VERSO SECOND QUARTER 2020 RESULTSfilecache.investorroom.com/mr5ir_versoco/522... · 2 In this...
Transcript of VERSO SECOND QUARTER 2020 RESULTSfilecache.investorroom.com/mr5ir_versoco/522... · 2 In this...
Second Quarter 2020 Results
NYSE: VRS
Forward Looking Statements
Non-GAAP Financial Information
2
In this presentation, all statements that are not purely historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements in this presentation include, but are not limited to our expectations for pricing and input costs. Forward-looking statements may be identified by the words "believe," "expect," "anticipate," "project," "plan," "estimate," "intend," “potential” and other similar expressions. Forward-looking statements are based on currently available business, economic, financial, and other information and reflect management's current beliefs, expectations, and views with respect to future developments and their potential effects on Verso. Actual results could vary materially depending on risks and uncertainties that may affect Verso and its business. Verso’s actual actions and results may differ materially from what is expressed or implied by these statements due to a variety of factors, including: uncertainties regarding the duration and severity of the COVID-19 pandemic and measures intended to reduce its spread; the long-term structural decline and general softening of demand facing the paper industry; adverse developments in general business and economic conditions; developments in alternative media, which are expected to adversely affect the demand for some of Verso's key products, and the effectiveness of Verso's responses to these developments; intense competition in the paper manufacturing industry; Verso's ability to compete with respect to certain specialty paper products for a period of two years after the closing of the Pixelle Sale; Verso's business being less diversified following the sale of two mills after the closing of the Pixelle Sale; Verso's dependence on a small number of customers for a significant portion of its business; Verso's limited ability to control the pricing of its products or pass through increases in its costs to its customers; changes in the costs of raw materials and purchased energy; negative publicity, even if unjustified; any failure to comply with environmental or other laws or regulations, even if inadvertent; legal proceedings or disputes; any labor disputes; and the potential risks and uncertainties described under the caption “Risk Factors” in Verso's Form 10-K for the fiscal year ended December 31, 2019, Verso's Quarterly Report on Form 10-Q for the three months ended March 31, 2020, and from time to time in Verso's other filings with the Securities and Exchange Commission. Verso assumes no obligation to update any forward-looking statement made in this presentation to reflect subsequent events or circumstances or actual outcomes.
This presentation contains certain non-GAAP financial information relating to Verso, including EBITDA, Adjusted EBITDA, Gross profit (excl. D&A) and related margins. Definitions and reconciliations of these non-GAAP measures are included in this presentation. Because EBITDA, Adjusted EBITDA and Gross profit (excl. D&A) are not measurements determined in accordance with GAAP and are susceptible to varying calculations, EBITDA, Adjusted EBITDA and Gross profit (excl. D&A) as presented, may not be comparable to similarly titled measures of other companies. You should consider our EBITDA, Adjusted EBITDA and Gross profit (excl. D&A) in addition to, and not as a substitute for, or superior to, our operating or net income or cash flows from operating activities, which are determined in accordance with GAAP. See the Appendix in this presentation for additional information on EBITDA, Adjusted EBITDA and Gross profit (excl. D&A) .
BUSINESS UPDATE
ADAM ST. JOHNPresident & CEO
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Q2 2020 HIGHLIGHTS DECISIVE ACTIONS TO POSITION BUSINESS FOR
LONG-TERM SUCCESS
RETURNED CAPITAL TO STOCKHOLDERS
• Operating rates and pricing at recent lows• Adjusted EBITDA1 for Q2: $(9)M
• Idling of Duluth and Wisconsin Rapids mills• Sharpened operating focus at our most profitable mills• Executing on strategy for diverse product offerings• SG&A and overhead reductions
• Initiated quarterly dividend• Continued share repurchase program
STRONG BALANCE SHEET + LIQUIDITY• $209M in cash• $423M in liquidity2
• No debt
COVID-19 CONTINUED TO IMPACT DEMAND
1 See Appendix for definitions of EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA are non-GAAP Measures. 2 Includes ABL facility limited by quarter end borrowing base of $214M and inclusive of cash
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RESETTING BUSINESS FOR FUTURE SUCCESS
Strengthened management with three new
executive team members:
• Senior VP of Manufacturing & Energy
• Senior VP of Sales & Marketing
• Senior VP of HR & Communications
Excellent safety performance with YTD TIR of 0.78
Implemented significant cost savings initiatives
throughout the business
NEW MANAGEMENT AND OPERATING EXCELLENCE
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RESETTING BUSINESS FOR FUTURE SUCCESS
Decisive action to address market conditions; reduces operating capacity by ~35%
Creates leaner organization; reducing employee base by ~44%
EXPECTED TO IMPROVE CASH POSITION
Sell through of inventory is expected to offset the cash costs of idling the mills
Maintaining operating flexibility:
• Restart if market conditions improve
• Sell/Close permanently
• Continued sheeting capacity
IDLING OF DULUTH AND WISCONSIN RAPIDS MILLS
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71%
9%
CONSOLIDATED BUSINESS STRENGTHENS OUR POSITIONING TO DRIVE STOCKHOLDER RETURNS
• Net Sales: $959M• Gross Profit (excl. D&A)1: $174M• Gross Margin (excl. D&A)1: 18.2%
DIVERSE PRODUCTSSTRONG LTM1 FINANCIAL PROFILE OF TWO OPERATING MILLS
GRAPHIC
SPECIALTY
PULPQuinnesec Mill • World-class paper and pulp mill well-positioned
in central region close to key markets
Escanaba Mill • Premier producer of graphic and specialty
products
7 1 Last Twelve Months (LTM) Depreciation and Amortization (D&A) for the two mills is $44M
SPECIALTY: Key Growth Area
• Growing sector• Loyal customer base• Stable revenue stream• Focused growth in niche products:o Release liners o Coated one-side labelso Direct thermal
• Leveraging internal pulp production
SPECIALTY1: ~21%
1 First half 2020 revenue mix for the Quinnesec and Escanaba mills8
• Low cost producer of high-quality hardwood pulp
• Moderate growth tied to diverse market applications
• Flexibility to increase pulp output:o Capability at Quinnesec Mill
PULP: Stable Performer With Growth Potential
PULP1: ~11%
1 First half 2020 revenue mix for the Quinnesec and Escanaba mills9
• Strong operating low-cost mills are strategic advantage
• Maintaining sheet businesso Well-established brands: Sterling®
Premium & Anthem Plus®• Opportunity to gain customers and market
share as capacity in sector decreases• Focusing on most attractive niche areas to
stabilize revenues• Effectively managing CapEx and working
capital
GRAPHIC: Capitalize On Premium Supplier Positioning & Maximize Cash Generation
Cash Generation Supports Investmentsin Specialty and Pulp
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Positioned to Succeed as Industry Dynamics Improve
NEAR/MID-TERM
• Capital efficient investments in specialty and pulp
• Drive cost savings• Option to restart
idled mills or divest
TODAY• Well-established
brands with clear product strategy
• Tight expense control• Strong balance sheet• Returning capital
MID/LONGER-TERM
• Financial strength and built-in operational flexibility to drive:⚬ Organic performance⚬ Strategic M&A
focused on growth• Sustainable returns
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Drive Shareholder Returns
FINANCIAL UPDATE
ALLEN CAMPBELLSenior Vice President & CFO
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Key Metrics• Net sales impacted by the sale of Androscoggin
and Stevens Point mills in February 2020, closure of Luke Mill in June 2019 and overall effect of the COVID-19 pandemic
• Implementing in excess of $30M of cost savings with more expected by the end of the year
• Incurred major maintenance of $10M during the quarter vs $20M prior year for four mills
• Built 96,000 tons inventory ahead of the idling of Duluth and Wisconsin Rapids mills to support customers’ needs
Commentary
($ in Millions except per share data)
Q2 19 Q2 20
Net Sales $ 602 $ 268
Operating Income / (Loss) $ (112 ) $ (42)
Net Income / (Loss) $ (112 ) $ (34)
Gross Margin (excl. D&A)1 $ 62 $ (3)
Adjusted EBITDA2 $ 44 $ (9)
Adjusted EBITDA Margin2 % 7.3% (3.4%)
EPS – Diluted $/share $ (3.23 ) $ (0.99)
Total Company Q2 19 Q2 20
Shipments (000 tons) 646 346
Average Net Sales Price $/ton $932 $773
1 Depreciation and Amortization (D&A) for Q2 2020 of $22M and Q2 2019 of $104M. 2 See Appendix for definitions of EBITDA, Adjusted EBITDA and AdjustedEBITDA Margin. EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP Measures
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Q2 2019 to Q2 2020 Adjusted EBITDA1
Bridge ($M)• Sale of Androscoggin and Stevens Point
mills impacted EBITDA by $11M
• Demand strained as a result of COVID-19 related closures resulting in price pressures and unfavorable mix
• Controlled costs and operations in response to revenue challenges
• Continue to maintain SG&A at industry low levels
• Major maintenance reduced due to Wisconsin Rapids Mill not taking outage in the second quarter, offset by higher Quinnesec Mill costs
Commentary
1 See Appendix for definitions of EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin. EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP Measures
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-9-23
-11
Major Maintenance
1
-35
44
-11
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Input Costs
Volume
9
9
OPS Q2-20
2
Sold Mills
Luke Q2-19 Ex Luke
and Sold Mills
SG&A/ Pension
Q2-19 Price/ Mix
Down Time
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Q2 19 Q3 19 Q4 19 Q1 20 Q2 20
Q2 19 Q3 19 Q4 19 Q1 20 Q2 20
Q2 19 Q3 19 Q4 19 Q1 20 Q2 20
Improved Balance Sheet & Strong Liquidity
CASH
LIQUIDITY1
DEBT
($ in Millions)
$6 $6
$276
$42
$209
$267$294
$318
$498
$423
$47
$21$0 $0 $0
1 Includes ABL facility limited by borrowing base and inclusive of cash. 2 See Appendix for definitions of EBITDA, Adjusted EBITDA and Adjusted EBITDAMargin. EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP Measures. 3 Includes restructuring, severance, interest and taxes
Change in Cash Q2 2020
Adjusted EBITDA2 $(9)
CapEx (15)
Net Pension (15)
Cash from Operations $(39)
Buyback / Dividend (23)
Other3 (5)
Total $(67)
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Key Metrics: Two Operating Mills
• Quinnesec and Escanaba mills gross margin of 18.2% (excl. D&A) considerably higher than Company average
• The Quinnesec and Escanaba mills LTM for Major Maintenance and CapEx are:
o Major Maintenance of $24M
o CapEx of $44M, of which $10M was related to one-off events
• Planning to maintain SG&A at less than 5% of revenues
Commentary($ in Millions)
LTM1
Net Sales $ 959
Mill Gross Profit (excl. D&A)2 $ 174
Mill Gross Margin (excl. D&A)2 18.2%
16 1 LTM as of June 30, 2020. 2 LTM Depreciation and Amortization (D&A) for the two mills is $44M
$3.4M
Regular Dividend• Declared quarterly dividend of $0.10 per share
o Payable on September 28, 2020• Initiated quarterly dividend of $0.10 per share
during Q2 2020o Paid on June 29, 2020
• Repurchased $19.7M or 1.4M shares in Q2 2020. Cumulative $22.4M or 1.6M shares o Current shares outstanding at 33.7M
Share Repurchase
Return of CapitalSpecial Dividend• Declared special dividend of $3 per shareo Payable on September 28, 2020
$2.7M
Q1 2020 Q2 2020
$3.4M
$19.7M
Q3 2020 Projected
TBD
~$3.4M
~$100M
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Cumulative Return
$2.7M $25.8M $130M+
Q&A
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Q & A APPENDIX
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EBITDA, Adjusted EBITDA, Mill Adjusted Net Sales and Mill Adjusted EBITDA Definitions
EBITDA consists of earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA reflectsadjustments to EBITDA to eliminate the impact of certain items that we do not consider to be indicative of ourongoing performance. Mill Adjusted Net Sales excludes sales from the Androscoggin and Stevens Point mills. MillAdjusted EBITDA excludes adjustments from the Androscoggin and Stevens Point mills. We use EBITDA, AdjustedEBITDA, Adjusted EBITDA Margin, Mill Adjusted Net Sales and Mill Adjusted EBITDA as a way of evaluating ourperformance relative to that of our peers and to assess compliance with our credit facilities. We believe thatEBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP operating performance measurescommonly used in our industry that provide investors and analysts with measures of ongoing operating results,unaffected by differences in capital structures, capital investment cycles and ages of related assets amongotherwise comparable companies.
We believe that the supplemental adjustments applied in calculating Adjusted EBITDA , Adjusted EBITDA Margin,Mill Adjusted Net Sales and Mill Adjusted EBITDA are reasonable and appropriate to provide additionalinformation to investors.
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Major Maintenance - Current Operating Platform
Major Outage Timing
Q1 Q2 Q3 Q4
2018 No Major Outage QuinnesecWisconsin Rapids
No Major Outage Escanaba
2019 No Major Outage Wisconsin Rapids Escanaba No Major Outage
2020F No Major Outage Quinnesec Escanaba No Major Outage
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3
22
5 6
38
1
20
15
2
33
-
10
12
2
2018 2019 2020F 2018 2019 2020 2018 2019 2020 2018 2019 2020F 2018 2019 2020F
Q1 Q2 Q3 Q4FY
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Q2 2019 & Q2 2020 Adjusted EBITDA Reconciliation
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(Dollars in millions) Q2 -19 Q2-20 QoQ Δ
Net income (loss) (112)$ (34)$ 78$ Income tax expense (benefit) - (3) (3)
Interest expense 1 - (1)
Depreciation and amortization 104 22 (82)
EBITDA (7)$ (15)$ (8)$
Restructuring charges 40 - (40)
Luke Mill post-closure costs 1 3 2
Non-cash equity award compensation 6 2 (4)
Other severance costs 2 1 (1)
Other items, net 2 - (2)
Adjusted EBITDA 44$ (9)$ (53)$
Adjusted EBITDA Margin % 7.3% -3.4% -10.7%
YTD 2019 & YTD 2020 Adjusted EBITDA Reconciliation
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(Dollars in millions) YTD Q2 2019 YTD Q2 20 YoY Δ
Net income (loss) (76)$ 20$ 96$ Income tax expense (benefit) 1 23 22
Interest expense 2 - (2)
Depreciation and amortization 132 45 (87)
EBITDA 59$ 88$ 29$
Restructuring charges 40 6 (34)
Luke Mill post-closure costs 1 6 5
Non-cash equity award compensation 8 4 (4)
Gain on Pixelle Sale - (88) (88)
(Gain) loss on sale or disposal of assets 1 - (1)
Other severance costs 2 5 3
Stockholders proxy solicitation costs - 4 4
Other items, net 2 1 (1)
Adjusted EBITDA 113$ 26$ (87)$
Adjusted EBITDA Margin % 9.1% 3.5% -5.6%
Q2 and YTD 2020 P&L Adjusted EBITDA Add Back Items
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(Dollars in millions, except per share amounts)
Reported
Q2-20 Adjustments
After
Adjustments
Reported
YTD Q2-20 Adjustments
After
Adjustments
Net sales 268$ -$ 268$ 739$ -$ 739$
Costs and expenses:
Cost of products sold (exclusive of depreciation and amortization) 271 3 (1) 268 698 7 (1) 691
Depreciation and amortization 22 - 22 45 - 45
Selling, general and administrative expenses 16 3 (2) 13 43 12 (2) 31
Restructuring charges - - - 6 6 (3) -
Other operating (income) expense 1 1 (4) - (87) (87) (4) -
Operating income (loss) (42) (7) (35) 34 62 (28)
Other (income) expense (5) - (5) (9) - (9)
Income (loss) before income taxes (37) (7) (30) 43 62 (19)
Income tax expense (benefit) (3) - (3) 23 - 23
Net income (loss) (34)$ (7)$ (27)$ 20$ 62$ (42)$
Weighted average common shares outstanding (in thousands):
Basic 34,548 34,548 34,827 34,827
Diluted 34,548 34,548 35,023 35,023
Income (loss) per share:
Basic (0.99)$ (0.80)$ 0.56$ (1.22)$
Diluted (0.99)$ (0.80)$ 0.56$ (1.22)$
(1)
(2)
(3)
(4)
Costs incurred after production ceased at the Luke Mill that are not associated with product sales or restructuring activities, and severance and related benefit costs not associated with restructuring activities
Severance and related benefit costs not associated with restructuring activities, amortization of non-cash incentive compensation, costs incurred in connection with the stockholders proxy solicitation contest and other
miscellaneous adjustments.
Restructuring charges associated with the closure of the Luke Mill in June 2019.
The table below shows the Company’s consolidated income statement as presented under U.S. GAAP in the first column, then adjusted to reflect the adjustments the Company uses to get from EBITDA to Adjusted EBITDA.
Gain on the sale of outstanding membership interests in Verso Androscoggin, LLC in February 2020, which included the Androscoggin Mill and Stevens Point Mill, and other miscellaneous adjustments.
(Dollars in millions, except per share amounts)
Reported
Q2-19 Adjustments
After
Adjustments
Reported
YTD Q2-19 Adjustments
After
Adjustments
Net sales 602$ -$ 602$ 1,241$ -$ 1,241$
Costs and expenses:
Cost of products sold (exclusive of depreciation and amortization) 540 1 (1) 539 1,089 1 (1) 1,088
Depreciation and amortization 104 76 (2) 28 132 76 (2) 56
Selling, general and administrative expenses 29 9 (3) 20 53 12 (3) 41
Restructuring charges 40 40 (4) - 40 40 (4) -
Other operating (income) expense 1 1 (5) - 2 1 (5) 1
Operating income (loss) (112) (127) 15 (75) (130) 55
Interest expense 1 - 1 2 - 2
Other (income) expense (1) - (1) (2) - (2)
Income (loss) before income taxes (112) (127) 15 (75) (130) 55
Income tax expense - - - 1 - 1
Net income (loss) (112)$ (127)$ 15$ (76)$ (130)$ 54$
Weighted average common shares outstanding (in thousands):
Basic 34,626 34,626 34,555 34,555
Diluted 34,626 35,213 34,555 35,199
Income (loss) per share:
Basic (3.23)$ 0.43$ (2.19)$ 1.56$
Diluted (3.23)$ 0.42$ (2.19)$ 1.53$
(1)
(2)
(3)
(4)
(5)
The table below shows the Company’s consolidated income statement as presented under U.S. GAAP in the first column, then adjusted to reflect the adjustments the Company uses to get from EBITDA to Adjusted EBITDA.
Costs incurred after production ceased at the Luke Mill that are not associated with product sales or restructuring activities.
Professional fees and other charges associated with strategic alternatives initiative, severance and related benefit costs not associated with restructuring activities, amortization of non-cash incentive compensation and
other miscellaneous adjustments.
Restructuring charges associated with the closure of the Luke Mill in June 2019.
Realized (gain) loss on the sale or disposal of assets and other miscellaneous adjustments.
Accelerated depreciation associated with the closure of the Luke Mill in June 2019.
Q2 and YTD 2019 P&L Adjusted EBITDA Add Back Items
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12 Months Six Months Six Months 12 Months
Ended Ended Ended Ended
December 31, June 30, June 30, June 30,
(Dollars in millions) 2019 2019 2020 2020
Net income (loss) 96$ (76)$ 20$ 192$
Income tax expense (benefit) (117) 1 23 (95)
Interest expense 2 2 - -
Depreciation and amortization 183 132 45 96
EBITDA 164$ 59$ 88$ 193$
Adjustments to EBITDA:
Restructuring charges (1) 52 40 6 18
Luke Mill post-closure costs (2) 9 1 6 14
Non-cash equity award compensation (3) 12 8 4 8
Gain on Sale of the Androscoggin/Stevens Point Mills (4) - - (88) (88)
(Gain) loss on sale or disposal of assets (5) 2 1 - 1
Stockholders proxy solicitation costs (6) 1 - 4 5
Other severance costs (7) 4 2 5 7
Strategic initiatives costs (8) 6 1 - 5
Other items, net (9) 1 1 1 1
Adjusted EBITDA (10)251$ 113$ 26$ 164$
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10) Adjusted EBITDA includes $13 million of income related to a pension settlement gain recorded in the fourth quarter of 2019.
Costs incurred in connection with the stockholders proxy solicitation contest.
Other miscellaneous adjustments.
Charges associated with the closure of the Luke Mill in June 2019.
Gain on the sale of the outstanding membership interests in Verso Androscoggin LLC in February 2020, which included the Androscoggin Mill and Stevens Point Mill.
Realized (gain) loss on the sale or disposal of assets.
Amortization of non-cash incentive compensation.
Severance and related benefit costs not associated with restructuring activities.
Professional fees and other charges associated with our strategic alternatives initiative, including costs incurred in 2019 related to the Pixelle Sale.
Costs recorded after production ceased at the Luke Mill that are not associated with product sales or restructuring activities.
LTM and YTD Adjusted EBITDA Reconciliation
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Verso Q2 2019 Mill Adjusted Net Sales and Mill Adjusted EBITDA Reconciliation
Verso
Androscoggin &
Stevens PointRemain Co.
(Dollars in millions) Q2 2019 Q2 2019 Q2 2019
Net sales 602 134 468
Costs and expenses
Cost of products sold (Exclusive of depreciation and amortization) 540 119 421
Depreciation and amortization 104 4 100
Selling, general and administrative expenses 29 4 25
Restructuring charges 40 - 40
Other operating (income) expense 1 - 1
Operating income (loss) (112) 7 (119)
Interest expense 1 - 1
Other (income) expense (1) - (1)
Income (loss) before income taxes (112) 7 (119)
Income tax benefit - - -
Net income (loss) (112) 7 (119)
Interest expense 1 - 1
Depreciation and amortization 104 4 100
EBITDA (7) 11 (18)
Restructuring charges 40 - -
Luke Mill post-closure costs 1 - -
Non-cash equity award expense 6 - 6
Other severance costs 2 - -
Other items, net 2 - 2
Adj. EBITDA 44 11 33 27
Q2 19 Q2 20
Shipments (000 tons)
Paper 592 280
Pulp 54 66
Total 646 346
Price $ / ton
Paper 965 844
Pulp 575 471
Average Price $ / ton 932 773
Shipments and Price
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