In an earnings call with investors and industry analysts Thursday, Verso President and CEO Adam St. John didn't offer great hope that the company will resume production at its Duluth mill anytime soon, if ever.
He said that shutting down mills in Duluth and Wisconsin Rapids, Wisconsin should enable the company to run its remaining two more profitable mills in Escanaba and Quinnesec, Michigan, at or near full capacity.
The market for graphic supercalendered paper — the Duluth mill's mainstay — has dwindled during the COVID-19 pandemic, as more business moved from print to online.
"These are certainly unprecedented times as COVID-19 continues to impact our industry. With the nation staying home, schools closing and large-scale sporting and entertainment events canceled, the demand for our products has decreased significantly," St. John said.
"It's never an easy decision to cease operations and lay off employees," he told investors. "And the current environment made our decision to take these actions particularly difficult. However, we took these proactive steps to address adverse market conditions, reducing our operating capacity by 35% and consolidating our strategy around two strong operating mills."
The future of the Duluth and Wisconsin Rapids mills remains uncertain.
"Moving forward, there are a few strategic options for these idled assets," St. John said. "Should market conditions improve, we could opt to restart the mills.
"Alternatively, we could sell the idled mills," he said, adding that the company is working with an adviser to evaluate the latter option.
"Finally, we could close them permanently," St. John said.
Chris Fleege, director of Duluth's planning and economic development division, said he and others are doing everything they can to make sure the last option doesn't become the only option. But he acknowledged significant investment — upward of $35 million — likely will be required to return the mill to sustainable operation.
Verso had just invested more than $5 million in the Duluth mill to begin producing kraft paper at a modest scale of about 90,000 tons per year when the pandemic hit. The company had been considering a full conversion of the plant to kraft paper, which goes into packaging applications, but it has since retreated from any capital-intensive projects.
Fleege predicts that it will take a forward-looking investor who recognizes the market opportunity of supplying packaging in these days of growing online commerce to see the value of the Duluth mill.
"Really, whoever buys this mill, eyes wide open, they'll probably have to make this conversion, because the graphic paper market continues to see erosion, and COVID only made it worse. Basically, no one was advertising, and the product they made went into advertising materials for Target ads and the things that go in newspapers," he said.
Nevertheless, Fleege remains optimistic that the relatively small-scale conversion of production Verso made at the Duluth mill will be viewed as a proof-of-concept exercise and will give a future buyer confidence to fully convert the plant to kraft paper products.
St. John previously confirmed at a May 11 earnings call that the the limited machine conversion in Duluth already was hitting the company's return expectations.
Duluth was prepared to help Verso shift its Duluth production completely to kraft paper products when the COVID-19 outbreak struck and the mill was idled, putting more than 220 people out of work in late June.
The city had earmarked $242,000 in local economic development funds for the project and also successfully lobbied for another $2 million forgivable loan from the state of Minnesota. Repayment of the loan would be waived if the Duluth mill continued operations for a certain number of years and continued to employ upward of 190 people — a proposed number since reduced to 150.
Fleege said he's hopeful similar assistance would be available for any prospective buyer.
He said the Duluth Economic Development Authority is also looking to retain the services of Baker Tilly, a consulting firm, to explore additional financing options.
The mill's location in an Opportunity Zone could provide another incentive, offering the prospect of significant tax breaks for capital gains realized by investors down the road, Fleege noted.
The fact that the Duluth facility already has a paper-recycling mill also makes it a more attractive candidate for a conversion to kraft production, he said, noting: "The pieces are in place. All the elements are there."
St. John told investors that the industry may already have endured the worst of times.
"Volume in the second quarter for all our grades was down 33%. We did have a significant uptick in July that we're optimistic about," he said. "So, as far as volume goes, we think we hit the low in June."
Prior to closing the mills in Duluth and Wisconsin Rapids, Verso amassed 96,000 tons of graphic paper inventory, Allen Campbell, the company's senior vice president and chief financial officer, said.
"We wanted to supply our customers and give us the ability to move our sheeting business to the two other mills," St. John said. "So, the market would have to come back pretty significantly for us to consider restarting those operations."