Prepared remarks
Hello, everyone. Thank you for joining Sonoco Global Marketing Communications. Roger, please go ahead.
Thank you, Warren, and good morning, everyone. Last evening, we issued a news release and posted an investor presentation that reviews Sonoco's second quarter 2026 financial results. Both are posted on the Investor Relations section of our website at sonoco.com. A replay of today's conference call will be available on our website later today, and we'll post a transcript later this week. If you would turn to Slide 1, I'll remind you that during today's call, we will discuss a number of forward-looking statements based on current expectations, estimates and projections. These statements are not guarantees of future performance and are subject to certain risks and uncertainties. Therefore, actual results may differ materially. Additionally, today's presentation includes the use of non-GAAP financial measures, which management believes provides useful information to investors about the company's financial condition and results of operations. Further information about the company's use of non-GAAP financial measures, including definitions as well as reconciliations to GAAP measures is available under the Investor Relations section of our website. Joining me this morning are Howard Coker, President and CEO; and Paul Joachimczyk, Chief Financial Officer. For today's call, we will provide prepared remarks, followed by your questions. If you'll turn to Slide 2 in your presentation, I will now turn the call over to Howard.
Thank you, Roger, and good morning, everyone. Our Sonoco team delivered solid second quarter results that met our expectations and exceeded consensus estimates as productivity and cost controls helped offset global inflation in logistics, petroleum-based chemicals and coatings, and raw materials. Paul will go through the financial details, so I'll concentrate my comments on the solid operating performance of our industrial and consumer segments. Our consumer segment was strong from what was a strong quarter last year and up 29% from the first quarter. The segment's improvement was driven by $16 million in productivity gains, which more than offset price/cost headwinds stemming from rising costs for freight, chemicals, OCC and lumber. Driving industrial growth with strong results from our North American URB mills, trade tons were up 6.4%, which boosted mill utilization rates to 95% — the highest level in years. Much of this increased demand came from new market development such as saturated URB for laminates as well as share gains. Reels volumes were up 10% as we continue to benefit from demand from wire and cable customers who are supporting the infrastructure build-out of data centers and artificial intelligence investments. Overall, global industrial volume mix was flat for the quarter as the strong results from our mills were partially offset by lower demand in Latin America and some of our converting operations. On the consumer side, operating profit was up by 5% during the quarter and was up 22% sequentially from the first quarter. Productivity and cost containment initiatives were central to the consumer results. Paper can volumes were up 9% in EMEA and APAC, with Asia volumes being up 29%. Overall, segment volume mix was off 1.8%, driven primarily by lower metal aerosol cans and adhesives and sealant demand in the United States. I would add that both U.S. food can and aerosol volumes were strong last year in the second quarter, which created a tough comparable for this year. As shown on Slide 5, global inflationary pressures driven by higher energy expenses stemming from the Middle East situation cost us roughly $10 million of operating profit in the quarter. Freight was the largest component of those cost headwinds. Raw materials were also higher, particularly OCC, which is up $40 per ton year-to-date to $100 a ton. While we were behind the price/cost curve in Q2, recovery mechanisms are now in place to fully offset these costs. This includes an April URB and converted product price increase, which fully goes into effect in the third quarter and a $60 a ton increase for URB, which went in place on July 8. We have also implemented contracted paper can price increases globally and are adding necessary surcharges to offset higher diesel costs. Now I'll take a minute and turn the call over to Paul, and then I'll come back on with some thoughts regarding second half expectations.
Thank you, Howard, and good morning, everyone. Before turning to the quarter, two quick reminders. First, all the results discussed today are on an adjusted basis, unless otherwise noted, with a full GAAP reconciliation included in our earnings release and accompanying presentation. Second, while the TFP divestiture has now fully annualized, ThermoSafe continues to affect certain year-over-year comparisons within continuing operations, and I'll provide underlying context where it is helpful. Turning to the second quarter results on Slide 7. The second quarter was another quarter of solid execution in line with the priorities we outlined at Investor Day. We delivered earnings growth, generated strong cash flow, maintained margins and continued to realize benefits from our profitability performance plan. Most importantly, these results demonstrate that the strategic actions underway across Sonoco are translating into measurable financial improvement and positioning the company for stronger long-term performance. Net sales were $1.9 billion, down 1% compared with the prior year. Pricing gains continue to provide support and helped offset softer demand in select markets, while foreign exchange was a modest tailwind during the quarter. Adjusted EBITDA was $324 million, down 1% versus the prior year, and adjusted EBITDA margin was 17.2%, in line with the prior year period. Productivity, pricing actions and early contributions from our profitability performance plan helped offset inflationary pressures and supported margin stability in the mixed demand environment. Adjusted EPS was $1.51 compared to $1.37 in the prior year, supported by the continued execution across the business, benefits from the profitability performance plans and lower interest expense resulting from the debt reduction actions completed over the last year. Prior year second quarter results from the divested ThermoSafe businesses were $66 million of revenue, $11 million of EBITDA and $0.08 of EPS. Excluding those results, second quarter 2026 revenue and EBITDA grew by 2% and adjusted EPS increased by 17%. Operating cash flow was also a highlight, coming in at $301 million, more than $100 million above the prior year. This performance reflects strong earnings conversion and continued discipline around working capital and capital deployment. Taken together, the quarter reinforces the strength of our operating priorities and demonstrates continued progress on the strategy we laid out at Investor Day. Turning to the EPS bridge on Slide 8, I'll take you through the primary drivers of the year-over-year improvement in earnings per share. Adjusted EPS grew $0.14 or 10% year-over-year. Within the business, both the consumer and industrial segments benefited from pricing gains and productivity improvements, which helped mitigate input cost pressures and softer volume in several markets. Nonoperational items also contributed meaningfully to the year-over-year improvement. Lower net interest expense provided $0.14 of benefit driven by debt reduction actions completed over the past year. Foreign exchange, an improved tax rate and other elements also supported the EPS improvement. Our profitability performance plan contributed $0.07 during the quarter, marking the second consecutive quarter of realized benefits. This is an important proof point that the program is gaining traction and beginning to deliver the structural cost and productivity improvements we committed to at Investor Day. The key takeaway from the bridge is straightforward. While the operating environment remains uneven, our teams are executing well. Pricing, productivity and cost discipline actions are helping offset external pressures and support continued earnings growth. While the earnings bridge highlights the benefits of those initiatives on profitability, turning those earnings into cash is equally important. Turning to cash flow on Slide 9. Cash generation remains a central priority for the company, and our second quarter results were strong. Operating cash flow of $301 million was up 56% and free cash flow of $237 million was up 139% year-over-year. Gross capital investment was $64 million, consistent with the first quarter spending levels. We continue to monitor capital spending very closely and remain focused on projects that generate attractive returns. Our capital allocation priorities remain unchanged: fund the business, support the dividend and continue strengthening the balance sheet through disciplined capital deployment. Turning to our segment performance on Slide 10. Looking at the consumer segment first. Sales increased 1% year-over-year to $1.24 billion, despite continued demand variability in select markets. Pricing discipline remains strong at plus 2 points and favorable foreign exchange contributed an additional point. We are seeing volume improvements in several served markets. Looking at metal cans, we had double-digit unit growth in our pet food business in EMEA, which now represents 15% of our global food can units. As Howard mentioned earlier, we are seeing strength in the paper can volumes in EMEA and APAC as well. The consumer team continues to make steady progress through pricing discipline, productivity improvements and profitability initiatives. The team remains focused on simplifying processes, strengthening their cost structure and improving operating performance. These actions are helping position the segment for stronger execution as we move through the balance of the year. Turning now to Industrial. Industrial sales were $643 million, up 4% versus the prior year. Pricing contributed 3 points of growth, while favorable foreign exchange added another point. Volume in URB and reels was flat, as growth in the global URB reels and Industrial Plastics offset softer demand in the Latin market and converting. Segment adjusted EBITDA increased 3% year-over-year to $122 million. The Industrial segment delivered solid execution in the quarter, supported by productivity improvements, commercial initiatives and disciplined cost management, while inflation in materials and freight and other operations pressures persisted. We continue to expect net sales of $7.25 billion to $7.75 billion, adjusted EBITDA of $1.25 billion to $1.35 billion, adjusted earnings per share of $5.80 to $6.20 and operating cash flows of $700 million to $800 million. As we move through the second half of the year, our priorities remain unchanged. We are focused on executing the profitability performance plans, driving productivity improvements, maintaining pricing discipline, and strengthening the working capital performance. Sonoco is becoming a more focused, more streamlined and more financially disciplined company. In summary, the second quarter demonstrated continued execution aligned with the priorities established at Investor Day. We generated strong cash flow, maintained our EBITDA margins, advanced our profitability performance plans and delivered year-over-year EPS growth. Collectively, these actions are improving the quality of our earnings, strengthening the balance sheet and increasing the company's long-term value creation. We are encouraged by the momentum we have built through the first half of the year and remain focused on delivering our commitments for 2026. With that, I'll turn the call back over to Howard for additional comments.
Thanks, Paul. And to your point, Sonoco is well positioned entering the second half. Let me explain why I'm bullish starting with our industrial side. Shown on Slide 14, our team continues to ramp up production of saturated URB for a growing opportunity in high-pressure lines. Recognizing an unmet need in this market, we took more than a year of technical development, trialing and testing to develop a recycled paper grade that can be used in making laminate products for countertops, flooring, plywood boards and decorative items. By the end of this year, we'll be producing roughly 10,000 tons annually. And with added capability, we expect to increase to 20,000 tons annually by the end of 2027. We're being conservative about this new market, but we think there is additional growth potential, and we will need further capacity to meet domestic demand. In addition to market leadership in URB, we also are the North American market leader in the production of nailed wood, metal and poly fiber reels as shown on Slide 15. In the second quarter, we completed a $20 million expansion at our Hartsville, Alabama wire and cable reels production center. This capacity addition is vitally needed to address the fast-growing wire and cable industry's demand in building out artificial intelligence data centers, along with serving the growing power grid and communication markets. Even though we increased sales by 13% and volumes 10% in the second quarter, we have been essentially sold out and needed this additional capacity to meet market demand. Currently, we're starting up new robotic equipment that will enable us to increase our nailed wood reels production by approximately 15%. Now switching to our Consumer Packaging segment. We continue to develop new commercial opportunities through new products and market developments as illustrated on Slide 16. Our new paper can plant in Thailand, which came online in March, is continuing to ramp up production and recently started the second line that allows us to produce roughly 2 million units annually with room for additional growth. In addition, we will be adding new paper can production lines in South America and in the U.S. in 2027 to serve growing snack customers. In Europe, Sonoco is the largest producer of metal cans serving seafood and vegetables, which are two of the largest can markets. To improve efficiency and to meet demand in the Italian market, we're installing two new can lines to serve tomato and other products. As Paul mentioned, pet food grew double digits in the quarter and represents one of the fastest-growing markets globally. We're launching new projects to grow our position, particularly in Europe. We recently opened a new metal can and ends production line in France that will enable us to work more closely in partnership with key brands and co-packers. Finally, our commercial teams have been working with our engineers as we invest to grow new products, which include examples such as Orbit easy-open closures, which make opening jars easier than regular closures; EcoFill, an easy-open feature for metal food cans which uses less materials; new microwavable-safe metal bowls, which are a highly recyclable alternative to traditional plastic trays for ready meals and convenience foods; and finally, our proprietary Green Can packaging innovation featuring up to 98% paper content that is able to package a wide range of dry food products. Turning to Slide 17. We are encouraged that several key indicators are strengthening in our favor as we begin our busiest period of the year. Demand for Sonoco URB in North America, as we've noted, is very strong, and our backlogs have grown, which requires that we import paper from Europe and Latin American mills through the third quarter. To remind you, this is a very complex market, and this allows us to not only ensure supply security but also enables longer sustainable grade runs in North America, which further drives our productivity. In Consumer, as I mentioned, new paper can growth in Europe, Asia, South America and North America along with exploring additional capacity expansions or customer promotions and new product launches are projected to lift can volumes as we enter the important pack season in both the U.S. and EMEA. And finally, we now have in place inflation recovery mechanisms, which will help us restore our margins. While we remain mindful of external macroeconomic conditions, we are confident in our strategy, our portfolio and our ability to execute through economic cycles. So with that, operator, we'd be happy to take any questions that folks may have.
Questions and answers
My two questions. Howard, over the weekend, we got some of the market commentary from the trade publications regarding some of the markets, and there was commentary that the URB market actually loosened, at least in terms of what those publications were hearing from their respondents. Is there anything — I recognize you're bringing in paper from Europe, but did any of your markets loosen? What, if anything, do you think might be observed by respondents and, I guess, do you remain comfortable with your pricing for July? The second question, as we look back at our notes and what you're talking about coming out of Q1, it looks like industrial did better and consumer maybe was a bit off from kind of your trajectory coming into Q2. Would you agree with that? And where were — if there were some of the variances in consumer, especially in consumer volume in North America, if you can talk to that.
Sure, George. Look, no, we are not seeing any weakness in our served markets under URB. As you know, we focus on the high end of the market. It's just, frankly, that was a bit of a surprise for us to read that. So we have gained some share along the way. But I really can't comment on where that sort of data came from because we certainly are not seeing that. As I said in my commentary, we're actually looking at backlogs all the way through the third quarter. We are bringing paper in support of demand here in North America. As I noted again, we can serve the market. It's just when we get to these types of operating rates in order to be as efficient as we can, it makes better sense for us to set up on our high-quality, high-performing grades and run, run, run and fill in with materials from overseas. On the consumer side, particularly in North America, we did see a bit of a slowdown, but it was somewhat, I would call, macro related, particularly in the adhesives and sealants. As you know, we are the largest producer of caulking cartridges, master cartridges in the U.S. and particularly in June, we saw a bit of a pullback but that is more of a housing-related remodeling type dynamic and could that be an indicator of what's to come? Maybe, but that was probably the biggest. Aerosols were slightly down. We had a tough comp, for sure. But the two portions of that are related to that segment—spray paint, et cetera. Other than that, things seem to be well in order. And I also talked about the international side, really strong snack performance and overall performance outside the United States that really helped balance things.
On the commentary, too, on the URB markets. Our North American mills are running at 95% utilization. Our European mills are as well, and we're not seeing any slowdown there. So I echo what Howard said too: we have a very technical, high-quality grade of paper and our servicing of the industry goes out there really, really well. So we're not seeing any slowdown in the markets that we serve today in the URB space. It is very strong demand still.
Good morning. Just following up on George's question. I was wondering if you could talk about maybe second half volume expectations that are assumed for your full year guide? And if there's any finer point you put on RPC versus metal cans and any early reads on pack season or maybe it's too soon?
As you're all aware, we have invested heavily. Frankly, we've been in it for over 125 years. But in the last five to eight years, we have really invested in our capabilities and one thing that we have been clear about is that we are focused on the high end, high-quality, truly demanding markets. It's not just about the product that we produce, but it's what you do behind the scenes: the service, the various applications and our deep knowledge of usage of our product and how we can solve problems for our customers. So we don't target commodities on a regular basis. We are as full as we can be servicing the high end of the market. We now bring in materials in from Europe and Latin America. That's because they too can make and participate in these higher-end markets. So I've heard that commentary and I don't see where that has any bearing on what we do.
That's great to hear. And then just going back to the comments on tariffs. So I understand that you guys don't really ship a lot from Canada into the U.S. I believe some of your peers in Canada do. Do you think that's material enough to maybe offset the new capacity coming online from one of your U.S. competitors? Obviously, the whole situation is fluid and we have to actually see if the 50% tariffs get implemented. But I'm just wondering how much could actually be constrained by these tariffs?
Yes. I think first off, it depends on what the ultimate rulings are — meaning what is subject to tariffs and what is not. I'm not all that familiar with the exact details. I agree with you, there are a couple of folks in Canada that probably do cross and participate in the tube and core side of things with smaller players. I don't want to be speculating, but there would be a real effort there to requalify someone that's not been a participant in this market to make sure they've got a product that would perform and be available in the marketplace.
Appreciate it. And I'll get back in the queue.
Thank you, Howard, Paul, Roger for taking my questions. One quick one just on your guide. Howard, based on your comments, it sounds like your guidance for the year embeds the July price increase of $60 per ton. However, as George noted, the trade publication didn't reflect that in the latest print. So can you help us understand any downside risk to the guide should that price increase not ultimately be implemented, particularly, I would assume you'd still be negative price/cost if you don't get that additional $60 through. So any color you can provide on downside risk to your guide should that not be reflected?
Yes. Thanks, Michael. I'll let Paul jump in a little deeper. But what I would say is we really feel good about the third quarter that we've got the recognition in pricing. While it was recognized contractually in the second quarter, July 1 is when we really started seeing a complete pass-through of the inflation that we have seen, and the pricing that we deserve going into the third quarter. And I'll add to it on the consumer side, we have some major contracts that based on our customers' financial years, were priced in the first half of the year and not passed; we'll be passing those July 1, August 1 time frame. So it's on both sides of the business for Q3 and Q4. Paul, do you have anything to add?
Yes. So Michael, just echoing what Howard is saying there too — our demand is really strong. Even though the guide came out last Friday and it didn't indicate movement in the pricing that's out there, we're not seeing any slowdown. Our full expectation is that we will be able to pass it. But just as a reminder, we're kind of shifting to the tan-bending chip index as an indicator for our profitability and a $10 movement in that is about a $10 million annualized number. So call it $2.5 million a quarter of an impact. So if you do see some movement, it's hard to predict the future. But given our demand levels across our industrial space today, we are not seeing any weakening. That helps us position for a very strong pricing position on a go-forward basis. Now, this round of price increase would impact primarily the fourth quarter given the timing and the nature of it; it would go live into basically starting in the October time frame. So it would be more of a fourth quarter impact than it would be a third quarter impact for us.
Got it. Very clear. I appreciate the color. And then just one quick follow-up, Paul. It seems like in terms of the profitability performance, you stressed that's gaining traction, but it seems like there was a little bit of a deceleration in Q2 relative to Q1. Is that just a function of the macro and higher inputs? Or is there something else going on? And can you help us think about the profitability performance acceleration in Q3 and Q4?
Yes. So the profitability performance plans that we outlined at Investor Day — we feel really good about them. We are focusing more on kind of the back office functions in the early phases of this, and that's really what you're seeing in that $8 million in Q1 and then $10 million in Q2 — it's accelerating. Now we do have plans on the operations front to focus on our footprint and some more of the improvements that are out there. Those structural changes take a little bit longer to implement. We need to move lines, things of that nature. So you'll see a larger acceleration of the profitability performance plan in Q3, Q4 and then also in '27 and '28 and beyond. But I feel really good about where we sit today, confident that the teams are doing the right things and the whole organization is focused on it.
First, just one quick clarification on OCC and URB. You talked about $10 movement being a certain impact. I thought though that some of the pricing is actually tied to OCC, not necessarily what the pulp and paper index is doing. Could you just clarify recognizing the expectation is that you are going to see that price increase reflected? If it were not to be, what type of impact does it have? I think it's less than the numbers you were saying, but if you could just clarify, please.
Yes, Mark. So OCC is definitely an input cost. But really, what we had shifted the market to is an index-based chip pricing a while ago. OCC will move and if it moves up or down, that's a reflection of our input costs. I would say a $10 movement in OCC is about a $6 million to $8 million impact on an annualized basis. So call it $1.5 million to $2 million a quarter.
Okay. Got it. Then second, it's interesting because you're pointing out a lot of areas where you're seeing nice growth on the consumer side and where it can make sense for you to be investing, and some of that is going on right now, and yet the overall number still hasn't been very good. I mean are there certain areas where you would highlight where you think it's cyclical — i.e., like the building product area? Are there other areas where there were cyclical factors or secular concerns that are offsetting the areas where you are talking about growth? Just trying to get a sense as to, with all these specific areas of opportunity, where are the risks of offset so that it doesn't translate to as much upside as one might expect?
Well, let me start with the positive side of things. I noted in my commentary that globally, our snack volumes have been turbocharged — a 29% increase in Asia, 9% in EMEA and APAC total region. One of our largest customers on the consumer side has changed ownership. Prior to that, we had invested capital that kind of got put on hold. We're seeing that capital go to work now. So what we're really seeing is an acceleration of market expansion from a couple of customers on an international perspective. That's a positive thing for the rigid paper side of the business. If we look into the third quarter, as I said earlier, early indicators don't show much improvement as it relates to the housing market-related caulking cartridge business. What we're hearing from our customers is strength in pet food and canned fish; it's a global phenomenon in terms of growth rates. So we're seeing tuna volumes in Europe outstripping our demand to the point where we're adding additional capacity to meet it. Yes, there are macro and weather-related issues that could come into play, but right now, things look really positive.
And Mark, to add on to that, last year we had a really tough comp. We had really strong growth in our aerosol businesses in all of those categories, tied to discretionary spend. With variability in demand and the current macroeconomic conditions, we did see a softness in that in the second quarter here for us. Q3 volumes are very critical for this organization in our consumer space. They are tied to pack season. Pack season is a little bit tied to mother nature, but early indicators, as Howard mentioned, are really strong for us, and we're expecting a strong pack season.
Just going back to the weakness in aerosol and adhesives, can you quantify the volume declines? I don't know if you've talked about that. I don't think I missed it, but what was the volume decline associated with those? And then did you see any improvement just exiting the month of June?
Are you asking if we saw improvement in those particular markets — the aerosol cans and adhesives?
On the adhesives and sealants side, we don't have the specific numbers available in the prepared remarks for the volume decline. So let me add a bit more color. There was a large player that exited the space in 2024. That capacity shifted over to a few markets and that did pick up and increase our volumes in 2025, which created a really tough comp for us this year. So I don't expect any long-term issues; it's largely a comp issue. As suppliers were shifted to those large aerosol customers, requalifications and restocking took place. So I'm not seeing anything that's a long-term concern at this point in time. That said, they are tied to discretionary spend, so we have to be cautious.
Okay. Got it. And then, I guess, your presentation talked about World Cup-related demand and promotions boosting volumes. How much of that are we going to see — how much of that is in the third quarter and fourth quarter?
The World Cup volume impact is really hard to read. That would have been more of a first quarter as our customers are building to load up their distribution chains. What we're really seeing is that our customers — particularly one or two in particular — are actually growing their geographic and distribution channels and we see that going throughout this year and into the coming years as well. So we're just seeing an overall lift in terms of new ownership of one particular brand that is being very aggressive. The good news is, as I mentioned, we had invested capital that got put on hold during the sales process and that is now being fully utilized. I noted Thailand as an example: with the units I mentioned, that represents about one-third of the targeted output of that particular location, and there's more to come in other regions of the world. So this is not World Cup pop; this is market expansion that we've been targeting for the last 18 months to two years as new ownership comes into play.
And Hillary, to add on to that, we are seeing increased promotional activity in that space as well, which is leading to higher volumes. That growth is really sitting in the international markets — Europe and the Asia Pacific regions — and we're seeing strong demand generation as competitors promote product and drive growth. We tend to benefit from that demand.
Howard, just going back to the consumer business. I know there's a lot going on depending on specific end markets, including aerosol, et cetera. But how has Evioshas been performing relative to your initial plan, including synergy realization, et cetera? It looks like it's been about 18 months since you closed on the acquisition. So just your thoughts as it relates to the franchise position there, your market share in the region, et cetera, would be helpful.
Thanks. It's a big acquisition and it's going to take us a while to fully settle things down. We're seeing the benefits. Frankly, we said this from the very beginning, across the globe. We're seeing benefits in North America and improvements in Europe as well. It's a multiyear playbook and it's a global one. Volumes look good in key markets. We talked about investments that we made last year that are already contributing, both volume-related investments as well as productivity. We have a nice funnel over the coming periods related to both growth and productivity. So I feel good about how things are heading and look forward to continued progress globally as these teams continue to work together to make a much stronger business.
And then in terms of the strength that you're specifically seeing — is it a function of just tighter capacity in the industry or improving demand? If it's improving demand, what is that specifically being driven by, do you think?
We see it as a combination. We have entered new markets that are relatively small in scope and scale, but we're also gaining share because of our investments. We've invested close to $200 million in our network over the last five to seven years, including the conversion of the #10 machine, and we continue to separate ourselves from the existing competition. With that, you get market share gains. So it's a combination of new products and doing what we do better than the rest of the market.
Ghansham, I think one of the things that is relatively new to this space is the innovation that the industrial business keeps driving and challenging the market with to get into new markets and provide better customer service across the space. It's phenomenal. Seeing the demand generation that they have done in the last 12 months is great, and they're not stopping. They're very aggressive in working with customers to find new solutions to continue to utilize our URB mills to their fullest capacity and keep that funnel completely full.
I don't want to belabor the point, but we don't spend a lot of time talking about our adhesives division and the hand-in-glove global relationship with our paper operations — how you take select coated board and ensure that it's bound and wound and meets the needs of customers. It's not just making paper; it's making sure that the adhesives are absolute. It's an enabler for us to be in the saturated kraft market. Our adhesives group works with our paper group, which is now all under one roof, to separate ourselves from the competition and allow us to enter new markets.
Second half, that inflation number came in at the high end — I think the $10 million-ish. Since last quarter it ran up again here in July. So maybe what are you betting for Q3 and the second half? Would you say your inflation outlook has improved or worsened since April and where are the greatest pressures?
Matt, the inflation did come at the high end of the range at about $10 million, and that was largely due to our inability to fully pass the recovery through in Q2. For Q3, though, all of the recovery mechanisms we talked about are in place, and we fully expect contractual increases to cover that. Now, changes can happen, and new issues could pop up, but as we sit today we feel really confident in our Q3 recovery of that inflation and we don't see it as a headwind on a go-forward basis.
And then one last clarification: what portions of the industrial paper are you able to get the list price into as of July 8? Or is it basically all tied to the index now that should then start layering in October given the one-quarter lag on those index-based contracts?
We've been pretty public about 70% being tied to index. That recovers early in the following quarter, so the recovery starts in July, and the rest is open market; those are typically able to pass through a big portion of the increase during the course of the quarter. So the real recovery starts as we enter Q3 and into Q4 for some elements.
I'm going to try to put a finer point on consumer and industrial for first half and second half. I think you're actually, on a year-over-year basis, ahead on price/cost in consumer, and Howard you said you've got some contracts that reset effective July 1 and August 1. On a year-over-year basis, in the first half you're down in EBITDA terms about $20 million, all of which I think is attributable a little more to volume. And it sounds like you said low single-digit year-over-year volume growth in the second half. So if that's the case, and then you recover what you're behind on price/cost — does that mean we should get back to a year-over-year growth of $20 million to $30 million in consumer in the second half? And then on the URB hike, Paul, using $2.5 million per quarter per $10 a ton, so a $15 million swing factor is what we're thinking about for Q4 should URB not reflect the price increase? Is that directionally how you're thinking about it?
Gabe, I'll break this down. The consumer impact is rightly positive on price/cost given contractual targeted increases that are in place, which will help keep that momentum for us and maintain a positive price/cost relationship in the consumer space. On the industrial side, it was lagging on price/cost recoveries and we're seeing a stronger lift now — that had to do with the inflation incurred in Q2. So while I won't give specific segment-by-segment dollar guidance here, we do expect Q3 to be roughly in line with consensus as it sits today. The URB $15 million sensitivity is highly dependent upon what actually happens in the marketplace on pricing. If you do see a drop and we don't get recovery, it would be tough to fully balance given our high demand and high mill utilization. But if it did not get implemented, your math around that sensitivity is directionally reasonable.
Okay. And then I appreciate the management philosophy. You're talking about the low end of the EPS guide range and the range is reasonably wide for understandable reasons. Is there some justification or thought behind maybe not lowering that — keeping optionality — given volatility and things like the Middle East that could put upward pressure on input costs? Or is there something you see in the second half that gives you a clear path to midrange or upper end of the guide?
Gabe, honestly, Q3 is our most critical quarter for this company, and it is highly dependent upon our pack season. Right now, early indicators are coming in strong. We wanted to give ourselves some optionality in the guide. After Q3 is complete, we'll be able to tighten up the range and dial it in for the full year. Given that close to 40% of our profits happen in that third quarter, we wanted to keep the optionality open.
I have a quick question. It sounds like you have the investment in saturated URB and you have some capacity expansion plans in paper cans. Given what we know now, is it correct to say that there will be a step-up in CapEx in 2027? And if so, what kind of order of magnitude are we talking about?
On the paper can side, what we've seen from a growth perspective is capital that's been deployed year-to-date. Going forward, we're comfortable maintaining the type of capital expenditure range that we've been in, roughly about 4% of sales, and pacing ourselves through that. So we don't expect a material step-up beyond that 4% rate against our sales.
Okay. And then just on capital allocation: I know you're planning to continue paying down debt through your three-year plan to 2028. How do you think about share repurchases within there? Is there any opportunity to step that up a bit over the next couple of years? How are you thinking about that?
It's a great question. We remain committed to paying down debt. Once we get our leverage ratio to the right targeted level for the rating agencies, we'll reevaluate. Our cost of debt sits around 3.5% today. If our dividend yield is north of 4%, it creates a different equation for us. From a pure math perspective, we'd evaluate buybacks versus dividends as part of our capital allocation framework once leverage targets are achieved.
For a follow-up: looking at Q3 volumes, I get that they're much more dependent for consumer on the pack season. But with the businesses that struggled, focusing on Americas sealants and aerosols in Q2, I'm just wondering what you have baked into the guide. Have you lapped some of those aerosol gains that you had by this point? Any specific comp issues we should think of in the second half as we're modeling?
I wouldn't think so from a comp perspective. Our go-forward is not to expect much lift from those specific categories; we've not planned for material improvements in that area in the second half. That segment represents about 15% of our turnover in North America, so while it's important, it's not the sole determinant of our outlook. Our guidance does not assume a material improvement in those categories.
Great. And then I just wanted to touch quickly on the freight surcharge opportunities that you called out in the deck. What are the opportunities? Is this contractual price recovery that you guys are able to implement or have implemented? And how is your freight structured — mostly spot or contracted — particularly on the URB side where you're importing tons from abroad?
Mostly contracted and balanced with some spot. We are putting in surcharges. There will be exceptions here and there, but for the most part, this is a line item on invoices labeled fuel surcharge and it will come and go as diesel varies.
Understood. Thank you, guys, for the time.
Yes, I want to thank everybody for their participation today and look forward to further communication during the next quarter. You can now hang up.