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Verso Paper Corp. (NYSE:VRS)

Q1 2014 Earnings Conference Call

May 07, 2014, 09:00 AM ET

Executives

Robert Mundy - Senior Vice President and Chief Financial Officer

David Paterson - President and Chief Executive Officer

Analysts

Operator

Good day, and welcome to the Verso Paper Corp's first quarter 2014 earnings call. Today's conference is being recorded. And at this time, I would like to turn the call 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 first quarter 2014 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 website, versopaper.com, under the Investor Relations tab. Additionally, due to the pending acquisition between our company and NewPage, we will not be taking questions after discussing our prepared slides this morning. Dave?

David Paterson

Thank you, Bob, and good morning to everyone on the call. I'd like to start on Page 3 by talking about our first quarter safety results.

The company in the first time in its history had injury free quarter and this was particularly gratifying, given that the first quarter normally is our most difficult quarter in terms of safety due to the weather conditions in our primary operating facilities in the Northern part of the country.

And it's a great compliment to all of our employees that we achieved the safety performance in the first quarter, and our safety performance continues to be very strong into the second quarter.

On the integration front, considering the NewPage transaction, those efforts are well underway, and I would say that are going well and cooperation is good between the two companies and we also continue to work with the Justice Department in terms of antitrust and regulatory components issues.

We always experienced weaker demand in the first quarter and this quarter was no exception. In fact, it was weaker than we had anticipated. This weakness in demand along with a severe weather we faced in the Northern facilities impacted our ability to operate at full capacity.

We took 38,000 tons of downtimes during the quarter in our facilities in Maine. This was driven by combination of the weak demand I already referenced, but also the huge spike in natural gas prices in the first quarter.

As we discussed in previous calls, in the first quarter we see a phenomenon of spiking in delivery cost of gas. Gas itself is not the issue or the cost of the commodity, but rather the transportation cost, still delivering our facilities in Maine.

To minimize the impact of these spikes in cost, we took a combination of downtime for energy as well as market demand. The net result of this is our inventories were flat quarter-over-quarter and 17,000 tons below the previous year levels.

The energy impact was roughly $11 million versus the fourth quarter, but would have been much more significant, had our new hedging policy not been in place. Bob will touch on that in his comments.

We also had a plant capital outage in our Androscoggin mill, where we replaced a head box in one of our paper machines. This had a negative impact of $4 million, due to that capital project versus the prior year, where we didn't have a capital project in the quarter.

We also completed the acquisition of 175 megawatt cogeneration power facility at our Bucksport mill. Previously, Verso had owned 28% of this asset and we now own 100% of the asset in is part of our energy portfolio as a company. Bob?

Robert Mundy

Thanks, Dave. Turn to Slide 4. Our overall volume for the quarter was about 34,000 tons below the first quarter of last year, due to the market related weakness Dave spoke of in the paper segment as well as energy cost-related downtime that we took. Sequentially, volumes were lower due to a slower than normal seasonal period moving from the fourth to the first quarter, in addition to weather related and capital project related outages we experienced.

Revenues followed a similar pattern to the volumes. However, in addition, overall average sales prices were down about $10 per ton versus the fourth quarter of 2013 and $15 per ton versus last year's first quarter. And we experienced our first ever negative adjusted EBITDA quarter at a negative $8 million.

On Slide 5, you can see that coated volumes were on those 25,000 tons below last year, again due to the difficult market conditions, primarily in coated groundwood as well as some energy cost-related curtailments that Dave mentioned. Coated prices were down about $40 per ton from last year's levels and $17 per ton from the fourth quarter, with most of the pricing weakness again in the coated groundwood grades.

Pulp volumes were impacted by a couple of operational issues at Quinnesec and higher coated freesheet production at our Quinnesec mill versus the comparative period shown. Pulp prices were flat with those of the previous quarter and $70 per ton higher than last years levels.

If you turn to Slide 6, you can see the key changes between our first quarter 2014 adjusted EBITDA of negative $8 million versus the $20 million in the first quarter of last year.

As mentioned, overall volume was down as a result of slow market conditions as well as energy costs related downtime that we took. Price mix was off about $7 million as the unfavorable coated prices offset these favorable pulp prices.

Market and energy-related downtime of 38,000 tons resulted in a negative $9 million of unabsorbed fixed costs and operations had a difficult quarter dealing with weather-related issues such as equipment freezing up, fiber quality and coming in and out of downtime as well as loss production due to a capital-related outage.

Based on lessons learnt from last years winter months, and although this year's market delivered gas prices exceeded the record set last year, we were able to minimize our energy input price risk through our hedging program as well as alterations in our mill operations relative to the high energy cost during this period. Had we not entered into some of the hedges we did relative to the delivered cost of our gas, the cash impact would have been over $20 million higher for this period.

Slide 7 gives you a view of the adjusted EBITDA changes between the fourth quarter of 2013 and the seasonally slower first quarter of 2014, lower volumes represented negative $5 million, while price mix was off primarily due to lower coated groundwood prices. 38,000 tons of market and energy-related downtime, represented $9 million of unabsorbed fixed costs, while manufacturing operations costs were negatively impacted by the planned capital outage as well as the weather-related operational issues.

The unfavorable input prices were due to higher energy prices as we move from the milder to extremely cold months as well as wood prices being up about a $1 million. There is a bit more information related to input prices on Slide 8, where you can see the direction prices were moving versus last year and versus the previous quarter.

Overall, raw material and chemical prices earn a relatively good spot, offset by the higher energy and wood prices we've recently experienced. We expect both of these negative items to head into a favorable direction as we continue to move through the second quarter. Dave?

David Paterson

Thanks Bob. On Slide 9, we look briefly at the second quarter of this year. We'll continue to work to close the NewPage transaction. As I mentioned earlier, there is a lot of good work going on in that area.

We recently entered into a revolving credit facility of $40 million, which will help enhance our liquidity going through the balance of this year. We see pricing as flat quarter-over-quarter.

I would want to comment on pulp pricing, which continues to remain strong, but we think pulp pricing will see some pressure later in the year, improved volumes over the first quarter of this year comparable to last year's second quarter. Energy costs have already begun to mitigate as temperatures have risen. Operating performance, we don't foresee market downtime in the second quarter of this year. And we continue to have an aggressive inventory management plan to work on our working capital.

So with that, I thank you for your attention. We continue to focus on safety and productivity and the NewPage transaction as a company. And we look forward to speaking to you about our second quarter results. Thank you very much.

Operator

This concludes today's conference. Thank you for your participation.

Question-and-Answer Session

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Source: Verso Paper's (VRS) CEO David Paterson on Q1 2014 Results - Earnings Call Transcript
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