Q1 2020 Earnings Call
First quarter 2020 earnings conference call, all participants will be in a listen only mode.
There will be an opportunity for you to ask questions at the end of today's presentation.
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At this time I'd like to turn the presentation over to personalize Treasurer, Tim News Bob. Please go ahead Sir.
Thank you and good morning.
First quarter 2020, Fiveish results reversal Corporation were announced this morning before the market open the earnings release as well as to sell slides issue. We will refer to during the call are available on the industry's page had burst shows website www averse OCO dot com.
Joining me the call today, as Adam Saint John versus President and Chief Executive Officer, and Allen Campbell, Senior Vice President and Chief Financial Officer.
I'd like to remind everyone that and of course the call in order to make sure to give you a better understanding wearable formats, where are we 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 rustom much prove incorrect actual results may vary but.
Sure away from management's expectations that you like further information regarding various risks and uncertainties associated with our business. Please refer to our FCC filings, which are posted on our website bercow dot com or the investor tab.
At this point I'd like to hand, a presentation over to Adam Saint John.
Thank you Tim good morning, everyone.
We're definitely going through some unprecedented and uncertain times.
So I'd like to start off by recognizing the leaders in our community.
And our company.
For helping us work through this terrible pandemic.
I'd like to take the opportunity all sort of think all the frontline workers dealing with this unfortunate situation.
Well there are obvious bravery commitment and hard work. So thanks everybody.
So let's get started with a slide three of the presentation you know 2020.
And it definitely time of concern and disruption.
With a sudden an abrupt code 19 outbreak beginning in the first quarter. So for me what comes to mind first as a the health and safety of our employees.
I've been doing an outstanding job running our mill operations per state government guidelines and C.D.C. you know she recommendations.
And it really safe and cost effective manner.
Yeah, we've implemented a lots of different things and the mills or keep our folks safe weve.
Implemented frequent cleaning of work areas.
Social destined thing.
We supplied face masks installed Barry as you know where work is not working in close proximity like control rooms labs and things like that and we're also screening for symptoms. So lots of lots of good work going on the mills to try to keep our our people safe and healthy.
I also appreciate our customers and suppliers working with us.
So the pandemic situation and I will note that we Fortunately, we haven't had any supply issues. So much much appreciated there.
In addition, a we've been quick to act and managing you know, what we can control and product mix, which which means product development efforts and our capital allocation.
In watching overall cost across the company.
What we're really focused on managing our cash.
Our financial position strong.
At the end of the first quarter, we had liquidity a foreigner 98 million through a combination of the proceeds of the sale the two mills to pick so.
Oh, which closed in the first quarter and the funds available under our ideal.
Oh these actions will certainly help us managing conserve cash through this economic crisis.
Now moving to slide four.
Put some results.
The first quarter, we had sales of 471 million.
Well the not adjusted EBITDA of 35 million compared to sales of 639 million.
With an adjusted EBITDA 69 million for the first quarter of 2019.
The first quarter 2020 results do include revenue of 59 million and adjusted EBITDA of 4 million.
And it's going to Stevens point up to the data the sale, which took place on a.
February 10, so half of the half of the quarter included a Andrew endpoint.
The Stevens point Nana Skogen Mills had a first quarter 2019 revenues of 131 million in an adjusted EBITDA of 5 million.
So it's important when looking at the comparison quarter to quarter to keep in mind that book was in the first quarter of 29 team.
And Stevens 0.0, it easily or ran half half the quarter in 2020, so a large capacity difference there explaining the difference in revenue.
Our graphic related products volume declined at a rate of 15% the first quarter as compared to the first quarter and 2019.
Oh and as already mentioned the there was no closure.
Big part of that and our intentional shift the packaging grades at the loop.
And the continued decline in the demand for our graphic products, which was further exasperated by the economic disruption.
Oh, the pandemic at the end of the quarter.
Oh, the bright side, our however, especially doesn't isn't packaging pulp business remains solid.
With the release line are up in volume.
Packaging you know products continued to grow as the result of the parse conversion that our Duluth facility.
Which was online a couple months for the quarter as schedule and also our market pulp sales remain sold out with a price increase announced for the second quarter. So we've got a.
Well the graphic business in decline, but some some really good news some solid business to offset that that decline with our specialty incident packaging in both.
Our mill operations teams had an excellent safety performance. Despite the transactions that came with a pandemic we had a T. <unk> 0.64 for the quarter, which is.
Really a great number I am sorry to report however that tragically.
There was a third party contractor fatality at Wisconsin Rapids Mill that is currently under investigation.
[noise], we continue to have a strong focus on managing our costs.
Including maintaining our industry lowest DNA expense as a percentage of sales.
We continue to try to manage that around the 4% range.
During the first quarter, we did repurchased 2.7 million or around 0.5% of our outstanding shares.
In a very limited window, a that we had available.
We do expect to continue this effort in the second quarter and also expects to initiate a quarterly dividend of 10 cents share.
Now turning to.
Slide five and your debt.
So in addition to.
What I've already mentioned.
We quickly and continue to take steps to address a decline in business due to do to covert impact.
We accelerated our announced workforce reduction to reduce our costs quickly which included approximately 95 positions.
Well. These all these eliminations were necessary to rightsize our S. DNA a after the Andrew and Stevens point sale. We're just implementing it ahead of time to to accelerate the savings. So we pick things up a little bit quicker.
We're also turning over every stone with a focus on continuing to reduce our operating costs and other corporate costs.
Mills have really done a nice job and stepped up with cost reduction efforts. So lot of lot of work going on in the mills to reduce cost and conserve our cash we trimmed our 2020 capital spend by 11 million.
We started out at a 56 million for the year, we're down to around 44 million 40 45 million.
To spend for the year and we'll continue to manage capital aggressively.
Hi, threshold, a while maintaining the reliability of facilities.
We're also focused on managing our initial finished goods inventory levels, and we'll take the appropriate downtime or.
To to maintain supply and demand. The current plan is to take the necessary downtime to bounce the demand in the second quarter, focusing on not increasing our inventory levels.
Given the current environment you know, it's it's a extremely difficult forecasts the continuing impact of code 19 on our business.
But when you apply industry forecast across first as a book of business, we could experience a 40% decline in shipments for the second quarter versus prior year.
You know obviously this will be fluid as we see how quickly the economy gets restarted.
So as previously mentioned in the first quarter, we completed the sale of Android Stevens point to pick sell.
Following the sale.
We did announce the authorization of 250 million.
To repurchase outstanding shares of the company.
Funded by the proceeds from the pixel transaction.
[noise] excuse me given the current state of the economy and volatility in the stock market. We believe it's prudent course to conserve our liquidity and will differ implementing a tender offer until there's greater visibility to return to a more stable economic environment.
We do believe executing a tender in this environment would be difficult at best.
However, we have mentioned we will continue the repurchase activity in quarter. Two in addition to expecting to initiate a quarterly dividend of 10 cents a share and Alan I'll give a little more color on that during his presentation.
Lastly, as I mentioned.
Our financial position remains strong.
We're in a healthy place with our balance sheet and we have substantial liquidity.
Well positioned extremely well to whether this crisis and have the ability to take advantage of opportunities that may arise.
Again, our focus will be on keeping our folks safe.
In managing our cash during this pandemic.
With that I'm going to turn it over down for review of our finances in detail.
Thank you Adam turning to page seven we provide some key metrics for the quarter.
As noted our first quarter includes partial quarter results for two sold mills.
In addition, we are fully operating our loop meal last year in the first quarter.
As Adam noted our sales were down in the quarter, excluding the sold males. We declined from 508 million to 412 million as we are down significantly and graphic papers looks sells out Willamette falls mills restarted on the west coast textbook delays and Supercalendered business decline.
Being significantly.
Declining volume drove the decline adjusted EBITDA.
We're continuing our efforts to improve our product mix as we moved the percentage of our business the pulp packaging and specialty on the current male configuration from 24% last year to 26% this year.
Our net income was driven primarily by the sale of Anders Skogen and Steven point Mills believe included a pro forma schedule to try to pull the noise out other quarter to show on a run rate basis. We did have positive net income on the remaining for mills.
On page eight we show the items that we believe our an appropriate adjusted EBITDA for burst so.
The calculated EBITDA was 103 million for the quarter with the pre tax gain on sale accounting for 88 million.
In addition, we had 10 million a blue cost, which we add back 9 million adjust its adjustments for tank cleaning wastewater and other cost.
We expect this cost to drop significantly going forward and we believe we're progressing on the sale of equipment and lay on there.
We booked 4 million a severance in the quarter, primarily related to a reduction of overhead really related to matching our cost structure with a goal poured for mill operation.
In addition, we had 4 million up cost in the quarter related to the contested proxy solicitation.
The rest adjustments were relatively minor and typical.
Turning to page nine we bridge or year over year performance.
Two things note the net impact of closing Luke improved adjusted EBITDA by 4 million.
Well the sold mills made 5 million a full quarter last year and 4 million for the partial period this quarter.
Price mix was large hitting the quarter, but total average pricing down 11% as we sell competitive actions around our product lines together with intentional growth and recycle packaging grades we try to comparatively lower price point [noise].
Volume is down, especially uncoated freesheet and supercalender products more than offsetting extra times gain a packaging and release liner.
In addition to the sales volume decline, we took some extra downtime around some small mill outages.
On a positive side input cost and freight cost are running more favorable.
In addition, SGN a cost control continues to pay off for us and we did see a favorable improvement that pension PNM will impact.
[noise] operations on the spread shows slightly unfavorable that was more than accounted for and a reduction in carrying cost of inventory as we improved our operations and input cost over this time period.
Moving forward to page 10.
This is why be focusing on this year, our cash and liquidity.
We ended the first quarter 498 million liquidity and 276 million of cash and the balance sheet.
I want to spend a few minutes walking through our cash you cash usage in the first quarter.
Note that the first quarter is always a seasonal use of cash for us.
They need 2 million use of working capital compares to 106 million use in the first quarter 2019.
When looking at the individual items and changes from year end 2019, the key drivers of this quarter's change include.
Accounts receivables up 26 million.
We had one major customer had a $12 million swing on this period 6 million earlier than expected payment 2019, well like playing paying 6 million this year.
Additionally, we saw several accounts flow pay in March and April.
We're working with our customers and managing this area going forward and we do not expect any major write offs.
Our inventory was up 24 million in first quarter, we increased our raw materials in the quarter by $28 million as we build our would inventories in the winter as we do every year ahead of the spring fall, which Sniffling hampers the movement of wood in supply chain.
Finished goods tons were up slightly the carrying value was lower this year due to lower manufacturing and purchasing costs.
Accounts payable is down 18 million.
This relates to timing of check brands, and then transit cash deltas.
Other amounts of 14 million, primarily seasonal impact of compensation programs and customer rebates.
Capital spending was 22 million.
We had a relative busy ended the year last year in capital projects and we included carry over here of a net $12 million from last year into the first quarter new spending on projects were 10 million. So that's the 10 plus the 12 to 22.
Pension contribution was 8 million in the quarter, but we also adjusted a 4 million dollar credit in the EBITDA number for a total of 12.
We discussed the restructuring closure costs were related to the looked mill.
We show the mill transition cash in our schedule Y other costs included proxy contest severance share repurchase and other miscellaneous items.
As Adam mentioned, we're focused on conserving our cash position through austerity measures managing capital spend deferred compensation and deferred payroll taxes has allowed by the cares Act.
On page 11, just a summary of what Adam mentioned in what we intended to do we.
No. The boat you know the board authorized up to $250000 <unk> million dollars a share repurchase and we did some in the four day window that we had in the first quarter were repurchased 205000 shares.
We expect to continue open market purchases when the trading window was open we believe they'll be able to be in the market throughout the projected open period, and we could purchase depending on trading levels and price somewhere between 15 and $25 million of shares.
Given unsettled market, we've been not me good timing to initiate a former tender offer.
We expect initiate the previously discussed 10 cents share dividend as Adam mentioned.
With that I'd like to return the call to the operator to open up the line for questions.
Thank you.
That's it side, if you would like to ask the question. Please press Star then one on your Touchtone phone.
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Our first question today will come from Jeff Van Sinderen of B. Riley. Please proceed with your question.
Hi, Good morning, everyone couple of multipart questions. If you don't mind bearing with me can you speak a little more about how the progression of demand and pricing evolved in March and then into April what the onset of co bid and unlock downs.
Maybe you can talk about graphic and specialty in pulp segment separately and then if you could touch and how you're thinking about demand and pricing as the U.S. economy reopens.
And then also what plans do you have to I don't production your facilities in Q2, if any and maybe touch on overall cost reduction efforts planned for Q2.
Sure.
Yeah, We don't we don't normally guide on price, but you know I will tell you that we're seeing.
Persistent downward pressure across all the graphic business.
Due to the lack of demand.
If you look at receive.
Predictions, there, they're predicting a 5% to 7%.
Erosion and in 2020.
So that's that's kind of all I can say on price. We are planning on idling production in the second quarter, we're going to try to balance our supply and demand. We're predicting 100 tender hundred 20000 tons on the graphic side of things really no downtime planned at all for our specialty pulp.
In packaging business.
And what was the what was what was your last question.
Austrian ER was just I guess reduction and ended up.
Yeah.
Yeah, So everything's on the table, we've got an austerity plan a an integrated action plan that we're working through obviously most of the most of it comes out of the mill.
You know, we're taking things out that we don't Dean is critical especially during a shutdowns are going to concentrate on doing.
All the all the regulatory requirements anything that would be a.
A safety issue.
And then where you know obviously cutting non essential spend everywhere through it throughout the mills cutting back on a you know.
Operational type purchases and things like that and.
We've got a pretty good list going in the millions of dollars that we feel it's going to help us to the situation.
Okay.
And then as a follow up today, just given that specialty in pulp are trending relatively better.
Can you speak more about what you're seeing in each of those segments had plans to lean into that relative strength and.
Maybe how we should think about you potentially increasing capacity for up to kind of go after opportunities and specialty which types of products in capital investment you're planning for that and then just generally what opportunities you see.
But you might pursue during during code.
Right I'm you know our as I mentioned, our pulp business remains remains strong so we.
Any any potential opportunity you know with.
If when we take downtime on the machines, obviously, we can make pulp on some of our machines. So we'll take opportunity to make more pulp and sell it to the market.
Our specialty business is doing well specifically our release line of business on Eathree I'm. So we're working.
And we've run some trials on some other machines with regard to that and we've had success.
Not really line of business. So we're we're ramping up that business. So those those are the kind of things we're doing.
On the product development side of things. So those those businesses are looking really good for us.
Going forward, we don't see any any decline happening so we're going to concentrate on moving as quickly as possible for as little as capital as possible to get into those.
Get into those markets a little bit deeper we don't plan.
On any significant you know.
Capital, we're going to be very stingy with our capital through this period.
Okay fair enough. Thanks for taking my questions and best of luck.
Thank you.
Our next question will come from how bad Clarkson BW S. financial. Please proceed with your question.
Good morning, just on the pricing pressures that you're seeing is being driven by customers is that being driven by competitors.
I had one competitors, noting they took market share.
For the last week.
Yeah.
It's a little bit of both but the the pressure from the lack of demand obviously there.
But we do have competitors that are that are taking the approach to fill in machines up.
And going after price aggressively.
So we have to react to that.
Right.
Are you changing any of your sales tactics in Q2, just give him because a couple that in.
You guys your projections of 40% decline and shipments.
Yeah, well, yeah were taken an aggressive approach with our with sales I mean, we're going to we're going to go after market share, where we where we think we can get it.
Obviously the sales guys.
Can't get out on the road and do their normal kind of thing, but they're they're constantly working the phones and using technology to get out there and talk to customers.
I would probably say, we've ramped up our efforts with regard to that speaking the cup customers more often try to get a field, where they're at and making sure that were there for them.
Going forward, we I would say we've seen a a flattening of at least cancellations and starting to get some.
Some some orders coming through so we may be seeing a bottom to what's been going on here.
How much do you think.
The customer bases oversupplied right now just because their business got the.
Impacted by covert 19, and how fast you think the orders ramp up once the economy gets going up.
Oh Jeez, I mean, if I can predict that I'd.
Really good that's that's a that's a tough one night.
I don't we don't really have visibility.
With printer.
You know what they have an inventory so it's hard for me to comment on that I apologize.
And then given the current circumstances business would you still be free cash flow positive this year.
Absolutely.
Okay. Thank you.
Our next question will come from Hail Hulk Hogan Company. Please proceed with your question.
Hi, guys. Good morning can you give a little more color around your capital expenditures you said you reduce the plan by 11 million. This year down to I think you said 44 million how is the 44 million being spend what are your current thoughts on what's kind of maintenance capex versus growth capex. Thanks.
Yes, no problem.
The plan is to spend.
10 million in quarter, one our heavy spend is in quarter two of 20 million and that's really all driven by our mill.
Outages quarter three we spent we plan on another 11, and then I believe in quarter, four or 5 million. We're we're really focused on Jeff.
This point, it's just the maintenance capital items.
Nothing extraordinary.
Okay, great and.
We did spend.
The Duluth capital that we that we said we were going to spend in the first quarter, we spent about 5 million too.
To convert the machine to some packaging products.
And is that it's early but it's not hitting your return expectations.
Yes it it.
Great. Thank you.
Good.
As a reminder, if you wish to ask your question. Please press Star then one on your Touchtone phone.
Our next question will come from Adam Ritzer, an individual shareholder. Please proceed with your question.
Hi, good morning, Thanks for taking my call.
Question about Europe pension contribution when you guys announced the sale of the mill.
Putting 54 million into the pension kind of Oh, well the whole year.
So could you explain if you're going to give you that if you're not and I noticed just 12 million in the pension in Q1, so any more detail on what you didn't do that.
The 54 million is still a place holder that we have for the contribution are required contributions a little bit less than that.
So you will see into Q what are required contribution is.
But it's it's our place holder in that range for this year, yes.
Our cash.
Contribution.
Just like you're not going have to put in the states you're not you didn't put in the system for milling it once you're going to.
And that roughly during the year.
That's correct larger payments in the third quarter.
Got it okay. Thanks.
And it's the dilutive.
And over now or you're only going to spend to 5 million to do the small conversion or is there anything further to do it the loop.
Currently that that's the.
That's what we're planning on spending we're still evaluating the first phase of that and we'll decide later, whether we're going to continue to invest in that project.
Got it and what about you know industry wide shutdowns have you seen any of your competitors shouting.
Capacity either here in the U.S. I know in Europe.
Closure coming you know I guess in Q3 Q4 anything further that's happened late.
Yeah. We've had we've got a lot of competitors announced downtime yeah. The last time I looked at an risk to report. It was it was north of 750000 ton of announce the downtime.
And that includes some downtime in Europe.
Hey, who in the U.S. shutting anybody Tom you could specific we mentioned.
No no I can't mention that I think it's in their earnings report.
Okay, but globally 750000 tons that Youve got you in that you're hearing about so far.
Yeah, that's I mean that that's what's been announced.
Right.
Yes.
Okay, great. Okay. Thanks, very much appreciate it.
That.
This concludes our question and answer session I would now like turn the camps Kinda conference back over to Adam say, John for any closing remarks.
Yeah.
Yeah, I said as I said before you know, we're we're definitely an uncertain an unprecedented times that are certainly having an impact on our business.
However, our focus on capital allocation.
And lots of austerity measures will help us through this crisis, our company's liquidity remains strong and we intend to manage our cash and take care of the expectations over our employees customers suppliers.
And and shareholders.
The cash flow.
Yeah, when I'm going to clarify that there was a question earlier about do we expect to be free cash flow. This year and it will be challenged this year. So it's a one we're working on.
Helping the earning side and also helping the spending side, but it's not obvious that will be free cash flow positive. We wanted correct that.
Right here.
All right.
Thanks to have a great day.
The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect.
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