Verso Paper Corp. (VRS)

VRS 
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Verso Paper Corp. (VRS)

Q3 2011 Earnings Call

November 7, 2011 9:00 am ET

Executives

Robert P. Mundy – Chief Financial Officer & Senior Vice President

Michael A. Jackson – President, Chief Executive Officer & Director

Analysts

Joe Stivaletti – Goldman Sachs

Bruce Klein – Credit Suisse

Tarek Hamid – JP Morgan

James Daly – Deutsche Bank

Richard Kus – Jefferies & Company

Chip Dillon – Vertical Research Partners

Gary Madia – Gleecher & Company

Bill Hoffman – RBC Capital Markets

Jeff Harlib – Barclays Capital

Michael Marshuk – UBS

Kevin Cohen – Imperial Capital

Eric B. Anderson – Hartford Financial

Presentation

Operator

Welcome to the Verso Paper Corporation third quarter 2011 earnings conference call. Today’s conference is being recorded. At this time I would like to turn the conference over to Mr. Robert Mundy, Senior Vice President and Chief Financial Officer.

Robert P. Mundy

Thank you for joining Verso Paper’s third quarter 2011 earnings conference call. Representing Verso today on this call is President and Chief Executive Officer Mike Jackson and myself Robert Mundy, Senior Vice President and Chief Financial Officer. Before turning the call over to Mike, I’d like to remind everyone that in the course of this call in order to give you a better understanding of our performance, we will be making certain forward-looking statements.

These forward-looking statements are subject to risk and uncertainties. Should one or more of these risks or uncertainties materialize, or should underlying assumptions or estimate prove correct, actual results may vary materially from management’s expectations. If you would like further information regarding the various risks and uncertainties associated with our business, please refer to our various SEC filings which are posted on our website www.VersoPaper.com under the investor relations tab.

Michael A. Jackson

If you could turn to Slide Three, our adjusted EBITDA for the quarter was $64.2 million which was $18 million above the third quarter of last year and $20 million above the second quarter of 2011. Operating income increased 136% to $30.6 million from $12.9 in the third quarter of 2010 and from $7 Million in the second quarter this year. Looking at it in key comparisons, we find that our total volume was up over 15% from Q211 but down slightly, about 2% from last year. The average selling price for our product line was up 8% and revenue was up 6%. Prices were up slightly from Q2 of this year. Gross margins before depreciation rose to 17.8% or a 2.7% increase over the second quarter of 2011.

You may remember during our second quarter call that we expected to have a good third quarter relative to operations and in fact, that was the case. Performance was driven by usage improvements encompassing the components of chemicals, water, pulp and energy which all contributed to the R-GAP category. All focus areas that we’ve spoken about in the past. In fact, operations were $10 million better than the second quarter of this year.

Bob will get into the details of our input costs but clearly they’ve been a challenge as our year-over-year increase for just the third quarter was $18 million. Chemicals and wood have been the main drivers with chemicals leading the way. Though inventory levels decreased 7,000 tons for our coated paper from Q2 2011 levels, we’re watching our coated groundwood inventories closely as we move into the fourth quarter. As the economy sputtered, it was clear that catalog companies had pruned their mailing spend.

Although not mentioned on this page, I did mention safety in our earnings release this morning and felt it important to mention again. Before the quarter we obtained a total incident rate of 0.8 which is world class performance. Clearly, there’s a correlation between excellent safety performance and improved operations which we certainly saw this quarter. With that, I’ll turn it back to Bob for some financial details and then I’ll be back to talk about the outlook and we’ll take questions at the end of the call.

Robert P. Mundy

If you’ll turn to Slide Four, the seasonally stronger third quarter volume was up over 70,000 tons from the second quarter, down slightly from last year’s third quarter. Although volume was down a bit from last year, revenues were up almost 6% due to six consecutive quarters of increasing coated sales prices. Operating income was up $18 million versus last year and we had positive adjusted net earnings of about $1 million versus a $19 million lost last year.

On Slide Five, you can see that coated volumes were down about 23,000 tons from last year, although, as Mike mentioned, we still were able to pull inventories down in the quarter. Coated prices are up over $80 a ton versus last year and up slightly versus the second quarter. Pulp volumes were where we expected them to be, and hardwood prices were down about $25 a ton due to the softening in the pulp markets.

On Slide Six, you can see the key changes between our third quarter 2011 adjusted EBITDA of $64 million versus the $46 in the third quarter of 2010. As I mentioned earlier, overall volume was down slightly while improved pricing contributed $34 million. Operations were over $3 million better than last year’s third quarter primarily due to usage and energy reductions and input prices continue to be a challenge and were $18 million above last year’s price levels.

On Slide Seven, this gives you a few of the adjusted EBITDA changes between the second and third quarters of 2011. The volume during this seasonally stronger period contributed about $11 million and slightly higher sales prices were worth just over $1 million versus the second quarter. I mentioned on our last call that our implementation planning for 2011 relative to productivity, direct costs, materials and usage, and indirect cost initiatives ramps up as the year goes on and you should see a clear indication of this during the third quarter which is what happened and what is represented by the $10 million improvement shown in the operations column. Although input prices were $4 million higher than the previous quarter, hopefully we’ll see some relief when we look at the fourth quarter results next time we talk.

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