Q3 2020 Verso Corp Earnings Call
[music].
Good morning, and welcome to Verso Corporation's third quarter 2020, <unk> earnings Conference call.
All participants are in listen only mode. There will be an opportunity for you to ask questions at the end of today's presentation if.
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Please note. This conference is being recorded a replay of this call will be available on the investors page of versus web site. After 11 am eastern time today.
At this time I'd like to turn the presentation over to versus Treasurer, Tim Nusbaum. Please go ahead.
Thank you and good morning, <unk> third quarter 2020 financial results reversal Corporation were announced this morning before the market opened the earnings releases was a set of slides that we'll refer to during this call are available under the new investors page, you're pursuing website www dot versus OCO dot com.
Joining me on the call today are Randy Knievel personally as interim President and Chief Executive Officer, and Allen Campbell, Senior Vice President and Chief Financial Officer I.
I would like to remind everyone that in the course of the call in order to give you a better understanding of our performance we will be making certain forward looking statements. These forward looking statements are subject to risks and uncertainties.
Should one or more of these risks or uncertainties materialize or should underlying assumptions or estimates prove inaccurate.
Actual results may vary materially from management's expectations.
If you would like further information regarding the various risks and uncertainties associated our business. Please refer to our FCC filings, which are posted on our web site <unk> dot com or the investors tab.
I'd now like to turn the presentation over to Randy Naval [noise].
Thank you Tim Good morning, everyone. It's a pleasure to talk with you. This morning, and I look forward to having the opportunity lead me to meet many of you in person at some point.
As many of you know I was appointed interim president and CEO of nurse. So on September Thirtyth, having served on the board since November of 2019.
I've enjoyed a long career in the pulp and paper industry. Most recently as capstone papers, he VP of packaging with overall responsibility for manufacturing and commercial operation.
Additionally, I've been very involved with industry organizations and have served as a board member of both the National Association of manufacturers and the American Forestry and paper Association.
As I have shared with the employees averse or the past month My management style is rooted in an unwavering focus on customers since.
Since joining the board last year, what was has always been incredibly evident to me is the quality of the personal team up and down the organization and there are no natural alignment with delighting customers.
It goes without saying that the industry has been experienced a lot of change and that's been accentuated by the pandemic virus.
Sure so as manage through this challenging period in a proactive and decisive way and has consistently provided customers great service and high quality products that have come to be expected.
But there is still significant room to improve turns.
Turning to slide four I want to take a moment to touch upon the vision I have for verso.
I respect that I have only been interim CEO for a short period of time, but some tenets of the go forward strategy have become crystal clear as I have stepped into this role.
First first of all will be recognized as a supplier of the best graphics specialty in pulp market offerings with the highest level of customer service.
We have to have an enviable reputation with our customers and we will take the steps to earn that reputation if.
If we execute on this we will also earn the right to grow our market share we.
We will prioritize a cap.
Capital projects with fast returns, we will focus on driving profitability and cash flow.
We will relentlessly pursue cost reductions finally, we will proactively engage our dedicated workforce to achieve these goals.
Slide five demonstrates the progress we have made as we have focused on versus key competencies we.
We assured verso remained focus on servicing our customers, while we reduce cat capacity this year we.
We did this by increasing our target inventory position, allowing us to fulfill customer orders and keep pace as the industry recovers.
We are focused on graphic product offerings, both sheets and web.
And we're leveraging versus well established brands like Sterling premium and anthem plus.
We are evaluating capital projects to expand the range of products we offer in these brands.
In addition, specialty is a growing percentage of our revenue with more stable market dynamics, we have built a long standing customer base in this area and our growth strategy is focused around labels for consumer packaging.
These specialty products are highly technical products that presented a significant challenge the new market entrants.
From an expense management standpoint, we have strategically reduce cost across the organization without impacting customer service.
A key focus or the next year will be to work with our fiber suppliers to take cost out of that supply chain.
Turning to slide six let's look at what we accomplished in Q3.
On a sequential basis, our adjusted EBITDA increased from a loss in the second quarter to a 12 million dollar profit in the third quarter. Good progress, but there is significant opportunity to improve with higher revenue and a focus on cost reductions.
We continue to strengthen our position for long term success.
Our safety performance was solid with a total incident rate a 0.81.
This is good but.
But I like to see our safety number near perfect nothing.
Nothing we do is worth anyone getting injured.
Our fundamental value is to keep our employees safe and healthy and I'm proud of the work. The team has done and continues to do so that our employees feel comfortable in the workplace.
The under other fundamental value I take very seriously is to operate at or better than all environmental standards, a key to maintaining our license to operate.
As mentioned, we preemptively reduced our capacity this year and downsides our operations to two two.
Two mills have great potential escanaba and Quinnesec.
Both of which saw improved performance during the quarter.
First of all has always focused on cost control. We are now taking it to another level as part of this will be deploying capital on high return projects throughout our mills.
We are proud to have partially fulfilled our commitment to return capital to shareholders and paid both a regular dividend and $101 million special dividend during the quarter.
At the same time, we maintained a strong balance sheet and liquidity with a $173 million in cash $293 million in liquidity and no debt.
Our strong balance sheet remains a competitive advantage for us as we navigate the challenging short term environment and look to grow long term shareholder value.
Turning to slide seven.
I want to spend a minute on the industry as a whole.
Our industry had progressed to a point of overcapacity at.
As the pandemic started.
As we illustrate here, we have seen a sequential decrease in capacity or the past three quarters and believe this is something that unfortunately had to happen.
We've also seen an uptick in demand in the industry since Q2, which is encouraging.
Obviously, there are many things difficult for us to control as the pandemic continues. So now is not the time to predict trend lines, but we are cautiously optimistic more.
More importantly, we are controlling the elements of our business that are within our power and recurring two are returning to our core strength.
Which all will help us drive improved financial performance as demand returns.
We also feel we're at a point, we can ask customer for a larger share of their spend especially in the center of the country.
With that I will now turn the call over to Alan to review financial performance.
Alan.
Thank you Randy good morning, everyone as we switch to slide nine you will see the reduction in net sales, which is reflective of the sold Andrew Skogen and Stevens point meals together with the idled mills to dilute the Wisconsin Rapids.
Our net income was impacted by $20 million as a result of idle close mills.
With additional 8 million in cost related to severance as we right size the organization.
Pricing was down $107 a ton over the same quarter in 2018. However.
However, it was up sequentially by 27 million to $27 per tonne site.
It was helped by improved mix during that time period.
Our commercial team announced price increases for both pulp and select graphic grades. So we expect that we have hit the trough in pricing.
[noise], leading to the decision to idle, but deluca, Wisconsin Rapids Mills, we've build up inventory to ensure product availability for our customers and weve been progressively drawing this down as we are successfully qualifying sheet products at Quinnesec and Escanaba Mills.
The major maintenance outages are behind us for the year and we have also started to realize the savings from our SGN initiatives with year to date adjusted EPS DNA at 4.2% of sales.
Moving to slide 10.
We note that our sold males and look impacted in the third quarter.
Third quarter, an 18 was night $14 million.
That's on a current basis last year was $50 million from adjusted EBITDA.
From the $50 million the bridge demonstrates the impact of cobot related economic conditions to our business in the third quarter with $40 million, a negative price mix and volume impact.
In addition, we incurred at $19 million now downtime impact.
12 million of which was related to our proactive decision to idle, the Luke and Wisconsin Rapids Mills.
On the positive side input cost of decline.
And our mill teams have worked.
To diligently improve operational performance its remaining two mills.
On slide 11, we point out the strength of our liquidity, which ended the quarter at 293 million.
Cash from operations were relatively flat in the quarter as we partially sold through our Toluca, Wisconsin Rapids inventories built.
Our net cash position was impacted by the total dividends of $105 million paid out in the quarter together with $32 million at ash funding to the pension and cost related to close an idled mills $27 million.
Moving on to page 12.
We talked about our key operating metrics at the two mills.
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Yeah. If you recall during the last quarter, we had LTM of 174 million. This was impacted this quarter unfavorably by $23 million of price and $8 million of volume.
After we work through the inventory and start to ship. She had products from these mills, we expect to see improvement in gross margin of around $15 million to $20 million at.
At these two mills and remaining CD operations.
Beyond this the total capacity for graphic paper specialty papers mall pulp remains at 1.4 million tons.
On slide 13, we've highlighted our pension liability we had to go through a remeasurement process in the third quarter because of the various activities that happened the transfer of a pension to pick sale and the two mill sales and some of the other adjustments and buyouts that we've made in the quarter.
Since we did that we had to revalue on the third quarter.
But we still will do the same thing Remeasure I should say was also a good measure in the fourth quarter. So you see it additional change and pork that should not be material to based on assumptions.
As you can see a various changes made through they are the largest one was $99 million of actuarial assumptions.
This included a 40 basis point reduction or PBL discount rate is also slightly impacted by mortality table changes.
Others walked through so you end up at the 435 in the third quarter even.
Even with this increase we have made significant progress reducing our risk around our net unfunded liability and we expect that will systematically reduce this in years to come.
[noise] as we reduced their number of bills slide 14 reflects our new initiatives in place to cleanup nonproductive assets. So we can focus on our efforts in serving our customers and improving operations and cost Escanaba and quinnesec.
They have collected $4 million through the third quarter from the sale of Blue mill related assets.
We expect additional 22 million in proceeds over the next several months.
We have paid severance that balu and expect to pay some severance at Wisconsin Rapids in fourth quarter.
We also completed the T. Assai agreement Txcell, which eliminate some of these distractions.
We will continue to look at opportunities around any nonperforming assets and see what we can monetize.
Turning to slide 15, we have returned $130 million of sale proceeds to our shareholders through these tough and uncertain times.
As we left the quarter four we intend to pay the regularly quarterly dividend on December 29, 2020 to holders of record as of December 18th.
With that I'd like to turn the call back to Randy for some closing comments. Thank you.
Thank you Alan.
Turning to slide 16, let me recap U verse those unique strengths that will enable us to not only meet demand, but also optimize our business first brand recognition versus direct a recognized leader in the industry.
Second our customers are long term customers that we have strong relationships with.
They rely on us to provide quality products and exceptional customer service day in and day out.
Lastly.
Our capacity reductions and streamline operations have resulted in a nimble organization, we can react more quickly to changing needs of our customers and that flexibility will help us to deliver long term shareholder value we.
We appreciate your support and now I will turn it over to the operator for questions operator.
Operator.
At this time, if you would like to ask a question. Please press Star then one on a touchtone phone you will hear a tone to confirm that you have entered the list. If you decide you want to withdraw your question. Please press Star then two to remove yourself from the list.
And the first question will come from Jeff Van Sinderen of B. Riley. Please go ahead.
Hi, good morning, everyone.
I Wonder if we can just touch on sort of the overall capacity picture, where the industry. Maybe if you can give us your latest assessment of specifically what graphic paper capacity you expect to exit the industry over the next say at all year or so or maybe how much tonnage that is in total.
So how much of that is competitive with your business.
And any sense you have a timeframe of when that capacity is exiting.
And I guess, how you see that impacting the broader supply demand picture.
And turn up for your business, especially given that you're starting to see an uptick now thanks.
Good morning, I think the only one that we can talk to is nine dragons announcement, the rumford of converting their machine from graphics too.
Containerboard or brown papers that we estimated about 300000 tons.
Other than that we don't comment on what we think other people may do we'll let them comment on that.
Okay fair enough.
And then maybe you can just update us on your thinking about <unk>.
The future of the knows that you closed I think you said you were taking and you collected 4 million from Lou can you expect an additional 22 million just wondering kind of what your latest assessment is that the acquisitive interest and he knows that are idle go the other assets you have.
Well we have a.
Put both Duluth, and Wisconsin Rapids on the you know with the investment banker at.
At this point, we've had interest in both mills, but.
But were slowing down taking kind of a pause on Wisconsin Rapids.
Because it's very difficult to deal with that mill in these times and.
The interest was not what we thought I think we'll be available when times are little better.
Duluth has got some people interested in that is ongoing.
Okay, Great and then any just if I could ask one last one.
Any thoughts you can give us around I know, you're not going to provide guidance, but just maybe.
Anything around your thinking on Q4 metrics, maybe what you're seeing so far in Q4 are we seeing improvement sequentially continue.
And then any quantification you can give us surrounding potential expense reductions as we're thinking about 2021.
Well as far as orders or October was a very strong month for us and November through.
Through the end of last week was looking good.
Going forward I think at the end of the year December is usually a pretty part month for us so.
No reason not to expect that it won't drop off as the month goes on.
As far as quantifying next year, we're still in the process of putting our budget together and.
And I don't I don't feel comfortable with giving any guidance with that.
Okay. Thanks for taking my questions and best of luck.
Thank you.
The next question comes from Hamad Khorsand of BW S. financial Please go ahead.
Hey, good morning, So first off just want to ask you have you are undertaking any of the these high return projects that you were referring to and could you provide an example, what you're thinking of doing.
Well, Hi return I define we'll start off doing the projects that have a one year pay out and then we'll move on to projects that have a two year payout those or use it usually relatively small.
You know hundreds of thousands of dollars or <unk> hundred thousand dollars. So they are not big projects.
We've done a lot of work in both mills identifying those and we're starting to put the capital request together, we will do go through our capital process to get it done, but I would say we're focused on energy reduction Ken.
Chemical reduction.
And productivity improvement, meaning a how to get more per person our out of our mills.
So.
Yes.
That's kind of what were thinking right now.
Okay, and then whats the feedback been like from customers is you've announced these price increases.
Oh, it's been mixed I think most customers.
Understand it.
No. The are a specific operating posture says that we should be able to get a price increase.
I think they understand that most some say it's good thing some say not so good but it's been I'd say divided pretty close to 50 50 between positive and somewhat negative.
And then yeah.
How long before you report numbers without the noise of these idle assets impacting gross margin I mean, you've been talking about your two mills, having really good gross margin, but it's been two straight quarters, where there's been a lot of noise. So we can't really see that in the financials you report.
Alan would you take that.
Sure.
I think we're going to have a few more quarters of cost related to the idled mills as we prep those for the next stage.
Then you should see after that.
Quote unquote normal business, we have to sell through some of our shooting inventory before we get full impact of our use structure of making a senior roles at the two remaining mills sent me a few quarters yet home until we.
We normalize so we're trying to isolate that information on those that too will slide and then talk about what are the options from there and then highlight.
Our caught them idle status mill sales, so, but it's going to take a few quarters yet to be pure.
Can you quantify how much inventory do you think you could sell through in Q4.
We haven't put that out there I think you saw a drop you didn't see a draw down in the third quarter, we were producing at those meals a little bit in the third quarter. So you can look at that and say, we should be able to deliver more than that in the fourth quarter.
Okay, great. Thank you.
<unk>.
[laughter].
Again, if you would like to ask a question. Please press Star then one.
And our next question will come from Nick Daily He BMR Holdings. Please go ahead.
Hi, good morning, Thank you.
In terms of that capital allocation going forward with them, yeah, nice liquidity, you've gotten on the balance sheet.
Where are you visit the stuck for purchase.
Alan do you want to take that yeah chair, we still have authorization for stock repurchase we have not returned all the commitment we have to the shareholders.
So that is one strategy de lever available to us and overtime, we intend to live up to our commitment of returning that capital to shareholders.
So I guess you know more specifically when do you anticipate you didnt buy back any stock in this last quarter correct.
We did not we felt like the dividend was appropriate. So we made a fairly large dividends. So we didn't think we should be in the market at the same time.
Now that changes from here on out.
Do you anticipate being the market this quarter.
We haven't stated we're going to be as I noted, we do have authorization.
Okay. Okay. Thanks, very much appreciate it.
Sure.
This concludes our question and answer session I would like to turn the conference back over to Randy Nebel for any closing remarks.
Oh, Thank you very much for dialing in and listening and thank you for the questions have a great holiday season, and we'll talk in the first quarter. Thanks.
Thank you bye.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.