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Verso Corp  (NYSE:VRS)
Q4 2018 Earnings Conference Call
Feb. 28, 2019, 2:00 p.m. ET

Contents:

Prepared Remarks:

Operator

Good afternoon, and welcome to Verso Corporation's Fourth Quarter and Full Year 2018 Earnings Conference Call. All participants are in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions) Please note this conference is being recorded. A replay of this call will be available on the Investors page of Verso's website after 3:00 PM Eastern Time today.

At this time, I would like to turn the presentation over to Verso Treasurer, Tim Nusbaum. Mr. Nusbaum, please go ahead.

Timothy D. Nusbaum -- Treasurer

Thank you, and good afternoon. The fourth quarter and full year 2018 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'll refer to during the call are available on the Investors page of Verso's website at www.versoco.com.

Joining me on the call today is Chris DiSantis, Chief Executive Officer; Allen Campbell, Senior Vice President and Chief Financial Officer; and Mike Weinhold, President of Graphic and Specialty Papers. I would like to remind everyone that during 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, at www.versoco.com under the Investors tab.

At this point, I would like to turn the presentation over to Chris DiSantis.

B. Christopher DiSantis -- President and Chief Executive Officer

Thank you, Tim. Good afternoon, everyone. I'm on slide three of the deck. So, 2018 was a fantastic year and we delivered on many fronts. Starting with EBITDA first. EBITDA grew from $134 million to $296 million on an adjusted basis really nice increase there. We remain the market share leader with an estimated 49% of all the capacity in North America.

Our specialty business grew very nicely up to 31% of our total revenue and we've successfully converted the mix in such a way that two out of our seven mills are now 100% non-graphic. So, the Androscoggin Mill and Stevens Point Mill making 100% specialty and packaging products. In 2017, we had no kraft linerboard business.

We successfully diversified in a low risk way into packaging papers even further, so net CapEx of $14 million that was an $18 million project, less $4 million that we received from the State of Maine at a Technology Grant and we now have 200,000 tons a year of virgin kraft linerboard Capacity. There were a variety of headwinds facing the business in 2017. We executed a number of counter measures to respond to that and drive cash flow for the business.

Some of those items included the implementation in 2018 of 745 unique operational initiatives under our operational excellence program that we call RGAP. RGAP stands for realizable gap. It's a program that we use to close the gap between where we are now and world-class performance for a variety of metrics in the mill.

We achieved record quality results in 2018. It's the best year we've ever had in our history with less than one complaint received from customers for every 1,000 tons delivered. We successfully redesigned our benefits program, which generates some significant savings. We sold Wickliffe mill for $16 million, which had an additional benefit of saving several million dollars per year in carrying costs associated with the mill.

And we successfully signed up a countervailing duty agreement with some Canadian suppliers that generated $42 million in cash as part of that settlement associated with the removal of super calendar duties. And I just want to remind everybody that mill sale and the countervailing duty settlement is not in our EBITDA numbers.

In 2017, SG&A was 4.3%, 3.9% on an adjusted basis. You can see the appendix for the adjustments. We drove a leaner cost structure and SG&A in 2018. Had some particularly good efficiencies in the information technology group, and we finished up the year with 3.8% on a total basis. 3.2% SG&A on an adjusted basis, we expect we can build on these successes in 2019.

Turning the page to four. Graphic papers represented 60% of our fourth quarter revenues on a percentage as far as the pie chart is concerned that was the lowest percentage of graphic papers, the business has ever had in its mix. Operating rates in North America were strong for the year. However, they did begin to weaken in December. So, for the year, as a whole, 96% operating rate for both coated freesheet and coated ground wood.

Global operating rates as a whole remain challenged. There were a variety of capacity conversions that happened in 2018 that we'll see the full year impact of those in 2019, so that should help. And as far as the end market dynamics are concerned, pretty typical in terms of demand erosion in coated freesheet and coated ground wood were down about 5% for the year and coated freesheet down 7% and coated ground wood.

Magazine ad pages were significantly worse than commercial print and catalogs. You can see the magazine ad pages down dramatically 17%. But one important thing for me to keep highlighting about magazine ad pages is for a number of years, the company has been very proactively trying to reduce its exposure to that segment.

And right now, if you looked at our entire system, only about 8% of the total tons whether it would be freesheet, ground wood, super calendar. If you trace all the applications only about 8% of the tonnage winds up in a magazine application.

The pricing environment was strong in 2018 with a number of increases that were implemented. The current pricing environment, I would describe as stable, relative to the exit rate of 2018. The tightness in the market in 2018 created a supply void given all these capacity reductions, conversions and so forth. And you could see in the import numbers for coated freesheet and for coated ground wood was both up significantly. Imports filled a lot of that gap.

Volume and order entry was very strong in '18, recently we're starting to see some slowdown in the order entry activity. We would attribute that to general concerns about the economy globally. And the inventory levels are higher now than they were as we exited 2018. And we're seeing more and more signs of a tough retail environment going forward. So, a lot of closures have been announced from Payless to Gymboree, ShopKo and other stores.

Turning the page to five of the deck. So, specialty papers, packaging, and pulp collectively. Everything outside of graphic was 40% of the total revenue of the business in the fourth quarter. That is the highest percentage of non-graphic business Verso has ever achieved. Market growth in those segments remains strong for us.

The drumbeat that seems to continuously grow louder and louder about the sentiment that's antiplastic in nature is creating more opportunities for us. It's creating opportunities for a lot of fiber-based products. We see it particularly in the specialty business with respect to our food and bag products.

Specialty paper saw price increases in 2018. There were a lot of inflationary costs particularly around pulp, that drove those necessary increases. There is some economic uncertainty right now that's clouding the short-term outlook for pulp and packaging papers.

But particularly with respect to China with what's going on there. But longer term, we're still bullish and think the longer-term fundamentals around fiber in those businesses are intact. The strong US dollars impacted exports both the shipment and on our pricing perspective and container board was tight. In 2018, we expected to ease a little bit. So we are in 2019.

Turning the page to six of the deck. So, we've got a lot to be proud of, I'll just give you some highlights here. Q4 2018 sales and adjusted EBITDA were way up versus prior year sales of 9%. Adjusted EBITDA up $31 million.

Margins were strong at 13.8% for the full year. Adjusted EBITDA was up 121% versus the prior year. We successfully retired the term loan completely in the third quarter of '18. We ended the year debt free with $26 million of cash on the balance sheet.

We saw a swing to the good of $201 million in net income as we went from a $30 million loss to $171 million positive in 2018, and we successfully ramped up Androscoggin Mill's No. 3 machine into linerboard primarily right now what we're making on that is 26 pound basis weight to 35 pound basis weight product.

We've got over 70 customers qualified. So, we've proven that we can do it. We can make quality products. And the machine can be flexed, which is a really important attribute of this asset because the way that we see our business is, we are in the business of converting fiber into customer solutions, and doing it in such a way that makes customers happy and maximizes our cash flow per hour.

So, being able to flex gives us the ability to pick our shot. So, if we want to make linerboard, we make linerboard, if we want to make softwood pulp and roll that up, we could do that. If we want to make bleach, we want to make brown, we can go back and forth as needed.

We grew the specialty paper business 12% over 2017. And one thing I want to say about specialty is we define specialty in a pretty narrow way as far as the industry is concerned. So, it truly has to be non-graphic for to be specialty. So, our specialty papers include technical, label and packaging papers. You'll see that term within the paper industry to find more loosely in other places, but this is truly specialty product as distinct from graphic.

We finished the year with an industry low SG&A, the sales of 3% on a non-adjusted basis. As I mentioned before, really good progress in IT costs and in benefits costs. Turning the page to seven of the deck. So as we continue to work toward our 50/50 or better vision which is getting to 50% specialty packaging and pulp the next few years. So, few things to keep in mind. So , we have a 3 million ton system. 2 million tons of it is graphic papers, printing and writing exposure.

Those are the tons that you need to be thoughtful about as far as erosion is concerned. So, if you think about 4% to 5%, it's kind of the typical annual erosion rate on primarily coated freesheet product that's most of what our system is. You've got roughly a 90,000 ton challenge per year and that's without major capacity changes.

So, when I use numbers like that, I'm assuming that our rate of erosion that we feel in our business and Verso is the same as the market, and we're a large percentage of the market that doesn't necessarily mean that we would see that erosion rate. 2018 is a good case point. They are depends on what happens in the rest of the industry as well.

Now, we are committed to be in the leader in graphic papers when we are committed to doing that in a way with strong operating rate. So, to the extent that we have to balance supply and demand, we're going to do that accordingly, and make sure that we meet this challenge.

There's a variety of different long-term interesting capital projects that we're looking to solve for that erosion. What I call the Treadmill effect and move us closer to our vision. And this investment strategy is very mindful of things not just like how much money you are going to invest, and how much money you are going to get back, and what's the percentage of return, but really risk adjusting, these various investment opportunities in terms of probability of success, as we really have to make good bets here with our capital as we go forward.

We're not ready to announce specific numbers or anything like that at this point, but I can give you a sense sort of flavor for the types of things that we're looking at. So, for instance, one thing we can do is we could speed up the specialty paper machine.

So, we have specialty assets. They have a certain amount of capacity associated with them. We would make the appropriate investment there just make those machines run faster, create more tons, go out and sell those tons that helps the mix.

Another thing we can do, which we've been doing, we'll continue to do is just keep the new product development machine rolling in such a way that we are able to introduce new specialty papers to displace graphic papers that could be a very low investment way of doing it.

We could expand the packaging paper capacity. So, we have the ability to make SBS product. We have the ability to make kraft linerboard right now. We could make investments to expand the capacity there. We just physically produce more tons on those assets, and larger investments would be things like converting entirely graphic-focused machines to either specialty or packaging grades.

Regardless of which investment strategy we take to grow, we're committed to right sizing capacity demand if we need to. So, we have to invest little money to balance supply and demand interim capacity will do that as well. In addition to kind of transforming the mix, one of the keys to be successful strategically is continuing to manage what I describe as the arbitrage between what do we sell our products for and what do we buy all of our raw material inputs for.

So, we spent a lot of money on chemicals, freight, wood, energy, et cetera. We sell our products for a certain price. That spread is a really important driver of shareholder value. So, we need to maximize that spread. We need to keep the machines full. We need to run a better mix and sustainable mix for the long-term less susceptible to erosion.

We have the right experience, the right tools and techniques to be able to take that and analyze it in such a way that we can maximize the cash flow per hour. You put all that stuff together and we've got the best numbers that we could possibly put up for the business given the circumstances.

So with that concluding the comments on strategy. I'm going to turn over to our CFO, Allen Campbell for financial update.

Allen J. Campbell -- Senior Vice President and Chief Financial Officer

Thank you, Chris. Turning to page nine. We highlight our selling prices in our shipments.

Paper prices continued to be strong up sequentially quarter-over-quarter by $11 a ton were up $89 a ton same quarter last year versus this year at 10%. Pulp up $60 a ton or 11% down slightly from the third quarter as our sales in the fourth include some unbleached kraft pulp off the A3, which decreased the average selling price a little bit.

As you can see, volume was up 2% on a quarter-over-quarter basis prior year and pulp was up 15% during that time period. Inventory was up 3% up $13 million. Moving ahead to page 10, we highlight our income statement. Sales, as Chris mentioned, was $695 million for the quarter. We had net income of $86 million. $86 million had a few special items primarily the $22 million gain from the remaining amount of the countervailing duty settlement.

If you take the adjustments out, we would have been $1.90 per diluted share up from $1.4 prior year. As you can see, as Chris mentioned, our SG&A remained well under control during this time period. Moving ahead to page 11, we show our bridge to adjusted EBITDA.

Starting with the $89 million of net income, adding back the traditional adjustments and interest. $115 million reported that included primarily the countervailing duty settlement, gain of $22 million I talked about earlier. There is $1 million, I wanted to point out that it rounds up $2 million that are post-reorg costs of final trustee fees related to 2012 bankruptcy case. Those will not continue going forward. We also had $2 million of non-cash equity during the period. So, that leaves us an adjusted EBITDA number of $96 million up $31 million versus the prior year same period and a nice margin of 13.8% for the quarter, which was 11% for the year.

Moving to the bridge on page 12. The $65 million to the $96 million are across the board and price increases contributed $65 million to the gain. Slight volume decline of $3 million. Ops, we took just small downtime in December hit for $1 million. Major maintenance was our timing and are scheduled for the mills that we have. We are up a little bit this year versus prior year of $5 million. Inflation continues high in our pulp area. Energy and chemical area $23 million year-over-year same quarter. And you see a small just favorable SG&A pickup and then on pension -- combination of pension OPEB and working capital is $3 million less quarter over prior year quarter. So, it gets you to the $96 million as reported.

Included one slide for the year that walks $134 million to the $296 million on page 13. $233 million delivered in the bottom line from price and mix of the business. Volume slightly off at $5 million. We ran very full for the year. So, our downtime is $4 million favorable. Major maintenance was higher $16 million of expenses. One to note is our Quinn mill has an outage every two years, and we took that outage in 2018.

So, year-over-year that maintenance, major maintenance expenses were up $16 million as we told you they would be. Inflation, pulpwood, chemical and energy that we talked about was a big hit for our business of $46 million and freight $23 million. The freight was heavier in the first part of the year, a little bit less at the end of the year. So, we're encouraged by the flattening out even though it's at a fairly high rate.

SG&A, as mentioned before, has been an area of concentration for us. Improved year-over-year by $8 million and our pension OPEB and workers' comp you are rolling all in one bucket we're $7 million favorable year-over-year which gets you to the $296 million.

As Chris mentioned, if we look at page 14. We highlight what went on with our cash flow in this business. At the same time, end of 2017, we were $204 million in debt. In the net debt basis, we ended the year at $26 million in cash. So a huge swing during that time period, you look at the top right, how did we drive the money, what are our sources or uses?

We generated $300 million from operations. We brought in $59 million from the Wickliffe sale and also the countervailing duty settlement. We brought in $359 million. We invested $69 million in CapEx, $43 million in cash to fund our pension, debt payments were $211 million during the time period. We incurred $17 million of interest, which includes a term loan prepayment fee of $1.16 million of cash interest.

So, our cash used total is $340 million, driving a net change in our cash balance of $19 million. Our net unfunded pension ended the year at $428 million favorable from the prior year. We thought it would be a little bit better in that, but as you know the earnings return in the marketplace wasn't very strong in December, and we saw discount rate move against us at the end of December. So, that's typical what you're probably seeing in others in this industry.

We are able to manage our letters of credit down. We are also very successful in amending our ABL, that was in February. We've got -- we've improved the rates, we've improved flexibility. We'll be able to do more than we were able to do in our prior ones. We're pretty proud of that.

Moving ahead to page 15. We provide guidance for the next quarter. We're looking at sales to be in the $625 million to $640 million range, and as Chris mentioned, some of the headwinds that we're seeing there in this first month or so. Capital expenditures are expected to be in the $16 million to $20 million range.

Cash pension funding of $7 million to $9 million and we do not expect to pay any cash income taxes. What are we looking for the whole year. We are looking at investing in our mills to improve reliability, spending a little bit extra in maintenance and CapEx for 2019.

We're in the midst of a union negotiations, and there will be a ratification vote today. So that we're looking at that and we expect our cash pension contributions in 2019 equal to what they were in 2018.

So that ends our guidance, we'd like to open the line up for any questions.

Questions and Answers:

Operator

(Operator Instructions) Our first question today comes from Jeff Van Sinderen with B. Riley FBR. Please go ahead.

Jeff Van Sinderen -- B. Riley FBR -- Analyst

Good morning, everybody. Maybe you can give us a little bit more on your thinking around the Q1 metrics, I know, you provided revenue guidance, but if we're looking at roughly flattish revenues. What are you assuming on pricing and volumes there, and maybe you can touch on, I guess, what you're thinking about pricing and demand beyond Q1. And, I guess, I'm just trying to get a sense of if you feel the headwinds are increasing. Is this year when you would expect headwinds outpace tailwinds or do you think it could still be the opposite as it was last year. And then, I guess, just in Q1, I mean, if you do run revenues in that range, could your EBITDA be up to start with that?

B. Christopher DiSantis -- President and Chief Executive Officer

Well, first let me cover the pricing aspect of it. So, the exit rate from 2018, we're looking at similar type numbers for the first quarter of 2019. So, I think, you can assume similarity there. There -- perhaps there's some upside potential, but I would assume kind of similar rates going forward.

From a demand standpoint, what I mentioned inventories, it's really systemwide inventory. So, looking at customers, looking at what they have, warehouse, those kinds of things, we're seeing that impact demand, it's too early to call the year as far as demand is concerned.

But we are seeing some softness in the first quarter, I mean, there's going to be several contributors to that. I mean the erosion effect in the business, hasn't gone away. So, that's still there, and that's why we need to have a strategy to deal with it. So, it's always going to be that factor as we continue to manage the mix accordingly.

The other factor is elevated prices, I think, you have a little bit more of an effect remain on demand. Erosion prices certainly now, however, now and they have in the past, and there's some systemwide customer inventory that's kind of impacting softness. But I think it's too early, I mean, in the year to sort of take that first quarter and project that going forward for them for the balance of the year.

Jeff Van Sinderen -- B. Riley FBR -- Analyst

Okay. And then maybe if we can sort of turn to just thinking about increasing your penetration and what I would like to call new generation paper, non-graphic paper. Can you talk a little bit more about some of the projects that you might undertake this year where, I guess, maybe what you're leaning toward doing in terms of growing. I don't know if it's going to be linerboard or whatever, but maybe just touch on some of those and in terms of expansions or conversions?

B. Christopher DiSantis -- President and Chief Executive Officer

Well, any of the projects that I listed whether you're speeding up machines, whether you're doing a larger conversion project, whether you're doing a major capacity expansion, it wouldn't have that much of an effect on the mix in 2019.

Just given the lead-time associated with the execution and implementation of those projects because you've got a complete engineering and, I mean, all of your analysis and all your work and you've got equipment, you've got lead times, and that kind of thing.

So, they won't have a big impact on mix. The lever for mix in any short-term period is the other lever I talked about which is really just about substitution where we are -- we've got some new specialty opportunity, we're able to close on that opportunity, and we're able to use the existing assets that we have with minor, I mean, investments to be able to accommodate that product, and then we've also got the ability to flex capacity.

So, we have a lot. We have 2 million tons of graphic capacity to the extent that does not match with market demand. There are various things that we can do to adjust the capacity, adjust the production in the system, size that to the demand. So, that could affect mix similarly in a positive way where we have a higher percentage of specialty packaging and pulp to graphic.

Jeff Van Sinderen -- B. Riley FBR -- Analyst

Okay. And then if I could squeeze one more, I think, there's been an exit in uncoated freesheet from the marketplace. I'm just wondering how you're thinking about that, I mean, would it make sense for you to lean more into uncoated freesheet or does that just not make sense economically for you?

Allen J. Campbell -- Senior Vice President and Chief Financial Officer

Well, the answer is, it depends. So, we've got very sophisticated analytics and a lot of experience around figuring out, what can we run on these assets and what mix generates the highest. I mean, profitability per hour, and there are points at which uncoated you know what, I mean, figuring which kind of uncoated we are talking about like offset versus depending on what that product is. It might make sense to certain price levels to run more of that in our mix. So, and one thing just to clarify, we do make uncoated product now, we don't make a lot of it, but we make it now, and we do have the ability to make more, if the economics of the market want.

Jeff Van Sinderen -- B. Riley FBR -- Analyst

Okay, fair enough. Thanks for taking my questions. And I'll take the rest offline.

B. Christopher DiSantis -- President and Chief Executive Officer

Okay, Jeff.

Allen J. Campbell -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

The next question comes from Hamed Khorsand with BWS Financial.

Hamed Khorsand -- BWS Financial -- Analyst

Hi. Could you just talk about the inventory situation. Is it -- are you taking a machine offline to address the increase in inventory and could you also talk about what you're doing with the increase in CapEx this quarter?

B. Christopher DiSantis -- President and Chief Executive Officer

Well, first, let me at a high level just kind of how we approach inventory, and then I'll ask Mike Weinhold here, I can ask him to talk a little bit more about systemwide what's happening with inventory. We don't have anything to announce at this point with respect to the adjustments that we are going to be making from as far as taking a machine offline is concerned.

But to the extent that the market is very tight. We know how to run the business in such a way to maximize the earnings of the company in the tight market. And to the extent that the market gets lose. There are a variety of levers that you can pull. Longer-term, it's all the projects, I mean, which I talked about, and that's the erosion is not going away. So, that has to be dealt with one way or another, but short-term, there are levels that we can pull from a capacity standpoint to just to make sure the demand meets the supply.

So, there is always a counter-measure, we just don't kind of let things happen. But I'll ask Mike to comment on inventory more generally in the market.

Michael A. Weinhold -- President, Graphic and Specialty Papers

Yeah. Thanks, Chris. So, generally speaking, we saw a slowdown as we entered Q4 of 2018, and we saw customer inventories as we got into Q1 of '19 elevated. And I think that's kind of the fundamental, as the price increases that were taking place throughout 2018. Customers in some cases buying ahead of that, waking up in 2019 Q1 with elevated inventory levels and a softening of the market. I think it's also important to understand in Q1 of '18 sequentially from the end of 2017, we actually had obviously very robust operating rates capacity closures that came out in Q4 2017.

So, the reverse of that is, we were drawing our inventories down in Q1 of '18 roughly paper inventories declined in our system by 6% to 7%. So, when you look at compared to the volume Q1 of '18 to Q1 of '19, we have a kind of a reverse. We have inventory levels actually elevating somewhat and we had a drawdown last year.

And so, inventory levels, we believe are certainly manageable, and we are managing them on our side and, I think, the question you asked earlier around downtime and/or taking assets offline. We are committed to balancing supply with demand. And so we definitely keep a very sharp eye on our finished goods inventory level and manage accordingly.

B. Christopher DiSantis -- President and Chief Executive Officer

And Hamed you asked a question as well on CapEx kind of why we're at for the quarter is that?

Hamed Khorsand -- BWS Financial -- Analyst

Yeah.

B. Christopher DiSantis -- President and Chief Executive Officer

We can take a look at for the whole year. We spent about $69 million in 2018. We have a major boiler work that we're going to do at one of our mills in 2019, that's going to add our capital about $18 million to $20 million for that.

That's one of our main reasons for the step up in capital spending. We want to make sure we have reliable mills. So we ran full -- almost all last year, we want reliability and quality to be up and we're investing this year. A little bit more than we were in the past, but a lot of it's just required work that we need a boiler in one of our mills.

Hamed Khorsand -- BWS Financial -- Analyst

So, if I'm looking at your operating rates and the guidance that you're providing what kind of implications does it have as far as EBITDA given what you're producing in Q1 of last year, right? I mean are we talking about the same kind of level of EBITDA already because the operating rates are different and pricing is hiring this year and the EBITDA going to be more or is it going to be less, I mean, it's kind of a change up here as far as the pace you're operating at?

B. Christopher DiSantis -- President and Chief Executive Officer

I mean we feel -- we still feel pretty good about the earnings, I mean, outlook for the business because we've got good pricing and pricing is economically just kind of one to one correlation. The EBITDA of the business and pricing is still good. So, we feel good about the numbers.

Hamed Khorsand -- BWS Financial -- Analyst

But if you're talking about like feeling good and this might be just temporary Q1 softness kind of thing. Why haven't you guys done anything beyond talking about reinvesting in the mills with now the balance sheet being stronger?

Allen J. Campbell -- Senior Vice President and Chief Financial Officer

Why haven't we said more?

Hamed Khorsand -- BWS Financial -- Analyst

Yeah, I mean, business --

Allen J. Campbell -- Senior Vice President and Chief Financial Officer

Yeah, well, here's the trick is that all these projects have to stand on their own merits, and they go through a very rigorous process. So, we take capital allocation very seriously in the company, I mean, these are bets that we're making, I mean, with shareholder money.

So, we need to be very smart, very thorough, very cautious about all the stuff, and every single one of these major projects, it goes up to the Board level, I mean, for approval. And we can't really announce, at sometimes projects take a diet debt at any point.

I mean you can have something in the early stages of concepts that just gets crossed off the drawing board, or you could be six months in the diligence on a project and something comes up, I mean, from an engineering standpoint or there's a major change in market conditions or something like that. And then it doesn't change and you don't do it.

So, I'm just being cautious on that. I don't want to put a list of you know what I mean projects out there and start to put dollars and numbers and everything about them and then some of them just don't come to pass, I mean, I think it would be, it's just kind of hard stuff to model, if you're looking at the business and you have a project in or take a project out.

So, really we can't announce what we're going to do until it's approved, and we're committed to doing it. And then at that point we talked about timing and dollars and return and that kind of thing.

Hamed Khorsand -- BWS Financial -- Analyst

You guys have been talking about this for over a year now. All we've seen is A3 line come on and we've seen the balance sheet delever. So it's been very slow process? I'm just trying to understand like why is it taking so slow to commit to anything?

B. Christopher DiSantis -- President and Chief Executive Officer

Well, I mean, last year where we had a bunch of things going on all simultaneously. So, we were looking at projects, but we are also looking at a variety of strategic alternatives. And those kinds of things. So, last year was a busy year looking at a lot of different things simultaneously and right now we're looking at, we're looking at more projects and looking at them in a deeper way and then we have in the past.

Hamed Khorsand -- BWS Financial -- Analyst

All right. And, lastly, is there your competitors having changed up quite a bit this year announced conversion this year and the next year. How does that mitigate your inventory issue in the channel or does that increase it because now you have this one-off where your competitors could just sell notoriously because they don't care because all venture you convert anyways?

Michael A. Weinhold -- President, Graphic and Specialty Papers

Yes, it's Mike Weinhold, I think, you just summed up kind of the two goal post in that question. So we do believe and we see, what you see from an announcement standpoint. So, we do believe conversions are out there. There's equipment lead time that's embedded within those conversions.

So to the extent those hit what year that's really a timing question. So, again, we're committed to managing our inventory levels, and doing what we can to keep those within manageable levels, but there certainly is a potential for inventory levels to increase on the supply side or on the customer side through actions of others they potentially will convert. And as you put it will run their business accordingly up to that conversion.

B. Christopher DiSantis -- President and Chief Executive Officer

And there is a lead times associated with all these things. So, a lot of assets have traded hands, and it would be reasonable to conclude that there's going to be investments that will, that would transfer those assets from producing printing and writing grades type product to packaging and pulp. I mean, who knows, I mean, what other companies will do from a timing standpoint. But it looks like those events are probably more likely in 2020 then they are in 2019 just from the sheer lead time of what it takes to do things. But that's pure that's speculation.

Hamed Khorsand -- BWS Financial -- Analyst

All right. Thank you.

B. Christopher DiSantis -- President and Chief Executive Officer

Thank you.

Michael A. Weinhold -- President, Graphic and Specialty Papers

Thanks.

Operator

(Operator Instructions) The next question comes from Joe Pratt with Stifel. Please go ahead.

Joseph Pratt -- Stifel -- Analyst

Hi, Chris. On the last call, there was a discussion, I believe, about what to do with the free cash flow in 2019. Do you want to comment on that as to what the alternatives are?

B. Christopher DiSantis -- President and Chief Executive Officer

Yes. So, there's a variety of things, and I'm not in a position to announce anything specific. But in terms of allocation of capital, I mean, we're continuing to evaluate. So, there's a list of projects coming that are there.

Those projects and that capital that would be associated with those projects, those are not in the CapEx numbers that we talk about. So, when we talk about, what the maintenance CapEx is for the year and how to schedule and what we spent in the first quarter.

All of that capital associated with those various projects would be incremental. And as those projects are proved and determined we would be announcing those. We're going to continue to look at other options as well. When you have a de-levered balance sheet, there's a lot of things that you could do from an M&A perspective.

So, one of the things that we're evaluating is, is there a way to transform that mix more quickly in such a way that we could go out and acquire, I mean, another business. We would do that, if we did that, we would do that in a very disciplined way. There's nothing specific I have to announce there other than when your job is to allocate capital and build shareholder value, and you have de-levered balance sheet that's one of the things that you look at.

And then the other thing is, to the extent, that you have, I mean, large amounts of excess cash, you're not going to deploy them coming into the business or deploy them into mergers and acquisitions. There's the opportunity to return capital to shareholders through like buybacks and things like that. We've been asked about that a lot, and that's one of the things that we're evaluating. But we're not in a position to make an announcement at this point yet on what we're going to do there.

Joseph Pratt -- Stifel -- Analyst

Okay. And last year, I think, that the CapEx number was $69 million?

B. Christopher DiSantis -- President and Chief Executive Officer

Right.

Joseph Pratt -- Stifel -- Analyst

Are you going to say -- are you saying and the fact that it's going to be a bigger number in '19?

B. Christopher DiSantis -- President and Chief Executive Officer

Yes.

Allen J. Campbell -- Senior Vice President and Chief Financial Officer

That's correct.

Joseph Pratt -- Stifel -- Analyst

And did you give a number or not?

Allen J. Campbell -- Senior Vice President and Chief Financial Officer

We didn't give exact number, but we said at that level we are going to spend an incremental $18 million to $20 million on our boiler capital project in one of our mills. So, we're saying it's north of in that range or a little north of there.

B. Christopher DiSantis -- President and Chief Executive Officer

Yes. So take that at the boiler rebuilt an rapids, and it's a likely maintenance level. We have a lot of discretion around these things, but we do think it's wise to invest in the assets and make sure they run them well.

Joseph Pratt -- Stifel -- Analyst

Okay. And what's the total of your outstanding unused lines of credit right now?

B. Christopher DiSantis -- President and Chief Executive Officer

At 12-31, it was over $300 million.

Allen J. Campbell -- Senior Vice President and Chief Financial Officer

Right.

B. Christopher DiSantis -- President and Chief Executive Officer

We are -- we do use capital, working capital in the first quarter. We have rebates with customers, we have our annual bonus payments, and then we have traditional build of inventory ahead of the higher selling season. So, you will see we have as we've published to cater them all. You'll see that we are using a little bit in the revolver in the first quarter and we expect that generally speaking and our use of working capital, it's that way in the first half of the year.

Michael A. Weinhold -- President, Graphic and Specialty Papers

Yes, it's pretty typical.

Joseph Pratt -- Stifel -- Analyst

Hey, lucky banker to have a unused line of credit encountering some use and no other funded debt. But what about -- have you seen any more Nine Dragons bought some catalyst properties converted them to containerboard, I think, have you seen any more from foreign companies wanting to acquire US either coated capacity or other capacity?

B. Christopher DiSantis -- President and Chief Executive Officer

So, just to clarify. So, Nine Dragons bought the Biron mill and bought the Rumford mill. It is very likely that they're going to be converting those mills to making packaging and pulp at some point, it's because that's the business that they're in. But the timing of that is a question mark only they know the timing of that. As far as other assets in North America other than what's already happened.

So, we've got paper excellence with the catalyst mills on the West Coast of Canada that transactions gone through. You got New-Indy which is behind them is the craft group, which bought the Catawba Mill. We don't believe, I mean, they bought those to the manufacture paper long term, but who knows when they will do a conversion there. But as far as other assets you know what, I mean, that are out there in North America to change hands, we don't have any thing to share about that.

Joseph Pratt -- Stifel -- Analyst

Okay. Thank you very much.

B. Christopher DiSantis -- President and Chief Executive Officer

Thank you.

Allen J. Campbell -- Senior Vice President and Chief Financial Officer

Thanks.

Operator

The next question comes from Greg Weaver with Invicta Capital. Please go ahead.

Gregory Weaver -- Invicta Capital -- Analyst

Hi. Thanks for letting me ask a few here. With the union negotiations, you've mentioned them a couple of times. What's the range of outcomes there? I'm trying to decide is this good or bad?

B. Christopher DiSantis -- President and Chief Executive Officer

We view, I mean, we view coming to an agreement on a contract as a good result. Whenever you have a contract, I mean, there are things like economics in there like wage increases and those kinds of things. But we want to have contracts in place what you know, I mean, with the various unions at our mills that are organized. We've been operating for a time, quite some time without contracts that creates a level of you know what uncertainty with the associates and the organization, I mean, we're all on the same team, we prefer not to have. So, we would view the completion of a contract as a positive.

Gregory Weaver -- Invicta Capital -- Analyst

Okay. And just I guess help me understand a little bit. At your current utilization rate, can you give me a rough cut of your cost of goods, how it breaks between overhead and like direct material, direct labor?

Allen J. Campbell -- Senior Vice President and Chief Financial Officer

That's not something we do publish.

Gregory Weaver -- Invicta Capital -- Analyst

Yeah, I'm just trying to figure back to Hamed's question about what happens to your EBITDA when your utilization drops off that's what you know?

Allen J. Campbell -- Senior Vice President and Chief Financial Officer

Well, you can look back at '17 and '18 by quarter, and you can look at the markets and our performance, and then you can bring price up the current, you can probably get a feel for that swing.

Gregory Weaver -- Invicta Capital -- Analyst

On average what's the price increase then since say last year?

Allen J. Campbell -- Senior Vice President and Chief Financial Officer

Well for the quarter we were up 10% year-over-year on paper.

Gregory Weaver -- Invicta Capital -- Analyst

Okay. Thank you very much.

B. Christopher DiSantis -- President and Chief Executive Officer

Yes, I mean, you're going to have and you're going to have and when you have softness, we expect some in the first quarter here from a shipment standpoint where we are going to have price offsetting volume.

Gregory Weaver -- Invicta Capital -- Analyst

Right. I got you.

B. Christopher DiSantis -- President and Chief Executive Officer

Yes, the pricing side of it is, from a -- just run the economics of the business, I mean, you have a $2.7 billion in revenue, you got a 3 million ton system. Every point is a lot of money to bottom line 1% of sales, $27 million of EBITDA on an annualized basis. So, it's something we watch very intensive.

Gregory Weaver -- Invicta Capital -- Analyst

And what's your sense of the discipline at this point, given how much capacity has been taken off the line?

B. Christopher DiSantis -- President and Chief Executive Officer

So, I mean, the only thing I can ask is what I said before is that the -- as far as the exit rates from 2018 are concerned, we see stability in the first quarter.

Gregory Weaver -- Invicta Capital -- Analyst

And no one's cut any price?

B. Christopher DiSantis -- President and Chief Executive Officer

I can't talk about what competitors you know what I mean are doing from a pricing standpoint.

Gregory Weaver -- Invicta Capital -- Analyst

Okay, thank you very much.

B. Christopher DiSantis -- President and Chief Executive Officer

Thanks.

Operator

The next question is a follow-up from Hamed Khorsand with BWS. Please go ahead.

Hamed Khorsand -- BWS Financial -- Analyst

Hi, just one more question. Could you just specifically just talk about what the right leverage rate is, and how you would get there from a balance sheet standpoint, it would be dividend or a buyback?

Allen J. Campbell -- Senior Vice President and Chief Financial Officer

So, leverage of the business and then dividends or buyback, is that the question?

Hamed Khorsand -- BWS Financial -- Analyst

Yes.

Allen J. Campbell -- Senior Vice President and Chief Financial Officer

I mean first let me start with the leverage. I mean, it really depends, I mean, from an operator standpoint, I mean you want to you know what I mean operate with much flexibility as you can, particularly when you've got a cyclical business, like we can.

So I don't know that I have a number in mind, but you don't prefer much lower levels or none at all for businesses you know what, I mean, like this. And as far as dividends or buybacks are concerned, I mean, generally the feedback that we've gotten from shareholders is, they prefer the buybacks is being more tax efficient than dividends, and we understand the mathematics of how they're looking at it.

But no, I mean I don't have a target leverage rate for the business, I mean, it really depends on the strategy, depending on which projects get done and how big they are in scope, size and dollars, how long they take to implement because if you had a even if you had a big project, it took you know what I mean a couple of years to implement, it doesn't necessarily mean that the earnings wouldn't cover the investment for that project.

So there is the ability over several years to do several projects and depending on how the company performs not even materially impact the debt status and liquidity of the company.

So, we don't, I don't have a target number to give you, and also depends on, if we actually did something from an M&A standpoint, if we've bought somebody or something then we would look at that with a blank slate and evaluate that based on the merits of the combination.

Hamed Khorsand -- BWS Financial -- Analyst

Okay, thank you.

Allen J. Campbell -- Senior Vice President and Chief Financial Officer

Thanks.

B. Christopher DiSantis -- President and Chief Executive Officer

Thanks.

Operator

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

Allen J. Campbell -- Senior Vice President and Chief Financial Officer

Thank you, Anita. I would like to thank each of you on the call for your interest in Verso. This concludes our call at this time. Note that we intend to file our 10-K tomorrow for more additional details. Thank you very much.

B. Christopher DiSantis -- President and Chief Executive Officer

Thank you.

Operator

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

Duration: 55 minutes

Call participants:

Timothy D. Nusbaum -- Treasurer

B. Christopher DiSantis -- President and Chief Executive Officer

Allen J. Campbell -- Senior Vice President and Chief Financial Officer

Jeff Van Sinderen -- B. Riley FBR -- Analyst

Hamed Khorsand -- BWS Financial -- Analyst

Michael A. Weinhold -- President, Graphic and Specialty Papers

Joseph Pratt -- Stifel -- Analyst

Gregory Weaver -- Invicta Capital -- Analyst

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