Q2 2020 Verso Corp Earnings Call
Good morning, and welcome to Brazil corporations second quarter Twentytwenty earnings Conference call.
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At this time I'd like to turn the presentation over to work so it's harder.
Thus far.
Thank you and good morning second quarter 2020 for natural resolved reversal Corporation were announced this morning before the market open the earnings release as well. So so slight refer to during the quarter available versus industrial web page versus website www dot reverse OCO dot com.
Joining me on the call today around Saint John First says President and Chief Executive Officer, and Allen Campbell, Senior Vice President and Chief Financial Officer.
I'd like to remind everyone that in the course to convert to give you a better understanding rubber formats, we make him a certain forward looking statements. These forward looking statements are subject to risks and uncertainties should one or more of these restaurant uncertainties materialize or should underlying assumptions restaurants prove incorrect actual results may vary mature.
Really from management's expectations. If you were like further information regarding the various risks and uncertainties associated with <unk>. Please refer to our SEC filings, which are posted on our website <unk> dot com under the Investor tab.
In addition, during today's call during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance presentation as information additional information should not be considered isolation.
As a substitute for results prepared in accordance with GAAP.
Reconciliations to comparable GAAP measures are available on our earnings release.
At this point I'd like to turn the presentation over to ask John.
Good.
Good morning, everyone.
Let's get started with slide for the presentation.
Certainly unprecedented times as Colin 19 continues to impact our industry well the nation, staying home schooled clothing and large scale sporting.
Attainment of that's cancel.
The demand for our products has decreased significantly.
The numbers speak for themselves year to date operating rates coated freesheet and coated groundwood already 74%, 72%, respectively, which our recent lows as a result of Cowen demand challenges with reported year over year prices down $70, a time for both coated freesheet coated groundwood role and down 39.
All the time for coated freesheet chief.
It's impacted our financial performance reported revenues of 268 million.
Adjusted EBITDA loss of 9 million, so as expected the tough quarter.
Right along with other than the industry.
That said during the quarter, we took decisive proactive actions not only to respond to the economic environment, but also to establish a stronger operating model and strategy for the long term success for us So we.
We consolidated the business to our two most profitable mill Baskin Robbins <unk>.
We shopper and our operating focus with the strategy around specialty graphic and Paul.
And we accelerate our return of capital to our shareholders with 23 million returned in the second quarter.
In addition to commencing a regular quarterly cash dividend during the second quarter today, we announced.
$3 per share special cash dividend.
Which will be issuing in the third quarter as part of our commitment to returning a significant amount of proceeds from the sale the underscoring Stevens point mills that to our shareholders.
We're in a position to do this thanks to our solid balance sheet.
209 million in cash 423 million in liquidity in zero debt as of June Thirtyth.
Our strong balance sheet is a key competitive advantage for us as we navigate challenging short term environment, but also as we look to build sustained long term value.
Moving on to fly Fi.
We have strengthened our executive management team with three new appointments and key positions, a new senior Vice President manufacturing manufacturing and.
A senior VP of sales and marketing in a senior VP of HR communications.
All are excellent experienced executives.
And we have already seen their impact within the organization.
Our operations team continues to maintain an excellent safety performance with a year to date <unk> 0.78, while managing through a cold with 19 related safety measures, including social distancing worried of math and complying with all CDC and local guidelines.
Finally, we continue to strategically important cost savings throughout the business.
This is an ongoing process and we have successfully maintained and lowest gene as a percentage of sales.
Moving on slide six.
During the quarter, we announced the idling of the gluten, Wisconsin Rapids the mill.
It's never any decision to cease operations and lay off employees and the incurred environment.
And our decision to take these actions, particularly difficult. However, we took these proactive steps to address adverse market conditions, reducing our operating capacity by 35% and consolidating our strategy around two strong operating mills.
Strategically idling these no not only reduce our costs and better aligns our operating strategy, but it also gives us sufficient operating flexibility in the near term we expect the sell through of the remaining inventory will offset the cash costs.
Mills.
Moving forward or a few strategic options for the idled assets should market conditions improve we cannot to restart the mills Alternatively, we sell the idle mills to rate non dilutive capital.
And are working with an outside advisor as we evaluate this auction.
Finally, we could close permanently given the uncertainty in the macro environment right. Now we believe this built in flexibility maximizes our position to drive shareholder value.
Now slide seven.
Well the streamlining of our business.
Let's now take a look a closer look at the two operating mill their financial strength in the product composition and strategy going forward.
First well there are a lot of moving cards right now, it's very important understand that on a standalone basis. The two mills have healthy operating margins.
Together with our efforts managing our SGT, managing capex and spend and funding the pension appropriately. We believe these two mills should provide a cash generation platform.
Well I think is a world class paper and pulp mill essentially position close to keep markets print markets and as a strong asset for the company. The Escanaba Mills are premier producer of graphic and specialty products and it's also a valuable asset.
We have refined our product strategy around these core product categories graphic specially in pulp and overtime, we expect to see specialty in pulp become a larger portion of this pie chart.
Now, let's get into our strategy around these products slide eight highlights one of the growth areas specialty papers is 21% of first half 2020 revenues on a second the escanaba.
We have built a longstanding customer base and specialty and we're focused on increasing the segment as a percentage of revenue.
Our growth strategy is focused around labels consumer packaging, our specialty products are used in labels for food hygiene and pharmaceutical products as well as late as necessary for E Commerce.
These are highly engineered technical products that use by the brand to interact with the customer.
We are the only north American supplier with multiple integrated facilities producing label and released products with this growing market.
Moving on to slide nine we take a closer look at pulp, which was 11% of the first half 2020 revenues for our second Escanaba mills. The pulp sector has historically been moderate growth tied to the various market applications. We have established ourselves as a low cost producer of high quality hardwood pulp at Cornell Tech mill.
And we are driving our strategy to grow in this market.
Expand the pulp business makes a lot of sense for us financially, we can increase our pulp production at our Quinnesec mill further improving the margin position of this already low cost asset. This is a growing market, where we have the low cost asset high quality product and a great opportunity for margin growth.
On slide 10, we take a look at our graphics business.
Our goal with the graphics business is to capitalize on our positioning as a premium supplier to maximize cash generation to support growth, especially in pulp business.
We expect capacity in this product sector will continue to come down and our strategy is to pick up new customers. That's competitive move away from this product category, our sheet business brand of Sterling premium and anthem plus are well established and we're leveraging that strong recognition in the marketplace.
To maximize cash generation will continue to managed cat capital aggressively while maintaining the I'll put it out facilities [noise].
On slide 11, we frame out the near mid and longer term strategy for the company.
Our first priority near term to keep our employees safe I'm proud of the work of the team has done it continues to do so that our employees feel comfortable in the workplace beyond that during the quarter, we've reset strengthen the business to maximize profitability and cash generation to execute execute against capital efficient operating strategy.
This enabler enables us to create shareholder returns.
Over the medium term, we expect to stay focused on executing against our capital efficient strategy for each of our markets and growing specialty and pulp as a percentage of sales.
When demand returns we have capacity at our two criminals and also have the awesome to restart the I don't know that needed.
We are an uncertain time dealing with many factors, we can't control, so I'm not going to try to predict when demand will return and at what levels. However.
We think we have seen the locally and are optimistic that we'll see stabilization and upward trend as we look into 2021.
As far as fact is under our control with our proactive consolidation and streamlining of the business, we now at multiple levers to growth.
Currently grow.
Our long term vision is to focus on growth areas of our business and drive our capital efficient growth strategy. We also believe we have the financial strength to evaluate non organic growth opportunities that are aligned with our strategy and create value for the shareholders.
With that I'll now turn the call down to review the financial performance. Thank you Adam Good morning.
Slide 13 review some key metrics for the quarter.
Sales decreased to $268 million, resulting from the combined impact of the celebrating skogen and Stevens point mills in the first quarter.
Those are the loop mill Els well as the overall economic downturn caused by the cold in 19 and damage.
As a result of these dynamics you can see in the chart in the right to both shipments and average pricing per ton decrease significantly during the second quarter 2020.
Net loss improved to 34 million or a lots of 99 cents per share for the quarter compared to net loss of 112 million or 323 from second quarter last year, which was driven by the write down of the loop mill assets.
As we move forward, we're driving a more focused revenue strategy and we've also implemented in excess of $30 million of cost savings with more expected by the end of year.
We believe these efforts will allow us to maximize cash flow, while selectively investing attracted parts of our business that potential to drive longer term shareholder returns.
Major maintenance for the quarter came down to $10 million, primarily due to the postponement of Wisconsin Rapids mill outage.
We did build 96000 tons of inventory, which is ahead of the idling our diluted in Wisconsin Rapids Mills.
So we intend to keep that inventory and sell through as we go through the remainder of the year in early into next year. This will put us well positioned to support our customers' needs.
On page 14.
We walk our 2019 quarter to adjusted EBITDA to the 2020 quarter too.
The $44 million. We achieved 2019 include $11 million of results from Andrew Skogen, Steven point Mills that we no longer own.
While the close look mail, how to swing a $1 million in the quarter.
That's on a comparable for mill basis, adjusted EBITDA was $34 million.
The remaining bars highlight the changes year over year for quarter on this for mill basis.
Nice mix down $35 million lower volumes decreased performance by $23 million.
In addition, we took downtime in the quarter to the tune of $11 million.
On a positive side input costs are generally favorable across the board contributing $6 million an improvement.
You can see in the remaining part of the bridge, where we control the areas that we could.
Major maintenance and significant cost controls and operations and in corporate overhead contributed $20 million improvement year over year.
Moving on to slide 14.
You will see that despite the hidden cash at quarter significantly improved our cash position.
Driven mostly by the sale of our two mills and correspondingly our liquidity has improved.
$423 million from a $267 million a year earlier.
The cash burn for the quarter was $67 million driven by the $9 million to negative adjusted EBITDA.
Capex of 15 net pension of 15.
Buyback and dividend activity at $23 million.
Other relate other costs of 5 million.
This other is made up for restructuring severance interest and taxes.
We've also remain debt free since the third quarter 2019.
Our balance sheet today provides us with a very solid foundation from which to drive shareholder value going forward.
On slide 16 would take a closer look the financial profile for the two current operating mills.
We have strategically finer operating businesses consist of these two strong mills with attractive economics.
When it set and Escanaba mills deliver higher margins than historical average gross margins, our business, which has generally been in the low teens.
Specifically for this Q2 males that combine major may maintenance was $24 million and Capex was 44 million.
What are that 44 million, we wanted to note that we had $10 million a fairly one off events, which was a tank failure and unexpected boiler wall repairs that are Quinnesec mill.
We are targeting SGN eight to remain at less than 5% of revenue after our planned cost reductions are implemented.
With the operating strategy, which Adam share and improved margin profile to Gulfport business and reduce expenses. We believe we are in a good position to maximize cash flow looking forward as we drive operating improvements to position the business for long term shareholder returns.
On slide 17, you'll see that we're also now returning considerable capital to shareholders through cash dividends and share repurchases.
Major step this commitment as our payment of 3 million $3, sorry, $3 per share special cash dividend payable on September 28 to shareholders of record as of September 18th.
This is on top of the regular 10 cents per share dividend that will also be paid at the same time.
Additionally, we have been actively buying back shares and to date, we have repurchased $22.4 million or 1.6 million shares.
With that now I'd like to turn the call over for Q1 a session operator.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
The first question.
From Jeff Van Sinderen of B. Riley. Please go ahead.
Oh Hello, everyone. You mentioned that you think that trough visit or that the worst maybe the high end as far as I guess, the overall marketplace can you speak more about how you're thinking about supply and demand.
Kind of getting to a better.
Balance in the marketplace for graphic paper and maybe how we should think about the status of your mills that are not running I know you mentioned a couple of different options there.
And then when you might reopen those Nols in other words, what would need to happen I guess for you to reopen those mills.
Yeah.
You know volumes in the second quarter, obviously were for all our grades was down 33%. We did we did have a significant uptick in July that we're optimistic about.
So as far as volume goes we do think we hit the low in June so things are really starting to pick up for us on the graphic side of things.
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As far as a reopening the mills right now I mean, it would have we've got a lot of inventory to work through that we built on purpose.
In order to supply our customers and give us the ability to move our sheeting business to the two other mills.
So the market would have to come back fairly significant for us to consider restarting the those operations.
Okay, and then just as a follow up to that you mentioned July really picking up is that because demand is picking up do you think or is it just because there's just a better balance of supply and demand at this point.
Yeah, I think demand is picking up in inventory is coming down.
Good.
And then any help you can give us on I wasn't really tough question, but any help you can give us on volumes and pricing assumptions or Q3, given that you're starting to see improvement.
Maybe what we should contemplate for revenues and profitability in Q3, I know, obviously, just running two mills, but.
Or even just order of magnitude around not any helping us there I will tell you that on volume. We've we've taken as you know significant capacity out we took 540000 tons out of.
Coated freesheet Rapids in Duluth, we took 270000 tons, though so our expectation.
Run the other two full.
So obviously.
If things change.
We would.
I would take necessary downtimes did not build inventory, but we feel like we've taken enough capacity out or unfold as far as price goes you're right. We don't normally.
Guide on price, but you know we know that we've felt were going to have continued pressure and 2020 and receive says that should be recovery in 2021 in 2022. So I can I can leave you with that.
Okay, and then just one more I know you mentioned wanting to increase the.
Specialty at nine graphic paper concentration in the pulp concentration can you maybe detail or just give us kind of an overall sense of what.
What the plans are around that projects that you're working on to get there. Yeah. It's all really product development efforts. There is no capital that we plan on spending to make those grades.
So we're doing it where we've upped our product development.
To make some more release liner type product products at Quinnesec.
And obviously, we've got a pulp mill in Quinnesec at low cost pulp mill that can.
That makes a nice sale of hardwood pulp and we have an asset there that's idle some of the time.
In our craft dryer, because Q 41.
When it goes on heavyweight that the paper machine, we don't have enough pulp to supply. The drivers. So we believe we can increase our pulp productivity and get more revenue out of the mill by selling more hardwood.
Okay, all right. Thanks, very much for taking my questions.
Again, you have a question. Please press Star then one touchtone phone.
Next question comes from our bought portion of Vws financial. Please go ahead.
Hi, So first off I want to ask too.
Have you seen competitors close yet and why would you think competitors would close capacity the universal has already taken out over a million tons in the past 12 month.
We have we took that we took downtime of about 70000 tons in the quarter. All we know is what we what we read so sappy, we know in North America took 107000 tonne tons down downtime.
And in worldwide 595000 tons of downtime that's really all that's been reported so that's all I can give you at this time.
Okay, but your I mean, you're seeing pricing pressures is that coming from.
Imports are coming from you as producers.
I think it's coming from both imports stayed flat the has still got 75000 tons a month coming from for coated freesheet.
And you've got 35000 tonnes a month coated groundwood.
They say that stayed the same to the cold period.
There's a there's a three month lag there so I'm interested to see what those numbers are going to look like going forward.
But over the years, that's been has been the numbers and they have they do impact they do impact upright.
And then.
What type of customers are you seeing coming back in July that volumes of creeped up for you.
Mostly merchant.
Right.
Last question was but how much of the cost savings will be at the middle level versus June.
Early on of the 30 million that we said we put in place now a majority of that came at the mill they'll be additional SGN a going forward.
Okay. Thank you.
Thanks, Tom Thanks Ali.
This concludes our question and answer session I would like to turn the conference back over to Adam Thank John for any closing remarks.
Yes. Thank you for joining the call today and we just wanted to have great day. Thanks.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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