Verso Corporation
Q4 2014 Earnings Call Transcript

Published: 6 Mar 2015

[Operator:]

Good day and welcome to the Verso Corporation Fourth Quarter 2014 Earnings Call. As a reminder, today’s conference is being recorded. At this time, I would like to turn the call over to Senior Vice President and Chief Financial Officer, Mr. Robert Mundy. Please go ahead, sir.

[Robert Mundy:]

Thank you, Doris. Good morning and thank you for joining Verso’s fourth quarter 2014 earnings conference call. Representing Verso today on this call is President and Chief Executive Officer, Dave Paterson, and myself Robert Mundy, Senior Vice President and Chief Financial Officer. Before turning the call over to Dave, I would 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. And should one or more of these risks or uncertainties materialize or 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 website where we have various SEC filings under the Investor Relations tab. Dave?

[Dave Paterson:]

Thanks, Bob and good morning to everyone. Let’s start by looking at Q4 2014. As we talked about before, this is a seasonally slow quarter for ourselves in the industry, because volumes were down 9.5% against a seasonally stronger Q3 and down 9.2% versus the prior year. Coated groundwood pricing was down 2.5% from Q3 and 6.6% in the previous year, while freesheet prices were up slightly for both periods. Inventory levels in Verso are below last year and last quarter. We saw input price increases in energy and wood. Compared to last year, wood costs increased, while energy and raw materials have declined. During the quarter, we halted production in our Bucksport, Maine facility on December 5. It was a very busy quarter. As all of you know a lot of activity driven primarily by the NewPage acquisition and the preparation for integration, we marketed and sold the Rumford and Biron mills as part of that transaction on acquiring NewPage and we marketed the sale of the Bucksport mill. All of these transactions have closed in January 2015. Bob, over to you?

[Robert Mundy:]

Thanks, Dave. If you will turn to Slide 5, you see at the top left, overall volume for the quarter was about 18,000 to 20,000 tons below last year’s and last quarter’s levels, which is virtually all attributable to coated groundwood and about half of that falloff results from the shutdown of the Bucksport mill during the quarter. Similar to the volume, revenues were below last year and the previous quarter due to the lower coated groundwood volume, along with the groundwood prices being about $56 per ton below last year and $20 per ton below the third quarter of this year. Adjusted EBITDA of $24 million compares to $37 million in the fourth quarter of 2013 and $41 million in the seasonally stronger third quarter. The EBITDA margin of 7.3% was down versus the other two periods primarily as a result of the lower coated groundwood prices, higher wood prices and higher operational costs, some of which was due to our scheduled maintenance outage at Androscoggin that was moved from spring into October. Turn to Slide 6. As mentioned, lower coated groundwood volume drove the lower coated paper volumes this quarter influenced by the shutdown of the Bucksport mill. The coated groundwood prices also moved down the overall coated price as I said of $56 per ton versus last year and $20 per ton versus the third quarter, while coated freesheet prices averaged about $5 per ton higher versus both periods. We had good pulp volume for the quarter, although prices were down about 4% versus last year and versus the third quarter. Slide 7 gives you a view of the adjusted EBITDA changes between the $24 million in the fourth quarter and the $41 million in the previous quarter, the third quarter. The impact of lower volume was about $2 million and the lower coated groundwood and pulp prices had a negative impact of $5 million, operations were a negative $3 million versus the third quarter. Again we had a maintenance outage at Androscoggin, which was a key driver of that. Chemical prices in the fourth quarter moved lower, however, continuing higher wood prices as well as higher energy prices coming out this – it’s a seasonally moved from energy for energy from the third to the fourth that resulted in a net negative $7 million compared to last quarter. Slide 8, you can see the key changes between the fourth quarter ‘14 versus the $37 million in the fourth quarter of 2013. Lower coated groundwood volumes and prices drove about an $11 million decrease in EBITDA and higher wood prices offset the favorable chemical and energy prices by about $2 million compared to the fourth quarter of last year. There is a bit more information related to input prices on Slide 9. Overall, chemical prices have been in a good spot for most of the year and energy prices driven by natural gas is below last year’s seasonally higher fourth quarter levels. However, wood prices continue to move up as they have for most of the year which is primarily due to the inability to get inventory levels in a good spot throughout 2014 which was a result of the extremely cold winter experienced in our procurement areas early in the year. We continue to work on this and hope to see some favorable trends during 2015. Looking at Slide 10, we just wanted to give you an idea of how RISI saw the coated freesheet and coated groundwood markets moved in 2014 versus 2013. While our results would indicate that our volume was off more than these industry numbers would indicate. Our prices held up better than the industry as our coated freesheet was off about 2% in coated groundwood around 6% for the year versus the negative 7.3% and 7.5% across the industry. As you can see on Slide 11, although even with most – maintaining our prices best we could, overall lower pricing were certainly the story our numbers for this year. But we do believe we managed the business through this in a way to minimize the falloff, keeping our inventory levels in a good place throughout the year even if it meant absorbing the cost of market downtime which we did take throughout 2014 at Bucksport to deal with extremely weak number five coated groundwood market. As Dave will touch on more in a minute going forward with our new company as a result of the shutdown of Bucksport and divestitures of Rumford and Biron we will only have a very small amount of volume attributable to these grades in the future which historically have been the weakest of all the coated grades and continue to reflect the weakest demand outlook over the next 4 year or 5 years according to RISI. Going – in 2015 we expect to have around maybe 40,000 tons in these grades versus almost 700,000 tons between the combined companies in 2014. Finally, we also wanted to mention how proud we are of our employees and their continuous focus on improving safety habits and techniques. 2014 was a record safety year for our company and the hard work and dedication to keep this up is an outstanding achievement. Dave?

[Dave Paterson:]

Thanks Bob. I would like to take some time now and talk about the new Verso. And as Bob mentioned new Verso has a very different product mix and forward looking market position from traditional Verso. Starting on Page 13 we are still in a challenged industry clearly, but we have created a platform we believe that will allow us to deal with those headwinds very effectively. We are now the number one coated paper manufacturer in North America. We have significant scale which allows us to improve our cost positions across a bigger platform and provide enhanced customer services. The reaction of our customers to the acquisition of NewPage has been encouraging and we continue to work very closely with all our customers in all grades. From a cost position, we believe we have the low-cost position, but with room for improvement. And that is a big part of our synergy realization that we will touch on in a minute. And from our cost position, we believe both in coated freesheet and coated groundwood we have a very low-cost mill system and allows us to compete very effectively. We believe this system will allow us to generate significant cash flow for debt repayment and reinvestment ultimately in our businesses. The platform has modest capital requirements we will talk about that a little bit a minute. And we also have a favorable tax position going forward to utilize earnings and cash flow. And from a cost structure and synergies, we believe we will be a top quartile of free cash flow generating company. Finally, the management team is in place, it’s a very seasoned team continuing to drive performance and improvement across the platform. Turning to 14, at Verso, we have our foundation document, which is a key to communication with our employees and to set expectations across our manufacturing, sales and operations platforms. We have talked about one of those strategies is enhance the core business by improving our margins. We are well underway to do that and we will talk a little bit about margin improvement. And the second, looking for new revenue streams outside of our core paper coated products businesses to mitigate the market forces there. This will come from the cash flow improvements in our core businesses and then reinvestment in new ideas and new businesses segments. We will talk about the manufacturing superiority by benchmarking reducing operating gaps. You’ve heard us talk quite a bit and historically about R-Gap opportunity. I would tell you that the process to identify R-Gap has been completed across the entire 8-mill manufacturing systems at Verso and we see significant opportunities for continued R-Gap improvements across the entire platform. We will talk about cash flow, it’s a key strategy. We want to be a top cash flow generator and effective stewards of that cash flow including how we manage our capital. And then the organizational capabilities, we are quite encouraged by the talent levels we have seen in NewPage organization. We hopefully are incorporating all the parts of NewPage into our operating sales, marketing and staff functions. And I would say that process is well underway and is going well. On 15, a quick snapshot of what Verso looks like today. It’s an 8-mill system. As you can see Duluth, Minnesota, Quinnesec and Escanaba, Michigan, Stevens Point, Wisconsin Rapids in Wisconsin, Androscoggin, Maine, Luke, Maryland, and Wickliffe, Kentucky, a little bit over 4 million tons of combined paper and pulp capacity, roughly 3.6 million in the paper grades. On 16, again looking at the new Verso, we talked about the 8-mill system, 3.6 million tons of paper capacity, product offerings in the coated digital, coated sheets, coated web, supercalendered, uncoated grades, market pulp and specialty label and packaging. And we have a fairly diverse customer base including commercial print publishers, corporate end users, converters and label and packaging suppliers. I will give you a little pie chart breakdown of how those grades look by end user and by paper grade percent. I would point to the fact that commercial print is a very significant part of our business in terms of end use applications and the course as Bob mentioned our coated freesheet position has been enhanced in terms of product mix and the coated groundwood position has declined significantly in terms of product mix on a go forward basis. On 17, I want to give you sort of a pro forma look at the new Verso. Starting with the volumes, we looked at 2014 on the pro forma basis with the 11-mill system, which would have been prior to the divestiture of Rumford and Biron and with the closure of Bucksport a roughly 5.1 million tons. The new system, the 8-mill system, a little over 3.9 million, 24% decline, on revenue basis, you see the same rough percentage, 23% decline in revenue on a pro forma basis, on a pro forma EBITDA flat. And then if you look at margin going from an 11-mill system to an 8-mill system on a pro forma basis has a 29% improvement in the EBITDA margin. And against our 2015 forecast, we see a 35% EBITDA margin improvement, which encompasses our already announced price increase in the first quarter of this year. Mix improvements, synergy execution and R-Gap closure across the 8-mill manufacturing system. Turning to 18, we wanted to give you a view of sensitivities within our new company and highlight what price means to us in terms of our ability to execute price increases or price management across our manufacturing platform in the paper segment. We have a $40 per ton price announcement in the marketplace. And we are able to implement that across our 3 plus million ton paper system. On an annualized basis, that’s roughly $120 million of contribution. And you can see different price levels and different execution levels depending on grade and/or level of execution on the pricing side and it gives you a guideline to the sensitivity of pricing of the new Verso. On 19, let’s look to 2015, as I mentioned briefly earlier, I would say we are progressing very well in integration and synergy achievement. We are off to a fast start. I think every facility I have been to has been very open and very eager to move forward in these areas. So, we are off to a great start. The completion of the Rumford and Biron sales was completed in January and those have gone well. And we continue to have an ongoing supplier relationship on many cases to those two mills. As I mentioned before, we have price increases in the marketplace both in rolls and sheets varying levels depending on grade and application and that is going well. From a volume point of view from our perspective, we expect flat volumes year-over-year. We continue to manage our inventories extremely tightly. That’s just a business operating philosophy of ours, but we see opportunities across the 8-mill platform to improve that from 2015. We continue to see modern inflation across our system, but it’s really driven by wood predominantly Bob touched on that. We continue to see wood escalation across our system. And again it is primarily related to another difficult winter that we are experiencing, particularly in the Michigan and Wisconsin basins. It will take a while to work our way out of that, but we have active plans in place to mitigate that, but wood is the primary inflationary cost that we are facing in 2015. From capital spending point of view, we are targeting $80 million to $100 million of spend in 2015 across the 8-mill platform. Most of that will be in maintenance capital and other costs related to maintenance spending. From a synergy point of view, we are looking at $70 million to $90 million in 2015 with the balance coming in 2016. I would point out that due to the extended DOJ review process, we were essentially a quarter behind in terms of where we hope to be in terms of implementing and executing. We are still very confident around that total target of $175 million. We are confident in our implementation ton curve. We are just getting started a quarter later. And that’s the final point was really about the delay in the closure and the transaction has pushed back some of these cash generating opportunities essentially by a quarter and that’s why we see a little less realization in 2015 and more realization in 2016 than perhaps we discussed previously. With that, operator, we will turn it over to questions and Bob and I will be happy to answer them.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Bruce Klein with Credit Suisse.

[Wei-Jen Yuan:]

Hi, good morning. This is Wei-Jen filling in for Bruce Klein. Thanks for taking my questions. Just one quick question regarding the end market demand, can you talk a little bit about what you see for magazines, catalogs and commercial print in 2015? Thank you.

[Dave Paterson:]

Sure. Well, I think it’s a continuation of what we have been seeing the last several years where magazine is probably under the most pressure. I would say catalogs continue to hang in there, though they do see some decline, but it’s not at the same rate as magazines. And on the commercial print side, I would say there has been a lot of innovation on the commercial print side. We are encouraged by some of that innovation from our customer base. We are seeing a move more to digital grades which is further their drive to faster turnarounds, higher graphics, different presentation, which is good alignment with our manufacturing strategy. So we are encouraged by what we see in the commercial print side and magazine. Again magazine is in the most under pressure and continues that way.

[Wei-Jen Yuan:]

Great. Thank you.

[Dave Paterson:]

Thank you.

[Operator:]

We will go next to Richard Kus with Jefferies.

[Richard Kus:]

Hi, guys. Good morning.

[Dave Paterson:]

Good morning.

[Richard Kus:]

First question for me, I don’t know how much you can say, but can you give us an idea how NewPage performed in the fourth quarter?

[Robert Mundy:]

Yes, those results haven’t been released – they will be released later in the month, so that would be a better time to talk about that.

[Richard Kus:]

Okay, very good. And then secondly, on your outlook you talked a little bit about volumes being flat on a year-over-year basis, was the $3.9 million you showed, I think it was on one or two slides before that as your pro forma volume, is that the right number to be kind of basing that off of?

[Dave Paterson:]

Well, there is 3.6 million of paper volumes and about 3,000 plus of pulp volume, so the pulp is pretty stable business and it basically we sell what we make in the pulp business.

[Richard Kus:]

Right.

[Dave Paterson:]

In paper, given our mix change, which is a much more heavy concentration on freesheet and some of these other growth grades like digital, which I have talked about and specialties we think the decline in the core business is to be offset by growth in new applications in specialty growth. So yes, that’s how we get to a flat paper outlook.

[Richard Kus:]

Okay. And I guess, my question is really, does that represent really a capacity number, is that actual volumes sold?

[Robert Mundy:]

That’s a volume sold number.

[Richard Kus:]

Okay. Got it, got it. And then lastly for me, can you talk a little bit about the import situation with where the euro has gone against the U.S. dollar and how you think that might impact your market here in 2015 and your ability to get those price increases that you have in the market?

[Dave Paterson:]

Well, it’s a great question. I think we have seen the euro, I believe is at a multi-year low today and of course now they are talking about euro going to parity, we have seen that before in the past. I think that it generally reflects itself in terms of incremental volume coming here, which can mitigate price increase. I would say that our sense is that the European producers need price just like the North American producers to sustain their business and the major players in Europe, I think faced many of the same or if not greater challenges than we do on the margin side. So it is a concern, but I think the large producers out of Europe tend to be long-term thinkers in terms of price is how I would respond.

[Richard Kus:]

Okay. Have you seen any increase in import activity on any of your grades so far this year?

[Dave Paterson:]

Not yet. I think the continuing battle is more on the coated mechanical side, as we see a lot of product substitution mainly coming out of Canadian mills. We shouldn’t forget that we talked – you asked about Europe, of course, the C dollar is down quite substantially from a year ago. And so on the coated mechanical sides, I think we see a lot of influence of Canadian dollar on pricing on those grades.

[Richard Kus:]

Alright. Thanks very much for responding to my questions.

[Dave Paterson:]

Thanks.

[Operator:]

[Operator Instructions] And from Saguaro Capital we will go next to Mark Heiman.

[Mark Heiman:]

Yes. Hey, guys. Thanks for taking my call. For Bob, I am just on Slide 17, can you give what those baseline EBITDA numbers are, so the bottom left chart pro forma ‘14 adjusted EBITDA, that’s the combined company at a run rate of $8 million?

[Robert Mundy:]

Yes, yes. And no, I can’t, I mean because we haven’t released the NewPage numbers yet. I really can’t do that right now.

[Mark Heiman:]

Okay, got it. So once NewPage does release the numbers, can you tell me what the adjustment will be at least to your EBITDA, so I can just drop that in?

[Robert Mundy:]

Yes. I mean, after the numbers are released, we could have that discussion. And when those numbers are released later, I think it’s around March 23 somewhere in there, it will be part of an 8-K filing that we are doing that will also provide sort of a pro forma view of the combined company that we have to file within so many days after the closing of the transaction. So, there will be I think some good information in there for you. And what you don’t see you can certainly give me a call and we can talk through it.

[Mark Heiman:]

Okay. And then just related, the 2015 I guess forecast EBITDA margin is going up 35% over the margin that we can calculate in that 8-K?

[Robert Mundy:]

Yes, I mean it’s going up over the margin – well, one of this is going up over the slide that you are referring to was to show that as an 11-mill system just by the divestitures of the three mills or the closure of one and the divestiture of the other two that just immediately there is a 29% improvement in the EBITDA margin of our company just by that again the number 5 coated groundwood volume going out of our company. And then from that starting point, we expect the margins to improve another 35%.

[Mark Heiman:]

It’s 35% off of 11% or off of what it is at…

[Robert Mundy:]

Off of this pro forma – this pro forma without all that coated groundwood of trying to give you a view of sort of what the company would look like without all the coated groundwood at the end of 2014. So, it’s a pro forma view without about 700,000 tons of number 5 coated groundwood. So, that gives us a margin bump immediately. From that point, so if you look at it – that’s how we would run the company combined in ‘14 that’s what’s pro forma. From that point, we expect to increase our EBITDA margins another 35%.

[Mark Heiman:]

Okay, good. So, it’s additive, it’s another 35%?

[Robert Mundy:]

Yes.

[Mark Heiman:]

Got it.

[Robert Mundy:]

Yes, based on what I think Dave mentioned, those – so that takes into account additional mix improvements. We talked about volume and volume overall doesn’t change a lot, but we are moving things around and we feel like we are getting a lot – some lower margin things make less of those, more of the higher margin themes. So, that mix improvement along with the synergy achievement that we have planned for this year. So, those types of things are what will drive the bar higher in ‘15.

[Mark Heiman:]

Great. And that’s even with some of the synergies slipping into ‘16?

[Robert Mundy:]

Yes, because we can’t get them all done in ‘15.

[Mark Heiman:]

Right. So, that’s I mean – so there is even more potential there. Okay, that’s it. Thank you so much. That’s a huge help.

[Robert Mundy:]

Yes.

[Operator:]

And at this time, there are no further questions in the queue. I will turn the call back to Mr. Paterson for any closing remarks.

[Dave Paterson:]

Okay. Well, thank you for participating today. If you have follow-up questions, Bob and I are available, just contact us, and we will respond. As Bob mentioned, the NewPage release will be around 23 or so of this month and we will have additional filings related to that and I am sure you will have questions at that time. So, thank you very much for your interest in Verso Corporation.

[Operator:]

And ladies and gentlemen, that does conclude today’s conference. We thank you for your participation.