Prepared remarks
Good day, and thank you for standing by. Welcome to the Smurfit Westrock 2026 Q2 Results Webcast and Conference Call. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Ciaran Potts, Smurfit Westrock Group VP, Investor Relations. Please go ahead.
Thank you, Sharon. As a reminder, statements in today's press release and presentation and the comments made by management during this call may be considered forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the earnings release and in our SEC filings as well as those discussed in our investor update presentation on our medium-term plan. The company undertakes no obligation to revise any forward-looking statements. Today's remarks also refer to certain non-GAAP financial measures. Where applicable, reconciliations to the most comparable GAAP measures are included in today's earnings release and in the appendix to the accompanying presentation, which are available at investors.smurfitwestrock.com. In addition, today's remarks include statements about Smurfit Westrock's medium-term financial goals and capital allocation priorities. These goals are aspirational and actual performance may differ, possibly materially, and no guarantees are made that these goals will be met. I'll now hand you over to Tony Smurfit, CEO of Smurfit Westrock.
Thanks, Ciaran. I'm happy to be joined today by Ken Bowles, our EVP and CFO. Our second quarter results demonstrate the continued progress we have made in Smurfit Westrock with an adjusted EBITDA of $1.14 billion and an adjusted EBITDA margin of 14.2%. This is especially impressive when set against the very significant input costs we have absorbed with only early-stage momentum on price recovery. Cost increases, especially in freight, have been a feature of the quarter. As a result, we have raised containerboard prices. These will be recovered through our converting operations as we progress through this year and into next. Market conditions for practically all paper grades remain as tight as I can remember. Our focus remains on being the most innovative packaging partner, delivering superior quality and service for our customers and the go-to sustainable packaging partner of choice. As such, we remain committed to improving all aspects of our business. We're also relentless in our approach to cost takeout, which we have again demonstrated through asset optimization with a number of closures in both our North American and EMEA and APAC regions. We have also continued focus on our owner-operator model, which I'm happy to report is showing considerable progress as we develop the new Smurfit Westrock culture. Turning to the regions and, firstly, to North America, where I'm happy to report progress and development across practically all areas. Most importantly, our full team for the future is now in place and delivering both cultural and operational change. Nearly all our paper mill system is fully booked and no commercial downtime is anticipated for the remainder of the year. We have implemented pricing initiatives in both domestic and overseas markets and shortage of supply is the current issue surrounding this business area. In our corrugated box operations, I'm delighted to report continued progress as we adopt our business model. The number of recurring loss-makers has considerably reduced, and our focus on innovation and customer service is attracting significant new business. Our quality and service metrics continue to improve. For example, year-to-date, our quality metric has improved by over 25%. In our consumer business, we have also made significant progress with new investments coming online, which will improve both productivity and our cost position. Importantly, we have also won new business because of our grade-agnostic approach that we have adopted. In our EMEA and APAC region, I'm very proud of the outperformance this region continues to deliver. The region consistently offers customers the most innovative and sustainable packaging as customers navigate a complex environment. Our recent innovation event attended by over 200 customers demonstrated the depth of knowledge that we offer across all paper-based substrates. In our fully integrated mill system, similar to North America, we're fully booked, and we expect to remain in this position. Our corrugated business remains very solid with a better performance forecast for the second half as we recover input costs with the normal lag period. Our consumer business is now fully integrated, and there are many cross-selling and development opportunities that we're developing across Europe and Asia. Turning to the LatAm region, we continue to see a strong performance across most countries in which we operate with two larger countries, Brazil and Colombia, performing very well. Our approach to innovation across the region is a significant differentiator and our market positions give us opportunities for growth. This region is an attractive region for both internal investment and acquisitions as we look to the future. I'll now hand you over to Ken to take you through some financials.
Thank you, Tony. Overall, this is a strong second quarter performance for the group. As a reminder, we've included detailed adjusted EBITDA bridges in the appendix for those who want to understand the quarter in more detail. At a high level, freight costs globally represented a significant headwind, driven largely by higher fuel costs and shipping rates due to the ongoing conflict in the Middle East and higher domestic transportation costs in both Europe and North America. Despite that, our teams across all regions did an excellent job mitigating those cost pressures through operational execution, pricing initiatives and disciplined cost management. In North America, we continue to make significant operational and commercial progress. While corrugated volumes were down 4.8% on a same-day basis or 4.5% on an absolute basis, this was very much in line with our expectations as we continue to execute on our value over volume strategy. Importantly, we are seeing further improvement advance with good order books and a strong pipeline of new corrugated business moving through August and into September. We remain focused on improving the quality of our customer portfolio, winning business where our decentralized operating model provides real value while exiting lower-margin business that does not meet our return requirements. Selling price remained a headwind in the quarter due to a small pass-through impact of weaker containerboard index pricing in February and also coming before higher index pricing was realized in some of our paperboard grades, which came this month. As mentioned, the region also absorbed a substantial portion of the group's freight inflation, yet still delivered a very resilient performance. Our mill system remains generally full, order books are healthy and commercial momentum continues to strengthen. In our EMEA and APAC region, Smurfit Westrock continues to outperform through disciplined commercial execution, strong cost management and an unwavering focus on customer service, quality and innovation. Corrugated volumes were up 1.9% on an absolute basis or 1.5% on a same-day basis. Our mill system operated at full capacity and the integrated nature of our business continues to be a significant source of competitive advantage. Despite ongoing freight and energy cost inflation in the region, which has led to near-term margin compression, the team delivered another strong result, supported by positive volume growth and continued productivity, procurement and footprint optimization initiatives. Latin America again delivered another excellent quarter. Demand remained healthy across our key markets as corrugated volumes continue to grow. The region continues to benefit from its strong market positions and the operational improvements delivered through recent investment programs. As a result, Latin America continues to generate attractive margins and strong returns while also presenting significant opportunities for future growth. Our approach to capital allocation remains unchanged. We have a business with strong cash generation, a strong balance sheet and a significant opportunity to create value through disciplined investment and execution. As a team with deep industry experience, we continue to view internally deployed capital as the lowest risk and highest quality use of capital, an approach that remains central to the future success of our business. Fundamentally, that is a returns-focused approach. Our balanced capital expenditure program is focused on improving our asset base, increasing efficiency and supporting growth in attractive markets. As a reminder, the average annual CapEx across our plan is approximately $2.5 billion a year with an average project spend of approximately $4 million and no project of scale in any one year. We currently expect to spend between $2.4 billion and $2.5 billion in total CapEx this year, which is well in excess of maintenance capital and in line with our DNA. As we outlined earlier this year, we also see substantial free cash flow generation over the coming years. And I would note that again today, we announced a quarterly dividend of $0.4523 per ordinary share. Underlying all of this is a balance sheet with significant strength and flexibility. As profitability and returns improve, we believe we are well positioned to continue to invest behind growth and cost takeout opportunities while at the same time increasing returns to shareholders. We are committed to maintaining a strong investment-grade credit rating and are firmly positioned in that space with Baa2 rating and positive outlook from Moody's, BBB with stable outlook from S&P and BBB+ with stable outlook from Fitch. So the message is a simple one: disciplined investment, disciplined capital allocation and a clear focus on creating long-term value for shareholders. Now as we look to the rest of the year, the main change in our full year outlook is indeed the higher freight cost environment. As we discussed, events outside our control have resulted in significantly higher freight costs across the group, and this remains the most significant headwind we face in 2026. While we have implemented pricing initiatives to recover costs, there is naturally a lag before those actions are fully reflected in realized pricing and earnings. As a result, the cost impact has been felt immediately, while the recovery comes through over time. Current energy costs are broadly in line with the assumptions we highlighted previously, while lower economic downtime in the region of EUR 100 million, alongside continued operational execution and significant cost takeout programs across the group are helping to offset some of that freight and other cost pressures. However, that inflationary cost environment is not showing signs of abatement, and we will continue to evaluate all options available to us as we progress through the remainder of this year. Taking all of that into account, we now expect full year adjusted EBITDA to be in the range of $4.9 billion to $5.1 billion. However, demand remains healthy across practically all paper grades, and we remain confident in the long-term earnings potential of the group. And with that, I'll hand you back to Tony for some concluding remarks.
Thank you, Ken. When we set out our medium-term plan in February, we presented a program of self-improvement led by operating excellence and disciplined capital allocation. We're also driving a much sharper commercial focus delivering quality, value and innovation for our customers. I'm very happy to report that we continue to make progress towards these objectives. Firstly, the performance-led culture of Smurfit Westrock is accelerating with the right people, the right skills and the right motivation to meet our objectives. The company is also progressing the transfer of best practice, knowledge and innovation across our regions as we roll out our experience centers to ensure our customers have access to the worldwide knowledge of our over 2,000 designers globally. As a company, we have always been and will always be committed towards having well-invested world-class assets in a capital-efficient way. We know that this is the secret to ensuring market-leading returns for our shareholders, many of whom are within Smurfit Westrock. I think we're well on our way to this objective. Global paper markets today are as strong as I have seen in my lifetime within this industry. What we've previously characterized as a generally better industry environment is now a significantly stronger and better operating environment. This provides us with a stronger fundamental backdrop to deliver on our medium-term plan. Our mills provide security of supply to our world-class converting operations, which in turn deliver quality, service and innovation for our customers. Smurfit Westrock's converting operations are networked to and connected with our over 30 innovation hubs across the continents and regions. This drives the continuous transfer of knowledge, application and innovation, enabling Smurfit Westrock to provide our customers' future packaging needs today. As we enter the second half of 2026, we have set a strong platform for the recovery of input costs and enhancement of our returns. This is especially true as we look into 2027 as we continue to execute on our strategic plan across all regions and fully implement all pricing initiatives. As we set out in February in a progressive step-by-step manner, we're building a stronger, better and more resilient Smurfit Westrock as we progress towards our medium- and longer-term objectives. I'm very confident in our team. I'm very confident in our offering to the marketplace. I'm very confident in our ability to execute, and I'm very confident in the long-term future of our globally integrated platform that will deliver value for all stakeholders. And with that, thank you for taking the time to listen to us. I will hand it over back to the operator, Sharon, to get questions to us.
Questions and answers
And your first question today comes from the line of Gabe Hajde from Wells Fargo.
I wanted to ask, Ken, I'm looking at the bridges in North America. And I think year-to-date, I'm just kind of going, like I said from the bridges, you're kind of neutral-ish on gross price. I'm curious if you'd help us posit how much tracked price or what you would expect sort of realization from just what's been recognized in RISI in North America?
I suppose, Gabe, it's probably a slightly more nuanced picture given where pricing went. That kind of pricing offset from the recovery you would have seen through corrugated pricing in the last number of months is probably on the paperboard side. If you remember, SBS came down, which negatively impacted the positive sentiment around that pricing column. We are absolutely beginning to see the benefits of the pricing initiatives through the back end of quarter 1 into quarter 2 in corrugated pricing. But for this particular quarter, given where SBS went and when you look at paperboard grades too, but principally SBS, you're getting a kind of natural negative offset within the total price for the overall group. So the simple way to think about it is, yes, progress continues, and the recovery happens on the corrugated side, which you'll see more in quarter 3 and quarter 4. But for this quarter, you're seeing the impact of paperboard prices being lower year-on-year and the impact of that.
Yes. Gabe, you understand, and the same in Europe, that there is always a lag period as containerboard prices come in, and that can be, depending on the customer, from one month to up to six months, again depending on the customer and depending on the region. Containerboard prices actually fell EUR 20 in the first quarter and then came back up by EUR 120 in the second quarter. So the full effect of that is going to be felt in quarter 3 and quarter 4, and any other pricing initiatives will be felt either very late in quarter 4 or into quarter 1 of next year.
Okay. Just maybe a point of clarification. I think from the disclosures you guys have given us, it's 8.5 million tonnes in North America of total containerboard, okay? And then on the volume cadence, it seemed like things within six weeks tightened up pretty quick. I'm curious from your system perspective, I know you guys have been busy at work, and I think you've mentioned winning over 500 new customers that should be commercializing in the back half. Maybe just a little bit finer point on would you expect, assuming the bottom doesn't fall out in volumes, that you should inflect positive at some point in the second half in your own corrugated system? And then any particular markets that you're seeing strength in North America?
Our expectation, Gabe, is that either in the third or fourth quarter, we will be better in volumes than last year. In talking to the folks in North America, we would expect to see positive months coming up in August and maybe even September. The acquisition of new business has continued pace during the second quarter. Obviously, it takes a little while to get that in. Then we're starting to lap easier comparisons because all of the large e-commerce customers that we didn't continue with we're not doing that. Therefore, that will make it a relatively easier comparison as we go into the second half of the year. So I think we're pretty optimistic about either the latter part of the third quarter or the fourth quarter being able to be positive versus last year.
Our next question today comes from the line of Mike Roxland from Truist Securities.
Congrats on the progress. Just first question, I wanted to follow up on what Gabe said. You mentioned good order books in August and as you move through September. Any way to quantify or provide some more color around what that means? Where do your order books stand relative to, say, historical norms?
Are you talking about paper or corrugated? If paper, our paper markets are as strong as I've ever seen. With the exception of one small grade we produce a little of, which is CRB, we're basically sold out in all paper grades. One of the reasons why in the fourth quarter we are very late in deliveries on our export orders is that we're in very much catch-up mode in our system as we look through the remainder of this year and even into the first part of next year on all brown paper grades. There are also some things happening on the bag and sack paper markets with relation to e-commerce that are causing those markets to be very tight as well. So when you look at the brown grades, we are really sold out for the foreseeable future, and that is very encouraging. For the consumer grades, our CUK business has been very strong and is sold out, and our SBS business, as we develop new applications and target many smaller growth areas, is also sold out. We just have very small open capacity in the small business area for CRB, but that's not very significant. In the European market, the situation is essentially the same. We tightened up over the summer and really all paper grades are sold out until the end of the year. In our Latin American business, again, similar scenario in our paper markets—short of capacity. So very strong change in the marketplace in the last six months in paper. Regarding boxes, it's a little more nuanced. It depends on the market and regions within markets—for example, the Californian market isn't as strong because of produce, and in Southern Europe, heat waves are affecting agriculture. Broadly speaking, Latin America is positive; Europe, with the exception of one or two markets, is positive or very positive; and in North America, depending on the region, it's basically flat to slightly positive looking forward. We've done a lot of heavy lifting, but we still have more to do. We still have loss-making corrugated box plants—many of which are our own fault—and we will turn those around in time. They do take time, but we've made considerable progress in our corrugated converting operations in North America. In our consumer businesses, we've made significant progress, though we need a little more price in some areas. Overall, I'm really happy. In Europe, our business has a very strong market position across countries and we've absorbed the input costs during the first and second quarters. Now we're about to get it back. If there are more paper-led initiatives, the benefit will be into 2027 across all three regions.
Got it. That's great color, Tony. Just one quick follow-up. You mentioned having a little bit of slack in CRB. I think you mentioned last quarter that you're not making enough return on some of your CRB assets. Does the shift of the business away from CRB to SBS, CUK afford you the ability to improve your CRB asset base? Or alternatively, does it help you evaluate your current CRB footprint?
We continually evaluate our footprint. We've just closed a long-standing asset in the U.K., which was producing over 200,000 tonnes of recycled board because it came to the end of life and it was either invest or be in a suboptimal scenario. That asset had stayed alive a long time. The CRB business we continue to evaluate. Most of them are cash generative and produce decent quality into our integrated system. We'll continue to work with them and keep them under evaluation as we do with all our assets. Clearly, they're earning cash and providing the quality and service that we need and they're not a drag on us. We want to offer customers the full suite of products—CRB, SBS, CUK—and that approach has worked very well over the last six months, giving customers what they need. We've seen some switches out of CRB into SBS, which has saved customers money and benefited us.
And if you remember, Mike, this time last year we were closing St. Paul, that CRB mill, to optimize and tighten that system anyway internally.
Our next question comes from the line of Philip Ng from Jefferies.
Tony, I apologize, I had some technical issues and may have missed some of this. Big picture: when you think about North America, you've always opined on your business being packaging at its core. Supply-demand is very tight right now and we're seeing good price momentum. How do you balance that out in the longer term? Does this attract more capacity? From a philosophy standpoint, how are you thinking about this bigger picture longer term?
We are a company committed to profit centers in all aspects of our business. Our box plants have to absorb the cost inputs we're getting and pass those into our paper system and ultimately into our box system. Each of our systems has to make a return; otherwise, they're not economically viable. Independent box makers must make a return on the paper price that's in the market, and the same holds for our box facilities. If paper price goes up because of supply-demand or cost inputs, and our paper system makes decent returns, that doesn't mean the box system shouldn't make decent returns because there's an independent market buying paper at the same prices. We have been very disciplined about how we think about our business. Our converting operations need to be commercial. What we bring is all the knowledge of packaging globally into our system. The owner-operator at the packaging plant brings that into his plant, offering significant savings for customers by packaging differently. That's what we continue to offer globally and why our European system has worked over the long term.
Phil, I think the idea that the latest round of price increases might lead to incremental capacity entering the market should be viewed against returns and return on capital. The cost of doing anything in North America has increased significantly over the last number of years. If you bring capacity into the market, it's at higher cost than previously and takes time—two to three years to meaningfully ramp. So yes, the current price environment could be attractive to entrants, but that must be balanced against the amount of capital required and the returns expected over the longer term.
That's really helpful color. And it's a perfect segue. From a supply-demand pricing on the paper side, clearly there's industry data showing price momentum. Tony, when you guys acquired Westrock, the real opportunity was getting a proper return on the box side and converting side and bottom slicing less profitable business. Can you give us perspective as we look out to 2027—where are you in that transition in terms of innings, to use a baseball analogy, in getting your returns and margins on the converting side in a good spot and your mix of customers? As we exit this year, do you expect to flip to a richer mix?
Using the baseball analogy, I'd say we're somewhere between first and second base. We're off first base and heading towards second; we'll get to second and then move on to third and fourth over the next couple of years. We've made considerable progress in many facilities. It's difficult to define the exact number of loss-makers because of movement in paper prices, but the number of loss-makers we're worried about is probably around 20, of which we're certainly going to solve 10. The other five we'll monitor over the next period depending on market and mix. We've come down from many more at the beginning. Getting to breakeven is one thing; going from breakeven to 8% or 9% is another. It's a journey. But I'm very happy with the teams, how they're embracing the new culture and leadership. We're continuing to attract real talent into the business, which is a sign of a winning team.
And just from a context standpoint, when you say you could solve for 10, is that 10 out of 100? I just want to understand the scale of the business that could still be somewhat challenged.
It's 10 out of 100.
Okay. All right. That's helpful.
In Europe we have three or four plants we continue to look at, and in our consumer business there's one or two. In Latin America there's practically none. That doesn't mean the ones that are positive are where they need to be; even those need to improve. We have great box plants and some that are not great, and those not great plants need to improve as well. It's continual work by the team led by Don, Rick, Nickie and Laurent.
Your next question comes from the line of George Staphos from Bank of America.
I wanted to pick up on the last line of questioning. When we look at the margin in North America, it was 13.3% in Q1 and 14.8% in Q2—good progress. How much of that improvement was in the North American box system margin? Said differently, if we're thinking about rounding first base and trying to get to high single digits, would North American box be somewhere around a 3% to 4% margin at present?
You're correct. We're around 3%—somewhere between 3% and 4% on a static basis without paper coming in. We've turned it from heavily loss-making to small EBITDA positive, somewhere in that range depending on the month. That will obviously change as we move forward.
Okay. And then my follow-up: you might have mentioned this earlier, but how much pricing is assumed in your guidance for the year? The $100 per tonne you've announced—is any of that in your numbers for 2026 or is that more for 2027?
George, no, none of that $100 is assumed in the 2026 number because by the time it gets implemented and works through the indices and everything else, there's not a lot left in 2026. It very much sets a platform and foundation for 2027.
Our next question today comes from the line of Hillary Cacanando from Deutsche Bank.
So just going back to the $100 per tonne price increase that was announced yesterday. One competitor announced $140, another announced $80 per tonne. Could you help us understand whether the differences in pricing reflect a different view of market conditions, a different customer mix, or simply a different go-to-market strategy?
Hillary, we're not going to talk about what our competitors are doing. We just have to consider what we do. We had been preparing for an increase over the previous couple of weeks and set a net level that we thought was correct.
Hillary, it's really about an inward look: where we see cost inflation in the system, where we see the need to restore margin that we might have given up during cost inflation—particularly freight and energy across the rest of the year. It's an inward-looking model that balances cost inflation against cost takeout and the capital we've injected, and broadly where we think we need to be is at that $100 a tonne in terms of output pricing to get us back to where we need to be.
Okay, got it. As a follow-up: the containerboard market looks really tight and pricing momentum is building, but we also saw a price increase in the SBS market in July. I think you also announced a price increase effective August. Are those SBS price changes driven more by rising input costs, or are you also seeing underlying SBS market conditions improve through higher demand, customer conversion, or industry rationalization?
The SBS market is much better than it was at this time last year. A lot of it is the work we've done over the last 18 months in attracting new business into our SBS system, and there are some quite exciting new grades we're bringing into SBS. Our agnostic approach to grades allows us to offer SBS instead of CRB or sometimes instead of CUK. The market is much better, but remember the market went down at the end of last year. This is about price recovery, not just price increases. We need a recovery in this grade from when it went down, and we're in a sold-out position, so we've announced increases to reflect that.
Your next question today comes from the line of Mark Weintraub from Seaport Research Partners.
First, one quick clarification on SBS: the increase I think you sent out July 10. That was before market publications had reflected anything. I assume that is a second increase; I just wanted to confirm that first.
Yes, Mark, it is a second increase.
So it's not reflected in the trade publications yet. Given the generally longer lag periods for those grades, it really won't be effective until the start of next year into our end customers. Regarding EMEA and passing through higher containerboard prices into boxes: we've announced an EUR 80 a tonne increase to our customers on recycled board over the last couple of days, and we expect to see that implemented as we go through September. That reflects significantly higher energy costs and other costs we've had in Europe in the last two to three months. Our European business is very strong; people there have been through this cycle before. If you look at the last cycle, we are a better company today because of investments and efficiency improvements, and margins were in the 18% plus level. There's no reason why, given a static state, we won't get back to those levels at some future date, whether first or second quarter of next year—I don't know—but clearly that is the opportunity.
Perfect. I appreciate that. Just to confirm, we also have the first EUR 100 increase that hasn't really flowed through into boxes much in Europe yet—correct?
That's correct. Our business has longer and shorter term contracts; we've been shortening contracts to three months. By the time it gets published and three months pass, it's really four months for most larger index customers. When prices move down, especially for recycled paper, companies often hold on to the margin they've recovered. Also, when paper prices move, often other inflationary costs move as well.
One last question: up until now, the contention has been the price increases in Europe have largely been cost reactive. Is that how we should interpret these increases too, or is there something supply-demand driven as in North America?
It depends on the grade. In recycled paper it's more related to cost; for kraftliner it's related to both supply-demand and cost.
Your next question today comes from the line of Detlef Winckelmann from JPMorgan.
Starting on that 8.5 million tonnes you have in North America: my understanding is roughly a quarter of that won't be exposed to domestic price increases we've seen in linerboard year-to-date and potentially another one going forward. How should we think about supply-demand and what's driving prices in that other, say, 2 million to 2.5 million tonnes that's Mexican/export volumes?
As well as kraftliner and containerboard, in that volume you have sack paper and bag paper, which are also going up. We have to work through some of the export tonnes that we've taken; we're behind delivering on those. By the end of this year, hopefully we'll have finished lower-priced tonnage and will be applying to export markets the same metrics we see in domestic markets. Pricing will differ by market, but those tonnes will be going up in a similar manner over the coming six months or so.
Okay. And then going into the next 12 to 18 months, your box volumes hopefully will grow above market. Can I assume export volumes will shrink and you will use more of that capacity domestically to supply your own box plants, changing the mix going forward?
Yes, that's 100% true. Currently local domestic price is higher than the export price, but we will keep evaluating. Fundamentally we believe in integration and using our own tonnage in our system. The inherited system is bigger than that, so we continue to be committed to the export market, which remains important to some of our customers. But we want to ensure we get paid the correct amount when delivering into export markets and that will happen going forward. A lot of the supply-demand issues are export-driven and people are pulling away from export markets, creating an opportunity for us at a proper price.
Your next question comes from the line of Anthony Pettinari from Citi.
Tony, I was wondering if you could talk about your internal inventory levels given the mill system is sold out. Is there any tightness or risk there? Do you need to build inventories in any region or grade? And as we look at underlying demand for Q2, did you see any pre-buy in Q2 in containerboard or boxboard given there are some hikes in the market?
Our inventory levels are sometimes in the wrong place or wrong grade. We're still early in this integration and our logistics system is still changing. Yes, we have some inefficiencies because stock levels are not necessarily where we want them—grades are not fully optimized. Over time our grade optimization program will be much better and we'll have the right SKUs in the system, mills running the right grades for the box plants that convert those grades. There's still work to do and some inventory issues where we have to use the wrong papers from time to time. So far, so good; the team is managing with some issues. Regarding pre-buying, there was very little pre-buying. In fact, probably the opposite: people did not expect the market to change so rapidly, which is why many export orders are unfulfilled. People kept stock levels low because they could get paper when needed. In the first quarter we had poor results because of freezes and other issues. It's been a surprise how quickly supply-demand effects were felt in the second quarter. So no pre-buying to any great extent and some logistical issues because of market tightness, but we're managing through it.
Anthony, from a general point, total inventory levels across North America are probably still in the range of 2.5 million to 2.6 million tonnes. That may have been about 2.8 million to 2.9 million as we exited the first quarter. So if there are issues, it's coming out of inventories rather than getting down to very low inventory levels; we're still fairly well stocked.
I would add that logistics is playing a significant role right now, especially in the North American market. We're expecting costs to be about $300 million higher than we anticipated three months ago in North America and Europe. That's a function not only of the price of diesel but also availability of transportation, creating issues for on-time delivery. Logistics is an issue in cost and availability, which creates disruption. We're managing through it, but that $300 million is a real cost impact and it is why we need further pricing initiatives to recover these costs and earn a decent return for our stakeholders.
Your next question comes from the line of Ioannis Masvoulas from Morgan Stanley.
Two questions. First, on costs you articulated: in the April update the energy headwind was around $220 million and you didn't change that with today's update. There's a big ramp-up in freight costs versus the spring update. How much of that is timing effects versus a conservative assessment on freight now versus April? Also, if you can give a sense of the split by region on the freight side?
Ioannis, we don't split freight by region in quarterly detail. At the end of April, freight was a headwind of about $50 million year-on-year. We saw indices spike sharply toward the back end of May into June and continued into July, which led to a changed environment and a changed outlook on freight, now around a $300 million headwind year-on-year. I wouldn't necessarily call that conservative; it's our best estimate based on where costs are. On energy, back then we would have said roughly $220 million to $250 million; it's probably still in that area. European gas prices have been volatile, which is reflected in our view. We have some hedges that help moderate the increase. The price increases announced, including the ones this week, should help overcome the freight increase, especially as we enter 2027 with more impact then than in 2026.
Perfect, that's useful. Second question: North American corrugated volumes in Q2 were somewhat weaker than expectations. On the Q1 call you mentioned April down 4%, and I think May was similar, implying a weaker June run rate. Can you talk about what drove that? Any specific effects that impacted June?
To be honest, I don't remember any specific big effect—these are small deviations. The acquisition of new customers continued apace; local-level responsibility and acquisitions of customers continued. We continue to see wins in the marketplace and customers who left want to come back because our quality and service have improved greatly in a year. We're applying metrics from Europe in North America and seeing good operational progress. A small deviation in a small region—like agriculture—can make a difference. The overall level of progress is very positive, and I'm sure Nickie and her sales team will deliver significant wins in the near future to get us back to where we need to be.
This concludes the Q&A session. I will now hand the call back to Tony for any closing remarks.
Thank you, operator, and thank you all for joining us today. Overall, I'm really happy with the progress of the integration between Smurfit and Westrock. I think the company now has the teams in place to make this company one of the great companies of the world. We continue to be hit by unexpected costs and a significant cost environment that we are in the process of passing through. I have full confidence that we will pass those costs through, and we're really setting ourselves up for a better second half and a very good 2027. Thanks for your support and interest. We look forward to meeting and talking to many of you in the days and weeks ahead. Thank you all.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.