Verso Paper's CEO Discusses Q2 2013 Results - Earnings Call Transcript

| About: Verso Corporation (VRS)

Verso Paper Corp. (NYSE:VRS)

Q2 2013 Earnings Conference Call

August 08, 2013 9:00 am ET

Executives

David J. Paterson - President and Chief Executive Officer

Robert P. Mundy - Senior Vice President and Chief Financial Officer

Analysts

Bill Hoffman - RBC Capital Markets

Joe Stivaletti - Goldman Sachs

Kevin Cohen - Imperial Capital

Richard Kus - Jeffries

Tarek Hamid - JPMorgan

Bruce Klein - Credit Suisse

Bill Hoffman - RBC Capital Markets

Phillip Rabara - Royal Bank of Scotland

Operator

Good day and welcome to the Verso Paper Corp. Second Quarter 2013 Earnings Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Senior Vice President and Chief Financial Officer, Mr. Robert Mundy. Please go ahead, sir.

Robert P. Mundy

Thank you. Good morning and thanks for joining Verso Paper’s second quarter 2013 earnings conference call. Representing Verso today on this call is President and Chief Executive Officer, Dave Paterson, and myself, Robert Mundy, Senior Vice President and Chief Financial Officer.

Before turning the call over to Dave, I’d like to remind everyone that in the course of this 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 incorrect, actual results may vary materially from management’s expectations. If you would like further information regarding the various risks and uncertainties associated with our business, please refer to our various SEC filings, which are posted on our web site, versopaper.com, under the Investor Relations tab. Dave?

David J. Paterson

Good morning and thank you for being on today's call. Starting out, let's look at the quarter we just finished. Volumes were down approximately 10% compared to last year's volume, both due to the Sartell mill closure as well as the closure of the No. 2 machine at Bucksport Paper a year ago. Pricing was up slightly versus the first quarter of last year. We have announced price increases effective July 1 of $40 on No. 5 coated groundwood, $30 on No. 4 coated groundwood, and $30 on coated freesheet.

During the quarter, our manufacturing costs were impacted by scheduled maintenance of our Androscoggin mill that cost approximately $5 million. Also during the quarter, we saw energy prices in the form of natural gas come down much below first quarter levels but we continue to see the delivery charges associated with procuring gas in the State of Maine trending well above historical levels and remaining a concern.

Bob, I'll turn it over to you.

Robert P. Mundy

Thanks, Dave. If you turn to Slide 4, as Dave mentioned, our overall volume for the quarter was about 10% below last year's level or around 47,000 tons. That was significantly driven by the capacity with permanent shutdown at our Sartell mill and one of our machines at Bucksport. Sequential volumes were fairly flat. Revenues followed a pattern similar to volumes as prices both year-over-year and on a sequential basis were up just slightly. Adjusted EBITDA of $22 million in the second quarter compares to similar results both last year and in the first quarter of this year.

On Slide 5, you can see that coated volumes were 36,000 tons below last year, which is the same amount of tons from machines that we have since permanently shutdown. Coated volumes were up about 2% from the first quarter. Versus last quarter, coated prices were off just slightly, less than 1%, while pulp prices were about 9% higher. Pulp volumes were below first quarter levels, primarily due to some unscheduled maintenance at Quinnesec.

Turning to Slide 6, you can see the key changes between our second quarter 2013 adjusted EBITDA of $22 million versus $23 million in the second quarter of 2012. As I mentioned earlier, volume was down as a result of the shut capacity. Overall, price mix was favorable by about $4 million with higher prices for all of our products except coated freesheet. Operational costs were $2 million better than last year and input prices were up just a bit. SG&A and distribution costs were fairly flat with LIFO inventories driving the largest part of the $4 million negative that you see there as we went from a slightly favorable adjustment last year to a slightly negative adjustment this year.

Slide 7 gives you a view of the adjusted EBITDA changes between the second quarter of 2013 versus this year's first quarter. Volumes were off about $1 million primarily due to lower pulp volumes I mentioned. As Dave said, overall prices were up slightly, but represented less than $1 million. Operations cost were higher than the first quarter due to the scheduled maintenance outage we had at our Androscoggin mill and input prices were $10 million positive due to the much lower energy prices that we expected coming off of the unprecedented gas price levels in Maine that we spoke of.

There is a bit more information related to input prices on Slide 8, where you're going to see the direction prices are moving versus last year and versus the previous quarter. Overall, things were generally favorable except for the slightly higher wood prices during the quarter which we expected. Going forward, wood prices should be fairly stable as should input prices overall. Dave?

David J. Paterson

Thanks Bob. Looking towards the third quarter, this is our seasonally strong period and we see that reflected in our volumes for the quarter. We expected paper prices to move up but perhaps not at before announced levels and we expect pulp pricing to remain strong. Manufacturing operations cost improvement from cost reduction initiatives and no scheduled maintenance outages should make those costs significantly lower during the third quarter versus the second, and we see input pricing remaining stable.

With that, operator, we'll turn it over to questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) We'll go first to Bill Hoffman at RBC Capital Markets.

Bill Hoffman - RBC Capital Markets

Can you talk a little bit about the expectations for the catalog season at first, and then the second question I wanted to follow that with is thinking about the magazine business, we've already seen some other noise about guys like Time Magazine potentially shifting capacity grades in non-urban areas, I just wondered if you can comment on both those markets?

David J. Paterson

Yes, I will. In general, the category of magazine remains weak and I think that is reflected in a lot of statistics you've seen around freesheet shipments and demand, and yes, there has been some movement by some of the magazines to lower grades, particularly as seen, in an effort to reduce their costs, and that's been ongoing really since the 2013 our volume negotiation started. So I think we saw that start in the fourth quarter of last year and it's pretty much continued into this year.

In terms of catalogs, we're feeling that this will be a strong catalog season just like the past years. Our coated groundwood system I think reflects that. It's very tight, very full, so our seasonal pickup from the cataloguers is occurring and is on our plan. So we feel good about catalog business, we remain concerned on the magazine side, and yes we do see great substitution on magazines but that's been going on really since the 2013 contract negotiations started late last year.

Bill Hoffman - RBC Capital Markets

Thanks. And then just again obviously the question I had was just the catalog structure within the context of where a huge interest is going to be and obviously a little bit of pricing here will help, I just wondered if you can just talk about your thoughts right now about what you're going to do with the capital structure there in the next intermediate term?

David J. Paterson

We don't have any near-term maturities, but I'm going to let Bob talk a little bit about those.

Robert P. Mundy

I mean that's the key point. We've done a lot of work over the last couple of years, and right now Bill, there's really nothing that – nothing from a capital structure standpoint that we're prepared to talk about today. When we think we have do, coming up next year is a smaller bit of the old floating-rate notes, but other than that, there is really not much more we can say today.

Bill Hoffman - RBC Capital Markets

Alright, thank you, I'll get back in the queue.

Operator

We'll move next to Joe Stivaletti of Goldman Sachs.

Joe Stivaletti - Goldman Sachs

I was just following up on your Slide 9 where you're talking about your outlook for the third quarter, and wanted to see if you could talk a little bit about on the cost side of things, you said that costs would be lower versus the second quarter, but was wondering if you'd factor in maybe the R-GAP in those types of things and also input cost shifts, so if you could give us some guidance year-over-year on what you are seeing in the third quarter, what benefits from R-GAP versus last year's third quarter, and then maybe the input cost side of things?

Robert P. Mundy

Joe, from an input cost perspective, things will be unfavorable versus last year, but I think between manufacturing operations and price and so forth, that will more than offset that, and so I would think something very comparable to last year's what we would be expecting for this year's third quarter in total.

David J. Paterson

We don't have a large maintenance outage in the third quarter.

Robert P. Mundy

Right.

Joe Stivaletti - Goldman Sachs

And you didn't have anything like that last year in the third quarter, right?

David J. Paterson

That's correct.

Joe Stivaletti - Goldman Sachs

Okay. And can you just talk at all anymore about how the price initiatives are going or what your expectations are for those?

David J. Paterson

Yes, sure. It's been hard, it's a tough negotiation. We feel that we'll realize about half of those announced increases and we're seeing that in our quarter book, so it has been a difficult negotiation with our customers but we are seeing price improvement.

Joe Stivaletti - Goldman Sachs

Okay. And then just was wondering if you had an updated CapEx guidance for the year?

Robert P. Mundy

No, it will be in the 50s type of fringe, Joe, probably at the lower end of that.

Joe Stivaletti - Goldman Sachs

Okay, alright, that was it for me. Thank you.

Operator

We'll go next to Kevin Cohen of Imperial Capital.

Kevin Cohen - Imperial Capital

I guess when you think about liquidity at the end of the year, do you still have the prior view of around $200 million plus or minus just given what you're seeing?

Robert P. Mundy

That was certainly predicated on us getting the price increases that we had planned for, and as Dave mentioned, it looks like, it feels like right now we'll sort of get around half of that. Obviously we are not done yet but that was a key assumption in getting to that number.

Kevin Cohen - Imperial Capital

And then in terms of the traction on coated prices, are you expecting to get half on both of the price hikes for the two different grades or was that for just one grade or just to clarify on that?

David J. Paterson

I would say it is on average across our system. I would say the negotiations again have been very difficult I think, our customers are under a lot of pressure, but we have been able to push through or negotiate through about half on average across our coated paper grades.

Kevin Cohen - Imperial Capital

Great, and then lastly, in terms of the natural gas cost issue in the state of Maine, is there any chance that the state might have given you any financial aid or any sort of temporary help or release to the Company just given its manufacturing presence there, et cetera?

David J. Paterson

I don't think that we would see the state of Maine participate in that, Kevin. There is an active dialog both at the state as well as a regional level with elected officials about finding a longer-term solution, but in terms of some sort of aid, monetary aid in the near-term, I don't think that's going to happen.

Kevin Cohen - Imperial Capital

Great, thanks a lot guys and good luck with everything.

Operator

Our next question comes from Richard Kus of Jeffries.

Richard Kus - Jeffries

Quickly on the Bucksport project, are you guys seeing the full benefits that you intended to get there or is there still some benefit to come through?

David J. Paterson

There are still some benefits to come through. I think the Bucksport project, that is the biomass boiler there, it has taken us longer than we had hoped to get up to our operating targets and we continue to make improvements. You've seen, I think there's been public comment about us working with the state of Maine on permitting issues, and that's really related to the time it has taken us to get this boiler up to where we want, but recent performance has been good and we think we are fine.

Richard Kus - Jeffries

Okay, and that said, majority of the benefits are coming through from the project, correct?

David J. Paterson

Yes, you'll start seeing in the second half of this year, you'll start seeing that flow through more obviously in the Bucksport number, so we have seen that already in the third quarter.

Richard Kus - Jeffries

Okay, very nice. And then my last question here regards the import situation. Have you guys seen any real changes to that given what's going on over in Europe?

David J. Paterson

I would say it is not significant but we have seen certain European mills be more active and they are sort of targeted on certain grades and certain volumes. So, yes, it's a little more active but I don't think it's meaningful at this point.

Operator

We'll go next to Tarek Hamid of JPMorgan.

Tarek Hamid - JPMorgan

On the other segments, with volumes down sort of 20%, I know it's a small number, so it's a little bit of small numbers in there but maybe just talk a little bit about that segment and sort of what looks like a mix shift there?

Robert P. Mundy

That segment sort of catches various grades and products and quarter to quarter there is always a mix factor going on, and I think that's what you're seeing in it in this quarter, there is nothing really nothing outstanding as far as we are concerned, as far as what our expectations were.

David J. Paterson

And we are still seeing growth there but we're coming off, as you pointed out on a relatively small base, but we are still encouraged by the opportunities we see in the specialty grades.

Tarek Hamid - JPMorgan

And then you have talked in the past about consolidation and just looking at pursuing acquisitions as the year progressed, so is there any update on that statement and sort of what are you seeing and what are your general thoughts on M&A at this time?

David J. Paterson

I think Verso as a company has been pretty consistent in that we believe consolidation is a path forward for us and for our sector. We remain active looking for opportunities, but as of today there is nothing occurring.

Operator

We'll go next to Bruce Klein of Credit Suisse.

Bruce Klein - Credit Suisse

The gas supply situation at Maine, I guess is there any – I know you mentioned active dialogs, but it sounds like there is nothing specific to this, there are no initiatives whether private or public that are occurring or you can see in the short-term, is that fair, so is that what you are trying to achieve in these dialogs or is there anything else I'm missing?

David J. Paterson

I think there are two sort of mega-issues in terms of gas supplies to the state of Maine and it's not just affecting Verso but it is affecting all consumers, both residential and commercial. There is plenty of gas to be had, and the price of gas, you can buy gas on the exchanges competitively, but there is a pipeline restriction so that gas you have to pay a premium just to actually get the gas delivered that you bought. So the intermediate effect is we need more pipeline capacity in the state of Maine to deliver gas and that is not going to be a short-term fix, it is going to require permitting and construction and investment, and that's the part where we're trying to be a part of a positive facilitation and discussion about the New England gas market and the New England gas supplier.

The other, the more near-term is, we're finally seeing some incremental offshore gas coming on in Canada and there is pipeline availability from Canada into Maine, and we hope that this new gas that's come online offshore in Canada will help in the near-term and we think it should, because gas out of Canada we can get to Maine at a more competitive delivery charges than gas out of U.S. side because of the restrictions coming on the U.S. side of the pipeline. So, those are the two issues, get more gas out of Canada and get more pipeline coming up from the U.S. side.

Operator

(Operator Instructions) We'll go next to Bill Hoffman of RBC Capital Markets.

Bill Hoffman - RBC Capital Markets

Bob, just one other question about your inventory level stand in the second quarter, they are obviously lower year on year just given the scale of the business I believe that makes sense, but can you just talk about where you are positioned inventory-wise for the rest of the year and expectation of release of cash from working capital?

Robert P. Mundy

Probably end of this second quarter, maybe a little bit higher, at least than we expected I think, but that was more due to just timing of shipments more than anything, and so I expect that in the third quarter that will probably be at a lower level than we had in our plan. So I think that we'll be fine in that inventories for the balance of the year, I think we'll just continue to move down and be where we expect them to be. We now expect good volumes, as Dave said, we expect a good catalog season, and then the fourth quarter should be okay as well.

Operator

We'll go next to Phillip Rabara of Royal Bank of Scotland.

Phillip Rabara - Royal Bank of Scotland

You had received $13.7 million in the first quarter related to a government grant for the Bucksport project, and it looks like you might have given the money back in the second quarter. Am I reading that correctly or am I wrong on that?

Robert P. Mundy

No, we certainly did not give any money back.

David J. Paterson

The CapEx line was net of that in the first quarter and then we had cash [coming to us] (ph).

Robert P. Mundy

The answer is, no.

David J. Paterson

The answer is, no.

Phillip Rabara - Royal Bank of Scotland

Okay, because I was just looking at the cash flow statement and you had that in other investing activities in the first quarter of $13.7 million, it looks like it just disappeared in the second quarter, but all you did was you netted it against the CapEx line, is that what you are saying you did?

Robert P. Mundy

Yes.

David J. Paterson

Right.

Phillip Rabara - Royal Bank of Scotland

Okay, I got you. Okay, understood. Thank you.

Operator

At this time we have no further questions in the queue. I'd like to turn the conference back over to management for any closing remarks.

David J. Paterson

Thank you all for participating in today's call. Again, as Bob said, you can go to our website to get additional information or Bob or I are making ourselves available if you have follow-up questions. So thank you all again for your interest in Verso Paper. Thank you.

Operator

And that does conclude today's conference. Again thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!