Verso Corporation (VRS) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning, and welcome to Verso Corporation's First Quarter 2021 Earnings Conference Call. All participants are in a listen-only mode. Please also note this event is being recorded. A replay of this call will be available on the Investor page of Verso's website after 11:00 a.m. Eastern Time today. At this time, I'd like to turn the presentation over to Verso's Treasurer, Tim Nusbaum. Please go ahead.
Timothy Nusbaum: Thank you, and good morning. The first quarter 2021 financial results for Verso Corporation were announced this morning before the market opened. The earnings release, as well as the set slides to which we'll refer to during the call, is available on the Investors Section of Verso's website www.versoco.com.
Randy Nebel: Thank you, Tim. Good morning, everyone. Turning to slide four. Verso's performance continued to improve in the first quarter. The benefits of operational improvements we've made during the past year combined with stronger industry dynamics led to an improved first quarter performance. Our adjusted EBITDA coming in at $30 million, which is a solid increase over in the fourth quarter of 2020. We also generated cash flow from operations of $7 million during a quarter that is historically slower and tends to be a cash draw. While this quarter was financially better, we are focused on long-term initiatives to build sustain long-term value. First and foremost, our fundamental commitment is to keep our employees safe and healthy. Our safety rating came in at a solid 0.25 total incident rate. I am proud of the work the team has done, and the result of their efforts is impressive. Verso has been implementing capital projects to improve reliability, product mix and our cost perception. One example of this is with our pulp lines. After thorough analysis by our team with relatively small incremental increase in capital spend, we have been able to drive higher returns and further optimize pulp production for our customers and internal use. We were essentially able to convert what could have been a routine maintenance capital projects to a cost savings project. We are applying analysis and a new ingenuity like this across the organization with some of the benefits of this thing impacting quarter.
Allen Campbell: Thank you, Randy. As mentioned, we turned the corner and adjusted EBITDA performance, delivering a 10.6% margin in the first quarter. Our net sales were $282 million compared to $471 million in first quarter 2020. This difference is reflective of market dynamics and reduction in capacity due to our sold and closed mills. Pricing improved sequentially up $28 a ton from the fourth quarter of 2020. Pulp prices have improved $27 per ton versus last year, while paper prices nearly average last year. Our operating and net income were impacted by accelerating depreciation related to the Wisconsin Rapids site and other costs of the closed mills. We continue to work on reducing these costs and its closed mills and then looking at lowering in each quarter
Randy Nebel: Thank you, Allen. In closing, I'd like to summarize a few key takeaways from the quarter. Through difficult times, we have kept our people safe, that will continue to be a Verso core value. It is also important to acknowledge that all the efforts we are going off -- that we have going on require significant engagement for our employees, which is a focus for Verso in 2021 and into the future. Order rates and backlogs are strong due to improved industry dynamics and price increases are being realized. We remain customer focus and have implemented capital projects to ensure that our customers continue to see our product offering improve in quality and our service improve. Our balance sheet remained strong, and we have made great progress in meeting our commitment to return $250 million to our shareholders. We are focused on our core competencies and reinforce our position as a leader in graphic papers. This strategy is key to driving profitability and shareholder value in the coming years. Turn it over for questions.
Operator: First question is from Jeff Van Sinderen of B. Riley. Please go ahead.
Jeffrey Van Sinderen: Good morning. I just wonder if you could talk a little bit more about the pricing increases that you're experiencing, you're able to put out there and have them stick. Just wondering if you expect and to be able to implement further price increases. And then also, do you feel like you're positioned to offset the higher input costs?
Randy Nebel: Thank you. Nice to talk to you. The price increases we put out so far have stuck and there always as a transition time as we have agreements and they don't all hit at the same time. But we're realizing the price increases. We're cautiously optimistic about what the future may be, but I'm not going to make projections about how -- what prices increase could be in the future. But we feel pretty good that we will offset inflation either with cost reductions in the mill or -- well basically cost reduction in the mills.
Jeffrey Van Sinderen: Okay. That's helpful. And then just thinking about Q2 metrics, I know you don't provide guidance per se. But just wondering if there's any more color or thoughts you have on sales, margins, overall profitability, things we should maybe take into consideration as we're working on our model assumptions. Just I guess, any order of magnitude or directional color you might have, either versus last year or sequentially from Q1.
Allen Campbell: Okay. I think you need to look at our business sequentially for a while until the noise from the last year as we change our footprint. As you mentioned, we have some tailwinds on pricing, so you should see sequential improvement in pricing. The market itself is strong for us more in the last half, so third and fourth quarter. So, we have more seasonality too. You'll see. We have -- in the second quarter, we'll have some higher maintenance costs, because we do have one of our mills with an outage in the second quarter, one in the third. So, you have a little bit of headwind there versus the first quarter. But commercially, tailwinds, a little bit of a freight and input costs, a little bit of a headwind, a little bit of maintenance of a headwind. But with the market coming back, the country coming -- getting back to work, we think the underlying economics are also a tailwind for us.
Jeffrey Van Sinderen: Okay. Great. Thanks for taking my questions and best of luck.
Randy Nebel: Thanks, Jeff.
Operator: Next question is from Hamed Khorsand of BWS. Please go ahead.
Hamed Khorsand: Hey, good morning. So, first question I had was given the op rates are running at 101%. Are you adding new customers, or are these customers taking early delivery, or are they ordering more? Are you able to manage through that? So, there's no real double ordering.
Randy Nebel: I guess. We're probably growing more with existing customers than we are taking on new customers. And as we -- our machines more -- become more competent at making some of the newer grades, heavier weights, we're expanding with customers into more grades that they need. We're not getting hit with double orders. We're managing that rather well, as we -- we've continued to kind of -- be on a glide path down with our inventories and we'll do that over time, but we've got to get ready for a third, fourth quarter after quarter -- quarter that are really good quarters for us. So, we'll be cautious in taking inventory down much in the second quarter. But in general, the backlog is strong and we feel good about where we're at with our customers.
Hamed Khorsand: And how much of your customer base is still on volume contracts? So, how long will it take to actually pass through these price increases you've announced?
Randy Nebel: That varies by product line, but the majority of things pass through pretty quickly, I would say 30 to 60 days. Some specialties are a little bit longer than that. But I think if you put something like 60 days in your model, you'd be pretty well covered.
Hamed Khorsand: And what's the risk right now of excess supply entering the market? Where would it come from? Could it be domestic?
Randy Nebel: I don't think domestic is much of a risk at all. I mean, there is a potential of excess supply coming in, I mean, from imports, but the market needs imports. Domestically, we don't have the capacity to service the entire market. So, we do need imports coming in. And that may -- there may be a bubble of imports come in as the ports clean out a little bit, but I don't anticipate that as being a super high risk at this time.
Hamed Khorsand: And last question is, do you think the imports are more expensive than your pricing right now? Just given what the freight's costing and pulp is costing?
Randy Nebel: More expensive? No, I think they are basically -- were priced in the same ballpark as where we're at and cost delivered, depending on the part of the U.S. that you're delivering to. I think what we have is our value proposition of a shorter supply chain, faster turns. And I think our customers are listening to that and taking advantage of that. If they're ordering from overseas, their money's going to be tied up 90 to 180 days.
Hamed Khorsand: Okay. I appreciate it. Thank you.
Randy Nebel: Thank you.
Allen Campbell: Thanks Hamed.
Operator: This concludes our question-and-answer session. Now, I'd like to turn the call back over to Mr. Randy Nebel for closing remarks. Please go ahead.
Randy Nebel: Thank you everyone for taking the time and for the questions. We appreciate your support and look forward to speaking with you next quarter. Have a good day.
Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
