Q2 2021 Verso Corp Earnings Call
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Good morning, and welcome to Verso Corporation's second quarter earnings Conference call. All participants are in listen only mode. There will be an opportunity to ask questions at the end of todays presentation.
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Please note. This conference is being recorded a replay of this call will be available on the Investor page of <unk> website. After 11, a M eastern time today.
At this time I'd like to turn the presentation of the diverse as vice President and Treasurer, Tim Nusbaum. Please go ahead.
Thank you and good morning, the second quarter 2021, and financial results for Verso Corporation Corp were announced this morning before the market opened the earnings release as well as the set of slides, which we will refer to during the call on available on the investors section of <unk> website.
Www dot of Bruce Holdco Dot com.
Joining me on the call today are Randy Knievel, Bruce <unk>, President and Chief Executive Officer, and Brian Coleman, Senior Vice President and Chief Financial Officer.
I would like to remind everyone net in the course of the call in order to give you a better understanding of our performance, we will be making of certain forward looking statements. These forward looking statements are subject to risks and uncertainties should 1 or more of these risks or uncertainties materialize or should underlying assumptions or estimates prove incorrect actual results may.
Very materially from managements expectations.
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 <unk> dot com under the Investor tab.
In addition, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating the performance.
The presentation of this additional information should not be considered in isolation, whereas the substitute results prepared in accordance with GAAP and reconciliations to comparable GAAP measures are available in our earnings release.
At this point I'd like to hand, the presentation over to Randy the evil.
Thank you Tim Good morning, everyone before we discuss the quarter I want to take a moment to discuss the unsolicited proposal from Atlas Holdings.
You have seen on April of on July 14th we confirmed receipt of an unsolicited proposal to acquire all of the outstanding shares of <unk> common stock for $20 per share in cash.
Today, we announced that our board of directors formed a special committee to evaluate the Atlas proposal and alternatives there to the.
The Special Committee is composed of 2 nonexecutive independent and disinterested directors, Robert K Beckler and Nancy Taylor the.
The Special Committee has retained independent advisors to assist thoroughly review and evaluate the proposal and alternatives there too to determine the course of action. It believes is in the best interest of verso and its stockholders.
As noted in the earning release, we do not intend to comment on sort of disclose further developments regarding the special committee's evaluation unless and until we deem further disclosures as appropriate.
Or required.
We will not be commenting further on the proposal today now let's dive into the results.
Turning to slide 4 this was a strong quarter for verso, combining the benefits of executing a focused strategy with positive macro trends, we have a lot of work to do but I am very proud of the team for driving the progress that we've made in this business to date.
Revenue increased 17% sequentially the $329 million.
Our adjusted EBITDA improved to $52 million with an adjusted EBITDA margin of 15, 8%.
The strong results were achieved in spite of $4 million in costs related to an annual maintenance outage at our when the SEC mill and input cost inflation.
Vessels operational cash generation was very strong at $57 million and where you are able to return $59 million to our shareholders during the quarter.
Much in the form of a modified Dutch auction in which we repurchased $55 million in stock.
Multiple factors contributed to the strong performance versus realized price increases across our product of portfolio shipments increased with North America coated freesheet operating rates at the 106% and order rates and backlogs remaining strong.
As I have said before employee safety is of Paramount importance to verso.
<unk> delivered good safety performance for the first half of the year, but we always strive to do better.
Our operations continue to improve performance focus on our core strength and aggressively execute on our customer centric staff strategy.
Our customer base is very supportive of verso.
First of all is keenly focused on listening to the customer and ensuring that we're going on not only continuing to be the preferred supplier, but also that we will grow with them.
In order to best serve customers, while maximizing profitability first of all.
Has analyzed and implemented many high return capital projects to improve performance in the areas of productivity product development and cost reduction.
This strategy is starting to pay off <unk> is well positioned to continue its improvement.
On slide 5 we outlined some of the trends that are creating opportunity on our business Indus.
The industry capacity has been reduced 24% from 620000 tons in the second quarter of last year to 472000 tons in the second quarter of 2021, the second quarter capacity reflects the impact of coated freesheet paper machine closures and conversions in 2020 and as we.
We previously mentioned verso removed the Wisconsin Rapids capacity in July of 2020, which represented over 400000 annual tons of coated freesheet capacity imports remained low although up from the first quarter, while container availability major supply chain delays.
And increasing freight costs remains challenging verso.
<unk> is better positioned to service of the freight logical domestic market with a more predictable and efficient service platform.
These factors combined with a 31% increase in demand over the same quarter last year due to the economic reopening.
The led to a strong shipment environment slide 6 profiles of the steady improvement in adjusted EBITDA over the past year.
The second quarter was another big step forward for verso as many of the improvements we have made combined with favorable industry dynamics helped drive our financial performance.
<unk> is starting to return to respectable margins and we are optimistic about the future.
Moving to slide 7 I would like to take a minute to clearly define vessels assets today and reinforce the strength of our consolidated operations and the value in our diversified revenue streams the.
Escanaba mill has the capacity of approximately 700000 tons of graphic and specialty papers. We are focused on the growth opportunities in coated freesheet, both web and sheet offerings and specialty.
It is a strong assets with opportunities to drive efficiencies and improve its cost structure.
The <unk> mill is also a strong facility.
That has the capacity of approximately 430000 tons of graphic papers and about 240000 tons of market pulp. Some of this market pulp is internally consumed and the mills we.
We are focused on making targeted capital investments to reduce cost expand graphic paper products offerings and optimized pulp production.
Wisconsin Rapids, as the converting operation the.
Plant provides <unk> with flexibility and our growth strategy. We are focused on transforming our converting operation into a customer focused feeding operation with 7 state of the art cheaters, and a better cost footprint.
Currently the internal and external operations are positioned to convert approximately 200000 tons of cedar roll product from our escanaba and Clint of SEC Mills.
Finally, we owned consolidated water power company also known as <unk>.
A regulated utility with 5 hydro electric facilities operating 38 turbines generating approximately 197000 megawatt hours of electricity annually.
Quip co sales the energy it produces together with purchases from other local utilities, 2 paper mills and some residential homes.
In addition to the equipped <unk> energy platform <unk> mills produce energy for use in the paper making process.
And some of this energy qualifies as of renewable energy credits, which is sold to offset our total energy cost.
The strength of our fully integrated platform and skilled work force positions <unk>, well for future growth and sustained shareholder returns.
I will now turn the call over to Brian <unk>, our new CFO for the financial review.
Excited to have Brian on board. He brings over 20 years of broad financial and strategic leadership experience with the majority of his career holding executive and senior leadership roles at Fortune, 500 companies, including Mcdonald's and Procter and Gamble.
Brian.
Thank you Randy.
I am thrilled to join the verso team, especially at the time of improving performance I'm also encouraged by our clear strategy to be the preferred north American supplier of graphic papers specialty papers and pulp.
Now I want to shift gears to slide 9 which highlights our financial progress as a result of improved execution and market tailwind we.
We experienced the realization of price increases with our overall average price being up 15% led by northern hardwood bleached pulp, which was up 37% compared to Q2.2020.
The improving demand environment resulted in a situation where shipments were greater than our production capacity, which reduced our finished goods inventory level by 20%.
As you look down the Q2.2021 results column, we are proud of all of the positive numbers for the quarter.
That said the team is focused on building on this momentum as we move through the year.
On slide 10, Youll see a bridge of our results from Q2.2020 to Q2.2021 showcasing improvements in nearly every category.
These results are headlines on the left side of the chart by a strong top line recovery that resulted in a total of $39 million adjusted EBITDA benefit.
This benefit was the result of price realization of which $11 million came from pulp as well as improved mix and the utilization of inventory levels to service our customers.
In the Middle of the chart, you can see $9 million worth of inflationary headwinds expanding energy chemicals and purchase pulp.
However, and encouragingly, we have also generated some positive impacts highlighted by changes to our wood purchasing strategy, which resulted in the $3 million benefit for the quarter.
Our operations also improved as production was up versus the Covid impact of Q2 and 2020.
This improvement in production together with usage improvement energy optimization and absorption of variances led to a positive $15 million improvement for the quarter.
Finally on the right hand side of the bridge, we are realizing the benefits of closing and idling high cost assets that were not aligned with our core business.
This resulted in an additional $9 million of adjusted EBITDA compared to last year, all associated with the Duluth mill and $2 million more of major maintenance cost reductions at our idled mills.
We will continue to remain focused on reducing costs generating cash and servicing our customers in the coming months.
Slide 11 highlights the positive results to our cash position.
For the quarter, we were able to hold our available cash balance steady at $117 million.
We added $52 million to our cash position from adjusted EBITDA contributions and $34 million more from working capital improvements primarily from inventory reductions.
Most importantly, our strong cash generation covered our capital investment and pension requirements, while also enabling us to return $59 million to our shareholders during the quarter.
We have seen a decrease in our liquidity, resulting from the lower ABL revolver borrowing base as a result of our lower finished goods inventories.
As we have shared previously we remain steadfastly focused on continuing to eliminate costs at our closed an idled mills. The chart at the bottom demonstrates this progress as we have gone from $23 million in Q4, $2000.20 million to $5 million in Q2.2021.
Turning to slide 12, our board made a commitment to return $250 million of proceeds from the Androscoggin and Stevens point mill sales to shareholders.
A date, we have returned $211 million against this commitment.
Having executed the $55 million modified Dutch tender offer in Q2.
Together with an ongoing <unk> 5 share repurchase program and the payment of the <unk> <unk> dividend in the quarter.
We also declared the third quarter dividend of <unk> 10 per share that will be paid on September 28th to shareholders on record as of September 17.
Finally, slide 13 features of our outlook for the full year of 2021.
We expect our cash capital expenditures to be between $50 million $60 million as we implement projects at our Escanaba and Quint of second mills in the second half and prepare for our 2022 initiatives.
The required pension contribution for 2021 is expected to be $25 million.
Which is out of reduced level of versus prior years due to the American Rescue Act provisions.
Our cash position is expected to continue to increase as we benefit from our improving business results and lower cost at our closed on idled mills.
I am proud of your part of the strong team and I look forward to meeting as many of you as possible in the near future I will now turn it back over to Randy. Thank you Brian in summary, I'd like to share with you of poster that hangs on the walls and all vessels facilities I think it encapsulates the core values of <unk>.
So today in our vision going forward, including.
Our commitment to our employees customers suppliers and investors.
Before I open the call for questions I would like to remind you that we will not be accepting questions regarding the Atlas proposal or the special committee process.
With that we will now open the call for questions.
We will now begin the question and answer session to ask a question Press Star then 1 on a Touchtone zone.
If you are using a speakerphone please pick up your handset before pressing the keys.
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At this time, we will pause momentarily to assemble our roster.
Okay.
And the first question comes from Amit <unk> with Dws financial Please go ahead.
Hi, good morning.
Firstly could you just talk about the price increases the pass through and the acceptance rate that's occurring and the timing of.
How much more of these price increases.
Are you expecting to realize in <unk>.
Q3 and Q4.
Good morning Hamzah.
I think I don't remember the exact number of price increases, but our acceptance rate has been very very high on all of those.
We continue to monitor where we're at on pricing and.
We will adjust as we see fit I think.
We don't project, whether we're going to have more price increases but.
I don't think I think it's safe to say, we could not going to have price increases like we have in the first part of the year.
<unk> kind of been unprecedented.
And how sustainable is it to meet the demand given that your inventory has been declining on a quarter over quarter basis for the last the.
3 quarters now I think.
Yes, well, we started the with an inventory of about 410000 tonnes last year and were down on the mid 150. So right now so we're going we have been living on inventory, we're slowly pulling back from that.
I think <unk>.
<unk> is going to be something we can.
Do a better job managing some of our.
Some of our products, we just we will have the choose not to.
To make anymore, but we're also spending some money in both mills that will make slight improvements in our production. So I think we're going to comfortably be able to satisfy all of our good customers.
Okay and.
Could you just comment as to why versus so decided to go the.
Committee route instead of just.
Creating any kind of the negotiation process directly because when a dispute of distraction for you and the customer base.
I guess the.
The decision that was made the go to the committee mile Route was made at the board level and I don't want to go into the basis for that.
I think no matter how.
When you go about of process like this it's got to make sure of it doesn't become a distraction for the company or your customers.
That's what the.
What I keep telling the company is business as usual.
And that's the way we're trying to operate.
Okay. Thank you.
Okay.
Okay.
Yeah.
At this time, we have no further questions.
I will now.
I will now turn the call back over to management for any closing remarks.
On the thank you for your question really appreciated that.
Thanks for the people listening and we look forward to talking to you at the end of the third quarter have a great and safe day.
The conference has now concluded.
Thank you for attending today's presentation you may now disconnect.
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Yeah.
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