Verso Corporation

Good morning and welcome to Verso Corporation's third quarter 2021 earnings conference call. All participants are in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. If you would like to ask a question during the question and answer session, please press star then 1 on a touchtone phone. You will hear a tone to confirm that you have entered the list. If you decide you want to withdraw your question, please press star then 2 to remove yourself from the list. If you should need assistance during the conference, please signal an operator by pressing the star key followed by 0 on your touchtone phone. 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 a.m. ET today. At this time, I'd like to turn the presentation over to Verso's Vice President and Treasurer, Tim Nussbaum. Please go ahead.

Thank you and good morning. The third quarter 2021 financial results for Verso Corporation were announced this morning before the market opened. The earnings released as well as a set of slides to which we refer to during the call are available in the investor section of Verso's website, www.VersoCo.com. Joining me on the call today are Randy Nebel, Versus President and Chief Executive Officer, and Brian Cullen, Chief Financial Officer. I'd like to remind everyone that in the course of the call, in order to give you a better understanding of our performance, we'll 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, for 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, VersaCo.com, under the investor tab. In addition, during today's call, we will discuss certain non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information is not to be considered in isolation, or as a substitute for results prepared in accordance with GAAP and reconciliations to comparable GAAP measures are available in our earnings release. Finally, on July 14th, we announced that we had an unsolicited proposal from Atlas Holdings. As you may have seen since our last call, the special committee communicated to Atlas that the previously disclosed $20 per share all cash offer was insufficient and we entered into a confidentiality agreement with them to allow exchange of additional information to facilitate ongoing discussions. The special committee is diligently continuing its work to thoroughly review and evaluate the ATLAS proposal and alternatives thereto. There can be no assurance that any negotiations between Verso and ATLAS will take place following the exchange of additional information or that any transaction with ATLAS or any other party will occur or be consummated. We do not intend to comment on or disclose further developments regarding the Special Committee's evaluation unless and until we deem further disclosure as appropriate or required. At this point, I'd like to hand the presentation over to Randy Niebel.

Thank you, Tim, and good morning, everyone. Turning to slide four, I would like to provide an overview of how we are positioning VRSO to continue to deliver improved performance over the past couple years Verso made a strategic decision to streamline its business and create a more focused, simpler, and stronger Verso. Our focus is on safety, environmental stewardship, superior customer service, improving operations, and our most valued asset, our people. Turning to slide five, our more focused operation has begun to move Verso to a more competitive platform. Verso's Escanaba mill produces 700,000 tons of graphic and specialty papers. Escanaba is focused on reducing its cost and better serving Verso's customers. Verso's Quinnisec mill has a capacity of around 430,000 tons of graphic papers and about 240,000 tons of market pulp. Verso is making targeted capital investments here to reduce costs, expand product offerings, and maximize pulp production. Verso's Wisconsin Rapids is a converting facility with about 200,000 tons of sheeting capacity. Wisconsin Rapids is transforming to being a customer-focused sheeting operation with seven sheeters and an improved cost structure. Finally, Verso owns Consolidated Water Power Company, a regulated utility with five hydroelectric facilities producing approximately 200,000 megawatt hours of electricity. QIPCO, as we call it, sells the energy it produces together with purchases from local utilities to the paper mills and some homes. Turning to slide six, sustainability is a high priority for Verso and our customers. We have made good progress. For example, We are using wood fiber from sustainably managed forests and over 65% of our onsite energy generation at Verso Mills is from carbon neutral biomass. We are also partnering with key organizations that are setting the standards for the industry. Verso is focused on continuing to reduce its carbon footprint by improving the thermal efficiency of our facilities. Turning now to slide seven. Let's get into the results. During the third quarter, Verso continued its improvement trend. Employee safety is a core value at Verso. We continue to deliver very good safety performance and will always strive to have no injuries. Revenue grew both year over year and sequentially to $339 million. Diluted earnings per share was $1.96. up from 47 cents in Q2, and a loss of 92 cents in the same quarter last year. Adjusted EBITDA was $67 million, up 29% versus the second quarter, with an adjusted EBITDA margin of 19.8%. These results were delivered despite a planned outage at our Escanaba mill and inflationary headwinds of about $19 million. Operational cash was $71 million, up $14 million versus the second quarter, resulting in $166 million in cash. These strong results enabled Verso to return $14 million in value to shareholders through quarterly dividends and share repurchases. Turning to slide eight, revenue grew 11% over last year and 3% over the previous quarter. Market demand continues to be strong with North America coded free sheet operating rates at 105%. Order rates and price realization continue to be solid across Verso's product portfolio. Verso will continue to build on our customer strategy to provide superior service and products. The capital investments Verso is making in its processes will improve quality and service, while expanding Verso's product portfolio and reducing costs. Turning now to slide nine. While up slightly versus the previous quarter, industry capacity is down about 15% versus the prior year. North American capacity reflects the impact of paper machine closures and conversions in 2020. As previously mentioned, we removed the Wisconsin Rapids capacity as of July 2020, which represented over 400,000 annual tons of coated free sheets. Imports, while up slightly versus the previous quarter, are about 10% lower than the previous 10-year average. Container availability, increased freight cost, and supply chain delays still remain a challenge. Verso continues to offer a more predictable and efficient platform to service the domestic market. Turning to slide 10, strong price realization and improved operating cost have yielded an adjusted EBITDA margin of 19.8%, up 400 basis points versus last quarter. As Verso continues to become more focused, simple, and a stronger company, There will be opportunities to improve on this results. I am very proud of the progress that the Verso team has made. Even with this progress, there is still a lot of work to be done, and Verso will continue to focus on improving operational performance and customer service across the company. I will now turn the call over to Brian for a review of the financials. Brian?

Thank you, Randy, and good morning. I want to shift gears to slide 12, which highlights Verso's financial progress, which benefited from market tailwinds and continued improvements in execution. As you look down the Q3 2021 results column, we are encouraged by the progress versus last quarter and last year across all metrics. Net income was $58 million, positive for a second consecutive quarter, which directly impacted our earnings per share. EPS also benefited from our share repurchase program, as we have repurchased 6.5 million shares since Q1 2020. Moving to slide 13, Verso continued to benefit from the realization of price increases, with overall average price being up 6% versus Q2, and up 17% compared to last year. Once again, shipment succeeded production, which reduced our finished goods inventory levels by 24% versus last quarter. That said, our team remains focused on closing out the year and building on this momentum. On slide 14, you will see a bridge of Verso's results from Q3 2020 to Q3 2021, showing good progress. These results were led by strength in pricing across all grades, which delivered $47 million of adjusted EBITDA. Inflation, meanwhile, was a $19 million headwind for the quarter, spanning freight, energy, chemicals, and purchased pulp. The middle of the chart highlights key savings in wood and operations. Our wood purchasing strategy delivered $4 million in savings, which is up $1 million versus Q2. And operations delivered $5 million in EBITDA due to improved pulping operations and lower warehousing expense. The right side of the chart highlights the $11 million benefit due to the conversion to our current two-mill system. And finally, we benefited from special items of $7 million, primarily due to an insurance recovery related to a 2019 insurance claim at our Quinnisec mill. Slide 15 highlights the significant growth in our available cash position, which increased by $49 million to $166 million at quarter end. This improvement in cash was driven by adjusted EBITDA, further reductions in inventory, and our continued focus on driving out costs at closed and idled mills. Most importantly, our strong operating cash generation more than covered our capital investment, pension contributions, and enabled Verso to return an additional $14 million to shareholders during the quarter. Turning to slide 16, To date, we have returned $225 million to shareholders, spread fairly evenly between dividends and share repurchases dating back to March of 2020. In total, we have retired 6.5 million shares. For the most recent quarter, we paid out another $3 million in dividends and repurchased $11 million in shares. We have also declared a fourth quarter dividend of 10 cents per share that will be paid on December 29th to shareholders on record as of December 17th. Finally, slide 17 features our outlook for the full year of 2021. We expect capital expenditures to be between $60 and $65 million as we implement projects at the Escanaba and Quinnisec Mills and as we prepare for our 2022 initiatives. Additionally, we have now met the 2021 full-year pension contribution requirement of $25 million and we expect our cash position to continue to increase through the end of the year. As we turn our attention to Q4, our team continues to remain focused on reducing costs, generating cash, and servicing our customers in the coming months. I will now turn it back over to Randy.

Thank you, Brian. In summary, I would like to again share with you the core values and vision of the Verso Company. This slide is a copy of a poster that hangs on the walls throughout the company. Our commitment is to our employees, our customers, the environment, and our shareholders. With that, we will now open up the call for questions.

We will now begin the question and answer session. If you would like to ask a question, please press star then one on a touchtone phone. you will hear a tone to confirm that you have entered the list. If you decide you want to withdraw your question, please press star then two to remove yourself from the list. At this time, we will pause momentarily to assemble the roster. And our first question will come from Jeff Van Sinderen of B Reilly. Please go ahead.

Yes, hi. I wonder if you can just give us your latest thoughts on what the outlook might be for volume and pricing near term. Any thoughts on that?

Well, if you look back to the presentation at the capacity and demand chart, there's a lot of demand and the capacity in the U.S. is down pretty significantly. Imports are coming in, but not an extremely high rate. So we think the volumes are going to be pretty consistent through the fourth quarter and into next year. We also have a price increase that we announced a few weeks ago that will be coming in towards the end of the quarter and into next year. So in general, we feel very good about the volume and pricing outlook, probably through the first half of next year at least.

Okay, but just to clarify on that, so you feel like, I guess I'm not clear on the dollar volume you're saying you think is going to be kind of consistent through Q4 next year, or are you saying year over year increases in volume?

We're saying the volume, the number of tons is going to be relatively consistent with where we've been operating currently and we're saying pricing is going to go up.

Okay. Got it. Okay. Thank you. And then, um, you know, even though margins, um, at, at, at a very good level, um, you know, for a couple of quarters now, what do you think is a sustainable EBITDA margin for the company going forward?

Well, As I said in my comments, there's opportunities to improve, and that's the way I feel. If you look at our company, and go back to some other things that were said, when we went to the two-mill configuration that we're in, that's a much stronger company. The other mills that we had basically were bleeding cash. when we had to make the decision to shut them down when previous management did that, which was a great decision. So we have two mills that are very capable of competing very well. And let me go to the third quarter. If you look at the third quarter, $67 million of EBITDA, $7 million of special things that won't repeat, so let's take that back to $60 million. We had a two-week shutdown in Escanaba that cost us somewhere around $10 million. So that takes it back up to 70. And to be honest, we still have lots of executional improvements to make on the cost side. So if you think about a base of 70, and if we do our job and improve our execution, improve on energy, improve on how we Tom Penna- Schedule the mills and better conform to the schedules that we have 70 should be a springboard, you know, with good execution to go higher on the volume side again capacity is down. It's going to be down. We have had Tom Penna- I'll say somewhat of a rejuvenation in the paper business, I believe in the coated paper business. You have large e-retailers putting out catalogs, beautiful catalogs that are being extremely well received. There are new smaller versions of those catalogs coming out every day. Direct mail is growing. One very large retailer had gone completely away from direct mail. They're back in in a big way. The people are starting to realize that direct mail gives them a better return sometimes than Internet advertising. So on the demand side, I think there's the potential of things being good or maybe getting better on during certain parts of the year. End of next year is going to be another political cycle, which is always good for the business. When you look at all those things, look at the strength of the platform we have, and look at the way we've repositioned to be focused around on freight logical delivery and customers, and the customers that we're partnering with, I feel very optimistic about what could be. And as I said in the statement, there are opportunities to improve upon the 19.8. Okay, so...

No, no, no, I appreciate that. So just to clarify, are you saying you think that, you know, the catalogs and direct mail and so forth are now driving the type of graphic paper that you make out of secular decline and into secular growth?

I'm not saying that, but I'm saying I think it is slowing the secular decline. And I think during certain times of the year it could, uh, you know, we will see spikes up.

Okay. And so just, and then just to clarify on EBITDA margin, your thinking is that, that you can improve EBITDA margin and run an EBITDA margin at the call it 20% roughly is where you were, I guess. And kind of, if you're hitting that 70, you know, getting to that 70 million, You think you can run about a 20% EBITDA margin pretty much, I guess, in perpetuity?

I think there's opportunities to improve upon the 19.8. And I don't forecast going forward. But there's opportunities.

OK. And then just one more, if I could squeeze it in. Can you just update us on environmental remediation, litigation, and then if there's anything more you need to do around that?

At this point, we've made agreements with Luke with all the environmental agencies that we have to react or interact with. And so that's pretty well, you know, charted out and we're in good shape there. Other than that, we really don't have any significant environmental issues out there, you know, beyond the normal questions we get once in a while.

Okay, fair enough. Thanks for taking my questions.

Welcome.

The next question comes from Hamed Korsund of BWF Financial. Please go ahead.

Good morning. So, first question was, given that demand has been so elevated versus supply and you're raising prices, what's the risk here of demand destruction?

Well, I don't know how how well I can estimate that. But what I can tell you is we are seeing people asking for more paper and not less. And we're seeing in some cases people, customers that say, you know, just get us paper. We'll pay what you want, which we don't do. So I don't think we're destroying significant demand in the future. but I don't really have any basis in fact for saying that. I think that's kind of a guess, but our order backlogs are high, and again, there's new things where paper is being used.

How are you managing just the double ordering and just the inflated orders in the system right now?

Well, we have a process, and And as we deal with our customers, first and foremost, we communicate as well as we can. But we are not over-scheduling our mills. So we tend to keep people to, I won't say a strict allocation, but kind of what they've ordered before. There's got to be some real major reason for us to give them more because we're trying to service all of our good customers.

And then how are you going to make space as far as production is concerned if the political cycle kicks in 2022?

Well, we spent some money in Escanaba, our number one machine in September, that should increase our production capacity. And in the spring, In Quinnisec, we have a significant amount of money going into both the pulping recovery boiler and the machine that should give us quite a few more tons. And we're out talking with customers about those tons that will be available and at some level pre-selling them. And so we'll have some more tons available. And then as I talked about execution in our mills, Our yield from the paper we make to the paper we actually sell is not as high as we would like. And we have, with good execution, some time, training, and higher standards, there's probably an incremental 30,000 tons a year that can come just from those small improvements that we're going to be working on every day in both mills.

OK. And then as far as the CapEx, your guidance is up compared to Q2. Is that related to that Escanaba project you were just talking about?

Yeah, we took basically the pulping operation down for two weeks in Escanaba. And we had a – it really hadn't had a good shutdown for some time. Last year we – Did a limited shutdown just because of the pandemic and getting people in and out. And we had some found work, things that will make the mill more reliable that we had to get done. One of which was our biggest turbine in the mill needed to be rebuilt. And we made the decision to rebuild that. And that was $1.9 million. So it was just work. Once we saw it, we had to get it fixed.

Okay, and my last question is you have a lot of cash in your balance sheet. What's your intention here? Obviously, just given the Atlas bid and everything that's involved there, does that sidetrack what you were trying to do with the cash? What are your plans here?

Well, the first plan is to put more there, and so we feel good about our ability to generate cash. After that, we have a whole list of options between management and the board we're looking at, including investing in the company. I won't tell you we have a set plan at this point of what to do with the cash, but we'll make good use of it. As Tim the Treasurer tells me, we're making tens of dollars a month on interest in that stuff, so we're happy with that.

Okay. All right. That's it for me. Thank you.

Again, if you have a question, please press star, then one. And our next question will come from Hale Hoke of Hoke & Co. Please go ahead.

Hey, Randy. It's Hale. Congrats on the good quarter. I know you're reluctant to give any fine-pointed guidance on margins, but you haven't really been in your seat all that long and you've had various distractions along the way. Can you talk about how many more quarters it'll take until you're at the margins that'll make you happy? Is it one or two more quarters or six more quarters? Or how do you think about where you are with regard to taking costs out of the system?

Well, that's an interesting question, Hale. I think we've begun on the path, and as you saw, roughly $19 million of cost has been, you know, fundamental costs have been taken out of the system so far this year. It's a long process. We use way, way too much natural gas, and we're making strides, you know, every day to get water usage and gas usage down in Escanaba. I think we will, you will see cost coming out, every quarter, hopefully at a faster rate than they've been coming out now. And that's one of the reasons I feel strongly about the opportunity to do better than the 19.8 is there's a large, large amount of cost to be taken out between our two mills. There's also, on the supply chain side, significant improvement to be made. Our mills aren't as reliable as they should be. And as we make them more reliable, that will allow us to schedule freight sooner. And there's a significant advantage on the freight side and actually in warehousing that we can get out of supply chain. And that by itself is tens of millions of dollars that we can flow to the bottom line. So I would hope, and I guess the last thing when you look at the management team we have now, it's a pretty new management team and people are just starting to get their stride going. I think I'm one of the older people in there, more senior people in the job, and I haven't been in the job permanently for a year yet. I think you'll see cost improvement every quarter going forward. We'll have to talk about inflation, but we've got a lot of ways to mitigate the inflation. And I think we could be in a good spot to show what we're capable of, let's say, about 18 months from now. I think you'll see a much more robust company and a much better indication of what our true potential is. I hope that answered your question.

Yeah, okay. Thank you. Can you also talk about, I mean, there was commentary about you becoming a more predictable and efficient platform, and can you kind of expand on that vis-a-vis imports specifically? Presumably, you are a better partner for a lot of the printing companies, and a lot of printing takes place in the Chicago area. You're much closer to Chicago. Freight becomes such a big issue for everyone. How do you think about being a good partner to those customers so if and when imports do come back, they still prefer to deal with Verso?

Well, again, that's an interesting question. I think, one, as we've talked, we have our backyard, which is the Chicago, Minneapolis, printing area. And we tend to, we're really focused in that area right now. It's Frank Logical. It's some place we can deliver to in a few hours versus somebody in Chicago having to buy imports in 90 days out at least before they get it. So we are doing everything we can to fortify in that area and build a moat around it. I think the other thing as a company that we're trying to understand is ESG. And if you think about everyone talking about their carbon footprint and then you look at companies that want to reduce their carbon footprint and the amount of carbon that comes when you're bringing paper from Asia or Europe into the heartland of the United States is pretty amazing. And I think that's going to be a competitive advantage for us. And that's one of the reasons I said we're more efficient at serving that market. We're driving 200 miles versus coming thousands of miles across the ocean. So I think if we are truly serious about being carbon efficient, that's a strategic advantage for us. Lastly, as I said, our mills are not as predictable as they could be. And as we improve that predictability, improve that reliability, that will allow us to better schedule freight and service customers with less lead time. So it's nothing magic, just a bunch of hard work. but it could make us a lot of money and I think it can cause some customers to be very dedicated to us as a trusted supplier.

Okay, great. You know, per our math, you're going to have over 200 million of cash by year end. And I know Ahmed asked kind of about your, your goals for that. You know, we're only one voice, but we own almost 10% of your company. And, you know, I think any investments you can make to, continuously improve the future earning power of the business we're in favor of. Anything you can do to lengthen the life of the business or slow the secular decline is great. But beyond that, I'd rather have the cash in my pocket earning zero than on your balance sheet.

You know, I think I've heard that from you before.

Yeah. Okay. Well, congrats on a great quarter and we look forward to seeing your fourth quarter results as well.

Okay, thank you and thank you for the questions.

This concludes our question and answer session. I would like to turn the conference back over to Randy Knebel for any closing remarks.

Well, thanks everyone for tuning in. We hope we got your questions answered and we look forward to talking to you next quarter. Have a good holiday season.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.