What options exist for Verso’s idled paper mills?
community leaders and elected officials, like U.S. Sen. Tammy Baldwin, D-Wis., who hope Verso finds a way to put people back to work.
Baldwin on Oct. 29 sent a letter to Verso’s board urging it to continue to seek a buyer for its mills and to treat its workers fairly. Baldwin said the employees are “in agonizing limbo” and watching as the company gave executives and directors bonuses.
Nebel responded on Nov. 3, telling Baldwin that Verso would “like nothing more than to be able to operate the mill profitably or to sell it to a potential buyer.” He said the mill has not been profitable since the company took control of it via Verso’s acquisition of New Page in 2015. In the letter, he said the company is “committed to making every effort to treat (employees) fairly and assist them as much as possible during this challenging and difficult time.”
Baldwin, in a Nov. 25 statement, said she remains concerned that the “activist investors” who gained seats on the company’s board will continue to push decisions that benefit shareholders and executives at workers’ expense.
“The company’s actions suggest that it is more interested in spending cash to prop up its stock price than treating its employees with the fairness and respect they deserve,” Baldwin said. “I hope the activist group will sell the facility to local buyers who are interested in purchasing it and operating it.”
Amid a graphic paper sales decline, coronavirus ‘threw gasoline on the fire’
The difficulty with restarting the mill or finding a buyer is that the market isn’t buying as much of what the mill is making.
Graphic paper sales have been in decline for years, but the coronavirus “threw gasoline on the fire” in the graphic paper segment, said Hamed Khorsand, an analyst with BWS Financial Inc. who has followed Verso and the paper industry since 2016.
A Sept. 18 McKinsey & Co. analysis of the graphic paper market said the pandemic cut demand by 40% between April and June as office printers went silent, print advertising declined, schools went virtual and e-commerce grew. McKinsey’s recommendations for the industry: Strategically assess operations, cut costs, develop new products and examine price and product mix.
Verso and every other paper company had little choice in the short term other than to idle mills to bring production in line with demand, Khorsand said. He said Verso’s first move in this direction was to idle its mill in Luke, Maryland, in 2019.
“They’re downsizing to meet the market. They tried with Luke Mill last year and it was not enough, so they took Wisconsin Rapids offline as well,” Khorsand said. “That still wasn’t enough. Competitors need to shut down machines to bring some stability, too.”
What there is growing demand for is specialty paper, the type used in packaging, food pouches and product labels. Specialty paper sales surged 14% in September, according to the American Forest and Paper Council.
Yet, in the last year, Verso has further concentrated its focus on graphic paper by selling two of its specialty paper-producing mills, in Stevens Point and Jay, Maine, to Pixelle. The company’s remaining mills, in Wisconsin Rapids, Duluth, Escanaba and Quinnesec, Michigan, predominantly produce graphic paper, in addition to smaller amounts of other products.
Verso’s second quarter earnings report indicated in August that graphic paper accounted for 68% of its product mix. Specialty paper, produced in Escanaba, made up 21% of its production, while hardwood kraft pulp, a key component of packaging produced in Quinnesec, accounted for 11%.
The move would seem at odds with market trends, but Verso sees a path to profits by focusing on its graphic paper segment while increasing specialty operations sales.
“We’re recognized as a supplier of the highest-quality products,” Nebel told investors. “We have an enviable reputation with our customers. (It) earns us the right to grow our market share.”
Three options are often discussed: Closure, a conversion or a sale.
Permanently closing the mill could look like what happened in Maryland, where Verso in June 2019 closed the Luke Mill, which had employed about 675 workers. The shutdown of the mill ended 131 years of production. The company entertained offers for buying the entire operation, but ultimately moved on and is instead selling components of the mill.
In August 2020, a Turkish company agreed to purchase the mill’s two paper machines and other equipment for $11 million, according to Verso’s third quarter earnings report filed with the SEC. There are also buyers interested in other components of the mill, such as its boiler, wood yards and water production facility, according to the Cumberland Times-News.
Conversion is a possibility that would preserve jobs.
Industry experts and analysts said new mill construction and existing mill conversions are focused on replacing graphic paper production with specialty papers and other products used in packaging and shipping, where demand continues to grow.
Market demand may shift within the industry, but what remains fixed, and costly, are the mills themselves. For example, Green Bay Packaging Inc. estimated the new mill it is building in Green Bay will cost $580 million, including roughly $80 million in local and state financial assistance.
Khorsand said new mills can be difficult to finance and find sites for, so when companies need to produce more, they usually turn to reviving existing mills.
“They will get shut down. They get closed. But they just never go away because no one ever wants another paper mill,” Khorsand said. “They eventually get reincarnated into something.”
Then there’s the possibility of a sale. A new owner could invest in the mill, hire back much of the workforce and adapt to the market, as happened at a former Verso mill in Wickliffe, Kentucky.
David Phillips, now mayor of Wickliffe, was at work the day Westvaco opened the coated paper mill in 1970, and he was there in 2015 when Verso shut it down and laid off 310 people. Verso, which had acquired the mill as part of its 2015 purchase of New Page, made the shutdown permanent in April 2016.
Hope was restored in the town of 700, near the confluence of the Ohio and Mississippi rivers, in August 2018 when Phoenix Paper LLC, a subsidiary of Chinese manufacturer Shanying International, bought the mill for $16 million and pledged to create 500 jobs and invest $150 million in the Wickliffe region of western Kentucky and southern Illinois.
Phillips returned to work at the mill in January 2019, spending six months there helping Phoenix Paper restart operations. He watched the first roll of bleached hardwood pulp roll out of the machine in May 2019. Shanying chose the company name purposefully.
“Phoenix Paper has been re-born from the remnants of the Wickliffe Paper Mill,” the company notes on its website.
“To have that come back, has just been …,” Phillips said. “I thought it was a miracle we even got the paper mill (in 1970). To get it back was a second miracle.”
Phoenix Paper’s initial investment converted the mill from producing coated papers to producing bleached hardwood pulp, a key component of packaging materials. The second phase, announced in August 2019 by the company and Kentucky Gov. Matt Bevin, was to build a paper recycling center adjacent to the mill. The $200 million project would add another 100-150 jobs and focus on processing recycled paper and sending the finished product to China for use in packaging.
Paul Fowler, executive director of the Wisconsin Institute for Sustainable Technology at the University of Wisconsin-Stevens Point, said Wisconsin Rapids could benefit as Chinese companies invest in U.S. paper production in order to reduce the amount of recycled paper shipped to and processed in China.
“Chinese businesses are seeing an opportunity to invest and recycle paper onshore (in the U.S.) and ship product back to China,” Fowler said. “The demand has injected new life and vibrancy into some sectors of the paper industry.”
Central Wisconsin residents don’t need to visit Kentucky to know what Chinese investment in paper mills can mean. ND Paper, a subsidiary of Chinabased Nine Dragons Paper, bought the Biron mill from Catalyst Paper Holdings in May 2018. Five months later, Nine Dragons announced a $189 million investment in the mill, retaining the 350 existing jobs and adding as many as 27 more.
A mill sale, as well as who might buy it, has been the topic of much discussion in Wisconsin Rapids. Rumors pegged Phoenix Paper as a possible purchaser while local workers have explored forming a multi-stakeholder co-op to buy and operate it.
As of Oct. 21, a group of timber professionals had created a cooperative and was looking for groups of mill workers and community members to join in creation of a multi-stakeholder co-op. The group told a local task force it had plans to secure financing to purchase the mill, and it had an idea of what the mill could produce in the future.
But Wisconsin Rapids isn’t likely to see a “sold” sign go up on the mill.
Nebel’s Nov. 3 letter to Baldwin better added a reason for the pause in trying to sell the mill: It’s hard to assess its value when the pandemic has put a chill on business travel. The letter said the sprawling mill is a complex operation that can’t be easily assessed remotely.
“We believe constraints on in-person review of the mill’s assets limits the number of potential buyers; therefore, we have determined it best to postpone our marketing efforts until the pandemic situation improves,” Nebel wrote. “If a qualified buyer or buyers were to come forward to discuss a potential transaction at a fair value, we would be interested in exploring the transaction.”
Experts optimistic about Wisconsin Rapids mill’s future
The Federal Reserve Bank of Chicago on Nov. 18 brought central Wisconsin leaders, a paper industry expert and an economist together for a panel discussion about the idled mill’s future and how the community can adapt with the changing paper industry.
Katie Weichelt, a learning analyst with Marshfield Clinic, told the panel the community will need to collaborate, pool resources and innovate, just as it did 130 years ago when it pivoted from lumber to paper.
“I’m struck about how they stopped, recognized what resources they had in the region, what they could do/strengths the area possessed, and took that to help their communities move in new directions,” Weichelt said. “Look for new opportunities, look at your strengths, seek outside assistance and dive into the unknown and take those risks.”
Though graphic paper sales are declining, demand for containerboard and other paper products is most certainly growing. That gives Fowler, at the Institute for Sustainable Technology, hope for the Wisconsin Rapids mill’s future. If mills can capitalize on the growing demand for different types of paper and convert their operations, there’s still hope.
“I’m optimistic about the future of paper. The demand is growing,” Fowler said. “There are entrepreneurs and innovation in that (paper industry) space and there’s a whole lot of demand driven by those global mega-trends. The industry, as a whole, is not dying. It has a sustainable future ahead.”