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Good morning. My name is Lisa, and I will be your conference operator today. I would like to welcome everyone to WestRock's Fiscal Second Quarter Earnings Results Call.
At this time, I'd like to turn the call over to Mr. James Armstrong, Vice President of Investor Relations.
Thank you, Operator. Good morning, everyone, and thank you for joining us today. We issued a press releases this morning and posted the accompanying slide presentation to the Investor Relations section of our Web site. They can be accessed at ir.westrock.com or via the link on the right side of the application you’re using to view this webcast.
With me on today’s call are WestRock's Chief Executive Officer, Steve Voorhees; Ward Dickson, our Chief Financial Officer; Jeff Chalovich, our President of Corrugated Packaging; and Bob Feeser, President of our Consumer Packaging segment. Following our prepared remarks, we will open up the call for a question-and-answer period.
Before we begin, I'd like to point out during today -- the course of today's call, we will be making forward-looking statements involving our plans, expectations, estimates and beliefs related to future events. These statements may involve a number of risks and uncertainties that could cause actual results to differ materially from those we discuss during the call. We describe these risks and uncertainties in our filings with the SEC, including our 10-K for the fiscal year ended September 30, 2017 and our 10-Q for the quarter ended December 31, 2017.
Additionally, we will be referencing non-GAAP financial measures during the call. We provided reconciliations of these non-GAAP measures to the most directly comparable GAAP measures in the appendix of the slide presentation. The slide presentation is available on our Web site.
So with that said, I'll turn it over to you, Steve.
Thank you, James. Good morning, everyone. Thank you for joining our call today. WestRock team delivered strong results during the March quarter. We strengthened our capabilities and solutions offerings for our customers with the completion of the Plymouth Packaging acquisition and by reaching an agreement to acquire KapStone. Paper and Packaging markets remained attractive. Today we're benefiting from favorable demand, price and mix trends across our paper and packaging businesses.
Pulp & Paper Week published $50 per ton containerboard price increase in March. Also in March and April, PPW published price increases across all of our consumer paperboard grades. Most of our contracts include price adjustments based on the prices published in PPW. We are within one quarter of achieving our $1 billion synergy and performance improvements goal that we set at the inception of WestRock.
Our annual run rate at the end of March was $975 million. We expect to reach the $1 billion goal within the next two months. We generated $753 million in adjusted operating cash flow through March of this year. In January, we raised our fiscal '18 adjusted operating cash flow target to $2.45 billion and we remain on track to meet that goal. We are raising our full-year guidance for sales to $16.4 billion and we are raising our guidance for adjusted segment EBITDA to $2.9 billion.
Sales for the quarter were $4 billion and adjusted segment EBITDA was $669 million. This was an increase of 22% over last year for an EBITDA margin of 16.6%. Adjusted earnings per share were $0.83. This was up 54% over last year. Our adjusted operating cash flow increased by 27% compared to last year. Our team generated $64 million in productivity which merely offset costs and labor inflation of $66 million.
Recycled fiber costs in the second quarter were favorable. This was offset by increases in transportation, chemicals, and other input cost. Transportation represented the largest inflation driver in the quarter and it's one we believe will continue. Higher truck and rail rates are impacting the entire U.S economy and we're taking actions to reduce these costs, ensure that we can service our customers efficiently.
We are expanding the number of carriers we use. We are increasing the use of dedicated fleets to provide additional shipping options. The disruption caused by the large number and severity of the winter storms had a negative impact on our mill and converting networks across our businesses. Lower production, higher energy, and higher maintenance costs as a result of these storms had a $28 million impact on our financial results for the quarter. This was significantly more than the $15 million to $20 million estimate included in our guidance.
As a reminder, as I'm sure you can understand, we provided guidance in January and we could not at that time predict that we would have had additional severe adverse weather in March. The results of the quarter reflect the strong momentum in the business, with significant growth in our year-over-year financial performance.
We are making progress toward completing the acquisition of KapStone. As previously disclosed, the acquisition is subject to the approval of KapStone's stockholders. We are continuing to work through the regulatory approval processes in the U.S. and Mexico, and we expect the acquisition to close by the end of the September quarter or during the December quarter.
Our WestRock Corrugated Packaging team posted strong results in the quarter with adjusted segment EBITDA of $425 million. This was a 39% year-over-year improvement. Our North American corrugated adjusted EBITDA was $392 million with an adjusted EBITDA margin of 20.5%. This is a 460 basis points improvement over the prior year. I have been very pleased with the progress our Corrugated Packaging team has made, improving the performance of the business over the past several years.
Our adjusted EBITDA margin immediately after the Smurfit-Stone acquisition were only 12.7%. After several years of attention to the commercial and operational aspects of the business supported by capital investment, the team has achieved adjusted EBITDA margins for the past 12 months of 20%. This is an important milestone for the business. And our team remains committed to even more improvement over the next several years.
Corrugated Packaging continues to grow its position as [technical difficulty]. This was demonstrated over the past quarter by the growth in the industry box shipments of 2.6% year-over-year on an average week basis. This growth in demand supported U.S operating rates above 96% and inventories below four weeks of supply. We are seeing strong demand across all of our sales channels.
WestRock's North American corrugated box shipments increased 6.8% compared to last year. This volume increase was driven by the contributions from our recent acquisitions as well as strong demand in e-commerce, pizza and retail markets. April of 2018 has two more shipping days than last year. WestRock's box volume so far in April has increased approximately 2% on a per day basis and approximately 12% on an absolute basis.
Our machinery solutions offering is a key component of our differentiation strategy that contributes to our growth and enhances the value that we provide to our customers. The acquisition of Plymouth Packaging expanded our automated packaging systems business with the box on demand line of machines. Across our machinery businesses, we installed 77 machines during the second quarter. This brings total machine installations to more than 2,300.
During the quarter, we realized the benefits of the previously published containerboard price increases and improved channel mix. Our integration level for the quarter increased from 69% to 73% over the past year, primarily due to acquisitions. Of interest, increased sales volumes to our box plants were more than offset by reduced sales volumes to export markets. While prices to export markets increased over the last year, on average they remain less attractive than domestic markets.
Our sales volumes to domestic independent converters increased by 3% over the last year. And in the past 12 months we’ve shipped more than 1.1 million tons of containerboard to this market. Sales of containerboard domestic independent converters remain very important to WestRock. We experienced interruptions to our operations during the second quarter due to severe weather conditions. These conditions affected both our mill and converting operations and resulted in the loss of $13 million primarily due to lost volume, under absorbed fixed cost and higher spot energy cost.
Net inflation in the Corrugated segment was minimal, because higher transportation of chemical and labor cost were mostly offset by lower fiber cost. Brazil, our Brazil team delivered extremely strong results during the quarter. EBITDA margins were 26.8% for the quarter. This was up 180 basis points sequentially and 740 basis points over the prior year.
Construction had our new Porto Feliz box plant is well underway and we expect this plant to start up in the second half of fiscal 2019. Our consumer packaging team faced challenges due to cost inflation and winter weather disruptions. We’re well-positioned for improved performance as we move into the seasonally stronger second half of fiscal '18.
We are seeing strength in healthcare, beauty, personal care, food-service, and liquid packaging as well as in retail food. The strength is being offset by secular declines, commercial print and tobacco. Fortunately, these declining markets account for less than 10% of total segment sales. Our Machinery Solutions are important element of our differentiated strategy to serve beverage markets. We had a good quarter with 13 beverage machine replacements. We have a strong backlog machine orders for the second half of the year.
Our Paperboard backlogs improved through the quarter and are currently between five and six weeks on SBS and CNK and between four and five weeks on CRB. As I mentioned earlier, PPW published price increases in March and April across each of our consumer grades, and we're in the process of implementing these increases across our business as they flow through our contracts.
Paperboard and converted products volumes were stable. Our shipments increased 55,000 tons or 6.1% on a year-over-year basis. This was driven by the volume associated with the multi-packaging solutions business. Adjusted segment EBITDA in the quarter was $243 million. Looking at the year-over-year bridge, volume declined or reflects the softness in merchandising display as well as lower pulp shipments.
Lower display volume was largely driven by promotional programs in fiscal '17 that did not repeat in fiscal '18. Input cost inflation unfavorably impacted the segment as we experienced transportation, chemicals, and labor cost increases. The OCC price reduction help offset some of these cost, but not to the same degree in the corrugated segment as our consumer mills used significantly less recycled fiber than our corrugated mills.
Like our Corrugated segment, the winter weather caused disruptions across our operations. We had a $16 million negative impact on the financial results for the quarter. Severe winter weather impacted all four of our virgin consumer mills. This resulted in lost production, higher energy cost and higher repair expenses.
During these storms we experienced production losses from the impact of freezing temperatures on machinery and power interruptions from local utilities. The consumer segment delivered yet another quarter of improved productivity. The $37 million in productivity were due to the benefits from our capital investments and procurement savings. They reflect the strength of our Six Sigma and performance excellence programs.
With initial implementation of the published price increases, seasonally improving markets, and the benefits of ongoing integration and productivity efforts, we expect this segment to deliver improved performance in the second half of fiscal '18.
Ward now I will turn it over to you.
Thank you, Steve. We're making good progress on the remaining land and development portfolio and expect to achieve our monetization goals by the end of this calendar year. As Steve referenced in the June quarter, we will accomplish our goal of $1 billion of synergies and performance improvements that we initially set when we created WestRock.
Turning to Slide 10. We detailed the key assumptions included in our fiscal third-quarter financial guidance. We expect sequential earnings, adjusted earnings per share -- diluted share to be significantly higher than the $0.83 achieved in the second quarter. First, we expect EBITDA to increase by $75 million to $90 million as a result of sales price increases, seasonally higher volumes, favorable mix and continued productivity gains.
Second we expect maintenance downtime to increase 83,000 tons sequentially across our mill system. This will have an estimated $20 million cost impact quarter-over-quarter. Third, input costs are expected to be $15 million to $20 million lower than the second quarter. Recycled fiber costs have declined and this is expected to have a positive impact.
Based on a regional consumption mix, our average index price paid for recycled fiber in the second fiscal quarter was $102 per ton. Our average April index was $82 per ton. For the quarter, we are forecasting recycled fiber prices to remain flat with April's levels. However, noting the volatility, we've seen this year predicting recycled fiber cost remains difficult.
Combining these items, we expect that third quarter adjusted EBITDA will be sequentially higher $98 million to $118 million. Adjusted EPS will also be unfavorably impacted by $0.08 to $0.10 due to higher expected tax rate, higher depreciation and amortization and higher interest expense.
Turning to Slide 11. We're raising both our full-year revenue and adjusted EBITDA expectations by over $100 million each. We now expect to generate more than $16.4 billion in revenue and more than $2.9 billion in adjusted EBITDA this year. We are reaffirming our full-year adjusted operating cash flow guidance of greater than $2.45 billion, which we raised by a $150 million on our first quarter earnings call. Our estimated full-year adjusted book tax rate is approximately 25.5% versus our previous expectation of 27%.
In fiscal 2018, we are investing in strategic capital projects that will improve our business. Our investments in the Porto Feliz box plant, the curtain coater at our Mahrt mill and a new paper machine and our containerboard mill in Florence, South Carolina are underway. We expect investments in these projects to reach approximately $150 million this year. This is in addition to our base capital expenditures for fiscal 2018 of $850 million. We are positioned to deliver record financial results for the full-year with strong growth in revenue, adjusted EBITDA, and adjusted operating cash flow.
And with that, I will turn the call back over to Steve.
Thank you, Ward. WestRock's vision is to be the premier partner and unrivaled provider of winning solutions for our customers. The completion of the Plymouth acquisition and our announcement of the proposed KapStone acquisition in January, advanced our strategy by strengthening on our capabilities and the value we can provide our customers. This is translating into our financial performance. We are driving margin growth across WestRock through strong operating execution and solid business fundamentals.
We expect our fiscal '18 total company adjusted EBITDA margins will increase by more than 250 basis points to approximately 18%. Our team is committed to working together to help our customers achieve their goals using our portfolio of differentiated paper and packaging solutions. Through our strong execution, we will continue to improve our margins and grow our cash flow. We will use our strong cash flow to reinvest back into our business and make acquisitions that support our strategy.
We expect to return capital to stockholders by increasing our dividend over time and opportunistically repurchasing shares within our target leverage ratio. I continue to believe that this is a formula that provides significant opportunities for WestRock employees, WestRock customers and WestRock investors over the short and long-term.
That concludes my prepared remarks. James we're ready for Q&A.
Thank you, Steve. As a reminder to our audience to give everybody a chance to ask a question, please limit your question to one with one follow-up as needed. We will get to as many as time allows. Lisa, can we take our first question please.
Our first question comes from the line of George Staphos from Bank of America Merrill Lynch. Your line is open.
Hi, everyone. Good morning. Thanks for taking my question. Thanks for all the details. Steve, I wanted to talk a little bit about -- a little about the projects that you have underway, the large box facility in Brazil, the curtain coater, the work you do in Florence. Obviously, you said the investments are $150 million, can tell us what the next mile markers are on these projects and them staying on budget both in terms of cost and ultimately performance improvement? And then my second question, you mentioned a couple of times in terms of the consumer and the corrugated business, the machinery solutions component which you’ve been talking more and more about. Can you put into perspective for us what that growth or what the number of machine installations you talked to in your formal remarks means in terms of percentage growth, and how that's helping you in the market? Thank you.
Okay. George, I’m going to talk about Porto Feliz briefly, then I may ask Bob Feeser to talk about Mahrt, and then Jeff to talk about Florence and machinery. So just Porto Feliz, we’ve broken ground, so there's a building going out and I think we expect to commence operations as we said in the second half of 2019. So that's the mile marker for the project. We expect to be operational as I said during the second half of 2019. Bob, Mahrt.
Yes. George on the Mahrt coater we are scheduled for April of 2019. The engineering is right on track and we feel very good about the progress on the project. It will have a -- as we talked about an important impact at Mahrt in terms of scheduling benefits, but also quality benefits for our product and cost reduction as well. So we feel we're right on track with that project.
Hey, Bob, just a quickie there. Is the Mahrt coater, is that bigger than a normal curtain coater, is that pretty standard for paper machine of that ilk?
George, it would be comparable to the curtain coater that we’ve on number two machine at Mahrt. So …
Okay.
… it’s large. As you know that’s a larger machine at Mahrt, but we've got experience with that technology of that scale with our other paper machine.
Thank you.
And George on Florence, we are on track. We are just getting started. We’ve down payments on machine. We are getting permits. So we're on track and it's still early, but again that's a large project for us, 330 inch machine that will take out three older machines, narrow web, higher costs, so we’re excited about the project and we’re on track.
And, George, this is Ward to give you a perspective of the capital investment that we’ve had over the first half of the year on these projects. We invested about $34 million in the quarter. About $20 million in the first quarter, so 50 -- just over $50 million in the first half. And then the Porto Feliz investment it's not quite, 50% of it is in this fiscal year and the remainder next year. The Florence capital investment obviously, the heavy investment period will be in FY19. And then the curtain coater is also more weighted towards FY’19 than FY’18.
And then on the machine piece, George, we continue to have two pieces to the machine. One, it helps our customers drive our total cost, its helping them internalize sales so they can sell more product, it streamlines our operations in the tight labor markets that are happening. These are solutions that are helping customers across their portfolio. For us, it has a great revenue pull and also has higher margins on our average brown box business, and it has stickier contracts. So these contracts are typically five years with high repeat rates up in the high 80%. So for us it's a large part of our growth and a significant part of our differentiation to our customers.
So, Jeff, the number you threw out, what kind of growth are we seeing, sort of just for clarification?
So the machine year-to-date in our APS group is over double where it was last year.
Okay.
We doubled that business year-over-year.
Thank you very much.
Sure.
Our next question comes from the line of Mike Weintraub from Buckingham Research. Your line is open.
Thank you. Thanks for the very clearly laid out presentation. I just had two questions regarding the pace at which pricing historically would typically get reflected both with the containerboard price increase having been -- having shown up in Pulp & Paper Week in March. If you kind of look back, how quickly does that typically translate into the box prices? And then likewise on the consumer side, how quickly did the pricing find its way into the contract and show up in the P&L?
Good morning, Mark. This is Jeff. I will start. As you’ve seen in the last two that we've done is we’ve been consistent, typically two quarters. So we will leave the September quarter at a full run rate of the $50, that's historically how we performed in the containerboard group.
Yes, Mike, this is Bob. On the consumer side, closer to three quarters. So with this recent round of increases that we’ve communicated to our customers we're looking at full run rate implementation in the -- our first quarter of fiscal '19.
Okay. And so that is for …
So Mark -- this is Ward. I was just reiterating the guidance that we gave for Q3 and then for the full-year reflected the implementation that both Jeff and Bob just described.
Right. And Jeff its -- and typically recognizing that you would have full run rate by the end of that second quarter. Historically, what percentage on average would you had in the first quarter, so it get a sense of how much might be included in the guidance for the quarter ahead, that’s there?
So, Mark, let me just correct the early part. It's by the end of our fourth quarter, our fiscal fourth, which is really the third quarter and its starts to phase-in. So, typically what you’ve seen is, it's a 30-day lag and then there's multiple contracts and negotiations with customers. But when you pile all that together by the end of five or six months we’re at a run rate of the $50 a ton.
Thank you.
Our next question comes from the line of Brian Maguire from Goldman Sachs. Your line is open.
Hi. Good morning, guys. Just following on Mark's question there, the lags. Just specific to consumer, I know it's a little bit of a longer lag than in corrugated and the consumer markets have improved a lot in the last year, obviously your own backlog, the industry backlog has improved quite a bit, but it's enabled some of this pricing here. Just wondering if other than the pricing toggle, the other thing to think about is maybe trying to use some of the industry strength to try and reduce that lag going forward, which I think would structurally make the consumer business a little bit better. Is that -- do you see that as a potential option or opportunity in this tighter market as contracts come up? I know they’re multiyear contracts, but as they come up do you see some scope or opportunity to reduce that lags to something closer to what we see on the corrugated side?
Yes. Hey, Brian, its Bob. This is very much top of mind for us and I think of an opportunity for us and certainly as we go forward in discussions with our customers, that’s how we will be thinking about it.
Any early read on what the -- what obstacles customers might have to that? Obviously, I think they like some price protection, but two quarters seems like enough visibility for guys to be able to put their own price increases into effect. Any reason why you have historically it hasn’t worked out that way?
You know the discussions with customers are very specific and each of them have their own dynamics, and we can't go into specifics around that. But as you might imagine in the consumer markets, in particular, with consumer products, that always is a big challenge for us. But again the discussions are very specific with each of those customers.
Okay. Maybe just one from Ward for me. Just wonder what the raised EBITDA guidance, with the maintained cash from ops, what the offset is in there? Is it working capital or some timing shifts or just what will cause that to not go up as well?
So, sure. Remember back in the first quarter we did raise the cash -- cash flow guidance for the impact of the lower cash tax rate for the year. So if I take the -- if I tax effect the $100 million EBIT -- EBITDA increase would imply a $75 million additional contribution to cash flow. We have some land and development sales that are straddling our fourth fiscal quarter and the fourth calendar quarter. So as compared to our original expectations that's a little bit of a use or less of a source. And then we do have a little bit of working capital usage because we have the higher receivables associated with selling price increases across both our corrugated and consumer businesses.
Okay. So that affects the timing shift, maybe start slipping into the first fiscal quarter, probably the fourth?
Yes.
Okay. Thanks very much.
Our next question comes from the line of Steve Chercover from Davidson. Your line is open.
Thank you. Good morning. From the text and from your comments, it sounds like it's all systems go for the KapStone acquisition. I know that DOJ has evidently requested some additional Information, so is this just normal course or is this more rigorous scrutiny than for instance MPS acquisition?
That’s normal course. So we did receive the second request. We are working cooperatively with justice as it conducts its review of the proposed transaction and we continue to view the KapStone acquisitions as pretty competitive because it's going to enable us to serve our customers and improve our ability to compete. So we’re remaining confident we’re going to successfully complete the transaction without challenge from the Department Of Justice.
Terrific. And then my second question is for consumer packaging where sales were up -- much, much more than EBITDA. And I recognized the sale of HH&B is part of that, it wasn’t a good transaction for you guys. So my question, I guess, is was -- were the margins higher in home health and beauty than in MPS, or is there just a noise?
Yes, Steve, as we indicated the margins in the quarter were really impacted by the winter weather as well as higher cost inflation. And as we look forward in the second half, margins will improve and we expect them to be in line with history. We are seeing very good demand environment for backlogs are strong, and we're implementing the price increases that we’ve communicated to our customers. And we also had a really strong productivity quarter, and we expect that to continue in the second half of the year. So overall, we feel very good about the second half outlook around margins.
Steve, this is Ward. Home, health and beauty margins were higher than MPS's published margins. Now over time, we get to narrow that through the integration of the paperboard than the other synergy opportunities that we identified when we made the acquisition.
Great. Thank you. And just to be clear, I think it was a good sale, so thank you very much.
Yes.
Our next question comes from the line of Lars Kjellberg from Credit Suisse. Your line is open.
Thank you. I just want to come back a bit to your external containerboard sales. You talk about taking volumes out of the export markets. Could you give some color on what sort of quantum we're talking about and when you’re shipping out to export markets, where do you currently see the biggest pull in those markets? What region is being better than the others?
Jeff?
Hi, Lars. Good morning. So we are looking at driving integration into our internal system. As we talked about, we said a 5-year goal to be at 80%. But it's important to remember that we’re managing the tails of all of our businesses. So export has the biggest delta, and so we want -- we don't want to be 20% export and be swung with the up and downs of the cyclicality in that, and we want better control. That doesn’t mean though we won't take tail of box and move some of that to export where we have a better opportunity over the long-term. And we’ve done that actually in the last two quarters. We’ve exited some of our low-end national account business and have moved some of that back into the export to support customer contracts in other places that is a better channel price for us over the term. So we're addressing the channels. We like the export market. We think it's going to be a long-term good mark. We just don't want to be overexposed to that market. The pull, we had good season in Central, in Latin America, so that continues to be grateful. We see more coming into Middle East, Africa, and also Asia right now has high pull. So across our segments, all of them, export, internal domestic box are all very good demand profile right now.
Just to be clear [multiple speakers].
Our export shipments were actually down on a year-over-year basis by approximately 62,000 tons, and it was offset by increases in our box shipments and increased sales to our domestic containerboard customers.
Very good. I just want to continue on the same topic really on the consumer board side. The -- some of your peers are making very bullish comments about the domestic demand in Europe, but equally so in export markets. So two questions in that. Are you seeing a much improved market for European footprint in MPS? And are you seeing improved export opportunities from your -- especially the SBS business from the U.S platform?
Yes. Lars, this is Bob. In general, I would say it's about stable. We haven't seen a significant tick up in international or export opportunities across consumer. The markets that we're in are good markets and they’re growing in their own right, so I wouldn’t say that it's out of what we would normally expect.
Lars [indiscernible] in Europe. MPS in Europe is performing very well, particularly the healthcare markets.
Okay. Very good. Thank you.
Our next question comes from the line of Chip Dillon from Vertical Research. Your line is open.
Yes. Good morning. First question just a little housekeeping. It looks like you guys are saying that EBITDA improvement, if you tax effect it, it's around -- in the third fiscal quarter it's around $0.31, and so with the headwinds of 8 to 10, it looks like you're guiding to around $1.5. So if you could just confirm that and/or correct me, and secondly in the full-year guide of $2.9 billion or so EBITDA, what is your assumption for OCC in the fourth fiscal quarter relative to the flat you see for the third?
Hey, Jeff. It's Ward. So I think -- your question about the Q3 guidance, I think you played back to me the -- our chart is accurate, so -- and easily understood. So -- and then as I think about the full-year, we have a -- approximately $20 per ton sequential increase assumed in -- from Q3 to Q4.
Okay. That’s very helpful. And then just a quick follow-up. You all were very less domestically focused before, MeadWestvaco and now you've had some good experience -- I’m talking containerboard now in South America with quite a bit of success. What are your thoughts about Europe and now that you have exposure there in consumer, what are your general thoughts about Europe as a containerboard market, for containerboard and boxes, especially given some of the different dynamics there regarding fiber?
I think we’re happy with the footprint that we have now, and can't really speculate on how Europe looks to us for containerboard.
Got you. Thank you.
Our next question comes from the line of Anthony Pettinari from Citi. Your line is open.
Good morning. Just had a question on transportation. I think you said freight was the biggest hit in the quarter sort of relative to your expectation. Is it possible to quantify or put a finer point on how much that hit was? And is that something that we can carry into fiscal 3Q or maybe even get a little worse or better as you undertake some of these actions in the trucking market?
Yes. So the freight inflation that we incurred in the quarter relative to our expectations came very close to directly offsetting the lower OCC versus our expectations at the beginning of the quarter. If I look at our domestic mix, I mean, we are about just over 60% truck and we are experiencing mid double-digit inflation on truck frieght. Intermodal is about 10% of our mode mix. And again its north of 10% inflation and then rail is about -- almost 30% of our mode mix and it's been more stable. It's been in the -- less than 5%. So that -- that's what we have seen -- saw on the quarter and the expectation for our total freight costs for the full-year would be inflation that's approximately 10% inflation.
Okay. That's very helpful. And then just on the corrugated side, you saw box volumes increase almost 7% in the quarter. I think you said April volumes were up around 2% per day thus far. I’m not sure if I heard that correctly, but is that the right number? And if so, does that represent a deceleration or is there -- I don’t know an M&A effect or how do you think about the volumes you’ve seen in April in corrugated versus very strong volumes in the quarter?
You’re right. That was 2% on a per day basis, but there's two more shipping days in April. So on an absolute basis they are up 12%.
Okay. So maybe [multiple speakers]
So our [indiscernible] continue to remain strong. So I wouldn’t read any slow back or decline based on there being more shipping days in April.
Got it. Okay. I'll turn it over.
Our next question comes from the line of Debbie Jones from Deutsche Bank. Your line is open.
Hi. Good morning. I wanted to ask a question in consumer just focusing on the volume number. I know that the negative number that would typically had to do with promotional display, if you called that out. I just wanted to understand when does that kind of lapped and how is that business performing? Should we expect a material sequential impact as we progress through the rest of the year in that business?
I don’t think I would expect a material sequential impact in -- but we did have -- we had two great promotions last year and we just didn’t have the same great promotions this year. So display is a great business, it's for us. It just fits with our approach to the market. It's well integrated with our mills, but it's even better integrated with the approach that we take to the -- take to our customers, because our customers are working to promote their products. And display gives us a just on point ability to support our customers success, such a very integral part of our value proposition.
Okay. And then just if I can move to corrugated, you have been pushing to move your tons more domestically towards your customers in the U.S. Where are you with that strategy? It's just the export market seems to be quite strong, pricing seems to be moving higher. I’m just wondering if there's any shift in strategy there?
Hey, Debbie, its Jeff. The strategy is to over the next 5 years to look at integrating 80%, that still puts a bunch of tons into export. And again, it gives us optionality in the tails of all of our channels. We are interested in the best margins over the long-term of our business, whatever channel that’s in. Then we believe that an 80% integration as a midpoint is not a black and white answer. It gives us optionality into other channels. And so that’s what we’re looking to do is create optionality and take advantage of the best channels where we can generate highest margins.
Okay. I will turn it over.
Our next question comes from the line of Mark Connelly from Stephens. Your line is open.
Thanks, Steve. Can you talk a bit more about the volume side of consumer ex merchandise display? You’ve obviously made some choices about the kind of business you want to be doing. So can you tell us where you see the carton volume side going and whether you have more pruning to do?
Mark, I’m going to let Bob Feeser respond to that.
Yes. Hey, Mark. So as you know with the MPS acquisition that was an important shift in the mix of the business overall. So roughly 43% to 45% of the portfolio is in health and beauty, personal care, food-service, and liquid packaging. We see those businesses -- or those end markets growing well above GDP. And then the 45% of the portfolio is in our food and beverage traditional business and then the 10% that we had indicated in tobacco and commercial print. So that gives you a little bit of a feel for the overall mix of the business. We feel good about that mix and we want to continue to shift to those higher growing markets in health and beauty. Again, that was an important reason for the MPS acquisition.
Where is the food and beverage side going? Are you seeing stability in demand or is that still shrinking?
Yes, I would say overall volumes are stable. As you know in the beer market mainstream beer's been flat to down and that’s what we’re seeing, but that's being offset by growth in Craft Brew. And then same in carbonated soft drink as well, being offset by sparkling. But in general flat to maybe up 1% overall. And then in the food markets, I would say down 1% to flat. But I think those trends are stabilizing and we’re seeing that in our business as well.
Okay. That’s super helpful. Thank you.
Our next question comes from the line of Scott Gaffner from Barclays. Your line is open.
Thanks. Good morning.
Good morning.
Just wanted to clarify something in regards to the guidance you instituted this new EBITDA measurement that you’re guiding to for 3Q. For the full-year though this $2.9 billion of EBITDA, is that segment EBITDA or is that segment EBITDA associated with EPS?
So if you actually look at the first -- over the first half of the year, the primary drivers of the adjustment is when we back out the L&D, either the L&D sales and earnings. And so if you look at the course of the first half, the material -- it's really not a material change between those two metrics over a long period of time. So it's one in the same for the full-year.
Okay. Just FYI, it's a little bit confusing to have two different EBITDA metrics, but just maybe something to look out in the future. In regards to the KapStone acquisition, Steve, I know you already answered this question, but when you did release the update on the second request from the DOJ, you mentioned that that the acquisition could twist [ph] into the fourth quarter from the third quarter. So that would suggest something maybe changed -- minimal change to the outlook there. Is it more material that they’re requesting or what’s driving the possibility of a delay?
I think it's just we got a second request and so that put the potential for that slippage in there.
Okay. And then just lastly, if I look at Brazil, can you give us a box shipment growth in Brazil in the quarter?
I think they were up about 3% year-over-year.
Okay. Perfect. Thank you.
Our next question comes from the line of Mark Wilde from BMO Capital Markets. Your line is open.
Good morning, Steve. Good morning, Ward. Nice quarter.
Hi, Mark. Thanks.
I got just two questions. One I wondered, Steve, if it's possible for you guys to talk a little bit about your strategy or kind of filling in, in Latin America. You’re in the two biggest economies right now, so maybe sort of expansion in Brazil and Mexico and also kind of in some of the other countries in the region and whether that might actually contribute toward your 80% integration? And then the second question I had is just whether in a good market like this you have an opportunity to move away from the dependence on the Pulp & Paper Week pricing in both corrugated and consumer. I think it strikes a lot of us is kind of strange that we got a $50 billion industry that’s being arbitrated by trade paper editors.
Okay. So take Latin America, and then I will talk about PPW. I think you’re right. Latin America is a terrific opportunity for us. I think just Mexico and Monterrey, we're investing in box capacity, we also have a new paper mill going up in Monterrey adjacent to the new box plant that is just coming into service in Mexico. Gondi has been a terrific investment for us and when we looked at it, one of the opportunities we saw was continued investment in Mexico. I think also in Brazil we’re investing in the box plant. Both our investments in Gondi and Brazil allow us to increase our integration. And I think with respect to filling in, we supply a significant amount of containerboard, primarily for agricultural uses in Central America and the Western part, South America. I think that’s a potential growth for us over time as well. I think with respect to the PPD -- PPW pricing mechanism, I take your point, I agree with your point and it's been there for as long as you've been in the business, as long as I’ve been in the business. I think it's hard to necessarily see a path away. I expect it's going to continue to be a subject of conversation for some time.
Okay. Good enough. Thanks, Steve.
Our next question comes from the line of Adam Josephson from KeyBanc Your line is open.
Thanks. Good morning, everyone. Two questions for me as well. One on guidance. Ward, can you just help me with the moving parts in your EBITDA guidance. I know you said sales and EBITDA are up by a 100, I would presume that your OCC cost expectations for the year is also down. So can you just help us with what change compared to three months ago in terms of the EBITDA? Second question just on OCC longer-term, as a company with a significant amount of virgin and recycled assets, what is your view of longer-term OCC prices? Obviously, some industry participants have been of the view that that OCC has got to go up over time because of global containerboard growth, but that hasn't happened in recent years. So if you could just address those two, it would be great. Thank you.
Adam, this is Ward. Let me -- I’m going to take you back to our guidance at the beginning of the year and then I'll walk you through we -- for the full-year, and then walk you through to where we are today. So back in November, I highlighted that I thought the overall commodity inflation would be about $90 million, and I think our full-year average at that point in time for FY18 for recycled fiber, we’ve assumed that it would drop $7 per ton versus our average for FY17. And then in January we said, look our total inflation outlook hasn't changed. The additional reductions that we had experienced in the first half -- I mean in the first quarter relative to our original expectations for recycled fiber had been offset by higher freight and chemicals costs. And here we are now in April and it's remarkable how it's -- our outlook is very consistent in terms of what that overall commodity inflation is relative to the initial expectation that we said at the beginning of the year. So as I said, we've laid out what the OCC assumption is. And again it has a $20 per ton sequential increase from Q3 to Q4. And then it's been offset by the dramatically higher freight cost than what our original expectations were. And again when I was talking about what our inflation have been for truck, it's been in the mid-teens. And then -- so the inflation expectations are remarkably consistent, albeit from very different drivers from the guidance we said at the beginning of the year. We're getting the benefits from the price -- the recent price increases that we -- published price increases that we did not have in the guidance at the beginning of the year, okay?
Thanks for that, Ward. Yes, thank you. And then on the longer term OCC question?
Yes. I can't really speculate on what prices are going to be. I think just a couple -- couple comments. The global containerboard market is really attractive. So it's over a 160 million tons and it grew 4.3% last year. So it's a -- and its expected to continue to grow, and so we’re going to need both virgin and recycled capacity over time. I like our position because we have a nice mix and I think as the markets change we're going to adapt -- we are going to be able to adapt. In Brazil, we've got terrific virgin model. In Mexico we are building a terrific recycled mill and our U.S containerboard operations are very well-balanced. So I like our position in containerboard. I think it's a nice market to be in. I can't -- don’t really know what recovered fiber price are going to do. China is interesting because their import volumes are down almost 50% in the past -- I mean, just -- and so you have a market which has that significant a player impacting prices, it's just hard to see where prices are going to go. So we’re going to stay flexible and be able to adapt where the market goes.
Thank you, Steve.
Our next question comes from the line of Gail Glazerman from Roe Equity Research. Your line is open.
Hi. Good morning. On the consumer side, on Pulp & Paper Week last updated prices, they made a pretty significant distinction between the folding carton and the food service market. And I just wanted to know is that consistent with your experience? And if so, they seem to be attributing it to kind of -- the specter of imports. And I’m just wondering what your view is there?
Yes. Hi, Gail, it's Bob. So we’re seeing both general folding carton as well as the food service markets firm at the moment. And I think that what was reflected in Pulp & Paper Work Week on the cup portion, really reflects the strength of the food service market right now. And as you know that's continued on for some number of quarters. But our folding carton business as well, it goes into many end markets, at this point it is very firm.
Okay. And just any view on whether or not you’re seeing incremental in core pressure than what you might have, let's say a year-ago?
No. Really no significant change from a year-ago.
Okay. And then, my next question is on inventory, just with some of the operational headaches and weather disruptions you had in the first quarter -- in the second quarter, just how you view where your inventories stand just directionally where they moved and how you -- and also how you view them in the context with some of the freight issues going on?
Hi, Gail. It's Jeff. I will start with the containerboard. So we were trying to build inventories going into the outages. We were affected with the weather about 35,000 tons. We didn't build as much as we thought. So we did pull from some inventories. However, our supply chain responded well and we have a minimum that we need for stock. So the box plants have been in good shape. It's not -- there's not a lot of room. So we’re making and shipping every ton of paper we can and so there's not a lot of room for error. And then on the freight side, it does exacerbated. However, we're looking at all the things we can do to control those things, so lading of trucks, railcars, getting incremental drivers, moving shipments around so that we can do more turns with our trucks to manage our inventories. So it's just a logistics challenge that we have to manage through and we’re managing through that well, and believe we're set with our inventories going into a large outage for us in the third quarter.
Okay.
Hey, Gail. Its similar on the consumer side on the inventories. Very similar story overall and as you might imagine in some portions of consumer, in CRB, in particular, there is very little inventory in the channel overall. So the market conditions are quite tight.
Okay. Thank you.
Our next question comes from the line of George Staphos from Bank of America Merrill Lynch. Your line is open.
Hi, guys. Thanks for taking my follow-on. Just a quick one. Piggybacking, I think, off of a question that Brian had asked, so if we look at consumer over the next -- I don’t know five years and we see the evolution of your business by end market. Would it be natural that the lag that you typically see in terms of -- the price increase being reflected in Pulp & Paper Week and when you ultimately implemented that gap narrowing just by itself aside from whatever actions that you take. Said differently, do you have more ability to implement pricing in food service and some of the other growth areas of your business more quickly than you would -- your more traditional food and beverage market? Thanks and good luck in the quarter.
George, I think it's hard to speculate on future pricing. I like very much the platform we have with consumer and corrugated. I think we’re able to go-to-market and serve our customers in a distinctive way because of the portfolio we have. It's really hard to carry that through to how contracts are going to work in the future.
Okay. We understand. We will pick it up at some other point. Again, good luck in the quarter.
Thanks, George.
Thanks.
We have no further questions in queue. I will turn back to the presenters.
Thank you, Lisa, and thank you to our audience for joining our call today. As always, reach out to us if you have any questions, we’re happy to help. Have a great day everyone.
This concludes today's conference call. You may now disconnect.