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Edited Transcript of VRS earnings conference call or presentation 8-May-19 1:00pm GMT

Q1 2019 Verso Corp Earnings Call

Memphis May 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Verso Corp earnings conference call or presentation Wednesday, May 8, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Allen James Campbell

Verso Corporation - Senior VP & CFO

* Leslie T. Lederer

Verso Corporation - Interim CEO

* Michael A. Weinhold

Verso Corporation - President of Graphic & Specialty Papers

* Timothy D. Nusbaum

Verso Corporation - Treasurer

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Conference Call Participants

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* Hamed Khorsand

BWS Financial Inc. - Principal & Research Analyst

* Jeffrey Wallin Van Sinderen

B. Riley FBR, Inc., Research Division - Senior Analyst

* Salvator Tiano

Vertical Research Partners, LLC - VP

* Adam Ritzer

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Presentation

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Operator [1]

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Good morning, and welcome to the Verso Corporation First Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note the conference is being recorded. A replay of this call will be available on the Investors page of Verso's website after 11 a.m. Eastern Time today.

At this time, I'd like to turn the presentation over to Verso Treasurer, Tim Nusbaum. Please go ahead.

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Timothy D. Nusbaum, Verso Corporation - Treasurer [2]

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Thank you, and good morning. The first quarter 2019 financial results for Verso Corporation were announced this morning before the market opened. The earnings release as well as the set of slides that we will refer to during the call are available on the Investors web page of Verso's website, www.versoco.com. Joining me today for today's call is Les Lederer, interim Chief Executive Officer; Allen Campbell, Senior Vice President and Chief Financial Officer; and Mike Weinhold, President of Graphic and Specialty Papers.

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 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 Investors tab.

At this point, I'd like to turn the call over to Les Lederer.

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Leslie T. Lederer, Verso Corporation - Interim CEO [3]

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Thank you, Tim. Good morning, everyone, and thank you for joining us on the call this morning. As you all know, I was appointed interim CEO by the Verso Board of Directors in early April. And this is my first opportunity to participate in a Verso earnings call. As Tim indicated, with me today is Allen Campbell who will walk through the financial slides and more fully explain our quarterly results. And also with me is Mike Weinhold who's available to respond to questions on our commercial efforts.

Since I joined the company, I have spent significant time with our senior leadership team, getting acquainted with Verso's business and the people who work at Verso. I've been impressed with everyone's effort to position the company for future success. Beginning next week and over the next few weeks, I will be traveling to our mill locations with Adam St. John, our Senior Vice President of Manufacturing, to meet with the mill teams to better understand our operating capabilities.

As described in the earnings press release and the presentation this morning, we still face continuing challenges due to the continuing decline in demand for graphic papers. In my review of the business with the leadership team, I believe we are positioning the company to overcome these challenges through product development and capital projects to be less reliant on graphic papers.

However, despite all our efforts, we have unfortunately announced that we will permanently shut down our paper mill in Luke, Maryland in response to continuing decline in customer demand for the grades of coated freesheet paper produced at the mill. These -- the decline in demand along with rising input cost, a significant influx of imports from Europe and Asia and rising compliance cost and infrastructure challenges associated with recent environmental regulatory changes also add to the issues that we have at Luke. We expect to complete the shutdown and closure of the Luke Mill by June 30, 2019.

We undertook this difficult decision because we could not overcome the operating and cost obstacles the Luke facility has faced, which caused the continuing losses. The company had studied the possibility of producing alternate grades of paper at Luke that could possibly provide better results, but the conclusions remain the same: We could not achieve profitability at the mill in today's market environment.

On Page 4 of the presentation slides, we have outlined the impacts to Verso as a result of the closure. First, it is important to note that the closure will have minimal disruption to our target markets as the majority of the coated freesheet and C1S specialty products produced at Luke can be made in our remaining mills. The closure will reduce the company's annual production capacity of coated freesheet by 450,000 tons.

Our first quarter production at Luke was 110,000 tons. The company's major maintenance spend otherwise planned for Luke will be reduced by $6 million to $7 million in the second half of 2019. Capital expenditures of $4 million planned for the remainder of 2019 at Luke will not be made.

The closure of the Luke mill will result in pretax cash charges for severance, benefits and other shutdown activities of approximately $25 million to $35 million. These estimated cash charges consist of approximately $15 million to $20 million in severance and benefit costs that will be reflected in our first quarter -- sorry, our second quarter 2019 results and approximately $10 million to $15 million in other shutdown costs to be recorded in 2019.

There are also noncash charges of $95 million to $115 million in accelerated depreciation and impairment charges for property, plant and equipment at Luke. The costs to maintain the Luke facility until disposition are projected to be $4 million to $5 million per year.

In spite of the issues we faced both with the results at Luke and the market generally, as shown in Slide 3 of the presentation, the company had a strong quarter and reported 2019 first quarter net income of $36 million versus a net loss of $2 million in the corresponding quarter of 2018. Our adjusted first quarter 2019 EBITDA was $69 million, an increase of $28 million over the corresponding quarter in 2018.

Sales for the quarter were $639 million and were flat compared to the corresponding quarter of 2018 with volume declining by 57,000 tons. But our -- all this was offset with better pricing and mix. The 12-month trailing EBITDA for the company totaled $324 million. Notwithstanding the favorable quarterly results, we believe that the impact of our first quarter decreased order volume was the result of both the unusual high level of inventory stocking by our customers at year-end along with the continued decline in demand for graphic paper products. We believe that with the closure of Luke, we'll be able to more effectively balance demand with available supply.

While Verso is the industry leader in production and sales of graphic papers, and we intend to remain the leader, we will continue to decrease our dependence on graphic-related products and grow our business in specialty papers and other paper products. These efforts have met with success. In 2017, 72% of Verso's revenue was in graphic products. That percentage is now 61%. Our success in decreasing our dependence on graphic products is the result of significant efforts made by our product development and commercial teams, working together with the operations team to trial and then commercially produce value-added alternate products.

In addition to the product development in specialty grades, the company's efforts to reduce our graphic focus was the efficient use of capital to convert and restart the number 3 machine at our Androscoggin Mill. The flexibility of this machine now allows us the ability to manufacture containerboard, unbleached and bleached pulp with the ability to swing between products as the market shifts, which optimizes the results from this machine. This was the case in our first quarter.

One other important note before I turn over the presentation to Allen, Kenny Sawyer, our Senior Vice President of Human Resources, led the company's negotiating team to a successful conclusion in the lengthy negotiation process whereby the United Steelworkers and select trade unions ratified a 3-year master agreement with Verso in March. This resulted in an agreement which more closely aligns Verso with current industry labor practices and supports the long-term interest of both the company and the employees covered by the contract. As a result of the agreement, the company incurred a cash charge of $6 million for the first quarter.

I will now ask Allen, our CFO, to provide a further financial update.

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Allen James Campbell, Verso Corporation - Senior VP & CFO [4]

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Thank you, Les. Turning to Page 6. As Les mentioned, prices were strong despite volume pressures. Paper prices were up $16 a ton from the fourth quarter and 9% versus prior year. Shipments were down 8% for the first quarter versus last year, with pulp up slightly and paper down. Inventory was up in the first quarter $75 million versus the same quarter last year as lower industry demand and strong production by our mills drove the increase. Mix of business in the first quarter, as shown on the top right, is fairly consistent with the fourth quarter. It is important to note the increase in specialty pulp and packaging for the first quarter of 2018 was only 29%, where now we've moved it to 39% in the first quarter of 2019, '18 versus '19.

On Page 7, we show key financial highlights. Sales came in towards the high end of our guidance at $639 million. The double-digit percent of sales adjusted EBITDA in the first quarter, which is not a weak quarter for us, as our prices overcame volume declines and inflationary hits. Net income continued with our fourth positive quarter in a row. Earnings were $1.03 per diluted share.

Continuing to Page 8. The $28 million improvement in adjusted EBITDA is highlighted in our bridge, walking the $41 million adjusted EBITDA in quarter 1 '18 to the $69 million we achieved in the first quarter of 2019. Price/mix has been strong for us, contributing $50 million in improvement to help offset $5 million of negative volume contribution. Price/mix is favorable across our product lines. The first quarter was relatively low in major maintenance projects, which contributed a $4 million improvement year-over-year.

Input costs were up $13 million primarily due to higher chemical and fiber prices. Included in the line $7 million other COGS and freight is the $6 million of union ratification expense that solved our master agreement with the representative mills and also allowed for improved operating arrangements going forward. Pension costs were $2 million unfavorable for '19 versus '18.

Forwarding to Page 9. Liquidity remained strong despite, as mentioned in our year-end call, the fact that we have seasonal use of cash in the first quarter as we incur seasonal build of inventory, employer compensation such as 401(k) and bonus payments and customer rebates.

Our build of inventory is high in the first quarter as a result of soft industry demand, seasonal build of wood inventories and strong operations performance as mentioned earlier. With our Luke closure, we will service customer orders and trim down the inventory levels throughout the second half of the year.

Cash from operations was down $38 million in the first quarter, a result of $106 million of working capital usage. Cash interest was down $4 million versus same quarter last year. Pension and CapEx were both up slightly.

Page 10 shows our major maintenance outage cost estimates for 2019 versus the prior years -- 2 years by quarter. Note that we'll step up spending in quarter 2 since we have a major boiler outage at our Wisconsin Rapids mill. Spending will continue to be high in quarter 3 and then drop significantly in the fourth quarter.

Moving forward to our guidance for the second quarter. We expect sales to be in the range of $620 million to $640 million; capital spending to be in the $32 million to $35 million range; major maintenance, $21 million for the year; and cash pension funding to be $7 million to $9 million.

For the year, we expect cash pension expense to be equal to 2018; as mentioned earlier, Luke mill closure cost to be in the $25 million to $35 million range in cash basis; and we expect finished goods inventory decline back to last year's levels by year-end.

With that, we conclude our prepared presentation and now return to operator to open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jeff Van Sinderen of B. Riley FBR.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [2]

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And Les, let me welcome you to Verso. I know you've only been there a short time. But as the new CEO, albeit interim, how are you thinking about changing the approach to pursuing strategic alternatives versus the prior attempt? And how are you changing the approach to operating the company or modifying it to make it more attractive to a potential buyer?

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Leslie T. Lederer, Verso Corporation - Interim CEO [3]

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Well, it's a long question, and it has many answers. The issue of our strategy, I've been asked by the Board to guide the company to a strategic alternative review. And as you said, I've been here a very short time. So that's not anywhere near to be completed. In operating the company, we will, as I said in my opening remarks, continue to diversify away from graphic products and get into specialty grades. I think it's important that we continue operating the business and try to get the most optimal mix of products from the machines we have remaining at the company.

As to your question about the former strategy of possibly selling the company, there is no specific design at this point to go in any direction but to seek out the best alternatives. And at this point, we're still studying the issues, and I will report back to the Board when we have the next Board meeting.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [4]

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Okay. And then any more color that you can give us on what you're seeing in terms of prices for the legacy paper business? I know your pricing was up year-over-year. Just wondering if you've seen anyone reduce prices on legacy, maybe on coated -- on CFS. And then what do you the outlook is for pricing as far as you can see?

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Leslie T. Lederer, Verso Corporation - Interim CEO [5]

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I'll let Mike answer that question.

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Michael A. Weinhold, Verso Corporation - President of Graphic & Specialty Papers [6]

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Jeff, obviously, you're seeing some of the same industry data that we live in the market environment, and demand has certainly changed from exiting 2018. Demand decline continues. With that said and as reported in our quarterly earnings, pricing for us has been positive as we move sequentially from Q4 into Q1. And we are basically seeing a stable pricing environment. From our standpoint with the Luke closure, we expect pricing for Verso to remain stable.

I can't speak nor would I pretend to speak for the marketplace, and we don't give forward-looking guidance on pricing. But current environment, I would characterize as demand, is certainly challenged in the graphics side. Spot prices have seen some deterioration. But in general, our pricing has been stable.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [7]

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Okay. And then just one more. Just wondering on linerboard, if you've seen demand slow at all there overall, if you're hearing about that given kind of the increased capacity that's hitting the marketplace. And just maybe you can speak to the outlook for your linerboard business and specialty paper growth this year.

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Michael A. Weinhold, Verso Corporation - President of Graphic & Specialty Papers [8]

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Yes. We -- so I'll take the linerboard question first. And that's really specific to our A3 conversion. We had a very successful conversion and start-up design for that machine. Initially was lightweight liner, virgin kraft, primarily targeting export markets. And we definitely have seen a slowdown in demand and a deterioration in pricing in the export markets. But we've also been able to produce other products than A3, and the design for flexibility was inherent in the conversion. And so we've been able to offset some of the dependency -- quite a bit of the dependency, quite honestly, of export linerboard into the domestic market.

So today on A3, as Les had mentioned in his opening, the flexibility of that asset allows us to produce NBSK pulp, UKP pulp, linerboard. And we are knee-deep in the development and successful trials of kraft bag markets, both bleached to unbleached. So there's a tremendous amount of flexibility.

So while we have certainly seen a slowdown in demand and a little bit of deterioration even domestically in pricing on the containerboard side, our dependence is less and our intention is to continue to develop products on that asset to lessen our dependency on export.

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Operator [9]

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Our next question comes from Salvator Tiano of Vertical Research.

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Salvator Tiano, Vertical Research Partners, LLC - VP [10]

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Les, welcome to the company and congratulations on the role. So first, I would just like to follow up a little bit on the containerboard issue. You did highlight also in the slides the flexibility. And I think there are a lot of companies that are focusing more on pulp, especially unbleached pulp. Just can you talk a little bit about how much -- firstly, how are your volumes trending in terms of actual containerboard versus pulp from the third -- the PM3 at Androscoggin and have -- whether you can provide an absolute number for containerboard production or at least how things have been trending since the start-up in the third quarter?

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Leslie T. Lederer, Verso Corporation - Interim CEO [11]

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Well, we really don't break down that type of detail in our disclosures. So all we can really say is to repeat what Mike and I have said already, is that we have flexibility in the machine to make containerboard, unbleached and bleached kraft products. And as Mike mentioned, we will kind of enter into some other product categories such as bleached and unbleached kraft bag. So that's the only type of disclosure we make at this point.

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Salvator Tiano, Vertical Research Partners, LLC - VP [12]

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Sure. And you mentioned the export markets. I think a few months ago, you had your Investor Day, and I think the idea back then was most of the product was initially exported, but I don't think that was the plan for the long term necessarily just to be on exports. Back then probably we're talking, I think, at least 80% or 90%. As we look now into your containerboard volumes, have you made more inroads into the domestic market? Or is it still mainly exported?

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Michael A. Weinhold, Verso Corporation - President of Graphic & Specialty Papers [13]

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Yes. No, we've had success with the domestic markets. And even during that investor presentation, and you've characterized it correctly, initial start-up certainly was targeted and it's a desirable product from an export standpoint. But we always intended to migrate into the domestic markets as well as develop alternative products. And certainly, we've accelerated that with the success of our domestic penetration and also with the deterioration we've seen in the export market.

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Salvator Tiano, Vertical Research Partners, LLC - VP [14]

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Okay. That makes sense. And just one last one on actually uncoated freesheet. With pricing there not just holding up for white paper, but actually increasing recently, there have been a lot of reports about companies, at least (inaudible) making white paper. Can you talk a little bit about your white paper volumes? How much perhaps you normally used to produce? And if there's been any material change in the past few months because of that?

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Michael A. Weinhold, Verso Corporation - President of Graphic & Specialty Papers [15]

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Yes. I won't give absolute numbers, but I will tell you by and large, uncoated freesheet production for Verso is a very small percentage of what we do. We've been focused on value-added products. We've been focused on growing our specialty. And as indicated by the Q1 earnings, the margins and the pricing for our coated freesheet products are holding up quite well. And so uncoated freesheet is not a big part of what Verso does.

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Operator [16]

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Our next question comes from Hamed Khorsand of BWS Financial.

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Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [17]

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So first off, just given the Luke and the commentary around -- about the profitability of that mill, are you at the stage to provide what kind of benefit you could see from an aggregate standpoint to the bottom line later this year?

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Leslie T. Lederer, Verso Corporation - Interim CEO [18]

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Well, let me make sure I understand, can you repeat that one more time, Hamed, the last part. I didn't quite get the last part.

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Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [19]

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Well, I mean, after it's shut down in June, one of the -- just backing out the onetime events expenses, wouldn't there be some sort of benefit to the bottom line as far as margins are concerned?

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Leslie T. Lederer, Verso Corporation - Interim CEO [20]

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Well, what we hope to do is to balance the supply and demand and the issues of -- we will have some charges as we explained. We hope that we can maintain price stability. But we don't have an expectation of the total effect at this point in time. We expect to maintain a balance in our supply and demand.

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Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [21]

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Okay. And then just from an inventory standpoint, the build that you had in Q1, will there be a further build in Q2? Or are you managing that more appropriately?

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Allen James Campbell, Verso Corporation - Senior VP & CFO [22]

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Well, look -- well, the balance of what we need to do with Luke, we -- the thought is with that mill closing, we're taking out 450,000 tons of capacity. We have sales for that product in the last half of the year. So we may build slightly in quarter 2. And then when production ceases, we'll be selling down that value throughout this last half.

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Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [23]

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Okay. And then as far as your Q1 performance is concerned, could that be repeated in Q2 given the current market environments that you're seeing in your end markets?

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Allen James Campbell, Verso Corporation - Senior VP & CFO [24]

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The one difference you need to look at closely is the maintenance. We have heavy maintenance in the second quarter, we did not have in the first. That will be a headwind for us in quarter 2.

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Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [25]

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Okay. Would it still be a free cash flow positive quarter?

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Allen James Campbell, Verso Corporation - Senior VP & CFO [26]

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We haven't forecasted what the cash flow will be for the quarter.

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Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [27]

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And my last question is, any plans or expectations as to what to do with Verso's capital structure? I mean, if you're generating free cash flow, wouldn't it be ideal to start looking at allocating for a stock buyback?

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Leslie T. Lederer, Verso Corporation - Interim CEO [28]

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Well, again, as I said in the original question that was asked as to our strategic direction, we're still working on the strategy for the long-term growth and performance of the company. So that issue has not been addressed as a final conclusion. I mean, we are not going in any one specific direction with our free cash flow. We're looking at all strategic alternatives.

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Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [29]

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But I mean, this has been an ongoing discussion for over a year now, right? I mean, I brought it up last quarter as well. I mean the Board's got to be listening to this call. They've got to be making a decision here.

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Leslie T. Lederer, Verso Corporation - Interim CEO [30]

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Well, again, the Board is fully aware of the questions that have been asked over this last few quarters. And they are trying to make sure that the direction the company goes is in the best direction for all constituents. And there has been no decision made on the specific questions you're asking. But we are measuring and looking at all strategic alternatives.

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Hamed Khorsand, BWS Financial Inc. - Principal & Research Analyst [31]

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You have a stock trading below book value generating free cash flow, and you can't make a decision on the capital allocation?

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Leslie T. Lederer, Verso Corporation - Interim CEO [32]

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Hamed, we're not trying to avoid your question. Again, we are trying to look at the long-term growth for the company. And if it requires additional liquidity and cash flow to achieve those objectives, maybe a stock buyback or a dividend isn't the best solution. I'm not saying we've reached a conclusion, but we have to measure all alternatives and have the Board make a decision. We have not made a decision on your question.

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Operator [33]

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Our next question comes from Adam Ritzer, a private investor.

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Adam Ritzer, [34]

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I guess my main question has to do with the supply/demand situation in the industry. How much supply do you think Luke is going to take out of the overall coated freesheet market right now?

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Michael A. Weinhold, Verso Corporation - President of Graphic & Specialty Papers [35]

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So the 450,000 tons as a percent of capacity, if you look at 2018, it's roughly 12%.

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Adam Ritzer, [36]

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Okay. So it's 12% there. And what's the status right now with the Catalyst Nine Dragon sale conversion? I know -- maybe Les could probably answer that. Where does that stand currently do you think?

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Leslie T. Lederer, Verso Corporation - Interim CEO [37]

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We're not involved with Nine Dragons' plans at all. I mean, we've seen the public disclosure of their plans. And if that was the purpose of their acquisition from Catalyst, they didn't disclose it to us at the time. All we see is the public disclosure. We don't know what the status is, what the progress is. So we can't answer that question.

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Adam Ritzer, [38]

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Okay. But your understanding is ultimately they're closing, converting. But I guess, what you're saying is you don't know the timing right now and you haven't heard that, that's officially closed. Is that the best way to look at it?

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Leslie T. Lederer, Verso Corporation - Interim CEO [39]

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All I can say again is that we are subject to the same information that you get. It's public disclosures to the extent they want to make public disclosures. They're a private company in the U.S. And I don't have any more insight than that.

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Adam Ritzer, [40]

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Got it. And could you -- what about the Somerset Mill closure by Sappi, any information on that?

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Leslie T. Lederer, Verso Corporation - Interim CEO [41]

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That's not a closure, that's a conversion. That's not a closure, it's a conversion.

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Michael A. Weinhold, Verso Corporation - President of Graphic & Specialty Papers [42]

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Yes. They continue through their conversion and -- of that machine, of that Somerset Maine, which was C2S, primarily coated freesheet being converted into SPS grades, and we are seeing that in the marketplace somewhat.

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Adam Ritzer, [43]

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Okay. Got it. So -- and also what do you guys think about the Stora Enso European closures? I know last quarter you talked a little bit about the inventory challenges in the industry. Looks like Q1 was pretty good. What about the import structure of that? I know you talked about imports maybe hurting pricing a little bit, but do you think that will help? And what do you think the timing is on that closures?

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Michael A. Weinhold, Verso Corporation - President of Graphic & Specialty Papers [44]

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Yes. And so again, we see what everyone sees from a public disclosure standpoint. I believe you're specifically referring to the Stora Oulu conversion, which certainly would have an impact on coated freesheet. A lot of coated freesheets are produced at that facility. So I don't think it's unusual to assume that, that also would have an impact on trade flows of those products and specifically products coming into the U.S. We have seen imports, and it has been mentioned, imports increasing, gaining share both in the coated freesheet and coated groundwood segments and certainly gaining share in coated freesheets. Korea, absolutely leading the charge in gains of coated freesheet imports.

So you could surmise that, that should have at least a positive impact on the global trade flows and potentially on imports into the U.S. should that machine convert -- or machines convert.

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Adam Ritzer, [45]

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Do you have any more specific data on how much imports are coming in right now? Any idea?

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Michael A. Weinhold, Verso Corporation - President of Graphic & Specialty Papers [46]

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Yes. And so again, if you look at just the imports as a percent of U.S. demand, in coated freesheet, it's roughly 24%. In coated groundwood, now it's 45%. Canada is roughly 40% of that coated groundwood being imported into the U.S. So we've always had imports, have a certain percentage share of both freesheet and coated groundwood. It is increasing in the coated freesheet side.

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Adam Ritzer, [47]

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Okay. So that could be pretty impactful. And then my other question has to do with your cash flows in the quarter. It looks like with your EBITDA less your pension contribution CapEx and some small interest payments, you guys generated a pretty decent amount of cash flow. You talked about the inventory build, so I understand that. But you also -- cash was down $20 million and debt was up $45 million. Could you discuss why is that occurring plus the inventory build? It seems like a big drawdown on all aspects of cash.

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Allen James Campbell, Verso Corporation - Senior VP & CFO [48]

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Well, if you look to the balance sheet somewhat, there's a lot of -- a little bit of noise in there because we've added lease accounting into our balance sheet. But our working capital usage was -- say, we made $69 million EBITDA, we had $106 million roughly of working capital usage. And then you throw the pension and other on that, and you get to roughly the numbers you're talking about. So the $106 million of working capital, $75 million was inventory.

And as we talked about that, we have a seasonal build of wood that we do every year, we're buying in the first quarter. And if we work that down on the second and third, the finished goods that we've built and, as we announced, the closure of Luke, that's going to clean that up in the second half. So abnormally high working capital usage in the first quarter combined with the seasonal build of wood drove that $106 million number.

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Adam Ritzer, [49]

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Got it. And it gets built up because of the new accounting charges on having leases on the balance sheet, is that correct?

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Allen James Campbell, Verso Corporation - Senior VP & CFO [50]

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No. No, it's strictly -- if you look at the $69 million EBITDA, you subtract the $106 million for working capital, that gets you 31 -- $37 million of usage of cash there. And then we had a few other payments go out in the first quarter.

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Operator [51]

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Our next question is a follow-up from Jeff Van Sinderen of B. Riley FBR.

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Jeffrey Wallin Van Sinderen, B. Riley FBR, Inc., Research Division - Senior Analyst [52]

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I just wanted to ask, in the light of the closure of Luke and all the analysis work that you've done over the last 18 months or so, are there any other potential line closures that you might make this year and keeping in mind that the company is looking at strategic alternatives, are you planning to wait to do any major conversion projects? Or should we expect you to move forward with some of the projects that may be looked at and seem like they are good return projects that might increase penetration in specialty and other grades of paper that we're on?

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Leslie T. Lederer, Verso Corporation - Interim CEO [53]

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Well, as we said, we definitely want to increase our concentration in specialty papers. To the extent it takes some conversion of capital to get the machines to make those types of products, we will definitely look into it. Again, the overall question of our strategic direction is still under study. And I've only been here a month or so. And I'm still gathering information, talking to senior leadership team about a variety of topics. Not trying to avoid the questions that have been asked this morning, but asking everyone to give us time to have the appropriate studies undertaken and then we can come back and give the disclosure that's necessary.

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Operator [54]

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(Operator Instructions) Our next question is a follow-up from Salvator Tiano of Vertical Research.

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Salvator Tiano, Vertical Research Partners, LLC - VP [55]

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A couple of follow-up questions. The first one is specifically about Luke. Obviously, you chose to shut down the mill. Now the way you're undertaking this project, is there a potential that the mill could restart, not obviously as a coated freesheet mill but as something else in the future, the same way Shanying, you bought this mill in Kentucky? And is there any -- could there be any potential interest from any Chinese companies? And why essentially are we going for a full closure instead of, specifically again for this mill, not for the entire company, considering any other alternatives like conversions, making pulp or trying to see if Chinese players would be interested?

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Leslie T. Lederer, Verso Corporation - Interim CEO [56]

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Well, again, whether someone is interested in purchasing the mill for other purposes, we do not have an answer on that. The question of us -- if you're asking us if we thought about converting that mill, we -- is that the question?

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Salvator Tiano, Vertical Research Partners, LLC - VP [57]

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Yes. Essentially why is it closed instead of doing something else?

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Leslie T. Lederer, Verso Corporation - Interim CEO [58]

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Look, it's closed because the products we make and the cost to make those products and the efficiencies and other compliance issues at that facility caused us to close the facility because we were losing money on the facility. We had negative cash flows on that facility. If we have not determined, we have not -- we don't have a direction how we can convert that mill and make it profitable. And therefore, we closed the mill because of those reasons.

If some buyer, whether it's Asian or otherwise, wants to come and look at the mill, we're more than happy to have them take a look. And if they wish to purchase it and alter it to some other purpose, we're more than happy to listen to them.

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Salvator Tiano, Vertical Research Partners, LLC - VP [59]

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Okay. Perfect. And just one last question that we're trying to understand a little bit, and if you could provide a little bit more color on the management change that took place last month. We're actually very puzzled with the press release, not mainly -- because at least on our end, we weren't expecting a CEO change. But we noticed there was like a 6-day gap between when the information became public with a press release and when actually the change took place on April 5. So can you elaborate a little bit on the management change and provide a little bit some color about why it happened and what happened during these 6 days?

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Leslie T. Lederer, Verso Corporation - Interim CEO [60]

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Well, again, disclosure of the company made around the executive changes in early April have been made. And that's the only disclosure we will talk about. So we made our disclosures, and the story that's in the disclosures is what we have.

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Operator [61]

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

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Allen James Campbell, Verso Corporation - Senior VP & CFO [62]

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I'd like to thank each of you for your time. We appreciate your interest in Verso, and that ends our call. Thank you.

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Leslie T. Lederer, Verso Corporation - Interim CEO [63]

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Thank you.

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Operator [64]

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