Q3 2021 Verso Corp Earnings Call
[music].
Good morning, and welcome to Verso Corporation's third quarter 2021 earnings conference call.
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There will be an opportunity for you 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 over to verso, as Vice President and Treasurer, Tim Nusbaum.
Please go ahead.
Thank you and good morning, the third quarter 2021 financial results reverse incorporation were announced this morning before the market opened the earnings release as well as the set of slides to which we referred to during the call are available on the investors section of <unk> website Www <unk> com.
Joining me on the call today are Randy Knievel, first as President and Chief Executive Officer, and Brian Coleman, Chief Financial Officer.
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 or estimates prove incorrect actual results may vary materially.
<unk> from management's expectations.
If you 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 certain non-GAAP measures, which we believe can be useful in evaluating our performance presentation of this additional information is not to be considered in isolation, whereas a substitute for results prepared in accordance with GAAP and reconciliations to comparable GAAP measures are available in our earnings release.
Finally on July 14th we announced that we had an unsolicited proposal from Atlas Holdings.
As you have seen since our last call with special Committee communicated the Atlas that the previously disclosed $20 per share all cash offer was insufficient and we entered into a confidentiality agreement with them to allow exchange of additional information to facilitate ongoing discussions.
The Special Committee is diligently continuing its work to thoroughly review and evaluate the Atlas proposal and alternatives there too.
There can be no assurance that any negotiations between <unk> and Atlas will take place following the exchange of additional information or that any transaction with Atlas or any other party will occur or be consummated we.
We do not intend to comment on or disclose further developments regarding the special committee's evaluation unless and until we deem further disclosure is appropriate or required.
At this point I'd like to hand, the presentation over to Randy.
Thank you, Tim and good morning, everyone.
Turning to slide four I would like to provide an overview of how we are positioning <unk> to continue to deliver improved performance over the past couple of years Versal made a strategic decision to streamline its business and create a more focused simpler and stronger verso. Our focus is on safety.
Environmental stewardship superior customer service, improving operations and our most valued asset our people.
Turning to slide five.
Our more focused operation has begun to move or so to a more competitive platform.
<unk> Escanaba mill produced a 700000 tons of graphic and specialty papers.
Escanaba has focused on reducing its cost and better serving <unk> customers.
First of all it's quite a Sac mill has a capacity of around 430000 tons of graphic papers.
And about 240000 tons of market pulp.
<unk> is making targeted capital investments here to reduce costs and expand product offerings and maximize pulp production.
<unk>, Wisconsin Rapids is a converting facility with about 200000 tons of sheeting capacity.
Wisconsin Rapids is transforming to being a customer focused cheating operation with seven cheaters and an improved cost structure.
Finally first of all it's consolidated water power company.
A regulated utility with five hydroelectric facilities, producing approximately 200000 megawatt hours of electricity.
<unk> as we call it sells the energy producers together with purchases from local utilities to the paper mills and some homes.
Turning to slide six.
Staying ability is a high priority for <unk> and our customers we.
We have made good progress.
For example, we are using wood fiber from sustainably managed forests and over 65% of our onsite energy generation at Verso Mills is from carbon neutral biomass.
We are also partnering with key organizations that are setting the standards for the industry.
<unk> is focused on continuing to reduce its carbon footprint by improving thermal efficiency of our facilities.
Turning now to slide seven.
Let's get into the results.
During the third quarter Verso continued its improvement trend.
Employee safety is a core value at first so.
We continued to deliver very good safety performance and we will always strive to have no injuries.
Revenue grew both year over year and sequentially to $339 million.
Diluted earnings per share was up $1 96.
Up from 47 in Q2.
And a loss of 92 in the same quarter last year.
Adjusted EBITDA was $67 million.
Up 29% versus the second quarter with an adjusted EBITDA margin of 19, 8%.
These results were delivered despite a planned outage at our Escanaba mill and inflationary headwinds of about $19 million.
Operational cash was $71 million up.
Up $14 million versus the second quarter, resulting in $166 million in cash.
These strong results enabled verso to returned $14 million in value to shareholders through quarterly dividends and share repurchases.
Turning to slide eight.
Revenue grew 11% over last year.
And 3% over the previous quarter.
Market demand continues to be strong with North America coated freesheet operating rates at 105%.
Order rates and price realizations continue to be solid across <unk> product portfolio.
First of all we will continue to build on our customer strategy to provide superior service and products.
Capital investments for Tso is making in its processes will improve quality and service.
While expanding <unk> product portfolio and reducing costs.
Turning now to slide nine.
While up slightly versus the previous quarter industry capacity is down about 15% versus the prior year.
North American capacity reflects the impact of paper machine closures and conversions in 2020.
As previously mentioned, we remove the Wisconsin Rapids capacity as of July 2020, which represented over 400000 annual tons of coated freesheet.
Imports, while up slightly versus the previous quarter or about 10% lower than the previous 10 year average.
Painter availability increased freight cost and supply chain delays still remain a challenge.
<unk> continues to offer a more predictable and efficient platform to serve as the domestic market.
Turning to slide 10.
Strong price realization and improved operating cost have yielded an adjusted EBITDA margin of 19, 8%.
Up 400 basis points versus last quarter.
As first will continues to become more focused simple and a stronger company.
There will be opportunities to improve on this result.
I am very proud of the progress that the <unk> team has made.
Even with this progress there is still a lot of work to be done and versatile will continue to focus on improving operational performance and customer service across the company.
I will now turn the call over to Brian for a review of the financials Bryan.
Thank you Randy and good morning.
I want to shift gears to slide 12, which highlights versus financial progress, which benefited from market tailwind and continued improvements in execution.
As you look down the Q3 2021 results column, we are encouraged by the progress versus last quarter and last year across all metrics net.
Net income was $58 million positive for a second consecutive quarter, which directly impacted our earnings per share.
EPS also benefited from our share repurchase program as we have repurchased six 5 million shares since Q1 2020.
Moving to slide 13, <unk> continued to benefit from the realization of price increases with overall average price being up 6% versus Q2 and up 17% compared to last year. Once again shipments exceeded production, which reduced our finished goods inventory levels by 20.
4% versus last quarter.
That said our team remains focused on closing out the year and building on this momentum.
On Slide 14, you will see a bridge of versus those results from Q3 2020 to Q3 2021, showing good progress. These.
These results were led by strength in pricing across all grades, which delivered $47 million of adjusted EBITDA.
Inflation. Meanwhile, was a $19 million headwind for the quarter spanning freight energy chemicals and purchased pulp.
The middle of the chart highlights key savings in wood and operations are wood purchasing strategy delivered $4 million in savings, which is up $1 million versus Q2.
And operations delivered $5 million in EBITDA due to improved pulping operations and lower warehousing expense.
The right side of the chart highlights the $11 million benefit due to the conversion to our current two mill system and.
And finally, we benefited from special items of $7 million, primarily due to an insurance recovery related to a 2019 insurance claim at our <unk> mill.
Slide 15 highlights the significant growth in our available cash position, which increased by $49 million to a $166 million at quarter end.
This improvement in cash was driven by adjusted EBITDA.
Further reductions in inventory and our continued focus on driving out costs at closed an idled mills.
Most importantly, our strong operating cash generation more than covered our capital investment pension contributions and enabled verso to return an additional $14 million to shareholders during the quarter.
Turning to slide 16.
Date, we have returned $225 million to shareholders spread fairly evenly between dividends and share repurchases dating back to March of 2020.
In total we have retired six 5 million shares.
For the most recent quarter, we paid out another $3 million in dividends and repurchased $11 million in shares.
We have also declared a fourth quarter dividend of <unk> 10 per share that will be paid on December 29 to shareholders on record as of December 2017.
Finally <unk>.
Slide 17 features our outlook for the full year of 2021.
We expect capital expenditures to be between 60% and $65 million as we implement projects at the Escanaba and <unk> mills and as we prepare for our 2022 initiatives.
Additionally, we have now met the 2021 full year pension contribution requirement of $25 million and we expect our cash position to continue to increase through the end of the year.
As we turn our attention to Q4, our team continues to remain focused on reducing costs.
<unk> generated cash and servicing our customers in the coming months I will now turn it back over to Randy.
Thank you Brian in summary, I would like to again share with you the core values and vision of the vessel company.
This slide is a copy of a poster that hangs on the walls throughout the company.
Our commitment is to our employees our customers the environment and our shareholders.
With that we'll now open up the call for questions.
We will now begin the question and answer session.
I would like to ask a question. Please press Star then one on a touchtone phone.
We will hear a tone to confirm that you've entered the list.
If you decide you want to withdraw your question. Please press Star then two to remove yourself from the list.
At this time, we will pause momentarily to assemble the roster.
And our first question will come from Jeff Van <unk> of B Riley. Please go ahead.
Hi, Yes, I just I wonder if you can just give us your latest thoughts on what the outlook might be for volume and pricing near term.
Any thoughts around that.
Up.
Well, if you think look back to the presentation up the capacity and demand chart.
There's a lot of demand and the capacity in the U S is down pretty significantly imports are coming in but not an extremely high rate. So we think.
The volumes are going to be pretty consistent through the fourth quarter and into next year.
We also have a price increase that we announced a few weeks ago that will be coming in towards the end of the quarter and into next year. So in general we feel very good about the volume and pricing outlook.
Probably through the first half of next year at least.
Okay, but just to clarify on that so you feel like I guess I'm not clear on the dollar volume you're saying you think is going to be kind of consistent through Q4 next year or are you, saying year over year.
Increases in volume.
We're saying the volume the number of tons is going to be relatively consistent.
<unk>.
With where we've been operating currently and we're saying pricing is.
I'm going to go up Okay got it okay. Thank you and then.
EBITDA margins.
<unk>.
At a very good level.
A couple of quarters now what do you think is a sustainable EBITDA margin for the company going forward.
Well as I said in my comments, there is opportunities to improve.
And that's the way I feel if you look at our company.
And go back to some other things that were said.
When we went to the two mill configuration that we're in.
That's a much stronger company.
Mills that we have basically we're bleeding cash.
When we had to make the decision to shut them down when previous management did that which was a great decision.
So we have two mills that are very capable of competing very well.
And let me go to the third quarter. If you look at the third quarter of $67 million of EBITDA $7 million of special things that won't repeat so let's take that back to 60, we.
We had a two week shutdown and escanaba that cost us somewhere around $10 million. So that takes it back up to 70.
And to be honest, we still have lots of execution improvements to make on the cost side.
No.
If you think about base of 70, and if we do our job and improve our execution improved on energy.
Improve on.
On how we.
Schedule, the mills and better conform to.
The schedules that we have.
70 should be a springboard.
With good execution to go higher.
The volume side.
Jim.
<unk> is now it's going to be down.
We have had.
Sure.
I'll say somewhat of a rejuvenation in.
In the paper business I believe in the coated paper business, you have large retailers putting out catalogs.
Beautiful catalogues that are being extremely well received.
There are new new smaller versions of those catalogs coming out every day direct mail is growing.
A very large retailer had gone completely away from direct mail theyre back in in a big way.
And.
The people are starting to realize that direct mail gives them a better return sometimes in internet Internet.
Advertising so on the demand side.
I think there is the potential of things being good.
Or maybe getting better on during certain parts of the year.
End of next year is going to be another political cycle, which is always good for the business. So when you look at all of those things look at the strength of the platform we have.
And look at the way, we've repositioned to be focused around on freight logical.
Delivery and customers and the customers that were partnering with I feel very.
Optimistic about what could be and as I said in the statement there are opportunities to improve upon the 19 eight.
Okay.
No no no.
Appreciate that.
Just to clarify are.
Are you, saying, you think that the catalogs and direct mail and so forth.
Are now driving.
The types of graphic paper that you make out of secular decline in that.
Secular growth.
Not saying that but I am saying I think it is slowing the secular decline and I think during certain times of the year it could.
We will see spikes up.
Okay, and so just and then just to clarify.
EBITDA margin Youre thinking is that that you can improve EBITDA margin and EBITDA margin.
20% roughly is where you are I guess kind of if youre hitting that 70.
Getting to that $70 million you.
Do you think you can run at about a 20% EBITDA margin pretty much.
I guess in perpetuity.
We have opportunities to improve upon the 19 eight and capital.
I don't forecast going forward.
But theres opportunity.
And then just one more if I could squeeze it in.
Can you just update us on environmental remediation litigation and then if there's anything more you need to do around that.
At this point, we've made agreements with Luke with all the.
The environmental agencies that we have to react or interact with and so that's pretty well.
Chartered out and we're in good shape there.
Other than that we really don't have any significant environmental issues out there beyond the normal questions, we get once in a while.
Okay fair enough. Thanks for taking my questions.
Youre welcome.
The next question comes from Holmen Coarsened of B Ws financial Please go ahead.
Good morning. So first question was given that demand has been so elevated versus supply and you're raising prices.
What's the risk here that.
Of demand destruction.
Well I don't know, how how well I can.
Estimate that but what I can tell you is.
We are seeing.
We are seeing people asking for more paper.
And not less.
And we're seeing in some cases people.
Customers, let's say.
Just get US paper will pay will pay what you want which we don't do so I don't think we're destroying.
Significant demand in the future.
But I don't really have any basis in fact for the saying that I think that's kind of our guests but.
Our order backlogs are high.
And again, there's new things where paper is being used.
How are you managing it just double ordering in gist.
<unk> orders in the system right now.
Well.
We have a process.
And as we deal with our customers first and foremost we communicated as well as we can.
But we are not over.
Scheduling our mills.
So we tend to keep people too.
I won't say, a strict allocation, but kind of what they've ordered before.
<unk>.
There's got to be some real major reason for us to give them more because we're trying to service all of our good customers.
And then how are you going to make space as far as production is concerned.
If you know the.
Political cycle kicks in 'twenty, one 'twenty two.
Well we.
Spend some money and escanaba.
One machine in September.
It should increase our production capacity.
In the spring.
In <unk>, we have a significant amount of money going into both the pulping recovery boiler and the machine that should.
Give us quite a few more tonnes and we're out.
Talking with customers about those tonnes that weren't available.
At some level pre selling them and so we will have some more tons available and then as I talked about execution in our mills.
Our yield from what the paper, we make to the paper, we actually sell is not as high as we would like.
We have.
With good execution, some time training and higher standards.
There's probably an incremental.
30000 tons a year that can come just from those small improvements that we're going to be working on every day and both mills.
Okay.
And then as far as the Capex.
Your guidance is up compared to Q2 is that related to that Escanaba project. He was just talking about.
We took.
Basically the pulping operation down for two weeks.
<unk>.
And we had.
It really hasn't had a good.
<unk> shut down for some time last year.
We do.
We did a limited shutdown just because of the pandemic and getting people in and out.
We had some found work things that will make the mill more reliable that we had to get done one.
One of which was.
Our biggest turbine in the in the in.
In the mill needs to be rebuilt and we made the decision to rebuild that and that was $1 9 million Bucks. So it was just work.
Once we saw that we had to get it fixed.
Okay and my last question is you guys have a lot of cash in your balance sheet.
What's your intention here.
Obviously, you just given.
The Atlas bid and everything that's involved there does that shai tracked what you were.
Trying to do with the cash.
What are your plans here.
Well first plan is to put more of their.
No.
We feel good about our ability to generate cash after that.
<unk>.
We have a whole list of options between management and the board, we're looking at including investing in the company.
But I won't tell you we have a set.
A set plan at this point of what to do with the cash but.
We will make good use of it as Tim the Treasurer tells me, we're making tens of dollars a month on interest and that stuff.
We're happy with that.
Okay.
Alright, that's it for me thank you.
Okay.
Again, if you have a question. Please press Star then one.
Our next question will come from Hale Hoak of Hoak and Cao. Please go ahead.
Hey, Randy a tail congrats on the good quarter I know you're reluctant to give any.
Fine point of guidance on margins, but you haven't really been in your seat all that long and <unk> had various distractions along the way can you talk about how many more quarters. It will take until you are at the margins that will make you happy as it were.
One or two more quarters or six more quarters or how do you think about where you are with regard to taking costs out of the system.
Well.
That's an interesting question Hal I think we've begun on the path and as you saw roughly $19 million of costs.
Certain.
Fundamental cost have been taken out of the system. So far this year.
It's a long process.
We use way way too much natural gas and we're making strides.
Every day to get water usage and gas usage down and escanaba.
I think we will you will see cost coming out.
Every quarter.
Hopefully at a faster rate than they have been coming out now.
And Thats one of the reasons I feel strongly about the opportunity to.
Do better than the $19 eight is.
<unk>.
There is a large large amount of cost to be taken out between our two mills.
There is also.
On the supply chain side significant improvement to be made.
Our mills.
Aren't as reliable as they should be.
And as we make them more reliable that will allow us to schedule freight sooner and there is a significant advantage.
On the freight side and actually and warehousing that we can get out of supply chain.
And that by itself is <unk>.
Tens of millions of dollars that we can flow to the bottom line.
So I would hope.
The last thing when you look at.
At the management team we have now.
It's a pretty new management team and people are just starting to get their stride going.
I think the.
I think one of the older people hitting their more senior people in the job and I haven't been on the job permanently for a year yet so.
I think youll see cost improvement every quarter going forward.
We will have to talk about inflation, but we've got a lot of ways to mitigate the inflation and I think we could be in a good spot to show what we're capable of.
Let's say.
About.
18 months from now.
Youll see.
Much more.
Robust.
Company in a much better indication of what our true potential as I.
I hope that answered your question.
Okay. Thank you can.
Can you also talk about I mean, there was commentary about you becoming a.
More predictable and efficient platform and.
Can you kind of expand on that vis vis imports specifically presumably.
You are a better partner for a lot of the printing companies and a lot of bringing takes place in the Chicago area, you're much closer to Chicago Freights becomes such a big issue for everyone. How do you think about <unk>.
Being a good partner to those customers, so if and when imports do come back they still prefer to deal with versa.
Well again, that's an interesting question I think.
One.
As we've talked we have.
We have our backyard, which is the Chicago Minneapolis Milwaukee.
Printing.
Area.
And we tend to.
But we're really focused in that area right now it's freight logical.
It's some place we can deliver to them.
Few hours <unk>.
<unk> somebody in Chicago, having to buy imports in 90 days out at least before they get it.
So we're doing everything we can to fortify in that area and build a moat around it.
I think the other thing as a company that we're trying to understand is ESG.
And if you think about everyone talking about their carbon footprint.
And then you look at companies that want to reduce their carbon footprint.
And the amount of carbon that comes when you're bringing paper from Asia or Europe into the.
The heartland of the United States is pretty amazing and I think that's going to be a.
Our competitive advantage for us and that's one of the reasons I said were more efficient at it.
Serving that market.
We're driving 200 miles versus coming.
Thousands of miles across the ocean.
I think if.
We are truly serious about.
<unk> carbon efficient.
That's a strategic advantage for us.
Lastly, as I said our mills.
Are not as predictable as they could be and as we improve that predictability improve that reliability.
That will allow us to better schedule freight and the service.
Service customers with less lead time.
So it's just it's nothing magic just a bunch of hard work.
It could make us a lot of money and I think it can cause some customers to be very dedicated to us as a trusted supplier.
Okay great.
Per our math youre going to have over $200 million of cash by you.
Year end and I know, Amit asked kind of about your your goals for that.
We're only one voice, but we own almost 10% of your company and.
I think any investments you can make to continuously improve the future.
Future, earning power of the business. We're in favor of anything you can do to lengthen.
The life of the business or slow the secular decline is great, but beyond that I'd, rather have the cash in my pocket, earning zero then on your balance sheet.
I think I've heard that from you before yes, okay, well congrats on a great quarter.
We look forward to seeing your fourth quarter results as well okay. Thank you and thank you for the questions.
This concludes our question and answer session I would like to turn the conference back over to Randy Knievel for any closing remarks.
Well, thanks, everyone for tuning in.
We hope we got your questions and certainly look forward to talking to you next quarter.
Have a good holiday season.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.