Graphic Packaging Holding Company Aktie

All right, guys. We're going to kick things off here. I'm Jefferies paper and packaging analyst. I'm Phil Ng. We're delighted to have the Graphic Packaging team here, Robbert, CEO; Chuck, the CFO. Robbert, I think you're going to kick things off with some insights, what you're seeing out there.

Yes. Well, good morning, everyone, and thank you to Jefferies for organizing this great conference, and thanks, Phil, for hosting us and inviting us. Before we get started with the fireside chat, I'd just like to say a couple of things about Graphic Packaging. We are one of the leading fiber-based packaging companies in the world. We create graphic packaging with designs -- you may be interacting with us 10 times a day without knowing it, when you open your toothpaste box, when you're opening your favorite cereal brand, when you're getting your favorite value meal at the leading quick service restaurant.

Our brands are pretty much everywhere. We have a global operation, and we're a leader in sustainable consumer packaging. We have 5 mills, very large milling operations. Kalamazoo, Michigan; Waco, Texas; Macon, Georgia; West Monroe, Louisiana; and Texarkana in Texas. We have 2 mills in Texas and pretty much one in the Midwest and then a couple in the South.

We have about 100 packaging converting facilities, and we have operations in 26 countries.

We are actually not a commodity seller. We sell a very premium product in very close partnership, and we have over 3,000 patents -- some of our most famous patents are the Fridge Vendor, which is the fridge pack that you can get with maybe a Pepsi or a Coke or Dr Pepper.

So think about the fridge pack. We have KeelClip, which is a very innovative replacement of plastic for cans, a paper cover, gives you new real estate to print graphics on. Boardio is a great technology we sell. And we have very strong relationships with the leading consumer packaged goods companies in the world. We're very diversified. We have businesses in the food industry, food service, pet food, beverages, household care, health care, wellness and beauty.

And we're basically in multiple corners of the store, and we're in quick service restaurants. We are very well invested as a company. We have very competitively advantaged, I would say, packaging assets with a very deep bench of talent. So, great operations organization, great operators across 26 countries.

Now, why are we a very good company to invest in? We've been at a very heavy investment cycle. So, we've invested heavily in our infrastructure. Most recently, we built the Waco recycled board mill in Texas, and we're very proud of that asset. And that's going to be a long-term durable competitive advantage in our recycled platform. We are now focused on generating cash. So, the investment cycle is behind us. We're going to be a free cash flow generative business for the years to come.

And we're strengthening our commercial approach, really focused on revenue management, so revenue growth management and driving and driving more profitable growth. We are also driving cost discipline. So a lot of productivity efforts, which include earlier this year, a reduction in force and really getting ahead of the inflation that's hitting all of us in this industry and in consumer packaged goods. We're implementing best practices as well, and we're streamlining our processes. A big part of the work we're doing is portfolio and footprint optimization.

So, you probably heard that this quarter, we're closing 2 facilities and redividing the volume across our existing facilities, really driving cost transformation. And most recently, we've launched -- we -- I should say, we've relaunched into uncoated recycled board, URB. We used to sell URB from Middletown, Ohio. We've just got back in that business, and it's going ahead of schedule. And it's really helping us with filling the Waco asset and also driving cost absorption. So, again, we're very pleased to be here, Phil. Thank you for inviting us.

And I suggest we get into the Q&A for the fireside chat.

Great. Maybe this is a silly question because you've kind of teased a number of things, but you've been in this role for 8 months now, Robbert. You come from a CPG background, which is exciting. You kind of teased out revenue management. But now that you've been in your role for some time now, what are some of the few big opportunities to really unlock value? So, that would be helpful.

Thanks for the question. Yes. So, I've been here 8 months after about 30 years in consumer packaged goods. So, I started in 1996 in Procter & Gamble, worked in Europe, worked in South America in Caracas, worked in Cincinnati 3 times, based in Geneva, worked in Central East Europe, Middle East, Africa, then went to Kimberly-Clark, where I spent a number of years in the U.S. and in Australia. Then joined PepsiCo Australia and New Zealand and then ran Quaker Oats in Chicago. So, I was the President of Quaker Foods North America.

And after that, I was the CEO of Primo Water and created Primo Brands, which is a big merger between 2 beverage companies. So, 30 years in CPG, and I found myself moving into the packaging industry as a former customer with all the insights that I had around the challenges ahead with the consumer. The first thing I would have said, Phil, is the business is very resilient. So, our volume is on track, right? Also for the quarter, we are surprisingly resilient. And part of that is really how diversified we are, as I said, across food, beverage, food service, 26 markets around the world.

The second one is that we have a really strong foundation, especially after building Waco. Waco was overspent, but now that we are beyond that, we actually are really enjoying the benefits of this incredible recycled platform that we have. We have a long track record of serving global customers, very strong relationships with those customers, and we can help them win. And that's really what we're focused on right now through surety of supply through our capabilities, our innovation, our speed to market, our lead times and our well-distributed manufacturing network, converting network across the U.S., Europe and international markets.

So, the other observation I had was we have a very deep talent bench. We truly are a world-class packaging company, and we are the go-to company for a lot of the largest CPG companies that want to work with the best. We are focused right now on restoring growth, which is why when we gave update to our guidance, we said we would end up in the high end of our guidance in sales.

Second, we're enhancing our profitability. They're really important, a lot of inflation this year, and we are now really driving productivity across the board to address that inflation, but also to get ahead of it. We want to future-proof the company and have the right cost structure to be competitive and drive the right value for our customers. The third is when we look at our global operations, we can optimize. We are looking at our footprint.

We're looking at where we should be investing, where we have the right to win, where we need to be geographically located to win with our customers and where we can close facilities and optimize. The same applies to our portfolio. We continue to look at our portfolio of businesses around the world and geographies, and it's an ongoing effort to see where we can further optimize.

Now, the other real new focus for us is free cash flow. We believe cash is king. And after the heavy investment cycle, we've committed to reduce our CapEx to below $450 million. That's really new thinking, new direction. I've actually stopped certain projects like our automated roll warehouses, which are really in place to continue to manage our inventory, but we don't need them because we're going to be reducing our inventory, various other key projects that we believe were not the right payback.

That allowed us to get well below $450 million, which is below 5% of our $8.6 billion in revenue and really focus on free cash flow. We have updated our guidance to $600 million to $700 million this year. That's a significant step up versus where we were last year, the year before and the year before that. With that, we're going to be deploying that free cash flow and pay down our debt. We are fully aware that our net leverage ratio is too high.

And everybody I've talked to all the investors, our Board are aware that paying down our debt, getting our leverage ratio down is one of my top priorities for the next 24 to 36 months. Now, it also comes with a bunch of opportunities. If you think about where we have the right to win, we can improve our commercial excellence, Phil. Revenue management is going to be key. Terms and conditions, think about pricing, think about inventory holding, payment terms, minimum order quantity and order lead times. Really zooming in on that, working with the world's best practices and the best outside consultants to get our revenue management really as a driver of growth and EBITDA.

Number two is we can get better in demand and supply planning. Historically, we have been a substrate forward business where the mills, we play in bleached, unbleached and recycled. We're pushing out their mill, their roll paper to the converting facilities. We are redesigning that to really think about demand signals and get the demand signals from our key customers and back that into our production planning, not only in the converting facilities, but at the mills. So, that's a huge piece of work we're doing to get our OTIF ups, our on time in full delivery.

And thirdly, procurement. So, we have a very large addressable spend. Procurement should be a core competency of our company, whether we're buying wood fiber, whether we're buying airline tickets or whether we're buying OCC, whatever it is we're buying, we should make that strategic -- so we are actually working with the world's best consulting people in that space, a very accomplished former CPO and her team to really set that up, hire a CPO and make that a best practice and competency for the company.

Then we're driving productivity, just in general by reduction in force and cost reduction, really disciplined approach with Chuck around cost management, and we can talk about that in a second, but also with AI. So, we are digitizing the company rapidly. We're bringing AI into all of our processes, and we'll continue to do so over the next 3 years. And finally, talent. We are hiring talent. You've probably seen the announcement of our new General Counsel, Daniel Fishbein, who came in from Corpay. And most recently, we've announced a new CHRO from Multi-Color Corporation, Tatiana Berardinelli, who's joined us this week, and we're very excited to have her coming in from the packaging industry with a lot of experience in developing commercial organizations and a very strong understanding of the talent in the market.

So, because of that, I'm very optimistic about our value creation runway. We have a lot of opportunities to enhance and grow our market share. We can leverage the competitive advantaged footprint that we have. We have a world-class paperboard manufacturing network, as I said, with recycled, bleached and unbleached. We have great packaging operations and people that run those. We have design and innovation capabilities both at our headquarters in Atlanta, where we have the PDC, we have our own test production facility downstairs. We can run all of our new products. We have an industrial design team, a graphic design team, and we're going to leverage those as value add for our key customers. And we have best in industry operators and employees. So, Phil, that's the first observation.

Yes, lots to unpack there. The revenue management part was the most fascinating once again, just because your volumes and just the broader industry volumes have been flat to down the last few years and then just a function of the consumer dealing with a lot of inflation. You talked about terms and condition, inventory holding, min order quantities and all that great stuff. How quickly can you implement that? Because most of your business is contractually locked in, right, and you got multiyear contracts. So, how receptive are your customers? What does that entail? Do you invest more in ERPs? Is this ongoing negotiations? So, just kind of help us think through this revenue management dynamic, how quick of an uplift could we see?

We have -- we are a contractual business. So, we are a very predictable business in general. We renew a good percentage of our contracts on an annualized basis. We also win new contracts, and we participate in RFPs. And as we do that, we build contracts and the majority of our customers want the RISI index in the contract. Historically, we would adjust our pricing once every 6 months. But with the dynamic and very volatile external environment, we're going to accelerate that to quarterly.

Then we have the non-paper-based inflation that we also have to address. That includes everything from labor to energy to transport to oil and gas, resins, which are going to be implemented in a more rapid way than historically. As our pass-through clauses were historically restrictive, we are trying to accelerate those into the market given the fact that we need to ensure surety of supply and the right level of profitability.

Revenue growth management is going to be a core capability of our commercial excellence initiative. And we will work with the world's best outside partners to help develop talent, help set terms and conditions, help develop the right contracts.

But we also want to do that to help our customers because our customers are more and more focused on the best-in-industry, reliable partners to help them win in the market with a very strong focus on surety of supply.

With all of these volatile dynamics in the market, surety of supply becomes more important. If you have a natural event, tornado or a hurricane, you want to make sure you have multiple production facilities where you can source from. So, you need multiple plates across multiple sites. There's only very few manufacturers in packaging that have those capabilities, and we're definitely on the leading edge of that.

Also sustainability. The regulations are changing rapidly. We are the sustainable alternative to plastic. So, plastic to paper is a secular trend that is a tailwind that's going to be here for years to come. Europe is slightly ahead of the U.S. We have a very big footprint in Europe. And as a result, we can innovate faster in Europe with our customers. The way we innovate is we get involved with the customer supply chain. We have to understand their pack price architecture, their business objectives and their tiering strategy across their brands.

When we do that, we can come in and offer solutions that run on their existing manufacturing network, so they don't have to recapitalize. That is a specialty of Graphic Packaging. That's why we are a preferred partner for most and get nominated for Supplier of the Year very frequently. So, that is the underpinning of the quality and the service that we offer that then allows us to drive revenue growth management. And order quantity and order lead time, they're all dynamic things where we can charge a little bit more for a product if the lead time is shorter or if the order quantity is less.

Okay. That's great color. Maybe, Chuck, you jump in, too. Pretty dynamic macro backdrop here, just given consumer concerns on consumer sentiment, oil prices, diesel prices have continued to take off. Any insights you're comfortable sharing in terms of July, August order trends and then how inflation is kind of shaping up relative to your expectations?

Yes, I'll take that one? So, just specifically around July and August, trending broadly as we guided and expected for the quarter. We guided the volume would be between plus 1%, minus 1% for the quarter and seeing trends that would reinforce that. So, quarter is on track from a volume standpoint. From an inflation standpoint, that's, of course, a very dynamic environment that changes every day. But indeed, with oil at $100 a barrel and OCC being recognized at 2 increases this quarter, we are clearly seeing inflation at the higher end of our expectations for the quarter.

So, I think that, that would impact the quarter in the range of $5 million to $10 million for the quarter, full year be in the range of $10 million to $20 million, but we're not standing still. What we're doing about that is going and looking for other costs to reduce other pricing that we can take to offset that. So, we still see a path to the low end of our guidance. And at this point, don't see any reason to change our guidance for either Q3 or full year.

Okay. So, the big swing factor is really diesel and energy relative to.

Those are the two. And then resin usually falls at a lag, but diesel and energy are the two that we're seeing -- or diesel and OCC, energy is pretty well hedged for the rest of the year. So, it's really diesel, OCC and then resin usually falls with somewhat of a lag.

Got you. Helpful. From a supply-demand standpoint, actually coming into the year, SBS, CRB felt really at an imbalance. It's actually in a pretty good spot right now. Obviously, some of the work you guys have done, the pivot to URB, some SBS capacity has come out in CRB as well. But perhaps give us some perspective what you are seeing in terms of supply-demand for the various grades and how -- is there any more noise around substitution between SBS, CRB and what that positions you -- certainly, you and the industry at large are trying to implement in that round of price increases.

Yes. Are you going to take that one. Yes. So, in general, what we're seeing is that we are in a situation where we're much tighter than we were earlier in the year. And I think you're hearing that from other participants in the industry. We've seen capacity come out in bleached, seen capacity come out in recycled. And so that has certainly had a positive impact more broadly on the supply-demand environment. And then also now there's the new tariffs with Canada. There's about 200,000 tons of paperboard that's being brought in from Canada. And that's primarily FBB and recycled.

And then imports from Europe are also down as well. So, all that's kind of worked to tighten the industry. You're seeing all that. We were very pleased to see the recognition of the $60 a ton in both cup stock and in bleached folding carton. And we are, of course, out with additional price increases in unbleached, bleached and recycled. So, broadly, we continue to be tight and full and expect to be able to continue to operate in that environment.

Any color how extended your backlogs are for the -- your main grades, whether it's CUK or CRB?

Yes. We don't give specific numbers on backlogs, but I'll just tell you that we're tight and have been. And I mean the one grade where we, of course, have capacity is in recycled since Waco has come up. And -- but we're the ones that control the excess capacity and recycled. We run our supply to match our demand. That's, of course, part of the reason why we're getting into URB and very excited about that to help absorb that excess capacity within our recycled system. And -- but clearly, from a bleached perspective and an unbleached perspective, very tight.

Got you. Okay. Helpful. On your earnings call, at least, you guys painted a path for perhaps EBITDA growth in 2027. Inflation certainly heavier than you thought. So, it's a bigger challenge this year. What are the key drivers that we should be mindful of that's going to help drive EBITDA growth? Certainly, pricing will be helpful. Inflation is out of your control, but any GPK initiatives in play that gives investors in this room confidence that you're back to growing EBITDA because EBITDA has been in decline for the last few years?

Yes. So, for 2027, we talked about a few items on the call. I'll run through some of those and then give you any updates on where we are with them. But I would, of course, encourage you to think about it as more how some items are impacting 2026 -- I mean, in 2027 that are occurring now versus a full year bridge or a full guide to 2027. And so these items totaled to about $175 million that should show up favorably in 2027 versus 2026. So, if you start with pricing, we said the pricing initiatives that we have in the marketplace, including what's been recognized is about $145 million. That we said $60 million of that would impact 2026. So, the carryover of that is about $85 million.

And then since we went out with our Q2 earnings call, the third-party index did recognize an additional $20 in bleached folding carton. So, think about that as another $5 million tailwind for that in 2027. So, that's from a pricing standpoint. From a cost standpoint, we've talked about the structural cost improvements that we're making in the business, call that at about $85 million for 2026 and on an annualized basis, be about $100 million. And so that's a carryover of about $15 million.

And then we have about $150 million of onetime items that are impacting 2026, and that's made up of the $90 million that we're taking to reduce inventory levels from additional downtime. It's the $40 million from the weather impact -- the weather event in Q1 plus the impact of the Mexico disturbance and some other onetime items that we've seen. And then about $20 million, we talked about the inefficiencies that we've experienced in unbleached this year. And so that all totals to around that $175 million once you back out the carryover of inflation. We called that out in Q2 at around $75 million, but now think of that more as around $80 million.

The one item that I'll add to that, that's, of course, all before volume growth. And so as Robbert talked about, the initiatives that we have in place to restore volume growth and then specifically URB. We only launched URB halfway through the year. So, we'll have a full year of URB next year. So, that will add to the growth as well. And then the other pricing that hasn't been recognized. As I mentioned on the last call, we have about $200 million of pricing that has been recognized out in the marketplace. So, if any of that gets recognized, that would be a carryover and would positively impact 2027 as well.

Helpful. Maybe this was a question for you, Robbert. Certainly, the COVID era where you were generating high-teen EBITDA margins, probably aspirational. I mean everyone saw a COVID bump, and you're not unique to that. But this business has generated pretty steady margins for a long time, call it, 16%, 17% EBITDA margins consistently. Appreciating we've had some macro shocks in recent years and all this inflation. Your margins are in the low teens right now. Looking 3 years out, is that still a path you feel pretty comfortable getting back to with all the big initiatives you have in place, getting back to that mid-teen margins? Or structurally, the industry just feels different now?

Yes, I'll take the question, and I'll pass it to Chuck. But that is the aspiration. We do have a number of initiatives that would suggest we should be able to get to that point, including revenue growth management, significant productivity initiatives. We've seen that paperboard pricing on SBS has now been passed through, which will significantly help. And then with the -- overcoming some of the irregularities this year like the winter in Mexico and some of the maintenance things that we're phasing out in the future.

And that combined with URB launch, we're really -- that's an absorption play. So, you think about adding about, let's say, 100,000 long-term tons of URB in our recycled platform. And remember, we are very good at URB. We used to make URB at Middletown. We know that market very well. And we have a lot of demand as a result. So, that's tracking ahead of where we thought we'd be now this time of the year and for the full year. And we are very hopeful that it will be about 100,000-ton business for us. Obviously, we'll confirm that as we get closer to next year.

But that's the aspiration. And that's a massive absorption play. And think about the cost structure of an integrated paper company that makes packaging, a lot of that sits with the mill. So, the more we can drive cost absorption in the mills and run those efficiently, the more that will translate into EBITDA. Chuck, any further thoughts?

Yes. I think Robbert covered it well. Only thing I would add, over time, you generally see the higher cost capacity come out of this market in this business. We've seen that start with bleached. We've seen a little bit of that with recycled. So, no reason to believe that wouldn't continue, and that will continue to benefit us over time and ability to take price to offset the inflation. And then the URB and any growth that we have in CRB is going to be highly margin expansion or expandatory with the initiatives that we have in place and with the fixed costs already in the business.

And so all that combined with the cost improvements that we have, I mean, clearly, we see margin expansion from here. We'll come back to you in a few months with more specificity around that as part of our strategic review; we're looking at our financial model as well.

To get that type of margin expansion with operating leverage, you got to see some real volume growth. So, aspirationally, your revenue management game plan, what type of long-term growth algo do you expect from a volume standpoint relative overall nominally or versus the market?

Yes, we're not ready yet to give guidance on volume growth. But what we have said is for this year, we are seeing our sales at the high end of guidance. That is a result of strengthening fundamentals and our ability to continue to be very competitive in the market with our service levels, our quality and our cost. We will give some more perspective on that when we give guidance. But our aspiration, as I stated earlier, is to restore growth. We have had 2 or 3 years of flat to declining volumes. This year is definitely a stabilizing year, and that allows us to build a platform for growth for the future.

We're also conducting a market study right now. I mentioned that in the earnings call. This is really an exercise whereby we will be defining our where-to-play choices, both from a segment standpoint and from a geographical standpoint. Obviously, our core businesses in food, beverage and household are the biggest contributors to our EBITDA. We want to double down on those, but we will also continue to find growth avenues in very margin-accretive businesses going forward. That is a core piece of the work we're doing.

We're also looking at building some significant core competencies. We talked earlier about commercial excellence. That's really the revenue growth and optimizing the commercial organization. But we're also focused on S&OP. S&OP gives higher service levels. That means you have a better demand signal, better demand planning, supply planning and production planning. It's all integrated, enabled by humans and AI. That gives you much higher predictability, longer production runs, and therefore, you are better able to serve your customer.

So, that's the second core competency we want to build. The third one is procurement. Procurement is as important as sales. We -- you can only make money by selling more or spending less. It's a really simple framework -- but we will be focused on making our procurement team a best-in-class team in the industry. And that's enabled by our end-to-end AI implementation and our talent, our human talent, all the human capital we have in the company and the one -- the new additional capabilities we're recruiting into the company. So, that gives us a very strong platform for growth going forward.

To get there, Robbert, what will that require from an investment standpoint? Is this people? Is this SG&A spend from a CRM system? Is it CapEx? Because yes...

It means we have to -- first, we started by building a transformation office. So, we brought in a former Booz & Co consulting leader who also worked in the industry and CPG to help us build a transformation team. And that transformation team is leading a transformation journey. That includes the RIF, includes productivity, includes portfolio optimization, footprint optimization and the market study, which we'll be concluding this month and then giving an update on later this year.

The second one is adding a Chief Procurement Officer. So, we are currently recruiting a Chief Procurement Officer. We have a number of lead candidates, and we will be making announcements there soon. And then finally, a stronger, more focused commercial organization. We have an incredible sales team, and we will continue to fine-tune that and enhance that with a revenue growth management organization that is world-class and industry-leading.

Will that require any incentive comp realignment for the sales force?

Yes. We are currently redesigning our comp plan for our sales force. We have historically had a management incentive program and a sales incentive program. We are currently redesigning that with the help of our new CHRO, Tatiana, who specializes in this area, and we will be deploying that in 2027.

So, once again, will this -- will we see a big step-up in SG&A? Will we see a big step-up in CapEx to kind of deliver these aspirations?

No, our CapEx will be capped. We will continue to maintain strong discipline around both OpEx, SG&A and CapEx, and we don't anticipate any escalation of those 2.

Okay. It's optimizing where you deploy your investments, right? I guess you're taking costs out and redeploying it. Just one last one for me. You talked about looking at your global portfolio and footprint. Where are you with that journey? You've taken some capacity out already, but whether it's the network or assets, are there anything that stands out where they're of substance or these are just smaller pieces of the business that you deem noncore?

Yes. The first -- in the public domain, we've announced the sale of our Croatia facility, the closure of our Lebanon, Tennessee facility, and we're in the process of closing a U.K. facility, right? So, that's announced. Those are the first steps towards this ongoing effort to optimize our footprint. With regards to portfolio, that's going to be informed by the market study later this month where we want to play and where we do not want to play going forward. And that will then lead to potentially some minor divestitures. Nothing too big.

I've said before, North America and Europe are core to our company. Food, beverage and household are core to our company. So, don't expect any major moves there. However, there is optimization possible. We -- I think we did just over 20 acquisitions over the last 10 years, including one very large one. We haven't really pruned the tree. We need to really understand where we want to play going forward. But we don't have any news on that today.

Okay. That's helpful. Well, let's wrap it up here. Robbert, you got a full plate and pretty impactful strategy. Let's see how you execute.

Thank you, Phil. Thanks to Jefferies.

Greetings. Welcome to the Graphic Packaging Holding Company's Second Quarter 2026 Conference Call. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to your host, Melanie Skijus, Vice President, Investor Relations. You may begin.

Good morning. Thank you for joining Graphic Packaging's Second Quarter 2026 Earnings Results Conference Call.

Today's presentation will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in today's press release and in our SEC filings.

We have with us today, Robbert Rietbroek, President and Chief Executive Officer; and Chuck Lischer, Senior Vice President and Interim Chief Financial Officer.

During this call, we will reference our second quarter 2026 earnings presentation that can be found in the Investor Relations section of our website at www.graphicpkg.com and company-directed slides that you are participating today through the webcast.

Now let me turn the call over to Robbert.

Thank you, Melanie, and good morning, everyone. Our second quarter performance reflects the disciplined execution of our global teams and the resilience of our business model. In a consumer environment that remains challenged and uneven we delivered results that were in line to modestly above expectations. Our competitive advantages continue to set us apart, including the strength of our diversified portfolio, the breadth of our capabilities, our industry-leading assets and global integrated packaging network, and our long-standing partnerships with the world's leading brands, QSRs and retailers.

For the quarter, net sales were $2.2 billion. Adjusted EBITDA was $247 million. Adjusted EPS was $0.14, and adjusted cash flow was $138 million. Volumes were steady year-over-year despite the impact of higher gas prices on consumer consumption behavior.

Importantly, adjusted EBITDA landed at the top of our guidance range, with margins expanding sequentially to 11.3%, a direct reflection of stronger cost discipline, operational improvements and agility in the organization we have been building throughout the year. These actions are generating meaningful savings that help us navigate the current inflationary environment with confidence.

Adjusted cash flow showed strong improvement from the prior year period, increasing $55 million. Across our end markets, we continued to see strength in food and health and beauty. Outperformance in the Food segment was driven by steady demand for center of the store staples, where dry cereal, pasta and snack bars remain affordable choices for value-focused consumers.

Within our international business, dry tea sales experienced growth, benefiting from continued consumer interest and wellness-oriented trends. Ready-made grocery meals grew across our domestic and international markets, offering convenience-driven consumers, a more affordable alternative to quick service restaurants.

The strength of demand for these products despite being priced at a premium to center aisle staples demonstrates the value consumers place on quick, high-quality meal options. Consumers view these ready-to-eat meals as a premium experience, where the value proposition extends beyond the product itself to the time saved on meal preparation, cooking and cleanup.

Health and beauty also remained a bright spot. This business, largely internationally driven for us today, experienced continued strength in the quarter with higher demand for premium personal care products. Strength in food and health and beauty segments was offset by declines in household and foodservice with many consumers delaying purchases of discretionary household goods and shifting their consumption preferences to more meals at home.

Our Household segment remains soft as purchases of facial tissue, laundry detergents, food wrapping and storage were pushed out. Pet food was an exception within the segment, and we achieved year-over-year growth for the second consecutive quarter. Whether supporting premium categories like protein, fresh produce and personal care or value-oriented staples, like dry mixes, rice and pasta, our competitive cost position, global scale and technical capabilities enable us to work effectively with customers across the full spectrum of consumer demand.

Importantly, we are refining and enhancing our approach to capture sustained growth in the marketplace, directing our focus towards opportunities for Graphic Packaging is best suited to win long term, aligning our growth strategy with our operating footprint. We are in the process of conducting a comprehensive market study that will deliver insights to shape our strategy, as we strengthen our leadership position.

The coordinated effort across our company is designed to ensure future investments, both time and resources are concentrated on the highest growth and highest return markets, where we can leverage our competitive advantages and help our customers win in the market.

As we continue to advance this work, we are confident it will improve our alignment between strategy, investments and market opportunity. These important insights will help guide our long-term growth priorities. We look forward to sharing additional details on our strategic plans later this year. We have accomplished a great deal so far in 2026.

The significant progress achieved in our near-term strategic priorities is encouraging and demonstrates our resolve to build a stronger business. Our near-term priorities include: first, capturing organic growth while providing exceptional customer service; second, driving profitability improvements through cost initiatives, operational efficiencies and select pricing actions. Third, optimizing our operations, footprint and portfolio mix to better focus on core competencies. Fourth is a focus on increasing free cash flow generation supported by inventory rationalization initiatives and capital spending discipline. And finally, utilizing this increased free cash flow to pay down debt and return capital to shareholders.

On the cost side, tangible actions have been implemented to improve our cost structure and streamline our processes. With heightened inflation now projected upwards of $150 million for the year, we focused on productivity improvement and cost reduction initiatives. Our hard work is paying off with in-year cost savings now reaching roughly $85 million, which will come through COGS and SG&A lines. These savings are additive to our continuous improvement programs our teams pursue on an annual basis as part of normal business.

Following 2 years of suppressed cash flow generation in the business, we have committed to delivering a significant increase in adjusted cash flow in 2026. We are unlocking cash in the business through working capital efficiency improvements and disciplined spending measures, supplementing the cash available from operations that in recent years has been tied up in a substantial capital spend cycle.

In the first half of the year, we reduced inventory by approximately $75 million and lowered capital expenditures by roughly $320 million compared to the first half of 2025. Since the beginning of the year, we have emphasized a more disciplined approach to capital allocation, and I am pleased with the progress we have already made in reshaping our approach to project prioritization and capital spend approval.

We're tracking better than original capital reduction targets and now expect capital expenditures below $450 million in 2026. While we continue to make meaningful progress on our working capital initiatives, a portion of the inventory reduction originally targeted for 2026 is now expected to be realized in 2027. This timing shift is primarily related to inventory impacts from an elongated maintenance cycle put in place in 2025. Chuck will elaborate further on this in his remarks.

Given higher-than-anticipated inflation this year and its impact to adjusted EBITDA, along with unfavorable inventory impacts from maintenance timing in unbleached, adjusted cash flow for 2026 is now projected in the range of $600 million to $700 million. The midpoints at $650 million represents a significant increase from $169 million in 2025 and the use of cash in 2024 of $27 million.

We are confident we have the right initiatives in place and the breadth of scope to deliver improved profitability and cash flow generation. Increased discipline in spending and the concerted push by our teams towards greater operational efficiencies will result in higher EBITDA to cash flow conversion rates in the future.

Our transformation agenda is focused on the optimization of our operational footprint. During the quarter, we completed the divestiture of our facility in Croatia, and we recently announced the proposed closure of our Lebanon, Tennessee facility, which would consolidate volumes across fewer facilities.

Additionally, in alignment with regulatory and consultation requirements, we are evaluating a potential closure of our facility in Winsford, U.K. These strategic decisions simplify our footprint and improve cost efficiency, while proceeds from divestitures will be used to reduce debt.

Commercially, we are elevating how we partner with customers. Packaging has become a strategic lever for brands, influencing sustainability outcomes, operational flexibility and consumer choice. Our teams are working closely with procurement, sustainability and executives across our CPGs, QSRs and retailers to help them navigate shifting consumer preferences and execute winning price pack architectures.

Over the past decade, the consumer packaging industry has experienced meaningful and accelerated transformation. We have seen notable variations of packaging formats in response to changing consumer trends, consumption behaviors and a broad realization that packaging is a differentiator on the shelf. Packaging drives consumer choice. It also accommodates the entire range of price point preferences. The graphic, we optimize packaging formats and execute winning price pack architectures for customers.

Our functional and attractive packaging solutions elevate brand appeal of customers with graphics and other design elements. As we shared last quarter, our commercial teams are energized, spending time with customers and strengthening partnerships. Recent packaging wins highlight our capabilities and strong service delivery. We are proud to support Polar beverages with our mini can multipacks.

Mini cans have gained popularity in the market and are aligned with increased preferences for smaller portion sizes and less food waste. The mini-can solution showcases our ability to help customers adapt packaging architecture to evolving consumer preferences.

As we partner with customers to navigate changing consumer behaviors, we support their timelines and desire to bring differentiated products to market quickly and effectively. A notable promotional collaboration with Heineken launched during the second quarter, our team worked closely with the Heineken team to develop a highly differentiated promotional package for the UEFA Champions League in the South African market. The leading beer brand required a quick tick sleek turnaround time for the promotion launch. Partnering closely with the customer, we created a unique carton shaped like a soccer ball and featured a commemorative glass and 8 bottles of beer.

Our commercial innovation delivered both premium shelf presence and durable product protection and was a big success in the market. Our commitment to customer service and ability to hit rapid turn deadlines showcased to Heineken, why we are the partner of choice. During the quarter, we were also proud to support promotions and packaging in celebration of the World Cup with 24 of our customers.

Our commitment to innovation remains central to long-term growth. In the quarter, we filed 24 new patents, strengthening our portfolio of over 3,000 issued patents worldwide. Patents filed in the second quarter were primarily comprised of new packaging features in trade technology and food service as well as enhancements to our packaging machine technology.

Our unique portfolio of intellectual property, combined with our long history in packaging innovation provides the tools to address a rapidly evolving regulatory environment. Over the last decade, innovation and demand for more sustainable consumer packaging solutions have remained constant priorities for global CPG and foodservice companies.

Additionally, new restrictions on single-use plastics and growing concerns around microplastics are gaining momentum. We are both confident in and excited by the growth opportunities in front of us as regulatory tailwinds and ongoing enhancements in recycling and collection infrastructure strengthen our competitive position and increase demand for innovative paperboard-based packaging solutions.

Consumer and market studies reflect global preferences that fuel support of the ongoing paperization trends in packaging. Our recent global data study of more than 22,000 consumers across 42 countries found a 73% viewer recyclable packaging is either essential or desirable, reinforcing growth in demand for paperboard-based solutions.

Preferences of global consumers are driving the adoption to more sustainable packaging alternatives. It has been encouraging to see broad-based infrastructure improvements beginning to take shape, advancements, including cup collection and recycling and expanded residential access and updated industry specifications reinforce the attractive long-term positioning and circularity benefits of our recycled paperboard platform.

Approximately 20% of the U.S. population has access to residential recycling for both single and double-sided paper cups today. This is a significant increase from 11% access in 2022 and only 5% access in 2017. With the substantial increase in collections that have occurred in less than 10 years' time, we expect momentum will continue.

35 North American mills now accept paper cups, including both our Waco and Kalamazoo facilities, expanding the opportunities to recover and recycle valuable fiber into new packaging. This follows last year's move by the Recycled Materials Association, which officially added paper cups to the inbound residential single stream and dual stream material specifications. These positive industry developments are enabling our mills and the broader industry to accelerate collection programs and recover valuable fiber.

In Foodservice, we most recently partnered with a leading Southern inspired QSR chain to support its conversion from plastic to paper cups for cold drinks. The new cup is currently being rolled out to all stores across the U.S. The move to paper cups advances the customers' sustainability objectives and increases its use of renewable materials and packaging.

We are proud to help customers transition from plastic to paper and to advance recycling and circularity education in the communities we serve. We are actively doing this through renew our social impact program.

During the second quarter, we were honored to receive the Asahi Global Supplier Co-Creation Award, recognizing Graphic Packaging as a preferred innovation partner. In addition, we received 7 gold metals across multiple categories at Pride of Print in New Zealand. These achievements reinforce the strength of our world-class innovation platform and our ability to deliver differentiated solutions for leading global customers.

Operationally, our teams continue to execute with discipline. We are driving structural cost improvements, realigning our workforce and maximizing productivity across functions. Our recycled paperboard system, consisting of Waco and Kalamazoo locations in the Southern and Midwest United States, will continue to ramp towards full capacity over time.

Following our pacesetter rich line launch announcement last month, we are engaged with existing and new customers and focused on successful ramps in demand for both coated and uncoated recycled grades. Waco's flexibility of production positions us to serve both consumer and industrial applications while improving profitability across our recycled system. The launch reflects our pragmatic entrepreneurial approach to unlocking new sources of demand and maximizing performance of our industry-leading assets.

We have identified an addressable URB market of more than 1 million tons across folding carton, lamination and other applications that we can serve immediately. This new incremental demand represents over 100,000 ton opportunity for us over time.

Our Waco facility is capable of producing to industry specifications today with no incremental capital required. Expanding into uncoated recycled paperboard broadens our offering, opens doors with new customers and improved utilization and profitability across our recycled platform. It is another example of the agility and execution capabilities that differentiate us.

Separately, in the second quarter, we released our 2025 Impact Report, highlighting continued progress we are making on commitments that matter to our customers, our employees and our communities as well as areas where we need to continue our investment. A central theme of the impact report is our partnerships with customers, and the support we provide to meet their recyclability and waste reduction goals.

Our paperboard-based solutions and ability to provide packaging that is both functional and a more sustainable option to plastic reinforces our role as a partner of choice. I'm pleased to report our 2025 safety metrics came in better than paperboard and packaging industry averages.

Safety is a cornerstone of our culture. We will continue to be unwavering in our commitment to the safety of our employees and will invest accordingly in the resources, training and capabilities to maintain a safe and responsible working environment.

As I reflect on the quarter, I am excited by the strength of our foundation and the enthusiasm we continue to hear from customers that differentiated capabilities. Looking ahead, we remain focused on deepening customer engagement, elevating our commercial and operational execution improving profitability and maintaining disciplined capital allocation. This strategic reset will position Graphic Packaging for its next phase of growth and long-term value creation.

With that, I'll turn it over to Chuck.

Thank you, Robbert, and good morning, everyone. Our performance in the second quarter highlights the resilience of our portfolio and disciplined execution of cost and productivity initiatives to offset higher inflation in the quarter. The momentum we have with cost reduction and productivity initiatives, along with the pricing improvement that I'll discuss, gives us confidence that we'll see margin improvement in the business going forward.

Net sales decreased 1% year-over-year to $2.2 billion. Unfavorable pricing impacted sales by $27 million or 1% as last year's third-party change on bleach paperboard flowed through the business along with more competitive packaging pricing.

Volume/mix was flat or down $2 million and foreign exchange and other was favorable by $13 million. Innovation sales growth added $40 million in the quarter, reflecting our strong customer partnerships and their continued interest in innovative, sustainable paperboard packaging.

Innovation sales spanned multiple packaging formats, and new innovations with customers were evenly distributed across Americas and International. In Americas innovation was led by strength solutions and cups and containers while international experienced growth in multipacks and food trays and bowls.

Adjusted EBITDA in the second quarter was $247 million, down $89 million from the same quarter in 2025. This decline was largely due to $60 million of commodity input and operating cost inflation, which is $10 million more than we expected at the beginning of the quarter.

Inflation was broad-based across logistics, resins, labor, secondary fiber and chemicals. Combined price volume and mix accounted for a $35 million headwind. Positively, net performance was a favorable $9 million in the quarter, and foreign exchange had an unfavorable impact of $3 million.

Adjusted EBITDA margin was 11.3%, an increase of 50 basis points from the first quarter. Positive net performance in the quarter was a result of strong operational productivity and cost management. Performance included approximately $25 million of savings from our cost reduction and productivity initiatives and $6 million in lower mill maintenance outage expenses versus the year ago period. This was partially offset by ongoing inventory reduction initiatives through downtime.

Adjusted EPS in the second quarter was $0.14, including a tax rate benefit in the quarter relating to a $6 million release of reserves for uncertain tax positions. We continue to expect a full-year tax rate to be approximately 25%. Second quarter adjusted cash flow was $138 million, an increase of $55 million from the second quarter a year ago.

We expect increases in cash flow in the second half of the year over first half, consistent with the historical seasonality of our working capital and cash flow.

During the quarter, we reduced net debt by $100 million, ending with $5.5 billion of net debt and net leverage of 4.7x. In July, we were pleased to see third-party recognition of our $60 per ton price increase for bleached cup stock and $40 per ton for bleached folding carton.

The contractual flow-through of these changes will have an approximately $5 million positive impact on 2026 results, with the majority of the improvements in price coming through our business in 2027. 2026 pricing will also be favorably impacted by other commodity input cost recovery mechanisms embedded in our contracts.

Given the continued inflation we're experiencing, we are also taking pricing actions on the approximately $1 billion of our revenue where pricing is not determined by a contract. Altogether, we expect positive pricing momentum to favorably impact 2026 full-year sales and EBITDA by approximately $60 million, with fourth quarter benefiting more than third quarter.

Pricing actions implemented and recognized will yield an annual run rate of approximately $145 million. We recently announced an additional price increase for both bleached cup stock and folding carton. And yesterday, we announced an increase in the price of recycled paperboard and our second increase on unbleached paperboard.

Looking ahead to the rest of the year. We are tracking to achieve full year net sales at the high end of our guidance range, primarily related to the favorable pricing actions. From a volume standpoint, our expectation for full year and the third quarter is consistent with our previous range of down 1% to an increase of 1% year-over-year. We expect the foreign exchange and other bucket to be unfavorable by approximately $20 million in each of the third and fourth quarters. We are seeing a broadening of inflation across other categories such as coatings, adhesives and other materials used in our mills and packaging plants and now anticipate inflation and operating input costs stay elevated in the second half of this year versus our prior expectations for a moderating trend.

Accordingly, we now estimate incremental input cost inflation for the full year totaling approximately $150 million versus our previous estimate of $60 million to $65 million. As mentioned earlier, we drove better-than-expected savings from our cost reduction and efficiency initiatives in the quarter and now expect to deliver approximately $85 million in 2026 versus our previous expectations of $60 million.

We now expect full-year adjusted EBITDA to be at the low end of our guidance range of $1.05 billion to $1.25 billion, primarily related to the higher-than-expected and prolonged inflation. In terms of the improvement that we see in the second half versus the first half of 2026, we expect the incremental inflation in the second half to be mostly offset by the pricing improvements that I discussed and an improved mix of the business.

We do not anticipate a repeat of the downtime caused by the weather that we experienced in the first quarter and expect lower cost of maintenance outages. As discussed earlier, our cost savings will also deliver more benefit in the second half, and we expect other operational and cost improvements. We expect Q3 adjusted EBITDA will be in the range of $280 million to $300 million.

Third quarter tax rate is expected to be modestly higher than the full year tax rate. We have updated our full year cash flow outlook to a range of $600 million to $700 million. This change is a result of updated expectations for full year adjusted EBITDA and headwinds to our stated inventory reduction goals for 2026.

As Robbert alluded to in his remarks, some of the inventory optimization we have projected for 2026 has been pushed into 2027 and that we now expect inventory to be between 18% to 19% of sales. The largest driver of the change is in unbleached paperboard were a combination of the timing of a mill maintenance cycle put in place in 2025 and other production issues resulted in efficiencies, higher operating costs and challenges with board supply during the 2026 beverage season. We now expect to end the year with relatively higher inventory. While a headwind to cash flow, the buffer inventory will ensure supply/demand mismatches do not recur and that we maintain exceptional customer service.

We now expect capital expenditures to be below $450 million following the comprehensive review of our investment plans. As a reminder, cash flow generation is back-end weighted, consistent with the seasonality of our business, timing of capital expenditures, pricing and inflationary cost recoveries. Interest expense is now expected to be approximately $275 million. And as a result, we have revised our adjusted EPS range to $0.65 to $0.90.

We are focused on the continued reduction of debt and intend to pay down between $400 million to $500 million of debt in 2026. Accordingly, net leverage is expected to be approximately 4.6x at year-end.

To summarize, we are gaining positive momentum that will benefit our financial results. The actions we are taking to drive disciplined organic growth, brand profitability with pricing actions and productivity will generate improved free cash flow and result in long-term value creation. 2026 is an important year in our journey, as we strengthen the business and position Graphic Packaging for sustainable growth and margin improvement.

I will now turn the call back to Robbert.

Thank you, Chuck. We are confident in our future and the long-term strategy in development that will drive sustainable value creation for shareholders. While the macro environment remains dynamic, we are concentrating on items within our control. We are executing with discipline, strengthening customer relationships, driving structural cost reductions and improving the balance sheet. We are positioned to capture greater upside as market conditions improve.

I want to thank our employees around the world for their continued dedication, commitment and outstanding execution. Their efforts are the foundation of our accomplishments this quarter and give me great confidence in the opportunities ahead.

With that, operator, let's open the line for questions.

[Operator Instructions] Your first question for today is from Anthony Pettinari with Citi.

You indicated that Waco is ready to produce URB. I'm wondering if your full year guidance assumes any URB sales in '26? And if so, how much? And then just kind of any thoughts on how that business could ramp into '27? .

Yes. Anthony, thank you for your question. It does assume a modest small amount. We have our first orders in a couple of thousand tons, and we have qualified URB for several other customers, and we're waiting for more orders. URB allows us to enter a large and attractive market. We have an immediate addressable opportunity in folding carton, laminations and related applications, such as edge protection, falling carton applications, slip sheets, dividers, laminations.

And we've just launched Pacesetter Ridge line, which is made from 100% recycled fiber, and we do believe there is some meaningful growth potential. We're estimating that to be 100,000 tons or above for the company, supported by both internal demand because we also use URB as a company and incremental external market opportunities. So we see strong interest from the customer. It's early days. Our engagement and qualification efforts are progressing well. And the market receptivity is really supported by very tight industry supply conditions and also lamination qualifications that are expected to conclude in the fall. So as I said, we have a couple of thousand tons of orders filled so far. And it is a natural extension of our recycled platform. We have available capacity and we have the operational flexibility to serve both CRB and URB.

And this will help our production mix at Waco. It will be driven by market demand, return optimization and allows us to balance service levels for the existing CRB customers and capture the growth in URB.

Okay. That's very helpful. And then just shifting gears. I think inflation expectations, you said we're going from $60 million to $150 million. I'm just wondering if you're assuming any further inflation in OCC and/or freight? Or do you just kind of assume those levels hold flat through year-end? .

Yes. This is Chuck. I'll take that. So overall, the way we approach our inflation forecast is, of course, we look at published indexes, forward curves and other market pricing. And so that is -- we do look at all of that. As we talked about in Q1 and looked at inflation in Q1, we had expected more of a moderating based on those trends. And now, we expect inflation to stay higher for the rest of the year. So the silver lining and all that is, of course, the surety of supply conversations that have now started with our customers, and they're much more receptive to pricing. But they do see the inflation that we're seeing, and that's in the areas of logistics, converting materials, secondary fiber, and that's all items that are easily visible in the industry.

Your next question is from Mark Weintraub with Seaport Research Partners.

I was hoping to maybe just get a little bit more clarity on the pricing, which you went through pretty quickly. Chuck, I think you referenced $145 million at 1 point, if I heard correctly. Could you reexplain what that was? And how this all breaks down? And really trying to get a little -- trying to understand what's included for this year and sort of what our starting point going into next year would be if we just take into account what you're expecting to have in place through the balance of this year.

Yes. So the $145 million is really just the annualized view of the $60 million that we expect to see in 2026. So that includes a few things that includes the recognized $40 a ton on bleach folding carton, the $60 a ton on cup stock, the contractual price recoveries, and then, the $1 billion of business that we have where pricing is not determined by a contract. So that's the flow-through of all of that.

As I mentioned, we have other pricing in the marketplace. And that's all embedded within the forecast, the outlook and that's in the $145 million. We have other pricing in the marketplace, as I went through in the prepared remarks, and that -- if all of that were recognized, that would be over $200 million of additional annualized, but based on timing of likely recognition, not expected to have a significant impact on 2026.

So basically, if I understand correctly, so we got, all the actions in place, $60 million this year, so then another $85 million essentially would show up in next year to get us to the $145 million. And then you have this new set of increases, which if successful would be additive to the tune of up to $200 million on an annualized basis?

Yes, you got it. Exactly.

Okay. Great. That's very helpful. And maybe just if I could on this -- so certainly, we've heard others in the market out there on SBS. Can you -- are you to your knowledge, the first on the -- and actually on your base well, but are you the first and only right now to your knowledge on the U.K. and on CRB?

On recycled, we just went out yesterday, and I haven't heard that anyone else is out yet. And on the majority of unbleached, yes, we're the first out with that as well. There was the uncoated, unbleached was somebody who was out with that previously, but the majority of the unbleached we are the first out of that as well for the second round.

Your next question for today is from Detlef Winckelmann with JPMorgan.

Maybe just a follow-up just to make sure I understand. I got the impression that some of the production curtailments had potentially been moved from 2026 into 2027. Firstly, did I understand that and did I hear that correctly? And then kind of secondly on that, can you quantify that? .

Yes. So yes, Delek. This is Chuck. I'll take that. The -- I think the way to think about it is we adjusted our inventory expectations, and so -- and then the downtime expectations as well. The downtime expectations, we now expect to be around $90 million for the full year, and the -- but the inventory expectations, we also adjusted as a result of the unbleached issues that we talked about, where the planned maintenance was in the quarter and then also the January weather impact and the other operational issues that are causing us to take a different strategy towards unbleached at the end of 2026. So a couple of things really going on in the inventory guide, but the downtime is lower to about $90 million for the full year.

Your next question is from Ghansham Panjabi with Baird.

Robbert, as you look out to the back half of this year, do you anticipate any change in how your customers are approaching their focus on price versus volume, just given the step-up in inflation year-to-date with energy costs and pretty much everything else? I know you maintained your volume outlook for the year, but just in terms of conversations with customers, do you sense any change coming? .

Yes, Ghansham, let me give you a high-level customer and then I'd like if you are okay with that going to quickly into subcategory level. With regards to the overall we do see the overarching theme remains a strong focus on driving volume and share recovery for the branded players given the private label growth.

The secondary theme though that we are starting to see is pricing to offset higher commodity inflation in the second half '26 and into 2027. And our customers continue to simultaneously invest in promotions to drive traffic and share. But we do see a focus shifting a little bit from volume growth to profitable growth.

What we heard, and I want to refer to a couple of the calls that were just done on earnings calls, we heard a very strategic intent to return categories to volume growth moving from heavy investment and value price points to a focus on innovation-driven mix for the next 12 months. From 1 of the largest F&B players, we heard leveraging a sophisticated price pack architecture to balance must by promotional frequency with a variety of pack sizes as well from another one. So it's a little bit of a combination.

Now, when you go to the category level, we do see a pretty stable demand signals with some pockets of strength. We're seeing select growth across large customers in key segments, particularly in the center of store staples. So Food, Health and Beauty remain growth drivers. We saw a pretty resilient demand for value-oriented staples like cereal, pasta, rice and snack bars. We saw strength in ready-made meals, and we saw strength in premium personal care products.

We also saw some growth in the international markets. We saw that with dry tea and premium health and beauty categories. And we see a continued wellness and personal care trends. We also see challenges. Household remains challenged. Foodservice remains challenged as consumers shift more consumption towards meals prepared at home.

And then one of the bright spots was pet food. We saw a year-over-year growth for the second consecutive quarter despite some softness across other household categories.

Okay. Great. And then, Chuck, I'm sorry if I missed this, but what are you now assuming for working capital benefit in 2026 relative to your revised free cash flow? .

Yes. That's helping us bridge to get to the current cash flow range. So the cash flow is, of course, negatively impacted by the EBITDA driven by the inflation and then also the lower inventory, but we are working other working capital initiatives around payment terms and around receivables to be able to offset that.

Your next question is from Gabe Hajde with Wells Fargo.

I'm curious, as you look at the URB opportunity, I don't know from a margin perspective or maybe EBITDA per ton, can you talk about maybe what that looks like? Our math maybe suggest something in the $200 to $225 a ton range. But just curious how you guys are looking at it.

And then any sort of early read on potential, I guess, impacts from the new distribution partner that 1 of your peers has for a recycled board in North America?

Yes. Let me take those 1 at a time, if you're okay with that. Gabe, thanks again for inviting us to your conference. We had a great time.

With regards to the margin expectations, we believe that our incremental demand for uncoated recycled board and the rising utilization at the Waco mill will result in higher EBITDA overall. It will drive better margins and faster returns on the investment, and it'll drive stronger margins for the recycled platform overall.

So really what it is about it's balancing the system to maximize profits. And when you look at the decision we made to get into URB again, remember, we used to make URB at Middletown. The decision really reflects a pragmatic approach to accelerate value creation through flexibility. The flexing between the production of these grades will allow us to maximize both earnings and cash flow as well, and we maintain the long-term value of the asset.

The production of CRB and URB are very straightforward, and we have a longstanding experience making URB at Middletown. So we can do both, and it will drive profitability at the system level. It's very low on CapEx. For what we're doing right now, there was no material CapEx required for these folding carton trials. And over time, we could probably expand to other applications like tubes and cores that would require some capital investments.

Now, with regards to the additional volume coming into the market, we tend not to comment on competitors, but this is existing volume that's been in the market that's just looking for a new distribution channel. We don't think it's going to affect the market in a major way.

Okay. And then Slide 4, the 1 thing that kind of jumps out at me was, I would have expected food service in the second quarter of '26 to be pretty strong given the on-premise trends that we saw with World Cup. I understand household, but that was the 1 that was -- that went more negative. I don't know if there's some -- if this is related to the CUK issue, I don't think it should be. And then maybe just sort of expectations for the second half in Foodservice specifically.

Yes, it's an excellent question. We had hoped for a stronger quarter of foodservice overall for the industry. We do see a shift back to meals prepared at home that tends to be driven by inflation and overall pressure on the wallet. And as we look forward, customers, we believe will continue to run promotions in foodservice and limited time offers to drive volume. And there is this consumer affordability element to the QSR space. And so the way we look at it is we have to play in both food and foodservice because of these portfolio shifts. We've seen that before over the last 5 years, and we need to be able to grow or at least maintain volumes in both of these scenarios.

Your next question for today is from Hillary Cacanando with Deutsche Bank.

So you're -- just you looking at your leverage ratio of 4.7x, it looks like it's getting close to the covenants. Am I right in that your covenant steps down to 4.75x, I guess, after December? And so I guess with that getting just close to covenant, how you plan to address that?

Yes. So a couple of points on that. First of all, our covenant leverage ratio is usually about 25 or 30 basis points better or lower than our printed leverage ratio, just the way the calculation works. So there's some natural headroom there. But just to clarify what that -- what the amendment did, we have a 5x covenant until the end of second quarter 2027. So it actually goes out into 2027. .

Got it. Okay. Okay. So then after that, after the middle of '27, it goes down to 4.7x -- 4.75x?

4.25x back in Q3, and that will, of course, be after we pay down all the debt we expect to pay down this year and then drive the 2027 EBITDA.

Okay. Got it. Got it. And then just going back to URB, I know you said that volume, it's not -- it's really existing volume. It's not really going to impact the market. At some point, do you plan on getting much bigger in this space, where it could have an impact on the volume?

Yes. The reference to the volume coming into the market was a reference to Mexican volume on coated recycled board that is going to be distributed by 1 of our competitors that we usually do not provide commentary. On URB, there's some tightness in the market, and we're entering with our grades to take advantage of the growth in that segment.

Your next question for today is from George Staphos with Bank of America.

I had 2 questions. The first is really a bridge to the second half. And then the second one is a question on Waco and where it sits in the industry. In terms of the bridge, Chuck or Robbert, I appreciate your comments earlier, can you talk a little bit about what the big buckets will be in terms of the step-up, if you can quantify them at all from the first half to the required second half EBITDA that you're targeting? In that regard, can you talk a little bit about how much productivity will add to that? And what the mix effect might be, either positive or negative, in terms of your end market trends? The reason I bring it up is foodservice traditionally, I recall, being pretty high margin for you relative to center of store. And I'm wondering if that is a drag or not that big of a deal.

The second question is with Waco, when the mill came on, obviously, was positioned as really a primary packaging grade mill and substrate producer, we understand why you want to use some of the capacity for URB. Where would Waco sit on the cost curve relative to the rest of the capacity that's out there for our URB. Are the trim with off that machine good optimal for what the converters require? Or how would you have to optimize over time?

George, this is Chuck. I'll take the first part and then maybe Robbert take the Waco part. On the bridge from first half to the second half, yes, as you mentioned, we covered that in the prepared remarks, but I'll just build a little bit more and try to give you some quantification. So first of all, several items that are favorably impacting the second half versus the first half and that we don't expect a repeat of the downtime due to weather that we had in Q1. And we also had some other nonrecurring items in the first half, and that all totals about $40 million.

And the pricing, as I talked about, would improve, and that's -- we've quantified that at $60 million. And we also, as you said, expect favorable mix. Foodservice is a part of that driver, but just back half mix overall improve as well. And of course, we'll continue to push for more pricing given that we see continued inflation into the business. We -- the $85 million of cost savings that we talked about, that adds about $15 million in the second half versus the first half. And as you saw us do in Q2, we'll, of course, push for additional cost savings, including procurement opportunities.

Maintenance outages are favorable in the second half by about $10 million and then other operating improvements. And clearly, I know Robbert is going to come in on Waco. Waco is 1 of it, and then just some of our normal continuous improvement initiatives. Those are all, of course, offset by the additional inflation, about $75 million of inflation first half to second half and then the lower volumes due to seasonality. So lots of moving parts and pieces, but where I think you'll really see it show up in our financials in our bridges is in the performance line.

Okay. And point of clarification, mix will be positive even with foodservice being weak? Would that be right?

Well, yes, yes. We expect that. I mean, foodservice hiccup season kicks in, in the back half -- and so maybe weaker than last year, but mix still is positive first half to second half.

I just want to talk a bit about Waco and your question. So just a quick reminder, we closed Middletown and East Argus. We took about 280,000 tonnes out of the market. We had already closed Tama and K3 at Kalamazoo. That was another 200,000 tons we took out. So when we added Waco, when we built Waco, we added 270,000 tons of capacity versus the system that we had in 2025. So that's just a quick, quick reminder of the capacity. We are very flexible, as I said, in Waco.

With regards to URB, our caliber is 14 to 30 points. It's -- we call it pacesetting ridge line. It is 100% recycled, and it's got at least 45% of post-consumer recycled content. And in that particular grade is really usable due to the caliper profile and the surface appearance as well as the compression to things like edge protection, folding carton applications, slip sheets, dividers and beverage containers and lamination. So that is a relatively sizable addressable market that we can go into without any major capital investments and that we are currently already producing. And as I said, we have a couple of thousand orders already on the books.

Your next question is from Phil Ng with Jefferies.

I guess, first, to kick things off, the incremental price increases you guys have announced for, I believe, CUK, CRB, one, can you give us any color in terms of the magnitude of the increases? And then two, have you seen orders, backlogs or any supply-demand dynamics that gives you perhaps more confidence to go around just because earlier in the year, you certainly got traction SBS, but CK was at least the publications then pick up on it?

Yes, Phil. This is Robert. So we do see a tighter market than before. And we see, as a result, the industry fundamentals are improving, and that's resulting in price rolling through and catching up. We see in the recent AF&PA report that there are more and more backlogs across grades, which really increasing. We've recently announced our second price increase on bleached cup stock and folding carton and unbleached. And now, we've raised prices about 120 ton on each. We've also announced yesterday a 50-ton price increase on recycled paperboard. With the situation that we face, it does warrant price increases and also obviously a reflection of the inflation.

Okay. Helpful color, Robbert. And then there's certainly Section 338 tariffs, we'll see how that all shakes out. But do you guys have any in-house view in terms of what potential impact it had in terms of trade flow? And how impactful it could be for different grades at least? First flush, it could be impactful for SBS unclear on CRB, but any more color you guys are comfortable sharing would be helpful.

Yes. I mean, our researchers showed that that's about 200,000 tons of primarily FBB coming in. The impact of it will, of course, see as time plays out, but I think that's the size of potential impact.

Any impact on CRB, Chuck? Is this just more of a FBB, SBI dynamic you think?

Yes. There's just not as much that goes across the border. And so not a significant impact. .

Our last question comes from Arun Viswanathan with RBC Capital.

Our last question for today comes from Matt Roberts with Raymond James.

Chuck, could you just clarify the debt coming out there? It was 475 through June 30, but please correct me if I'm wrong. And I know that you're not putting out a guide for free cash flow in '27. You did talk about some of the EBIT drivers from incremental price, but maybe any other early considerations for '27 free cash flow? Maybe how much of a benefit from that inventory shift? And I believe working capital is usually a drag in first half as you have given seasonality. So any other puts and takes we should think about for '27 that provides headroom to that leverage target or any other meaningful divestitures you all are considering?

Yes. So yes, the covenant is 5x and has adjusted to that. In terms of the cash flows, yes, '27 in, of course, we're not giving a guide, but I'll just give you a couple of items to think about. 2026 EBITDA, of course, has a significant number of onetime items, and then, there's some carryover impact from the pricing net of the inflation and the cost savings. So think about that all as $175 million of kind of a combination of the onetime items in 2026. So again, not guiding to EBITDA or cash flow, but we do have the $90 million of inventory reduction downtime, $40 million of and other onetime items that I talked about.

And then, we also talked about the unbleached inefficiencies, and that's about $20 million. And then, of course, the pricing, if that -- the carryover there is about $85 million. The carryover for inflation is about $75 million and the carryover cost saving is about $15 million. So that all -- so there's some tailwinds to potential tailwinds for 2027 from all that as well.

Then, of course, 2027 will benefit from lower interest cost, and we'll keep pushing on capital spending, and then, the taxes -- cash taxes will continue to be lower in 2027. And there -- the potential for additional inventory takeout inventory reduction, really, as we leverage tools, technology and really take our inventory reduction to the next level. So a lot of items to consider and develop, and we'll come back to you with a 2027 guide.

This concludes the Graphic Packaging Holding Company's Second Quarter 2026 Conference Call. You may disconnect your lines at this time. Thank you for your participation.

[Audio Gap] packaging analyst, joined by my colleague, I think, here, Bailey Gordon. Richard is walking around as well. We'd like to welcome today Graphic Packaging and representing the company is CEO, Robbert Rietbroek, and who has just over 5 months, I guess, tenure as company President and CEO; and also attending Charles Lischer, Interim CFO; and Melanie Skijus in the audience with us.

GPK, as many of you may or may not know, the world's largest manufacturer of sustainable consumer packaging, primarily made from paperboard. Currently, close to 2/3 of sales are in food and beverage applications, about another 20% coming from food service. So generally speaking, should be pretty resilient. So this is intended to be a fireside chat. To the extent there are questions in the audience, please blur it out, raise your hand, throw something at me. That's fine.

And with that introduction there, Robbert, I think you had maybe a couple of opening remarks, and then we can jump into Q&A.

We can go right into Q&A if you want to.

Okay. Fair enough.

So I'm asking all my companies this question. You were at a different seat when all this happened. But how would you compare the current acceleration in input cost inflation, however you kind of want to describe it, and maybe the durability of that? Because I think at least as we're thinking about it, looking out over kind of the next 6 to 12 months, we've learned that inflation is not ideal for the low end of the K for the consumer, which then translates into a more challenging volume environment. So just thinking through that piece of it as you guys are kind of experiencing it real time?

Yes. The question obviously is, is this inflation more permanent in nature? Or is it more inflationary or transitory in nature? And as I think Chuck mentioned in the earnings call, we've -- we are about $65 million more inflation than originally anticipated in the annual operating plan and guidance, which we're trying to work through and offset now. I think part of it is probably going to be there for a while, given the fact that some capacity has been taken out of the market, and there's a time to start that back up. Part of it is transitory. It's not entirely clear yet how much of that, but it's definitely -- some of it will be permanent. And we're doing a lot of work in productivity.

So we've announced in the first quarter, we did a -- or actually, in the earnings call for the first quarter, we announced that we executed a reduction in force, where we reduced 500 roles to drive better cost in our SG&A. We are currently working through a number of other initiatives in procurement, for instance, where we're looking at all of the direct and indirect costs to see if there's any immediate savings that we can generate. We have announced the sale of our Croatia facility as part of our footprint optimization effort to really get the right network of production facilities.

And Chuck and I are working on a weekly basis to manage our OpEx to really look at costs across the board to drive savings and CapEx as well. So CapEx is obviously related to our free cash flow, but all of the CapEx projects that were in flight were relitigated, if you will, reevaluated and requested for new approvals. So we are treating this inflation like it's permanent in the way that we're reengineering our cost structure. But we are hopeful that part of it is transitory.

Understood. We're going to have a couple of different angles and bites at demand. But just is there anything that you've seen kind of post February 28 from a demand cadence standpoint when you look at the business that would suggest to you customers are either trying to prebuild some inventory ahead of potential price increases, potential shortages, anything like that, that stands out to you all?

Well, we have seen our demand in the market be very resilient. We have not seen spikes in any way that would suggest inventory buildup. We feel that given the fact that we're so diversified across food, beverage, household, we're even outside of the perimeter now in fruits and vegetables. We're in health, we're in beauty, we're in nicotine. We're in Europe, we're in Asia, we're in Africa, we're in North America. That geographic spread, that portfolio diversity -- diversification has created quite a bit of a calm in our top line.

So we've had the luxury of not worrying so much about our top line so far and really focused on the cost side of things. That's where all the volatility sits in the business. So you know that our margins are more depressed than they were maybe 2 years ago. So we're laser-focused on productivity and driving our cost structure down to restore EBITDA margins. Part of that obviously is impacted by the fact that we're taking inventory down this year. It's $130 million. But that's the right decision from a free cash flow generating standpoint.

Okay. All right. Back at the ranch. So new CEO, about 5 months. It's been a difficult time to come into the organization as an outsider. And then obviously, you get hit with the conflict. There's some winter storms. It's probably easier to run, I'm going to say, a water cooler business versus running paper machines during winter storms. But just as you kind of -- you're settled down now, what excites you most about what brought you, what drew you into GPK? I know you've been asked on the conference call, but just anything that now comes to mind 5 months in, what gets you excited about working at GPK and the opportunity?

Yes, Gabe, thanks for that question. I was attracted to Graphic because I was excited about the prospect of leveraging my 3 decades almost in consumer packaged goods at Procter & Gamble, Kimberly-Clark and PepsiCo and to serve my previous employers and other players, big players in the CPG industry, be a vendor and work so closely with them, and at the same time, the sustainability aspect of this company.

We make fiber-based biodegradable packaging. So all the secular trends are in our favor. In Europe, by 2030, single-use plastics will be largely eliminated from grocery. We anticipate similar trends to come to at least certain states in the U.S. and potentially broader. So I think the long-term prospect of this company.

When I look at the last 5 months, as you know, I've told you this, I've traveled a lot. I've been to various markets. In fact, in 1 week, I was in 6 countries. I did 8 flights in a week. This was really eye-opening. I visited 4 of our 5 mills. I visited a number of converting facilities. And what I realized as I was traveling the world is what a big moat we have. We have 5 mills that have a massive replacement value and just under 100 converting facilities. Just the sheer replacement value of those facilities is an enormous competitive advantage. It's really hard to replicate.

The second thing is if you look at the demand side, as I said before, it's far more resilient as I've seen it than what you read in the media. And the media, I read the media, I think all of the consumer packaged goods companies are in severe decline. That's a little bit of the headline. We see a far more resilient demand picture where we see all of the turbulences on the cost side, the inflation side, particularly driven by transport, logistics, oil and gas prices and obviously related to the conflict.

From a consumer side, there is a challenged consumer. We can talk about it maybe a little later, but there is a value orientation now that we see that can be addressed through price tiers, that can be addressed through pack price architecture and simple promotions, end caps, et cetera. The customers are really engaged with Graphic. So I visited a number of customers in the Northeast, in the Midwest, in the Netherlands, in Switzerland, in France, and I have visited facilities in the U.K. and France as well. And so what we see there is that we are absolutely one of their preferred vendors because of our capabilities.

We talk a lot about paperboard pricing, but we are actually a packaging company. So more than $8 billion of our sales is finished products. And so we have 3,100 patents, and we have proprietary products like the fridge pack for beverages is one of our inventions. So really, we got to think less about this constant focus on pricing of paperboard and much more about what we do in the market with our customers, the innovation we drive, the products we launch, the innovation centers we have in places like Colorado, Atlanta, Bristol, U.K., that's where the energy is, and that's where our customers are engaging with us.

So the net of it is, I'm incredibly encouraged by the last 5 months. It was difficult walking into this assignment. It was definitely, I'm not going to deny that. But as where I sit now 5 months later, I'm far more optimistic but also realistic about the challenges that we have on the cost side.

So I want to double-click on that a little bit because I think Smucker's was out today talking about their fiscal '27 guide. I think volumes that you pointed to would be down 1% across the organization on a consolidated basis. But just if that's the new normal, and we can kind of tick down the list of is it population trends? Is it GLP-1? Is it health and wellness? I think sometimes there's winners and losers within those buckets, right? And sometimes we make healthier decisions and that means more around the perimeter. But just as you look across the portfolio, as you challenge the teams, what are you seeing in terms of kind of real-time feedback? I'll say, absent the macro in terms of what demand we hear like you said and read in the market, the headlines?

Yes, Gabe, I think what we need to do and what we are doing is expand our portfolio beyond the center of store. So we are more and more active in the perimeter of the store. We've developed a very large fruit trade business in Europe, where products like berries are now marketed not in plastic, but in paper trays, again, towards the 2030 regulatory change in Europe. We have talked about the fact that we have a $15 billion potential addressable market of plastic to paper conversion and foam to paper conversion.

So whether you're replacing a styrofoam cup or styrofoam food container that you get maybe when you're going to pick up your food at a restaurant or whether we're looking at expanding beyond center store from the traditional cereals businesses and the cookies businesses where we have such strongholds, that's the focus. So we're trying to grow the category. And there are a lot of plastic-to-paper conversion projects in the pipeline. I can't name any of them because that's obviously proprietary information.

But think about replacing a plastic tray in a cookie execution with a paper tray, think about fruit and vegetables, tomatoes, cherry tomatoes, blueberries, things of that nature, there is a tremendous upside. And I just came back from Bristol and Cholet in France, and we're making some of those products there. And I was surprised to see the size of that business. It's actually very meaningful already. And we're now obviously trying to globalize those businesses.

So I think rather than only competing where we've historically competed, we are going to start growing the paper convertible packaging category instead. That's much more exciting for the team. It's much more exciting for the industry. And also, we have some excess capacity, as you know, in Waco for recycled board. So we'd like to make sure that we can complete and fill that mill.

Okay. I guess 2 questions off of that. The value orientation that you talked about from the consumer. Your products, when you think about relative cost to whether it's polymer or otherwise, polymer is up right now, and actually, I think polypropylene, polyethylene were down a little bit on a spot basis in May. But just cost competitiveness of your product, are there offsets if it's more expensive, sort of the initial upfront cost, whether it's throughput, whether it's efficiency somewhere else?

I've had this conversation in the boardrooms with my top customers several times in the last couple of months, where we typically look at a certain product category where they're currently in plastic, and then they express a desire to go to paper. And then the question is, is this cheaper or more expensive? I've seen both, all right?

So the first is like let's take the styrofoam beverage container. That's much cheaper than a paper beverage container. But a plastic single-use microwavable cup can be more expensive than a paper microwavable cup. So for instance, if you're in the ready-made meals category where you add a little water and you have mac and cheese or something like that or it's rice-based or something like that, pasta-based, you may be better off with a paper cup.

Then there's a lot of gray area where we may be a fraction more expensive than plastic. But then that's obviously evolving with the resin prices and coming up in oil and gas prices. So there's a lot of variability. Beyond that, all of these large customers have tremendously high aspirations from a sustainability standpoint in the carbon emission reduction and recyclability. So that's the angle where there's -- it's a multidimensional discussion. It's not only, "Hey, what's the cost, but how can we make the footprint better and how can we drive more recycling?" And you know 70% of our products are made of recycled material, approximately. And I think just in the mid-90s are recyclable.

So we really are well positioned in that discussion. So I'm actually engaging in some cases, with the Chief Sustainability Officers of some of these large corporations directly to understand their needs, the process, how they engage with procurement, how they track performance.

Shrinkflation. You sell converted product, surface area. I would assume that goes up on a per-calorie basis or however we want to measure it. Again, are there some analytics behind that, that you all have done internally or a way to think about it, net positive, neutral?

Yes. I think the shrinkflation word, I've seen it, I've read it. We like to call it pack price architecture. So it's a much more friendly word. And we like to call it portion control. And so when you look at the best examples of portion control are, for instance, mini cans of CSDs, which we all love because all of us like -- most of us like the occasional CSD, but we may not be feeling like drinking a full can. Those are all very favorable for Graphic Packaging because that's a lot more packaging material and packaging boxes for us because you sell a lot more of those units.

So when we look at downsizing portion control, we are very much in favor of that. When our customers go there, we can support that and make that economically viable. Also, we have such a big global footprint, and we have the lead times that they require for both promotional packaging as well as we can really be agile. We have some customers where we work in a 2.5-week lead time. That's pretty incredible. And we can even move faster in the foodservice side of the business.

We're going to switch gears a little bit. We'll try to maybe talk some dollars and cents in the first half and the second half, and we've got a lot of investor questions about it. You mentioned $130 million of destock on the cash flow side. Our math says roughly maybe $400 a ton of under -- or underabsorbed fixed overhead directionally. I know the math doesn't always work out right. But just Q1 came in, I think, at $234 million. You're guiding $230 million to $250 million for the second quarter. Anything on the production side? Is the destocking tracking with what you were kind of projecting at the beginning of the year? Any color or context around that?

Yes. This is Chuck. I'll take that. So a couple of things. So if you looked at our Q1 inventory decline, Q1, we saw about a $50 million decline in inventory from year-end, whereas in the prior year, it was a $60 million increase. So you're clearly seeing the inventory come out of the business, and that's something that is helping to support our free cash flow. Due to the seasonality of the business, we do generally have more of an inventory build in the first half and then we harvest that more in the second half.

And so we did have negative free cash flow in Q1. But even though it was a negative almost $200 million [indiscernible] $250 million positive to where it was last year at the same time. So all that will give us a long way -- take us a long ways to getting to the $700 million to $800 million of free cash flow that we see in 2026 versus the just under $200 million that we saw in 2025.

Okay. And then I think there's a SBS price increase on the table for folding carton as well as cup stock for June implementation. It seems like at least from the feedback that we've been getting, folks are fairly optimistic that, that will be implemented. So I guess maybe a 2-part question. One, to the extent you can comment whether it's contract business versus noncontract business, what you've been doing on the price side to offset some of that $65 million of inflation that you've seen?

And by our math, I think even just on the transportation side for paper, there's probably $25 to $30 a ton, excuse me, of inflation flowing through the system. You've got the normal, I call it the inflation treadmill, labor, et cetera. Just how you're tracking? You reiterated the $65 million, so I'm assuming that's still a good number. Anything else you want to call out?

Yes. On the pricing side and all that, as you said, we are out with both cup stock increase on the bleached side and folding carton side and then also out with unbleached price increase as well. So that's all on the paperboard. We will see how that gets recognized, first opportunity in a couple of weeks. We don't speculate on that. But as you pointed out, and as Robbert talked about earlier, there's a tremendous amount of inflation in the business. So that's clearly what's driving the need for the price increase, and that's well chronicled both in our business and in the broader industry. So that is something that certainly shows the need for the price increase.

And then the way that will all show up in our individual contracts. Just as a reminder, the way the index works for us, that's really a price change mechanism. So we set the price of a package at the time that we negotiate a contract with a customer. And then the price change mechanism during the contract is partially driven by the paperboard price. There's some other pieces of that price change mechanism as well, a piece tied to CPI and a few other things -- a few other items as well, but that's driving the majority of it. And for us, from a bleach standpoint, there is a greater business that's tied to open market. So we do have a greater percentage of our overall business that is tied to an index in the bleach business than it is in some of the other businesses.

So that's on that portion of the price increase. We also talked about on the Q1 call that we were out with $1 billion of packaging price increase. And then we also have contractual pass-through mechanisms to offset some of the inflation that we see. So all of that will help us bridge from the first half to second half guide.

Okay. As it relates to paperboard supply, you talked about we sell packages, and we've heard this for a while. We also sell raw boxboard. There was a tragedy in the Pacific Northwest that took some capacity out. Just to clarify for investors and folks that are asking questions, we continue to get questions about it to this day. Our understanding is that liquid packaging board was the majority of what that mill was making. And it's a little bit different characteristics and capabilities that you need within a mill to make that, lamination and extrusion, et cetera.

So just maybe talk about what your capabilities are? Have you heard anything in the marketplace in terms of trying to source alternative supply? Again, our understanding was that the majority of that mill's production was going back to Japan. So just -- I know it's not your asset, but to the extent it affects you?

Yes. We've all heard and read about the extraordinary tragedy that occurred. For those that are unaware, there was a -- there was an accident in the state of Washington at a mill. And our thoughts go out to those affected and the victims. The impact on our market is minimal. And we probably get a couple of orders here and there we can help out, we'll help out. But most of that production was going back to Japan, and that was being used for an integrated fashion. So the closest thing we make to that product is our cup stock paper, bleached paper and texture kind, but we do not believe that there is a major impact on our business from that.

Okay. If you were to kind of put your old consumer hat on, and right now, we've got the World Cup. We've got America 250, which I think most people are pretty excited about. Just maybe things that you would be thinking about from a marketing standpoint, from a commercial standpoint that maybe is an opportunity for Graphic today. And then maybe 1 or 2 key things that you're worried about. We think about -- again, we continue to read the low end of the K is struggling?

So as you know, I worked in CPG for about just under 30 years, and I've not only worked in North America and Europe, but also in some of the emerging markets like Venezuela. And we dealt with a lot of economic volatility in those markets. And the first thing that we would have looked at would have been getting the right price tiers in the market, the right portfolio to serve the high end of the market, the middle end of the market and the lower end of the market to really offset and fight back against the private label growth from a branded standpoint.

So having the right portfolio, and that's usually enabled by a formulation, but also by price pack architecture that we talked about earlier to have more accessible variants. Then you look at what channels you want to operate in. So certain channels tend to grow in growth periods and other channels tend to grow in more recessionary or economically challenged periods. So you want to make sure you're in those channels.

And then e-com is continuing to go from strength to strength, particularly the younger generation tends to get a lot of home delivery. It's unbelievable how that's taken off and how that continues to grow. And that requires new formats, new pack formats and new product executions. So I would focus there, and then I would try to drive and reignite growth, right? There's a lot of categories that we see that are contracting right now from a consumption standpoint. It is possible to restore growth in those markets. You just have to get very creative and you have to get differentiated.

So marketing, brand building, product innovation are really important right now. And we see that, for instance, the protein products, particularly helped by GLP-1s are winning. That's been a trend that's been going on for a while. I remember when gluten-free was the big idea. And then protein came in early beginning of the decade, became really big. I launched a number of protein products myself in oats, for instance and that continues to be very popular. So when we look at our business, and we talked about it in the earnings, some of the protein areas have grown much faster, and we tend to be overrepresented in that space.

I would also then really take advantage of the World Cup. We have 24 brands that we serve in our portfolio that are doing World Cup thematic events. And that is a worldwide event with billions of viewers that happens to be in North America this year in Canada, Mexico and the U.S. I'm personally planning to be there this Sunday at the game in Dallas. I can't wait. It's exciting. I hope all of you are going to tune in. And if you see brands that are doing promotions in the World Cup, just buy them, just go all out, just support them because we do want to make sure that we continue to market our brands and that everybody is excited about what's going on in the world. And this is a very positive event where all the nations come together.

So yes, I would be focused there. Pack price architecture, product, price tier portfolio, winning in the right channels and specifically in e-commerce, and I would really drive thematic promotions. And the last thing I'll say is value meals are really in demand right now. We obviously have a very big business in foodservice with the biggest companies in the world. There's a lot of activity in thematic value meals, and there's still a lot of room to do exciting marketing promotions there.

Protein forward?

Yes.

And maybe 1 or 2 things that would keep you up at night?

I think the last 5 years have been -- we've seen a lot of inflation. So in the beginning of COVID, there was a lot of demand-driven inflation. Everybody -- remember, everybody is filling their pantries with beans and rice and oats and spaghetti. And there was just a shortage and there was just not enough inventory around. That was then followed by supply-driven inflation when we saw shortages in CHEP pallets and transport issues and stuff like that. Remember, all the containers ship in Los Angeles. So the consumer is fatigued when it comes to inflation. They're sort of tapped out, and that's exacerbated by the fuel prices. And so now you have to make choices every day, consumers -- moms and dads out there have to make choices.

So as manufacturers, we have to be empathetic. We have to make sure we provide the right value propositions to enable consumers to buy what they need, and it goes back to the earlier conversation. And then overall, I think the inflation in transport, oil and gas, diesel. Diesel affects everything. It touches all the ag sectors, et cetera. So for that -- if that would come down, it would be very beneficial to everyone.

Got it. Going back to the guidance, like I said, $230 million to $250 million for kind of puts you, let's say, at $470 million for the first half of the year. The midpoint of the guidance is $1,150 million. So again, we talked about being back-end weighted. Non-repeat of weather, we got some pricing that should be coming through. Can you walk us through some of the puts and takes H2 to H1? And if there's any more clarity today than there was maybe at the earnings call in April?

Yes. So I think you touched on several of them, and it's the same items that some of it -- in addition to some of the same pricing that I touched on earlier. So yes, the weather impact in the first half is $25 million. There was additional about $20 million of higher maintenance in the first half than there is in the second half, additional production curtailments, about the same number, about $20 million in the first half versus the second half. And then, of course, then the cost from a -- on the cost side, we committed to the $60 million of cost takeout, and that's a 2026 number, not an annualized number.

And we saw about $10 million of that in Q1 and then a little bit more of that in Q2. And so that will accelerate. The pricing that I already talked about earlier on the $1 billion of packaging price and the contractual pass-through mechanisms will all contribute. So as you can tell, there's a long list of things that are going to help us bridge from first half to second half, but a high level of confidence that we can bridge inflation that we see.

Okay. I think the $15 billion of addressable market on conversion opportunities that you talked about, I think, Robbert, you called out some converting capacity that it would be nice to have or maybe that it seems like it's growing pretty quickly. I think you said France on fresh produce. Is that -- I'm assuming the answer is yes, but just maybe lay out for us I'm going to bring up Vision 2030 only because we talked about, I think, 5% of revenue and CapEx. So all within that spend wallet of 5% that we can achieve what you'd like to?

Yes. So the fruit trade business was actually initiated in the U.K. market and is now rolling out in Europe, and we have those capabilities to produce those things in France as well in the Cholet factory where I was recently. When you look at the 5% CapEx, so what we said is 5% or below, which is really a big part of becoming free cash flow generative, and we want to return money to our shareholders, obviously, over the years to come. We are going to pivot a little bit and allocate a little bit more of that to the converting side of the business.

So when you are engaging in a project with Graphic, there's 3 ways you can do that. The first way is we sell you or lease to you a piece of CapEx, for instance, for KeelClips for cans or bottles, the clips that used to be plastic, they are now paper, the rings around the cans. It's a great example of such a project. The second type of project, we would put the CapEx in-house, those are low amounts usually with really aggressive returns, very fast paybacks. And the third, and those are things we designed for is that we use existing equipment of manufacturers that are making cookies and they want to tray that looks and gets handled the same way as the plastic current execution. So we will design for that so that it goes through the same machinery or minor adaptations. Those are obviously preferred by our customers.

So with regards to the mills, we will continue to invest the necessary maintenance and repair, but there's also regulatory investments. I think water treatment is a big deal. We will -- and we're still working on the cogen facility in Waco. We will complete that cogen facility. We will invest in regulatory requirements. We will invest in repairs, maintenance and make sure that we have the right outages to do the maintenance, which is required on an annualized basis where you go into the equipment and you look for cracks and you do welding and you do inspections to keep it all operating well and safely and at a higher performance level.

And then on the converting side, it's really exciting because there are some projects that Chuck and I get on our desks that we look at that have a payback under a year. And you simply go and build the equipment and you launch the product, and it's already contractually agreed, obviously, and then you have that instant payback. That is going to be part of: a, becoming a much more free cash flow generative business over the next years; and b, a higher ROIC. Because as I looked at our ROIC over the last 5 years, I don't think it is where it should be with regards to the industry average and industry standard, but we can get there.

Last one for you. I think we got about a little over a minute left. You talked about some divestitures to maybe accelerate deleveraging or things that I'm going to say noncore, but just as you look across the portfolio, anything that's become more evident to you? Again, I know it's only been 6 weeks or so since we last caught up, but just...

Yes. Yes. So we have announced the divestiture of the Croatia facility. We are always going to look at our footprint globally to understand where there are opportunities to, let's call it, unlock cash that is trapped. This could be consolidating facilities. This could be selling facilities or parts of our business. It could even be a sale of a building and doing a leaseback. So all of the above will be part of our ongoing business process. We did conclude a 90-day review, which resulted in, obviously, not only the sale of Croatia, but also the reduction in force where we reduced 500 roles to drive productivity and our SG&A number down. But yes, this will be an ongoing process.

And Europe was determined to be strategic?

Yes. We have -- we deliberately went out in earnings to say we are very committed to our Europe business. We believe we are a -- our core is North America and Europe. We serve a lot of the same customers in both continents, and we are very happy with our European business.

Excellent. Puts us out of time. Thank you all for your attention. Thank you, Robbert, Chuck.

Thanks, Gabe.

Thank you.

Good day, ladies and gentlemen, and welcome to the Graphic Packaging Holding Company First Quarter 2026 Conference Call. [Operator Instructions] And please note, this conference is being recorded.

I will now turn the conference over to your host, Melanie Skijus, Vice President of Investor Relations. [ Mom ], the floor is yours.

Good morning. Thank you for joining Graphic Packaging's First Quarter 2026 Earnings Results Conference Call. Today's presentation will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in today's press release and in our SEC filings.

We have with us today, Robbert Rietbroek, President and Chief Executive Officer; and Chuck Lischer, Senior Vice President and Interim Chief Financial Officer. During this call, we will reference our first quarter 2026 earnings presentation that can be found in the Investor Relations section of our website at www.graphicpkg.com and company-directed slides if you are participating today through the webcast.

Now let me turn the call over to Robbert.

Thank you, Melanie, and good morning, everyone. As many of you know, Melanie has just rejoined Graphic Packaging as Vice President, Investor Relations, and we are excited to benefit from her leadership in the role. Over the past 4 months, I've been getting to know the team visiting our facilities both domestically and abroad and meeting with many of our customers around the globe.

Separately, I'm pleased to report that we have now completed our 90-day review of the business. Our review has confirmed several important conclusions. First, our foundation is strong in points that is consistently validated during by site visits and in discussions with our major customers. Second, we have talented experienced teams, including world-class operators support growth with customers. And lastly, our integrated high-quality asset base and production footprint, enhance our service capabilities, expand innovation opportunities and provide a competitive advantage. All in, we see meaningful opportunity ahead. We're taking decisive focused actions to strengthen our operations and position the business for improved profitability.

In the first quarter, we delivered strong performance at the high end of our expectations. Net sales were up 2% year-over-year to $2.2 billion. Volumes were up 1% compared to last year. with volume performance improving as the quarter progressed. Adjusted EBITDA was $232 million. Adjusted EBITDA margin was 10.8% and adjusted EPS was $0.09. While adjusted cash flow was a negative $183 million in the quarter, this represents a significant year-over-year improvement from negative $442 million in the same period last year.

As we look at the demand environment this quarter, scanner data across our markets continues to reflect a more selective and value-conscious consumer, our innovative packaging solutions that span the grocery store from the center of aisle to the perimeter and on-the-go foodservice items meet consumers wherever they go. As we proceed to the first half of the year, we are encouraged to see customers increasingly taking actions to store volume growth.

Looking across our end markets, Food and Health & Beauty were bright spots for us during the quarter, with higher packaging volumes from value products and consumption of every essentials. Bars, refrigerated ready meals and yogurt continue to perform better due to more protein products entering the market to satisfy consumers' desire for higher protein diets. Health & Beauty, which is primarily an international business for us, delivered strong growth consistent with the trends we saw in the second half of 2025 as consumers continue to prioritize small indulgences like skin care and perfume. Our beverage business remains stable, while food service and household reflect ongoing consumer affordability trends.

Now I will provide an update on the results of our 90-day review of the business. The decisive actions we have begun taking to achieve our strategic priorities and an update on our views and expectations for 2026. As I walk through each of these topics, you will note that we are focused on accelerating the pace of execution across our business. That means enhancing operational efficiency and generating free cash flow to drive shareholder value in an evolving market. While we are taking swift action and implementing tactical improvements to drive efficiency, there is still significant work ahead.

Our path forward is clear. We're focused on advancing our 5 near-term strategic priorities. First, we are committed to disciplined organic growth and providing exceptional customer service. Second, we intend to drive profitability improvements through cost initiatives, operational efficiencies and select pricing actions. Third, we will continue to optimize operations, footprint and portfolio mix to better focus on our core competencies. Fourth, we will generate free cash flow through inventory rationalization and reduced capital spending. And finally, free cash flow will be used to pay down debt and return capital to shareholders.

Over the last 4 months, I have spent time at our Atlanta and Brussels offices, world-class mills and manufacturing facilities, met our talented teams across the globe and witnessed our technical capabilities and commitment to sustainability in action. I visited four of our five paperboard mills and several packaging facilities. Waco in Texarcana in Texas, Stone Mountain, Berry and Macon in Georgia, Elk Grove in Illinois, Kalamazoo, Michigan, Cholet, France and Bristol, England. I have met face-to-face with 6 global CPG customers in North America, Belgium, Switzerland and the Netherlands and engaged with leading QSRs and retailers who deeply value our long-standing relationships

These customers have confirmed the value that Graphic Packaging brings as a trusted partner. We are one of the world's most innovative paperboard packaging companies and hold a leading position with a large addressable market, supported by sustainability trends. With the comprehensive 90-day review completed, we are taking decisive steps to optimize our operational footprint, reduce structural costs and impose discipline across capital and operating decisions.

I will walk you through our key takeaways, actions and where we will continue to focus our efforts. Strategically, our review has reinforced our commitment to the core North America and European markets, and we will make selective disciplined moves to optimize our portfolio while maintaining our scale advantage. That means expanding with customers in our core markets and driving new growth opportunities through innovation. With regard to our portfolio, we have started to simplify and streamline our business and organization. We recently reached an agreement to divest our noncore assets in Croatia. We are in the final stages of the transaction which we expect to complete in the second quarter.

Operationally, our transformation office is driving continued improvements in both our operations and cost structure. We are executing this transformation in real time with a focus on network optimization, disciplined capital allocation and aligning our commercial teams to highest value opportunities. To increase efficiencies and better align with the business environment, we have taken actions to streamline our global workforce and eliminated over 500 roles.

The majority of these roles were salaried, including both employee separations and eliminating vacant roles. These were difficult decisions but the changes we have made are based on structural improvements and element to business needs, while maintaining vital frontline operations. Importantly, these actions will not impact our commitment to customer service and growth-focused initiatives. Reductions represent less than 3% of all global roles. Though they account for over 10% of global full-time salaried roles. We are instituting a rigorous capital spend process. One that demands every dollar of spend be justified against our highest priorities.

As we continue to progress, we are confident we will deliver on our full year 2026 capital spend commitment of approximately $450 million.

To further enhance productivity and operational efficiency, we are deploying AI to streamline areas of our inventory management and procurement processes. We are also utilizing remote monitoring of machine usage and performance, leveraging machine learning to generate predictive analytics and enable proactive maintenance, reducing unplanned downtime. I am confident all these actions will deliver the $60 million in cost savings announced last December and enhance our agility and decision-making, enabling us to move faster, reduce complexity and empower our teams.

Continuous improvement is an ongoing effort and we are actively pursuing opportunities for additional cost savings. We will operate with fewer layers, increased focus, more accountability and clear priorities. Concentrating on what drives the greatest impact for our customers, our people and our business. Our efforts and the many actions underway Graphic Packaging, reflect a company focused on value creation. We are committed to strong financial discipline, building a more resilient cost structure and accelerating free cash flow. Chuck will elaborate on this further.

I would like to focus now on the aspect of our business that I'm very passionate about, our partnership with our customers. We are focused on driving disciplined organic growth by building on our strong customer relationships and capturing new business through our commercialization efforts. In the face of changing customer growth strategies, we are strengthening our position across categories and have recently reorganized our commercial team to better align globally with customers and to support them through different ages and market conditions.

Our customers continue to experience a dynamic consumer environment. While demand is relatively resilient, we recognize that consumers are continuing to prioritize value with about 47% of global shoppers now considered value seekers. Shoppers are switching to private label options, opting for value packs or sizing down to smaller pack sizes at lower price points. To appeal to this value-seeking population, consumer brands and retailers are investing in their product quality and value perception.

Leveraging price pack architecture and novel pack designs while also focusing on selling through value-oriented channels. Consumer preference for store brands continues to grow creating meaningful opportunities for our retail partners to enhance their private label strategies and drive sustainable packaging solutions. Recently, we partnered with one of the world's largest retailers to produce packaging for its private label butter using our PaceSetter Rainier recycled paperboard.

This is a great example of how we are helping our customers address consumer preferences for more sustainable packaging. By replacing bleached paperboard with 100% recycled alternative the large retailer is making measurable progress towards its sustainability objectives without sacrificing print quality. The private label butter is expense to reach store shelves in the coming weeks and we are proud to support that journey. Our customers are also looking to drive volume growth and gain market share.

We continue to see customers selectively upgrade to our premium packaging solutions as our innovative differentiated designs, allow their products to stand out and win on the shelf. We recently partnered with Keurig Dr Pepper to create a premium package for their coffee collective take-up launch. They wanted a premium unboxing experience for consumers to match the elevated coffee blends. We created a custom 2-piece box set utilizing our unbleached paperboard for stiffness and applied mat and glass coatings and foil stamping to enhance the look of the carton and differentiate it on the shelf. This example highlights our innovation, operational capabilities, and commitments to helping customers achieve their goals.

In addition to CPG customers, QSR brands are increasing promotional activity and limited time offers in an effort to drive foot traffic and bring consumers back into the restaurants. We are supporting a number of our QSR customers across multiple geographies in these initiatives. My experience leading and growing CPG companies and their brands will supplement and strengthen the team efforts to be an even stronger partner to our customers. We are supporting our customers' pursuit of meeting consumers where they are in order to grow volume and expand market share. There are many ways we partner with our customers to successfully elevate their brands.

Customers rely on us to lead with innovation and accelerate their adoption to more sustainable packaging solutions preferred by consumers. A broader understanding of customer economics and their decision-making processes will enable our team to better anticipate customer needs and leverage insights to drive commercial and innovation engine. Graphic Packaging has a unique ability to partner more effectively on pack design, brand architecture and growth. And we are actively strengthening partnerships, taking a proactive commercial strategy and having conversations with top CPGs, QSRs and retailers around the globe. We continued to build on our strengths and had an exceptional quarter driving packaging innovation. We filed 13 new patents, adding to our portfolio of approximately 3,100 patents.

Looking ahead, we remain committed to growth of intellectual property and extending our competitive advantage in serving customers. Our capabilities in sustainable packaging are truly differentiated and position the company for continued leadership. Graphic Packaging is seen as the premier sustainable packaging partner by the brands we serve. We are differentiated with our scale and capabilities, superior innovation and technical expertise and talented people. With a broad portfolio and a strong innovation engine, we are partnering with customers to bring even more innovative products to life.

From our childproof laundry pod box to our double wall cups have retained heat and cold to our produce pack [ puts ] for fruit and vegetables. Our addressable paperboard packaging market opportunity is an estimated $15 billion with roughly 85% of it plastic to paper packaging conversion. Representing opportunities we have solutions for right now. Over time, we anticipate regulatory retailer, consumer and NGO scrutiny on the use of single-use plastics and foam packaging to increase with the continued customer focus and innovation and an evolving regulatory environment, this market opportunity is expected to grow and will be an area of differentiation for us.

We recently commercialized an innovation in partnership with a health focused emerging brand. We are supporting their transition from plastic to a more sustainable paperboard multipack to better align the packaging with their environmentally conscious consumer base. We developed a custom carton solution for the 10-pack SKU and seasonal formats. The structure optimizes in-store merchandising. The plastic back to box transition is available today on shelves at leading retailers. As customers increase commitments and their desire to move to more sustainable packaging, they often evaluate solutions that move away from plastic or greatly reduce its usage.

These packaging transitions to paperboard alternatives can increase brand equity without compromising product performance or shelf life. We are proud to help these advancements and for the recognition we have received for our leadership and support of customers on their sustainability journey.

In January 2026, two of our solutions earned World Star Best of the Best Awards. PaperSeal Shape deployed with leading European retailers delivers roughly an 80% reduction in plastic per tray while maintaining full shelf life performance and runs on existing customer lines. Our produce Pack Pet tray was also recognized for replacing PET with renewable recyclable paperboard, eliminating more than 17 million plastic trays annually in a single retail application.

In addition, Enviro [ Club Duo ] received an award of distinction at the PAC Global Awards for sustainable packaging design, reflecting our continued ability to replace plastic bile-preserving functionality and shelf appeal. This award was one of 8 PAC Global Awards we received. From an operational standpoint, this quarter was marked by a number of wins. At Waco, we continue to make meaningful progress ramping production. Commercial performance is meeting expectations, and we are ahead of plan with customer qualifications.

This positions us to better penetrate new geographies and more efficiently support existing geographies while taking advantage of available recovered fiber streams in our Texas triangle. In parallel, we are completing our cogeneration plant projects, strengthening power supply assurance while helping to advance our customers' sustainability goals. We expect Waco to be a durable competitive advantage for us over time. We are excited to help prepare our customers for promotions through the 100 days of summer at large events select the upcoming World Cup. 24 brands across our food and beverage customer base are running promotions for the World Cup and our customers are planning for increased demand from spectators advance.

For large global events like these, customers rely on a consistent, trusted partner who can deliver to time-sensitive deadlines can execute critical graphic changes. We are prepared to provide the excellent customer service Graphic Packaging is known for. We also took a significant step forward in our renewable energy strategy. Finalizing a virtual power purchase agreement with NextEra Energy Resources. This agreement increases renewable electricity coverage across our North American operations and supports disciplined execution against our long-term emission targets.

The 250-megawatt solar energy plant in West Texas is expected to begin commercial operations at the end of 2027. This agreement better positions us to support our customers, the world's leading consumer brands and making progress towards their sustainability goals. We continue to build an award-winning culture and be recognized for our values in the way we do business. In March, we were recognized as one of the world's most ethical companies by Ethisphere. This recognition alongside our placement on the 2026 ranking of America's -- most -- just Companies by -- just Capital and Fortune World's -- most Admired Companies shows that others recognize the values our people put into action every day.

Finally, as we build on our strong foundation, we are also strengthening our team with highly selective new hires to ensure that we have the right talent and leadership roles as we drive performance across our business. As I mentioned at the start of the call, I'm excited that Melanie Skijus has rejoined Graphic Packaging to lead Investor Relations. Additionally, we recently appointed Randy Miller to serve as Vice President of Treasury and Capital Finance, Randy will lead global treasury with a focus on cash flow generation and capital structure optimization. We just announced that Daniel Fishbein will join as General Counsel in June.

Daniel brings more than 2 decades of legal experience having spent his career as a corporate attorney focusing on strategic transactions, corporate governance and securities law matters. He most recently served as Executive Vice President and General Counsel of Corpay, where he oversaw the company's global legal and regulatory function. These leadership appointments and talent upgrades support our priorities.

Starting with our commitment to enhancing shareholder value. We aim to deliver greater returns for shareholders by harnessing the significant cash generative business we operate with our immediate priority to reduce leverage and strengthen the balance sheet while continuing to return capital to our shareholders through our established dividends. Our progress gives me confidence in our strong market position and the many expansion opportunities ahead.

Our first priority is to strengthen the balance sheet. We are utilizing our strong capabilities to drive sustained growth through a robust proactive commercial strategy and commitment to innovation. You can expect future investment in growth to be more disciplined and focused on the highest return opportunities.

Looking ahead, we have an opportunity to reduce our operational complexity and improve accountability by focusing on driving profitability and business excellence, including the ramp-up of Waco. We expect to reduce our capital spend to 5% of sales or less and reduce our inventory from 20.5% at the end of 2025 to between 17% to 18% of sales this year toward our long-term goal of 15% to 16% of sales. We will also continue to innovate and develop world-class products for our customers. We remain on track to generate $700 million to $800 million of adjusted free cash flow in 2026.

Moving forward, I am encouraged by the opportunity to grow alongside our customers and partner with them to achieve their goals. We are uniquely positioned with our broad product portfolio, strong innovation engine and integrated network, we are on offense.

Now I will turn it over to Chuck to provide more details on our financials.

Thank you, Robbert, and good morning, everyone. I'm pleased with our performance in the first quarter, including the strengthening of packaging volumes we experienced as we progressed through the quarter. Total volumes were up 1% from the same period in 2025. Top line growth and higher packaging volumes are a direct result of the resilience of our business, the markets we serve and the execution of our team.

Sales increased 2% year-over-year to $2.2 billion, driven by the volume increase and a $50 million benefit from favorable foreign exchange. Partially offsetting these gains, price experienced a decline of 2% in the quarter. The pricing decline reflects third-party index changes and bleach paperboard that occurred in the fourth quarter of 2025 along with the continuation of unusual competitive packaging pricing experienced in the last few quarters of 2025.

Innovation sales growth was $42 million in the quarter, reflecting the strength of our innovation pipeline, continued strong partnerships and engagement with customers. Adjusted EBITDA in the first quarter was $232 million, including a $6 million foreign exchange benefit. This represents a $133 million decline from the first quarter of 2025. Price volume and mix combined were a $46 million headwind and again were a result of the unusual competitive price environment.

Commodity input and operating cost inflation of approximately $37 million was roughly $10 million higher than we were expecting. Unfavorable net performance in the quarter of $56 million was driven by several factors. Severe weather in January across the Central and Eastern United States and the domestic disturbances in Mexico during the quarter caused an approximately $25 million impact from disruption and downtime in our facilities.

In addition, heavier scheduled maintenance in the quarter and our decision to curtail production, produce inventories resulted in additional costs of $20 million each as compared to the year ago period. Robbert discussed, we are executing cost reduction and efficiency initiatives, which drove about $10 million of savings in the quarter. And though these savings were offset in the quarter by the factors mentioned, we will swing to positive overall contribution to earnings from net performance later in the year.

Adjusted EPS in the first quarter was $0.09 and included a higher tax rate due to the vesting of employee equity awards during the quarter. We still expect the full year tax rate to be approximately 25%. In line with historical seasonality of cash flow and working capital, first quarter adjusted cash flow was a negative $183 million which is an improvement of $259 million from the first quarter of 2025. First quarter adjusted cash flow results included heavier capital spending than we expect for the rest of the year. Attributed to the work to complete our recycled paperboard mill in Waco, Texas. We ended the quarter with $5.6 billion of net debt and net leverage of 4.4x.

As Robbert alluded to, our environment remains dynamic with geopolitical uncertainty and inflation impacting the business. During the quarter, we experienced incremental commodity cost inflation resulting from the conflict in Iran which embedded our logistics, energy and resin spend. With energy, we're about 60% hedged for both natural gas purchased in North America and electricity purchase in Europe and have commodity cost recovery mechanisms embedded in many of our contracts.

However, these recovery mechanisms can experience lags due to contractual terms. We are proactively addressing the inflation and working on initiatives to offset it. On April 9, we announced a $60 per ton price increase for bleached cup stock effective May 8. While this price increase will be realized in Q2 for non-index-based paperboard sales, most of our affected contracts require price recognition by the industry's third-party index before we can pass it through our packaging business.

Looking ahead to second quarter. From a volume standpoint, our expectation for Q2 is consistent with our full year range of down 1% to up 1%. We see pricing similar to Q1 and expect foreign exchange to be a slight benefit. With adjusted EBITDA, we anticipate certain commodity costs to stay elevated in Q2 before moderating towards the end of the year. Accordingly, we estimate a sequential $10 million incremental inflationary impact in the second quarter versus the first quarter totaling $30 million of incremental inflation in the first half of 2026 compared to our original expectations.

Q2 adjusted EBITDA is now expected to be in the range of $230 million to $250 million. We are reaffirming 2026 guidance. Many initiatives that we laid out today in addition to the contractual recovery mechanisms to be realized in the second half of the year and our pricing actions are expected to help offset the incremental inflationary impacts throughout the remainder of the year. As a result of these efforts, we remain confident in our ability to deliver 2026 adjusted EBITDA in the range of $1.05 billion to $1.25 billion, in line with our prior guidance.

Our 2026 adjusted free cash flow outlook remains unchanged in the range of $700 million to $800 million, a significant step-up from 2025. Cash flow generation is back-end weighted, consistent with the seasonality of our business, timing of capital expenditures and timing of inflationary cost recovery. We intend to pay down approximately $500 million of debt in 2026 and remain committed to our dividend. We understand that our dividend is important to many of our shareholders and also reflects the confidence that we have in the future cash flows of the business

Capital expenditures in 2026 are expected to be approximately $450 million. As a result of our completed 90-day review, we identified certain projects and investments that no longer align with our operational priorities, so we canceled them. One of these projects, the automated roll warehouses at Texarkana and Kalamazoo resulted in a onetime primarily noncash write-off of approximately $40 million.

Importantly, this decision avoids approximately $200 million of capital spending over the next few years and is a prudent move given the project no longer yields the original return thresholds since we will be operating with less inventory.

In conclusion, we are moving out of a heavy investment cycle to a cash harvesting cycle. This is an exciting and much anticipated phase. The past few years have been characterized as building years with capital investments and acquisitions made to differentiate our packaging and service offerings in the marketplace and position the company for long-term growth. Now we are focused on optimizing our footprint and operations, executing disciplined capital allocation, expanding profitability in the business and to my prior point, delivering the free cash flow we committed to. 2026 will be a foundational year for Graphic Packaging, and we are excited about what our future holds.

With that, I will turn it back to Robbert.

Thank you, Chuck. To conclude, we see a clear line of sight to long-term value creation, supported by the value we are generating from our near-term strategic priorities. Our confidence is grounded not in aspiration, but in a clear path to execution and operational excellence. We look forward to taking your questions and continued engagement to hear your perspectives as we continue to enhance and streamline the business. Let me take this opportunity to thank our dedicated team around the world for their hard work in delivering a strong start to 2026.

With that, operator, let's open it up for questions.

[Operator Instructions] Our first question today is from Ghansham Panjabi with Baird.

First off, welcome back memory -- Melanie, we look forward to working with you. I guess first off, on the heat map on Slide 5, can you touch on if you're actually seeing any sort of inflection in food or just easy comparisons from several quarters of just minimal growth? Just trying to get a sense as to what you're seeing in that market, specifically to that category, which has been weak for several years at this point?

And then second, as it relates to the realigned commercial teams, can you just give us a bit more insight into what's going on there?

Yes. Thank you, Ghansham, and thanks for welcoming Melanie back. We're very happy to have you back, Melanie. With regards to your first question on food, let me just reflect on the macro environment for a second, and I'll zoom in on food. What we're hearing from our customers continues to be a focus on growth, gaining share investing in product quality that specifically applies to food and value perception, pack size and pricing promotions and there is an increased emphasis on overall across the categories of price pack architecture as well as novel pack designs and obviously, a localized, reliable supply chain.

And the consumer environment of which food is a part remains very value driven, and there is a focus on affordability. And we are seeing stable demand signals, Ghansham, with certain pockets of strength and we're seeing select growth across larger customers and key segments, particularly in what we call everyday essentials. So food is performing rather well with strength, particularly in protein-driven categories like yogurt, bars, refrigerated meals, and that really reflects underlying consumption trends.

If you look at some of the other categories like Health & Beauty, that's performing well as consumers continue to prioritize small indulgences like skin care, perfume, beverages is stable, and foodservice was a little slow due to the weather and consumer affordability trends but is expected to gain momentum throughout the year. So that's how we see food as part of the broader macro environment.

With regards to the realigned commercial organization, we are seeing a big need to serve our customers better both at the national level, in some cases, international level where we see more and more procurement team centralized in locations like Switzerland or the Netherlands or even Ireland, so we are organized now in a way where we can serve both the global procurement organizations of our large CPG customers as well as domestic customers with a slightly enhanced organization.

And we feel very good about the leadership we put in place under Jean-Francois Roche who is really doing a great job in getting me in front of customers as well. I've met 6 global customers across different geographies in the first quarter and in the last month as well. And that's really given me a good perspective on how our commercial organization is now organized and how well we are serving customers.

Okay. And then just for my follow-up question. On the EBITDA reconciliation in the press release, what is the $71 million add back specific to the first quarter of '26, just quite a bit higher than the first quarter of last year. And then just to clarify, as it relates to the commodity cost comment, are you expecting a sequential moderation in commodity costs? Is that what you're assuming in that $30 million incremental impact in the first half? And what would that number be comparable in the second half?

Yes. Ghansham, this is Chuck. I'll take those. So on the -- what we have in the special charges bucket, I mentioned on the prepared remarks, the $40 million from the automated roll warehouse write-off. So that was the biggest component of it. We also had severance from the actions that we took that we talked about in the quarter, that's about $20 million. And then for the Croatia business that we're divesting, we had about a $13 million write-off of assets, and that's primarily for intangibles that we had acquired with the AR Packaging acquisition.

So those components are the majority of what you see in the quarter. On the inflation, so yes, what we called out is $10 million of incremental inflation in Q1 $10 million incremental to that in Q2. So for a total of $30 million versus our original expectations in the first half. And then at this point, we see about the same number, about $60 million to $65 million of incremental inflation for the full year.

That environment, of course, remains very fluid and dynamic, so changes every day. But what you see us doing is pulling several levers to offset that inflation. We talked about on the call, the contractual recoveries and pass-throughs, and that will account for about 1/3 of it. I talked about the cup stock price increase, and then we're further evaluating some packaging price increases. And then as Robbert mentioned, we're looking at other cost savings, procurement initiatives to provide a further buffer. So with all of those offsets, we're confident that we can neutralize the inflationary impact that we see.

Our next question is coming from Mark Weintraub with Seaport Research.

Chuck, just a point of confusion for me. So the -- I think that $71 million, that was on adjusted EBITDA. Was the warehouse and Croatia, were those not noncash write-downs primarily? Or maybe if you could just clarify for us?

Yes, it's primarily noncash, but just in the add back to get to the -- effectively the number that the EBITDA is, of course, an all-in number. It does include depreciation and amortization, but it does include noncash charges before you adjust for them.

Okay. And then second, and I know you were kind of answering this in Ghansham's question as well. So basically, you have about $200 million of improvement in the second half of the year to the first half of the year. If you'd be willing, would you kind of share in terms of the way you provide those buckets, volume, price, the big drivers, where the majority of that $200 million would be shown up?

Yes, happy to do that. So broadly, we see the year playing out similar to what we laid out in the original year-end call other than inflationary impact that I already talked about. But if you look at first half to second half, as you mentioned, there's a step up second half versus first half. Think about a few things. So first of all, our first half includes several unfavorable items as we talked about the January weather that caused facilities downtime that we don't expect to recur in the second half.

Second, our first half has a larger unfavorable impact from several items, including scheduled higher maintenance and then also the market downtime that we're taking to lower inventory levels is higher in the first half.

And then finally, the second half has a bigger impact from some of the positive items that we're seeing. For example, we mentioned the contractual cost recoveries, the packaging price initiatives and some of the procurement and other cost savings initiatives. So several moving parts. But of course, with our current expectations for inflation, we are confident that we'll be able to hit our full year EBITDA guidance.

Okay. Super. I mean any chance getting a little bit more granular? I think you talked about weather being $25 million in the first quarter. I think on the last quarter's call, you -- roughly downtime would be about $50 million -- inventory-related downtime about $50 million lower. Are those numbers about right? And then so if we're kind of left with like $125 million in the drivers you were providing kind of just round numbers to where they might come from, it's not understood, but just trying to get a bit more granular.

Yes. I'll just give you a couple of more nuggets and then we can talk more offline. The phasing of the cost savings that we called out $10 million in Q1. It will pick up a little bit in Q2, but then the majority of that will be back-end loaded. You mentioned the downtime. That, of course, is something that we'll be taking more market downtime in the first half than the second half. So we can work through it more offline.

Our next question is coming from Hillary Cacanando with Deutsche Bank.

So just the breakdown that you were just -- you were talking about to get to your guidance. Last quarter, you actually had guided to $100 million incentive compensation impact for 2026, and I didn't see that in today's presentation. Is that included anywhere and maybe in like net performance in the first quarter? And like what type -- what phasing should we expect for incentive compensation through the year?

Yes, that's all included within the original numbers that we had expected and all included in what we've reported, so we didn't talk about it again. It is a year-over-year factor in that performance.

It's all included in the first quarter. So there's -- we're not -- you're not expecting any additional incentive comp this year for the remainder of the year?

Of course, it will roll throughout the year. It's the Q1 impact that we had expected recorded in Q1.

Okay. And then -- and then how much should we expect for the remainder of the year?

Again, we embedded about the $100 million in our full year guide.

Okay. Got it. And then just on pricing, I know you had asked for price increase. Does that have to go -- like is [ RISI ] involved in this? Or do you have is it pretty fast? Like is it just between you and the customer? Or is it really involved? Like is it like -- is it going to depend on what they come up with -- in terms of like what the final number will be or if there will actually be an increase?

Yes, a couple of components of our price. Specifically, what I talked about in the prepared remarks was an increase in cup stock paperboard price, and that is something that will impact our open market business more quickly than it would pass through our foodservice packaging business. That will be once [ RISI ] recognizes it and then whatever the contractual period is before it starts getting reflected. And so that is on that side. Then on the other packaging price increases, those would go into effect in our, let's say, around $1 billion of revenue that we have that's not under direct pricing contract.

Our next question is coming from Arun Viswanathan with RBC Capital Markets.

I guess maybe I can just clarify maybe the walk on free cash flow. So it looks like you have kind of harvested some amount of working capital and inventory. But does that maybe reverse as you take some downtime? And then maybe next year also, would you have to kind of rebuild those inventories? And do you expect kind of less contribution from work capital and then related to that point, just kind of curious if you still expect kind of an $80 million uplift from Waco and is that being offset by maybe some downtime at Kalamazoo?

Yes. So I'll start with the last part. First of all, on Waco, what we're seeing there is the business case for Waco is indeed playing out in terms of the variable cost. What we -- the benefits we have recommitted to the specific benefits number because until we're able to cover the fixed cost with the volume that we -- then that's when you'll see the additional impact of the fixed cost.

But as Robbert talked about on the call, the operations are running well. The ramp-up is going well and everything overall is going very well. And in terms of the first part of your question, inventory will not be rebuilt in next year as we talked about or as Robbert mentioned, we expect to get the 17% to of inventory -- inventory as a percentage of sales this year on our way towards our longer-term target of 15% to 16%.

So we will continue to see some working capital benefit in next year from lower inventory. And then also 2027, if you think about 2027's cash flow, that will continue to benefit from lower cash taxes and then, of course, lower interest expense. So some of the items will come back. And then as we talked about at the year-end call, we still see the post 2027 free cash flow number of $700 million plus.

And then if I could ask on supply/demand. So obviously, there's been some changes in SBS. Our understanding is, I guess, that may not necessarily have the impact as to reduce supply to tighten up that market enough to get pricing power. Would you agree with that? And are you still kind of facing some pricing headwinds in SBS? And is that weighing on CUK and CRB as well? Maybe you can just comment on kind of potential pricing in those -- across the different substrates to cover inflation.

Yes. Let me take that question. With regards to the paperboard grades, the 2 grades that really matter most to us, as you know, are recycled and unbleached because that's what we primarily use. And both of those markets are in good balance. With regards to the cross-category dynamics, we're not necessarily seeing a lot of impact of bleached on recycled with regards to cannibalization. So we're not seeing recycle lose volume to bleached, but it does have to respond to price competition.

So switching is rare. And with our new PaceSetter Rainier grade, that matches bleached printability, but it's 100% recycled and cheaper to make. And we continue to believe that PaceSetter Rainier will take volume from bleached over time. And when it comes to the balancing of supply and demand, I just want to remind you that we closed Tama, Iowa, which was a CRB mill in '23. We decommissioned our K3 machine in Kalamazoo in '23, and we closed Middletown, Ohio, which was a CRB mill in '25.

Then we closed East Angus in Quebec in '25 and '26, and we sold the Augusta mill, as you know. So bleached continues to be oversupplied, but accounts for the smallest part of our business. And we have been very proactive in our approach to supply whilst others have added capacity, as you know. So what we do here is we actively match our internal supply with our demand profile, and that's supported by our integrated system and our portfolio as a result is structurally advantaged.

Our next question is coming from Anthony Pettinari with Citi.

Just following up on, I think, Hillary's question. If you look at your total tonnage, is it possible to say what percentage is on a [ RESI ] index versus like a custom index, maybe what the lag is in terms of price increases if it's realized in RESI versus you see it in a custom index and then how much of your volumes would be covered by that cup stock price increase that you talked about earlier?

Yes, this is Chuck. I'll take that. So in our bleach business, we have more of our packaging tied to [ see ] than we do in our other models. And so the majority of our packaging volume is indeed tied to [ res ] that's for the cupstock business, a couple of hundred thousand tons and generally would be recognized in price 3, 6 months after it's recognized by [ RISI ] depending on the timing during the quarter that is recognized by RESI.

Okay. We don't disclose exact details around the percentage of our contracts that are tied to [ RESI ], but Chuck did refer to the $1 billion of noncontractual sales, and we do have a cupstock business as well where we sell a big part of that on the external market. So that should answer your question.

Got it. Got it. And then I guess, fiber is up, diesel is up. You've indicated that you're not seeing big cannibalization of SBS into CRB. I mean, obviously, you can't talk about forward pricing or anything like that. But can you just talk about maybe your philosophy on pricing? Do you expect graphic to be a price leader? How do you think about it? We've seen price improvement in other containerboard graphic paper grades this year. Can you just talk to us kind of how you think about pricing generally?

The majority of our business is converted to finished product packaging. So -- and the majority of that is either recycled or bleached. And so -- unbelieve, sorry. And so we are not necessarily spending our entire day thinking about paperboard pricing, graphic, and we continue to focus on customer service, operating excellence and taking share and growing our business by delivering better products, better finished products, which are essentially converted finished packages. That is how we think about pricing.

Our next question is coming from Phil Ng with Jefferies.

Robbert, I appreciate the 90-day post review, volumes are up, so that's great. You got some headwinds this year that you are going to work through, but it sounds like destocking inventory could potentially still be a drag when we think about 2027. So with some of the levers that you may have a better appreciation now, is there a path where you could grow EBITDA next year with our prices going high? I just want to think through that just because, obviously, it's a big earnings reset this year.

Yes. Look, I just -- thank you for raising the 90-day review. I just want to give a little bit of color on that, and then I'll talk a little bit about how it's all going to impact EBITDA. We have we have concluded that review and confirmed that we have a strong foundation, an opportunity to drive better financial and operational performance as we talked. And we've taken 500 roles out of the organization.

As Chuck talked about, that's going to primarily impact the second half of this year. We are advancing some of these capital efficiency initiatives where we're prioritizing higher return opportunities. We've reorganized the commercial team. We've deployed AI. So we are very confident that the work we're doing is going to allow us to deliver on the cost reduction commitment that we have, which is $60 million. Now there is some inflation, as you know, we have mitigation actions in place, which include contractual cost recovery mechanisms, those have some timing lags. There are some target price actions in the noncontractual business that we just discussed.

And then we just announced a recent price increase on [ cut ] stock and primarily cost reductions and operational efficiency actions. With that and the fact that we're taking obviously an EBITDA hit this year to reduce our inventory and we are resetting the base because we're reinvesting in incentives for our associates. That's the walk that Chuck talked us through. We will continue to rely on productivity and category growth and share growth to drive top line and therefore, EBITDA

Okay. So it sounds like you feel like you got enough lease to grow next year from an EBITDA standpoint, Robbert? Just quickly summarize or...

We're not in guidance for next year at this point. It's early, we're still early days in 2026. So give us a couple of months to get a better understanding, but we're doing all the right things and the right work to set ourselves up for a great 2027.

Fair enough. A question for Chuck. Your guidance you reiterated, which is encouraging. Certainly, you're seeing some inflation here. Your guidance, does that embed the SBS cup stock sticking? Granted there is a lag, I don't know how impactful it's going to be. And then some of the packaging price increases that are not tied to research some of these contracts? Is it embedded that you get price?

I asked just because in your prepared remarks, you mentioned you've seen some unusual price declines in packaging prices, right, not necessarily in [ SBI ], the other grades. Have you seen that component like stabilize? Like what are you seeing on some of that packaging price in the last few months?

Yes. A couple of things there. So we don't embed anticipated [ RESI ] moves until they are announced. And so any impact to that on our [ track ] from our [ Cove ] would not be reflected we will embed what we see in the open market business, of course. From time to time, we would have bet packaging prices, but right now, we're still working through exactly the size of all of that. And -- and so we'll embed that as we go. So that's what we see on the price.

Have you seen a stabilization there, Chuck, on the packing price? What you've said that it's been unusual coming the year?

What we see there is our customers, however, there's geopolitical uncertainty that the assurance of supplier becomes a bigger deal to our customers and they talked about local supply and our integrated model really sells well to them. And so it certainly gives us the opportunity to stop in negative trends or to introduce the idea of a packaging price.

Our final question today will be coming from Gabe Hajde with Wells Fargo Securities.

Robbert, I'm curious if we can go back to the cup stock announcement. I find it interesting, I think, in the slide that you gave us, it's the 1 category that decelerated, it was pretty strong over the last 2 quarters. So I guess is there something unique about that supply-demand dynamic in cup stock that would afford you all to the industry to get price or maybe something unique about the input cost structure that makes it such that you can recover costs faster than maybe some of the other [ two ] grades you participate in?

Yes. On the -- there is a higher input cost, of course, that cup stock is barrier coded with resin. And so there's a an impact when you see [ resin ] prices increase. And so yes, a higher input cost. And then cup stock has historically been a strong grade for us and so down had a lot of excess capacity.

Okay. And then as you have conversations with your customers, I mean, you are trying to reduce inventories. Maybe they were looking around the corner at oil above 100, and we might envision some price increases. Do your sales folks in using any sort of prebuying activity that happened into the summer? And then one last one on CapEx. It sounds like the entire $200 million that you called out is specifically associated with that 1 discrete or those 2 discrete winder projects I've seen remember there were some, I guess, greenhouse gas initiatives later in the decade, and it seems pretty hard right now to get some projects still on the drawing board?

Yes. Let me take the one on customers, and you could talk, Chuck, about the -- how we got to the $200 million capital investment reduction and what that [ entails ], that's one project or more projects. So the question around customer stock is a good one.

We haven't really seen a lot of stocking in Q1 as a result of anticipated price increases. We are having a lot of conversations with our customers regarding surety supply or assurance of supply. That's primarily related to having multiple sites producing their packaging, so that they're not relying on one side in case of a natural disaster, more so than anything related to oil and gas right now.

And as Chuck said, they do really value our integrated business model. But the customers, they want value, they want to balance costs. They want to see the best performance especially in our beverage sector, you need certain properties in the packaging. They want sustainability. And most recently, there's more and more discussion on [ assurance ] of supply, as I discussed. And they are focused on cost can and are looking for ways to optimize packaging formats, reduce material usage and improve cost. So those are most of the things we're seeing, Gabe.

And then, Gabe, I'll build on the I'll build on the CapEx. The $200 million that we called out, that was those two projects specifically, but that was over the next several years that, that $200 million would come out not primarily this year that the $450 million is the number that we had originally guided to for this year and clearly we've gone in and shored up our path to get there, and we'll continue to look for opportunities to even cut further.

So with regards to capital, we are implementing a very rigorous and disciplined capital spend review and approval process. We will be evaluating and prioritizing investments that promote safety and fulfill regulatory obligations. We will continue to consider investments that announce cost-efficient season to [ generate ] the right returns for our portfolio. So that's how we're viewing this. And there are obviously a number of projects in the future that we are currently evaluating, including the ones that you're referring to.

Ladies and gentlemen, this does conclude today's Q&A session and also our call. You may disconnect your lines at this time. Have a wonderful day, and we thank you all for your participation.

Welcome to Wednesday, Day 3. My name is Matt Roberts, the packaging analyst here at Raymond James. I'm very pleased to welcome Graphic Packaging.

Graphic Packaging is no stranger to this conference and annual attendees. So we thank you for the continued support. However, I am honored to welcome a couple of new faces with Graphic as well. We have Robbert Rietbroek, President and CEO, also Chuck Lischer here with me, SVP and Interim CFO. And of course, Mark Connelly is here, SVP of Investor Strategy and Development. So gentlemen, thank you all for your time and being here with us morning. Robbert I believe you have some slides to kick it off and then we'll get to Q&A after that.

All right. Well, thank you, Matt, and I want to just thank Raymond James for hosting us at this wonderful conference. It's not my first time, it's a pleasure to be back here, and I really enjoyed it so far. Thank you. And thank you all for coming and thanks for your interest in Graphic Packaging this morning.

So let me just quickly get started. Graphic Packaging is a leading sustainable consumer packaging company. We have significant strengths in our people, in scale and capabilities. We have about 23,000 associates around the world, 100 packaging facilities, more or less in 26 countries. We have superior innovation and technical capabilities, 3,100 patents, 95% of our sales are from recyclable products. We have an incredibly strong customer base.

We have some of the top global consumer brands and retailers and quick-serve restaurants that we work with. We have a very loyal customer base. We help our customers win by strengthening brand perception and helping to achieve sustainability goals with best-in-class packaging solutions. We have industry-leading, highly integrated asset base. We have a base that's built for a long-term advantage. And we have two of the highest quality, most efficient recycled paperboard manufacturing facilities in North America.

With regards to our end markets and products, we are the global leader in sustainable consumer packaging. We have a broad portfolio with strong positions across retail and away from home. In foodservice, we have solutions across cups, bowls, trays and scoops. In beverage, we have the -- we are the largest beverage packaging producer in North America. And in food, we began in dry food and now expanded across the store to protein, deli, bakery and produce.

In household, we are now expanding our presence across product offerings, in particular, laundry, detergent, home air filtration, toys, tissues and pet care. In health and beauty, we're primarily a European business with opportunities to expand in North America and take our European success and translate that into North America.

We are in the hands of tens of millions of consumers every day. We're really in consumers' life multiple times a day. We package lives every day in moments. We shower -- when you shower in the morning, when you feed the dog, when you brush your teeth or you're preparing a meal with your family. In the past 24 hours, almost everyone in this room has likely interacted with one of our products.

Now our key priorities to drive value creation are, we've communicated those recently. I'd like to reiterate them today. Our manufacturing footprint and our customer relationships are very strong, but there is significant work to do. We have 5 key priorities focused on unlocking Graphic Packaging's full potential to create value for all of our stakeholders. The first one is to enhance profitability through cost actions and operational efficiencies. We really need to control the controllables.

The second one is to reduce inventory and capital spend to drive significant free cash flow generation. We are taking immediate actions to introduce more disciplined capital spend governance and reduce the inventory built in preparation for Waco start-up and softer-than-expected demand. The third is to drive disciplined organic growth with innovation and exceptional customer service. Leveraging my consumer goods background to help our customers protect and grow market share by focusing on where we have the right to win.

Then we want to prioritize free cash flow to reduce our leverage and return capital to shareholders. We would like to pay down $0.5 billion of debt and work to reach investment-grade credit rating by 2030. We also -- and that's the fifth priority are going to conduct a comprehensive business review to optimize our operations and footprint. We will ensure our resources are focused where we can create the greatest value for our shareholders.

We also need to enhance profitability through cost reduction and operational efficiency. Our EBITDA margins are compressed from external pricing and demand pressures in our cost structure. So we are planning to optimize the cost base to reduce our 2026 SG&A costs by $60 million, while protecting the capabilities and market positions that differentiate GPI. The effort spans SG&A, manufacturing footprint and efficiency, support functions, core processes and a very broad deployment of AI tools.

We have built a transformation office in place to strengthen accountabilities to drive operational excellence and deliver productivity and cost savings without disrupting customer service. We are going to take a fresh set of eyes to simplify the organization, improve execution and eliminate inefficiencies to support a return to profitable growth. Where needed, we will have talent and capabilities to accelerate stronger organic growth.

We also want to focus on generating significant free cash flow. After a period of heavy capital investments, our ability to generate free cash flow now increases. We are reducing capital spending to 5% or below net sales in 2026. With tighter approval and governance standards, I will review and approve almost all spend when it comes to CapEx.

Reducing inventory is the next one. Our longer-term goal is to be at 15% to 16% of sales. This year, we'll probably get to around 17%, down from 20% in the year-end. Combined with cost actions, disciplined organic growth and the continued ramp-up at Waco, we expect to generate about $700 million to $800 million of sales -- sorry, of adjusted free cash flow in 2026. And our improved cash profile will give flexibility to reduce leverage, return capital and reinvest in the business.

So in conclusion, the mid to long-term shareholder value creation plan is very clear. We will enhance profitability by optimizing our cost structure and driving greater operational efficiency. We will generate significant free cash flow through inventory reduction and reduced capital spending. We will focus on disciplined organic growth and deliver exceptional customer service. We will reduce debt on our path to investment grade and return capital to shareholders through dividends and opportunistic stock repurchase.

And after a thorough review, we will optimize our resources to ensure they are focused where we can create the greatest value for our shareholders. So that's really it, Matt, over to you.

Thank you very much, Robbert. Really appreciate the overview and the message there. Maybe I could start just on a high level. So you are roughly 60 days into that 90-day review. So maybe first, what attracted you to Graphic Packaging at this time? Is there something about your background and prior experiences that you used to think this is the opportune time to be at Graphic? And you did touch on this on your slides a bit, but maybe in that initial 60-day assessment, granted 30 more to go. What is your initial assessment and the largest priorities? How do you think about it? Is it whether a new commercial approach? Is it preserving price and margins, the cost and footprint actions that you alluded to, how do you view those and rank those? Or it could be something else other than what I mentioned, of course.

Yes. Thanks, Matt. Yes, I spent almost 30 years in the consumer packaged goods industry. I started in 1986 at Procter & Gamble, worked in Europe, South America, North America. I went to Kimberly-Clark, where I worked in North America and Australia, joined PepsiCo, ran PepsiCo Australia, New Zealand and then ended up running Quaker Oats. And then Primo Water and then led the merger to become Primo brands before I joined Graphic Packaging.

So I've always been very fond of packaging. In fact, I designed many packs myself including some new -- with the team, of course, some novel ideas that led to patents. So I created 3 novel design ideas that led to becoming patents for Procter & Gamble. And spent an inordinate amount of time in my career working on pack design. I always like to tell people about the fact that I give Captain Crunch his fourth stripe in his fifth finger, and that's a true story and 60th birthday of Captain Crunch with Graphic Packaging. Graphic was obviously the vendor that makes Quaker Oats and Captain Crunch packaging.

So I've always known the quality of the products and worked to produce, procure, packaging from obviously, Graphic and other vendors. So I really have a fondness for it and then the sustainability aspect. This is a fiber-based biodegradable, recyclable packaging business. Really a great business to be part of. It's a great large scale business with global presence. That plays to my global background of working across multiple continents and multiple geographies. So as Chuck by the way, he's worked in the U.K., Brussels. And so for us, it's really fun to run a global company.

With regards to the short-term priorities, obviously, we need to control the controllables. We are reducing costs, focus on operational efficiency, free cash flow generation through inventory reduction. CapEx reduction and governance around CapEx and debt reduction. Those are really the -- that's the story for 2026. Beyond, we'd like to grow the core, really disciplined growth, really look at our portfolio, our footprint, optimization and have balanced capital allocation to reduce debt and make share repurchases beyond '26.

And then we have some nonnegotiables as well. We focus on safety. We are a very big manufacturing company, exceptional customer service to our highly valued CPG and food beverage and the QSR customers and operational excellence. I mean, those are really table stakes and nonnegotiables for me.

Really appreciate all the detail there. And now you've also altered my breakfast as I'm going to look at my Captain Crunch box differently and analyze it a little bit differently tomorrow morning. Maybe shifting gears slightly. I know you all just had earnings a couple of weeks ago and recognizing there is no update today. And generally, I would think not a lot of changes in a short period of time. But the pace at which I checked my Twitter account reminds me otherwise. So I'd be remiss if I didn't ask you how 1Q is tracking versus expectations? Were there any impacts in January, February, either from weather outages at your own facilities or with customers and impact to their volumes or given storms, puts and takes in end markets, whether it's foodservice, [indiscernible]. Just anything you're seeing there, color you can provide?

Yes, yes. So I'll take that one. So Q1 volume trends overall, consistent with what we were seeing in Q4 and our overall expectations, still dealing with a stretched consumer. We have been pleased, of course, as of late to hear privately in conversations with our customers and then even speaking publicly about our customers' desire to be more aggressive in promotion and drive volume. And so look forward to the outcome of all that.

On the foodservice specifically and the other individual aspects, I mean, given the very balanced portfolio, we have now a softness in one area as a result of weather or anything in the short term would really be balanced with the other. And so that kind of all balances out to play to a reasonable spot here in Q1 as well. But while on the question, I'm going to address EBITDA and you mentioned the storm as well. We, of course, had gone out in our year-end call and said that we were working through the impact of the January storm and anticipated that having a $20 million to $30 million impact on the quarter.

That ended up coming at the low end of that range. However, we have had a modest impact from some of the recent disturbances down in Mexico. And so the combination of both of those really kind of plays within that $20 million to $30 million range. And so overall, we're comfortable with our guides for Q1, full year and overall free cash flow targets.

Appreciate all the detail there, Chuck. And you did touch on a theme, and I've heard it repeatedly through the halls and through other CPGs alike, and that is the potential to invest in value and promotions. Are you seeing any tangible evidence of that yet? Or is it really just excitement and optimism at this point? And when you think of broader pressures on the consumer, whether that's GLP-1s or just healthier preferences, how do you weigh whether it's -- or measure whether it's an inflationary impact or some other structural impact that would be driving that?

Yes, we're coming off of a 4-, 5-year period of inflation. And there is some fatigue around that with the consumer, which has been reflected in slowing volumes and the algorithms of many of our customers obviously lied more on pricing than volume. We are hearing broadly that value and affordability and household penetration are priorities going forward. We are also reading that in the public statements. And we believe that we can play a role in that with really innovative packaging solutions for -- whether that be a value meal, deal or impact price architecture optimization with smaller packaging.

So we are very much in service of our customers. When they do well, we do well. We are very encouraged with their prioritizing of volume going forward. It's early days. For the full year, we're guiding on flat volume, as you know. So we're not yet seeing it in our business, but we are hopeful that the multiyear trend will evolve.

And maybe if you think about your own growth profile, where you've talked about disciplined growth, how is that different than Graphic of the last couple of years? Does that mean narrowing the focus to fewer markets, whether it's geography or fewer product categories or customers, how do you think about that growth? And what does discipline mean there?

Yes. Discipline means that we are very choiceful in focusing on certain segments. Obviously, we are very big in food, we're the leader in beverage, and we are also growing our household business. So we have very strong strategic partnerships with leading consumer packaged goods companies and quick-serve restaurants as well as retailers. And really, our priority there is to improve volume growth for them, but also to accelerate speed of commercialization when it comes to new and novel pack designs or pack price architecture and putting resources into the markets that have the best long-term prospects.

We now have the best cost structure in America with Waco coming online and we also have terrific quality. So we feel like we are well positioned to target customers in attractive growth segments who value those advantages, specifically quality, cost, affordability, recycled, sustainable and we have truly demonstrated and continue to demonstrate that commitment to service.

I appreciate that. And you mentioned there are two words in there, new, novel. And when I think about my model for whatever that's worth, it's probably not much. But one thing that has been bankable is the innovation sales target has been very consistent at line, I can -- it's been 2%, hovered there for the last couple of years, despite weak overall markets, they're consistent. So now is the -- are innovation still -- is that still at a higher price or higher margin point than system average and why do you think innovation is holding up better than the overall market? Is it sustainability? And has that shifted at all? Or how do you think about that?

Well, we have 3,100 patents as we discussed, and we are -- we have great ideas like the fridge pack for beverages, still continues to be a best seller. I was in Perry the other day, and I watched the manufacturing of the product and partnership with our beverage partners, which is exciting to see. Our innovation sits at about 2% and our CPGs usually run 5% to 10% at least on an annualized basis. Obviously, because we have long-term contracts, we are at a slower pace, so 2% is actually quite significant for the packaging industry.

And we are looking at very novel, interesting ideas. Some of the ones that I find remarkable are the use of paper with a moisture barrier for meat products in Europe. It's being rolled out right now in anticipation of the regulatory changes that are coming around single-use plastics. The childproof laundry pod box that's being rolled out and we're partnering with, several of our customers are launching. So there's definitely great ideas out there. And we tend to focus our innovation around plastic or foam replacements.

So double barrier cups is a great example of such an innovation where you can retain heat or cold better. So there are obviously price points. Innovation cost -- tends to cost a little bit more. But I think many of our customers are willing to pay for that innovation because of their differentiated position and the need for innovation in their end markets. So we're very confident in that.

Very good. And you did allude a little bit to contracts in there. And I believe in your guide, you also have some negative price as well. So if I think back, I believe it was Investor Day in 2024, Graphic was one of the first to question the third-party index pricing pass-through and how that works. So maybe now that you've taken a fresh look at it, do you think that, that pricing strategy is still accurate? Is it still a priority at Graphic to move contracts away from that industry structure? And has there been progress made towards that goal?

Yes. Let me start with that and then if Robbert wants to build anything then he certainly can. So as context, those that are newer to the story, what we're talking about here is not -- is really the price change mechanism within the contract. So at the beginning of a 3- to 5-year contract, we negotiate to market prices with our customer. And then we have a price change mechanism within that 3- to 5-year contracts is to how prices adjust during that time period. And there have been third-party sources for that, and we also offer a cost model and an index model is what we had rolled out.

Where we don't see -- primarily see the inaccuracy in the third-party models is mostly in recycled and unbleached, where there's just not a significant amount of open market or sales of pure paperboard because the businesses are so highly integrated, both with us and our competitors. And so we believe that there's a better model that gets to our customers' goal and our goal of transparency and accuracy. And that's what all we're trying to do. So given these are long-term contracts, we've continued to make some progress in moving away from the third-party index and to our cost model and our index model, but it's a journey.

That makes sense. And one of the big parts of the story, and of course, even the slides there was on the free cash flow and focus on the balance sheet. And so last week, you did restructure some of your credit agreements in light of the inventory curtailment. The leverage can go to 5x in '26 and then 4.75x in first half '27. Not that those are your targets, but the covenant ceiling. So as I read that, so higher in '26, comes down in first half '27, how much inventory curtailment is still needed, as I read that, if it comes off in second half '27, does that mean the inventory curtailment is done after first half 27? Any color you can give there?

Yes. So on the -- it's a great point, and we did, of course, get an adjustment to our leverage ratio targets last week, as you said. And so that allows us to take the inventory out in 2026 and we'll see -- we'll print the leverage ratio, as we said, at somewhere over 4x. We do think that, that's, of course, too high. And so our short-term priorities, as Robbert mentioned, are to pay down debt and pay down that $500 million of debt. We are focused on the inventory reduction in 2026.

And as Robbert said, our long-term target is 15% to 16% of sales in 2026. Our guide would get us to about 17%. So there'll be a little bit more that continues into 2027 and beyond of the inventory takeout, but looking to get it behind us pretty soon after 2027.

I appreciate the detail there. And also in regard to that credit agreement, how does it impact any allocation towards repurchases or your dividend considerations going forward? As I know that's certainly been a -- stable dividend has been a part of the story as well.

Yes. In the short term, our capital allocation priority is to pay down debt and get our leverage back into a good spot. But in more medium term, we do see the opportunity to have share repurchases and would anticipate that being a part of the story over the medium term once our leverage ratio gets back into a more comfortable range. And then after kind of in that medium term that we would have a balance of debt paydown and share repurchases on our journey to investment grade by 2030.

And thinking about some of the other puts and takes in that free cash flow profile, how much CapEx going forward is driven by maintenance or growth projects? And what's the current base sustaining requirement? And any examples of discretionary spending projects that you will continue or pull back on to focus on that debt reduction?

Yes. So overall, I'd say we have a very well invested set of assets. We, of course, just had a CapEx investment program with our K2 machine, our Waco machine. And so we have an overall very well invested asset base. And so our goal, as Robbert talked about, is to lower CapEx, drive free cash flow and return that to stakeholders through debt pay down, share repurchases. We believe that with sustaining requirements, regulatory requirements and our well-invested asset base that below 5% is a sustainable level for us. And so that is the target. And we will continue to reevaluate every project, make sure it drives an appropriate return.

There are, of course, productivity projects that we'll invest in, to automate our labor force and to continue to improve our operations, but those will have short paybacks and high return and drive our return on invested capital up.

And I do want to somewhat round trip this discussion because Robbert, initially, I think it said 60 days into 90 days. I know you have the 90-day review going on. You've also alluded to potential divestitures. So as you analyze the business as a whole, are there certain categories you're focused on more or potential opportunities, whether that's mills, converting plants, geographies, end markets? Are there sacred cows, if you will, within the Graphic portfolio that are just untouchable?

Yes, very good question. So 2/3 into the first 90 days, it's really too early to share any specifics. But I would say that we are a cash flow generating business with a very strong customer portfolio, a very loyal customer base, high growth potential over the next coming years in need of more disciplined spending and operational excellence. I have announced that we're driving productivity, particularly looking at SG&A this year. And then beyond that, we're looking at procurement as well and footprint optimization, potentially in the converting side. And we have announced a selective portfolio review. That's an asset by asset or review of certain assets that we acquired that we're just trying to understand whether or not they are core or noncore to our business.

And then could they play a role in potentially -- in accelerated debt paydown in the mid to long term. So we are in the middle of that assessment. And obviously, we have a lot of work we're doing right now, and we'll keep you posted.

All right. We'll look forward to hearing more on that. With that, I do want to thank you all for attending the conference and being with us today, Robbert, Chuck and Mark alike. We will have a breakout session after this down at Cordova 5. So again, thank you all for being with us today.

Thank you, Matt.

Thank you.

Good day, everyone, and welcome to the Graphic Packaging Holding Company Fourth Quarter and Full Year 2025 Conference Call. [Operator Instructions]. It is now my pleasure to hand the floor over to your host, Mark Connelly. Sir, the floor is yours.

Good morning. We have with us today Robbert Rietbroek, President and Chief Executive Officer; and Chuck Lischer, Senior Vice President and Interim Chief Financial Officer.

During this call, we will reference our fourth quarter and full year 2025 earnings presentation available through this webcast and on our website at www.graphicpkg.com. Today's presentation will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in today's press release and in our SEC filings. Now let me turn the call over to Robert.

Thank you, Mark. Good morning, everyone, and thank you for joining us today. Before we review our results, I would like to take a few minutes to introduce myself and share my perspective on the for Graphic Packaging and to discuss my initial observations and key focus areas as we adjust our strategy to drive value for shareholders. I've spent more than 25 years leading global consumer brands and businesses, including leading a Fortune 500 division and serving as a public company CEO.

I've lived and [indiscernible] across North America, Europe, South America and Australia. Over that time, I've held leadership roles at Procter & Gamble, Pepsi Co., Kimberly-Clark and Primo brands, where I gained experience operating complex businesses with global manufacturing and supply chains and building consumer brands at scale. In several of these roles, I've been a customer of Graphic Packaging and my teams work closely with the Graphic Packaging team to design winning packaging solutions.

Throughout my career, packaging design and procurement has been a major part of my work. I work directly with brand teams and retail customers on creating winning packaging, including design and technical specifications, sustainability and manufacturing requirements and performance needs. Notably, I worked on three innovative packaging solutions that went on to receive patents protection. Packaging is a critical part of the consumer experience and I am aware of how packaging influences consumer purchasing decisions at the shelf and how consumers interact with packaging at home.

I understand how important packaging is to our customers across the consumer packaged goods, quick service restaurants and retail industries. And I'm acutely aware of the challenges and opportunities our customers face in a world of GLP-1, [ MAA ] and the evolution of private label. I also see firsthand the exceptional quality of our packaging solutions and the impact they have on customers, brands and consumers. I have a deep appreciation to the role we play not just in protecting products or reducing costs, but in shaping and enhancing brand perception, enabling sustainability goals and delivering exceptional quality and reliability. That perspective is what attracted me to Graphic Packaging, and it will shape how I approach the business and manage towards the substantial opportunities we have ahead.

Today, I will spend some time discussing how I am assessing the business. What excites me about the foundation we have and where I see opportunities to significantly improve performance and create value for shareholders. Chuck will then walk you through our fourth quarter and full year results and our outlook. Graphic Packaging is a world [indiscernible] company with leading positions across attractive end markets. Strong relationships with many of the world's most [indiscernible] consumer brands and retailers and industry-leading asset base that was built to provide high level of integration and durable long-term competitive advantage. Our people, scale and capabilities are significant strengths. We have an exceptional team and an industry-leading production footprint, including a network of about in facilities and the two d2 highest quality and most efficient recycled paperboard manufacturing facilities in North America, in Waco and Kalamazoo.

Our superior innovation and technical capabilities are helping us build stronger, deeper customer relationships with leading CPGs, QSRs and retailers. While our manufacturing footprint and customer relationships are strong, we recognize that there is significant work to do. The actions we are taking now and will take place in the next several months are focused on unlocking Graphic Packaging's full potential to drive stronger performance and value for all our stakeholders. Our investors, communities, employees, customers and suppliers.

When I stepped into the CEO role at the beginning of the year, we initiated a comprehensive, operational and business review, including of the company's footprint, systems and organization, selected portfolio assets and financial performance. This review is underway now. I've already visited multiple facilities including Waco, Macon and Perry spent meaningful time with our leadership team and the Board held a global town hall joined by several thousand of our employees join the leadership of select industry organizations, met with key customers and spoken with several of our shareholders. These interactions with our most important stakeholders are informing our early actions. Recognizing the depth of talent in this organization and the need for continuity, we've taken steps to retain and attract top talent.

We have also implemented select initial organizational and reporting changes to enhance transparency and accountability. We established a transformation office led by our new Chief Transformation sort who will work hand-in-hand with me to drive operational improvements, enhanced productivity and cost savings throughout the organization without disrupting customer service. We engaged external expertise to supplement our own resources as we evaluate opportunities to enhance profitability and drive growth and innovation. And we have initiated a comprehensive view of our organization structure and operations footprint and a selective portfolio review to ensure that our resources are focused where we can create the greatest value for our shareholders.

Now that I have been in the role a little more than 30 days, I would like to share a few of my initial observations on the most meaningful opportunities within our control. One, the external environment remains challenged near term. Overcapacity commodity bleach paperboard markets is putting pressure on finished packaging, and demand trends for consumer staples remain uneven as a result of affordability and macroeconomic concerns. While we expect these trends to improve we also acknowledge that a consumer purchasing patterns and the dynamics between brands and private label are evolving. We are not simply waiting for markets to recover. We are focused on what we can control and where our resources have the best opportunities to create lasting value.

Two, the combination of softer-than-expected market demand and the need to build inventory out of the Waco [indiscernible] led to paperboard and finished goods inventory levels higher than what we currently required. In addition, we need to rightsize our cost structure for the realities of the current macroeconomic environment. We're taking immediate steps to address these issues that we believe will enhance our profitability over time and drive free cash generation in 2026 and beyond. Three, we have the best and most efficient recycled paperboard manufacturing facilities in North America. However, our cost to complete these projects was higher than anticipated, driving the need to quickly the value these assets could generate.

Four, we need to significantly reduce inventory and ensure that every spending decision brings an appropriate return. These steps should allow us to reduce our debt, which, in turn, would allow us to prioritize returning capital to our investors. Five, through the investments we have made, Graphic Packaging is strong and durable competitive advantages. However, I believe that there are select opportunities within the portfolio to better optimize our position over time and drive value creation for shareholders.

And finally, we are a global leader in packaging innovation but we need to move more quickly from [ ideal ] to [indiscernible]. We are already working to more carefully align our innovation teams with our best market opportunities in both new and existing customers. This is a key source [indiscernible] for Graphic Packaging. And I believe that our innovation team is the best in the business. In sum, I see tremendous opportunity to create real value for shareholders by: One, enhancing profitability through cost actions and operational efficiencies; two, reducing inventory and capital spending to drive significant free cash flow generation; three, driving disciplined organic growth with innovation and exceptional customer service; four, prioritizing our free cash flow to reduce our leverage and return capital to shareholders; and five, conducting a comprehensive business review.

In 2026, we expect to generate adjusted free cash flow between $700 million and $800 million. There are, of course, onetime items in our 2026 and also in our 2027 adjusted free cash flow projections, particularly with respect to inventory reduction and cash taxes. As we look beyond that time frame, we are targeting adjusted free cash flow of $700 million plus incremental EBITDA growth, recognizing that our current adjusted EBITDA is substantially lower than it was projected to be when the company first established its Vision 2030 financial targets, when volume growth was expected to be positive. Restoring top line growth and delivering stronger margins is central to our value creation plan and key to delivering on the free cash flow generation potential of this exceptional company, achieving an investment-grade credit rating by 2030 and remains a central element of our Vision 2030 commitments.

Now let's take a few minutes to dive a little deeper into each of those objectives. Our EBITDA margins have come under pressure in recent years, driven by both the external pricing and demand environment and our own cost structure. I believe that there is meaningful opportunity to optimize our cost structure and better aligned with the current operating environment while protecting the operational capabilities and market positions that make Graphic Packaging an industry leader. This effort spends SG&A manufacturing footprint and efficiency, support functions and core processes and includes extensive deployment of AI tools.

As previously mentioned, I have established transient office to lead the effort to strengthen accountability and drive operational excellence and enhance productivity and cost savings across our entire company without disrupting customer service. My goal is to simplify the organization, improve execution and eliminate inefficiencies, ensuring we can return to profitable growth with the cost structure that supports both our near-term needs and our long-term objectives. Where it makes sense, we will also be adding additional talent and capabilities to drive stronger organic growth. I want to briefly address Waco and Kalamazoo. The Waco project is substantially complete and already producing top-quality recycled paperboard to service our packaging system needs, Waco and Kalamazoo are world-class assets, the highest quality, the most efficient recycled paperboard manufacturing facilities in North America. While the Waco facility is large, it's net impact on our capacity is quite small after we closed two of our older higher-cost facilities and other producers close capacity.

Its impact on our cost of production, however, is substantial, and creates durable long-term competitive advantage. While the market has been weak, a return to more normal consumer demand should put us in a strong position to restore growth and help ensure that we can leverage our production cost advantage to drive the best possible returns from our world-class Waco and Kalamazoo assets. Total 2025 capital spend was $935 million, higher than the company's target. Total project spend for the Waco greenfield facility, which is substantially complete is currently estimated at $1.67 billion when we include capitalized interest of approximately $80 million. Spending through the end of 2025 totaled $1.58 billion. A review of the root causes of the higher than originally planned capital expenditures on the Waco project is underway, and appropriate corrective actions will be taken to prevent the similar events from occurring in the future.

Capital spending is expected to drop by approximately $485 million in 2026, including the remaining spend to complete Waco and will remain at or below 5% of sales for the next several years even as we invest selectively in productivity and new capabilities. As we exit the period of heavy capital investments, our opportunity to drive free cash flow improves significantly. We expect to reduce capital spending to approximately $450 million in 2026 and are raising the bar for new capital spending project approvals. At the same time, we are working to reduce our inventory balance towards our 15% to 16% of sales goal from an at 20% level at year-end. Together with our ongoing cost actions, disciplined organic growth and the continued ramp-up at Waco, we expect to generate $700 million to $800 million of adjusted free cash flow in 2026 as we benefit from ongoing inventory reductions and the tax legislation passed last year, and are targeting adjusted free cash flow of $700 million plus incremental EBITDA growth in the years ahead.

This will give us the flexibility to significantly reduce leverage, return capital and reinvested in the business over time. Our growth strategy is customer-centric and markets backed. We are focused on disciplined organic growth, including our resources into markets with the best long-term opportunities while reducing our exposure to markets where we see less opportunity. We are partnering [indiscernible] key consumer packaged goods companies, quick service restaurants and retailers to improve baseline volume growth, bring innovation to market faster and, in some cases, selectively move into new end markets. In recent calls with customers, a recurring theme is the need to drive volume growth to protect or regain market share.

We are ready to help our customers meet these goals with our best-in-class packaging innovation unmatched scale and exceptional customer service. We aim to be more than a supplier. Our goal is to be a trusted strategic partner to our customers. As part of this renewed commercial and customer focus, we recently promoted Jean-Francois Roche to Chief Commercial Officer. I see the value in his global role, and I'm working with Jean-Francois to ensure that we have the talent we need to drive sustainable growth. Innovation is one of Graphic Packaging's greatest competitive advantages. A strength that was built over decades in North America and enhanced by the acquisition of AR packaging in Europe in 2021. Our global innovation team is helping us bring paperboard packaging into new markets offered through plastic or form replacement.

Innovation has been a part of why we have been able to retain volume in the markets we serve. Innovations like Pace Center Rainier, ProducePack, and PaperSeal are driving adoption in growing categories such as produce, fresh food, protein, household products and wellness. Delivering the more circular, more functional and more convenient packaging solutions that Graphic Packaging is known for. My priority here is to accelerate the speed of commercialization and ensure that our resources are focused on the most promising opportunities. With a broad portfolio that spans every gross real both with brands and private label as well as food service prioritizing where we put our resources is essential to drive real value creation.

We aim to be the first choice for our customers and believe that with innovation product quality and exceptional customer service, we have the right to win in a more normalized macro environments. Finally, the key pillars of our capital allocation strategy are one, reducing our leverage; two, returning capital to shareholders; and three, identifying opportunities to optimize our footprint and portfolio over time. Today, our net leverage sits at 3.8x. We are taking concrete steps to reduce debt and move towards our target of a grade rating by 2030. And deleveraging is our highest near-term capital allocation priority. We expect to pay down approximately $500 million of debt in 2026, but with the impact that our inventory reduction actions will have on adjusted EBITDA, our leverage ratio is likely to remain elevated.

Returning capital to shareholders remains a key priority. We remain committed to returning capital through dividends and opportunistic share repurchase and expect to increase share repurchase activity as leverage declines. Lastly, we will look for opportunities to optimize our footprint and our portfolio, ensuring that capital and management attention are focused on the areas where we have durable competitive advantage and attractive growth opportunity. The common thread across all of this is disciplined. By improving execution and cash generation, we will create a much stronger balance sheet that will provide the flexibility to [indiscernible] capital in a way that creates long-term value for shareholders.

With that context, I'll turn it over to Chuck to walk through our fourth quarter and full year results [indiscernible].

you, Robert. to Slide 13, I will begin with a summary of our fourth quarter and full year financial results. In the fourth quarter, net sales were $2.1 billion, basically flat year-over-year, driven by volumes and pricing, which were both down slightly less than 1% and more than offset by a $40 million foreign exchange benefit. Adjusted EBITDA for the quarter was $311 million, as discussed in earlier quarters, the pressure on adjusted EBITDA reflects a combination of unusual competitive pricing and softer package volumes, which together reduced adjusted EBITDA by approximately $40 million versus the year ago quarter.

Commodity and other operating cost deflation were in a similar range along with the negative performance as a result of the production curtailment decisions we made during the quarter to manage inventory Foreign exchange was an $8 million curtail plant. For the full year, net sales were $8.6 billion, down approximately 2%. It got the divestiture time for $150 million of the $190 million decrease. Price was an approximately 1% headwind and volumes were basically flat, while FX was a $57 million tailwind. For the full year, adjusted EBITDA was approximately $1.4 billion. Price and volume were a combined $174 million headwind and that performance of $59 million was not enough to offset commodity input and operating cost deflation of approximately $150 million. That performance was lower than normal as a result of production curtailment decisions we made primarily in the fourth quarter. [indiscernible] divestiture reduced adjusted EBITDA by $30 million and foreign exchange was a $13 million tailwind.

Adjusted EPS for the full year was $1.80, and we ended the year with a net leverage of 3.8x and reflecting the headwinds to EBITDA investments at Waco and our decision to repurchase more than 2% of shares outstanding during 2025. Slide 14 lays on current expectations for 2026. We expect net sales in the range of $8.4 billion to $8.6 billion, which assumes volumes in the range of down 1% to up 1%, including the benefit of innovation sales growth which is expected to be approximately 2% of sales. That implies market volumes down approximately 2% at the midpoint, reflecting our expectation of continued inflationary pressure and ongoing affordability challenges in the consumer staples markets. While we do not comment on future pricing expectations, our guidance assumes a similar level of competitive pressure packaging pricing as we saw in the fourth quarter and includes the expected impact of recent third-party announcements.

Together, these represent $150 million headwind across 2026 and at the midpoint of our guidance range. Adjusted EBITDA is expected to be in the range of $1.50 billion to $1.25 billion on a reported basis and $1.2 billion to $1.4 billion on a pro forma basis, excluding the temporary impact of production curtailments related to our actions to remove approximately $260 million paperboard and finished goods inventory in 2026. Our adjusted EBITDA guidance range also assumes a restoration of incentive compensation programs. roughly $100 million figure represents approximately 5% of Graphic Packaging's total compensation costs and impacts of over 2,000 employees.

Given performance that was below expectations in both 2024 and 2025, incentive compensation awards were well below plan in 2024 and effectively 0 in 2025. A return to more normal incentive compensation, assuming that we reach our performance targets is important to employee retention and attracting talent. Adjusted cash flow is expected to impact sharply upward to 2026 to $700 million to $800 million. This improvement is driven primarily by 3 factors: First, a step down in capital spending to approximately $450 million. We will be reviewing all significant planned spending to ensure that it delivers appropriate returns; second, the net benefit of our inventory reduction actions as we optimize inventory to our comp production footprint and adapt to market demand realities; and third, improved profitability through our renewed focus on disciplined organic growth, operational excellence and SG&A and other cost reductions.

I look forward to partnering with the new transformation office that Robert established to improve our processes and better leverage technology NII to drive fixed cost removal, operating cost reductions and productivity initiatives. Adjusted EPS is expected to be in the range of $0.75 to $1.15. While we do not generally provide quarterly guidance, we do want to highlight a few factors that are expected to affect the progression of sales and EBITDA in 2026. The Normal sales seasonality is more pronounced in submarkets than others, but relatively modest overall. In general, we tend to book something in the range of 23% of full year net sales in the first quarter and 26% in the third quarter, second quarter, modestly higher than fourth quarter.

Adjusted EBITDA tends to follow that same pattern before [ discrete items ]. Scheduled maintenance at our paperboard manufacturing facilities will be heavier in the first half by approximately $15 million, mostly in the second quarter and by about $10 million in the fourth quarter. There is no significant maintenance schedule for the third quarter. The production curtailments to reduce inventory that Robert mentioned, are expected to be heaviest in the first half in the range of $45 million at the midpoint for the first quarter and roughly $40 million in the second quarter. Third quarter curtailment activity is expected to be the lowest since it is generally our busiest quarter. The actions that we are taking to reduce SG&A and other costs and to make operational improvements are expected to be moderately more back-end weighted.

And finally, recent severe weather across the Central and Eastern United States impacted operations at several facilities. While we don't have a final tally our best estimate of the impact on first quarter adjusted EBITDA is in the range of $20 million to $30 million. Taken together, normal seasonality and these discrete items implied that first quarter adjusted EBITDA be in the range of $200 million to $240 million. We expect first half adjusted EBITDA to be roughly 40% to 45% of full year adjusted EBITDA. And while we expect our effective tax rate to be in the range of 25% for the full year, our first quarter tax rate will likely be slightly higher than in subsequent quarters.

Slide 15 walks through the key drivers of the year-over-year adjusted EBITDA change and a bridge to our 2026 adjusted cash flow target of $700 million to $800 million. Starting from $1.4 billion of adjusted EBITDA in 2025, there are several moving pieces were highlighting. First, the incentive compensation that I mentioned earlier was not earned in 2025. Second, as noted earlier, price and volume outcomes are assumed to be negative overall, reflecting the Zoomer affordability challenge and unusual competitive pressure in packaging pricing along with the impact of announced reporting price changes and bleach paperboard. Third, the items over which we have the most control in our performance, including the benefits from Waco and SG&A reductions, partially offset by January weather and production impacts add between $100 million and $150 million.

These gains will be partially offset by the onetime production curtailment impact as we reduce inventory levels. The actions we are taking to reduce inventory will generate cash flow in 2026 that do not reflect our normalized earnings per Taken together, these factors are expected to result in 2026 adjusted EBITDA of between $1.05 billion and $1.250 billion approximately $1.2 billion to $1.4 billion on a normalized basis. On the right side of the page, we provide a bridge from expected 2026 adjusted EBITDA to expected 2026 adjusted free cash flow. The largest contributor to the incremental free cash flow to 2026 is capital expenditures, which are expected to decline to approximately $450 million. Additional contributors to 2026 adjusted cash flow expectations included in that working release from inventory reduction and lower cash taxes as a result of the 2025 tax law changes.

Incentive compensation is noncash in 2026 as it would be paid in 2027. Cash interest is expected to be in the range of $255 million to $275 million and other working capital and cash items are expected to be a source of cash of approximately $5 million at the midpoint. As Robert mentioned, our highest near-term capital allocation priority is to reduce debt given our current leverage position. We expect to pay down approximately $500 million of debt in 2026, which will put us on the path to an investment-grade credit rating by 2030.

We remain committed to return capital through dividends and opportunistic share repurchase activity and expect to increase share repurchase activity as leverage declines. In summary, 2025 reflected a challenging operating environment and also represents the final year of heavy investment. We're taking actions to optimize the company, drive operational efficiencies and reduce inventory. We are entering a period where we expect will be defined by strong free cash flow generation, significant balance sheet improvement and disciplined growth. With that, I'll turn it back to Robert.

Thank you, Chuck. Graphic Packaging is a strong company with a world-class asset base, deep customer relationships and leading positions across attractive end markets. Our mid- to long-term shareholder value creation plan is clear. We will enhance profitability by optimizing our cost structure and driving greater operational efficiency. We will generate significant free cash flow through our actions to reduce inventory and reduce capital spending. We will focus on disciplined organic growth and deliver exceptional customer service. We will reduce debt on our path to investment grade and return capital to shareholders through our dividend and opportunistic stock repurchase.

And after a thorough overview, we will work to optimize our resources to ensure they are focused where we can create the greatest value for our shareholders. With that, operator, let's open it up for questions.

[Operator Instructions]. Your first question is coming from Matt Roberts from Raymond James.

Robert, Chuck, good morning. Robert, welcome, and congratulations on the role. So when you've joined Robert, the board noted your strong CPG background and the timing, of course, coincide with Vision 2030. Those numbers are revised today. Ultimately, as you embark on that 90-day review or look to your longer-term targets like, what makes your approach different and what has come before a graphic packaging you say more operationally focused to reach free cash flow projections or our commercial efforts more of a priority to ensure you're able to reach flat volumes in 2026?

Thanks, Matt. Thank you for welcoming me. Yes, I do want to just recap a bit of my background. I did spend about 30 years in consumer brands, as a customer of Graphic, not only in North America but also in Europe, South America and Australia. So I bring a bit of a global perspective on the business. And I worked at Procter & Gamble I have a background with complex businesses with global manufacturing and supply chains and have a lot of experience of packaging design, procurement, and some prior experience, as you know, on tissue with tower manufacturing and ran the [indiscernible] in Australia when it was running Kimberly-Clark Stradale. With regards to the approach I plan to focus on cost reduction, productivity, operational excellence. We want to make sure we deliver a really good experience to our customers. I've had a number of calls with key customers over the last couple of weeks, including yesterday, I spoke to two customers.

These are customers across food service, beverages and food, grocery, and they really need us to help them restore growth, and therefore, we need to stay very close to that. I'll bring up more disciplined approach to CapEx going forward and a focus on free cash flow generation to create value for our shareholders. So with regards to customer centricity, I do believe in a market-backed approach and really partnering with our customers. We'll do a bit of a review of our manufacturing footprint to understand where we can consolidate and drive productivity. We do have to defend where we have the right to win where we have competitive advantages and focus the resources behind the core.

We have to define what that core is. We have a lot of businesses that around the world in different geographies that we have to understand better. And we'll do a selective, very selective review of the portfolio. Of course, the mills are where the money is made. We will make sure that the mills and manufacturing facility stay state-of-the-art and are fully utilized.

It's all very helpful. Thank you, Robert. Look forward to working with you and seeing the progress there. For my follow-up, if I could ask about the inventory reduction. I think it was 15% of sales to 20% to 15%. I think that number implies about 200,000 tons. How are you able to balance that much coming out while Waco continues to ramp, and given that inventory curtailment is a onetime benefit in '26 and then cash and the incentive comp also hits in '27. What other elements are needed to bridge to that $700 million figure again in 2027?

Yes. Just let me clarify the inventory reduction program. It will primarily focus on recycled bleached and cupstock. We're also reducing some fixes inventory where demand fell short of expectations. And in the leaks paperboard use production and demand are a good balance. It's just really the inventory that's too high. And I want to emphasize that our customer service is a priority and will not be disrupted by inventory reduction actions. Let me pass to Chuck financial details.

Yes. Matt, this is Chuck. So on the bridge to the $700 million, as you pointed out, a lot going on in cash flow and EBITDA while we provided the detailed bridges that we did. But before I talk all the way about post 2027, I want to just reiterate the confidence in 2026, we've outlined the levers there. We see those levers and have the confidence that we'll be able to pull those levers to hit the $700 million to $800 million range in two will continue to benefit from the tax benefits and there'll be additional inventory reduction.

And then post 2027, there really some negatives and positives that have been some of the items that come that happened in '26 recurring. But for example, the tax benefits and then we have interest rates that are reducing. And as Robert pointed out earlier, we're going to be continuing to push on CapEx and other items in addition to normal EBITDA growth. So we can take you through details more of that off-line.

Your next question is coming from Ghansham Panjabi from Baird.

Thanks, operator. Best wishes to the two of you in your respective roles. Robert, maybe just to start off with you, just given your background at the CPG level and your unique lens, if you will, how do you think this pricing dynamic situation in paperboard in the U.S. will play out for the industry over the next couple of years? What can you do internally to sort of navigate through this period because presumably customers will be pretty opportunistic as it relates to substitution, et cetera, just given the change in the pricing dynamics?

Yes. Thanks, Ghansham. The two grades that matter most to us are recycled and unbleached. And both of those markets are in good balance. You know that we are very highly integrated as a company. And our smallest business is bleached paperboard, which is oversupplied with substantial new capacity that's come into the market, and the demand outlook is trending down. So the current prices, we don't believe that bleached paperboard producers earning a good return on capital. As I said, we have very high integration in our bleach business. So our margins tend to be higher, but are still a little bit below cost of capital. I think the beach markets are less integrated, so the economics are a little tougher and the overcapacity is impacting the markets. And so that's what [indiscernible]. Chuck, any thoughts from you?

Yes. I think you saw that in the APA data that came out in the last week that I think you can see recycled and unbleached is generally aligned to demand and lease up in the weakness that you see there is consistent with what Robert talked about. So I think it's all, as Robert laid out.

Okay. And then Robert, do you kind of step back a bit. Obviously, a lot going on this year and next and so on. But if you look at the company's EBITDA margin profile, 2023, 19.9% as your slide deck lays out, obviously, a huge deterioration that you're projecting over that time period through 2026. Is there anything structurally having changed in the industry that you cannot get back to the sort of high teens EBITDA margin threshold? Or was 2023 just a unique situation?

We think that, over the long run, we will be restoring our EBITDA margin to the higher teens level as a result of restored demand cost management productivity. So we're pretty confident that we will be managing it back towards the original Vision 2030 level. But it's too early to tell exactly where that's going to be.

Your next question is coming from Arun Viswanathan from RBC Capital.

Great. I guess I'll add my congratulations on the new roles as well. Yes, I guess just kind of going along a similar line of questioning, maybe we can get your perspective and insight on what you're hearing from your customers. Specifically, are they talking about rationalization, changing packaging strategy. Harry, what are you hearing on how they're dealing with [ Maha ] and maybe other changes to consumer behavior Obviously, we've seen some relatively lower volumes on the food side and food service. And are you hearing any kind of customer response to address that?

Yes. Thanks, Arun. We do have very extensive conversations with our customers across food, beverage, grocery, various other industries and food service. With regards to consumer packaged goods, customers are really highly focused on cost right now and driving rationalization in the number of packaging executions to reduce downtime and changeovers in the manufacturing process. So there is a need for simplification to drive basically COGS for their cost of goods and our packaging complexity is part of that. So the more we can simplify our assortment, whether that's a specific execution in the beverage industry or in food industry, the better. They also continue to focus on share of shelf. Share of SKU because they want to gain volume share at retail. And a lot of the CPG companies and some of them that I've spoken to are reviewing their pack price architecture at the right price points with smaller portions and lower consumer prices.

The other trend we see is that there's a lot of private label embracing innovation quickly, and they continue to gain momentum. Even in some categories that were historically insulated from private label growth. And customers, they really want packaging solutions now that reduce material usage that improve palletization simplify the number of formats and complexity, but they also want very high-quality graphics that prove shelf appeal. So they are not going to compromise on the way to get the shelf, when you get the first moment of truth. There is another big trend, which is -- it starts in Europe, but it's coming to the U.S., which is the single-use plastic reduction. That continues to be front and center of discussions with the large global players.

Reduction of plastic in the U.S. specifically reduction of foam to improve the sustainability profile of our customers. With regards to food service, affordability has really created a challenge for the quick service restaurants, and they need to innovate and stay competitive. Both have food and beverage and meal solutions. So they want to hit hot price points. They want to make sure that they are competitive across the board. Marketing and thematic promotions continue to be important. That's where we come in with our thematic packaging and our ability to react quickly to their orders. So we're starting to see some improvements with recent large-scale promotions. And I think the food service opportunity is substantial and plastic and foam placement will continue. So on Europe specifically, innovation is now a key driver there because of the regulatory changes against plastic. In North America, we're seeing that more and more consumers for paper cups over plastic info.

Comprehensive answer. I guess, just as a quick follow-up, back on to the SBS question. So I understand that it's a very small grade for you. But I guess our perception -- or my perception is that the oversupply is kind of also pressuring unleached and maybe customers are getting the option to switch into SBS because there's not much premium there. So how do you -- do you see that as well? And do you see that kind of oversupply in SBS continuing to weigh on other grades as well? Or is it not really impactful?

It's a well-known fact in the end. There's no capacity of bleached. And there is -- it is the most fragmented of the paperboard range, as you know, and periods like this had to resolve themselves usually through capacity rationalization, downtime, consolidation. But remember, we primarily sell finished packaging and have a high degree of integration. And we do see some price pressure on recycled packaging for bleached producers. They're looking for volume, but we haven't lost volume, and we have to be competitive with package price, and that can cause a little bit of margin pressure. And we also know that leach packaging selling at the price recycled. Long term is not sustainable. It's more expensive to produce and it doesn't in the cost of capital returns.

Now we're focused on driving volume where we have the right to win, and we control what we control. So we are focused on cost spending, exceptional customer service. So that's where we are on that.

Thank you. Your next question coming from Lewis Merrick from BNP Paribas.

Good morning, Robert, Chuck, Mark. Congratulations on the appointment, Robert. Maybe just going to the portfolio review comments that you had in the deck and in your opening statement, can you just give us a sense or expand on the factors, what you would consider as elements which would determine a core or noncore asset in your business today?

But it could be quite long. Very good question. Thank you for the question. Thanks for coming. Look, I'm a big believer in the focus on the core as part of any company strategy. When you have a strong growing for you with I think where we may have to provide a bit more perspective on all of the businesses we own around the globe that may or may not be core to the operation. We're looking at an initial review of the business portfolio of the operations and our global footprint. And we want to really focus on future growth and value creation and understand where we have the right to win.

Let me give you an example of very obvious places, which are part of our core. Our North America, Europe, food and beverage business is obviously the biggest part of our company. No question that we have to play there. But there may be some smaller businesses that we have an opportunity to review. We want a durable competitive advantage, and we want synergies. We were in high duration rates in our -- between our paperboard manufacturing and our conversion factories, converting factories where we make the finished packaging. With regards to looking at everything we do, we're also going to look at zero-based budgeting and particularly at CapEx, it's fair to take a fresh look at all we do. We'll take a comprehensive look in the context of what is really a changing market.

Consumer dynamics are changing. Certain packages are starting to accelerate. Others are starting to decline. Consumption patterns are evolving as well. And so we need to bring those consumer insights back into our company so that we can align our assets to future growth opportunities. Now it's very early days. No decisions have been made, and we'll keep you updated as appropriate.

Have you and the board had any thoughts as to whether you may look to revisit your dividend this 20266?

Dividend. On dividends -- sorry, I didn't catch it for the first time. So on dividends, as we said in the prepared remarks, our clear most highest near-term priority is debt pay down. And so we will be focused on debt paydown in this term, but we have not committed to a dividend change this year yet. But over time, I would expect to have growing dividends as we talked about in the prepared remarks, and increasing the return to shareholders. But clearly, our near-term priority is to pay down debt given our current leverage ratio.

Your next question is coming from Mark Weintraub from Seaport Research Partners.

Welcome, both. Questions, since you did mention that overcapacity in bleached board has been putting downward pressure on finished packaging pricing across your grades. I guess one the questions I have is that if the trade journals show, for instance, CRB prices were to go down or something like that, if to some extent, it's already been reflected the pressures in the business because of overcapacity in SBS, do you get hit a second time? Or can you help us understand how the prices we might see in trade publications can affect what you end up realizing on a go-forward basis?

Yes. Mark, this is Chuck. I'll take that. So -- and as you know, we've been seeking to convert many of our contracts over to a cost model and many of our made progress on that. So many of our contracts are no longer tied to publish pricing. We do still have some contracts that are tied to published pricing and our guide does not reflect any unpublished or unannounced changes in pricing.

Okay. And so just to follow up. So if there are changes, is it modest because of the direct impact modest because of the adjustments you've made in your contracts? Or any help you can give? And I recognize if you're not comfortable understood, but figured I'd ask.

Yes, there's several factors. There's timing as to when the price impact would be recognized based on our contracts. And then there's also, of course, offset by the ones that are already on the cost model. And so it's -- there are a lot of moving parts and pieces there to give you specifics around it.

Okay. And just one other follow-up then on Waco. I know originally, you had outlined some relatively significant start-up costs, I think, $60 million or something like that. Could you just update us how -- what has happened and how you're reporting that? And it seems like you're just putting that in net productivity now? How should I be understanding that?

Yes. So the good news on that, given the start-up, really strong start-up of Waco that our start-up costs came in below and we do not expect any longer sort of cost to continue into 2026. So our start-up costs came in at around $40 million in 2025. And so lower than our original expectation, given the strong startup. And importantly, though, we do put those costs below the line. And so that doesn't roll up into performance, it does roll with them into the items that are below adjusted EBITDA and some that information that was provided to you in the previous deck was just information only, but that is something that of course, impacts catching and came in stronger. And it is a 0 in 2026.

Okay. And just on clarify. So the Waco start-up costs were excluded from the adjusted EBITDA number you gave us or included?

We're excluded from adjusted EBITDA.

Our next question is coming from Gabe Hajde from Wells Fargo.

Good morning. Welcome. I had a question about seasonal working capital changes and then obviously the very concerted efforts to reduce inventory seems like a decent amount of that production will hit and the reduced production will hit in the first half. But normally, you consume cash and working capital in the first quarter. And if I look at kind of what you gave us the 40% to 45% of EBITDA earned in the first half, it looks like leverage can, in fact, tick above closer to the mid-4s or higher. Can you talk about that a little bit? And then I have a follow-up.

Yes. I think you've identified all the right trends. Historically, our cash flow is strongest in fourth quarter, and that's how it played out in 2025, and we would expect it to play out that way in 2026 as well. I will say the impact in 2020 should be significantly moderated versus where it was in 2025. If you remember, 2025, the heavy spend of Wako was through the first 3 quarters. And so you would have seen a much more negative impact or a heavier negative impact on free cash flow in 2025 than what we'll see in 2026. So it will more follow the EBITDA, but it is still -- our cash flow has historically and always been back-end weighted as we build for the season through the summer and then harvest that cash in the back

Okay. And then the 200,000 tons roughly of inventory reduction this year, obviously, you gave us $1 equivalent. I guess, Chuck, for '27, can you give us a reference point, I think you talked about some moving parts to bridge to the $700 million of free cash flow. But will you still be sort of underproducing next year. And again, it depends on demand. But -- and unlocking some inventory? And if so, do you have an order of magnitude as it sits right now?

We -- and we're not giving 2027 guidance now, so I'll give you the number. But you hit on the key factors, I mean, we are committed to bring inventory down to the target ranges that Robert gave the 15% to 16% target. We would, of course, much prefer that to come out via demand, as you mentioned, then it came out via downtime, but we are indeed committed to bringing it out or to getting it out.

Thank you. We have reached our allotted time for Q&A. I'll now hand the conference back to Robbert Rietbroek for closing remarks. Please go ahead.

Thank you, operator. I appreciate you joining us on our earnings call today. I'm excited to be here leading this outstanding team that is truly a pivotal time for our company. Graphic Packaging serves markets with attractive subsegments, solid secular trends with the best-in-class assets and a highly talented team. We're a global leader in sustainable consumer packaging. Through the actions we're taking, we plan to grow our market share and further strengthen our industry-leading position.

While I had the opportunity to engage with several of you already, I look forward to connecting with others and to providing ongoing updates on the business and our progress against these priorities. Thank you for your interest in Graphic.

Thank you. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.

Good morning, and welcome to the Graphic Packaging Third Quarter 2025 Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Mark Connelly, Senior Vice President of Investor Strategy and Development. The floor is yours.

Good morning. We have with us today Mike Doss, President and Chief Executive Officer; Steve Scherger, Executive Vice President and Chief Financial Officer; and Chuck Lasher, Senior Vice President and Chief Accounting Officer. During this call, we will reference our third quarter 2025 earnings presentation available through this webcast and on our website at www.graphicpkg.com.

Today's presentation will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in today's press release and in our SEC filings.

Now let me turn the call over to Mike.

Thank you, Mark, and good morning and good afternoon. Thank you for joining our call today. I want to start by taking a moment to acknowledge the enormous contributions that Steve Scherger has made over the past decade as Graphic Packaging's Chief Financial Officer. As announced last month, Steve has decided to leave Graphic Packaging to take on a new challenge. He has stayed with us through this week to close the books on our third quarter, and I appreciate that. Steve was my partner in the development and execution of our business transformation. From the acquisition of International Paper's Consumer business and more than a dozen acquisitions to our Kalamazoo and [indiscernible] investments, this impact on the team we have built and the culture we have created a Graphic Packaging will shape our company for years to come. I will miss his counsel.

I'm pleased to introduce Jeff Lischer, who Steve hired in 2019 as our Chief Accounting Officer. Chuck will take on the new role of Interim Chief Financial Officer. Chuck has been a key member of our leadership team and involved in every major decision Steve and I have made. We are fortunate to have someone with Chuck's deep knowledge stepping in as we pivot from Vision 2025's investment to Vision 2030's free cash flow.

Now let's turn to the quarter. Graphic Packaging sales were $2.2 billion. Adjusted EBITDA was $383 million. Adjusted EBITDA margin was 17.5% and adjusted EPS was $0.58. While the challenges of a stretched consumer and the impact on grocery volumes as well chronicled, we are focused on what we can control. We executed well in the quarter, made progress on costs and reduced inventory. Meanwhile, our innovation platform continues to open up new markets for paperboard packaging, once again allowing us to outperform the broader markets we serve.

Turning to Slide 3. I'm pleased to announce that we produced the first commercially salable role of paperboard at our Waco recycled paperboard manufacturing facility on October 24, that was significantly earlier than our plan, and faster even than our highly successful K2 start-up in Kalamazoo in 2022. I could not be more proud of our team, many of whom were part of our team that built our Kalamazoo K2 machines. I want to thank our contractors, and I'm incredibly grateful for the strong support we received from the Waco community, from Governor Abbott and the State of Texas. Wico was Graphic Packaging's largest capital investment and extends our economic and quality advantage in recycled paperboard across all of North America. Waco is a critical enabler for the consumer packaging we sell, improving surety of supply, reducing waste, allowing us to only offer the highest quality packaging materials and expanding the markets or recycled paperboard badging set. Having [indiscernible] on our system gives us a competitive advantage that will last for decades. The Waco facility sits in the Texas Triangle, which is a highly attractive location for recovered fiber sourcing given its proximity to 4 major cities.

Our team also developed an internal fiber sourcing plan, which allows us to bring scrap paperboard from our packaging facilities to Waco. This is exceptionally clean and very low-cost pipe. True circularity isn't just about the environment. Don't write is also above some business economics. By closing the loop between our own manufacturing system scrap and Waco's recovered fiber sourcing we dramatically reduce overall system waste while simultaneously improving our production economics. And with the inclusion of paper cups in the recycled materials Association's recently updated guidelines, a key strategic investment we made at Waco looks even better. We designed Waco to have the capability to process up to 15 million paper cups a day. And as [indiscernible] ramps up, Graphic Packaging will play a key role in assuring this high-value fiber sources put to good use rather than ending up as landfill. As previously announced, the ramp-up to full production at Waco is expected to take 12 to 18 months. The start-up of Waco marks the end of our Vision 2025 transformation program. We now have everything we need, strong positions across a wide range of markets to drive top line consistency, the packaging industry's best innovation team to open new markets for paperboard and an integrated packaging platform with durable substantial long-term competitive advantage.

On October 30, we formally announced that our East Angus recycle paperboard manufacturing facility will cease production December 23. Taken together with our earlier Middletown closure and the recent closures by [indiscernible], Waco will add just a couple of percent to total capacity, only about 75,000 tons more than the industry had at the start of 2025. As was the case in Kalamazoo, we do not expect to start up Waco to materially impact recycled paperboard market balance. Graphic Packaging has a long and consistent practice of matching our forward production to our demand for our packaging.

Turning to Slide 4. The pressure on the consumers is evident by the grocery volumes. Increasingly, we hear from our CPG customers that the consumer market is bifurcated. Upper-income consumers are still spending or are spending differently and more carefully. Lower-income consumers continue to cut back as food prices rise further. And in the third quarter, we also saw more of our CPG customers timing their purchases as a way to manage cash, which has made order flows less predictable.

In the third quarter, our volumes were down 2% year-on-year again, outperforming most of the markets we serve. We also saw some incremental price deterioration, not so much in paperboard, but in packaging pricing. Recycled and unbleached packaging markets are in good balance. While we continue to see highly unusual competitive pressure from bleached packaging producers normally won't choose to compete directly with recycled because their costs are so much higher, yet we are seeing competitors offering discounts on bleach packaging that essentially matches recycled packaging pricing despite the obvious lack of profitability that those kinds of price apply.

Given that bleach capital costs and annual sustaining capital requirements are dramatically higher, we don't believe that the situation is sustainable. With the investments we have made at Kalamazoo and Waco, we can match bleach paperboard's appearance and print performance with a sheet that cost significantly less to make on equipment that requires a fraction of the capital to maintain. We believe that our investments have put us in the sweet spot for all 3 packaging substrates, and that our economics and quality create a durable, long-term competitive advantage.

Over time, we expect our recycled paperboard to replace more expensive leach paperboard and arrange markets. As we discussed last quarter, we are not a meaningful participant in open market bleach paperboard, but the impact of a large imbalance in that market has been to reduce the pricing power and recycled in unbleached packaging. Recycled and unbleached our primary markets, and both are healthy and good balance. So this is really about margin pressure rather than market share.

Looking at our markets. food and household products were steady overall, while beverage and foodservice were weaker. Health and Beauty, which is mostly a European business for us, was again solid. Beverage promotion returned to a relatively normal pattern this year, but promotional activity for food and foodservice remains highly targeted, an approach, which has not driven the meaningful volume for foot traffic. Mass retail, superstores and discount grocers continue to take share from traditional grocers. That is 1 of the driving forces behind the surge in private label offerings, although traditional grocers have increasingly embraced store brands as well. In the past 2 years, literally thousands of private label and store brand SKUs have been introduced and trademark data suggests the trend will continue into 2026.

Meanwhile, our innovation portfolio continues to expand. Innovation is steadily opening up in new markets for our paperboard packaging from household products to protein to produce.

Turning to Slide 5, the breadth and depth of our consumer staples packaging portfolio is especially important in times like these, where consumer purchasing patterns are rapidly evolving. We are in every gross real in supermarkets and superstores and are a major packaging supplier to quick service restaurants. We are introducing recycled paperboard packaging to more markets and more categories, including household products, health and beauty as customers increasingly embrace our paperboard as a less expensive, more responsible choice their consumers perform.

Turning to Slide 6. Excluding the effect of FX, third quarter packaging sales were down approximately 2% year-over-year, a modest deceleration from second quarter market trends. Food results were roughly flat overall, with continued uneven performance in the Americas, partially offset by strength in international, although as we have previously noted, consumers in our international markets are also feeling the stress of high prices. As in past quarters, [indiscernible] category trends are emerging. We see targeted promotion that shifts product to product and brand to brand, but has been insufficient to drive overall volumes higher. As our customers evaluate the effectiveness of promotion, they are also developing clear insights into price points where customer purchases either grow or decline rapidly. So for example, a $0.25 price increase to $4.50 to $4.75 may not cause a big change in demand, but a $0.25 increase from $4.75 to $5 might be causing major decline in sales. Getting a better handle on that sort of price sensitivity should help our customers as they work to reposition, resize and reformulate it.

In beverage, we saw what we returned to a more normal promotional activity this summer, which helped drive soft drink multipack demand. The longer-term trend towards less beer consumption continued both in the Americas and in international markets. Keep in mind that well trends in multipack demand do track references like Nielsen over the medium term, [indiscernible] can vary, particularly when beverage are purchased and when they're concerned. [indiscernible] for example, will tend to be consumed more quickly if it goes directly into the refrigerator. So when you have a 2-for-1 promotion, it can be a bit harder to predict when consumers will be back to buy more.

Some of the normal second quarter beer production shutdowns that typically occur around the 4th of July holiday were deferred this year and are now scheduled for the fourth quarter. The impact of that shift is difficult to predict, but represents an effort by our customers to match their own production to demand. We serve beverage producers of all kinds of sizes with multipacks for cans, bottles and plastic. Over time, we expect to outperform the overall beverage market, both in the Americas and in our international business based on our innovation portfolio and the strength of our integrated beverage packaging model.

foodservice results were broadly weaker as has been well telegraphed by the [indiscernible]. While affordability has been the primary challenge to foot traffic and volumes, this is also the category with the most bleach paperboard packaging and bleached packaging is where we have seen the most unusual additive behavior, which is affecting sales as well as profitability.

Our smaller international foodservice business continues to perform very well with the new product innovation and strong execution and driving continued volume improvement. In household products in the Americas, we see consumers reducing purchases and shifting to private label alternatives. Our international business continues to provide a significant offset largely driven by our product innovation.

Health and Beauty is a relatively small and most of the international business for us that has significant potential to grow over time in the Americas.

Slide 7 highlights our 5 packaging innovation platforms. Innovation is a critical component of our strategy because our innovation team is opening up entirely new markets for paperboard packaging. In the past couple of years, our innovations have taken us since meat protein, especially prepared food, ready meals in Europe, ground coffee and a host of markets which were traditionally dominated by plastic and foam. Innovation is why we are confident in our ability to grow faster than the QSR and CPG markets we serve.

On Slide 8, we highlight an innovation that demonstrates our market expansion in the produce aisle, and especially with small fruits and vegetables, plastic punnets are the traditional packaging standard. But while plastic punnets are cost effective, their performance in consumer appeal is mixed [indiscernible] and recycling rates are low. As our customers look for better functionality and greater consumer appeal, we have developed a family of paperboard punnets, including open, top seal and clamshell designs and use up to 95% less plastics and are recyclable in most existing programs.

On this slide, we highlight our ProducePack top [indiscernible] punets. These examples are from 2 of our large store brand customers, Marks & Spencer and TESSCO in the U.K. Produce and vegetables are packed in many different ways depending on the grower, the scale and the market. So we design our pundits to work on the same automated lines as plastic punnets and minimize switching costs and to be superior to plastic alternatives where more handling is involved. Our [indiscernible] shell design, for example, serves a handback market. But unlike the plastic [indiscernible], ours can be locked into a close position with 1 hand, improving labor efficiency.

When we began this project, our team started the science of food ripening and develop containers that have a meaningfully positive impact on how long some fruits and vegetables stay fresh. In cherry tomatoes, for example, third party is verified an increase in shelf life of more than 3 days, a really big advantage for highly parishable product. Other testing demonstrated that our paperboard plants slowed the mold growth compared to plastic all targets. Our punnets also offer outstanding [indiscernible] inside now, something you can't get with plastic. That gives the growers and retailers a way to increase their brand marketing impacts to distinguish more easily between products and quality levels and to educate consumers about what they are buying.

Our paperboard punnets, along with other new innovations like our paper steel line are perfectly with today's trends towards healthier eating and the growing use of GLP-1, and they are great examples of just how effectively Graphic Packaging improves with the consumer.

Turning to Slide 9. Our vision for Graphic Packaging is clear, and my confidence in our business model remains strong. Innovation, culture and the commitment to making packaging that is better for the planet are fundamental to driving best-in-class results for our customers and for all of our stakeholders. With Waco now ramping up, we have everything we need to reach our Vision 2030 goals, and that means we can turn our full attention to execution and driving cash flow.

On Slide 10, we summarize our financial results. I've already described the big drivers of sales and margin performance. Slide 11 highlights the still challenging consumer packaging environment on the left and the strength of our business model and execution on the right. Delivering margin improvement and faces sequential price volume pressure is a testament to the strength of our model, and the value we bring to our customers. While we are not satisfied with earned results, we are confident that we can meaningfully improve margins as demand and competitive behavior normalize.

Turning to Slide 12. We used $150 million to repurchase approximately [ 6.8 million ] of the company's outstanding shares year-to-date reducing shares outstanding by 2.3% in 2025 after a similar reduction in 2024. We have repurchased approximately 24% of the company since 2018.

Turning to the outlook on Slide 13. We have modestly revised our guidance to reflect performance to date and our best view of what's been an increasingly difficult to predict volume outlook. In this environment, we are focused on the things we can control, and that includes cost and inventory. We are assessing opportunities to further reduce SG&A and finding other opportunities to reduce costs, which I believe will further cement our significant efficiency and margin advantage over competitors. You saw us take action to reduce inventory in the second and third quarters, and we will continue to drive inventory out of our system as we optimize around Waco and Kalamazoo. In the fourth quarter, we will take further action to balance production with customer demand. which we expect to have approximately a $15 million impact on EBITDA.

These decisions are intended to protect our margin profile and to protect our volume. At a time when competitors are running for cash, and signing contracts that we believe carry margins well below the cost of capital. We are focused on protecting our industry-leading margins and protecting share where we are the best and most logical supplier in the medium and long term. We are using this period of unusual competitive behavior to align our order books with customers who understand the durable competitive advantages that we have in innovation, cost, efficiency and quality.

Our year-end leverage target is up modest. That is mainly a function of the change in our EBITDA expectations as well as our decision to take advantage of the dislocation in our share price with additional share repurchases in the third quarter. Graphic Packaging has doubled in sales and EBITDA since 2017 and maintaining prudent debt levels has always been a major factor in the company's success.

With our Waco investment nearing completion, we expect a significant free cash flow inflection and we'll prioritize deleveraging alongside our other uses of cash in 2026 and beyond.

In keeping with our commitment to prudent use of leverage and maintaining financial flexibility, we made an important financing transaction in October. As detailed in the recent 8-K, we've entered into a $400 million delayed draw term loan, which will be used to repay the bonds maturing in April of 2026. This loan has a floating rate 35 basis points lower than our revolver and matures in June 2027.

This new financing addresses the upcoming bond maturity, while giving us more time to decide what the longer-term financing is needed. Given the substantial cash flow we expect to generate in 2026 and beyond, the flexibility of prepayable debt is particularly attractive now.

Our current cost of debt is approximately 4.5%. As a reminder, with the Waco investment effectively complete, our capital spending will decline significantly to approximately 5% of sales. Capital spending is the largest driver of our expected cash flow inflection.

With the team we now have in place and the levers we have to pull, I'm confident in our ability to generate our targeted $700 million to $800 million of free cash flow in 2026.

Let me be very clear about this. We can't control demand, and lately, we can't predict it any better than our customers or our competitors can. But Graphic Packaging is at a very different place today. With Waco complete, we have the industry's best assets and best cost position, and we have far greater control over our ability to generate free cash flow than we did a year ago. While competitors are restructuring, spending and lately, making short-term deals that don't generate cost of capital returns, Graphic Packaging needs to focus on delivering results for our customers and our stockholders. We have everything we need and the next 5 years are about innovation, execution and free cash flow. Graphic Packaging is in a better place to create lasting value for our stockholders than ever before.

In the appendix that begins with Slide 15, you'll find some additional information you may find helpful. That concludes our prepared remarks. Operator, let's begin with Q&A.

[Operator Instructions] And the first question today is coming from Ghansham Panjabi from Baird.

I guess, first off, just wanted to congratulate Steve. I wish him the best for the future. Obviously, a great run in the company and look forward to your next role. So congrats again. So my first question, Mike, just kind of looking back at 3Q, did the end markets track pretty much what you thought, but the difference was just the share shift because of the leach board conversion? And related to that, why would that dynamic change near term barring some sort of inflection higher in volumes?

Ghansham, it's Steve. Just thank you for those very kind words, and I'll let Mike jump into the response here in a moment, but it has been just a phenomenal opportunity over the last 10 years. I want to thank Mike personally, just a phenomenal partnership, a true opportunity to work hand-in-hand with him, which has been just a wonderful and honorable experience.

Probably looking ahead, though, it is excited for the business as it could be if you look out now with the investments that have been made, Waco coming to life, above cost of capital returns out into the future, the business is incredibly well positioned for success going forward and the cash flow inflection that's happening as we sit here on this call with you today is outstanding. So my thanks to Mike personally for all that we did together and look forward to what lies ahead as well. So thanks for that, Mike.

Thank you, Steve. It's been real honor. To your question, Ghansham, in terms of expectations in the quarter versus the results we realized, first, I want to clarify there was no share loss for us there. That was really a function of customer purchasing patterns. And when you look at their volumetric performance through second quarter and into third quarter and the third quarter material that's been released so far by a handful of our larger customers, it shows we're actually outperforming their overall volumetric performance, and that's really a function of our innovation. Our innovation in the quarter was another $52 million, roughly 2%. So that's helping us kind of outperform some of the challenges that they're seeing in terms of their volumetric performance.

Okay. And then in terms of -- with all the dynamics that are occurring, do you still feel confident with the Waco EBITDA contribution specific to next year? Or does that depend on some of the dynamics in the marketplace that are taking place at this point?

No, thank you for that. Look, I'm very confident in Waco's ramp up in delivering the $80 million that we talked about. And obviously, there's another $80 million behind that. By way of reminder, the first $100 million of that -- those savings was really a function of the mill closures, Middletown, which was closed at the end of May, as you know. And now we formally announced our East Angus facility in Quebec will close by year-end. So that's all in line.

Relative to the total impact of that in 2026, we have to see kind of what the volumes look like as we go into 2026. I mean if volumes are largely flat, year-on-year, that's a different outcome than when they're down 2%. So if they're down a little bit next year, then we will need to look at our Kalamazoo K1 machine, and we'll run that in a way that allows us to optimize operating our K2 machine in Kalamazoo, which is our most efficient and Waco, which could be our most efficient paper manufacturing facility. And if we do need to toggle a little bit, we can take some downtime on our K1 machine, and we're able to do that at a very reasonable cost.

Your next question is coming from George Staphos from BofA.

I appreciate all the details. Also I want to make a quick shut out to Steve. Really important drivers as you mentioned, Mike, of what Graphics become the last 10 years and really thank him -- want to thank him for all the support. He's had given us all on this phone both in terms of our industry research and research on graphic. So Steve, thanks so much.

In terms of my questions, you mentioned, Mike, the opportunity perhaps to further improve productivity and the like, and that's my phrasing, not necessarily yours. What opportunity do you think you have? How important is that in terms of Waco and the commercial opportunities and to some degree, the commercial challenges now that you're facing in the market to getting to that $80 million plus, how much of that additional cost reduction SG&A and so on is required or would it be added? And then I had a follow-on.

I think the big part of that, my confidence in the $80 million on the Waco ramp-up for '26 is very high toward. I mean the facility is, as I said in my prepared comments, has come up a little faster than we even expected. We're very happy with what we see so far. So that's there. I think the bigger question is around our visibility in what the end-use markets are doing as we head into 2026. And as I said in my prepared comments, what we're really going to focus in on the things that we can control. So we've got some unusual competitive activity going on right now, as I mentioned, around bleached paperboard. We don't necessarily control that. We don't necessarily control what the overall volumetric performance of our customers are. They're working very heavily on that. You hear and read about the things they're trying to do to get their businesses going in the right direction. So we're obviously cheering for them.

But in the meantime, we've got a number of levers that we can pull to really make sure that we operate the businesses efficiently and effectively as possible. And those kind of in order, our first thing is CapEx is going to revert back to a more normalized level to 5% or below. That's going to generate in excess of $350 million of free cash flow just by that. And ultimately, even though, as you well know, we've got a very low cost structure here. We're looking at every cost, SG&A and plant costs that really allow us to make sure that we don't impact customer service levels. But given some of the realities we've got going on in the market, we've got to challenge all those things. And we're doing that some internally here. So we'll continue to do that.

And ultimately, taking a look at our inventory situation, you've seen we released -- we had a capital release so far this year of about $30 million. We expect upwards of another $20 million here in Q4. And as we go into next year, that will be another area we're really looking at hard because with Waco and Kalamazoo online, if you think about it, we now have 5 very well-capitalized paperboard manufacturing facilities, and that gives us a unique perspective to be able to look at our overall system, look at our supply chains, take a step back, really make sure that we're challenging kind of where we're at and what we can do. So those are the numbers that we really have in our control. That's how I'm thinking about it. As I mentioned, to Ghansham, if we need to take a -- to manage our supply and demand on our [indiscernible] recycled paperboard as Waco really ramps up quick, we can toggle our K1 machine. We're able to do that, and we're able to do it cost effectively.

My other question, just more of an end market question. So foodservice, I think from the chart was 1 of the end markets that wasn't doing as well for you in the quarter. Foodservice has been kind of an interesting market for more observations, right? You've had fast casual not doing so well, but quick serve has been picking up some steam. What kind of trends were you seeing into the fourth quarter? And to the extent that customers can know and you can share, you might be limited in either ability, what do you think -- ability to talk about it, what do you think is the outlook for foodservice there? And if that picks up, it's actually a relatively higher margin end market for you.

Thanks for that question. I think the -- you said it well. I mean, the fast casual is definitely under pressure. I mean, last week, you had policy release. I won't go through all the comments, but the CEO really talked about the 25- to 35-year-old consumer, unemployment levels being higher, disposable income being lower, and in his words, that was driving them back into the grocery store. And again, I think that's a worthwhile comment to make, and I bring it up because, as you know, we've built our portfolio to move with the consumer. So if that shift happens, given we're in every aisle of the grocery store, we actually are okay.

We do see that trend around more of the QSR impact, which makes sense given the price points of QSR versus fast casual. And we're there. And we also think that we've got a number of innovation ideas and we're working with those customers that ultimately will allow us to continue to earn a place at the table and grow our volumes. So that's how we're thinking about that dynamic.

Do you think it grows, Mike, next year? I guess, just to draw a bow on it or tie a bow on it?

I'd like to believe so. But again, George, it's just difficult for me to talk about demand. I mean I think about a quarter, our customers have a hard time doing it. If it does for us, it would be most likely because of innovation.

Your next question is coming from Matt Roberts from Raymond James.

Steve, I'll echo everybody else's thanks. Appreciate your comments and all the time over the years. And if you want to get a risky comment on this last question, I'll see the floor to you. But maybe on the competitive price pressure on SBS and CUK on CRB, I apologize if I missed it. How much of a drag was that in 4Q? How long are you expecting it to last? And while I believe your SBS is mostly cupstock, are you able to sell incremental SBS or CUK similar to your competitors at the extent of CRB given that price spread? Or how has your own sales mix by paper types changed in this environment? Or do you expect any shift in 2026? Any incremental color on how the tons from Waco layer in over 2026, and that impacts your mix would be helpful?

Yes. Thanks, Matt. So I'm going to address the SBS, CRB, CUK comments. We get fair money inbound and that, as you can imagine, over the last week or so. So the first thing you need to know, and you have seen it in our volumes, we have not lost share. And we're going to be very focused on making sure we don't lose any share because if you think about it, you've got a product making SBS, and we make it. We've got mill that does it take Arcana, we know the cost structure on that. It's much more expensive to make [indiscernible] recycled paperboard. So from our standpoint, we would never substitute SPS for CRB given the cost advantage we have. In fact, it's lower cost to make CRB from a recycled paperboard than it is to make bleached paperboard. So the margin profile, just simple arithmetic there in terms of what that looks like. And again, we're operating in that mill, and we operate Kalamazoo and Waco. And what I'll tell you is that the CapEx requirements of a virgin paperboard manufacturing facility are 4x what they are for a recycled paperboard facility. That is, again, part of the decision we made when we invested so heavy in Kalamazoo and in Waco because of that phenomenon.

So over the medium to long term, we're highly confident that we can continue to not only protect our share, but win share from bleached because the cost of capital returns start to get in a way there. And ultimately, that's something that needs to find its own level.

There's, I think, [indiscernible] in their last article or so talked about 500,000 tons of excess bleach capacity in the North American market, we'd agree with that, not a little bit more. So that's got to be dealt with. That's really not something the Graphic will deal with, as. You know, our focus is on package sales, make cartons, we make wraps, we make caps, we sell value-added packaging. 90% of everything we do is in that area. So from our standpoint, I mentioned this in my prepared comments, most of this was on and the package price, not on the actual paperboard level itself, which makes sense given [indiscernible] and what you saw happen with pricing in the quarter. We're confident in our ability to, over time, not only protect our share, but continue to grow it with the high-quality, low-cost material we have coming out of our coated recycled pet platform.

So hopefully, that gives you a little bit of color on how we're thinking about it.

Certainly. Really appreciate it, Mike. And maybe if I could squeeze 1 quick follow-up. On the cash flow for next year, any flexibility in terms of the CapEx number? You said I think 5% of sales are lower. Any growth projects that you could potentially defer and bring that 5%? And any lower or any other cash costs associated with the ramp-up?

Yes. It's -- we're looking at all that as you'd expect, and we'll dial it in. The next time we talk to you, we'll give you a little bit clear view on kind of what that looks like for 2026, obviously. But it's a good question and something we're looking at all the time. But what I'm very confident is the $350 million deflection that will occur year-on-year.

Your next question is coming from Charlie Merrick from BNP.

Just firstly, on Waco, can you just give some clarification around the phasing. You've obviously guided the start-up costs of the $65 million. Have they been largely incurred now? Or do they step up sequentially into the fourth quarter? And how should we be thinking about those in this year versus next year. I mean effect is a step-up in reversal of those plus the $80 million? Or would that be double counting? That's the first question.

My apologies if I don't hit this properly. I amhaving a difficult time hearing you. I think your question was around the phasing of the onetime costs associated with Waco, which is outlined in the materials to be $65 million to $75 million. Assuming that was your question, the phasing of that is like a 2/3 this year, 1/3 2026. And if I didn't get it right, please come back.

Great. Yes. Hopefully, you can hear me. Can you also give us an update on the progress in selling your pacesetter Rainier premium CRB? Are you achieving specific price premium for that now?

And then 1 final piece is ,can you just talk about the deleverage that you're expecting in the fourth quarter to get to the 3.5x to 3.7x net debt EBITDA at year-end?

Yes, thanks for that. So I'm going to address the question around Rainier first, and then I'll cover the leverage. Listen, on Rainier, it's a great product. And 1 of the great things we have is we've got the most modern cleaning systems in both Kalamazoo and in Waco that give us tremendous competitive advantage over anybody else in the North American market. We've got curtain coaters on all 3 of our paper machines that give us the ability to really have brightness that approaches bleach paperboard levels. Now Rainier is actually used -- it's 1 of the tools we're using to make sure we don't lose any share as we're competing against the SBS guys. Now ultimately, that does have some margin impact. The pricing we would expect to get is a little lower, as you would appreciate, because they're lowering their packaging prices to compete with CRB.

So that's something we have to work our way through, but we have the levers to pull and we have the capabilities do it. So I really am happy that we've got that great in our portfolio of mix. And relative to year-end leverage, yes, we've got a range of 3.5 to 3.7 for year-end numbers in terms of overall debt. That's really a function of a little bit of reduced EBITDA number, as you can imagine, and the fact that we wanted to be opportunistic to buy back some shares this year given the dislocation. We talk to our Board about that given the ultimate inflection of free cash flow that will happen here in 2026, that made sense to do. And as I said in my prepared comments, as we go into 2026 with that free cash flow, we'll be looking to delever as well as return cash to shareholders in a way that makes sense that drives long-term shareholder value.

Charlie, this is Mark. You'll recall that Q4 is typically a positive free cash quarter for us. And so that will help us get that leverage down to we're looking for.

Your next question is coming from Gabe Hajde from Wells Fargo.

Steve, pleasure working with you, Mark, as well. I had a question about working capital and cash flow as well into next year. Steve, can you help us with some of the AR factoring that's been done or reverse factoring? Just give us a sense for what that looks like, and maybe how that will be managed into 2026?

Mark, why don't you handle that question, if you would.

Yes, Mark, we'll let Mark handle it. I'm sorry, it's -- this is Steve. The question is around AR client accounts receivable financing, Gabe, there won't be any material changes year-over-year relative to that in terms of the expectations of where we would be at the end of '25 versus '26. That's not really an enabler for cash flow in '26. As Mike mentioned in his comments, the '26 cash flow enablement is really about reduced CapEx, reduced inventory levels, also some managing of SG&A costs. Those are going to be the levers that will be pulled to drive cash flow, that confidence in the $700 million to $800 million. So it won't be a round -- it won't be about accounts receivable programs being materially different.

And just to clarify, Gabe, CapEx this year running $850 million, $450 million next year. So that delta is $400 million of cash flow inflection.

Okay. And then Unfortunately, I feel like there's still some confusion around the start-up costs, the $65 million to $75 million. Can you give us a little bit more specificity around if that's capitalized interest cost, if those are kind of, I'll call them, wasted tons, but rolling test tons off and recycling them through. And if I heard you right, Mike, there's $65 million to $75 million this year, and that reduces down to $35 million next year, so for a net positive of $30 million. And again, is that the same as the $80 million that we're talking about in terms of contribution from the investment?

Okay. So there's a number of things to unpack there. The $80 million EBITDA run rate, so that's on the EBITDA line into next year. The $65 million to $75 million is -- this is -- we've talked about this a number of quarters now are the onetime costs, cash costs associated with the start of both the machine. Charlie's question was what's the phasing of that that $65 million to $75 million? 2/3 of that in this year, 1/3 of it is in next year. And I'm going to ask Chuck [indiscernible] to give a little bit of detail on the breakdown of that just high-level buckets so that you kind of understand what we're talking about there, Gabe.

Yes, that's mostly just operating costs associated with running the facility prior to startup. So as we train the team and bring the team on board to have the facility ready to be up and running. Anything that does not get capitalized is what we've been capturing in that $65 million to $75 million. And yes, that is a multiyear number, not just a single year number, those $65 million to $75 million.

The other point on the capitalized interest, that, of course, is something that we do during the period of construction. That will, of course, stop once the asset comes into service. So we won't see capitalized interest again in 2026.

Okay. Or in Q4?

Well, a little bit of potentially a little bit in Q4 as the asset came in service during Q4. And there's a little bit of continued spend, but -- and then just regular capitalized interest. But for the primary Waco asset, and that would cease.

Your next question is coming from Arun Viswanathan from RBC.

Great. Steve, great working with you. Thanks for all the help and insight over the years. and I look forward to the next chapter as well. So I guess my question is around maybe an initial thoughts on '26, and specifically around Waco. Maybe you can just kind of give us some of the assumptions underlying the $80 million EBITDA uplift and if those are still intact? I believe most of those are around cost per ton. But is there any volume component?

And then the related matter, I guess, do you still feel the same way about '27 as well, another $80 million uplift? Or is that also somewhat volume dependent?

So Ron, I'm going to kind of take a step back and make sure I kind of walk through this again so that I want to make sure that my points are clear here. We're very confident in our ability to deliver $80 million [indiscernible] as it ramps up next year. And then in 2027, there'd be another $80 million. By way of reminder, that's $160 million in total, $100 million of that, as I mentioned, is focused on kind of the fixed cost of not running Middletown and East Angus. So that will come in there next year. We'll be ramping up. We won't be at full run rate, as I said in my prepared remarks, from a volumetric standpoint for 12 to 18 months. But our confidence level in the $80 million for next year is very high. We had always said that as we kind of brought it online and the outline years been some volumetric growth that hasn't changed. And the way we're going to deal with that, as I mentioned to George earlier is we'll toggle between running our K2 machine in Kalamazoo, which is the new 1 we just operated now for the last 4 years, the Waco mill, those are going to run wide open, and we'll service our business on our lowest-cost assets, highest quality, lowest cost. We'll use our K1 machine, which is the smaller of the 3 machines to take any downtime that we need to take to make sure that we match our supply and our demand. And of course, we'll be working quickly to make sure that we fill that out. A lot of it depends on kind of our customers' volumetric performance. As I mentioned earlier, if they're able to get back to at least flat volumes in 2026 that's a big deal for us because our innovation has consistently added close to 2% of volume. So that's really how to think about Waco, and how we're planning for '26 and beyond.

Okay. Just on the markets then, it sounds like beverage was a little bit weaker in Q3 and foodservice was as well. Do you expect that to continue to remain weak as you move into Q4 and '26? And maybe you can also comment on some of the other markets, food and household and health and beauty.

I guess I am -- and have you seen any change in innovation sales in those markets? We've been hearing anecdotally that there may be some trade down amongst the consumer packaging companies into traditional substrates, maybe a little bit less willingness to assess the waters with some innovation-led products. I don't know if that's what you're hearing as well. But maybe you can just comment on what you're seeing on that side.

Yes. I'll start by saying I don't expect to see much change in Q4 versus what we saw in Q3. I mean October started off substantially similar to what we saw in Q3. You get to read our customers' exerts as I do. And as I talked about earlier, fast casual is down a little bit, QSR may be a little better. It's hard for us to know exactly what our customers' volume performance is right now, and I said that in my prepared remarks given some of the things that they're doing to manage their balance sheets and production schedules around the holidays and so on and so forth. So that's part of why we're being a little bit deliberate in calling that out.

As we head into 2026, look, I know every 1 of these customers, as we talk to them all, are very focused on getting their volumetric performance back. They got to grow, and they're doing the things that they believe are required to do that. We see a lot of new CEOs. We see a number of restructurings that are going on. We see agitation at different levels. So hopefully, that [indiscernible] itself into biometric performance as we head into 2026, for sure.

I would just add a couple of things -- Arun, I'd just add a couple of things mark. In the beverage market, typically, you see promotion activity in the fourth quarter, but we also saw some changes in production schedules by our customers, sometimes taking downtime around the July 4. That didn't happen to all of our customers this year. Some of that may happen in the fourth quarter. So that adds a little bit of variability. We're also certainly, in the food business, continuing to see a lot of unevenness. Customers moving from 1 category to another to try to save money. And not so much destocking by the food suppliers, but strategic stocking, as Mike mentioned, in terms of trying to get their year-end numbers and cash where they want it. So a lot of unusual behavior, but no real change in any of the trends.

And just to clarify, so it sounds like you will have the $80 million next year, and then aside from that, it's mainly volume and price that we should be keeping in mind as far as what the drivers are for any kind of EBITDA bridge. Is that correct?

Yes, that's exactly right.

Your next question is coming from Mark Weintraub from Seaport Research.

And thank you, Steve, for your help over the last few years. So I just wanted to revisit again on Waco, in terms of the ramp, order of magnitude, how much tonnage would you be expecting to produce in 2026?

Yes. Mark, I'm not going to call that out. I mean it's going to be -- as you can think about it, though, we put it into service here in October. It's a 12- to 18-month ramp. So that's pretty quick coming up.

For sure. And so let's say we were to assume it's $400,000 to say something. So I guess what I'm just trying to think through is that East Angus is 100,000 tons, Middletown, I think a little less than 200, but was down for about half the year, correct me if I'm wrong. So we're talking about like 200,000 tons of replacement board effectively. And so I just -- is the rest because you're bringing down inventory this year? Or maybe if you can just kind of walk through the math on where the Waco tones -- what they fill in for and/or is there a little bit of growth that does just to kind of to meet the full production that you're expecting to have from Waco next year? And that would be super helpful.

Thanks for the question. Here's the math I'm going to walk you through. If you really look at East Angus, which is our facility, it will shut down the end of the year, and our Middletown facility, which closed at the end of May, and then what others have announced that they're closing, it's 475,000 tons. Waco, of course, adds 550,000 tons to the overall market. So on a net basis there, it's about 75,000 tons of additional capacity that's coming online. I'll tell you this, Mark, I need Waco to come up right now to make sure that I'm able to service my customers. You saw the [indiscernible] data. Our Inventories are down pretty dramatically on CUK and CRB. That's deliberate plan on our behalf here relative to what we did. So we need those funds coming off the Waco mission to help service our customers and make sure that we take care of our overall demand.

But you had a good note out earlier this week. You talked a little bit about K2 in Kalamazoo and Waco in balancing that production with our K-1 machine. I think you got it pretty right. So I don't have a whole lot more that I think I need to add.

Okay. And I fully appreciate that once everything is reset, we should be at the target levels of profitability. I'm just trying to make sure that I fully understand the transition period though as we go hopefully into kind of a better 2027 demand environment, et cetera, and everything is sort of kicking into gear. And I guess I'm a little -- I just want to clarify because implicit in what you're saying, and I don't mean to be oppositional anyway here, but implicit what you're saying is that you basically have gotten a lot of the business from the other capacity that was shut. And I'm not -- or is there something I'm missing? Is it -- again, is it that inventory reduction which you're doing this year and therefore, you're not doing it next year? And so that's why? Because those would be pretty big numbers. So just trying to fully understand the...

In CRB, I think that's fair. We have work to do, in our opinion, with some of the other optionality with some of the other substrates we have and Waco and Kalamazoo we hope enable that as well relative to our overall supply chain. But I think, like I said, you've got the math pretty well set, and we're going to match our supply and our demand on CRB like we always do. That swing machine will be arcane machine in Kalamazoo.

Your next question is coming from Mike Roxland from Truist Securities.

I'll just echo what everybody else said, Steve, thank you for all your help over the years and wishing you the best of luck in the future.

In terms of the '26 free cash flow bridge, obviously, you guys have expressed confidence in the $700 million to $800 million of free cash flow next year. Just trying to get some more color around it because year-to-date, adjusted free cash flow, as you pointed out in your press release, is minus $332 million. So you have $400 million of CapEx step downs. You're looking at a starting point of $68 million in terms of free cash flow. I know you got a few hundred million dollars of free cash flow in 4Q due to working capital unwind. But also you are contending with, I think, a higher working capital, cash taxes and interest, but you called out on your call last quarter of about $300 million, $350 million. So can you help me reconcile those moving pieces I just mentioned with the $700 million to $800 million you're still confident you will achieve next year?

Yes, I want to focus in on 2026 and give you a little bridge. You have to remember, Mike, and you know this Q4 is always our big cash quarter. So we'd expect that gap to close dramatically as it always does every year. And as we look at next year, we've got the contribution from Waco. We've already talked about that. And then the bridge is really pretty straightforward. It's around the CapEx reduction, which we've already talked about, which is close to $400 million here, as Mark just mentioned. We've got cost control that we've got at our disposal, both in terms of SG&A as well as things we would do at the plant levels and discretionary spending, and we've got inventory that we're really going to focus in on, too. And like I said, I'm really excited about our new platform with 5 large, well-capitalized paperboard manufacturing facilities that there's more capital release that we can work on, both in terms of roll stock as well as finished goods as we roll into next year. And that's the bridge. And that's what gives me really a high level of confidence in the $700 million to $800 million next year.

Got it. So we I'm talking...

This is [indiscernible]. I was just going to add that this is 1 of the areas that I've dug into over the last few weeks, and I share Mike's high level of confidence in this area. He mentioned the levers. We know what they are. We are going to pull them. In addition to that, cash -- federal cash taxes are going to be very favorable for us next year, are -- and so we know what the levers are. We're ready to vote, and we have a high level of confidence in the number.

So it sounds like last call, you mentioned $300 million to $350 million of interest, cash taxes, working capital. That sounds like that's coming down significantly as well.

We're going to have to take that bridging off-line, Michael. Let's do that. Again, I'm focused, and as I said, the levers that we're pulling here in the $700 million to $800 million, we'll help you get your model rights to the works. So let's take that offline after the call.

100%. No problem. One quick follow-up and ingot of time here. Just in terms of the 550,000 tones per mill, I mean, how comfortable are you bringing on that full amount of the capacity over the next 12 to 18 months in a market that's depressed? Or are you assuming that we're not going to be in the same place 12 months from now. And so just wondering -- it's a lot of -- I understand on a net basis is $75 to get that, but the market itself, as you pointed out, your competitors are acting irrationally? How would you -- I mean do you intend to bring this, 550,000 fully anything much? Or do you have flexibility to basically push that further if SBS the folding cards does not improve materially in the near term?

We're going to ramp Waco as fast as we can. It's our lowest cost, highest quality mill along with our K2 machine in Kalamazoo. And as I've mentioned a number of times here now, if I need to match my supply our demand, we'll do it on our K1 machine. So I want to bring it on as fast as we can. It's a great facility. It's going to allow us to compete in markets that, quite frankly, we haven't been able to compete in before. It's going to help us with some of that behavior by some of the bleach board producers in a way that allows doctor industry-leading margins. So you want us to do that, it really makes sense to do so.

Look, we'd love to bring a brand-new machine on like we brought the K2 machine on into a really [indiscernible] market. But you make a decision, it takes a number of years, in our case, 2.5 years to bring it on. This is what we've got. And we've got a lot of levers to pull, and our confidence level is high to deliver the free cash flow next year, and that's really where our focus is.

Next question is coming from Anojja Shah from UBS

Just 1 quick 1 for me. When I think about capital allocation priorities next year, it's going to have a lot of free cash flow. You've talked about deleveraging, of course, share repurchases. CapEx was down significantly. Is there anything else in there we should be thinking about? Like is there room for bolt-on M&A or expansion in international markets? How are you thinking about it?

Look, from my standpoint, it's really 2 things in our priorities. It's delevering our balance sheet, which we've talked about as well as returning cash to shareholders. That's our focus.

Thank you. That was all the time we have for questions. I would now like to pass the floor back to Mike Doss for closing remarks.

Thank you, operator, and thank you, everyone, for joining us on our call today. With Wake up and running, we have 5 America's very best paperboard manufacturing facilities, the strongest and most capable Global Packaging manufacturing network and the world's fast packaging innovation team. We are uniquely positioned to deliver exceptional results for our customers and to generate strong, steady cash flow across the next half decade and beyond. I want to thank our employees for their dedication and our stockholders for their confidence in Graphic Packaging. Thank you, and have a great day.

Thank you. This does conclude today's conference call. You may disconnect at this time, and have a wonderful day. Thank you once again for your participation.

Thank you, Phil, and good morning, everybody. It's nice to be here. I appreciate the invitation to come to the industrial conference. And first we're first up on presenting this morning on the packaging side, which is great. We appreciate that and your interest in Graphic Packaging. I'm going to start by basically through the safe harbor statements, making the case for why Graphic. And that's really what I want to do over the next 20, 25 minutes in my prepared comments. Then we'll open it up for questions from the floor. Hopefully, there are some there. Phil's got some, too. So I'm sure we'll use our 35 minutes in a productive way.

Look, I mean, if you think about Graphic, one of the things we've really done over the last 7 years is transformed this company. I'll go into some details in terms of what that really looks like. The last of the major expenditure getting ready to wind down with our Waco investment in recycled paperboard manufacturing facility in Texas. And we will inflect to serious cash flow generation, really driven primarily by the reduction of CapEx going down to a more moderated level at about 5% of sales, as well as the EBITDA that will come from Waco, as well as some working capital reductions given. We just really shrunk our paperboard manufacturing platforms make us more efficient. So that really will all inure to significant value creation for shareholders and something that I want to make sure that we outline for you.

We do have some near-term headwinds that we're dealing with. Some of those have been pretty well chronicled. I'm going to spend some time talking about those when I get to a slide. We believe they're temporary, and we've got a lot of confidence in our long-term algorithm and the business model that we built. So let's jump right in. Here's Graphic at a glance. You can see we're a little almost $9 billion in sales. We operate principally in 2 markets, North America and Europe. We do have a little bit of sales outside of those regions which is primarily all beverage, servicing our large beverage customers. About 70% of it is in North America, 30% of it is in Europe. Europe is a growth market for us. We earn our cost of capital in Europe. We have good ROIC in Europe, even though we're not an integrated business in Europe. We do ship some of our own paperboard over there. I think the other note that I'd make here is the portfolio we have is really not commodity-based. We've got over 3,000 patents and a lot of intellectual property that we use for the packaging we supply our customers. We spent the last 7 years really transforming the business as part of our Vision 2025. For those of you who are familiar with us, and there are really 3 main things that we tried to do when we did that. The first thing we wanted to do is have more capabilities. For example, we didn't even have a foodservice business in 2017.

And really, what that caused is if the consumer was eating out, we weren't getting those sales. So it impacted our ability. I'll show you a slide here in a little bit later on in the deck, all kind of profile that in a lot more detail for you and why it's important. But the big thing we did to address that is in 2019. We purchased International Paper's Consumer Packaging business, making us the #1 player in paper cups, roughly 30% of all the paper cups in North America we manufacture. We make the paperboard for that, as well as have 5 low-cost cup converting facilities there. We've also invested in innovation in a big way. Many people thought our expansion with AR packaging in Europe was simply just to get more geography. There was an element of that. It allowed us to get into Eastern Europe, which are great markets for us. But the biggest part of it was they were the most innovative company in the space, and combined with ours, that we had, we now have 5 global innovation design centers that routinely develop new and different solutions to replace primarily plastic and foam packages, and that's allowed us to really expand our markets, and I'll talk a little bit about that more in a minute.

And lastly, we invested for competitive advantage. We had some bespoke opportunities on the coated recycled paperboard area here to take a significant step forward in terms of cost leadership. Our first investment was in Kalamazoo, Michigan, and one is pretty well chronicled and has gone extremely well. And then after that, we announced that we were going to do a greenfield facility in Waco, Texas which we'll bring online here in Q4 of this year. And as I mentioned earlier, at that point in time, we will have all our major investments made in this kind of long-cycle CapEx that we've been doing, high CapEx upwards of 12% of sales here will revert back to a more balanced level around 5% of sales or below. So we're excited about that. Look, this is where we were in 2017. I mentioned this earlier before we got our food service platform. We were largely dry foods and beverage, we kind of center of the store primarily. Our top 25 accounts represented almost 80% of our sales. It was nice from an SG&A standpoint. But again, if one of those customers got a cold, we got the flu.

And so we really needed to build out our portfolio, and that's exactly what we've done. When you look at that same picture of the store now, we actually put a drive-through in there because we're getting the drive-through window as well. And a lot of the work that we've done around plastic replacement really allows us to get that perimeter to the store, and we'll be profiling some of those packages in our upcoming earnings report. We have here with Q3 with some things that we've done in Europe that are continuing to accelerate that. So really excited about that. Again, real balanced customer portfolio, which allows us to drive consistency across our revenue base. I guarantee you that in the last 24 hours, you've touched something that we make. Here are some examples of what we do. You can see there on the slide, the balance that we have really across our portfolio between food, beverage, food service, household and health and beauty.

Health and Beauty is the smallest business. It came from AR packaging, and that really allowed us to get into that space, primarily in Europe. We're learning a lot about what it takes to be a successful provider of those cartons. We really provide a limited amount of that in North America, but we see that as an opportunity for us. Here's that slide that really shows that. You can see AR packaging's addition with the lighter green balls there. We really have a nice platform in Europe with 38 facilities now geographically located in the right spots to take care of customers. As I mentioned earlier, this is a nonintegrated business. We do ship about 250,000 tons of our own paperboard to ourselves into that market, and we buy the rest of the paperboard, which is a great position to be in given the supply and demand dynamics of paperboard in Europe. So excellent business, great innovation and AR packaging has really been a home run for us.

Here's our 5 platforms that we drive as part of our innovation. And they're primarily -- $13 billion of that $15 billion is really focused on plastic and foam replacement. And what this has allowed us to do is really outperform our customers in the markets that we participate in. Look, we're not immune to our customers having volume challenges. And I'll talk a little bit more about what doing about that here in a minute. But what innovation has allowed us to do consistently quarter after quarter is outperform. And it's really a function of the innovation efforts that we have, and that's why we spent so much time investing in space. Here are some examples of some of the innovations we've done. You can see these are types of products that are available every day in the marketplace. Things and other consumers use routinely. And this will continue to be a key focus for us as we go forward here.

Here's our Vision 2030. We put this together and we rolled this out in February of last year. And you can see there are really 4 pillars of this, starts with innovation. I commented a lot on innovation already and why that's so important to us, allowing us to outperform in markets that are a bit challenged, with innovation really kind of driving that uptick that we have. We focus on culture. We focus on people. At the end of the day, we have 23,000 associates that come to work every day, and they're driving our business forward, taking care of customers. We need them motivated, we need them to be committed. And so we work hard to create a culture that really fosters that kind of engagement and innovation across our entire company.

We focus on making the plan in a better place. We do invest heavily to reduce the amount of carbon that we generate. I've got a slide in here, I'll show you how we're going to do even more of that. The investments on recycled packaging, I think, speak for themselves. We spent almost $2 billion in the last 5 years to create North America's lowest cost, highest quality recycling platform. We can now take dirty your fiber, clean it all up and put it into high quality packaging, and we've got a significant cost advantage in being able to do that. And most importantly, that's where the end-use customers really want us to go. They really appreciate coated recycled paperboard, where it can be used in a package, they want it used in a package. And all of that really inures itself and to do a good job on those 3 things, the results for both our customers, our shareholders and our employees as well.

As I mentioned earlier, what I'm excited about with our Vision 2030 is once Waco is complete, we have everything that we need to drive this Vision 2030 commitments that we've made on this. It's not like we've got another big acquisition or another big capital investment that we need to make to go out there and do it. This is going to be about innovation and execution on the asset base that we have. I like this slide. It kind of organizes a little bit some of the things we're doing around sustainability commitments. I get asked all the time, are you still committed to reducing the amount of carbon that you generate? And the answer is yes. We're going to be thoughtful on how we do it. But you have to remember, almost half of our customers are domiciled in Europe, and they've specifically called us and said, look, are you still committed to driving the reduction of carbon and out of your company? And the answer is yes, we will be able to do that, and you see here on the lower section there that we expect to generate almost a 50% reduction in our overall carbon by 2032, with investments that we'll make in the business, all part of our 5% of sales on the CapEx line. So it's all in the numbers. It's not like there'll be some big capital call that we have to do.

We've laid that out. If you haven't had a chance to take a look at our impact report, it's very detailed in there what we plan to do, how we plan to do it and the time lines that we've put together to do it, and that's really resonating well with our customers who have made some pretty significant pledges, even though some of those have been moved back a little bit. We need to be there to be able to support them, and we will be there. Investing in people. I've mentioned why that's important. All of you understand that. We need to make sure that we've got the right workforce and trained the right way to be able to do what our customers need them to do. And of course, the packages that we generate each and every day need to be more circular, more functional and more convenient. Otherwise, they just don't resonate with our customers. Those are the things that we have to do. So every time we have a new innovation, we've hit the mark on those 3 things, and that's really a differentiating point for us in the marketplace in terms of what we do with innovation.

Here's our arrow slide that really shows our end-use markets. I think this really speaks to the diversification I mentioned earlier with some of the things that we did in Vision 2025, relative to building out our portfolio in that kind of the overall picture I showed you of the supermarket with the drive-thru in there. Look, you can see in quarter 2, we actually went sideways on a number of those. Health and Beauty was up a little bit. I think that's a pretty good testament. We -- if you think about what has happened here on the Foodservice side of the business has been pretty well chronicled some of the challenges that the QSRs have experienced. And yet the last 2 years, our business has been up pretty substantially. And the reason for that is we've been replacing plastic and foam in terms of cups. And so again, kind of giving you some real examples of how that works. Being able to shift and move with the consumer is essential. And that's what allows us to drive that consistency and the innovation allows us to drive market expansion, and really make sure that we outperform in terms of volumes in terms of what our customers are buying from us each and every year.

One thing I will add, and I was asked the question in the hallway, and I want to make sure that I addressed this too in terms of Q3 volumes. Those of you who follow consumer packagers, or consumer goods companies, I should say, food companies and beverage companies. Several of them have released in the last couple of weeks, some of our customers have. So you're probably not surprised to know that our Q3 is off to a little bit of a mediocre start. We had kind of forecasted to be plus or minus flat. And we're probably down about 2% through volumetrically, through the middle of August, really a little outperforming relative to what we've seen in terms of Nielsen and some of the other data but I am willing to share that with you today. We spend a little bit of time on this slide. This is an important slide because it's really part of the case that I need to make around why Graphic.

If you look at the far left-hand side of that and take a look at the volumes, you can really see what we've been dealing with for the last couple of years. If you look at 2023, as our customers kind of rolled out of COVID, they dealt with the destocking, got their inventories back in line with where they wanted them to be. I get asked a lot is there still destocking going on? If there is, we don't really feel it as a material impact, I think most of that is in our rearview mirror. But you can certainly see where it was in 2023. Our volumes held up pretty well. We did take a fair amount of market-related downtime in our paperboard manufacturing facilities to make sure that we dealt with that, matching our supply and demand like we always do. But you can see the margins held up pretty good during that period of time.

There are really 3 things that are impacting us right now. We view them as unusual, and we view them as temporary, but they're real for us in the near term. And so I need to talk about them and make sure you understand how we're viewing them, and what we're doing about them. The first one is really the fact that food is extensive. If you take a look at really what's this has been, again, well chronicled, our customers raised prices pretty dramatically during the COVID era. And they've been reticent for all the right reasons not to reduce those costs or reduce the pricing. In many cases, their costs are up pretty substantially as well. But affordability remains a challenge. The consumer is stretched. And so that's impacting our customers' ability to drive their volumes. I have to tell you, it's gone on a little longer than I anticipated it would. But there are some green shoots that seem to be happening.

Of course, you read journal as I do this weekend, there was a fair amount of news in there around what's going on with the big CPGs, 4 of our big customers were mentioned in there. So from our standpoint, we believe it's being addressed by those companies and those Boards. And they've got a long history of reformulating and repositioning their business in order to resonate with customers. And I anticipate that they will. All that said, that takes some time. Reformulation doesn't happen overnight, repositioning some of these brands. It takes some time as they're going through some of their -- the changes that are going to happen in corporate structure and things like that, we'll have to deal with that over that period. But they will get it right. I'm quite confident. These are well-capitalized companies with great brands, and they've been through different events in the past and been able to do it.

The second part of that is really dealing with what I'll call the MAHA movement and GLP-1 drugs. And they're different. I mean the MAHA movement is really somewhat expensive for our customers and comes in a very inopportune time for them. They're already dealing with some of their volumetric challenges. And now they're having to go to reformulations that almost always are more expensive, just kind of a fact in terms of what's happening there. Replacing some of the artificial flavors and colorings that are out there. And that takes away from money that they otherwise could be using for promotional activity, slotting fees and things like that. So it impacts some of their demand. They'll work through that. Most have made pledges to do it, '26, '25, '26, and I think some early '27, so it will kind of flow through there. But it is something that they're having to address, and it's a near-term headwind for them for sure.

GLP-1 drugs, I could make a case is actually probably more of a friend for Graphic than a foe. We don't participate in kind of the salty snack category in a material way. That's mostly film, plastics that do that. And again, customers will reformulate some of whom already started doing this with higher protein type additives in food. And any time they reformulate or look at a different size, that's an opportunity for Graphic. But again, it's churn that our customers are dealing with. They're having to figure out how they put the resources on this and it takes some time for them to get it right, but I believe that they will. A third element that's impacting us right now is really kind of a truly interesting and unusual situation, and that's on the paperboard market, specifically SBS. So that's the white paper board. We're a small player in that market. Almost 80% of everything that Graphic does is on recycled paperboard or unbleached paperboard. The biggest thing we do on the bleach paperboard side is paper cups, and that's a really good market, as I already mentioned to you.

But on the coated SBS market, there's been capacity added here in North America to a market that was already well supplied. It's driving operating rates down pretty dramatically. One analyst wrote this morning and he's right. There was a 520,000 ton machine added into a market that was operating rate of around 82%. So what that's doing is that's keeping a bit of a collar on our ability to push pricing on coated recycled paperboard and unbleached paperboard. And it's really kind of a new phenomenon because if you look at the spread on coated SBS and go back 10 years, it used to have a 40% premium over coated recycled paperboard. That premium right now is as markets is down to 7%. So it's a very, very unusual spot to be in, particularly when you think about it cost 50% more to make that paperboard than it does to make coated recycled paperboard and the CapEx requirements are substantially higher, almost 4x that of coated recycled paperboard annually.

So our opinion is, is that really no producer that's making that right now it's probably earning the cost of capital. So it will get solved, but that's an issue in the near term that we're dealing with. So those 3 things are really what's impacting us. You see it in our adjusted EBITDA margin. Our confidence remains high in our business model and the investments that we've made. Again, we've more than doubled down on coated recycled paperboard, we're the lowest cost producer of that grade. But these issues do impact us, particularly the SBS in terms of what those markets are doing in the near term. So it's something that we have to watch. It's not ours to sell. We're a small player. We're actually busy on our coated bleach side of the business and our cup business. We have 2 machines in our Texarkana paperboard manufacturing facility, one makes cup, the other makes coated bleached and both of those are very busy because it's -- they're over 95% integrated in our own stuff. So it will be someone else that needs to do it. It won't be us. But in the near term, that's a headwind that we have to deal with.

Here's our base capital allocation model as you look there in our algorithm. We're obviously behind a bit on our base model. We're not generating those results right now. But our confidence over time that we will is very high. You can see low single digits on the annual sales growth, which really assumes kind of, call it, a flat market than innovation really being what gets us into that low single digit. Right now, that innovation is getting us closer back to 0 so far year-to-date in 2025, with markets being down a couple of percent. So we're not hitting on that right now, but we believe we will over time for the reasons I just got on talking about what our customers are doing, reformulating. And that drives adjusted EBITDA growth of mid-single digits. It's pretty mechanical for us. We get good absorption relative to that level of growth. That drives high single-digit EPS growth. And I've already mentioned our CapEx is going to revert back to 5% of sales or less starting in 2026. So that's like 6 months away from now relative to what you can expect from us. And that drives our capital priorities, which are listed there to reinvest back in the business.

We need about 2% of that 5% is what I'll call true maintenance CapEx. So even at 5%, we're investing into new markets into lower-cost assets things that make the company better. It's not like we're starving the company of CapEx. We have a well-invested company, very well-invested companies. As a matter of fact, and we will continue to be smart about how we allocate capital to do that from an investment standpoint. We want to grow the dividend. You've seen us made a couple of moves here about every 24 months, we take a look at that. We think a growing dividend attracts investors, investors that want to invest in a company like Graphic. So committed to that. We've been pretty upfront around our desire to reinvest, repurchase our own shares, if you will. We have allocation right now about $1.6 billion out there. And you saw us in our second quarter, I made some moves. We have to manage that in accordance with our leverage ratio, which we said we'll finish the year around 3.5x. But with our stock trading where it's at, it's pretty clear what's the best priority for us in 2026 is. You can expect us to continue to be very focused on that.

Getting investment grade as part of Vision 2030, that's in the cards here too. We need to get our leverage down a bit, which we will. It's pretty mechanical with the cash flow generation we're going to generate over the next few years. We think that's important and that will be another leg of the stool in terms of our overall financial stability. And I have to tell you that M&A, do we look at it? Sure. But is the bar extremely high in this environment? Absolutely. And it's even higher now given where our stock is trading relative to what we can do with our own reinvestment back in our company in purchasing our own shares. So that's how we think about capital allocation as we roll into 2026. This slide basically just shows the cash flow, and we've adjusted it to kind of show the jump-off point a little bit lower than where we had anticipated to be. But I think the point you really need to take away from this is the vast majority of what's driving that uptick in the free cash flow is the reduction in CapEx.

Then you've got a little bit of Waco coming on $80 million next year and $80 million the following year, a little bit of working capital. And then there is some growth in the overall business, but the big uplift here isn't around, hey, our volumes have to come back and be 3% in order to make this all happen. Certainly not in the near-term years that we've got. So our confidence in our ability to generate that free cash flow is very high. And you should take some comfort in the fact that we know how to repurchase the company back. The slides in there. We bought back almost 25% of the company since we did the acquisition of IP's consumer business in 2018. You can see it there. We've been pretty smart about how we do it, and we've retired those shares in a way that has been value creating for our shareholders. There's our guidance and commentary, which is unchanged. And with that, Phil, I've got about 10 minutes left. So I'm happy to take in questions.

I'll kick things off, and then we'll open up the degree. Mike, so I appreciate all the great color. The 3 headwinds you talked about, whether it's SBS, MAHA and just volume challenges as consumers seek value. Those don't seem to be an easy fix in the medium term. So in that backdrop, what are some of the levers that are at your disposal to kind of grow earnings? Or is it going to be a pretty muted EBITDA environment? And just cash and things that you can control? So just kind of help us think about the longer term, the medium-term algo.

In the near term with those is the headwinds that we're facing right now, our focus is clear. I mean we've got to get Waco up and running which will start up here in Q4 of this year. We're heads down really focused on that. You should have a fair amount of confidence that will be successful given it's an identical paper machine to the one we started up successfully in Kalamazoo in 2022. So we've got a lot of people there that know how to do that. We need to continue to drive innovation. We have to help our customers win in this crowded market space with the things that they're dealing with. And suppliers that help them win when they're going through all these changes and struggles are the ones that are going to be rewarded with additional volume. We have to earn that.

Our cost structure is such that we can be smart about where we would decide to take strategic share. and really focus on the investments that we've made and leverage the investments that we've made to make sure that we hit the volumetric targets that we've put out there. So I think when you look at all that, those kind of operationally, what we're focused on. And then the capital allocation piece of it, Phil, as I mentioned, is another area we generate alpha for our shareholder base, and I've kind of alluded to what our priorities are. So near term, that's what we have to do.

Super. Questions in the audience?

Yes. Can you talk a little bit about -- can you just clarify a little bit about this reduction in cash flow long term that you guys talked about with your Q2 call and how we should think about that? What does that all mean?

Thank you for the question. And so really, as I mentioned, our jump-off point is a little lower as we go into next year. So that's why it was the $80 million that we talked about. And I think you're specifically asking around when do we get back to $1 billion, which is kind of what we guided with the Vision 2030 piece. The question is, I don't know for sure when those 3 things really kind of take care of themselves, but they will take care of themselves.

Our customers will find their mojo. They will reformulate. And on the SBS side of the business, people aren't going to operate paperboard mills that aren't earning the cost of capital in infinite. Sooner or later, someone is going to make a decision. I've been doing in 35 years, it always happens. It seems like it takes longer than it should. And as I mentioned, this is one we're kind of on the sidelines watching and waiting, so it does impact us, but there's not a lot we can do in the short term there because our facility, as I mentioned, in Texarkana is running full. We get some collateral damage on that, and it certainly puts a cap on what we can do on our other 2 grids, which by the way, the backlogs on both coated recycled paperboard and unbleached paperboard are very solid, as you saw, and Phil actually wrote about in coming out of Q2 with the AF&PA data that was released.

So those are again the things that we can do. And I think the thing that you can count on is that we're positioning Graphic to be spring loaded when that does get resolved, and it will, that we're in a good position to take advantage of it and kind of close that gap. But I can't give you an exact timing on it.

Just a technical one related to the same question. So 2026, you gave free cash flow guidance of $700 million to $800 million and then you said cash requirements from $750 million to $850 million -- just looking at 3 components CapEx, $450 going back to 5% of sales [indiscernible] and the tax [indiscernible] $230, that puts me at $900. What is this like have you built that coming from this or that the build or how do you look at the [indiscernible]

It's a combination of things. The big beautiful bill is a portion of it as well as working capital reductions on the downsizing, specifically inventory downsizing to 5 very well-capitalized paperboard manufacturing facilities.

Yes, there's an inventory optimization in there that we couldn't do before Waco. We need to build up our inventory to get ready for the closures. So inventories and then, of course, with customers coming in short, we ended up with inventories even higher than we expected. But the big beautiful bill has a significant positive for us with the bonus depreciation.

Our timing was quite good with Waco as a result of that legislation.

[indiscernible]

And then the very to -- can you just on the format the expectations were flattish.

Yes. So through -- what I've said is through the middle of August right now, we're seeing -- we had guided to plus or minus flat and we're down 2% through the middle of August volumetrically.

Yes, the plus or minus flat is for the year. But third quarter tends to be a good quarter, and it's starting off well.

We had a number of customers that actually took the week of the fourth of July just down a manufacturing. And so that impacted us a little bit there. Other questions, Phil?

From a pricing standpoint, I think you guys have been trying to move off of RISI and have more of a cost-plus type approach and you introduced value-based pricing where it's off of the public indexes. How is that evolution coming along as you kind of negotiate contracts for next year, perhaps?

Yes. Thank you for that. And you're absolutely correct, that is a stated strategy of ours. And we were kind of early in kind of moving away from RISI. As you well know, we've been at this now for the better part of 6 to 7 years for reasons that make a lot of sense, at least for Graphic. And we continue to make progress there. It takes a while to do it. We don't play to an empty chair that's #1. And so customers still have options there to be sure that we're thoughtful in terms of how we do it with them.

But those who have made the move really like the transparency. We've got the ability to see that their Bloomberg terminal and really know what's going on with their pricing because it's very transparent in terms of how it goes as opposed to as you know, the RISI process, which is far from transparent.

Well, you guys were roughly 50%. Like is there an aspirational target, call it, in the next 2 to 3 years, where you want to be more cost-plus versus RISI?

Yes, higher.

And then you talked about some of the MAHA dynamics, GLP-1s and then some of your customers going through some transition. How do you kind of tackle that? Are you making incremental investments in bolt-ons to be more perimeter store? And do you expect some of the changes at the customer level, MAHA or creating some disruption this year in terms of demand?

To this point, it really hasn't been -- our response has not been M&A. And I don't think it will be. The bigger opportunity for us is just to continue to take advantage of this excellent innovation team and process we have internally with Graphic. And we get asked a lot. Europe is still very, very committed to innovation and moving away from plastic. It slowed down a little bit in the U.S. for reasons that are pretty well understood here. But that doesn't mean that it's going to go away. It just means in this dynamic where you have customers splitting themselves up, and selling their businesses that they're focused on different priorities right now.

But we have to continue to come forward with those ideas because ultimately, you have to win in the marketplace. They ultimately have to sell more products. And our customer -- our products help get it off the shelf and into the cart for our customers, and that's really where we plan to help them win.

[indiscernible] $80 million and then $80 million what utilization does that assume?

Yes. Thank you for the question because we get asked a lot around, is it volumetrics? Now if volumes just completely crashed the answer is yes. But the first $80 million is really driven by cost. And the better part, if you remember, when we rolled it out, we said $100 million of the $160 million is cost shutting down Middletown, shutting down East Angus and tying out that EBITDA that we got from those because we're just -- it's a lot lower cost facility. And then the remaining $80 million will have to be some impacted by volumetric growth. So that's into 2027. But 2026...

So utilization is just a quick one with what you're shutting down?

Yes. Well, we're actually adding tons at Graphic, but the industry has taken tons away the industry removed about 330,000 tons here this year. And when you tie that all out, the net add into the industry with weight goes about 80,000 tons. So it's pretty small. CRB is a really good balanced market, and it's in high demand by consumers as well, particularly the high-quality material that we're generation.

And East Angus will come down after Waco starts because we can't -- we'll get too short. The market is tight in recycled. You don't see it in pricing right now because of what's going on in bleach, but the market is tight. If we shut East Angus, we'd be shorting our customers right now.

And we're tied in on bleach to. We've actually had to purchase more tonnes this year than we anticipated to kind of take care of that business. So it really is a phenomenon with leach paperboard that we're dealing with.

With some of the investments you made on the CRB side, anything you'd call out from a customer penetration for some of your newer products, where you've taken share or any new innovation that you could point to where you've seen adoption?

Well, certainly, the Rainier product that we launched competes directly coated SBS that kind of creates another headwind for coated SBS. And that particular product has got the brightness and smoothness is of the high quality SBS materials, which I mentioned to you earlier, usually take about 50% more cost to make. So that is resonating with some customers. We anticipate, I think, over the next 3 years, we'll have upwards of 80,000 tons in that grade and we started with 0. So it's been a nice win for us. Good innovation.