International Paper Company (IP) Earnings Call Transcript & Summary

Good morning, and thank you for standing by. Welcome to International Paper's Second Quarter 2026 Earnings Call. [Operator Instructions] It is now my pleasure to turn the call over to Mandi Gilliland, Senior Director of Investor Relation. The floor is yours.

Thank you. Good morning, and good afternoon, and thank you for joining International Paper's Second Quarter 2026 Earnings Call. Our speakers this morning are Andy Silvernail, Chairman and Chief Executive Officer; and Lance Loeffler, Senior Vice President and Chief Financial Officer. There is important information at the beginning of our presentation, including certain legal disclaimers. For example, during this call, we will make forward-looking statements that are subject to risks and uncertainties. These risks and uncertainties and other factors that could cause or contribute to actual results differing materially from such forward-looking statements can be found in our press releases and reports filed with the U.S. Securities and Exchange Commission. We will also present certain non-U.S. GAAP financial information. A reconciliation of those figures to U.S. GAAP financial measures is available on our website. Our website also contains copies of the second quarter earnings press release and today's presentation slides. So now let me turn it over to Andy Silvernail.

Thanks, Mandy. Good morning, good afternoon, everyone. Let's begin on Slide 3. During the past few quarters, we've been clear about our focus on improved execution. [indiscernible] in the second quarter showed tangible progress, reflecting the commitment of our team to deliver in a complex operating environment. Across the company, we delivered strong operational performance, successfully executed a particularly heavy outage schedule and advanced key strategic investments. Also, we continue taking cost and complexity out of the business. producing results that exceeded our expectations for the quarter. In North America, we continued our trend of year-over-year box volume growth, and we expect to outpace the industry again this quarter. We also improved our overall mill performance and completed the Riverdale machine conversion on time. In EMEA, we accelerated cost-out actions and advanced our transformational investments. We also continued making steady progress toward the planned separation of our EMEA Packaging business. More broadly, the priorities we established for 2026, improving reliability, simplifying the business, strengthening our cost structure and investing where we can create the most value are progressing as expected and reinforcing the momentum we're seeing. We still have work to do, but we're seeing better execution and improving performance as we build a stronger international paper. Let's take a closer look at the quarter. I'm on Slide 4. One of the clear signs we're making progress is our ability to grow above the market. In the second quarter, our box volumes in North America increased 1.7% year-over-year on a daily basis, and we expect to outpace the industry by approximately 2% for the full year. That growth is a direct result of the work we've done to strengthen customer relationships and win new business. We believe a superior customer experience is an important differentiator for International Paper. We're helping customers improve performance, innovate faster and grow their businesses. One example of our customer focus and action is the investment we made in our Aurora, Illinois commercial performance and Innovation Center. At Aurora, we've created a place where our customers can work side by side with our designers, engineers and technical experts to solve their toughest problems, innovate together and bring new packaging solutions to market faster. I'm now moving to Slide 5. We're bringing the same intensity to our internal operations, which enables another strategic pillar and advantaged cost position. This slide shows the impact of the actions we've been taking to strengthen our mill system. Mill performance has improved by approximately 500 basis points year-over-year. More importantly, we're seeing consistent improvement in capacity utilization as the benefits of our focused efforts begin to compound. We've simplified the mill system and reduced costs by executing a series of footprint actions while directing capital to the assets and projects where it will have the greatest impact. We're also beginning to see returns from targeted investments in reliability and productivity. All of our actions have been driven by a win the-day mentality that is enabled by discipline of daily management. The result is a leaner, more efficient mill system that is generating more output from a stronger and more capable asset base. This trend is encouraging and reinforces our confidence that the actions we're taking are delivering the results we expect. On the next slide, we'll take a closer look at some of the key investments helping to drive our improvement. I'm on Slide 6. We're making focused investments across our system to upgrade our portfolio and drive reliability, productivity and growth. This is 80/20 in action. We've made tough choices to exit areas where we weren't delivering adequate returns so we can reinvest that capital where we see the greatest opportunity to win. The 4 investments shown here are examples of that approach. Each one strengthens our competitive position, supports our customers and drives financial returns in the mid-teens to mid-20s. Let's start with the Orpak mill. Before turning to the strategic rationale for NorPac, I want to acknowledge the strategy that occurred at the neighboring Nippon facility in May. Our thoughts are with those directly impacted and with the entire Longview community, including our own Norpac employees who call that community home. Safety above all else is our core value, and this is a sobering reminder of why we must be relentless in that commitment. Against that backdrop, we completed the NORPAC acquisition in June. The mill production was temporarily slowed during the DuPont investigation, but we responded quickly to address the reduced steam supply from their facility. As a result, the current mill operations have been returned to pre-incident level. [indiscernible] is an excellent fit for International Paper. It expands our ability to serve growing demand for lightweight, high-performance packaging grades, reduces distribution costs for the West Coast, lowers our total cost position and strengthens our overall mill system. At Riverdale, the machine conversion is complete and the ramp-up is progressing as expected. We anticipate the ramp to be largely achieved by the end of the year with machine reaching full run rate in the first quarter of 2027. The ramp period allows us to work with customers to qualify the machine across all product lines. This project strengthens our product mix, enhances our advantaged cost position supports a more balanced paper system over time and is expected to deliver returns consistent with our investment expectations. Next, Dover converting facility acquisition strengthens our footprint in an attractive region adds an established customer base and supports our long-term growth strategy. In Waterloo, we're preparing to start up in the fourth quarter and expect to be fully operational by the second quarter of 2027. Waterloo is a state-of-the-art facility designed around safety, productivity and innovation. It expands our presence in an attractive segment of the market and will position us to deliver high-quality packaging solutions with greater speed and reliability. Together, these investments reflect our 80/20 approach, investing in the capabilities and locations that help us win in concentrating resources where they create the most value. Now let's turn to Packaging Solutions EMEA, with some of the investments underway there. I'm on to Slide 7. Over the past 18 months, we've taken significant steps to transform the EMEA business. We've simplified the organization, integrated legacy acquisitions, reset the cost base and built a stronger commercial model around key customer relationships. Investments have been a critical enabler of that work. Across EMEA, we're investing to maintain and strengthen the asset base, improve competitiveness and lower cost and support growth where we see the most attractive opportunities. The 3 examples on this slide highlight the difference that we're making by putting capital to work. At Luca, we're modernizing our recycled containerboard platform by replacing an older paper machine with a new lightweight machine that will deliver higher yield, lower energy consumption, and greater sustainability performance. It's a transformational investment that will create a more efficient mill and strengthen our ability to serve our converting network. We expect this investment to come online in the third quarter. In Germany, we're executing on our cost-out strategy by consolidating volume from smaller facilities into more modern and efficient plants, like our Lighthouse approach that we used in North America. We're maintaining capacity while improving utilization, lowering fixed costs and strengthening our cost position. And in Romania, we're investing to capitalize on growth. Eastern Europe continues to be one of the fastest-growing regions in our portfolio at approximately 4% CAGR. We're expanding capacity within an existing operation to support our customers and capture that growth. Taken together, These investments will generate stronger financial returns and illustrate how we're improving the business for the long term, strengthening our asset base, lowering cost and investing where we see the best opportunities for growth. I'm moving on to Slide 8 and staying focused on our EMEA business. As in North America, we're simplifying the system and aligning resources to the assets and the opportunities that can create the most value. To date, we announced more than $210 million of run rate footprint and cost savings actions. Those actions include 31 manufacturing facilities in a central office that have closed or in the process of closing and are expected to result and net reductions of more than 3,000 physicians. The actions shown here go beyond site closures. An important part of this work is asset optimization. We're optimizing the network by redeploying equipment, capital and capacity into the sites where we can have the greatest impact. Approximately half of the equipment moves we have planned have already been completed, allowing us to consolidate operations, improve utilization and better align our assets with customer demand. With that, let me turn it over to Lance to discuss our second quarter results and outlook in more detail.

Thanks, Andy. Turning to Slide 9 and our enterprise results for the second quarter. Starting with sales in our North America business. While our box volumes are up 1.7% year-over-year on a daily basis, overall sales declined due to the planned exit of our nonstrategic export business following the closure of our Savannah mill. In addition, our EMEA business experienced softer demand primarily driven by the geopolitical environment. Earnings and margins declined year-over-year. In North America, the primary drivers were planned outage activity and the Riverdale conversion. In EMEA, we experienced margin squeeze due to the impact of higher paper prices on our packaging sales. as well as higher distribution costs. Despite those headwinds, operational performance was stronger than we anticipated and the results reflect continued progress on execution across the company. Even with a quarter that included significant outage activity and investment spending, free cash flow was stronger than we anticipated. Free cash flow in the quarter was negative $7 million as cash from operations was used to fund transformation initiatives and capital investments of $533 million. Turning to Slide 10 in our Packaging Solutions North America second quarter results compared to the first quarter. Overall, our results reflect solid performance across the business. Price and mix was favorable by $37 million, reflecting faster realization of previously announced price increases and a more favorable mix due to lower export sales. Volume was $16 million favorable, driven by normal seasonal improvement one additional shipping day and continued growth in our domestic business. Operations and costs were $1 million favorable, primarily driven by improved mill performance ex-TAC insurance recovery and the nonrepeat of the winter storm impact in the first quarter. These favorable items were primarily offset by increased costs associated with the Riverdale conversion and other reliability work completed during the outages. Maintenance outages were $127 million unfavorable in the quarter. As planned, this was a very heavy outage quarter at roughly twice our normal levels. Despite the scale and complexity of the work, the team executed exceptionally well across the system. In fact, the second paper machine at Riverdale returned to service ahead of schedule while conversion work on paper machine 16 was underway. Input costs were $21 million favorable primarily driven by the non-repeat of elevated energy costs associated with the first quarter winter storm. However, those benefits were partially offset by higher OCC and freight costs. In total, Packaging Solutions North America delivered $425 million of adjusted EBITDA in the second quarter. Moving to our third quarter outlook for Packaging Solutions North America on Slide 11. Price and mix are expected to be favorable driven by the continued realization of previously announced price increases through June publications. Volume is expected to be unfavorable as one additional shipping day is more than offset by anticipated lower export volumes. Operations and costs are expected to be favorable sequentially. Benefits from the Riverdale ramp-up and the contribution from NORPAC are expected to more than offset the step-down of XTA insurance proceeds anticipated in the third quarter. Input costs are expected to be unfavorable, primarily due to higher OCC and seasonally higher energy costs. Lastly, to ensure the safety of our team members, we proactively suspended operations at our Pine Hill mill to complete structural roof repairs. We currently expect the mill to be operational by the end of August. Our outlook shows a separate line item forecasting an approximately $85 million impact in the third quarter. before any expected insurance recovery. These items result in an adjusted EBITDA outlook for Packaging Solutions North America of approximately $555 million to $585 million for the quarter, which includes that Pinehill impact. Turning to Slide 12. We outlined the key drivers and assumptions behind the step-up we expect in North America from the first half to the second half of this year. Our full year adjusted EBITDA outlook is now $2.35 billion to $2.45 billion. We have reduced the top end of the range by approximately $50 million primarily based on the macro environment and the prolonged impact from the Middle East conflict. We delivered first half adjusted EBITDA of $902 million and continue to expect a significant step-up in the second half of this year. The right side of the slide walks through the primary drivers supporting that step-up and the progress we're making across the business. Compared to last quarter's view, the favorable adjustments include $50 per ton of the June published price increase, which is now factored into the price total. Volume is now slightly offset given that we originally anticipated an uptick in second half industry demand. We now expect industry demand trends to remain generally stable from the second quarter into the third quarter. Some of our 80/20 initiatives were achieved earlier than planned, shifting a portion of the benefit into the first half of the year and reducing the step-up reflected in the second half. Now that the heavy second quarter planned outages are behind us and the Riverdale ramp-up remains on schedule, our expectations for these items remain unchanged. The largest unfavorable category is the macro environment. We had anticipated approximately $50 million in headwinds. Now we expect an impact closer to $150 million, primarily driven by elevated transportation spot rates and higher OCC, diesel and employee medical costs. Putting it all together, these factors support an improvement of approximately $600 million from the first half to the second half of this year, excluding the impact from Pine Hill. Our preliminary estimate for the Pine Hill disruption in the second half is between $70 million and $100 million. We do expect to recover the majority of that impact through insurance in the second half, but we're still working through the details. The key takeaway is that we have successfully completed several important milestones in the first half of 2026, including our heaviest outage quarter and the Riverdale conversion. We're realizing prior price increases and continuing to execute our 80/20 initiatives. While the operating environment remains dynamic, these actions will help mitigate macro headwinds and support our confidence in the outlook for the remainder of 2026. Turning to Packaging Solutions, EMEA on Slide 13. The business delivered results that were ahead of our expectations for the second quarter. Price and mix was $12 million unfavorable sequentially as higher paper prices for external sales were more than offset by the unfavorable impact of higher paper prices on our packaging sales. Volume was slightly lower sequentially, reflecting continued softness in the market, driven by geopolitical uncertainty and consumer sentiment. Operations and costs were $16 million unfavorable sequentially but better than our expectations. While distribution costs associated with higher oil prices remained a headwind, the team made progress on cost-out actions which mitigated the impact. Input costs were $10 million favorable as lower energy costs, which include subsidies more than offset higher OCC costs. All in, Packaging Solutions EMEA delivered $182 million of adjusted EBITDA in the second quarter. Moving to our third quarter outlook for Packaging Solutions remain on Slide 14. Price and mix are expected to be favorable driven by the continued realization of prior paper price increases and the related recovery in box pricing. Volume is expected to be favorable reflecting seasonal strength and the continued onboarding of customer wins. Operations and costs are expected to improve sequentially, driven by progress on our cost-out initiatives and lower distribution costs. Lastly, input costs are expected to be slightly unfavorable as lower OCC costs are largely offset by higher energy costs, including the nonrepeat of the energy subsidies received in the second quarter. These items result in an adjusted EBITDA outlook for Packaging Solutions, EMEA of approximately $230 million to $250 million for the third quarter. Turning to Slide 15. We outlined the key drivers behind the step-up we expect in EMEA from the first half to the second half of this year. First half adjusted EBITDA was $390 million, slightly ahead of our prior expectations. With that higher starting point, the expected second half step-up is now approximately $170 million, supporting our full year adjusted EBITDA outlook of $900 million to $1 billion for Packaging Solutions EMEA. The largest contributor remains margin recovery and commercial uplift. We expect packaging margins to improve in the second half of the year as prior paper price increases flow through to box contracts. This benefit is supported by incremental commercial growth from new customer wins, normal seasonality and 3 additional shipping days. Taken together, margin recovery and commercial volume uplift are expected to contribute approximately $110 million of incremental adjusted EBITDA in the second half. Beyond margin and volume, there are 2 additional contributing factors to the step up. First, we expect to realize about $40 million in cost out benefits in the second half of this year. These benefits will come mainly from footprint optimization actions and improvement in distribution costs, assuming no further material escalation in geopolitical-driven volatility. Lastly, Input costs are expected to contribute approximately $20 million, reflecting anticipated lower OCC costs. Altogether, these factors add up to a second half adjusted EBITDA of approximately $510 million to $610 million for EMEA. With that, I'll turn the call back over to Andy.

Thanks, Lance. I'm on Slide 16. I'll start by doing a couple of points on the planned EMEA separation. We're making good progress and have a dedicated team focused on readiness activities. We are establishing the necessary governance, legal, operational and technological infrastructure and making significant progress on our key transaction documents. The separation remains on track to the announced time line. Next, as we've discussed today, our focus remains clear. As always, all of our actions are focused on delivering value for our customers, our teammates and our shareholders. We're improving execution across the company, strengthening reliability and performance across our network, simplifying the business and investing strategically to create the most value. We're seeing positive momentum in advancing the priorities we've laid out for the year. As we close, I want to thank the IP team. I am extremely proud of the focus and commitment they have demonstrated in the second quarter. And I have confidence that together, we will deliver strong performance throughout the remainder of the year. With that, let's open it up for questions.

[Operator Instructions] Your first question comes from the line of George Staphos with Bank of America.

Congratulations on the progress. I guess my first question as we look at the ramp-up that you have for second half versus first half, and we appreciate the bridge detail. When we do some rough math, it implies a 50% or so increase from the midpoint from third quarter to fourth quarter. So can you talk about some of the individual items that make you comfortable with that outlook, Andy and Lance? And recognizing prices change from day to day and week to week, what have you factored in for potentially higher diesel prices even since June 30, July 1 given where we're at right now. . And my second question is more broad. Can you update us in total what you've achieved in terms of [ 80-20 ] across both. You had the slide earlier on Europe, but also North America, what do you expect will be at for this year and what will be left for '27?

Yes. Let me -- I'll take -- let me take the second one, and I'll have Lance put some color on the first question. So I think, George, across the board, -- if you look at the ramp first half to second half and then as you think about going forward, right, the 80-20 work has been central to everything we've done. Let me start with Europe. You've seen the focus on facility rationalization on reducing the people cost intensity in the business. 31 facilities, over 3,000 people impacted by that. And that will continue to move forward just as we have outlined in the past. So that ramp that allows us to move into significant profit increases through the second half of the year and as we think about next year. That's been the bulk of that. And then really importantly, George, it's a matter of taking those resources and making really smart reinvestments like we have back in the U.S. in terms of -- on the commercial side. So reducing unnecessary waste, taking out unnecessary capacity or an effective capacity in effective assets driving profitability and reinvesting intelligently back into profitable growth of the business. And we expect to see that same trend as we move into the second half in Europe that we had in the U.S. in the U.S. specifically, right? We've done the major structural changes to the mill footprint and the plant footprint, right? So we've taken out the big chunks of those things. That being said, right, we're continually driving optimization. Every month, I'm out in the field visiting mills and/or a plant recently in Pennsylvania. And the work that we're doing there, we built a new facility a number of years ago or driving some rationalization that is driving efficiencies in that plant. And now it's about how do you tune that facility to drive incremental profitability. Lower utilization of working capital and capital in general. And then it's the big investments that we have made, so cutting and building, right? So the big investments, the big decisions that we made really throughout the last couple of years about taking assets out that were ineffective and reinvesting really aggressively back into a Manfield Riverdale, a NORPAC as examples. Back into now a Waterloo, and we've announced Mississippi to the Dover Delaware box plant that we built. So those things are ongoing, and you should expect to see that kind of change continuing across the company. really to take out unnecessary waste, reinvest back into profitable growth. So those are going to continue. Obviously, the massive impact that we had in the U.S., you're starting to see moving towards optimization. And in Europe, we're really still right in the throes of it. And so Lance, do you want to tackle the first one.

Yes. Sure. Just to go back to your question, George, on 3Q to fourth quarter ramp. And I think in particular, you're focused on North America. And I think it's really driven by the momentum that you see or what that would imply for the fourth quarter is really driven by a couple of things. One, the continued ramp in Riverdale, right, as we continue to bring that machine up and online to get to sort of the full run rate by early next year. The second, of course, is the pricing flow through that's going to continue to strengthen into the end of the year on pubs, the price publications through June, right? So we'll be continuing to add momentum as we realize more price across our box system into the end of the year. And then just the constant maturation of the cost-out initiatives that we've got throughout the business, right, that we're continuing to work on throughout the course of the back half of the year to continue to layer on to the profit momentum that we have. I think those are the things -- and if you think about kind of what are the headwinds and the way that we thought about the cost side of this, from a diesel perspective, look, we've just taken a stance that hard to predict where that goes, given some of the geopolitical uncertainty and the back and forth that we see going on around the world today. So we just basically taken in our assumptions to strip -- and so that's something that we've kept relatively simple from an assumption perspective.

Your next question comes from the line of Matthew McKellar with RBC. .

First I'd like to just how you're managing the downtime at wet conditions is seemingly tight as they are. You called out some favorable mix and less exports in Q3 outlook for North America and the materials, I think that would be separate. -- from the $85 million Pine Hall impact we called out. So any color on impact to mix and how you supply your converting system would be helpful. And then I guess, just to clarify, does the guidance for '26 assuming insurance recovery it would be in the same ballpark? Is that $70 million to $100 million hit do you expect the Q3 results? .

Yes. Let me touch on the insurance piece real quick. I mean our intention is we think that there's a likelihood that a majority of that will be reimbursed. -- we are endeavoring to make sure that we try to match that as close to the periods that are impacted as possible to avoid the noise and some of the sequential comp comparisons. So -- we're focused on it. It's still early days. Majority of it is around the business interruption side of the business. And so we will be working with our insurance providers to work through it, and we'll keep you guys updated as we get deeper into the process.

Yes. And on Pinehill specifically in terms of how you think about the network and the impact to it, there's a few things. Number one, we think that we'll be up and running by the end of August. So it won't be an extended period of downtime. However, right, given the tightness in our system and in the system in general, right, it certainly has an impact -- we started actually if you think about all the work that we've done in the past couple of years of optimizing the system, very thankful that we've been ahead of the curve on that in terms of being able to match paper grades to customers, to industries to locations. And so we've had a lot of work has gone on ahead of time. Thankfully, that's really good news. And one of the things we've been driving across the board is to maximize the mill network efficiency along all paper grades. Also, we have downgraded or reduced the amount of export that's out into the system. So we're pulling that back into the network to make sure we take care of our core customers. So it will be a tight couple of months, right? If you think about July and August is no doubt it will be tight and it exacerbates the tightness in the market across the board, but we think we've got it covered. We can't deny though that it will be tight here over the next month or so. And then we think we'll ramp out of that pretty quickly.

Okay. Very helpful. And if I could just follow up with 1 more. Between what's been recognized so far and announced to the market, North American pricing seems like it should be meaningfully higher in -- how are you thinking about looking at some tier response we see across the industry as that kind of to through to an extent experts continue to move are you likely to see new capacity announcements...

Matthew, I'm going to -- let me interrupt you. You're really muffled. We could not hear the second part of that. So if you could you start the question over again?

Sure. Sorry about that. So the price that's been announced and recognized so far, it seems like North American pricing should be meaningfully higher in '27, how do you think about what kind of supply response we see across the industry as that flows through? To what extent do the industry exports continue to move lower? -- we see new capacity announcements? How do you expect this to play out? .

Yes. Great question. So first of all, in terms of -- like anything, right, supply-demand dynamics are going to drive competitors' reactions, alternative reactions, things from overseas, you could expect to see potentially a bunch of stuff. I think structurally, as I look at the cost of building, we've done a lot of analysis on replacement costs, right? And as you can imagine, and I think pretty much anyone would attest to replacement cost of mill assets has skyrocketed in the last half decade. If you think kind of post COVID, just the ability to build a mill to bring on incremental capacity, it's a much higher bar than it was 5 or 10 years ago. I think that's a very fair thing to say. So that's not to say that it will not happen, but the bar is higher. It's more expensive, and I think you've really got to think through that. You've heard me say in the past that I thought the threshold for people to really take a high look at that is kind of mid-teens to high teens return on invested capital. And I think there's -- for somebody to enter the market with a major mill investment, I don't know that we're quite there yet. But with our own analysis and we think about that. Reactions from overseas, obviously, you have the shipping costs that are very substantial, especially when you look at the incremental energy costs incremental OCC costs that are out there in the system. So there are some challenges to that, but we'd be naive to think that you won't see some movement across that -- and then finally, on alternatives replacements, obviously, what we've seen in the Middle East with the cost of energy and therefore, how that's impacting the world of plastics. Generally, I feel good about where we are. I like our position. I like how we have managed our business and how we're reacting to the market, and so I feel good about where we stand and good about the future.

Your next question comes from the line of Mark Weintraub with Seaport Research Partners.

I apologize if it's a bit detail oriented here, but it sort of ties together, George and Matthew's question a little bit. And just clarifying, is Pine Hill included in the updated $3.2 billion to $3.4 billion guide? And if -- and/or recoupment of insurance proceeds, but that might help explain that very large pickup from 2Q to 4Q and just clarify a few other things. If you could just is on that? .

So in the overall total guide, it's not included. It's excluded, right? But what we're anticipating is that we recuperate the majority of the loss in the second half of the year.

Got it. Okay. And then if I could, sort of 2, but for next year, given what you're seeing here, how are you feeling about kind of the $4 billion, $5 billion, $5 billion that you've talked about for a while, which frankly seemed like a big stretch at one point, but maybe is looking somewhat more feasible. I don't know if you're willing to provide updated thoughts there. And then kind of at the same time, you talked about demand being more flat rather than up year-over-year in corrugated. Any kind of additional color? Is that just a macro call? Or what's the change there?

Yes. So let me tackle the second question first and then I'll come back to the broader implications. So on the demand side, what we've seen in the U.S. and in Europe, is the expected pickup in the second half. We're now not seeing that given what's going on with inflation and affordability we think that mutes the overall market going into the second half of the year. But we had expected a pickup of about 1 point. And so we're downgrading that to effectively flat. -- in the second half of the year in North America and up modestly in Europe in the second half of the year. That being said, that really is -- if you look at the things that are kind of holding back the market, I'll put the affordability just kind of across the board, that issue is the biggest issue and the uncertainty for the lower end of the economy, right? So if you're sitting in the bottom half of the economic spectrum, you're struggling today. And you can see it with the major consumer packaged goods companies that are out there the protein companies, the vegetable companies, et cetera, they're certainly seeing that especially in that more cash constrained part of the economic spectrum. And that and he put housing with that, we still really have not seen any relief there. So we see some pretty exciting pent-up demand into the future, but I think the conflicts and the affordability questions are going to mute that here certainly into the second half, and we'll see what that means for '27. Very specifically, we're seeing some slowness on the fruit and vegetables side, specifically on the West Coast from what's going on. We've seen everything in the news around some of the issues on the vegetable side with some contamination. We're seeing that firsthand, and it's showing up in our -- in the western part of the U.S. where the eastern part is pretty much in line with exactly what we thought. So we believe we can really focus in a narrow that, that's a short-term impact. But that will be a headwind. For us, we're seeing it in the month of July. We'll see if that lets up here as you see a rebound, when people go back to normal behavior, but I expect we'll have some headwind in the third quarter from that. As regards the -- as we think about what does this mean for the future? I'm going to be very careful not to give any real detail about the future for a couple of reasons. One, there's a lot of uncertainty out there with what's going on with everything in the Middle East and what's happening to input costs and everything else. And so we'll hold off commenting further on what we think the likelihood of demand looks like into the second half of next year. You've seen the pricing. You can do the math on the pricing right? We've always given kind of a guide of about $9 is a good proxy as we're doing that math, right? So kind of -- as we think about that math and how it flows through you can do your math on there of what that means going forward. We've talked in detail about the cost-out efforts that we've done. The other thing we just have to be cautious of is we're getting closer and closer to the spin. And so we -- by regulation, we have to be very cautious about forward-looking statements that aren't appropriate in that process. So we'll be a little bit -- we'll be holding off on there. You'll hear more in the third quarter. And obviously, in the fourth quarter, we'll lay out all of the details of our expectations for 2027.

Fair enough. And just care that $9 reference, that's a $1 per ton of contained board leads to $9...

Correct. Yes. Thank you, Mark. Yes, thank you for clarifying that.

Your next question comes from the line of Phil Ng with Jefferies.

Solid quarter and good execution. I guess my first question, Andy. You and your peers are certainly out with a September containerboard price increase in North America. And as you alluded, the market is quite tight. So when I think about this increase, -- is this -- do you need us to kind of offset the inflation outlook that you're seeing that's in front of you? Or this is more of getting a proper return because you guys are obviously recapitalizing your assets and more importantly, bigger picture, when you think about the supply/demand backdrop and where you're deploying capital, what's your pricing philosophy? How should we think about it going forward longer term?

Yes. Look, at the end of the day, a combination of pricing to market and supply-demand scenarios, right? And so we make our own decisions on what we believe is the right thing to do given what's happening, certainly on the demand side, right now, a lot more is happening on the supply side with inflation and the tightness in the market. And so we -- as we think about pricing, we think about what is appropriate given all of the different market forces and that's why we've landed where we've landed thus far this year. And we'll continue to do that, right? Pricing, as you know, is incredibly dynamic in this environment. And we're really kind of looking at all those different pieces and all those different factors, and that's been driving our investment philosophy and how we thought about the assets that we want to have and what drives profitability, maximum profitability for our business. the pricing up to now has really been eaten by inflation. I mean if you look at what's happened with OCC, energy, ESOL freight, you name it. right? It's unfortunately really eaten every bit of that -- of the pricing up until today. What happens to inflation going forward and therefore, what happens relative to the most recent announced price increases we don't know, right? That -- it's impossible to know. Obviously, we would expect some of it to flow through attractively to the bottom line. But we'll have to see kind of what happens specifically to what's going on in the energy world from the conflict in the Middle East. And what we're seeing with just general inflation across the economy that still flowing through from trade and tariffs and all the noise on that. So we feel really good about where we are right now. We feel good about the mechanisms we use in that decision-making and ultimately turning into profits in line with the things that we've talked about in the past.

Okay. Very helpful. contact, Andy. And then as you kind of articulated earlier in your prepared remarks, you're deploying your 80/20 playbook, you're taking out some high-cost capacity. First, that was on the mill side. You've done some on the box side. So one, where are you with that journey on your box network rightsizing? And then certainly, you've announced some investments this year, whether it's Riverdale, Dover, Waterloo, Orpak, -- where are you in terms of recapitalizing your asset base in terms of investments? Are you still pretty early in that journey. Just give us a little color in terms of where you are in that process at this point.