International Paper Company

Good morning and thank you for standing by. Welcome to International Paper's second quarter 2026 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, you will have an opportunity to ask questions. To ask a question, press star 1 on your telephone keypad. To withdraw your question, press star 1 again. As a reminder, to ask a question, press star 1. To withdraw your question, press star 1 again. It is now my pleasure to turn the call over to Mandi Gilliland, Senior Director of Investor Relations. Ma'am, 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, Mandi. Good morning, good afternoon, everyone. Let's begin on slide three. During the past few quarters, we've been clear about our focus on improved execution. The results from the second quarter show 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 continued 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 four. 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've 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 five. We're bringing the same intensity to our internal operations, which enables another strategic pillar, an advantage 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 a 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 six. 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 four 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-twenties. Let's start with the NORPAC mill. Before turning to the strategic rationale for NORPAC, I want to acknowledge the tragedy 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's production was temporarily slowed during the Nippon 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. NORPAC 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 the 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 advantage 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 and 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 seven. 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 three examples on this slide highlight the difference that we're making by putting capital to work. At LUCA, we're modernizing our recycled container board 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 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 costs, and investing where we see the best opportunities for growth. I'm moving on to slide eight 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've announced more than $210 million of run rate footprint and cost savings actions. Those actions include 31 manufacturing facilities and a central office that have closed or are in the process of closing and are expected to result in net reductions of more than 3,000 positions. 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 nine 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 non-strategic 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, XTAC insurance recovery, and the non-repeat 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 Ixtac 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 and 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 Pine Hill impact. Turning to slide 12, we outline 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, where 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 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 EMEA 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 non-repeat 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 outline 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 a billion dollars 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 three 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 two 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 timeline. 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 and 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 up for questions.

Thank you. If you would like to ask a question, simply press star 1 on your telephone keypad. To withdraw your question, press star 1 again. As a reminder, to ask a question, press star 1. To withdraw your question, press star 1 again. We will now pause a moment to compile the Q&A roster. We do ask that you limit yourself to one question and one follow up question. Your first question comes from the line of George Staffos with Bank of America. Please go ahead.

Hi, everyone. Good morning. Thanks for the details. 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. you know, what have you factored in for potentially, you know, higher diesel prices even since June 30, July 1st, 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 we'll be at were this year and what will be left for 27.

Thank you very much. Let me take the second one and I'll have Lance put some color on the first question. 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, 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 ineffective capacity, ineffective 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, We've done the major structural changes to the mill footprint and the plant footprint. So we've taken out the big chunks of those things. That being said, we're continually driving optimization. Every month I'm out in the field visiting mills and or plants. I was recently in Pennsylvania and the work that we're doing there, we built a new facility a number of years ago are 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, a Riverdale, a Norpec as examples, back into now a Waterloo and we've announced Mississippi too, 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 you're moving towards optimization. And in Europe, we're really still right in the throes of it. So, Lance, you want to tackle the first one?

Yeah, 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. 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. So we'll be continuing to add momentum as we realize more price across our box system into the end of the year. just the constant maturation of the cost out initiatives that we've got throughout the business that we're continuing to work on throughout the course of the back half of the year that continue to layer on to the profit momentum that we have I think those are the things and if you think about what are the headwinds and the way that we've thought about the cost side of this from a diesel perspective we've just taken a stance that Thanks, George.

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

Hi, good morning. Thanks for taking my questions. First, I'd like to ask how you're managing the downtime at Pine Hill with conditions as seemingly tight as they are. You called out some favorable mix and less exports in the Q3 outlook for North America and the materials. I think that would be separate from the $85 million Pine Hill impact you 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 assume an insurance recovery that would be in the same ballpark as that $70 to $100 million hit? Do you expect the Q3 results? Thanks.

Yeah, let me touch on the insurance piece real quick. I mean, our intention is we think that there's a high likelihood that a majority of that will be reimbursed. We're 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's around the business interruption side of the business. And so we will be working with our insurance providers to work through it. We'll keep you guys updated as we get deeper into the process.

And on Pine Hill 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, given the tightness in our system and in the system in general, 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 you know 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 but we think we've got it covered it 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. Thanks very much. And if I could just follow up with one more. Between what's been recognized so far and announced through the markets, North American pricing seems like it should be meaningfully higher in 27. How are you thinking about what kind of supply response we see across the industry as that kind of goes through? to what extent do experts continue to move lower? Are we likely to see new capacity announcements?

Matthew, let me interrupt you. You're really muffled. We could not hear the second part of that. Could you start the question over again?

Sure. Sorry about that. That's better. So the price that's been announced and recognized so far, it seems like North American pricing should be meaningfully higher in 2027. How do you think about what kind of supply response we see across the industry as that flows through? To what extent do industry exports continue to move lower? Do we see new capacity announcements? How do you expect this to play out?

Thank you. Yeah, great question. So first of all, in terms of, like anything, 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 five 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, you know, for somebody to enter the market with a major mill investment, I don't know that we're quite there yet. but it's 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. Please go ahead.

Thank you. 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 to 3.4 billion guide? And if, and or recruitment of insurance proceeds but that might help explain that very large pickup from 3Q to 4Q and just clarify a few other things. You could just tell us the specifics 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 two. But for next year, given what you're seeing here, how are you feeling about kind of the four, five, five billion that you've talked about for a while, which, you know, 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 and corrugated. Any kind of Additional colors, 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. Well, we expected a pickup of about a 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. You know, 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, you know, just kind of across the board, that issue as 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, etc., They're certainly seeing that, especially in that more cash-constrained part of the economic spectrum. In that, and you put housing with that, we still really have not seen any relief there. 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. you know very specifically you know we're seeing some slowness on the fruit and vegetable side specifically on the west coast from what's going on you've seen everything in the news around some of the the issues on the vegetable side with with some contamination you know 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 and 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 it regards, 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. 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 of what we think that 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. We've always given kind of a guide of about $9 is a good proxy. as we're doing that math. 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. By regulation, we have to be very cautious about forward-looking statements that aren't appropriate in that process. will be a little bit, we'll be holding off from there. You'll hear more in the third quarter and obviously in the fourth quarter we'll lay out all of the DTLs of our expectations for 2027. Fair enough.

And just to clarify, so that $9 reference, that's that $1 per ton of contained board leads to $9? Correct.

Yeah. Okay. Thank you. Thank you, Mark. Yeah. Thank you for clarifying that.

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

Hey guys, solid quarter and good execution. I guess my first question, Andy, you and your peers are certainly out with a September container board price increase in North America. And as you alluded, the market's 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, you know, this is, you know, more of getting a proper return because you guys are obviously recapitalizing your assets and more importantly, bigger picture returns. 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?

Yeah, look, at the end of the day, it's 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, you know, certainly on the demand side. Right now, a lot more is happening on the supply side with inflation and the tightness in the market. As we think about pricing, we think about what is appropriate given all of the different market forces. That's why we've landed where we've landed thus far this year. We'll continue to do that. 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've 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, diesel, freight, you name it, It's unfortunately really eaten every bit of that 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. 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's 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 concept, 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, I was on the mill side. You've done some on the box side. So, Juan, where are you with that journey on your box network, you know, right-sizing? And then certainly you've announced some investments this year, whether it's Riverdale, Dover, Waterloo, Norpact. 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.

Yeah, really good questions, both of them. On the first side, what I would say in the box world, we're really in, I'm just going to call it optimization mode, where We've taken out the obvious, you know, kind of high cost capacity, you know, things that had to be kind of completely recapitalized were not, they were uninvestable, so to speak. We've done kind of the big swath of that. Now what you're seeing, right, are the moves that look like, I'm going to call it on the most aggressive end, a Waterloo or Mississippi, right, where you're really going in and you're making a major bet. on a market, on a geography, or on productivity. That's kind of the most aggressive side. And then you have things like Dover, which is really around strengthening around a market and being able to integrate box and paper, right? Being able to do that in the right kind of market is really very consistent with our strategy. then the next I would call the next level would be brownfields which we have a number that are that are underway which we're boosting the right kind of capacity driving cost points down driving responsiveness up you know in the business and then the last part the last level of those is really around what I'll call just 80 20 optimization price volume mix how you think about all those things coming together in and around a geography that has multiple plants so the example I mentioned earlier that I was in and Pennsylvania here a week ago. And they are right. We have multiple facilities servicing that geographic marketplace and getting that right mix of a super plant, which is really kind of blow and go versus hybrid plants that are dealing with a lot more complexity in the marketplace. Finding that right combination, we're starting to dial that in, which means responsiveness goes up, cost comes down. And that's exactly what we're trying to do. So we're were absolutely, you know, working that spectrum of things. And we'll continue to make those bets. But in terms of kind of the bolus of stuff, the really big things that have come one after another, you're going to see it be much more measured as we go forward. On the big investment side, and these are related, obviously, you know, we've made a lot of big bets in the last two years. And what I'm really happy about is they're starting to really show up. that's that's big so if you think about the combination of things that we've done right closures of three different mills that effectively were uninvestable right you could have put it you had to put a lot of money into them for really nothing back that was really around extending the life and and frankly you know building product or paper that wasn't fit for the right kind of market at the right kind of profitability levels we made those tough decisions and then we reinvested super aggressively back into places like Mansfield, Riverdale, NORPAC where we see a future of more appropriate paper for the marketplace both in terms of grade and location and market at significantly lower cost points. I think frankly, I think we're going to find that NORPAC was a great acquisition. in terms of a great asset, a great team in the right location at a very attractive cost point, as an example. The investments in Mansfield have paid off dramatically. We're starting to see Riverdale ramp up, knock on wood, right, because we're still early in that journey. And then to the last part of your question about investment, we've said to expect the same kind of level of investment in North America for the next two to three years, and you should expect that. What I'm trying to drive is two key elements, two key pillars of our strategy. One is around an advantage cost position. We have a footprint and we have, I'll call it the bones of assets, to be absolutely the low cost player in the marketplace. And I fully intend to drive that relentlessly, to be the low cost player, not the low price player. That's not what we're trying to do. We're trying to be in a position where we have strategic choices that others do not. and we very much are trying to drive that across the business. Second, on responsiveness, right, we're integrating more fully our mill and our box network. We're building, we're making the right kind of paper in the right places for distribution to drive cost down and service levels up, which then drives a lower cost position within the box network and the ability to react even faster to customers. and so that that that cycle right that virtuous cycle is what we're now investing in and that's going to require us to continue to make investments pretty aggressively over the next few years.

That's super insightful Andy and looking forward to these investments hopefully coming to fruition contributing next year. Thank you.

Your next question comes from the line of Gabe Hedy with Wells Fargo Securities. Please go ahead.

Andy, Lance, good morning. Thanks for taking the question. I wanted to ask about the SPIN and as you kind of put all the infrastructure in place for that to be a standalone entity, would you say that there are still other options that could be pursued or evaluated as part of that process?

Yeah, look, we're working diligently to focus on the SPIN. That's our priority. is to drive the spin. We have a clear path to doing that. We're on track to that. All of our efforts are focused on that. And I don't see a reason why we won't hit the timelines that we've outlined. In terms of alternatives, we've said all along that at the end of the day, we have to do the right thing for our shareholders. And if someone shows up and has an appropriate interest and they are the right kind of partner, We have to listen to that and we certainly would with the right kind of proposition. And so, you know, look, at the end of the day, it's about our fiduciary duty and our responsibility to our shareholders and to drive the most value. And that's what we're going to focus on.

Thank you. I want to take one more stab, I guess, at the Georges and I think Mark's question. If we dial back to kind of pre-D.S. Smith, and I'm simple, so I'm going to stick with I think $1.2 billion of cost saves and $800 million of commercial opportunity in what was kind of P.S. North America. You guys, I think, acquired maybe $100 million or so of EBITDA in there. But, you know, take out the report card. Have you actioned everything on the cost side to get you to that $1.2 billion? And on an exit rate or what you've accomplished thus far in 25, 26, where would you say you are at on the $1.2 billion? And then on a commercial side, any help there? I mean, I think we can do some of our own math, but I appreciate that demand is probably 3% to 4% less than what you would have anticipated in March 2020.

Yeah, so first of all, I applaud the fact that you have triangulated appropriately on it. The fact that your attention to detail and really understanding that, that's a really good thing here. I think in terms of there are a few things that have shifted since that original goal. And what I mean by that is just how the world has shifted. And that's really around demand is lower, right? And inflation is significantly higher, right? If you just kind of look at those two pieces of it. So we've been squeezed. You're right. It's actually probably more like four or five percent. If you if you look at the difference between expectation and action, what we were saying. Right. If you look at that, it's probably four or five percent. And I'd have to go back and add up the difference in inflation compared to our expectation. But if you kind of think of it on a year in year out basis, we're looking at about 200 million dollars of internal inflation, not including input inflation. Right. Obviously, the internal we've dealt with incredibly well. The external, you know, that kind of muddies between that input inflation and then what happens on the commercial side. And you understand that really well. That set as context, let's go the cost side first and let's come back to the commercial. So on the commercial, if you look at kind of what you'd expect that's going to flow through the actions that will flow through into next year in North America, it's in the range of 350 to 400 million dollars. that is carryover cost out of all the things that we've done that being finalized that rollover, right? So that if you just kind of do the math on that, that's about what that is. In Europe, it's more like a couple hundred million dollars, right? Two to $250 million, it's incremental. So you've got about half of that 1.2 billion that we talked about before that will be finalized, it's flowed through. To be clear, almost all of that is action. Right. Europe still has a few things. I mean, they're going to do more as the year goes on. But you're not talking about three quarters of it having to be actioned. You're talking about a quarter of it having to be actioned. The rest of it has been actioned and is working its way through, you know, the system. What I would say, you know, the negative to that is where we have gotten it wrong is the cost to execute has been higher than we expected by to some degree, but not outside the realm of a pretty darn good execution. It's taking a little bit longer than we had expected, a little bit more expensive. But if you actually look at the dollars, we've gotten them. There's no doubt about it. On the commercial side, what I would say is the commercial has been far more than we expected. So it's a much larger number than if you went back two years ago than we expected, but it's been eaten up by the inflation. When it's all said and done, when you put all this together and you kind of look at the 2027, and again, we've got to be really careful about how we talk about it, but we're going to be right in the range of what we said two years ago. We're going to be right there. If you kind of back out GCF being sold and you look at the split between North America and Europe, we're going to deliver pretty darn near exactly what we said we were going to do two years ago. It's been a lot of bumps along the way and the path has not been straight, but I can't tell you how happy I am and how proud I am of people grabbing onto it, dealing with this incredible uncertainty and putting this company in a position to win.

Thank you for that. I mean, I don't think anyone, as you pointed out, had tariffs or a Middle East conflict. It was not on our bingo card. I'll hop back in. Thank you. Thanks.

Your next question comes from the line of Mike Roxland with Truist Securities. Please go ahead.

Thank you, Andy, Lance, and Mandy for taking my questions, and congrats on all the progress.

Good morning, Mike.

Yeah, in terms of volumes, a quick question there. You mentioned that your North American volumes were up about 1.7% on a per day basis. I think you, last quarter, you were guiding them to be up around 3%. What changed with respect to... Thank you. Thank you.

So it's a difference there. I think that's where you're getting the 3%. Because nothing's changed from our expectations in terms of where we're falling. I think we're right kind of where we thought we would be. That's exactly right. I don't know, Andy, if you want to add more color.

Yeah. I'm sorry. Can you clarify that, Mike, with the second part of that question?

Oh, sure. Yeah, just any color you can have in terms of how your shipments are trending in July.

Yeah, so I would say outside of fruit and vegetable, it's pretty much in line with where it's been, which is softer than we had expected, right? But not outside of the bands. I do expect to have some headwind in fruit and vegetable on the West Coast in the month of July. We'll have to see, you know, people may have seen the Taco Bell announcements this morning. They expect they're starting to see a return to growth and whatnot. And so that will work itself through. I do expect there to be some volume headwinds in the third quarter from it. The exact number is really hard to put your arms around just because it was really noisy for a couple of weeks. You can see the noise is starting to die down, but let's find out kind of where it is and if consumers are moving back, you know, kind of what I call just a normal consumption, which historically with these things has happened after, you know, a short period of time, but we'll see where that goes.

Got it. One quick follow-up just on price. Lance mentioned more favorable price due to faster realization of previously announced price increases. What does that relate to? I mean, have you reworked contracts that is allowing you now to recapture price in a faster pace than you have historically? Just any color as to why you're able to capture price faster than history. I would appreciate the call. Thank you.

Yeah, look, I think it's just a factor of how we work through this. It's a contract-by-contract basis. We try to make some assumptions on a three-month forward look, 90-day forward look. And we effectively just sort of outperformed in the way that we're executing those contracts.

And I think part of this is just tied to the fact that we put a lot of work into building our commercial team, right? So if you look at the work we've done in terms of people and process, It's not something we've talked a lot about on these calls, but it's where we have retooled a very large percentage of our field force. We've changed incentives and we have invested in their tools. And so I think it allows them just to move a little bit faster into the marketplace.

Got it. Thank you.

We have time for one more question. And that question comes from the line of Anthony Pitoneri with Citi. Please go ahead.

Good morning. Good morning. Just following up on the last question, assuming the price increase is realized in the publication in September, would the hike be fully realized exiting 1Q27? I'm just trying to figure out how much you would see in calendar 26 versus calendar 27. I don't think we'd see...

Yeah, regardless of what happens to the pub, you pick your number, right? It's, you know, just the way it flows, you're not likely to see much in 26. It's really at 27. 27, yeah. It's really 27.

Got it. Got it. And it would be fully realized exiting 1Q, 2Q? I don't know how you think about the lag, but...

It's probably... 1Q, 2Q, somewhere in there. Right in there. Yeah, it's going to be between there, but, I mean... It's not going to look a lot different than what you've seen historically. We can't imagine it would be like that. It's pretty systematic.

Got it. Got it. And then one last quick one, and I'm sorry if I missed this, but if I think about the assumptions underlying the full year guide on the cost side, so I guess OCC, diesel... At the midpoint, are the assumptions that those remain at current levels or 2Q quarter end levels or baking in some inflation? Just wondering the kind of cost assumptions underlying.

Yeah, so we're assuming some cost increase as you get into the latter half of the year around OCC. But really our diesel costs, like I said earlier, is really the assumption that we're driving there is just today's strip.

Okay. That's very helpful. I'll turn it over.

Thank you guys very much. Just a few closing comments. So first, just some notes of thanks. I want to thank the European team. They have just carried an incredible load working through Project Diamond and the corporate team that's focused in on doing that, right? So that's our name for it internally on working on the spin. And for anyone who's been involved in those kinds of things, you're doing your day job and then you've got to do that job. And it's an incredible amount of work and they're doing a terrific job around that. Secondarily, Lance mentioned this in his comments, but if you look at what the second quarter was in terms of workload for the container board team, for the mill system, in terms of Riverdale and the amount of outages, what they executed, that's no small feat. In moments like this, you kind of move past it pretty quickly. but I really want to note the incredible work and the execution that's happened around that while keeping a really tight focus on safety. Safety above everything else and so just congratulations to that team. And then just more broadly, we have gone through a lot of change at IP and we still have more change to go through and people have stepped up and so I just want to thank everyone for that incredible work and then finally to our investors. I appreciate your interest and your continued support in what we're building here at IP, and I thank you for that support. So everybody take care, and we'll talk to you in 90 days.

Once again, we'd like to thank you for participating in International Paper Second Quarter 2026 Earnings Call. You may now disconnect.