Q3 2019 Earnings Call
Good morning, and well diversified Corporation's third quarter 2019 earnings conference call.
All participants on this not only about.
So there will be opportunity last discussions agenda for todays presentation.
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At this time I like to kinda presentation over to divorces, Vice President and Chief Accounting Officer <unk>.
Thank you and good morning, the third quarter 2019 financial results for personal Corporation were announced this morning before the market open the earnings release as well as the set of slides that we will refer to during the call are available on the Investor page reversals website at Www dot for so co dotcom.
Joining me on the call today, our gene Davidson Alan Carr co chairman of personal board of directors, let's let her interim Chief Executive Officer.
Allen Campbell, Senior Vice President and Chief Financial Officer, and Mike Weinhold, President of graphic, especially papers.
I'd like to remind everyone that in the course of the call in order to give you a better understanding of our performance 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 are <unk> estimates prove incorrect actual results may vary materially from management's expectations.
If you would like further information regarding the various risks and uncertainties associated with our business. Please refer to our SEC filings, which are posted on our website adverse OCO dot com under the Investor tab.
Now I'll turn the presentation over to gene Davis.
Good morning, everyone.
The past two years, the board and management have worked diligently at tirelessly to assess a broader range strategic options for the company.
Accordingly, actual mergers combinations sales mill closures and lost share buybacks.
Yes, it's taken longer than we expect well, we're pleased to announce $400 million sale or I'm, just talking that Steve I spy pills subject stockholder regulatory and other customary approvals to purchase price adjustments.
In closing, we expect sort of trying to significant proportion net proceeds from the sale to our stockholders I think by way of dividends or share repurchase actually utilize approximately $54 million.
It's a portion of the company's actually actually right.
You're continuing to analyze and assess waste most efficiently returned capital to our stockholders and expect one out of your mouth X form of return on capital following the closing itself.
I'd like to try to know what's my co chairman Alkar who'll provide you with more specifics how to deal as well as leadership changes as we continue our focused strategic process out.
Thank you gene.
As noted we're very excited.
About this transaction, which we expect to close in the first quarter of 2020, which we probably believe isn't the best interest of our company and our stockholders.
In addition to the sale the interest skogen and students plate mill and the related assets. The parties have also agreed to execute it pulp supply agreement whereby pick sell the purchaser will purchase from birth, though beach K Bale pulp in either drill dried bells and or whatnot form for a tariff for years.
Subject to an additional renewal option at the option of picks up or another four years.
Again, the purchase price is $400 million.
355 of that is payable in cash 35 billion payable via the assumption by pixels certain pension liability to the company.
The purchase price also subject to working capital adjustments.
As far as it has been a net proceeds we believe 37 $336 million with the anticipated net proceeds which is net of pixels assumption of the $35 million and pension liability as previously mentioned.
Anticipated working capital adjustment and transaction expenses.
In addition to HSR and broke approvals this transaction is subject to shareholder approval.
[noise] timing of the stockholder meeting.
Subject to the filing a review of the FCC of our proxy statement for that meeting. We currently anticipate a stockholder needs to be held in closing to occur in the first quarter of 2020.
You can find more information on the terms and conditions of the definitive documentation and related agreements and the company's form 8-K filed earlier today and in our proxy statement, which we filed as promptly as practicable.
Okay.
The past several years, our leadership team has capitalize on the growth of our specialty paper operations.
Given the I'd be extracted by the sale of and just Gonna Stevens point, coupled with our internal projection on the cashless EBITDA of each all remaining mills, we believe that prioritizing graphics operations, one will allow us to be more resilient to market headwinds and to provide us with greater flexibility to take advantage of future opportunities as they arise.
Looking forward, we expect to be able to generate sufficient EBITDA and cash flow to permit the company to enhance our competitive position, while we will continue our rapid city.
The teach weekly optimize our assets in operations.
I'd like to turn now to discuss leadership changes that are happening effective today.
Yes, let's let him at our interim CEO since April has been a tremendous asset, leaving the company's efforts in this transaction.
He didn't get together with many others in the senior leadership team and our budgets houlihan locally aching Gump have the board full appreciation for their hard work.
That's a stepped down as interim CEO , but we staying on with us in an advisor role so as to ensure a smooth closing and transition. Thank you less you've done a terrific job for a company.
As we look to our future we're pleased to announce that Adam Saint John will become a new CEO effective today and serve as a member of the board of directors.
Adam has been our senior Vice President manufacturing with responsibility for a mill system.
With almost two decades of paper experience in more than a decade of experience at a burst, though we're confident that Adam is the right choice to lead the company. It is aligned with our strategic focus for the future.
Congratulations Adam on behalf of the entire board, we look forward to working with you in your new role.
I'll turn it back she now.
Thank you will clearly we've been quite busy adverse incorporation well we've had our fair share of challenges in 2019.
Most of that much success and very much the forward to the future.
With that we will try to turn it over the last allowance to.
To discuss our third quarter and I can take questions here. Thanks.
Thank you gene and Alan and good morning to everyone.
Thank you for joining us on the call. This morning.
The sale transaction that gene and Alan just described.
The effort of the key core of individuals adverse though.
And I would like to thank each of them for their efforts in getting us to where we are today.
Aside from our co chairs with me today is our CFO Allen Campbell, who will walk through the financial slides and more fully explain our third quarter results.
Also with us as Mike Weinhold, he was available to respond to any questions. You may have on our commercial efforts.
In my remarks. This morning O presented overview, our third quarter results and market conditions before to <unk> before turning the presentation over to Allen, who will provide more detail.
Turning to page three of the presentation deck.
Our third quarter 2019, adjusted EBITDA was $64 million versus $108 million in the third quarter 2018.
Sales volume in the quarter was 75000 tons lower than the third quarter of.
2018, as a result of declining graphic paper demand.
As well as the continued influx of imports taking advantage of the relatively stronger U.S. dollar.
And lessening demand for competing products in their home countries.
Inventory levels at the end of third quarter were $43 million lower than the levels in the second quarter 2019.
Despite the lower sales in the quarter inventory was lowered as a result of both planned production downtime in the quarter as well as production losses at the Wisconsin rapid mill due to weather related power failure, which caused the mills acid sewer to fail.
Inventories at the end of the third quarter 2019, however.
We are higher than the third quarter 2018.
We do anticipate inventories to further declined by year end as we continue to balance our production to our customer demands and reach inventory levels equal to year end 2018.
Net sales for the quarter were $616 million slightly lower than our guidance for the third quarter of $620 million to $640 million.
As I mentioned earlier, our adjusted EBITDA for the quarter was 64 million, resulting in an adjusted EBITDA margin of 10.4%.
Our adjusted EBITDA was impacted by my earlier reference to the unplanned outage at her Wisconsin Rapids mill.
As a result to the acid sewer failure.
The failure adversely impacted results by $9 million.
Average pricing for our paper products in the third quarter were down $12 per ton or 1% versus the same period last year.
Well core coated prices were stable in the third quarter.
As was the case in the second quarter.
Mix issues adversely impacted pricing compared to third quarter of 2018.
In the third quarter results were favorably impacted by our lower maintenance spend versus the second quarter.
Additionally.
The fourth quarter, we expect to spend $22 million lower maintenance costs compared to the third quarter.
Well there are definitely headwinds in our industry going into the fourth quarter as well as the first quarter 2020.
We believe the significant mill conversions in the U.S. and in Europe .
It's stabilized product demand with supply.
First those mill system. After the transaction is complete will be a cost efficient mill system that will LNG and referenced in the earlier presentation provide EBITDA and net cash flow that will permit the company can be successful in the future.
In addition to the cost position of the remaining mill locations. We also Bursa will continue its focus on ESG today.
We have been successful SDMA reductions as a result, but the Lou closure early this year.
And we will continue to focus on reducing sta. Upon the completion of the transaction announced today.
Before I turn the presentation over Allen Campbell, but we'd like to thank the board for the opportunity to be adverse so.
It has been my distinct pleasure to work with the quality people that we have adverse though.
I want to thank all of them and in particular, the senior leadership for all the assistance every see will I have been here.
I want to provide my sincere congratulations to Adam thing John are being named CEO .
I know he will provide exemplary guidance and leadership to the team.
I look forward to working with him as we work closely as we work to close the transaction.
Yeah, I would like to turn the presentation over to health Campbell.
Thank you less turning to page seven we provide the key metrics for the third quarter 2019, compared the same quarter last year.
As mentioned previously sales were significantly challenged as total paper shipments were down 11% with prices off 1% doing a mix.
Pulp tons were flat year over year, but price drop $171 per ton or 25%.
Adjusted EBITDA margin was respectable at 10.4%, despite the lower volume and higher maintenance costs earnings per share were 85 cents for the quarter.
The major adjustments to EBITDA for the quarter was primarily related to the look mill closure.
We recorded $4 million of restructuring.
$3 million, the pulse closure costs, along with $2 million, a severance related to our overhead downsizing brought on by having one less mill in our system.
As less bench and inventory management efforts continued in the quarter as we dropped $43 million of inventory since end of the second quarter.
On the next page, we have bridge adjusted EBITDA from $108 million in the third quarter of 2018 to the 64 million in 2019.
Price and mix was $15 million unfavorable as pulp pricing was off approximately 10 million the product mix accounting for the remainder.
Volume loss contributed $17 million to the year over year decline.
We had a major hitting operations for the quarter as the power outage at subsequent assets sewer failure at one of our males hit us for $9 million.
The $10 million major maintenance increase over prior year was primarily due to planned outage at our Escanaba mill.
On the positive side of the quarter performance, we have seen favorability in purchase pulp costs, some decreases in chemical and energy costs, along with some easing on the freight side.
SDMA costs were down due to initiatives and some compensation adjustments.
Pension as noted above was $2 million on favorable year over year.
Turning to page nine we ended the quarter with just $15 million a net debt.
We improved our liquidity at $294 million.
As mentioned last quarter previously you expect to end the year no debt and a positive cash balance.
Looking at the cash flow table in the top right.
Please note that the 2018 numbers.
Include $20 million of countervailing duty receipts and $16 million Smith sell our Wickliffe mill.
A more comparable number would show $81 million the cash from operations and the 2019 quarter versus an adjusted 77 million last year.
On a net basis, we generate $26 million cash in the quarter covering the major maintenance and a step up and capital spending.
Key capital projects in the quarter included a 5 million dollar furnace replacement and Wisconsin Rapids.
$3 million productivity improvement project, the AMDRO tank replacement of 3.6 million at Quinn and a $1.7 million specialty paper project at Escanaba.
On the page 10, we highlight the impact a major maintenance schedule has on a reported numbers.
As you can see our major algae, just are behind us and spending expected declined 16 million from third quarter.
Finally, coming to slide 11, I want to share with your profile the company post transaction.
We'll have four remaining mills that are well positioned in the products they make.
In addition to traditional graphic papers the remaining business will include pulp sales specialty papers and some packaging.
Quinnesec that includes pulp and fragrance grade papers.
Wisconsin Rapids has point of purchase papers and SBS, while escanaba has seen.
Hello to one side labels.
We also are entering into recycled containerboard and Kraft paper markets at our Duluth mill.
After the transaction will be retaining a robust business that represent 79%, our LTM revenues and 83% of the adjusted LTM EBITDA.
In addition, our LTM capital requirements represent only 74% other total capital spend.
We will continue to evaluate the remaining assets focusing on alternative alternative markets cost reduction and other strategic options.
At this point I'd like to turn it over the operator first question answer session. Thank you.
Yes. Thank you at this time as you would like to ask a question. Please press Star then one on a touchtone phone you'll hear a ton differ from you have entered list.
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And the first question comes to someone towards China with vertical research.
Okay.
Good morning, and congratulations from this transaction.
And you know I achieving lease sale. It seems your contribution to be died revenues are certainly you know.
Well below the one third of the mills you've exposed so that's sounds pretty good just I wanted to understand a few things as we go forward.
Firstly.
You know with regard to your strategy. The idea was when you have this charge, where youre growing specialty and packaging grades and obviously that's reversing besides.
Do you have any other options and easier subject field to start.
Oh, refurbishing existing printing and writing assets should.
We expect gen towards more specialty or are we shifting dalton from that.
No I don't think we're shifting our view to improving the position of of the paper mill.
What we're trying to do the offer we received in the transaction. We entered into today is very very favorable transaction for the company.
And.
The net proceeds that we're going to get.
As stated in the.
Press release, we're going to return a substantial portion to investors.
We will retain some portion to make sure that we can grow the operations. We have the cash flows we were going to have from the remaining mills will be significant and we will you know.
Review the opportunities we have at the mills to reposition them into greater cost effective operations. So we're not abandoning the idea of growth. We just had an offer that was very very beneficial for the company and we acted on it.
Okay, that's very helpful and the other and coupled with a subjective I understand.
You sold it for you so at least two meals for around maybe eight and a half time strong trailing EBITDA.
And I Wonder obviously, the company's trading at a much lower valuation but.
I see you sold most of your specialty asset base, how should we think you know how do you view the of mall the appropriate multiple going forward given but now the compounding is more focused on printing and you know.
And writing grades and you know even or any other transaction to take place.
How should we think about potential valuations there for the remaining means.
Well.
I will defer the valuations to the marketplace. The we believe we have a.
Very.
Good company that remains in that that we will generate cash flow that and EBITDA that is significant and we'll let the market decide how they want to value the company as to further transactions as.
The chairman both chairman the co chairman David talked about today, we're reviewing our strategic options. So that's the headline in the press release and we'll move on from there.
Perfect and just one last one.
You know on.
On the Jay meal that you're actually accelerate kind of give us an update.
I know you want on it.
The mill going forward, but just to understand a little bit how was the mill performing with regard to its conversion to.
Containerboard during the past few quarters and how you know how important it was this conversion you believe in.
The sale.
The price pack for the for the mean.
Well again picks so.
Let me offer for two operations and.
Don't know how important that was to them because they decided to buy both mills. However, we believe that the conversion. The company went into in 2018 to convert Athree to a containerboard machine operationally was very effective we cannot control the market pricing in linerboard and.
In the export market that we participated in we would be more than happy to have better pricing, but the operational side of Athree has been excellent.
Great. Thank you very much.
Thank you and the next question comes on Jan France, I turn with J B. Riley.
Hi, Jeff and sender and with B. Riley.
How much your business will be legacy graphic versus specialty in packaging and pulp going forward just trying to clarify that.
Sure sure Jeff on our page 11 on the presentation, we tried to.
Picture that in the graph the top 76% on LTM basis would be graphic and then obviously 24 will be the other three areas.
That's our LTM.
Okay. Okay. That's helpful.
Does this concludes the strategic process or are the rest of the assets go and process.
Well again, the we stated that the strategic review continues in that country that encompasses a variety of issues, we will focus on the.
Improvement of the mills.
So if there is a transaction for the assets you know the board will have to determine whether it's a.
A significant enough transaction too.
To negotiate but.
At this point in time.
Yeah, we're focusing on understanding what we can do to better the mills.
Uh huh okay.
Okay.
And then can you just remind us once it's Steven is what were the primary I know what athree is but Stevens.
What's the primary products for their just a quick.
Sure sure Stevens point produced a EMG coated products machine glazed.
Thermal papers direct thermal thermal transfer paper at a wide variety of technical and label papers.
Okay got it.
That's helpful and.
Just trying to let me ask just as a follow up on Luke I think there was I think there was some environmental remediation just wondering if that's concluded at this point if theres any more environmental exposure and then also on the.
On the acid sewer failure is there any environmental exposure there or is that.
There is no environmental exposure on the asset sewer failure, we do have a insurance claim in with our carrier.
We haven't settled were concluded the discussion about that claim has to environmental issues at Luke.
Most recently there was a.
Some seepage that.
As being investigated from Duluth mill, we have the states in West Virginia in the states in Maryland involved with US we have consultants looking yet to the source of the.
Of the seepage, we have installed some pumps that the area to pump out the seepage and not get into the environment. So we are taking care of the issue, but we don't have a full explanation what caused the issue where the source or the.
The product that is being seeped into the into the ground.
Okay. So fair to say no idea of what what exposure might until their I guess until you get more information.
That's correct, but we don't expect a huge.
Okay. Good.
All righty, just any I guess any other color since everyone is very focused on the transaction today just started any other color.
Broader landscape.
What you're anticipating for pricing.
Prices I encoded sounds like Dave Oh, I'm, just wondering if you're expecting that to continue or if there any.
Yes cracks in the marketplace that make you think pricing might not hold for for somebody for for coated and any other legacy papers.
Yes, Mike why don't I think everybody certainly aware of the industry statistics relative to shipments in demand in the graph paper space.
They've been challenged this year compared to last year I think we've done a very good job executing through that as indicated in our ability to reduce inventories and manage supply and demand.
As also indicated from a pricing standpoint, we feel pretty good about the core coated paper prices and holidays held up with that said the marketplace continues to be a challenge from a demand standpoint, I believe that potentially could improve as we move into next year relative to this year.
And obviously towards the end of year, you have customers that were taking a look at their working capital in year end inventories and responding accordingly.
Okay. Thanks for taking my questions and best of luck.
Thank you. Thank you.
Thank you and then next question comes from Brian Grad without Warburg asset management.
Hi, good morning, guys.
Is there any.
More clarity you can give us on what your preference would be for.
Either paying the dividend or buying shares back in the market and what have your largest shareholders.
How to think about that issue.
Well first of all we just announced it today. So we don't have any shareholder feedback at this very moment.
The the presentation co chairman were very clear that they're considering you're very rajiv options and that decision. We made it later date in the distribution will occur after the closing the transaction.
Okay. Okay I just thought maybe you had some ideas on whether you'd rather see it paid by dividend or whether by tender.
At this point as I said that we got it indicated that our conversation with the group. This morning that it's being considered oh aspects are being considered.
Got it very good thank you.
Thank you and the next question comes from advent correspond with VW U.S. financial.
Hey, good morning, So first off just wanted to understand.
Given the competitive environment coated paper are you doing anything differently and how much do you think the your book end market has still in excess inventory if you still consider excess inventories in June .
It's Mike once again.
We think we're doing as we have the demonstrated in the past a very good job trying to manage supply and demand relative to our own internal inventories I can't speak.
Relative to the outside industry, we don't have readily viewable industry statistics, our total inventories, but I would tell you from my experience that we entered this year with elevated inventory.
And I believe those inventories of slowly work their way through with that said I think theres still a little bit of customer inventory overhang that continuing the adjusted and more than likely will be adjusted as it goes through the end of this year, but I think we've worked through the lions share of that.
Apply satish.
And do you think the customer is really more inventory.
They have on hand, or as a macro related that they're not buying as much they did last year.
I think it's a little bit of both I think we have to be realistic in the in the state of the market in the run up in prices in 2018, coupled with what turns out to be.
Inventory build potentially excessive inventory build on customer side, certainly had an impact on demand levels. As we go through 2018. So I think it's a little bit of both higher elevating customer inventory levels that need to be worked off and people dealing with higher prices coming into 2019 and having to adjust the.
Budgeting spend accordingly.
And how are you dealing with pricing.
Are you able to hold pricing or.
What are you expecting from going forward.
Again, we gave a I think very good information relative to how prices has performed to date, we won't and sell them give.
Right.
Okay. Thank you.
Thank you.
Thank you and then as far as it comes from out I'm, just not so much keybanc.
Hi, Thanks, everyone for taking my questions I appreciate it.
Just one more on the strategic review as part of that review do you have a predisposition to sell more of the four remaining males or to spend money on your.
Existing metal three purpose built to packaging papers.
You know as we said we're looking at all options.
This point that focuses on improving the mills and.
You know if someone to come.
Comes through the board and has a idea of.
Have a potential purchase of course, the board's going to consider that but at this point.
In looking at the betterment of the mills to enhance what we have remaining after the transaction is complete.
Sure I just wanted to loose conversion is that has anything changed there in terms of your conversion at the mill to recycled containerboard and Dag papers.
Well as we said in their last analyst call in August .
We are converting a portion of the mill about 40000 to 44000 tons a year of recycled.
Containerboard and craft bags and that project is well on its way to completion, it's expected that we will produce.
Net capital expenditures sometime in the first part in January and that's where we are in that project.
I appreciate that and just to others.
On the pulp market can you somewhat.
They are producers have opined that in a market as near bottom.
His bottom or our near bottom, but we've heard similar things for seemingly months now do you have a particularly strong view on where the other about where we are.
In the pulp cycle.
We we obviously see the the total inventory levels the days on hand casinos in the species, we participate in which is hard with craft.
As far as that internal sales coming down.
I will not pretend to be able to predict where where the markets generally we're going to Paul as you know they are fairly typical but generally we believe weve seen a flattening out and potential bottom.
Hello.
Thank you just one line. Thank you for and just on the coated paper.
Price increases you talked about last year that have caused this demand destruction. This year, I guess, where you not anticipating that the level of demand destruction that you've seen pursuant to those price increases I'm just wondering what your thoughts for.
Along those lines.
No I think we fully comprehend and understand price elasticity and so we expect that there will be.
Certain negative impact that demand we have rapidly rising prices like we saw in 2018, I think what we underestimated what the inventory build and and the inventory build that took place primarily through almost all of 2018 and how much overhang we had in the marketplace subsequently how that inventory hedging.
Thank you very much.
Absolutely. Thank you.
Thank you and the next question comes from concede Webster with US all those capital.
Hi, Thanks, very much for taking my question I just wanted to ask.
On the background the discussions and if you could provide any color. There you know when they started just considering I think you know three months ago, we were talking about spending pretty close to 120 million on these two mills and now they're being sold so curious on on when everything sort of came together and how that played and with that the timeline of the set of pretty previously announced that capex projects that yet thanks.
Well, we announced the Capex projects before we had.
The interest it was exhibited by picks though.
And.
The capital projects that we announced were to enhance a Andrew Skogen end Stevens point as well as dilute.
The offer made in the the reservation to capital we can deploy another mills made the transaction that much more.
You know a favorable to us so.
We had an intention to invest in Andrew in Stevens point.
And but you know deploying that capital allocation to the other mills as well as the proceeds from this transaction made it very very favorable for US to proceed on that transaction Robyn deploying the capital we had indicated in August .
Thanks, that's very helpful and just one quick follow but if I could on is there anyway to quantify that the volume impact from the outage that you had at Wisconsin Rapids, I didn't get a $75000 I'm, sorry, I 75 ton decline in the quarter on how much of that if anybody that's due to the outage at Wisconsin Rapids, well that was.
Constant Rapids outage was 2500 tons.
Okay, great. Thanks.
Quick.
Thank you.
And that's just how would like to return to Florida Allen Campbell for any closing comments.
Yes, we'd like to thank you for your interest in first so we look forward completing the announced transaction and you should expect to see more information regarding the proxy as we go forward them future. Thank you very much.
Thank you. This concludes today's teleconference. Thank you for attending today's presentation, you may not a centralized.