Verso Corporation (VRS) on Q2 2021 Results - Earnings Call Transcript
Operator: Good morning and welcome to Verso Corporation's Second Quarter Earnings Conference Call. All participants are in listen-only mode. There will be an opportunity to ask questions at the end of today's presentation Please note this conference 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 Vice President and Treasurer, Tim Nusbaum. Please go ahead.
Timothy Nusbaum: Thank you and good morning. The second quarter 2021 financial results for Verso Corporation were announced this morning before the market opened. The earnings release as well as the set of slides which we will refer to during the call are available in the Investors section of Verso's website www.versoco.com. Joining me on the call today are Randy Nebel, Verso's President and Chief Executive Officer; and Brian Cullen, Senior Vice President and Chief Financial Officer. I would like to remind everyone that in the course of the 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 SEC filings which are posted on our website versoco.com under the Investor tab. In addition, during today's call we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute of results prepared in accordance with GAAP and reconciliations to comparable GAAP measures are available in our earnings release. At this point, I'd like to hand the presentation over to Randy Nebel.
Randy Nebel: Thank you Tim. Good morning everyone. Before we discuss the quarter, I want to take a moment to discuss the unsolicited proposal from Atlas Holdings. As you have seen on July 14, we confirmed receipt of an unsolicited proposal to acquire all the outstanding shares of Verso common stock for $20 per share in cash. Today, we announced that our Board of Directors formed a special committee to evaluate the Atlas proposal and alternatives thereto. The Special Committee is composed of two non-executive independent and disinterested directors, Robert K. Beckler and Nancy M. Taylor. The special committee has retained independent advisors to assist, thoroughly review and evaluate the proposal and alternatives thereto to determine the course of action it believes is in the best interest of Verso and its stockholders. As noted in the earning release, we do not intend to comment on or disclose further developments regarding the Special Committee's evaluation unless and until we deem further disclosures as appropriate or required. We will not be commenting further on the proposal today, now let's dive into the results. Turning to Slide 4, this was a strong quarter for Verso combining the benefits of executing a focused strategy with positive macro trends. We have a lot of work to do, but I am very proud of the team for driving the progress that we have made in this business to date. Revenue increased 17% sequentially to $329 million. Our adjusted EBITDA improved to $52 million with an adjusted EBITDA margin of 15.8%. These strong results were achieved in spite of $4 million in costs related to an annual maintenance outage at our Quinnesec Mill and input cost inflation. Verso's operational cash generation was very strong at $57 million and we are able to return $59 million to our shareholders during the quarter, much in the form of a modified Dutch auction in which we repurchase $55 million in stock. Multiple factors contributed to the strong performance. Verso realized price increases across our product portfolio. Shipments increased with North America coated freesheet operating rates at 106% and order rates and backlogs remaining strong. As I have said before, employee safety is of paramount importance to Verso. Verso delivered good safety performance for the first half of the year, but we always strive to do better. Our operations continue to improve performance, focus on our core strength and aggressively execute on our customer-centric strategy. Our customer base is very supportive of Verso. Verso is keenly focused on listening to the customer and ensuring that we're not only continuing to be the preferred supplier, but also that we will grow with them. In order to best serve customers while maximizing profitability, Verso has analyzed and implemented many high-return capital projects to improve performance in the areas of productivity, product development and cost reduction. This strategy is starting to pay off. Verso is well positioned to continue to its improvement. On Slide 5, we outlined some of the trends that are creating opportunity in our business. Industry capacity has been reduced 24% from 620,000 tons in the second quarter of last year to 472,000 tons in the second quarter of 2021. The second quarter capacity reflects the impact of coated freesheet paper machine closures and conversions in 2020, and as we previously mentioned Verso removed the Wisconsin Rapids capacity in July of 2020 which represented over 400,000 annual tons of coated freesheet capacity. Imports remain low, although up from the first quarter while container availability, major supply chain delays and increasing freight costs remains challenging. Verso is better positioned to service the freight logical domestic market with a more predictable and efficient service platform. These factors combined with a 31% increase in demand over the same quarter last year due to the economic reopening have led to a strong shipment environment. Slide 6 profiles of the steady improvement in adjusted EBITDA over the past year. The second quarter was another big step forward for Verso as many of the improvements we have made combined with favorable industry dynamics helped drive our financial performance. Verso is starting to return to respectable margins and we are optimistic about the future. Moving to slide 7, I would like to take a minute to clearly define Verso's assets today and reinforce the strength of our consolidated operations and the value in our diversified revenue streams. The Escanaba Mill has a capacity of approximately 700,000 tons of graphic and specialty papers. We are focused on growth opportunities and coated freesheet both web and sheet offerings and specialty, It is a strong asset with opportunities to drive efficiencies and improve its cost structure. The Quinnesec Mill is also a strong facility that has a capacity of approximately 430,000 tons of graphic papers and about 240,000 tons of market pulp. Some of this market pulp is internally consumed in the mills. We are focused on making targeted capital investments to reduce cost, expand graphic paper products offerings and optimize pulp production. Wisconsin Rapids is a converting operation. The plant provides Verso with flexibility in our growth strategy. We are focused on transforming our converting operation into a customer focus sheeting operation with seven state of the art sheeters and a better cost footprint. Currently, the internal and external operations are positioned to convert approximately 200,000 tons of sheeter roll product from our Escanaba and Quinnesec Mills. Finally, we own Consolidated Water Power Company also known as CWPCo a regulated utility with five hydroelectric facilities operating 38 turbines, generating approximately 197,000 megawatt hours of electricity annually, CWPCo sells the energy it produces together with purchases from other local utilities to paper mills and some residential homes. In addition to the CWPCo energy platform, Verso's mills produce energy for use in the paper making process and some of this energy qualifies as renewable energy credits, which is sold to offset our total energy crossed. The strength of our fully integrated platform and skilled workforce positions Verso well for future growth and sustain shareholder returns. I will now turn the call over to Brian Cullen, our new CFO for the financial review. We're excited to have Brian on board, he brings over 20 years of broad financial and strategic leadership experience with the majority of his career holding executive and senior leadership roles at Fortune 500 companies including McDonald's and Procter & Gamble, Brian?
Brian Cullen: Thank you, Randy. I am thrilled to join the Verso team especially at a time of improving performance. I'm also encouraged by our clear strategy to be the preferred North American supplier of graphic papers, specialty papers and pulp. Now, I want to shift gears to Slide 9, which highlights our financial progress as a result of improved execution and market tailwinds. We experienced the realization of price increases with our overall average price being up 15% led by Northern Hardwood Bleached pulp, which was up 37% compared to Q2 2020. The improving demand environment resulted in a situation where shipments were greater than our production capacity, which reduced our finished goods inventory level by 20%. As you look down the Q2 2021 results column, we are proud of all the positive numbers for the quarter. That said, the team is focused on building on this momentum as we move through the year. On slide 10, you will see a bridge of our results from Q2 2020 to Q2 2021 showcasing improvements in nearly every category. These results are headlined on the left side of the chart by a strong topline recovery that resulted in a total $39 million adjusted EBITDA benefit. This benefit was the result of price realization of which $11 million came from pulp as well as improved mix and the utilization of inventory levels to service our customers. In the middle of the chart, you can see $9 million worth of inflationary headwinds, spanning energy, chemicals and purchased pulp. However, and encouragingly, we have also generated some positive impacts, highlighted by changes to our wood purchasing strategy, which resulted in a $3 million benefit for the quarter. Our operations also improved as production was up versus the COVID impacted Q2 in 2020. This improvement in production together with usage improvement, energy optimization and absorption of variances led to a positive $15 million improvement for the quarter. Finally, on the right hand side of the bridge, we are realizing the benefits of closing and idling high-cost assets that were not aligned with our core business. This resulted in an additional $9 million of adjusted EBITDA compared to last year all associated with the Duluth Mill and $2 million more in major maintenance cost reductions at our idled mills. We will continue to remain focused on reducing costs, generating cash and servicing our customers in the coming months. Slide 11 highlights the positive results to our cash position. For the quarter, we were able to hold our available cash balance steady at $117 million. We added $52 million to our cash position from adjusted EBITDA contributions and $34 million more from working capital improvements primarily from inventory reductions. Most importantly, our strong cash generation covered our capital investment and pension requirements, while also enabling us to return $59 million to our shareholders during the quarter. We have seen a decrease in our liquidity resulting from a lower ABL revolver borrowing base, as a result of our lower finished goods inventories. As we have shared previously, we remain steadfastly focused on continuing to eliminate costs at our closed and idled mills. The chart at the bottom demonstrates this progress as we have gone from $23 million in Q4 2020 to $5 million in Q2 2021. Turning to Slide 12, our Board made a commitment to return $250 million of proceeds from the Androscoggin and Stevens Point Mill sales to shareholders. To date, we have returned $211 million against this commitment having executed the $55 million modified Dutch tender offer in Q2, together with an ongoing 10b-5 share repurchase program and the payment of a $0.10 dividend in the quarter. We also declared a third quarter dividend of $0.10 per share, that will be paid on September 28 to shareholders on record as of September 17. Finally, Slide 13 features our outlook for the full year of 2021. We expect our cash, capital expenditures to be between $50 million and $60 million, as we implement projects that our Escanaba and Quinnesec Mills in the second half and prepare for our 2022 initiatives. The required pension contribution for 2021 is expected to be $25 million, which is at a reduced level versus prior years due to the American Rescue Act provisions. Our cash position is expected to continue to increase as we benefit from our improving business results and lower costs at our closed and idled mills. I'm proud to be a part of this strong team and I look forward to meeting as many of you as possible in the near future. I will now turn it back over to Randy.
Randy Nebel: Thank you, Brian. In summary, I'd like to share with you a poster that hangs on the walls in all Verso's facilities. I think it encapsulates the core values of Verso today and our vision going forward, including our commitment to our employees, customers, suppliers and investors. Before I open the call for questions, I would like to remind you that we will not be accepting questions regarding the Atlas proposal or the Special Committee process. With that, we will now open the call for questions.
Operator: And, the first question comes from Hamed Khorsand with BWS Financial. Please go ahead.
Hamed Khorsand: Firstly, could you just talk about the price increases you passed through and the acceptance rate that's occurring and the timing of how much more of these price increases are you expecting to realize in Q3 and Q4?
Randy Nebel: Good morning, Hamed. I think I don't remember the exact number of price increases, but our acceptance rate has been very, very high on all those. We continue to monitor where we're at on pricing and we'll adjust as we see fit. I think, we don't project whether we're going to have more price increases, but I think it's safe to say we're not going to have price increases like we have in the first part of the year, we've kind of been unprecedented.
Hamed Khorsand: And, how sustainable is it to meet the demand given that your inventory has been declining on a quarter-over-quarter basis for the last three quarters now I think?
Randy Nebel: Yes. Well, we started with an inventory of about 410,000 tons last year and we're down in the mid-150s, so right now. So, we have been living on inventory. We're slowly pulling back from that. I think demand is going to be something we can do a better job managing some of our products we will have to choose not to make anymore, but we're also spending some money in both mills that will make slight improvements in our production. So, I think we're going to comfortably be able to satisfy all of our good customers.
Hamed Khorsand: And, could you just comment as to why Verso decided to go the committee route instead of just creating any kind of negotiation process directly because one of this be a distraction for you and the customer base?
Randy Nebel: I guess the decision that was made to go the committee route was made at the Board level and I don't want to go into the basis for that. I think no matter how you go about a process like this you got to make sure it doesn't become a distraction for the company or your customers and that's what I keep telling the company is business as usual, and that's the way we're trying to operate.
Operator: At this time we have no further questions. I will now turn the call back over to management for any closing remarks.
Randy Nebel: Hamed, thank you for your question, really appreciated that. Thanks for the people listening and we look forward to talking to you at the end of the third quarter. Have a great and safe day.
Operator: The conference is now concluded, thank you for attending today's presentation. You may now disconnect.
