Verso Corporation
Q4 2009 Earnings Call Transcript

Published: 3 Mar 2010

[Operator:]

Good day, everyone, and welcome to the Verso Paper Corporation fourth quarter and year-end earnings conference call. Today’s conference is being recorded. At this time, I would like to turn the call over to Mr. Robert Mundy, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

[Bob Mundy:]

Thank you. Good morning and thank you for joining Verso Paper’s fourth quarter 2009 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 turning the call over to Mike, 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 various SEC filings, which are posted on our website, versopaper.com, under the Investor Relations tab. Mike?

[Mike Jackson:]

Okay. Thanks, Bob, and good morning, everyone. If you could go to slide number three, we reported fourth quarter results of $84 million EBITDA as compared to $30 million in the fourth quarter of 2008 and $111 million for the third quarter of 2009. On an adjusted basis, which primarily excluded $49.8 million of alternative fuel credits and a $7 million gain on early debt retirement, our results for the quarter were $32 million versus the same adjusted EBITDA last year and a third quarter ’09 result of $50 million. The third quarter, as many of you know, is our strongest volume and earnings quarter. On the right hand side of the slide, you will see net earnings for the quarter of $18 million compared to a net loss of $34 million in 2008. On an adjusted basis, our net loss was $35 million versus $32 million for the fourth quarter of ’08. On slide four, I’d like to make a few comments on the fourth quarter results. First of all, coated volume was 23% above Q4 of ’08 and down only a bit less than 2% from our seasonally strong third quarter numbers. This, by the way, is less than half of the normal seasonal decline that we would normally see during this period of time. Although volume, as mentioned, was up 23% year-over-year, during the quarter, we still took downtime of 22,000 tons at a cost to the business of almost $5 million. This number was similar in scope to the downtime that we took in the third quarter, but 52,000 tons less downtime than we took in the fourth quarter of ’08. Coated prices for the quarter continued to be under pressure, as they were down 3% from last quarter. Pulp prices, on the other hand, were up 18%. Certain key input prices reached an inflection point during the quarter. And on the whole, we see some costs increasing. I believe we indicated this point of inflection was coming during last quarter’s earning call. And you will see the specifics of these costs in a later slide that Bob will cover. I mentioned the price of pulp going up by 18%. The impact of our pulp sales price versus our pulp purchase price was a net $2 million positive. We continue to manage our cash wisely, and our coated inventories were lower sequentially as well as year-over-year. Lastly, on this page, our liquidity improved by $104 million versus last quarter, and we had no outstanding revolver borrowings at year-end. With that, I will turn it over to Bob for further details and then I’ll come back to wrap up 2009, spend a little bit of time reviewing our focus areas for 2010 and beyond, and give a brief view on the outlook for the first quarter of 2010. Bob?

[Bob Mundy:]

Thanks Mike. Looking at slide five that gives you a view of the year-over-year changes for the fourth quarter of 2009 versus the fourth quarter of 2008. As Mike mentioned, volumes continue to improve as they were 93,000 tons higher this year versus last year’s fourth quarter. However, due to continued pressure, prices were down just over 17% versus last year or about $80 million. Currently, prices are off just over 18% from the most recent peak, which is in the third quarter of 2008. Operations, input prices and SG&A are all favorable year-over-year and we continue to get good results in the freight and distribution area through our management of chart versus rail opportunities. Finally, we took significantly less downtime during the quarter, which had a favorable impact on less unabsorbed fixed costs compared to fourth quarter of 2008. Turning to slide six, you can see the key changes between the third quarter of 2009 EBITDA of $50 million versus the fourth quarter of $32 million. Total volume was less than 2% below the seasonally strong third quarter. We said during our last call that coated prices will continue to be under pressure during the quarter, and a $5 million negative variance is primarily driven by coated prices being down just over 3% versus the third quarter. Operations costs were higher than the third quarter primarily due to some additional repair and maintenance related items, as well as some miscellaneous adjustments required at year-end. Turning to slide seven, we took some of these revenue metrics earlier, and you can see a significant coated volume improvement over last year and down only slightly versus the seasonally strong third quarter. Market downtime was slightly below last year. As we said -- I'm sorry, below last quarter. As we said, coated prices continue to remain under pressure and declined versus the third quarter by about $29 per ton. However, the higher pulp prices together with better volumes during the quarter resulted in revenues being up slightly versus last year. Moving on to slide eight, we mentioned during our last call that prices for some of our key inputs had reached an inflection point. And for the first time this year, we saw an overall increase in the prices of some of our key inputs. In the chemical area, the increase was primarily driven by latex and clay. Wood prices continue to stay at a very good level for us, although energy creeped up just a bit during the quarter. As many of you know, pulp prices continue to increase. However, due to the pulp long, this is actually a net benefit to us. Although this quarter I expect that overall input prices will be fairly flat going from the fourth quarter of this year -- of ’09 into the first quarter of 2010. Slide nine provides a full year adjusted EBITDA comparison between 2008 and 2009. As you are all well aware, the horrible economic conditions and existence for the better part of the year had dramatic effects on the demand and sales prices of our key products. Every other key driver of EBITDA shown on the slide shows nice year-over-year improvement. On slide 10, this reflects our continued efforts to improve liquidity and pay down debt. During the fourth quarter, we paid down remaining $45 million on our revolver. So we currently have zero drawn on that facility. Since the beginning of an extremely challenging year, we’ve been able to improve our liquidity by $124 million and reduce our net debt by almost $175 million. On slide 11, you can see that we have no near-term maturities on our debt, and you remember that back in the second quarter of 2009 we refinanced our debt to eliminate our key maintenance covenant, and we extended our first significant debt payment out to 2014. I think throughout 2009, we made prudent decisions to ensure the long-term security of our company. With that, I’ll now turn it back over to Mike.

[Mike Jackson:]

Thanks Bob. If you move to slide 12, in the face of the worst recession in seven years and with the first half drop in coated demand of almost 40%, Verso accomplished what I believe as many, many things against our goals. First and foremost was the further development and execution of our energy strategy, which focuses on driving cost savings, improving revenues, and reducing our carbon footprint. We competed against 350 diverse companies in the US, and we are one of only nine to receive Area 3 [ph] DOE grants. This will help fund 12 projects across our mill system, which will save the company 1.27 trillion BTUs. This is a very healthy return on invested capital for Verso. We also competed with many companies in Maine and received an energy grant to apply against other identified projects that have very high returns. And we are one of the leaders in the DOE’s Save Energy Now program to reduce energy intensity by 25% over the next 10 years. Secondly, in spite of the large first half fall off in demand, we managed to reduce inventories from 2008 year-end levels. At the same time, we took this downtime as an opportunity to develop and introduce new products that capitalize on, and you’ve heard this before, our light-weight manufacturing capabilities as well as our coating expertise. During this challenging year, as Bob mentioned, we reduced debt by almost $175 million through well timed repurchases while at the same time managing our cash, working capital, CapEx and fuel credits to improve our liquidity by almost $125 million. We also, as mentioned before, have no outstanding revolver borrowings and we have extended our debt maturities and eliminated our maintenance coverage. And as Bob mentioned, again, we have no significant debt repayment until the summer of 2014. If you move to slide 13, I’d like to spend a few moments on our areas of focus for 2010. Area one, as mentioned, we managed our inventories to stay below 2008 levels, and we will continue to monitor our inventory levels versus our customer needs. We will also continue to utilize the flexibility of our machines to manufacture new products, which are outside of our core coated markets. This puts us in a very favorable position for the economic recovery. Second piece is certainly cash flow. It will continue to be critical. It will always be critical. And we will continue to manage CapEx and working capital, as we’ve done in the past. Our new products continue to gain momentum, and manufacturing these products on scale machines will be a positive going forward. Utilizing our core competencies in light-weight manufacturing coating has really opened up our substantial set of new channels in markets, which continue to broaden our revenue base. We’ll continue to be extremely focused on cost savings opportunities that we’ve identified. And we expect our R-gap and other initiatives to more than offset input price inflation during the year. And you’ve heard us talk about this for a while, but our energy strategy has taken roots. During the year, we will be completing some of the initial progress of this strategy, which focuses on reducing our outside purchases of electricity, coal and oil, reducing our consumption of energy, increasing our internal generation of power, as well as increasing our green power sales. If you move to slide 14, simply stated, there are different ways to manage supply through a market cycle. We chose two. One was obviously market downtime, and we have and will continue to develop new products to diversify our revenue. By making these choices, we believe we would influence the total coated freesheet inventory levels, which you can see on this chart at the lowest level in over five years. If you move to slide 15, we believe our strategy has influenced coated groundwood inventory that now stand at a combined printer and mill level that we’ve not seen in many years. Slide 16, as I’ve said, because of what we have focused on for the last several quarters and our belief that we have reached the trough on pricing during the first quarter, we are well positioned for that market upturn. There is significant upside potential ahead of us, as these two charts indicate. A couple of points here. A $60 a ton increase in pricing for Verso means an almost $100 million EBITDA improvement. Said another way, if prices go back to the last half of 2008 peak levels, that would mean an additional $325 million EBITDA improvement. Secondly, on the right, you can see that by taking significantly less downtime in 2010, then the 340,000 tons that we took in 2009, that this will also have a very positive year-over-year impact. Slide 17, this closure of a downtime gap, as I just mentioned, will be driven by the portfolio of products on your right, which I know you’ve seen before, again all within the confines of our core competencies. We believe opportunities abound in these new channels while at the same time we have the opportunity to reduce coated groundwood and coated freesheet capacity as necessary. Slide 18, as we’ve already mentioned, we have been developing a long-term energy strategy, the first roots of that are based off of our 25% reduction commitment with the DOE and driven by multiple quick return projects matched by DOE grants. The first phase, as you can see, is conventional technology, focused on cost reduction. That’s the first phase. The second phase is power generation, and the third phase includes liquid fuels. Our five-year view, which is really focused on the first two legs of the slide, is both very exciting and substantial as it relates to EBITDA improvement for the company. The last slide is slide 19. Before we open up for questions, let me give you just a few thoughts on the first quarter of 2010. One is that volumes will be much higher than the first quarter of 2009, but down from the fourth quarter of ’09, which is really just a seasonal issue for us. Our downtime for the quarter will be minimal, and our new product volume will continue to increase. As mentioned, prices are still under pressure, but we believe that they found the bottom. And as Bob noted, we see some input prices rising, but overall we don’t expect much of a change from the fourth quarter levels. Our inventory and working capital will be managed, as we’ve done in the past, but remember that there is a normal build in the first half of the year for us to hit anticipated demand, and we will monitor that very, very well. Lastly, and again, no surprise to those that follow the company, we expect good things from our continued focus on cost and R-gap improvements, and that will continue to grow relative to driving cost savings to the bottom line. So with that, Lisa, Bob and I would be happy to take questions.

[Operator:]

Thank you, sir. (Operator instructions) Our first question today comes from Bill Hoffmann, RBC Capital Markets.

[Bill Hoffmann:]

Mike, can you talk a little bit about the different markets, catalog, magazine, commercial print, and what you’re seeing? There have been a couple of things recently. The magazine advertisers have put out their own advertising regarding print. We’re hearing that the catalogers have stepped up their printing again and then -- but what I don’t have a good feel of the commercial printing side here early in 2010.

[Mike Jackson:]

Sure, I will. Let me start with the catalog market. I think we’ve been pretty consistent with the feedback on the same type of question, Bill, and that is that the catalog is collectively, I believe, feel that they cut too deep in 2009. And that primarily revolves around prospecting, and I believe that we’re -- we have a number that says that there will be probably another 150 million to maybe even 200 million catalogs that will be shipped in 2010 versus 2009. So I think the catalog market is certainly coming back. Your point about magazines, I mean, magazines had a tough year in 2009, but I think the comments that the major publishers have made relative to the metrics that are supporting the campaign really are undeniable. And when you think about magazine readership has risen 4.3% in the last five years, the average paid subscriptions reached nearly 300 million in 2009. And during the life of boo-boo, magazine readership increased 11%. I mean, all of those are really interesting data points that really add up to -- I think their saying was “Did instant coffee killed coffee?” It certainly didn’t. And so we are -- I'm not going to say overly optimistic, but we are optimistic that magazines will slowly retrench. And Bill, by the way, they still hold a very good percent relative to the media spend. It’s 19%, and that 19% has kind of escalated between 20% and 19% over the last 10 years. So they have not lost market share as it relates to total media spend. The last question was the commercial print, and we have seen some increased activity in commercial print. And actually part of our strategy around channels has been to have a bit more of a presence with the medium sized printers. So all those are ticking up slightly.

[Bill Hoffmann:]

And Mike, just with regard to the commercial printing, any fallout from this Quebecor World, Quad/Graphics merger?

[Mike Jackson:]

Not yet. I’m assuming that Quad will begin to rationalize that system, but I’ve not seen anything good, bad or different, Bill, relative to what the impact of that might be. I would just say this that our relationships -- maybe this is a personal opinion, but my view is that we had a very good relationship with both printers and certainly one was Quad that’s been developing over the years and certainly a company that we hold in high regard. So I think in the end, it will be good for Verso.

[Bill Hoffmann:]

Thanks. A question for Bob. Is there any holdover of cash in black liquor? I think you guys shifted to this to tax yield with some of your black liquor in the back half of the year.

[Bob Mundy:]

There is no -- the holdover, Bill, I mean, we had $10 million in a receivable that we since received during the first quarter. That took us through the end of 2009, and that was it.

[Bill Hoffmann:]

Okay. Thanks. I’ll get back in the queue.

[Operator:]

Our next question will come from Bruce Klein, Credit Suisse.

[Bruce Klein:]

Hi, good morning.

[Mike Jackson:]

Good morning.

[Bruce Klein:]

I know we all met sort of last week, but just the pricing environment I guess, I don’t know if anything has changed, I know Chile has outages in pulp, which may hurt more of your competitors and you guys, and I know Abitibi announced. But have other guys announced anything other than Abitibi? Has there been any other thoughts and maybe impact from Chile at all?

[Bob Mundy:]

You mean on the pulp side? I mean, everyone -- when you think about pulp side, Bruce, I wouldn’t -- these increases on pulp have been coming fast and furious. And so you kind of lose track of who announced what. But I have not heard to date beyond Abitibi, anybody else responding to the tragedy in Chile. So I can’t -- I'm sure there will be a raft of announcements today, but I’ve not seen anything in the pulp side beyond Abitibi Bowater.

[Bruce Klein:]

Okay. And then liquidity, your liquidity obviously is as high as it has I think ever been. Is there a comfort level or a plan or how do you prioritize the use of that cash? I guess -- and is there a sort of comfort level you don’t want to go below? What do you think about that?

[Bob Mundy:]

Well, 2010 is still -- it will be slow going. So we wanted to make sure we set ourselves up. Things are positive, as we’ve indicated, and things are moving in the right direction. It’s very, very slow. But I think we’ve got ourselves -- we've put ourselves in good position, Bruce, as I mentioned on our liquidity and opportunities schedule and our covenants and so forth, really to do okay during a slow climb-back. That’s our primary concern. Our capital will be up a little bit this year, probably in the plus $16 million range. So we’ll need a little for that. And some of the things that Mike mentioned on our energy strategy, there are some things that we want to keep pushing and stay in the queue on. So we don’t get behind the timeline that we’d like to keep track with theirs. So we’ll have some cash certainly for -- to keep pushing that even though it will be from an operating standpoint. This first half, it will be a bit slow.

[Bruce Klein:]

Okay. I’ll pass. Thanks, guys.

[Bob Mundy:]

Thanks.

[Operator:]

Next is Chip Dillon, Credit Suisse.

[Chip Dillon:]

Hey, good morning. Sorry about that. Yes. Mike, it’s interesting when you look at the capacity situation from last year to this year. What doesn’t surprise me is that you are down about 200,000 tons and you’ve done a great job explaining the shift in some of the uncoated special areas. I was a little surprised to see that that your net pulp position actually looks to be reduced. And I guess since you’re making 200,000 tons fewer tons of paper, I was a little surprised to see that you are also selling on a net basis about 100,000 or so fewer tons of pulp to the market. Could you explain how that came about?

[Mike Jackson:]

Yes, you bet. Certainly the economical thing to do in 2009 was to divert as if we could any of our pulp production, because of the downtime, keep it internal rather than go to the outside market, which certainly only made good sense. But the major factor, which I think, Chip, we had mentioned in maybe only slightly in the past is, the 2009 forced a lot of companies to do some things that they perhaps wouldn’t have done in the past. And I’ve spoken about our Quinnesec Mill is that we were actually able to swing, which we had never done before, swing to softwood. And it used to be this thought process that we’d have to spend a tremendous amount of money to do so, but these times put you -- you (inaudible) in terms of what you can do. And these folks at Quinnesec did a great job. So we ended up swinging between hardwood and softwood. And I mean, that was outstanding. And I think you know our cost structure to Quinnesec. So that’s number one. Number two is, they have increased their -- I'm not going to give you number because it’s substantial, but they increased their efficiencies by a significant percent. So those two combinations gave us the opportunity to be long in pulp.

[Chip Dillon:]

Right. But if I’m reading the K right, it looks like -- at least when you measure your capacity, in ’08, you had 878,000 tons and that your plan was to use 493,000 internally. So you had 385,000, but you could sort of sell to the market that on a net basis. And in 2009 the case is just that the capacity for pulp was only down a little bit, like 40,000 tons, but that your planned internal usage has gone up. I mean, seeing how pulp prices are likely just to keep going up, it would seem like -- it's not -- it would be great if we have more pulp to serve the market I guess is what I’m saying. I know you are talking the mix that you use internally. But maybe the better way to ask the question is, how many tons of pulp do you think you will sell to the market net of what you purchased in 2010? I mean, can you give us a range?

[Bob Mundy:]

It would be probably something south of 150,000 tons, Chip.

[Chip Dillon:]

Okay. It would be the net of what you --

[Bob Mundy:]

That would be net. We are long 130-plus on pulp.

[Chip Dillon:]

Okay, all right. And then can you talk a little bit about the – when you look at the situation, and we had you yesterday that their duty has been put on coated freesheet. I seem to remember in the past that the grades they have targeted didn’t really apply as much to you from Asia, but could you just review -- do you see any impact from that ruling on your company and on the particular grades you make?

[Bob Mundy:]

Yes. Well, I guess my comment would be that obviously this has to go through another level of decision making. And of course you saw the last one in 2007 had to go through two levels of decision making. But assuming that it does and it comes out the way that the announcement came out yesterday, I would say that it’s simply a trickle-down effect. You know we’d only run sheets. And that primary focus was on sheeted imports. But because of that, I mean, clearly it can’t hurt us, Chip. It can’t hurt it. I guess it would be the best way that I can describe that.

[Chip Dillon:]

But the real issue of imports for you all has always been, if I’m not mistaken, is Europe. And that’s where we need to keep an eye on things. And I guess seeing the Euro starting to get stronger in the last few days is probably a good thing for Verso.

[Mike Jackson:]

Yes. We have not seen a significant impact between the delta between 125 to 153. I think that’s in the high and the low in the last 18 months or so, maybe two years. We’ve not seen a significant reaction to the Euro as it relates to the European input. So you’re right. Our major concern would be groundwood. I was trying to answer your question relative to the tariff on freesheet.

[Chip Dillon:]

Right, right. Got you.

[Mike Jackson:]

Yes. We’ve not so -- we've not seen that, and it’s not to say it couldn’t happen, but yes, the Euro heading north is better than it heading south.

[Chip Dillon:]

Got you. Thank you.

[Mike Jackson:]

You’re welcome.

[Operator:]

Next up we’ll here from Gary Madia [ph], Broadpoint Research.

[Gary Madia:]

-- of non-core asset sales, Bob. Can you give us a sense, is that something that is definitely on the table or it’s one of those things that just-in-case category, and perhaps I guess help us quantify what that might look like in terms of size?

[Bob Mundy:]

Yes, Gary, you sort of cut out at the beginning, but I think your question related to non-core assets?

[Gary Madia:]

Yes, that’s correct. I was mentioned in the K, and I just wanted to get a better sense from management. Is that something that’s expected or is it going to be a just-in-case-if-necessary type of plan? And then hopefully quantify the potential size of that.

[Bob Mundy:]

It’s not expected. It is not unexpected. It’s just something that’s out there that everyone knows we have. We have some non-core assets that are available to us, but I would say that there is nothing imminent around that.

[Gary Madia:]

Okay, nothing imminent. And no mention about the potential magnitude?

[Bob Mundy:]

Correct.

[Gary Madia:]

Okay. Secondly, in terms of -- sitting here today, what are your thoughts about CapEx in 2010?

[Bob Mundy:]

I think I’ve mentioned on our call [ph], I mean, a few questions ago that it will be in the -- we expect it to be in the upper 60s this year. We will see how the year goes and see how the first half goes. And as we get further into the year, we’ll certainly have a better view on what our expectations are (inaudible) right now. But I would expect it to, at least as we sit today, be in the upper 60s, feels about right.

[Gary Madia:]

Okay, great. Yes, I thought that was working capital. So I misinterpreted that response earlier. And final question, on the $50 million of cost savings for 2010, am I to assume the way things presented in the presentation that that’s over and above the cost inflation since you’re adding the $50 million down to EBITDA?

[Bob Mundy:]

That’s correct.

[Gary Madia:]

Okay. That’s all I have. Thanks, guys.

[Bob Mundy:]

Thanks.

[Operator:]

Next up is Philip Worth [ph], Zodian Capital Group [ph].

[Philip Worth:]

Yes. I wanted to ask a question about what you’re seeing in the super calendar market. I remember you had mentioned a few times last year that you had some ability to swing production and sales into that market. But it seems like some of the other large producers have really aggressively tried to capture some market share there. Do you think the prices in that market are going to pretty much track coated groundwood and freesheet this year?

[Mike Jackson:]

Yes. You’re right. Going back to the product launch, we launched (inaudible) plus in June, and we’ve been very happy with the trend relative to the volume. It is an opportunity for us to fill the gap in a product line. But clearly with the pressure that we’ve seen on prices, and to answer your question, that -- there is usually spread that follows between the movement in both freesheet and groundwood. And we certainly are seeing that. So it’s something we watch very closely. And right now, as you think about where the pricing is, I mean, it is in the last five or six years certainly a new low. So it does put pressure on that grade. There is no question about it. But we have it. We’re running it. It’s a great product, and our customers really like the product.

[Philip Worth:]

Thanks, great.

[Mike Jackson:]

You bet.

[Operator:]

Eric Anderson of Hartford Financial is up next.

[Eric Anderson:]

Yes, good morning. I wondered if you could just elaborate a little bit on slide 17 talking about all the new products that you are able to develop while you have some time to work on that last year. What do they mean potentially in terms of revenues this year and over the next couple of years?

[Mike Jackson:]

I think over time we’re really looking at between different channels. And I throw a little bit of export in here as well. We’re looking at about 20% of our revenue going forward .

[Eric Anderson:]

That would be 20% of both grades of coated, excluding the pulp sales?

[Mike Jackson:]

Yes.

[Eric Anderson:]

Okay. And when you say over time, is that two to three years or --?

[Mike Jackson:]

I would say it’s -- yes, two -- maybe a two-year period or so. I would say two years or less because we’re really getting some pretty nice traction in these products.

[Eric Anderson:]

Do you expect to have some meaningful revenues of some of these new products this year?

[Mike Jackson:]

Yes, we do.

[Eric Anderson:]

Okay. That sounds good. And on your presentation last week in New York, you had a segment that looked at what you felt were the lost market shares going forward due to technology shifts in both printing and catalogs. And I’m wondering what -- in terms of magazines, I’m wondering what you feel as the long-term evolution in the catalog space with a lot of companies trying to use Internet for emails for target transactions and doing less printing of catalogs.

[Mike Jackson:]

I think probably if you were in New York, and it sounds like you were, I think I’d probably just stay with the story that we presented because that was a longer term view. And our number was roughly 11% to 12% of coated freesheet and coated groundwood, we believe, is lost that it will not come back. And I think we kind of broken out and said, depending on the grade, and these are round numbers, 15% was from drawdown of inventory, 15% from the recession, and the balance is products that won’t come back. And so I think that that for us is probably a two or three or four-year view. And honestly, beyond that, catalogers are looking at models. Certainly magazine publishers are looking at models. But funding and finding successful strategy hasn’t taken place yet. And a cataloger will tell you that having something in your hand and being able to look through that product line, it’s significant relative to driving sales. So look, we’re not going to put our head in the sand relative to what might happen long-term. And we do believe that these products will be around for a long, long time. And as importantly, that’s why we’re developing other products that will be in the same family as it relates to light-weight and coating, but it just gives us a much more diverse base based on whatever comes over (inaudible).

[Eric Anderson:]

Okay. My last question relates to slide 18 in terms of your strategic energy initiatives. In that category of two to five years you’ve got box for green power production. I assume that’s really sales outside on to the grid. Are you actually going to be adding new capacity to ramp up new sales of power, or are you just diverting what you’re currently generating?

[Mike Jackson:]

No, it’s really just investing more efficient ways to do what we’re currently doing. I mean, we already fell into the grid. So we have a very good view of what -- that is not new for us, and that’s the beauty of our energy strategy. We played in this for the last couple of years. We understand what the market looks like. We understand what our mills can deliver to the communities and beyond that we’re in. So it’s really just taking the great back-end of our mills that we have and making them better.

[Eric Anderson:]

All right. Have you taken a look sort of at what some of the Canadian companies are doing? And I’m referring to Mercer with their Celgar mill where they actually I think got a $40 million grant out of the Canadian government to actually make green power plant in addition to what they are doing.

[Mike Jackson:]

Yes, I have. I’ve been -- we've been following that. And that -- as I understand it, that was a standalone -- almost a standalone. And at this point in time, everything that we’re doing is really connected to some of the products that we make. And we feel there is no need to greenfield anything. We’ve got a lot of opportunities with the two legs of the stool that you see on that slide in the left hand side. The one, way out to the right, I mean, that’s not part of -- there is nothing there relative to EBITDA improvement that we would refer to at all. We’re just saying that, look, that’s not on our radar screen, but our focus is bringing home what we know we can bring home.

[Eric Anderson:]

Okay. Thanks very much.

[Mike Jackson:]

You bet.

[Operator:]

And next we’ll hear from Richard Kus, Jefferies.

[Richard Kus:]

Yes. Hey, guys. With regards to the new products, you guys seem to be doing a great job in getting a lot of traction there. Do you guys have a target for what kind of contribution you expect in 2010 on revenue?

[Bob Mundy:]

We have a target. I don’t that’s something we’re ready to talk about right now, Richard. But we -- as Mike said, we expect the volumes from these products and new channels would be a significant part compared to history of what we do in Verso. And we’re -- the run rate just increases every quarter. What we did in the fourth quarter was below what our run rate is now in the first quarter relative to these new products. And so -- but as far as specific contribution, it’s not compared to get into that.

[Richard Kus:]

Okay. That sounds good. But then just generally, margin-wise on the new products, how does that compare to your current traditional coated type sales?

[Bob Mundy:]

Well, it’s obviously -- that changes, right? I mean, it depends on where you are in the cycle. It’s certainly -- as Mike mentioned and we talked about in New York last week, when you look at an industry where we think less than 12% of what used to be was gone. It’s certainly better than -- it's a way to deal with that situation and also make some positive contributions to your business. So that’s the most important thing right now as we slowly climb back to something towards normal in our core markets.

[Richard Kus:]

Right. Okay. So it’s not -- sorry about that.

[Mike Jackson:]

No. I was going to say -- I think the other thing that I would add to what Bob said is that all these grades are variable relative to what those contributions are. And that’s something that we continue to get involved with.

[Richard Kus:]

Okay, okay. And then lastly, just can you guys touch on what your expectations are for working capital this year and whether or not you can bring out some additional gains from that? Thanks, guys.

[Bob Mundy:]

Yes. Working capital, as you know, we manage at very low levels. And it’s not a lot of ringing out that we could do in working capital. It’s -- we work very hard just to keep it at the levels we do. And when you’re at 4% of sales or whatever, or less sometimes, that’s pretty darn good. But I do expect to have a slightly positive source of working capital for the year; nothing significant though, Richard. And you will see the seasonality. I think you will see our normal seasonal pattern in working capital is it will be a use in the first quarter, source in the second, a use in the third, and a source in the fourth. And I expect that pattern to continue in 2010.

[Richard Kus:]

Great. Thanks, guys.

[Operator:]

Our next question today is from Oppenheimer’s Vy Noe [ph].

[Vy Noe:]

Hi. Could you give me a sense of what operating rates are today? And then at what type of operating rates do you guys need to get some level of pricing power?

[Bob Mundy:]

Our operating rates, of course, they -- are you talking about right now or in the fourth quarter, because that’s all I can really --

[Vy Noe:]

Whatever you can give, it’s fourth quarter or today and then just give an idea of where your rate --

[Bob Mundy:]

Sure. I would say in general the low 90s is where we’re at. And to answer your second question, I think anything in that 92%, 93% operating rate gives you an opportunity to move prices.

[Vy Noe:]

Right, thanks. And then also, the 11% secular demand decline that you guys quoted, I just kind of want to follow up a little bit. How did you get to that number? Did you look at historically last three years and say that maybe demand declined by 7% to 8%, or did you look back historically to get to that kind of forward number? And I just kind of want to get a sense of, did it maybe increase a little bit more or tick up a little bit, say, the last three years versus maybe more historically back.

[Bob Mundy:]

Yes. Vy, it’s certainly just our view, and everyone has a view on what they think. And historically really is not a good indicator of what the future is in this case because things are different. And we don’t think history, in a lot of areas in our industry, will be about a benchmark for certain things. But it’s just our view, and our feedback that we get from customers, the feedback we get from the people in our business, our sales and marketing group and what they see and their context. And we had outside industry experts that have views that it’s just where we arrived at as far as what we think will happen in the future. And maybe you’re right, we may be wrong, but it just feels good to us right now.

[Vy Noe:]

Great. Great research. Thank you. It’s very helpful.

[Bob Mundy:]

Okay, Vy, thanks.

[Vy Noe:]

Thank you.

[Operator:]

We’ll now hear from Jeff Harlib, Barclays Capital.

[Jeff Harlib:]

Into Q1, you gave guidance of down seasonally with volumes. Can you say if you’re seeing a little better than typical seasonality and maybe differentiate groundwood versus freesheet, and whether customers might be building a little bit of inventory or not?

[Mike Jackson:]

Yes. We haven’t had -- we saw our inventories very closely, and we have a very -- I think, a very good insight into the end use and certainly into the printers, because we have a technical group that’s always out in the marketplace providing technical expertise to those that needed. So I think our view into the industry levels are pretty good. And it’s not to say that there isn’t some inventory build going on, but I think it’s minimal, because I think what we found is that the order to press time has been reduced. And so we have a three-week turnaround. That product normally goes on to press. And that -- I think that the customers will change the way that they have kind of ordered in the past. The other thing, the question relates to kind of the activity piece. I would say that at least right now, the groundwood business seems to be, in the catalog specifically, a bit more active than the freesheet, number one. The number two, overall -- and this is the difficult part, is that -- I think we’ve mentioned it before. We’ve had a very steady increase in order activity of bookings since, call it, June of 2009. And I think we’ve given you in the past a view of month-over-month. And some of these increases are substantial. And it’s because it’s coming off of such a terribly low base at the end of 2008 and in the beginning of 2009. So you don’t want to allow yourself asleep saying, well, these bookings are great, they are very good. But -- and significantly better than in 2009. But I think in another month or two, I’m going to tell a bit more about the trend and a bit more about the 11% or 12% number that Bob and I have put out there to you. So we’re feeling better about the bookings certainly.

[Jeff Harlib:]

Okay. And about your current coated paper inventories, are they at a level that you expect to hold them at or do you expect to build some as you enter a seasonally stronger period?

[Bob Mundy:]

Yes. Jeff, we will build some in the first quarter, which is typical, and into the second as we do pretty much every year to prepare for the stronger period when capacity just doesn’t able to keep up with demand. And where our inventories are at the end of the day and where they are as we sit today, we feel really good about what we see over the next several months.

[Jeff Harlib:]

Okay. With the CapEx in the high 60s, are there some grants that offset the cash needs there? In other words, net CapEx number.

[Bob Mundy:]

Well, that’s sort of net -- you’re probably referring to the -- we've received from the Department of Energy, as you know, some substantial grant money. But that -- my number is net of that.

[Jeff Harlib:]

Okay.

[Bob Mundy:]

So that would be our -- that would be our cash contribution towards our total capital program, and we would not lower it by these grants.

[Jeff Harlib:]

Right. Okay, thank you.

[Operator:]

Chip Dillon of Credit Suisse is up next.

[Chip Dillon:]

Yes, hi. Sorry to beat a dead horse on this but -- the question I had was, when you look at the -- again, your pulp position, what I said in my last question is to take into account is what you actually buy. And you’re absolutely right. You obviously bought a lot less pulp in ’09. But even when you take what you make, what you use, minus what you buy, your sales to the market was like it fell from 219 in ’08 to 192 in ’09. That’s in thousands. And then I think you said you’re going to only sell 150,000 tons in 2010. Even though you make less paper, and I guess for the pulp market on fire, I’m just wondering, are you getting to a point where maybe you don’t make paper and you just sell more pulp?

[Bob Mundy:]

I guess, Chip, I won’t follow those numbers, and that would probably be best to maybe talk later today because those aren’t -- the numbers you just quoted are not the numbers that I have. So why don’t we do that and we can sort of sort that out?

[Chip Dillon:]

Okay. Just so you know the way, I got them as -- the ones that are literally in your K under craft pulp, page eight, but that may be more mixing capacity with what you actually did. But yes, that would be great.

[Bob Mundy:]

Okay.

[Chip Dillon:]

And then one other quick question I had was, when you look at the -- you missed some of the specialty papers that you moved quite aggressively into and how you certainly see the future of the company. Are you -- could you just review again sort of how quickly you think you can move up the curve in some of these specialty areas? And are you, I mean, in essence, already getting to where you are, if you will, sold out? And could we see more conversions, say, out of coated groundwood, coated freesheet into some of these specialty uncoated areas?

[Bob Mundy:]

I mean, certainly we have the ability to do. Our machines have the flexibility to do more in the specialty area if we think we need to. But we’ve got a pretty sound piece of capacity, as Mike mentioned earlier, directed towards these products. And our goal for this year is pretty significant as it relates to our historical coated capacity that will not be directed to the coated market. And it’s directed towards some areas that we’re excited about it. We’ll continue to grow throughout the year. But our target for 2010 is significant.

[Chip Dillon:]

Okay, got you. And then last question, I don’t think you answered this. But when you look at the 12 projects that you are doing in Maine, I guess -- or across the whole company, on the energy side, is there some number we can sort of look to, whether it’s two years out, five years out, however you want to tell us, that we could see the savings either on a pretax basis or on a per-share basis? For example, you have companies in the packaging industry that are doing similar things with their boilers. Packaging Corp. would be an example. They are telling us they are expecting to tell us what they are spending and what they expect the return to be. Can you give us any feel for what that could be, even if it’s avoided barrels of oil purchase?

[Bob Mundy:]

Well, I guess, Chip, those -- every company is different, and depending on what they are doing, obviously (inaudible) timing and the equipment they are doing it too. But for the most part, the DOE 3, Area 3 projects, which are the ones that you’re referring to, those are being worked on as we speak and we’ll start to see some benefits from those late this year and into 2011. But again, that’s just a piece of our energy strategy, as there are other things with even larger savings that are little further down the road, but we’re working on them now.

[Chip Dillon:]

Okay, thank you.

[Operator:]

Kevin Cohen of Imperial Capital is up next.

[Kevin Cohen:]

Good morning. Thanks. I’m wondering if you guys could talk a little bit about what you expect the volumes in full year 2010 for you guys and how much of that would be organic versus potential incremental inventory restocking.

[Bob Mundy:]

I think basically what we’ve said is that we -- compared to last year, we plan to run pulp. And I think we’ve got perhaps compared to the 340,000 tons, we may be looking at 25, maybe 50 tops [ph] depending on where the markets go. So -- but again, that’s across the base of our home machines. One comment I’d like to make about these new products, I want to be very, very clear here, is that our core products, freesheet and groundwood and the way we’re positioned on the cost curve, we’re going to continue to obviously because where we’re positioned continue to push the lighter weight products on the groundwood side and heavy weight on the freesheet side. I don’t want to lose -- I don’t want anybody in the call to lose sight of the assets that we’ve got in place, that we’ll move into specialty, those machines that were not competitive in the coated groundwood market. Take those, and they’d become scale machines in the products that we’re moving into. So it’s an optimization strategy based off of the equipment that we have in place. And I think that’s the key that we are -- the core assets for freesheet and groundwood, but we’re going to plus that as it relates to growing other markets as long as we’re -- as long as we can take a fourth or third quartile machine and make it a first or second quartile machine.

[Kevin Cohen:]

That’s great. And then in terms of product price, you mentioned that they are still under pressure, but they would find a bottom. In that context, what are you guys kind of seeing in terms of competitive activities in the spot market in the last two or three weeks? And is that (inaudible) a little bit or is it still kind of the way it was in early February? Any color on that?

[Bob Mundy:]

Yes. I think it’s a -- you know, I think that -- that’s why we made the comment about both the first quarter of probably being the trough.

[Kevin Cohen:]

Great. That’s helpful. Thanks a lot, guys.

[Bob Mundy:]

Thanks.

[Operator:]

And ladies and gentlemen, that is all the time we have for questions. I would like to turn the conference back over to our speakers for any additional or closing remarks.

[Mike Jackson:]

We’d just like to thank everybody for taking the time, and look forward to our next quarterly call. Thank you.

[Operator:]

And once again, that does conclude today’s conference. Thank you all for your participation.