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Verso Paper Corp. (NYSE:VRS)

Q3 2009 Earnings Call Transcript

November 5, 2009 9:00 am ET

Executives

Bob Mundy – SVP and CFO

Mike Jackson – President and CEO

Analysts

Bill Hoffmann – RBC Capital Markets

Bruce Klein – Credit Suisse

Claudia Hueston – JPMorgan

Joe Stivaletti – Goldman Sachs

Tariq Hamid – JPMorgan

Chip Dillon – Credit Suisse

Sandy Burns – Sterne Agee

Jeff Harlib – Barclays Capital

Richard Close [ph] – Jefferies

Richard Deutsch – Ladenburg Thalmann

Eric Anderson – Hartford Financial

Operator

Good day, and welcome to the Verso Paper Corporation third quarter earnings call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Bob Mundy, Chief Financial Officer. Please go ahead, sir.

Bob Mundy

Good morning and thank you for joining Verso Paper’s third quarter 2009 earnings conference call. Representing Verso today on this call is President and Chief Executive Officer Mike Jackson; and myself Bob Mundy, Senior Vice President and Chief Financial Officer.

Before turning the call over to Mike, I would 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 risk 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 website, versopaper.com, under the Investor Relations tab.

With that, I will turn it over to Mike Jackson.

Mike Jackson

Okay. Thanks Bob, and good morning, everyone. If you could go to slide 3, Verso reported third quarter results of $111 million EBITDA as compared to $80 million in the third quarter of last year and $51 million during the second quarter of ’09.

On an adjusted basis, which primarily excluded $46 million of alternative fuel credits and a $24 million gain on early debt retirement, our results for the quarter were $50 million versus $81 million last year and the second quarter ’09 result of negative $9 million certainly a significant improvement over the second quarter.

If you move to the right side of this slide, net earnings were $44 million for the quarter compared to $19 million last year and the net loss of $10 million for the second quarter. On an adjusted basis, the net loss was $18 million versus a $20 million positive for the Q3 ’08 and a loss of $71 million for the second quarter of ’09.

On slide 4, I would like to give you a little flavor what drove the results and mention of the some other improvements that we made during the quarter. Our third quarter guidance for volume during our second quarter call was for increased demand due to seasonal pickup and low inventory levels.

As you will see, volume was very close to third quarter ’08 levels and we will show you that on a later slide. Although volume was up 46% from the second quarter, we still took downtime as necessary and we will continue to do so based on business conditions. Although we took significantly less downtimes in the third quarter than in the first two quarters, the downtime came in a cost of over $5 million to our EBITDA results.

Total sales price was up 1% versus Q2 ’09, but the details of this average price are important, pulp pricing was up 10% while coated prices were down 6%. Revenues have reflected an increase of above 32% from the second quarter.

On the import price side of the business, which we will get more specific on a later slide, but as we mentioned in our second quarter, we did expect the import prices to be down sequentially and year-over-year and they were. We say that certainly energy particularly was a bright spot for us.

We have been very pleased with our people’s efforts to reduce cost. You may remember that during the first quarter, we made a $65 million commitment that was going to cover various areas. We did add another $7 million to that number during our second quarter call. We are on track to meet or exceed that number and through the third quarter we have generated $43 million against that goal.

Our efforts to focus on working capital continued to pay off as inventory were $22 million lower than the second quarter. Liquidity improved $17 million versus the second quarter. And since the end of March, our liquidity has been improved by $122 million. During the third quarter, we also repurchased $54 million of debt and we repaid $66 million on our revolver.

With that, I will turn it over to Bob for further details and then I will be back to talk about the marketplace and our fourth quarter outlook.

Bob Mundy

Okay. If you turn to slide 5, you can see the key changes in adjusted EBITDA between the second quarter and third quarter of 2009.

Total volume was over 122,000 tons higher in the third quarter at just over 509,000 tons. We said during our last call that coated prices would continue to be under pressure during the quarter. And the $12 million negative variance primarily represents coated prices being down about $55 per ton. All other key areas were positive on a sequential basis with the largest being significantly lower market downtime as a result of the much improved volume during the quarter.

Slide 6, this will give you a view of the year-over-year changes for the third quarter. The volume was only slightly lower than last year. However, price was down $79 million, which represents about $156 per ton or 16% of the most recent peak in the third quarter of 2008. Operations, input prices and SG&A are all favorable year-over-year. And we took about 13,000 tons additional downtime this quarter versus last year which represents about $3 million of additional unabsorbed costs.

Turning to slide 7, we touched on some of these revenue metrics earlier. You can see a significant coated volume improvement over the second quarter of 135,000 tons which was within 13,000 tons with 2008 shipments. This resulted in the lower market downtime during the quarter. Although coated prices were lower as I mentioned, the higher pulp prices together with the improved volumes during the quarter resulted in revenues being over $97 million higher on a sequential basis.

Moving to slide 8, we saw a continued improvement year-over-year and on a sequential basis in overall input prices. Chemical prices were slightly lower to flat on a sequential basis. Some of the larger items like starch and latex as an example were going in opposite directions while clay was flat versus last quarter. Wood has continued its downward trend from both the year-over-year basis as well as sequentially.

Energy prices as you can imagine fall on the larger amount since last year, close to 30% year-over-year and 23% from the second quarter to the third quarter. As we said before, we had some unfavorable gas hedges throughout the year, but those will be expiring very soon. Distribution costs which represent a little over 7% of our cost of sales are down year-over-year by about $10 per ton and are about flat versus the second quarter of 2009.

Moving to slide 9, this shows our continued efforts to improve liquidity and pay down debt. During the third quarter, we paid down $66 million on our revolver. Since the beginning of the year, during the most challenging economic times we’ve ever faced, we’ve been able to improve our liquidity by $20 million and reduce our outstanding debt by $85 million.

On slide 10, you can see that we have no near-term maturities on our debt. As I am sure you are aware, back in the second quarter, we refinanced our debt to eliminate our key maintenance covenant and extended the first significant payment by about a year to 2014.

I will now turn it back over to Mike, who will talk a bit more about the market and the fourth quarter outlook.

Mike Jackson

Okay, thanks, Bob. If you would move to slide 11, our priorities are clear. And as we’ve demonstrated in the last quarter, we will continue to focus on increasing free cash flow, certainly reducing debt and improving liquidity. We will do that through really capitalizing on the way that we position the company for the upturn and the continued market dynamics which we will talk about in a moment.

So what really what are the elements of positioning in our company? We would say that we view the alternative fuel credit in a proved manner that our cost structure continues to improve, that our balance sheet significantly improved since January, and we are very encouraged about the financial benefits that are focused on new products in our energy platform will drive in the coming quarters.

Just one example of this energy opportunity which we’ve spoken about in the past was evidenced about two days ago. When Verso was one of only nine companies in the United States that were awarded a matching energy grant which will save us about 1.27 trillion Btus a year. Some of these projects will provide certainly local jobs and we will be able to keep jobs, and as importantly reduce our cost of goods sold. This is honestly just a sample of some of the work that we are doing down the energy side and we are very, very optimistic about future projects that we have on the board.

Before we give the outlook for the fourth quarter, I would like to address on slide 12, the market dynamics that are taking place in both coated freesheet and coated groundwood in North America. It’s simply stated that supply gap is closing, driven by a partial demand recovery combined with capacity shuts and the shifts to other grades.

September North American operating rates were at 99% for coated freesheet and 95% for coated groundwood. Demand has come back as you can see by these two charts. We recognize however that some volume is lost forever and we are not suggesting 99% operating rates going forward. But what we do know is oversupply is now gone. That coated groundwood capacity as depicted on the right hand side of the chart only needs another 150,000 tons or so capacity to shut that will drive operating rates of 95% of grades.

We also would not be surprised to see European manufacturers continue to further aggressively shutdown high cost capacity at an accelerated rate. If I believe the European supply demand balance is certainly even not as good as this here in North America.

With that as a background, turning to slide 13, certainly the economic is still in our view in a state of flux. Our volumes for the fourth quarter will be seasonably lower on a sequentially basis but higher year-over-year. The fourth quarter is heading as I think most of you know into the slower parts of the year. However, our downtime will be similar to that that we just took in the third quarter. Last year, just as a benchmark during the fourth quarter, we took about 74,000 tons of downtime.

We have been encouraged by our last few months’ bookings that have been 30% plus better than last year’s same period of time and our new products are continuing to gain momentum as we enter into the fourth quarter and move towards 2010.

Coated paper as we said in the past has a much greater upside versus other grades when coming off of a recession. You saw the impact of the downside as well. Pulp prices are continuing to climb and coated prices at the end of October seemed to be stabilizing. Although, we still expect some sequential benefit.

Import prices will begin to flat to somewhat on a sequential basis, however our year-over-year savings will continue. And upside for Verso is that our unfavorable gas hedge begins to roll off after the fourth quarter and that will have a favorable impact on our energy cost.

Our gap continues to deliver impressive results and our $70 million plus remediation effort will continue to attain that committed level. As we have done in the past, we will continue to evaluate paying down debt. I would say overall, we certainly expect the fourth quarter to be better than the fourth quarter of 2008.

Before I had it back to Ben, on slide 14, I would like to mention a few regulatory items that have gotten some recent press. First, the biomass proper systems program or what you recognize perhaps BCAP. This has not been implemented. However as it stands this morning, producers of eligible biomass can be converted into energy will be able to receive payments as the purchaser meaning Verso of biomass we are simply advocating a leveled playing field for cost of that material in relationships to other buyers of the product.

The second item which has done a tremendous amount of press in a multiple set of views is around the biofuels tax credit. Our view is fairly simple that there is no significant direct benefit to our operations. And lastly relative to Section 45 of the tax code, again we are advocating extending the tax credit which is non-refundable for electricity onsite or some times referred to as “Behind the Meter”, which is driven by renewable resources. Now currently that does not take place.

So Ben, with that, Bob and I are now ready to go the Q&A.

Question-and-Answer Session

Operator

Thank you, Mr. Mundy. (Operator instructions). And our first question comes from the line of Bill Hoffmann with RBC Capital Markets. Please go ahead.

Bill Hoffmann – RBC Capital Markets

Good morning guys.

Mike Jackson

Hi Bill.

Bill Hoffmann – RBC Capital Markets

Mike I want to ask you to talk a little bit about this some of your fourth quarter guidance, kind of interested when you talked about the downtime being similar to the downtime you had last year. And trying to get a sense on what kind of real visibility you have especially when you get into towards December, when most orders kind of stop?

Mike Jackson

Yes. Bill just to be clear, my comment was, similar to the third quarter that we just took. So we are going to be close to that number that we took this year not last year. And last year, I was just giving you a base saying that we took 74,000 tons of downtime last year, it will be much less this year.

Bill Hoffmann – RBC Capital Markets

Okay. And just from a sort of an outlook standpoint, because you have got order backlogs at this point in time or like is it – why do you feel more confidence now than you did maybe two or three months ago?

Mike Jackson

Yes. I think honestly it’s a simple matter of our bookings. I mean our bookings are were up 30%. Now remember, these are coming off of pretty anemic booking levels last year. But they are clearly up in that 30%, 35% range and that’s been steady for the last couple of months. And the other thing is, which we talked about is, we continue to build momentum with these new products.

Bill Hoffmann – RBC Capital Markets

Right. And can you just talk a little bit about the new products and sort of how much – you talked a little bit about the volume improvement quarter-over-quarter, maybe give us some further detail on whether those were sustaining volumes and whether they will get some seasonality to them as well?

Mike Jackson

Well, certainly there is a little bit of seasonality that relates to the Clarity Plus, which is our new FCA Plus grade, which has really been a significant grade for us, of new business. By the way, this isn’t taking our coated groundwood business and substituting it for Clarity Plus, this is – these are new customers, a whole new marketplace that we had not really been significantly involved in the past. But there are other grades as well that are candidly non-seasonal and that’s what we are trying to Bill, we are trying to take our core competencies of rolling lightweight product because of that access to north and south wood fiber and our coating capability.

And so when you think about food packaging, sugar package as an example, there is no – there is not a lot of seasonality to that or certainly not compared to the catalog and market business. If you look at our coated one side business, potential of label stock, if you look at some of the very, very lightweight financial papers that we are now involved in that we didn’t just couldn’t involved before.

Clearly for us as the financial markets begin to improve, we believe that we have a tremendous opportunity to grow that grade as well. And so those would be some examples of grades that we have that we are very excited about. And some of these grades can evenly made at our Quinnesec Mill, which is as you are probably aware an extraordinarily low-cost in facility.

Bill Hoffmann – RBC Capital Markets

Thanks. And then just quick question for Bob, can you explain a little bit on the energy hedges and do you help us quantify the difference in where your energy cost will be once those roll off?

Bob Mundy

Yes, the $6 million or $7 million is just unfavorable almost every quarter is what we have experienced this year, Bill. And that will – once we get through this fourth quarter that will go away. And we do have some volume hedged in the 2010, but it’s at a much better level.

Bill Hoffmann – RBC Capital Markets

Can you tell me what percentages you have got hedged for into 2010?

Bob Mundy

It’s 40% or so of our volume.

Bill Hoffmann – RBC Capital Markets

Okay. Thank you.

Bob Mundy

Yes.

Operator

And our next question comes from the line of Bruce Klein with Credit Suisse. Please go ahead.

Bruce Klein – Credit Suisse

Hi, good morning, guys.

Mike Jackson

Good morning, Bruce.

Bruce Klein – Credit Suisse

Just wondering, can you just touch more on demand sort of what are your catalog magazine and printers are telling you? I know you gave a little bit of update on obviously shipments and orders, but sort of what they’re challenging? And secondly just anything new on sort of asset sales in the status and maybe how high a priority that might be for you guys?

Mike Jackson

Okay. Bruce, I will take the demand piece. What our customers are telling us and again our customer base is obviously the main focus as catalog and magazines, but now we have got a broader base of customer which includes retail, commercial print, and some of the food businesses that we talked about. So our view is maybe a bit broader than it’s been in the past. But staying on line with the catalogs and the magazines, we have seen as we describe in terms of our bookings an increase in our catalog orders clearly.

I do believe, I mean this has been fairly steady across our customer base that the catalog are just saying, we believe for a whole bunch of good reasons that we cutback too much in our catalogs for 2009, and particularly with new business, in other words sending catalogs to new potential customers, they cutback on that significantly, and I think it showed up on their revenue stream. So I am fairly optimistic about where the catalog market is and that it will bounce back from what it was in 2009.

The magazine side is a little bit different story. I think they are continuing to wrestle with their model. Readership is still significantly – is still a significant number. But I mean obviously with ad pages being down I believe 29% year-to-date that’s had a huge impact on the number of pages in the magazine.

But I think the magazine guys have taken a good look at their business and I think they are restructuring relative to cost, but there print on paper is still the majority of where they get their revenue. So I think that will still continue to be perhaps under stress. But I think the catalog business will kind of offset that for us as we think about 2010.

Bob Mundy

Yes. And your question on asset sales, Bruce that’s something we have always said we would always evaluate any non-strategic type of interest in our assets, and we continue evaluate that. There has been some interest in hydrous and other things, there is people who are always questions about those. So we continue to evaluate whether that will make good sense for us to entertain that.

Bruce Klein – Credit Suisse

Okay. I will pass it on. Thanks guys.

Mike Jackson

Okay Bruce.

Operator

And our next question comes from the line of Claudia Hueston with JPMorgan. Please go ahead.

Claudia Hueston – JPMorgan

Hi, thanks very much, good morning.

Mike Jackson

Good morning.

Claudia Hueston – JPMorgan

Just going back to issue of volumes, your volumes in coated paper are a little bit stronger that I had expected a little bit more than what the market had done. Can you just talk a little bit about maybe what you were seeing that was different than the broader market trends?

Mike Jackson

Claudia, I think a lot of that was new business for us. I mentioned the Clarity Plus and that is basically a new retail market that we hadn’t been strong in before, because we didn’t have the product to supply it to the customer. And most of that product is made out of the United States, and I think that it’s just – that product has come at a good time for us. So that was part of it.

We mentioned the other grades, they weren’t significant, but they added to that improvement. And remember, because we are so strong in catalogs and magazines, particularly catalogs that this third quarter is the catalog season. And so we tend to get a little bit of a maybe higher wave than others do simply because of our product mix.

Claudia Hueston – JPMorgan

Okay. And how would you characterize the pickup you saw in the third quarter in some of the catalogs and magazines there versus what a normal sort of seasonal pattern would be?

Mike Jackson

Still behind, clearly. So when we talk about our bookings being up 30% plus the last couple of months, I mean that’s coming off of a pretty low base last year. So sequentially, yes it’s certainly an improvement. But I would say it’s still about 20% what you would normally expect.

Claudia Hueston – JPMorgan

Thanks. That’s very helpful.

Mike Jackson

And one other thing I should mention is that I think the other reason for that volume piece is imports continue to go down and that’s obviously been helpful to us as well.

Claudia Hueston – JPMorgan

Okay. Great, thank you very much.

Mike Jackson

You bet.

Operator

And our next question comes from the line of Joe Stivaletti with Goldman Sachs. Please go ahead.

Joe Stivaletti – Goldman Sachs

Hi, I wondered if you might talk about what you think it needs to happen for some of this improvement to translate into selling price increases on the coated side. I mean what do you think needs to happen before those can be successfully, and do you have any kind of view on the timing of that?

Mike Jackson

Yes. Joe it’s all speculative obviously. But that slide that I showed you as it related to the capacity and the demand and that tells a lot. I mean when you look at that gap, there is not a significant gap. And that gap can close very, very quickly with an impact or with an improvement in demand in any time of facility shutdown. I mean the balance is very, very close. I mean you can go from 80% operating rates to 95%, very, very quickly. I do believe that we are going to see – I mean we have bottomed out.

Let’s – I think we have talked about the last time that we were on the call. We’ve clearly bottomed out and we do believe – this is our view of things and perhaps others have a different view. But I believe we are going to see sequential improvement certainly throughout all of 2010. It’s not going to be dramatic but I think it will be certainly an improvement.

And at some point in time, that supply demand ratio will be good enough to move prices, because they can’t stay – certainly can’t stay where they are. And so, we are optimistic. As it relates to the timing of that, I would say, that’s going to be driven by demand and I don’t even though we expect demand to improve, I would certainly say sometime in 2010, we are going to be moving numbers upward.

Joe Stivaletti – Goldman Sachs

Okay. And just to clarify, when you said that you thought the fourth quarter would be better year-over-year, you are referring to your adjusted EBITDA?

Mike Jackson

No, I was talking – volume will be much better on a volume basis for the fourth quarter. The guidance is for the fourth quarter from a volume perspective to be better than it was in the fourth quarter of ’08.

Joe Stivaletti – Goldman Sachs

Okay. And just one other question, the – what ability do you have at this point to move money to upward, to continue the repurchase some of the full coat term loan. Are you – can you just give us a feel for what your flexibility there is?

Bob Mundy

Yes. Joe, I think we have said in the past, we – there is a little bit availability there, but nothing significant as far as that remaining basket that was available to do that, so not a whole lot of maneuverability there.

Joe Stivaletti – Goldman Sachs

All right, thank you.

Mike Jackson

Okay.

Operator

And our next question comes from the line of Tariq Hamid with JPMorgan. Please go ahead.

Tariq Hamid - JPMorgan

Good morning.

Mike Jackson

Good morning.

Bob Mundy

Good morning.

Tariq Hamid – JPMorgan

You noticed in the 10-Q this morning there was a mention of a lawsuit with Thilmany LLC, can you talk a little bit about how much that paper machine represent to your capacity, and I guess how much of your black liquor generative capacity, just help us frame in a little bit?

Bob Mundy

Well that machine is about – is probably just shy of 50,000 tons a year on our base, so that sort of gives you an idea. And so you can sort of use that if you sort of want to ballpark, it’s representation of the energy consumption of a facility that’s very, very large facility.

Tariq Hamid - JPMorgan

Understood. Helpful. And then secondly, I noticed that CapEx is a little bit low this quarter, any changes to your expectations on CapEx for the year or how should we be thinking about that?

Bob Mundy

No. I think we have been fairly consistent after we made some remediate – have been part of our remediation efforts for the year as we were getting through the very tough first and second quarters. One of the things we did was relook our capital spending program and we targeted to be in the low 30s and that thing – that’s where we will end up the year.

Tariq Hamid - JPMorgan

Great. And just one last one, with sort of volumes up sequentially a lot here, should we be expecting working capital to build a little bit from where it is, I guess what are your just expectations on working cap?

Bob Mundy

I am hoping it will be a little favorable. I think inventories will be fairly close, but I think receivables will probably be down a bit just from the lower revenues and payables maybe a little bit up a bit. So I think flat to maybe slightly positive.

Tariq Hamid - JPMorgan

Great. Thank you very much.

Mike Jackson

Okay.

Operator

And our next question comes from the line of Chip Dillon with Credit Suisse. Please go ahead.

Chip Dillon – Credit Suisse

Good morning, Bob and Mike. I wanted to ask you I guess first about a little bit more dig into working capital just a little bit. I noticed the receivables, we didn’t ask you about those as they seem pretty flat year-to-year, and from the third quarter of ’08. And I would guess you still have some black liquor payments that you earned as of September 30th that you might not have actually received from the government yet. Could you share what those might have been how much?

Bob Mundy

Yes. That’s – it’s little less than 50 – probably about 11 or 12 Chip. If you look at last year’s receivables versus this year and you make an adjustment for that receivables are down, they are down about $28 million – I mean, I am sorry – yes, receivables are down this year versus the same period last year by about $27 million.

Chip Dillon – Credit Suisse

So the way to think about it is at least in terms of the black liquor, is that you will – since you are taking about the same amount of downtime in the fourth quarter that you should get the same amount of cash as you – I mean the same amount as you gave – as you showed in profit for the third quarter plus this $11 million to $12 million receivable.

Bob Mundy

That’s probably fair.

Chip Dillon – Credit Suisse

Okay. And then I am looking also the inventories and maybe you can just help me understand these, again if you look at it just from not on what you have on your release, but if you look at last year’s third quarter, it looks like the overall inventories were basically pretty flat except for this work-in-process category that was up, but your finished goods were in the same number. And I am just curious because we have seen the industry inventory data looked like it’s come down from where it was at September of 2008. So are you – is there something to explain why you might have the same level of finished goods inventories you did in September ’08?

Bob Mundy

Well I mean you are right. I think the inventories are comparable to where they were in September of ’08. Actually I think groundwood is lower than it was at this point last year and freesheet is elevated a bit from where it was this time last year. But overall, yes, I think they are flat, but different dynamics working in those two key products.

Chip Dillon – Credit Suisse

Okay. And one thing we read in the paper this morning about the NOL carry back, maybe been experienced for five years, will that have any impact on you or not?

Bob Mundy

No.

Chip Dillon – Credit Suisse

Okay. And then I guess when you look at the 2010 and since you are seeing how you are talking about a lot more confident in the order book, how much visibility or how much confidence do you have in your customers? I mean you might with prices sort of down where they are, if I were to be devil’s advocate, I would try to talk up my game if I were a customer to make sure you guys ran full. And then when will it be actually got to next year, if the orders weren’t quite – I am sorry, my demand wasn’t so good, then you have all this inventory and you will have a harder time raising prices. Do you feel you are pretty confident that you have good visibility into those demand levels?

Mike Jackson

Well, when you ask the question Chip, confident, I think that we do have a good view or certainly a better view on in terms of the dynamics of the marketplace. But what you just said is, from my perspective, where I know I mean clearly negotiating prices which you have to do at this time of the year for 2010 is difficult, because we are coming off of such weak, weak demand scenario and good companies try to leverage that. So that’s why I think I was fairly – I talked about prices and what might happen and I was conservative relative to 2010 saying, maybe mid-2010 or certainly somewhere in that timeframe.

So yes, I mean that – but that game is played all the time with customers and that’s their business, that’s their job. But when I go back to say that since we leveled out here that once we get that momentum going in the right direction which we have seen and that’s why I related to 30% increase in both things [ph], we are going to continue to see that grow. I mean I really believe that. I think that – I mean you think about advertising, the automobile industry is off 49% in advertising, finance is off 47%, those numbers are not going to stay, so I am usually conservative. But I think I am a bit optimistic as it relates to where we have come from and where I think we are going to go to.

Chip Dillon – Credit Suisse

Got you. And when you look at capital spending next year, can you give us an early read into what you see there?

Bob Mundy

Right now Chip, it will be back towards something that we would call a little more normal in that – sort of in that 60 plus range.

Chip Dillon – Credit Suisse

Okay. And then lastly, I know that there is a proceeding – I believe there is a proceeding dealing with I guess dumping of rolls I think from Asia. I know a few years ago, there was a similar proceeding that defined the dumping – the dumped product is coated freesheet and then the dumpers decided to change their recipe slightly and here we are I guess back to another challenge where I guess you are defining what’s been dumped more by the way it’s used now, what the recipe is. Where does that process stand and how do you think that’s going to play out?

Mike Jackson

Well, there should be a first round decision here I think sometime next week. I think it’s on 9th or something, 9th or 10th or 11th of November, so yet to be decided. And I don’t know, you never know how those cases are going to come out. And Chip I think we talked about this the last time, even though you didn’t ask the question, I think I kind of filled this in.

Verso did not signup for that simply because the products that were under the gun are the products that we don’t run. We don’t make sheeted products nor do we make rolls that are sheeted. So maybe it looked funny that we weren’t at the table, but that’s the reason why. We couldn’t really show damages in the sense.

Chip Dillon – Credit Suisse

Got you. Thank you.

Mike Jackson

You bet.

Operator

And our next question comes from the line of Sandy Burns with Sterne Agee. Please go ahead.

Sandy Burns – Sterne Agee

Hi good morning.

Mike Jackson

Good morning.

Sandy Burns – Sterne Agee

Just talking a little bit further about your downtime plans for 4Q, could you share with us built into those expectations? Are you looking to possibly build your inventories a little bit because you feel like they have gotten unusually low or is the plan to still further reduce your finished goods inventory?

Bob Mundy

Inventories may build a little bit. But as I was saying earlier Sandy, I don’t think it will be anything significant. I think overall working capital I would – hope to be little close slightly positive.

Sandy Burns – Sterne Agee

Okay, great. And then also just in terms of your attention to the balance sheet and the debt you have been borrowing back, could you share with us your thoughts on possibly why you haven’t been buying back any of the subs at all, just given the even more depressed prices they (inaudible) been trading at relative to the second liens?

Bob Mundy

Well we certainly evaluate all of the opportunities that are available to us and that’s just not one that for various reasons that we chose to pursue.

Sandy Burns – Sterne Agee

Okay. Do you think that may change in the future or is the focus really on the whole coats and the second liens at this point?

Bob Mundy

Well that’s I guess anything could change in the future. But I would suspect that we will continue to – our focus will continue to be where it has been in the past.

Sandy Burns – Sterne Agee

Great, okay. And just last question – just coming back to business conditions, I mean obviously it was a seasonally strong period for the company and so it makes sense that the demand had picked up quite nicely. But just given how we have heard a lot about how customer inventories had been in very low levels. Any sense on if maybe customers would start to rebuild their inventories a little bit especially with prices and I would probably, it’s hopefully kind of like a bottomed for pricing as well?

Mike Jackson

Yes I think we are going to see that. I think we are seeing a little bit of that and – so that’s certainly part of the demand scenario. But again I go back to the underlying piece that things got so bad that they hit the bottom.

And so we are going to see that actual demand to continue to improve, but certainly we are seeing a little bit of inventory build based off of exactly what you just said. With these low prices, people have probably taken a few extra tugs, so I think that’s a fair comment.

Sandy Burns – Sterne Agee

Great, okay. Great, thanks. And good luck.

Mike Jackson

Thank you.

Operator

And your next question comes from the line of Jeff Harlib with Barclays Capital. Please go ahead.

Jeff Harlib – Barclays Capital

Hi, good morning. Can you just remind us what typical seasonal demand decline is in Q1, if you look over historically?

Mike Jackson

The percent is a really hard to call. But I would say that it usually goes like this. The first quarter and second quarter fight for the worst quarter if you will. And normally the second quarter is the worst of the two, but sometimes they fight for that. Third quarter is always our strongest quarter. And then obviously, the fourth quarter is just behind the third quarter in terms of volume. So if you split the year, I would say it’s a 60-40, 60% in the back side of the year and 40% in the front side.

Jeff Harlib – Barclays Capital

Okay. And then just if the beginning of the calendar year do have an unusual number of customer pricing contracts being renewed some three, six months, et cetera and what can you say about that?

Mike Jackson

Well, again it’s an interesting time of year, because we are negotiating contracts for 2010. And obviously I think Chip had mentioned it, we are at the low level relative to pricing. So it’s – we are trying to minimizing the amount of contracts that we guarantee. I think we’ve spent the last couple of years really trying to get away from that. I think it served us well. And we are going to continue to do that. We – is the volatility of this market. I think to get yourself hooked into six months deals that some of these prices is not a good business decision.

You may run full but I think you really pay at the end of the day for that. So we are going to be very careful continue to do the best we can. Obviously if we get that business, good to be very, very careful in terms of how long we guarantee things, because as you know, these prices can change pretty significantly when they start to go up.

Jeff Harlib – Barclays Capital

Okay. And with your SC-A Plus, is that – do you have a visibility on continued significant ramp there at your Sartell Mill?

Mike Jackson

Can you say that again, Jeff?

Jeff Harlib – Barclays Capital

Just one thing, with the SC-A Plus that’s been ramping, do you have customer commitments for 2010 to see an appreciable ramp in volumes there of that site?

Mike Jackson

Yes we do. Yes, yes we do. We have seen some – again I think I have mentioned that these – this is new business for us. It’s not taking away from our coated groundwood business. But we do see a very good ramp up. I believe in our last call, one of the comments that I made was we felt that maybe half of their production out of that facility by the end of 2010 would be SC-A Plus.

And if I would say, they were on that track to do that. Plus we have, I would say probably 35 (inaudible) going on right now as we speak. So I am very optimistic about that grade and it’s really filled a gap that was missing for us.

The other thing that I would say is that we brought this to market very, very quickly and which I think speaks to the speed and the adaptability of our organization. It didn’t take us long to do what we needed to do.

Jeff Harlib – Barclays Capital

Okay. And just with your liquidity – $200 million of liquidity and just with your debt repurchases, what is sort of your minimum comfort level on overall liquidity for the company?

Mike Jackson

Well I think where we are at right now Jeff is not too bad when all things considered. And it’s sort of a level I would like to stay at or improve upon. But I think this is a good level for us and it gives us the flexibility to continue to look at some debt repurchase opportunities as they arise, but sort of stay in sort of at a minimal of sort of where we are at right now.

Jeff Harlib – Barclays Capital

Okay. Thanks a lot.

Mike Jackson

You bet.

Operator

And our next question comes from the line of Richard Close [ph] with Jefferies. Please go ahead.

Richard Close – Jefferies

Good morning, guys. Would you mind given a little bit of a additional color around the import situation and how that competes with your products?

Mike Jackson

Yes, I guess when you think about – let me just get – obviously the two major grades are certainly coated freesheet and coated groundwood.

Coated freesheet has in terms of imports the last – let’s see the last four, five months, they have been averaging imports about – and these are round numbers – about 40,000 tons, maybe 42,000 tons a month. And in the past based in as an example, in 2007, they were up around 70,000-75,000 tons a month, so you can see a significant drop off.

On the coated groundwood side, it’s even more significant because the Europeans which really has been our primary competitor, they were off significantly as well. So – and we have seen drops of 30% to 40% and actually up to 50% from where they have been in the past.

So I think that gives you perhaps a bit of a view on in terms of the two grades that we’re most concerned about. The grade that has increased and therefore that’s why the anti-dumping suit is sheets that they have increased from China and from Asia, and that’s something obviously that does not impact us.

Richard Close – Jefferies

All right, great. Thanks a lot guys.

Operator

And we do have time for one more question. And that comes from the line of Richard Deutsch with Ladenburg Thalmann. Please go ahead.

Richard Deutsch – Ladenburg Thalmann

Yes, thank you, good morning. I have just two quick questions. Number one, your views on what could happen to pricing once the alternative fuel tax credit ends at the end of this year?

Mike Jackson

You know what I think that pricing is going to be driven by demand – supply demand. It’s got nothing in my view nothing to do with the alternative fuel credit and particularly on the groundwood side. Coated groundwood is – it has no connection to alternative fuel credit.

Richard Deutsch – Ladenburg Thalmann

So you don’t see any production coming out once the support is removed from some other producer?

Mike Jackson

That could happen, but I think your question was the impact of alternative fuel on pricing and –

Richard Deutsch – Ladenburg Thalmann

Right.

Mike Jackson

Yes. And so certainly if capacity comes out, that will be helpful. But again in my perspective what drives this pricing scenario is demand.

Richard Deutsch – Ladenburg Thalmann

Okay. And final question, where do you stand with regaining compliance with New York Stock Exchange standards?

Mike Jackson

Well we certainly have passed the dollar test, so that’s behind us. And by the end of the third – I am sorry, at the end of the fourth quarter, our market cap which was – I think the cutoff was $75 million, we are well, well above that. So my full expectations would be by the end of the quarter that we would be off the list and in the blue waters.

Richard Deutsch – Ladenburg Thalmann

Okay. Thank you.

Mike Jackson

You’re welcome.

Operator

And just as a reminder, we do have time for one further question, and that comes from the line of Eric Anderson with Hartford Financial. Please go ahead.

Eric Anderson – Hartford Financial

Yes, good morning. Just quickly, can you kind of just give us a ballpark as to the percent of your sales that go into the catalog markets and then the percent that goes into magazine paper?

Mike Jackson

Yes, we are about round numbers like 60-40.

Eric Anderson – Hartford Financial

For catalogs are the bigger part?

Mike Jackson

I am sorry catalogs will be the high – yes, would be the 60.

Eric Anderson – Hartford Financial

Okay. That’s it. Thank you.

Mike Jackson

All right. Ben.

Operator

And we have no further questions.

Bob Mundy

Thank you. Thank you for joining our call. And have a great day everyone.

Operator

And that does conclude today’s conference call. We thank you for your participation.

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