million tons, over a million tons in inventory. So, but again the key here is, its all about the demand side and so you can get lost in the inventory numbers, and but we are confident that the printers are drawing down their inventory, we know the direct buyers are bringing down are taking down their inventory. So they are working off of what they had, which again is I guess in today’s environment at least that’s positive.
- Sandy Burns:
- Okay. And just a last question, you talked a little bit about being very focused on conserving cash in this environment, it certainly makes a lot of sense, can you comment at all, if you have been or you are contemplating buying back any of your bonds vis-à-vis operating company bonds or the bonds at the wholesale level?
- Robert P. Mundy:
- Yeah, of course, we contemplate, we are contemplating all of our options and opportunities and that's certainly one of them, but obviously that’s not something that we would, we talk about right now, we have got lot of things, we have a lot of things in the energy arena that we are excited about obviously with where that's trading, that’s an opportunity for sure, but you also have to be very prudent in these times, and with these market conditions, and no one knows where the bottom is I guess you have to be prudent and not jump up or do something that you regret later. So, but we are balancing all that and hopefully we will just continue to manage through.
- Sandy Burns:
- Okay. And then also on the Holdco note, I guess at this point you are still paying the interest on that any thought on you have the ability to pick that note to stop that payment like you did on the dividend?
- Robert P. Mundy:
- In our K we make a comment and I think it's in the liquidity section that we did pick that note in early January.
- Sandy Burns:
- Okay. I missed that, sorry. Great, now that's a good move, great. Thank you very much.
- Robert P. Mundy:
- Thank you.
- Operator:
- We'll take our next question from Jeff Howard with Barclays Capital.
- Jeffrey Howard:
- Hi good morning.
- Michael A. Jackson:
- Good morning.
- Jeffrey Howard:
- Just on your own inventories, it looks like they built about 40 million in 4Q and are up about 60 million from year ago levels, can you just talk about I think you had some positive comments on coated groundwood, but where is that inventory been building mainly coated papers is it raw materials?
- Robert P. Mundy:
- Yeah. It's Jeff it's more in the freesheet side of things groundwood was down and when we did that little freesheet inventory, we were very low in the third quarter. So, that's not a, we are pretty much expecting that a little bit of pulp inventory, but the freesheet and the freesheet and pulp.
- Jeffrey Howard:
- Okay. That's all I have.
- Operator:
- We'll take our next question from Gary [Inaudible] of [Broadpoint Capital].
- Unidentified Analyst:
- Thank you. Most of my questions have been answered, the only one I want to certainly dig a little bit, I think you kind of alluded to it earlier in the call is a comment that you made regarding lost market share in fourth quarter '08 am I assuming, based upon based upon your previous comments on avoiding some spot business in the coated freesheet market kind of explains that?
- Michael A. Jackson:
- Yeah, I mean really what I said was it was a challenge, and some of these numbers because the quarter, but certainly [years] ended, the data that comes rolling in at the end of January beginning to February, where we're trying to make sure that we truly understand the difference and let me explain that is, last year when you think about what went on with imports and also what went on with some capacity shuts in North America, people would call a great coated freesheet, but it was really coated groundwood, and then, and particularly the Chinese they then went back and reversed it. So, some of the data we just have to be careful with. But, yes the answer to your question I think I said that in December and late November, we didn't participate as much in the spot market, as we would normally would have done on the coated freesheet side. And for some very good reasons we thought it was a very spotty to put, to put it candidly, and we thought we would be prudent in that and that's what we did, we've kind of backed away from some of that.
- Unidentified Analyst:
- So, would that also kind of speak to the slight inventory build in freesheet?
- Michael A. Jackson:
- Yes.
- Unidentified Analyst:
- Okay. All right. Well that's all I have. Thanks guys.
- Michael A. Jackson:
- You bet.
- Operator:
- We will go next to Matthew Eric with Goldman Sachs.
- Matthew Eric:
- Good morning. Just a couple of quick questions. One can you touch on your pulp inventory levels, and if you are currently net long versus your pulp performance a bit lower volume and is there opportunity to liquidate pulp into the market with cash and secondly can you touch a little bit on the SG&A absolute dollar amount as we look forward it was a sequential growth from 3Q to 4Q and its certainly higher than what the 2007 averages, what's the right way to think about your SG&A budget for 2009?
- Michael A. Jackson:
- Yeah. Regarding the pulp inventory Matt we can see we have the ability within our system to because where the pulp market is obviously we do buy softwood pulp and we sell hardwood but we have the capability to make softwood and not hardwood and consume that internally, which prevents us from buying it on the market, even though the market prices are very low obviously it makes more sense to keep all that cash in-house and consume the softwood pulp that we can make. So, that's a nice future we have to sort of mitigate against what's going on in the pulp market. So, we feel very good about that. SG&A in '08, I think we pretty much are fully flushed out our standalone company, infrastructure wise and people wise and so forth. So, that's really the key reason why it's up over '07 and I think in '09, I’d expect through some of things that Mike mentioned in his opening remarks around what we are doing to sort of back down the hatches on cash around salary increases and headcount initiatives and things of that nature that I’d expect it to be down versus '08.
- Matthew Eric:
- Great. And lastly can you touch quickly on your covenant compliance on the fixed charge coverage test is that a maintenance test or occurrence test, have you gone back to the bank to have the initial conversations about renegotiating that level for 2009?
- Robert P. Mundy:
- We don’t see any need to have those discussions, we are very comfortable with our coverage test, but obviously our key test is our first lien ratio when we are well, we have a lot of cushion there and what Mike – I think Mike had mentioned. Yeah, we feel very good with where we are at.
- Matthew Eric:
- Great. Thank you very much.
- Robert P. Mundy:
- All right Matt.
- Operator:
- We will go next to Terry [Inaudible] with JPMorgan.
- Unidentified Analyst:
- Thanks. Most of my questions have been asked. One thing I would like to drill down on is the alternate energy incentive payments. I know its complicated, but can you give us a little bit of color on how that relates to the volumes produced at those two mills, and how should we be thinking about it at least for the first quarter of ’09 I know you can't really give too much guidance on it?
- Robert P. Mundy:
- Yeah. I think, the guidance is what we put in the note in the 10-K, but, the its just the infrastructure of an integrated pulp and paper facility gives you opportunities to do things around alternative fuels and biomass and some other things that are as opposed to fossil fuels that we take advantage of, and that's basically what we are doing and as I said we will sort out the financial statement representation in the first quarter.
- Unidentified Analyst:
- I guess on a going forward basis should we think about at some point in say April or May should there be a repeat payment for the first quarter of ’09 assuming the rules obviously the same.
- Robert P. Mundy:
- Well, like I said, we are going to continue to pursue this opportunity and although there are no guarantees, as we said in the K that we will continue to qualify or that the rules won’t change or what have you, but we are going to continue to pursue this during ’09 and I think it also indicate that this program does expire at the end of the year so at the end of 2009. So, but we will continue to move forward, and what the money we will receive from Androscoggin and what's indicated to be received from Quinnesec related to volumes of relative to the fourth quarter of ’08.
- Unidentified Analyst:
- Okay. Well thank you very much.
- Michael A. Jackson:
- Thanks. You bet.
- Operator:
- And we have time for one more question. We will go to Joe Stivaletti with Goldman Sachs.
- James Kitchel:
- Hi guys. This is actually James Kitchel, I just work for Joe over here. Just I am sorry about, I wanted to follow-up on the question that was just asked actually I really, it sounds like this stuff is sort of complicated, but I was just curious and I mean maybe I am not understanding, but so I guess you burn a lot of alternative fuels in Androscoggin and Quinnesec, the government is happy about that and they want you keep burning those fuels so they pay you $30 million and you expect that they will pay another $30 million during March 2009. I mean are there any restrictions on how that money is used or you obligated to continue to invest that money in alternative fuels, or do you have discretion on sort of how its used?
- Michael A. Jackson:
- I guess James, as we stated that there is lot of guidelines and protocol around this process and the, I guess the key takeaway is obviously if you can burn alternative fuels as opposed to fossil fuels and there is certainly some incentives that are available, we will continue to try to take advantage of those as we operate our mill.
- James Kitchel:
- Okay. Thanks guys. That's all it.
- Michael A. Jackson:
- Okay.
- Operator:
- Ladies and gentlemen that does conclude today's conference. We appreciate your participation. You may disconnect at this time.
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