Earnings Call Transcript
Greif, Inc (GEF)
Earnings Call Transcript - GEF Q2 2020
Operator, Operator
Ladies and gentlemen, thank you for standing by and welcome to the Greif Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Matt Eichmann. Thank you. Please go ahead, sir. Thank you, Tucan and good morning everyone. Welcome to Greif’s second quarter fiscal 2020 earnings conference call. On the call today are Pete Watson, Greif’s President and Chief Executive Officer, and Larry Hilsheimer, Greif’s Chief Financial Officer. Pete and Larry will take questions at the end of today’s call. In accordance with Regulation Fair Disclosure, we encourage you to ask questions regarding issues you consider material because we are prohibited from discussing significant non-public information with you on an individual basis. Please limit yourself to one question and one follow-up before returning to the queue. Please turn to slide two. As a reminder, during today’s call, we will make forward-looking statements involving plans, expectations, and beliefs related to future events. Actual results could differ materially from those discussed. Additionally, we’ll be referencing certain non-GAAP financial measures and reconciliation to the most directly comparable GAAP metrics can be found in the appendix of today’s presentation. And now, I turn the presentation over to Pete on slide three.
Pete Watson, CEO
Hey, thank you Matt and good morning everyone. We really appreciate you joining us today. On behalf of Greif, I'd like to offer our thoughts and best wishes to all of you who have been impacted by the COVID-19 pandemic and express our thanks and admiration for the brave healthcare workers and first responders on the frontlines of the health crisis. I'd also like to recognize our 16,000 global colleagues at Greif and their families for their enduring spirit and perseverance as we've been adapting to new ways of working and communicating. I'm really inspired by the efforts and proud of our performance and the global team that we've delivered during the crisis. The COVID-19 pandemic remains an evolving situation, and we continue to monitor the latest updates. Our global and regional pandemic taskforce is meeting multiple times weekly to ensure we safeguard the health of our colleagues and the continuity of our supply chain to serve our valued customers. Our purpose at Greif is to safely package and protect critical goods materials that serve the greater needs of communities all around the world. Given our position, Greif has been identified as an essential business as we continue to operate all of our production facilities in more than 40 countries. Our global portfolio is uniquely capable of fulfilling customer needs worldwide, and our sourcing and supply chain is well supported with extensive alternate backups in place for all critical products and components. If you could please turn to slide four for an overview of the quarter. We continue to make really strong progress across all of our strategic priorities. Our second quarter adjusted EBITDA and adjusted free cash flow both improved versus the prior year quarter, with especially strong performance in our global Rigid Industrial Packaging segment. In addition to improved financial performance, we completed our third annual Gallup colleague engagement survey scoring in the 89th percentile of all manufacturing companies. We also recorded our best-ever trailing fourth quarter customer satisfaction index score. We firmly believe there's a linkage between engaged colleagues and customer service excellence to improve financial performance. We also published our 11th annual sustainability report, which reflects the progress we've made to reduce our environmental footprint and build a more circular supply chain as part of our overall business strategy. Lastly, we completed several portfolio optimization moves aligned to advancing our strategy. First, we acquired a minority stake in Centurion Container, which is expanding IBC reconditioning capability in North America, and we have an optional path to full ownership in the future. Second, we completed the sale of the Consumer Packaging Group to Graphic Packaging for $85 million subject to customer closing adjustments, enabling us to refocus on our industrial franchise, optimize our capital expenditures, and pay down debt. Third, we announced yesterday the closure of our Mobile, Alabama Uncoated Recycled Board mill as part of our ongoing network cost optimization initiatives. We also consolidated two Rigid Industrial Packaging operations, one in Brazil and the other on the West Coast of the United States as we examine ongoing portfolio performance in that business. I'd like to now review our business performance by segment, and if you could please turn to slide five. Our Rigid Industrial Packaging business delivered a solid second quarter. We generated record global IBC production with volumes 26% higher versus the prior year quarter, thanks primarily to our new IBC investments in Tholu, which is an IBC reconditioning facility in Europe, and our two new IBC plants, one in Houston, Texas, and the other in Kaluga, Russia. Global steel drum volumes declined by 70 basis points versus the prior year quarter. Steel drum demand in EMEA, which is our largest steel drum region, grew by roughly 60 basis points. North America increased by 1.6% due to a strong first half of the quarter fueled partly by increased customer stocking and new customer growth. Steel drum volumes in APAC were roughly flat versus the prior year. Volumes in Latin America were down nearly 16% due to weak demand for lubricants, as well as the loss of a low-margin high-volume customer. RIPS second quarter sales fell roughly $9 million versus the prior year quarter on a currency-neutral basis due to raw material price declines in corresponding contractual pricing adjustments, which was partially offset by strategic pricing actions and better volumes in certain regions. RIPS second quarter adjusted EBITDA rose by roughly $23 million versus the prior year quarter due to favorable product mix, lower raw material costs including roughly $7 million of opportunistic sourcing benefits, and lower segment SG&A expenses, all partially offset by the impact of lower sales. For comparative purposes, RIPS in our second quarter of 2019 adjusted EBITDA was negatively impacted by a $1.5 million customer bankruptcy bad debt write-off that was previously disclosed. I'd like to now have you turn to slide six. Given the extraordinary time we find ourselves in, I want to spend a moment to discuss what we are currently seeing in the market. One of Greif's strengths is our broad end-market exposure, and our business is not overly dependent on any one customer or any one segment. Broadly speaking, during the quarter we experienced additional demand for pharmaceuticals, sanitizers, and disinfectants, partly due to the pandemic and buying softness in lubricants, paints, and coatings as economic activity slowed. Looking ahead, we anticipate several of these end markets improving as economies reopen, and those currently strong will remain that way. If I'd ask you to turn to slide seven. Our flexible products & Services segment second quarter sales fell roughly 9% versus the prior year quarter on a currency-neutral basis. Soft demand, raw material price declines, and corresponding contractual pricing adjustments were the main drivers. Our second quarter adjusted EBITDA fell by roughly $1 million versus the prior year due to lower sales, which was partially offset by lower segment SG&A expense. We estimate that FPS lost roughly $600,000 in adjusted EBITDA during Q2 due to government-mandated operating capacity reductions in Turkey aimed at preventing the spread of COVID-19 in that region. Those restrictions are slowly being lifted, and we anticipate operating at full capacity in our fiscal third quarter. I'd please ask you to turn to slide eight. Our Paper Packaging second quarter sales fell by roughly $16 million versus the prior year quarter, primarily due to lower published containerboard and recycled prices. Volumes were also negatively impacted by 24,000 tons of containerboard economic downtime taken in the second quarter. Paper Packaging second quarter adjusted EBITDA fell by roughly 4% versus the prior year as lower sales were only partially offset by lower segment SG&A expense and by the incremental adjusted EBITDA contribution for 11 more days of Caraustar assets this year. We estimate that PPS experienced roughly an $8 million adjusted EBITDA headwind during Q2 from non-essential customer closures. For comparison's sake, Paper Packaging second quarter in 2019, the adjusted EBITDA was negatively impacted by a $9 million inventory step-up charge that was previously disclosed. During the quarter, we announced a $50 a ton price increase for all grades of uncoated and coated recycled board effective with shipments beginning May 13 of 2020, which we are continuing to implement. Yesterday we announced the closure of our URB mill in Mobile, Alabama as part of our ongoing network cost optimization activities, and further enhance our capital deployment efficiency. The total capacity of this mill was 140,000 tons, which includes a shutdown of our mill's number one paper machine that was accomplished in October of 2019. We thank all of our colleagues in Mobile for their hard work, and we're committed to supporting them through this transition. I'd like to ask you to turn to slide nine. Similar to our Rigid Packaging review I want to provide a little bit more commentary on what we're seeing in the Paper Packaging end markets. Our CorrChoice corrugated sheet feeder network consists of six state-of-the-art facilities east of the Mississippi River that service a mix of independent and integrated corrugated box plants. During the quarter, sales to integrated customers were softer as they internalized some of the volumes previously outsourced to us in their own networks. Sales to independent customers were negatively impacted by lower durable goods demand, as a result of the slowing economic activity and all the automobile manufacturing closures. Similar to our Rigid Industrial Packaging business, our Tube and Core business serves a diverse mix of end markets. We estimate that roughly 40% of our top 10 Tube and Core customer markets were labeled as non-essential businesses during the health crisis in Q2, which dragged on our results. We were particularly impacted by weak demand and cloth, yarn, and carpet segments; film core volume growth was solid versus the prior year, and we expect demand for construction and protective board products to moderately improve over the remainder of the year. I'd like to now turn over the presentation to our Chief Financial Officer, Larry Hilsheimer on slide 10.
Larry Hilsheimer, CFO
Thank you, Pete. Good morning everyone. I want to really reiterate Pete's comments to all of those impacted by the COVID-19 pandemic and express my thanks to each of our colleagues for their dedication and professionalism during these very challenging times. Slide 10 highlights our quarterly financial performance. Overall, Greif generated very solid results. Second quarter net sales excluding the impact of foreign exchange fell roughly 3% year-over-year. However, adjusted EBITDA rose strongly by roughly 12%. That improvement was driven largely in RIPS, but all segments and the corporate center recorded reductions in SG&A expense. Currency was a modest $2 billion headwind to total company results compared to the prior year. Below the operating profit line, interest expense decreased by roughly $4 million, and our bottom line adjusted Class A earnings per share rose 17% versus the prior year quarter to $0.95 per share. During the quarter, we recorded a $38 million loss related to the CPG divestiture, roughly $36 million of that $38 million relates to a portion of the PPS segment's goodwill that we were required to allocate to the transaction. That non-cash charge has no associated tax benefit, which is why our GAAP tax rate was more than 62% during the quarter. Our second quarter non-GAAP tax rate was 32.6%, and we continue to expect that rate to range between 27% and 31% for fiscal 2020. Finally, second quarter adjusted free cash flow improved by roughly $33 million versus the prior year quarter to a source of $79 million due to increased EBITDA and lower CapEx. Please turn to slide 11. Given the continued uncertainty caused by COVID-19, we are withdrawing our fiscal 2020 adjusted Class A earnings per share and adjusted free cash flow guidance as it is very difficult to estimate projected near-term business performance with precision. We are providing the key fiscal 2020 assumptions you see listed on slide 11 to assist with modeling. In terms of what we saw in May in RIPS, steel volumes were down roughly 8% on a per day basis versus May 2019 as customers destock, while IBCs were up slightly over 10% per day. In PPS, CorrChoice volumes were down single digits on a per day basis versus May of 2019, while volumes in our Tube and Core business were a bit softer than that. Demand for corrugated sheets and Tubes and Cores improved between April and May this year. So, we're hopeful that we're beginning to see a positive trend as businesses reopened. We currently believe our fiscal third quarter will be our weakest volume quarter before overall demand later this year. I think it's important to point out at this point that our quarters obviously differ from most, as many companies talk about their second quarter being their weakest; our third quarter will be our weakest. Please turn to slide 12. We can't control how long this pandemic will last or determine what the ultimate impact will be on our global customers. That said, we have taken steps to prepare a portfolio for an economic downturn by identifying variable cost reduction actions, determining potential back office reductions or delays in hiring open positions, and optimizing capital spending plans and working capital requirements. In fact, we've already implemented actions to generate roughly $40 million of EBITDA benefit over the remainder of fiscal 2020. We believe our business today is significantly better positioned to weather a prolonged economic slowdown than it was in 2008. We've optimized our portfolio by closing or divesting 62 underperforming or non-core assets, while replacing and walking away from over $400 million of low-margin business and securing new higher-margin business of over $400 million via organic growth activities, resulting in EBITDA growth of over 65% since fiscal 2015. We've expanded into newer and higher-margin packaging substrates like the IBC and penetrated less cyclical markets such as food, pharma, and agriculture. We've also implemented a single ERP platform across the majority of our business, enabling better and faster decision-making, which is critical during a downturn. Please turn to slide 13. Our balance sheet is solid with substantial access to liquidity and a well-structured debt maturity profile. We currently have $690 million of available liquidity undrawn on our revolver and another $72 million of cash and equivalents. Our only near-term debt maturity is our senior notes due midway through 2021 with a principal of 200 million euros. At quarter-end, our compliance leverage ratio stood at 3.6, well below our stated covenant of 4.75. Given current market uncertainty, to be prudent, we are reducing or postponing non-critical expenses, including capital investments. We now anticipate spending between $120 million and $140 million on CapEx in fiscal 2020; roughly $10 million of the CapEx reduction relates to the sale of CPG. Roughly 24% of our remaining forecasted CapEx is earmarked for various growth projects and could be reduced further if needed. Lastly, our largest pension program, which resides in the U.S., is fully funded from an ERISA standpoint with no required contributions for the next three to four years, although we currently intend to continue making contributions. While our financial position is strong, we will continue to evaluate our liquidity needs and options to reinforce our balance sheet as needed. Please turn to slide 14. We've used this slide for a number of quarters to point out that our capital allocation priorities are firm. They are funding organic CapEx, delevering our balance sheet, maintaining steady dividends, and pursuing our strategic growth priorities in IBCs. IBC reconditioning and containerboard integration, consistent and predictable capital allocation, we believe is critical to value creation. So what you see here is what you're going to get. With that, I'll turn the call back to Pete for his closing comments before our Q&A.
Pete Watson, CEO
Hey, thank you, Larry. And if everyone could please turn to slide 15. In closing, I want to thank all of our 16,000 global colleagues again for their commitment to Greif and to our customers. While a lot is behind us, there will be more uncertainty ahead as countries and communities reopen their economies. That said, I'm extremely confident in Greif's ability to navigate these uncertain times. We have a highly engaged and motivated team focusing on providing differentiated service to our customers. We're well positioned to serve a variety of end markets through our industry-leading product portfolio and our commitment to customer service excellence. We are successfully advancing our strategic priorities, and our balance sheet is strong. Thank you for participating this morning, and we appreciate your interest in Greif. We look forward to taking your questions.
Operator, Operator
Your first question comes from the line of George Staphos of Bank of America. Your line is open.
George Staphos, Analyst
Thank you. Hi, guys. Good morning.
Pete Watson, CEO
Good morning, George.
George Staphos, Analyst
Thank you for taking my questions. Thanks for all you're doing on COVID and congratulations on the quarter. My two questions, first in terms of the May volume trends. Pete, can you talk a little bit about the geographic trend you might be seeing and kind of parenthetical here. There was a comment about trend getting better between April and May, and I wasn't sure what that was referring to? The second question, just on SG&A cost reduction. You did a great job there. I think the year-on-year number was down roughly $20 million. How much of that is sustainable going forward? Was there any kind of one-off that maybe dissipates over the course of the year? And what do you think you can do from some of these additional cost reduction efforts that you talked about generally? Thank you.
Pete Watson, CEO
Yeah. George, let me talk about some of the volume trends from April and May for your question, then I'll ask Larry to comment on the SG&A. So, when you look at volumes overall, I think you first have to look over the last four months at the global health crisis. I think we've done a really excellent job in demonstrating our resilient and battle-tested supply chain. Our sourcing and materials are regional by design, and we've had no disruptions at all, have been very stable. Our operational footprint is diversified, as we've talked about. We've done an excellent job at demonstrating to our customers that we can deliver in very challenging times in a reliable and dependable manner. Our value propositions, we've always talked about security of supply and customer intimacy. So, there have been some challenges. But if you look at our volumes from April to May transition, I'll talk about on a per day basis because May compared to a year ago, it had two less days. So, let me just walk through RIPS and then talk about paper because they're slightly different in transitions on volumes from April to May. In our Rigid business, in large steel drums, on a global volume basis per day, our large steel drum business globally is down about 5%. That evolution really aligns with the geographies around the world that are consistent with how economies are recovering from COVID-19 cases. So, in China, for example, the PMI was above 50% in May, which is a significant change in the last two or three months. The large steel drum volume in APAC was up 1% on a per day basis compared to April. EMEA's volume on large steel drums were down 7% on a per day basis compared to April, and North America was down double-digits. That's reflective as economies reopened and businesses are transitioning across this health crisis. In IBC and reconditioning, it's on a much stronger basis. While it's not as high as the breakneck pace that we had in Q1, we're still up 10% versus the prior year. Again, that's with two less days. So, while we were challenged from April to May in steel drums around the world, we still see positive growth in our IBC and IBC reconditioning. As we talked in our earlier comments, I think we're going to have more challenge volume outlook in steel in our third quarter, which is May through July. In IBCs, we still expect to see double-digit growth of 10% plus in that range for our third quarter. In Paper Packaging, the trends are somewhat different. We faced more challenges with volumes, especially in converting. However, we anticipate that our mill system volumes will increase by 3% per day in May compared to April. The backlog in our mill system remains stable at four to five weeks as we enter early June. URB volumes have improved in May, showing a 1% increase compared to April on a per day basis. Our CRB volume is also consistent, particularly at our facilities in Tame, Iowa, and Sweetwater, Georgia. It's important to note that we had 5,000 tons of economic downtime in containerboard solely on the West Coast, which reflects a decision to delay customer orders rather than an issue with market demand. When comparing our converting operations, specifically in CorrChoice, we saw a 6% increase in volumes from April to May on a per day basis. The last eight days of May reflected particularly strong performance at CorrChoice, likely due to the reopening of durable manufacturing industries like automotive, which are beginning to fulfill supply chain needs. However, our visibility is limited, with less than 24 hours of clarity on orders. We are seeing more encouraging signs with improved May volumes compared to April. For Tube and Cores, our volumes in May were flat compared to April on a per day basis, with some exposure to non-essential businesses that are gradually reopening without interruptions. We expect steady improvement in this segment from May into June and July. Overall, we remain cautiously optimistic about Paper Packaging as the health crisis continues to improve, and we expect to see sequential growth from May through the end of the third quarter. I’ll now hand it over to Larry to discuss SG&A.
Larry Hilsheimer, CFO
Great. Thank you, Pete. And George, with respect to the SG&A, when you really break it down year-over-year, in the second quarter you had about $12.3 million of salary and benefit reductions, $2.5 million in travel and entertainment. Professional fees were down about $3.2 million. Depreciation of our IT system caused depreciation to actually be up about $2.5 million, and other miscellaneous areas such as local taxes and bad debt were down about $3.5 million. So, overall about $19 million in reductions. When you look at it, is that sustainable? We've been focused on reducing our SG&A costs for some time, as you know, committing to get down below 10% by 2022. Some of the reductions are just part of that effort. We obviously have put in a lot of actions to reduce costs. We did adjust incentives in the second quarter, which inflated the number a bit. But to cut to the chase, we do expect that our SG&A will continue to run at substantially lower levels than last year.
George Staphos, Analyst
Thank you very much.
Pete Watson, CEO
Thanks, George.
Adam Josephson, Analyst
Pete and Larry, good morning. I hope you and your families are well.
Pete Watson, CEO
Yeah. Thanks, Adam.
Adam Josephson, Analyst
My two questions, one on Peter, if I may start with rigid margins. Obviously, you had a phenomenal margin quarter. You mentioned many things. Obviously, you have the SG&A reductions. You also talked about opportunistic sourcing. You had a timing benefit. Can you just talk about what exactly drove that rigid margin in the quarter? How much was opportunistic sourcing? What exactly that was? And how much were timing benefits of raws falling and prices not catching up, et cetera? And then what your expectations are in terms of margins in that segment normalizing thereafter.
Pete Watson, CEO
Yeah. I will make a few comments and Larry can get into the specific financial impacts of each of those categories, Adam. But yeah, we were really pleased with the RIPS performance. Looking at that business, we consolidated it into a global organization nine months ago; Ole Rosgaard leads that, and he's leading a transformational strategy. We expect to continue to get benefits from a lower cost structure, a more efficient manufacturing footprint, and also a continued push to grow our higher-margin products. So, we really feel good about the improvement trend in that business. The details are that we had favorable price and product mix, meaning we had higher margin growth products. We talked about the IBC and reconditioning results. We had lower raw materials and advantageous cost raw material sourcing, and we did aggressive cost reduction activities. We consolidated two plants, one in Brazil and one in the U.S. Larry talked about organizational SG&A reductions, and we had a lot of discretionary spending reductions. I'll let Larry walk through the bridge and what those dollars meant in each of those categories.
Larry Hilsheimer, CFO
Thanks, Pete. So, Adam, on the value add percentage, we went from 45.8% to 50% in RIPS. So, really nice improvement. About 1% of that was some of the sourcing opportunities, and most companies would not need a sourcing group if you're going buy at index prices; that's what you're there for. You work the market to see if you can find opportunities in a dislocated market like we're in. Our team did a great job of sourcing about $7 million of raw material cost benefits relative to index prices. Part of that benefit got offset by currencies in terms of how that translates over to U.S. dollars. We lost part of that benefit, but also timing. We talked in recent years about the timing of our pricing adjustments being a drag on us. It actually turned around for us a bit in this quarter. That was the sourcing was about 1%, while the timing was about 1%. The other 2.2% was just really good activities around managing pricing for non-raw materials. We've been discussing how that’s been ongoing for the past couple of years, and some of that started to flow through in our quarter. If I go to overall adjusted EBITDA and you look down through those, the others are the pickup in SG&A. Some changes in allocations because the Paper Packaging business getting bigger; they get a bigger relative share of our corporate allocations, which is just obviously a shift. Depreciation was actually a drag as we implemented the ERP system and other things. There are a few other negative things that offset and get us to that 4.4% increase in our EBITDA margin.
Adam Josephson, Analyst
I really appreciate that. Regarding the OCC situation, it has been quite unpredictable this year, surprising everyone with its fluctuations both upwards and now downwards. Prices for June are coming out tomorrow, and most people anticipate a decline. The question is how significant that decline will be. Can you discuss the expected drop in OCC for June and possibly beyond, and how that influences your thoughts on the URB price increase, especially considering the challenges in URB demand? The increase seems to be connected to OCC, which I believe is set to decrease by at least $20 per ton. Could you elaborate on your expectations for OCC for the remainder of the fiscal year? Thank you very much.
Pete Watson, CEO
Yeah. Adam, we're expecting a $30 ton decline based on our exposure to OCC markets and our recovered fiber group. But we’ll wait and see definitively tomorrow. I know people have varying opinions. Regarding our price increase, it was really predicated on cost inflation as well as market demand. As I indicated, our volumes were up in our boxboard mills over 4% versus the prior year. And again, in May versus April, our volumes continue to be steady with steady backlogs of four to five weeks. So, when you look at cost inflation though at OCC, there's a $90 a ton increase from January to the present and a $30 a ton decline in pricing that occurred in February on boxboard products, URB and CRB; that created a $120 price cost squeeze. So, we are moving forward with the pricing increase in mid-May, and we need to maintain acceptable margins for our shareholders, and that's our position.
Adam Josephson, Analyst
Thanks, Pete.
Pete Watson, CEO
Yeah. Thank you, Adam.
Ghansham Panjabi, Analyst
Hey, guys. Good morning. How are you?
Pete Watson, CEO
Hi, Ghansham. How are you doing?
Ghansham Panjabi, Analyst
Thank you. Pete, could you provide more details on the end market verticals for RIPS as shown in the pie chart on slide six? Many companies in the chemical and industrial sectors, which are downstream from you, have reported over 20% declines in April. Given that a significant portion of the world was shut down that month, it's notable that your volumes actually increased in North America and the EMEA region during the quarter. Can you help us understand this outperformance? Were share gains a contributing factor?
Pete Watson, CEO
Yeah. So, it's a good question. It's really a case of haves and have-nots on the end market exposures in our global RIPS business. As you can imagine, we saw a really strong March sequentially in our quarter. February was fairly consistent; March was very, very strong. The second half of April, we saw fairly strong volumes, and it started tailing off at the end of April and as I indicated in my comments to George's questions in May. If you look at the end markets where we saw really strong volumes on a global basis, those exposures were to pharma and personal care, and we had a lot of customers transition some of their manufacturing capabilities to alcohol-based disinfectants. As I indicated, we had strong restocking in March, which continued into early April. In the offset of that was lower demand in lubricants, paints, and coatings, and as you can imagine, when the shutdown occurred mid-March through April, the lubricant business was negatively impacted by reduced commercial and industrial vehicle traffic, as well as some lower manufacturing activities in non-essential businesses. The exposures to our IBC and reconditioning business were much more positive because they're more geared to products experiencing stronger end-market growth. Our steel drum, while flat year-over-year, was reflected more of the commodity and bulk and lubricants in bulk and commodity chemicals. We believe we benefited from overstocking in March and early April. Our large plastic drum business was up 2.5% in the quarter; that exposure again was in pharma and personal care. We had a bit of lower ag chem demand, mainly because of access to labor and some delayed seasons. We also had a little bit of an addition because we added new capacity in the U.S. and we're doing well in those markets. In the IBC and reconditioning, that demand exposure for food, disinfectants, and detergents really benefitted us for the quarter. We expect some of those markets to maintain their strength; but it's very clear that destocking is occurring at the end of April into May. We expect that destocking to normalize through our third quarter.
Larry Hilsheimer, CFO
To your other part of your question, Ghansham, we feel very confident and know that we've gained a share of wallet and new customer business. We attribute that directly to our focus on customer service. At the same time, Pete mentioned in his comments, we walked away from some very low-margin, high-volume customers in Latin America, and we've also walked away from some other low-margin business in other parts of the world, but net-net, we feel comfortable that we're gaining market share in places we're targeting.
Pete Watson, CEO
I think what's really important …
Ghansham Panjabi, Analyst
Okay. And then for my second question in terms of the opportunistic sourcing you've benefited from in Q2, should we assume that there's a positive component for the third quarter as well? And then just in terms of your base raw material basket for the cost structure for RIPS, will the paths continue to be favorable in Q3 as well to the same extent?
Larry Hilsheimer, CFO
I think those opportunities are usually unpredictable. It's difficult to incorporate them into your model and rely on them happening again. As I mentioned, we encourage our team to focus on sourcing to achieve some of these benefits. We account for them achieving an improvement in index spread. We believe there will be some positive impact in Q3; however, I wouldn't expect it to match the level we saw in Q2.
Ghansham Panjabi, Analyst
Okay. Perfect. Thanks so much, and stay safe.
Pete Watson, CEO
Yeah. Thanks, Ghansham.
Mark Wilde, Analyst
Thank you. Good morning, Pete. Good morning, Larry.
Pete Watson, CEO
Hey, Mark.
Mark Wilde, Analyst
I wondered just going back to Adam's question around OCC. Is it possible to get a sense of what your OCC cost will look like in the second quarter? And then best as you can estimate now based on May and what you're seeing in June, where you might end up in the third quarter?
Larry Hilsheimer, CFO
We saw OCC prices increase from about 82 dollars a ton in April to 119 dollars in May, which was a significant rise. We believe this trend will continue, but it's difficult to forecast precisely. One reason we withdrew our guidance is the uncertainty surrounding potential spikes in hospitalizations if the country reopens fully. The closure of retail and restaurants has significantly affected the supply of OCC, combined with strong demand across the paper industry. Our expectation is that prices will be at least 30 dollars tomorrow, but we anticipate they should trend down if there isn't a spike, as businesses reopening should increase supply. We believe demand may be slightly weaker, particularly in exports, and while we see a potential downward path, we haven't made specific forecasts on where prices will settle after tomorrow.
Mark Wilde, Analyst
Do you have an estimate, Larry, of what you might have averaged during the second quarter? It's been somewhat challenging from the outside to understand how this affects your inventories, and we know that this situation occurred during the quarter.
Larry Hilsheimer, CFO
Yeah. Do you remember what the average number was, Matt?
Operator, Operator
In February, we had 37, in March we had 47, and in April we saw roughly $82. That gives us an average cost for the quarter.
Larry Hilsheimer, CFO
Thanks, Matt.
Mark Wilde, Analyst
Okay, that's really helpful. I wanted to ask about downtime. You mentioned 24,000 in containerboard during the second quarter. Is the only amount you addressed in May the 5,000 on the West Coast that Pete referred to?
Larry Hilsheimer, CFO
Yeah. It was really isolated, Mark, to a specific delay in some customer orders. It wasn't really reflective of the demand pattern we're seeing in our containerboard system.
Mark Wilde, Analyst
Yeah. Okay. The last one for me is just kind of related to that. One of your bigger competitors flagged walking away from some sheet business last month when they reported. I wondered if you can just give us some more general color about what you're seeing in both pricing and volume in that sheet market.
Pete Watson, CEO
Our CorrChoice business primarily serves independent box makers and integrated box plants, which means we operate in two different segments. A significant part of our exposure is tied to durable markets, particularly in the automotive sector, and the decline in these areas has posed challenges for our volumes. In markets sensitive to volume fluctuations, we often see instability. Throughout the quarter, this has been evident as some integrated box plants, facing weaker volumes, have temporarily engaged in the sheet market, employing strategies that differ from traditional sheet feeders. This variability contributes to the overall instability. We aim to focus on our core strengths, which involve handling complex products with quick order turnover and smaller order quantities, while adopting a value-driven approach. Such fluctuations are not uncommon in this type of market environment.
Mark Wilde, Analyst
Okay. That's helpful. Thanks, Pete. Good luck for the quarter.
Pete Watson, CEO
Thank you, Mark.
Steve Chercover, Analyst
Thank you. Good morning, everyone.
Pete Watson, CEO
Hi, Steve.
Steve Chercover, Analyst
So, just to clarify, was there about a $4 million transfer from RIPS to Paper Packaging in terms of overhead in the quarter? And is that the run rate?
Larry Hilsheimer, CFO
That's about it, Steve. Yeah.
Steve Chercover, Analyst
Okay. That's fair. I was kind of late in the session as well. And then, Pete said that fiscal Q3 will be the weakest from a demand standpoint, and looking back over many years growth has been very much a second half story. So, just I'm wondering if that's still the case.
Pete Watson, CEO
From a demand perspective, the reason we adjusted our guidance is due to uncertainty. However, our best estimate today is that as economies begin to reopen, the volume we experience will largely depend on the extent of supply chain disruptions and the speed of destocking in our RIPS business. This will influence our volume trends in Q3. We are optimistic about the conical season related to agriculture in our RIPS business, particularly on the West Coast of the U.S., which we expect to see positive volume contributions in our fiber and steel drum sectors. Delays in our Latin America juice and agriculture seasons suggest there may be some upside potential. However, uncertainty remains around our RIPS business. On a more positive note for paper, we believe our volume bottomed out in April within our paper and converting segments, with margins likely reaching their lowest point in May due to the OCC squeeze. We anticipate sequential improvement in this business during Q3, particularly if the economies reopen in a controlled manner without significant supply disruptions or a severe resurgence of COVID cases. We expect to see progress toward the end of Q3 and further improvements in Q4.
Larry Hilsheimer, CFO
Yeah. Steve, I’d supplement what Pete said. Pete and I tend to be pretty optimistic people. Generally, I have to put on my CFO hat sometimes to be pessimistic by profession. When you're trying to go through our normal forecasting process, our business unit leaders are doing everything they can to talk to all of our customers. Our customers aren't able to tell them much out more than 15 or 30 days. Most of what we hear tends to be a bit pessimistic, but every time we get the weekly results, they seem to be still going fine. May trailed down a lot. As Pete mentioned, we think that's tied to destocking, but we tend to be a GDP industrial production type of business, and all of the predictions of the economists show the second calendar quarter of the year just diving down 30% plus. Well, if that happens, that should have a negative impact on our business. Those disparities between how Pete and I feel about things and some of the optimistic things measured against what we're hearing from economists has us at a point where we decided we need to pull guidance.
Steve Chercover, Analyst
Yeah. Did you say, Larry, that you had $40 million in EBITDA benefits in the second half of the year from the cost initiatives?
Larry Hilsheimer, CFO
We've implemented several initiatives that relate to the question from George about whether we can maintain low SG&A levels. These include some revenue and cost items among other factors, and yes, we expect $40 million in the second half of the year.
Steve Chercover, Analyst
That's good. So, despite the volume from an earnings perspective, it could still be somewhat tilted towards the second half, since obviously the lowest point was in the first quarter. I'll just leave it at that. One other unusual question, because I've been watching a lot of TV. I've recently seen advertisements for these Bagster bags from waste management that can hold 3,300 pounds. They look just like one of your flexible products. Are you familiar with those? Do you see that as a potential opportunity? Do you know what I'm referring to?
Pete Watson, CEO
I haven't been watching that much TV, Steve, but I see pictures of that. I would be lying to you if I could intelligently talk about if that's an opportunity or not. But I will ask Hari Kumar, and I promise you he'll have a response to me by tomorrow.
Larry Hilsheimer, CFO
Thanks for your enthusiasm.
Steve Chercover, Analyst
Dumped? It's a flexible dumpster. It's what it is. Okay. Thanks, guys. Stay safe.
Pete Watson, CEO
Thanks, Steve.
Justin Bergner, Analyst
Hi. Good morning, Pete. Good morning, Larry.
Larry Hilsheimer, CFO
Hey, Justin.
Pete Watson, CEO
Hey, Justin. How are you?
Justin Bergner, Analyst
Good. Thanks. Hope you guys are well. In addition, I guess to start the sourcing benefit that you characterized the $7 million in the second quarter with some carry over benefit in the third quarter. If we were to look back prior to the second quarter, what type of levels with the sourcing benefits have run at sort of quarter to quarter, was in material or was it sort of de minimis prior to the second quarter?
Larry Hilsheimer, CFO
It was slightly lower than the first quarter, Justin. If you look back further in our transcripts from a couple of years ago, we often discussed the advantages of strategic sourcing. Those benefits diminished in 2018 and 2019, and we had virtually none. When you examine the year-over-year comparisons, we would mention that. As I said, in dislocated markets where things are unsettled, and businesses and industries are shutting down, suppliers end up having challenges with placement. You have those opportunities if your sourcing team is performing well.
Justin Bergner, Analyst
Great. That's helpful. So, it's similar to a trading-type profit when the opportunity arises, I suppose.
Larry Hilsheimer, CFO
That's right.
Justin Bergner, Analyst
I'll move on to a second question, which is I noticed interest expense came down $4 million or $5 million. Is that mainly because of the proceeds from the sale? And if so, should I read into sort of the similar interest expense as sort of a harbinger that, while you're withdrawing the free cash flow guide, one might not expect it to be too dissimilar from your prior guide, or one might expect a number that you're …?
Larry Hilsheimer, CFO
Yeah. Justin, I feel comfortable answering your question, but I'll actually have David Lloyd, our Treasurer, answer it because he's sitting right here and he'll be much more articulate and accurate than me.
David Lloyd, Treasurer
Yeah. So, the interest expense decline is really driven off of a couple of things. Obviously, we had a fairly heavy pace of debt repayment during the quarter, at least part of which was driven by proceeds from the CPG divestiture. Obviously, variable interest rates were at significant lows. We benefited from that significantly as well. Then we've done some things in the portfolio as well to drive lower interest costs also.
Larry Hilsheimer, CFO
Then on continuing.
David Lloyd, Treasurer
I believe that our previous forecasts regarding interest rates will remain largely unchanged. Most of our rates are currently fixed.
Justin Bergner, Analyst
And then, I guess, for the second part of that question, I mean, is it presumptuous to sort of assume based on the interest expense not changing too much that the free cash flow – while sort of pulled is, there's no reason to expect it to be too dissimilar from the prior view?
Larry Hilsheimer, CFO
Yeah. I mean, from the impact of interest expense, that's true. Obviously, with us pulling back on providing guidance, I mean the main driver of cash flow is obviously operations. And so that's why we are not giving free cash flow guidance for the remainder of the year either, Justin. But we do feel very confident about how well our treasury group is managing cash around the world and how well our business is doing focusing on working capital. So, we feel very good about our cash flow for this year. But it's all going to be relative to results. Obviously, as we said, there's just too many variables out there right now for us to give any kind of guidance range around that.
Justin Bergner, Analyst
Okay. Thank you for answering that question. All the best.
Pete Watson, CEO
Thank you, Justin.
Gabe Hajde, Analyst
Good morning, Pete, Larry, Matt. I hope you and your families are doing well.
Pete Watson, CEO
Thank you, Gabe.
Larry Hilsheimer, CFO
Same for you, Gabe.
Gabe Hajde, Analyst
Thank you. I will attempt to address the guidance question again, connecting it to your comments about volume trajectory. Can you provide any indication of whether, if the volume environment unfolds as anticipated, EBITDA would decline on a sequential basis from fiscal Q2? Is that what I am understanding?
Pete Watson, CEO
Well, I mean, it's hard to predict that. But again, we expect our volumes in our rigid business to be much lower in Q3. Some caveats are how fast supply chains recover and weather disruptions determine the evolution of that within the quarter into Q4. I think it also depends on how quickly economies recover from the health crisis. If you look at the case rate improvements, do you have any disruptions or negative events on the medical side that could hamper that recovery? I think there are a lot of unknowns that could be a variable that could impact it. But as what we know today, we think we're going to have a tougher volume month in RIPS in Q3, a worse in May and slowly improve in June and July, with a better view in Q4 in Paper. I think you're going to see an improving scenario in volumes. Although, as I mentioned, April was a lower point for our converted products in April. But again, the variables on how fast the durable market opens, how fast automobile manufacturing plants open, and what's the demand from consumers? Is there a disruption during the health crisis? It’s really challenging to predict. We're trying to give you our best view of the volume scenarios across both RIPS and Paper, Gabe.
Larry Hilsheimer, CFO
Yeah. Gabe, you think about it; auto, like Pete explained earlier, has a big impact on our CorrChoice volumes, and they peaked up toward the end of May as some of the auto manufacturers came back online. There are nice articles in the Wall Street Journal today about consumer demand and some dealers not having enough inventory on F-150s and other kinds of vehicles, but then you have the challenges they have because they can't get parts from Mexico or whatever. It makes it really, really hard to give you a solid answer on where we think things are going.
Gabe Hajde, Analyst
I understand, no problem. Perhaps this question will be easier. With the closing of the second machine in Mobile, Alabama, I assume the remaining business will be redistributed to other facilities. Could you give us an idea of what the fixed cost savings might look like? Is that included in the $40 million you mentioned, or is it something separate?
Larry Hilsheimer, CFO
Yeah, there's about $1.5 million just shy of that for the remainder of the year related to the closure, and that's a $5 million annual basis. Just to put this in context, you recall before we ever got into COVID, we'd been talking since last June about being in an industrial recession. We kicked off a process last fall to go through and review every single one of our plants across our businesses; that has led already to the closures of the two RIPS plants that Pete mentioned. That was also the genesis of the closure of this plant. It just wasn't an efficient one, and you're right. We will shift all that business to other facilities. It just wasn't a cost-effective operation.
Pete Watson, CEO
From a customer transition, it's a little easier for us because over 95% of our customers in that facility were all consumed internally with our own Tube and Core facilities.
Gabe Hajde, Analyst
Interesting. Okay. And I guess, maybe the last question you raised is about Larry's comment regarding alternative sourcing for products within RIPS, which I believe constitutes about 60% of the cost of goods sold. This seems like it could provide a sustainable benefit moving forward. Is there a way to quantify that or put a number on it for us?
Larry Hilsheimer, CFO
It wasn't. I may have misstated something there. We experienced some pricing and other actions that contributed to that margin of value-add, if that's what you're referring to. You might recall us discussing how we reinitiated our contracts upon renewals; we introduced alternatives for other pricing areas, aside from just the standard raw materials. We believe and expect that these developments will continue in our business, but you won't see them reflected year-over-year because, as we progress, we think much of this will be sustainable in our margin.
Gabe Hajde, Analyst
Understood. Thank you, guys. Good luck.
Pete Watson, CEO
Thanks, Gabe.
Adam Josephson, Analyst
Pete and Larry, thank you for allowing me to ask my two follow-up questions. First, returning to what Gabe was discussing regarding the timing of EBITDA, you initially expected Q3 to be the peak and that EBITDA for the second half would surpass that of the first half. However, this was before the pandemic, which has transformed many aspects since then. Is it still fair to anticipate that the second half will outperform the first half, or is it uncertain now without clear visibility, making those expectations unlikely? What are your thoughts on this?
Larry Hilsheimer, CFO
Adam, I hope you and your family are doing well.
Adam Josephson, Analyst
I appreciate it.
Larry Hilsheimer, CFO
Second, third quarter is clearly not going to be what it normally is; that's painfully obvious to us. Like I said, if the economists are right about where the calendar second quarter is, we should see negative impact in June. But again, Pete and I keep having optimism about it. It's just all over the place about where we think it could be. What we do not think is Q3 going to be what we thought it would be. We do expect that we'll start to see recovery in July and then through our fourth quarter. But trying to predict how strong that's going to be, I mean, I listen to more economists' calls than I ever have in my life and I always listened to a lot, and the range is all over the place. We just couldn't get a handle on it to feel confident to give you real true guidance.
Adam Josephson, Analyst
Yeah. No, understood. And just one last one on paper volume. So, I think, Pete, you said CorrChoice volumes were down single digits in May and that Tube and Cores were down a little more than that. Could you be a little more precise about the extent to which CorrChoice in terms of Tube and Cores were down year-on-year in May? And then just more broadly, we've looked at containerboard volumes in past recessions, and they've averaged down about 6% in the months in which the U.S. was technically in recession. Usually, URBs are a bit more economically sensitive than even containerboard. So, who knows how long this recession will last? Do you think containerboard and/or URB volumes are more likely to be up or down for the balance of the year on a year-over-year basis?
Pete Watson, CEO
Yeah. So, let me just reiterate what I've mentioned about CorrChoice and Tube and Core volumes, so my comments were about transitions from April to May; I wasn't referencing what our quarter volume was. In CorrChoice, from May to April on a per day basis, they were up 6%. If you remember, in May, we had two less working days than a year ago. That's why I'm referencing sequential evolution of corrugated. So, they were up 6% from April to May; our volume in the last eight days at CorrChoice was really strong. That’s reflective of the durable manufacturing businesses that were closed and deemed non-essential during the shutdown, including automotive. They're starting to fill up their supply chain needs. Our business has exposure to durables and automotive. So, that was my comment on the April and May transition. We don't really have any backlog on 24 days. Other than telling you what I know today, I’d be throwing a dart at a dartboard, trying to think beyond that. In Tube and Core, relative to May volumes from first April sequentially, they're flat. We have a high exposure, non-essential businesses that are gradually reopening, and based on how they come up, whether their demand is positive or there's disruptions in their supply chain would dictate our trajectory in volume in that business in Q3. Regarding your second question of trying to project what our volumes may be in boxboard and containerboard, that's a hypothetical question because of the uncertainty. I just cannot predict what those two businesses will do beyond what we know today.
Adam Josephson, Analyst
Yes, just one question about the year-over-year performance in CorrChoice and tubes and cores. Pete, I understood you correctly that there was a decline in single digits in core.
Pete Watson, CEO
Yeah. So, if you're talking about Q2 volume, our Q2 volumes in CorrChoice were flat versus the prior year, and our Tube and Core volumes for Q2 this year versus Q2 prior year were down 5%.
George Staphos, Analyst
I was curious if you could share some comments on the CSI scores you're seeing in RIPS, as there has been some nice improvement there. Thanks, and good luck in the quarter.
Pete Watson, CEO
Yeah. Thanks, George. We are seeing increased CSI scores across the whole portfolio. North America and APAC now are at a 95% level, we’re really pleased with that. A big part of the improvement is EMEA. EMEA is driving toward that low 90% range. So, I think again, having one global organization with a very singular focus is making a significant impact. As Larry mentioned earlier, that's driving some of the opportunities we're seeing with new customers or expanded wallet share in our Rigid Packaging customer base. So, thanks for the question.