Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Verso Paper Corp. (NYSE:VRS)

Q3 2013 Earnings Conference Call

November 7, 2013 09:00 AM ET

Executives

Dave Paterson - President and CEO

Robert Mundy - SVP and CFO

Analysts

Kevin Cohen - Imperial Capital

Tarek Hamid - JPMorgan

Bill Hoffmann - RBC Capital Markets

Jonathan Sacks - Stonehill Capital

Philip Birbara - Royal Bank of Scotland

Operator

Good day and welcome to the Verso Paper Corp. Third 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 Mundy

Thank you. Good morning and thank you for joining Verso Paper’s third 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?

Dave Paterson

Thanks Bob and good morning and thank you all for participating in today’s call. Start off by commenting about volumes, we saw seasonally stronger volumes both in our coated freesheet and coated groundwood volumes as we anticipated, overall pricing was up slightly versus Q2 of this year and the prior year. Our inventories are in good shape but we saw a significant decline in finished goods inventories over the second quarter of about 21% and our inventories remain in very good shape. We saw the cost improvement versus second quarter as our maintenance outages are behind us and we continue to see improvement across our manufacturing platform. We also saw input prices decline in-line with our expectations versus the previous quarter.

Turn it back over to Bob now.

Robert Mundy

Thanks Dave.

Turning slide four. As Dave mentioned our overall volume for the quarter was seasonally stronger versus the second quarter and was at about the same level as last year’s third quarter. Revenue reflected a pattern very similar to the quarterly volumes. Adjusted EBITDA margin was 13.5% the same as last year’s third quarter. And our adjusted operating income was $3 million higher than last year at $24 million.

Slide five. You can see the coated volumes were seasonally stronger versus the second quarter and about 4,800 tons below last year versus the last quarter coated prices were slightly higher as we had some traction relative to our announced price increases starting in July, but as we move through the quarter we began to lose some momentum relative to maintaining those increases. Pulp volumes were where you would expect and pulp prices were up versus both last year and the second quarter of this year.

Turn to slide six, and you can see the key changes between our third quarters adjusted EBITDA of $51 million versus the $22 million in the second quarter of this year. As I mentioned we had seasonally higher volumes and overall prices were slightly higher, the lack of scheduled maintenance outages in the third quarter versus the second along with the realization of the benefits from our productivity direct cost and material usage initiatives resulting in a $12 million improvement. And also input prices trended down in all of our key categories as we expected.

Turn to slide seven, which gives you a view of the adjusted EBITDA changes between this year’s third quarter and the third quarter of last year. Volume was down less than a half a percent and prices were up about 1%. Improved manufacturing and distribution costs offset the higher input prices we experienced over last year.

And on slide eight, there is a bit more information related to input prices. You can see the direction prices are moving versus last year and versus the previous quarter. Overall, things were generally favorable except for slightly higher gas prices versus last year's third quarter.

I'll now turn it back to Dave.

Dave Paterson

Thanks Bob. As we look at the fourth quarter, we are going to see our seasonally slower volumes versus the third quarter, from a pricing perspective, we continue to see some price erosion across our major grades with two bright spots being our specialty grades as well, so market pulp continues to perform exceptionally well both in price and volume as we go into the fourth quarter.

Our manufacturing costs improvements are in place and are continuing to find more opportunities even though, energy prices will seasonally be higher in line with the turn in the weather in the Northeast and Midwest. Our inventory levels are in good share as we enter the quarter and we look forward to meeting our fourth quarter outlooks.

So with that, we'll take questions. So, Operator ?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we will take our first question from Kevin Cohen with Imperial Capital.

Kevin Cohen - Imperial Capital

Good morning and thanks for taking the questions. I guess in terms of coated volumes in the quarter are pretty solid performance relative to industry trends I guess. Why do you attribute these sort of implicit market share gains still?

Robert Mundy

Yeah. I don't know if we it's necessarily a significant market share gain I think we were where we expected to be relative to our view and the feedback from our customers that we had go into the quarter, but we did performed well.

Dave Paterson

Kevin, I would add that I think in there as with our sales group has done a nice job of shifting tons between segments, not all segments of our credit paper customer base are experienced decline to the same rate. So that was a positive for us and I think our growth in specialty coated product continues to go well. So while the overall segment is down significantly I think our sales group and our operations group have done a good job of repositioning orders and repositioning grades within the metrics of the customer base.

Kevin Cohen - Imperial Capital

And then one other question. In the past the company has given somewhat of an outlook on perspective liquidity, I guess any color commentary you can furnish on that front, maybe where you see that trending over the next few quarters or anything on that?

Robert Mundy

No, really not Kevin. We certainly had a target out at the beginning of the year and I think we've talked about on the last call that we would fall short of that relative to the price increases and I guess the lack of those really sticking as we had anticipated in our plan, but outside of that everything is coming in at where we are at pretty budgeted end plan for the year.

Kevin Cohen - Imperial Capital

Okay. I'll get back in the queue. Thanks guys.

Dave Paterson

Thank you.

Operator

We’ll take our next question from Tarek Hamid with JPMorgan.

Tarek Hamid - JPMorgan

Good morning.

Dave Paterson

Good morning.

Robert Mundy

Good morning.

Tarek Hamid - JPMorgan

On the energy front as you headed from a winter months, obviously there is a huge impact in 2012. Could you maybe just talk a little bit about your expectations on that gas for winter 2013 relative to ’12, sort of what have you done to help mitigate that if anything?

Dave Paterson

Sure. I’ll start and Bob can finish up. I think fundamentally, we reexamined our entire energy procurement strategy and primarily focus in the State of Maine remembering us where we saw the huge spikes in pricing. Structurally the state still has a lack of delivery capacity to deal with peak demand months, so we’re entering those peak demand months, our fundamental change was that we've now hedged the basis or in affect the transportation cost of gas, we never really saw spikes in the commodity itself, it was all around the delivery cost, with the understanding that there is pipeline restriction into the State of Maine.

So we feel we've effectively cut off, the high end of those spikes, if the weather turn cold this winter and we’ll just have to see what happens in May in terms of temperatures. But in effect where all the volatility was last year with a basis, we've changed our hedging policy every field that we've adequately hedged the basis for the delivery costs and time will tell, when our first quarter welcomes out, we’ll give you the results. Bob do you have anything to add?

Robert Mundy

Not much.

Dave Paterson

I think we've done.

Tarek Hamid - JPMorgan

I guess as you, any sort of dollar number on per BTU basis that we can think about on the delivery cost hedge that would be just help us model this?

Robert Mundy

We really don’t get into those details Tarek, but we do feel comfortable that we won’t see, as Dave indicated, we won’t see the spikes we saw last year and so other than saying that, we expect it to be a lower cost, really can’t get into the quantifying that for you.

Tarek Hamid - JPMorgan

Thanks. And then just as you look at the hardwood pulp obviously pricing up a lot in the last two quarters, any sort of thoughts on price evolutions yet in the ’14, just given some of the capacity additions out of Brazil, should that impact you materially?

Dave Paterson

Yeah. Well, I think we all know that there is significant hardwood capacity coming in Brazil and we see as industry sort of forward looking price forecaster has always had a price decline built into that expansion of hardwood capacity in South America. We have to see it. I think it will happen and probably happen in ’14. There is no doubt about that as new capacity will affect pricing. I think the positive sign is demand for pulp in general and hardwood has held up very well and in fact in North America it has shown real life as you have seen some people shift out of producing hardwood into specialty pulps. And so we are finding demand in North America than we’ve budgeted which is good. So yes, but the price will decline once the impact of those Brazilian tons start to be filled on supply demand balance. And so we are now saying that will be probably first half of 2014 and originally that industry that we see forecast or some thought second half of 2013 and we haven’t seen any of that as our numbers reflect.

Tarek Hamid - JPMorgan

Great. And just last one from me on working capital heading into 4Q, you talked about inventories relatively stable sort of any expectations on our receivables, payables, kind of how much cash if any should we expect to get out in the fourth quarter?

Robert Mundy

I wouldn’t think it’d be anything significant one way or the other Tarek. We’re going to be -- obviously the key drivers is on inventories as Dave said at the beginning. We’re in good shape and we’ll maintain those as we head through the quarter and in the year. So it won’t be a large number plus or minus up or down a little bit.

Tarek Hamid - JPMorgan

Thanks, guys.

Dave Paterson

Thank you.

Operator

We’ll take our next question from Bill Hoffmann with RBC Capital Markets.

Bill Hoffmann - RBC Capital Markets

Good morning, guys.

Dave Paterson

Good morning.

Bill Hoffmann - RBC Capital Markets

Dave, can you talk a little bit about just sort of your asset plans for next year, no run rates, let’s assume that we have sort of continue to decline in quarter demand of whatever price 5%, 6%, 7% kind of the range. How do you think about running your assets next year? We’ve that you’ve been close and I think the operating rates are up and the other machines or what is the approach?

Dave Paterson

Well, I think the first step continuous to be can we find new grades new applications for our mill capacities which we call our specialty papers, so continue to grow there. The declines our beyond our ability to grow new accounts or new grades then we would look at managing capacity and we have multiple mill system or multiple machine system, so we would manage appropriately understanding that for our firm cash management and inventory management peripheral issues, we would take that all into capital, yes we have a very manufacturing platform across three sites with multiple machines and multiple grades and we feel we can make the appropriate decisions.

Bill Hoffmann - RBC Capital Markets

And just with regards to the specialty sales in the third quarter, what percentage was it? And is that sort of a more of a seasonal business as well?

Dave Paterson

It’s not a lot, it’s less seasonal than our traditional high volume grades. And for us it shows not much seasonality basically as we're growing. It tends to be, it's very right, I guess it's once your call kind of specified by a customer tends to be slightly see pick-up volumes as you add accounts or add applications in your paper. So traditionally we would see a growth in our volumes in those grades in the first quarter as we get new accounts or new applications approved for the year. And then that's pretty much stable. I mean one of the nice parts about that business is it's very stable from a demand perspective point of view.

Bob do we have a figure out?

Robert Mundy

It's just is, Bill I think your question was how much is that of our total revenues?

Bill Hoffmann - RBC Capital Markets

Yeah.

Robert Mundy

It runs around 15% or so I'd say.

Dave Paterson

And it grows, it has a growth component, we still see pulps are taking share of that business and the volume in those businesses has some growth to it as well. So it's a nice business for us and we look forward to continue opportunities there.

Bill Hoffmann - RBC Capital Markets

Okay, thanks. And then if, as you look into next year, I would assume you are in conversations with kind of lots of magazine producers for next year, any thoughts on the [tone] of those conversations?

Dave Paterson

Well, I would say the normal yes, they are the [God] now, but they normally heat up in December and January when you start trying to fix volumes and look at pricing for the first half of the year. I think sort of the general tone is okay. I think the one sort of big negative that we have to play through is what's going on with US postal rates in the post office where they’ve asked for price increases on delivery cost in excess of the inflation rates to try to recover or try to make up for some of their operating losses. So that has to be worked through. Traditionally you will see a temporary hit to demand on catalogs and mass mailings have been overtime it will recover. So that issue is out there. But I would say the catalogers in general are looking for flat to marginally lower volumes next year, but it’s still early so we’ll just have to see.

Bill Hoffmann - RBC Capital Markets

Okay, thanks. And then just last question with regards to the fourth quarter just given the trends you have third quarter was quite stable year-over-year, but still tracking on a lower level. Do you think there is any pull forward in the third quarter from fourth quarter, is the seasonal demand tethering out this year you think?

Dave Paterson

We don’t have a sense to that. I think our paper volumes across the system were at or above what we have thought they would be so we had a nice October from a volume point of view. I would say November is tracking well. So I think to answer your question about we don’t have a sense that volume was pull forward into third in any sense remembering that at least in the first half to two-thirds of the third quarter virtually was trying to implement price increases. So typically that’s you would lose volume in those scenarios in which our numbers said we didn’t really lose much volume. And I would say in the fourth quarter volume is tracking as we would normally expect in the fourth quarter seasonal way.

Bill Hoffmann - RBC Capital Markets

Okay, great. Thank you.

Dave Paterson

Thank you.

Operator

(Operator Instructions). We’ll take our next question from Kevin Cohen with Imperial Capital.

Kevin Cohen - Imperial Capital

Thanks for taking the follow-up, I am not sure if it was answered previously. But in terms of the change in energy cost looking ahead to 1Q of ‘14 versus 4Q ‘13 would the order of magnitude in absolute dollar amount be similar to $15 million number that we've experienced in the year ago period sequentially between those two periods?

Robert Mundy

Well, I guess Kevin I answered it the best I could earlier as far as quantifying the amount, it will be higher, but we don’t expect it to be as high as it was last year because of some of things that Dave mentioned.

Kevin Cohen - Imperial Capital

Got it. And I guess in intuitive industry pricing, what you attributed sort of the recent slippage to I mean presumably Verso is remaining disciplined, what you sort of attributed, is there anything particular, imports or anything?

Dave Paterson

Well, I think we’re dealing with the macroeconomic issues right, so number one, as statistic show consumption has declined. And in a declining environment like we’ve been experiencing for several years, pricing can’t come convert a pressure as people try to keep their machines full. So second is, yes we see more activity on imports I think that has picked up. And we see, continue to see products substitution. So we’ve seen a lot of our coated grades moving to SC grades with the restart of -- in Canada, as well as incremental activity out of Europe on the SC grades, as well as coated free and coated mechanical.

So that global component is affecting pricing, as well as the macroeconomic condition of decline in demand. And so to an earlier question that was asked, I mean I think inventory management and operating right issues really drive pricing and Verso we think has a disciplined approach to both of those issues and we plan to make to aim that.

Kevin Cohen - Imperial Capital

And I guess in terms of from 30,000 foot level view and you think about potential industry consolidation, it’s materialized in other grades, what do you think sort of ultimately happens in coated paper, do you think we see sort of a material structural shift or any impediments about?

Dave Paterson

Well, I think we've always been very open to it, we think consolidation is a strategic option for the industrial space of coated paper and we’ve certainly tried to facilitate consolidation and we will continue to do that if the opportunity presented itself. So we would hope that there would be consolidation in the future. I don’t think there are any impediments to consolidation other than the normal you’ve got to get governmental approval and you have to get shareholder approval, but those are normal course.

Kevin Cohen - Imperial Capital

Thanks a lot. I appreciate all the commentary.

Dave Paterson

Thank you.

Operator

We’ll take our next question from Jonathan Sacks with Stonehill Capital.

Jonathan Sacks - Stonehill Capital

Hi, thanks. Can you tell us approximately what portion of EBITDA came from the pulp business versus the paper business?

Robert Mundy

Well, we’ve never given that out before, but obviously pulp prices were significantly higher than our expectations and really help pull the weighted average of our overall pricing to a good spot. But we’ve never just given the EBITDA component of that.

Jonathan Sacks - Stonehill Capital

Okay. And can you tell us a little bit maybe about your utilization level and utilization broadly in the industry?

Dave Paterson

Well, I think you are talking about capacity utilization?

Jonathan Sacks - Stonehill Capital

Yes.

Dave Paterson

Yeah I think the public figures talking about below 90% and that’s what we see. So remembering that in the majority or, excuse me the high volume grades in our coated paper business there is a real seasonality factor so if you were to pull apart the operating rates they tend to be lowest in the first half of the year and then actually because you have to ship above your capacity in the third and part of the fourth quarter like to above 100% as you pull inventories down, so that’s our seasonal component. But on average, we’ve seen them running in the low 90 percentile and that’s seasonal component to it. And I think for next year the [RICCI] guys are predicting similar, though slightly lower operating rates because of those continued decline in consumption.

Jonathan Sacks - Stonehill Capital

And can you talk a little bit about any recent or expected changes in capacity industry wide, I recall someone shutdown a large plant, they had a little bit of coated capacity recently. Can you be just touch on that as well as any other shutdowns or potential shutdowns or openings for that matter that you are aware?

Dave Paterson

We don’t have knowledge of what’s going to happen in the future, but clearly most of the outage issue or closure issue refer to had been in the uncoated freesheet systems North America where I believe (inaudible) specific and International Paper announced significant uncoated freesheet in the machine or mill closures and at core month which is the IP closure there was one machine that make coated grades.

That’s to my knowledge the only coated machine that’s recently been closed in the system, in the North American system. I think most of the closure activity that I am aware of in the coated grades both free and mechanical has been in Europe where you continue to see more capacity overhang versus demand than we do here in North America and also for the reason you are seeing more activity on the European trying to export to North America because they do have a larger dislocation of capacity over there on a percentage basis than we have here in North America.

So a lot of assets closures that could appreciate one machine and coated grades, a lot of activity in Europe and to be decided by others in for 2014.

Jonathan Sacks - Stonehill Capital

Okay. And overall just putting those two things together the capacity utilization question and the shutdowns, would you say that in North America, the capacity is reasonably sized to the demand, recognizing that the demand is going down over time so that the balance will shift. But as it stands now, do you think things are relatively well balanced?

Dave Paterson

I think it depends on the grade of paper you are talking about, there are multiple grades, multiple competitors. I would say that the expectation of continuing decline will impact the coated mechanical side more than coated freesheet side and we participate in both sides. And the coated mechanical side is where you see probably more international competition, but coated freesheet we can see coated freesheet coming in for measures as well as Europe.

So what I'm indicating to you is that there is a plenty of competition out there and there is a global overcapacity, but the U.S. market from a demand perspective right now certainly compared to Europe is probably the most stable. Though declining, it's stable in the sense that it's predictable and people, I think in terms of their view would try to sell product in the U.S. due to pricing and the stability of that marketplace relative to particular Western Europe.

Jonathan Sacks - Stonehill Capital

Thanks.

Dave Paterson

So that's we just have to deal with that.

Jonathan Sacks - Stonehill Capital

Thank you.

Operator

We'll take our next question from Philip Birbara with Royal Bank of Scotland.

Philip Birbara - Royal Bank of Scotland

Was there any change in the maintenance expense this quarter versus a year ago or the second quarter?

Robert Mundy

Yeah. Versus the second quarter we had scheduled out which is in the second quarter that we didn’t have in the third and that was probably something near $4 million, $5 million of the sequential change not that different, but versus last year’s third quarter really nothing like that was going on in either quarter.

Philip Birbara - Royal Bank of Scotland

Okay. So basically unchanged versus the year ago?

Robert Mundy

Yeah.

Philip Birbara - Royal Bank of Scotland

Okay. And just from an industry perspective, it looks like coated paper inventories are at the highest level and for this time of the year in the last three, four years, are you concerned that that could put greater than expected pressure on pricing going forward here or are you confident that you’re just going to see a modest decline in price?

Dave Paterson

Well, I mean, that’s an unanswerable question, but I think, yes, the inventories are concerning, but we start by looking at our inventory. So we feel we're in the proper spot for our inventory levels and we will continue to manage our inventories appropriately. Yes, but higher inventories tend to lead the pricing pressure, I would say the pricing pressure is not exceptional at this point.

I think when we have our first quarter call, I mean typically price pressure is at max level in the first quarter as people are looking at a seasonally slow demand period and they’re trying to wrap up their discussions on their annual commitments both in price or price targets and volumes with the major customers in North America. So the first quarter from our perspective is probably when we’ll see how serious any price pressure is.

Philip Birbara - Royal Bank of Scotland

Okay. Thank you.

Dave Paterson

Thank you.

Operator

And we have no further questions at this time.

Dave Paterson

Okay. Well, thank you all for your interest in Verso Paper and we look forward to speaking with you after the fourth quarter. Thank you very much.

Operator

This concludes today’s conference. 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!

Source: Verso Paper's CEO Discusses Q3 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts