Graphic Packaging Holding Company Aktie

[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.

Good day, everyone. Welcome to Graphic Packaging Second Quarter 2025 Earnings Call.

[Operator Instructions]

It is now my pleasure to turn the floor over to your host, Mark Connelly. The floor is yours.

Good morning. We have with us today Mike Doss, President and Chief Executive Officer; and Steve Scherger, Executive Vice President and Chief Financial Officer. During this call, we will reference our second 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. Good morning, everyone, and thank you for joining our call today. Graphic Packaging is a global leader in sustainable consumer packaging. In the second quarter, we saw a continuation of uneven volumes as consumers remain stretched. Promotional activity helped drive modest volume improvement in some categories. Conversations with our customers suggest potential for an increase in focus on volume growth and protecting their market share in the quarters ahead.

Meanwhile, the last major investment in our Vision 2025 is nearing completion and we expect to generate cash substantially in excess of our needs beginning in 2026. In the second quarter, Graphic Packaging sales were $2.2 million. Adjusted EBITDA was $336 million. Adjusted EBITDA margin was 15.3% and adjusted EPS was $0.42. Volumes in the Americas were modestly better than expected driven mainly by an increase in beverage promotion and some targeted promotional activity in Food and food service. Our decision to curtail production to further reduce inventory levels did impact our adjusted EBITDA margin, but positions us to operate much closer to normal ones in the second half.

Turning to Slide 3. We will bring our Wake over cycle paperboard investment to life in the fourth quarter. While the project remains on schedule, we are experiencing higher costs, principally labor and final engineering and design costs related to permitting and insurance requirements. We are now estimating 2025 capital expenditures of $850 million. In 2026, capital spending will decline 5% of sales, consistent with our original targets. The higher spending in 2025 will be offset by lower cash taxes after recent federal tax law changes and lower working capital as we reduce inventories. So we expect no net impact on estimated 2025 free cash flow. With Waco set to begin production later this year, we closed our Middletown, Ohio paperboard manufacturing facility in May.

We are now serving those customers mainly from existing inventory Waco is the last major investment of our Vision 2025 transformation program. Recycled paperboard has by a wide margin, the lowest environmental footprint, the lowest upfront capital and sustaining capital requirements and with our quality advantage can replace more expensive to produce bleach paperboard in a wide range of applications. When you look at the numbers from an investor standpoint, there is just no comparison. We will continue to utilize bleach paper appropriate. From the vantage point of cost, capital and consumer appeal recycled a superior bleach, and we will continue to keep our footprint in bleach paperboard small and focused.

We were pleased by the recent decision of the Recycled Materials Association to for the very first time, include paper cups in their single stream and dual stream recycling specifications. Graphic Packaging's own [indiscernible] worked closely with the association and with our colleagues at closed-loop partners and the foodservice packaging institute to promote and encourage this important update. The association's guidelines are highly influenced with waste collectors and with thousands of material recovery facilities and deciding what does and doesn't get collected in municipal recycling and collection systems is the largest producer of paper cups in North America and a major user of recovered fiber. This update has particular significance to us we designed Waco to take full advantage of this high-quality underutilized fiber source, which today mostly ends up in landfills.

I've already mentioned our action on inventory. Steve will discuss capital allocation in his comments in a few minutes. As expected, volumes across consumer stables remain uneven. A stretch consumer is spending more money on groceries, but leaving the store with fewer items than they did a year ago. Our volumes in the Americas were roughly flat, modestly better than expected and we again outperformed the broader CPG and QSR markets we serve. Our international results remain positive, but growth slowed modestly confirming that consumers in those markets are also stretched as we cautioned last quarter. Private label and store brands continue to gain traction in select food categories. Trademarking activity has also been accelerated, suggesting that private label offerings will continue to expand across more grocery and other consumer staple categories.

We have an excellent position with retailers and co-packers and have been particularly pleased with the reception our innovation portfolio is getting from these customers. We delivered innovation sales growth of $61 million in the second quarter and are on track to reach our 2% of sales growth target for the full year. While we have seen a few customers scale back their packaging innovation plans in the near term, most customers remain committed to reducing the environmental footprint of their packaging and our innovation sales pipeline remains robust. Turning to Slide 4. The breadth and depth of our consumer staples packaging portfolio is the foundation of our strike.

We are in every aisle of the supermarket and are a major packaging supplier to quick-service restaurants. Over time, we expect to grow our presence substantially across household products and health and beauty as customers increasingly embrace recycled paperboard as a less expensive more logical and more appealing alternative to bleach paperboard. Turning to Slide 5. Overall second quarter packaging sales were roughly flat year-over-year. Food results remained uneven. Snacks are among the more discretionary grocery items and saw pressure, although bars continue to benefit from wellness trends. Cereals saw continued weakness [indiscernible] pasta sauces and prepared foods saw gains as consumers shifted from high-cost alternatives. Our Boardio container is driving solid growth for us in coffee where we are also benefiting from a trend towards more home and office consumption.

In the Americas, Rosen Foods saw further declines as consumers shifted to fresh and refrigerated categories, including bakery, grocery stores generally earned higher margin on freshly prepared food items and are continuing to expand and promote the fresh offerings. In Europe, Frozen food results remain solid as consumers in those markets continue to prioritize convenience. After solid beverage seasons in 2023 and 2024, we are encouraged to see 2025 again off to a very good start. Peers decline moderated for us and carbonated soft drinks saw good growth on the back of higher promotional activity around Memorial Day. July and August are the heart of the beverage season, and July results have been very good. energy drinks, flavored seltzer and wellness beverages are continuing to gain in popularity with consumers.

Foodservice results were relatively unchanged despite some aggressive but targeted promotional activity. We are actively engaging with our QSR customers on their strategies to drive higher foot traffic. Promotional activity in Europe continues to drive volume more successfully than it has in the United States to this point. Household product results were relatively unchanged overall with tissue products turning positive and food storage remaining strong. Health and beauty is still mostly an international business for us, although we expect that to change over time. Fragrances are showing further recovery after a good result last quarter, and health care products also showed improvement. Slide 6 highlights our fine packaging innovation platforms, which are key to generating top line growth over time.

We are seeing good opportunities across each of these areas and every new product launch adds to our insights and to the value we bring to our customers.

On Slide 7, I want to highlight an innovation specifically designed for club store customers. Most of the innovations we have highlighted recently are focused on plastic replacement, but sometimes innovation means taking a fresh look at traditional packaging solutions in creating something better. One of our largest CPG customers asked us to help them develop a more cost-effective bulk packaging solution for coffee pods, working closely with their product development and marketing teams, we developed a solution that reduces materials, cost production and material handling costs, improves on-shelf marketing impact and delivers a superior customer experience.

The traditional packaging method for bag coffee pods is called [indiscernible] l, you set up a corrugated box, dump deposit and glue the box shut, our nested pod solution is better from nearly every angle. As you can see in these pictures, by oriented positive layers and the new design eliminated the dead space at the top and fit the same number of pods into a 21% smaller package. It also uses 30% less material per package, reorienting the container to be dare and taller gives the package more shelf appeal and takes up less space in the consumers' pantry. The taller narrow box also means that we can stack 26 boxes per layer on a pallet rather than just 16 and are only stacking 4 layers high rather than -- moving the opening to the top center made the size corners of the package stronger. With fewer layers and stronger structure, we were able to switch to layer in our materials.

And finally, we replaced the expensive bleach paperboard top sheet with our Pacesetter Rainier recycled paperboard that lowered the cost further and reduced the package's overall environmental footprint with 100% recycled alternative that provides the same outstanding print quality. This new nested coffee pod solution is on store shelves right now and represents the gold standard for coffee pod packaging. Turning to Slide 8. Our vision for Graphic Packaging is clear. Our focus on innovation, culture and commitment to sustainability is how we generate best-in-class results for our customers and for all our stakeholders. When our [indiscernible] investment is complete, we will have everything we need to reach our Vision 2030 goals.

On the governance front, I'm happy to report we recently published our 2024 impact report. We've added 2 new directors to our Board in the past year with extensive operational and senior leadership experience in food and health care, and we are in the process of declassifying our Board. Our commitment to driving shareholder value is stronger than ever. and Vision 2030 is our road map. Now let me turn the discussion over to Steve for a review of the company's financial performance and capital allocation.

Thank you, Mike. Turning to Slide 9. Sales for the second quarter of 2025 were $2.2 billion. If we exclude the impact of the Augusta divestiture and the impact of foreign exchange in the quarter, packaging sales were roughly flat. Packaging price was approximately 1% lower, which mainly reflects the impact of third-party price recognition from 2024. Overall volume was up approximately 1% and with Americas basically flat and international modestly positive. Adjusted EBITDA was $336 million, in line with the commentary we provided in June.

The second quarter is our biggest maintenance quarter, and we took aggressive action to manage inventories, which had an incremental impact on our reported margin but positions us to run at more normal levels in the second half. During the second quarter, the impact of lower prices, input cost inflation, labor and benefits inflation, and the Augusta divestiture reduced EBITDA by approximately $64 million. Our actions to reduce inventory drove net performance negative in the quarter, more than offsetting a modest benefit from higher volume for a combined net negative $13 million.

Inflation did moderate in the second quarter with lower resin recovered fiber and logistics costs compared to the first quarter. Foreign exchange was an $11 million tailwind. Slide 10 highlights the still challenging consumer packaging environment on the left and the strength of our business model and execution on the right. While inflation and our inventory management decisions pushed our margins below normal this quarter, less maintenance and the actions we have taken on both cost and production should push margins closer to normal levels in the second half and we will see the Waco investment benefits starting in 2026.

Turning to Slide 11. We repurchased 1.6% of the company's outstanding shares during the second quarter at an average price of $22.26 per share. We allowed net leverage to rise modestly in the quarter, taking advantage of what we believe was an unusually attractive stock price. We expect to end the year with net leverage below 3.5x, in line with our guidance. In the appendix to today's presentation on Slide 18, we highlight the company's strong record of opportunistic share repurchase. Since 2018, when we completed the combination with International Paper's Consumer business, Graphic Packaging has repurchased nearly 1/4 of the company, while we doubled in size and completed the transformation into a global consumer packaging leader.

With the Waco investment nearing completion, free cash flow will rise substantially. And as of June 30, availability under share repurchase authorization was approximately $1.75 billion. Turning to the outlook on Slide 12. We have updated our guidance to reflect performance to date and a somewhat narrow range of outcomes with no change to the adjusted EBITDA midpoint. Volume uncertainty remains elevated, given the stretched consumer and the targeted promotional activity we are seeing, particularly in food packaging, our biggest market. Many, if not most of our CPG and QSR customers continue to express caution about their own near-term volume outlooks.

As I mentioned, we expect second half adjusted EBITDA margins to be meaningfully better than first half as a result of actions we have taken to reduce inventories, less scheduled maintenance and normal seasonality. As Mike mentioned, the increase in capital spending in 2025 is offset elsewhere. And so our expected 2025 free cash flow remains unchanged. This late phase increase in project cost is not expected to materially affect overall investment returns. Geico's economic and quality advantages are expected to be even stronger than they were in our previous estimates.

Slide 13 summarizes the company's Vision 2030 base financial model and capital allocation priorities, which are unchanged. As we move toward 2026, Graphic Packaging will return to a more normal level of reinvestment for growth and productivity, which is included in our 5% of sales CapEx target. We expect to generate free cash substantially in excess of our needs over the next several years, and we plan to return significant capital to stockholders while also reducing debt levels. We remain committed to an investment-grade credit rating by 2030.

On Slide 14, given the weaker near-term volumes and their impact on 2025 adjusted EBITDA, we've adjusted our expectations for 2026 free cash flow to $700 million to $800 million as volume moves back to more normal levels, we expect to achieve our original free cash flow targets in 2027 and beyond. In the appendix that begins with Slide 15, you will find additional information that may be useful for modeling, information on seasonality the review of our buyback history, which I referenced earlier. That concludes our prepared remarks. Operator, let's begin the Q&A.

[Operator Instructions]

Your first question is Anthony Pettinari with Citi.

Good morning. I had a question about the -- in terms of the increase in capital spending from $700 million to $850 million, so that impacts free cash flow in '26? I'm just trying to understand kind of the flow-through because it looked like you trimmed the '26 free cash flow number. And then -- is that just completely sort of onetime in nature? And then '27, you're kind of stepping up from a lower base? Or just can you help us understand how that sort of flows through it impacts cash from '25, '26, '27?

Yes, Anthony, it's Steve. I'll take that. 2025, as we articulated, CapEx, $850 million, a combination of cash taxes, working capital down $150 million. That's driven by some benefits from the recent tax legislation, about $50 million and a decrease in working capital as we've significantly reduced working capital. So for 2025, no change in our free cash flow and as such, no change in our expectations for year-end leverage. In 2026, what we've done is we've updated 2026 cash flow for our expectations of where the leap-off point is for this year's EBITDA, and so that's got 2025 EBITDA at the midpoint of 1.5%. Our assumption obviously is that will grow next year.

And then the cash to run the company in 2026 is very consistent with what we've shared previously. Total cash for CapEx, interest, taxes, working capital, will be between $750 million and $850 million, and that will have CapEx at 5% of sales. So think about that as in the mid-$400 million range. And then the remaining items in the mid-$300 million, $300 million range. So that's kind of the path to the updated $700 million to $800 million of free cash flow in next year. So we took this opportunity to update it for this year's CapEx, this year's cash flow consistency and then updating it for 2026 as cash flow -- free cash flow expectations.

Got it. That's very helpful. And then maybe just one follow-up. In terms of -- you referenced maybe some higher permitting costs, insurance costs, maybe labor around Waco, was that something that was sort of inflating over the course of the year? Or were there some aspect of the project where you saw kind of a big step-up in that estimate maybe during the quarter? Just trying to understand what's driving those costs if it's maybe a bunch of little things or something that changed with the project?

Anthony, it's Mike. Yes. Look, it's a couple of things. I appreciate the question. First, labor costs, specifically electricians as you can appreciate, we've got about 600 electricians working to finish up the project here as we speak in the final phases of it. That portion of the labor came in a little higher than what we expected. That's really a function of the fact, as you're well aware, there's a real boom on data centers and other construction that's bid up by the cost of that labor. So we had to deal with that.

I think if you take a step back and look at it over a 2.5-year period, we started with a greenfield -- and of course, we had the engineering done on certain aspects from Kalamazoo. We built the same machine hall. There were other elements that were different because we did gain have certain things like the POWERHOUSE wastewater treatment, those types of things. We had to build and that comes with what we had initial permits and insurance understanding. And some of that stuff evolved over the course of construction. You try to deal with those as they come in. In some cases, there were some rework that was required on things that we had already done in order to get the final permitting as I alluded to in my prepared remarks. And all of it was [indiscernible] And so ultimately, you kind of put it together, we pushed out the $150 million we talked about today.

If you add up where we're over on that project, it's around 20% from our original commitments that we made about 2.5 years ago. And what I'll tell you is that I'm more encouraged than ever around our ability to really deliver on the returns of that project capabilities are going to be fantastic, both in terms of quality and cost when you put Kalamazoo and Waco together, the replacement costs of both of those assets are substantially above what we paid for now if someone was replicated. So it really creates a bit of a moat around that business. No one likes cost overrun and we take those things seriously. And obviously, we try to deal with them as you've seen us do here by managing other aspects of our business to make sure we deliver our free cash flow. But we had to get the project done. We will have it done here. It's going to start up on time. And I'm really excited about bringing Waco life here in the fourth quarter.

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

I guess as we look out nearer term in terms of margin and the implied as we were doing the math, 19% margin or so for the second half of this year. Mike and Steve, can you talk to us about maybe not to the penny, but what some of the building blocks are there that give you confidence that you can get there? And what's sustainable into 2016 and beyond? And then I had a follow-on related to the intermediate term growth outlook for EBITDA?

George, it's Steve. I'll take that. Maybe just do it this way, kind of first half, second half, first half EBITDA, $700 million, midpoint of second half $800 million the margins, as you described, a couple of components. One, our pricing while around $50 million negative in the first half will be closer to $25 million in the second half, so that's a $25 million first half, second half pickup. And then really, the majority of it, probably $60 million, is that combination of less planned maintenance downtime, Q2 was very high for planned maintenance and less market-related downtime as we took over 50,000 tons of inventory out of the company in the first half that doesn't need to be repeated in the second half.

So 2 major components to the $100 million price and performance being 25 and 60, cumulatively. The remaining $15 million is the cross-section of some other inflation FX side so relatively modest. So that's really the first half, second half conversation, and we're very pleased with our inventory reduction efforts through -- from December year through June. There'll be more inventory coming out of the company naturally in the second half of the year with the Middletown closure. But the economic impact of that is relatively modest as we sell aggressively out of inventory.

Very good. I appreciate that, Steve. It's just maybe factually, if you can cover it as part of the answer to the question. I didn't see really the inventory move that much 1Q to 2Q. So I'm assuming you're holding some extra as you basically, the fleet of machines is changing. You've got Middleton coming out. You've got Waco coming. I'm assuming that's a little bit of a buffer. And then as we think out more to '26 and '27, obviously, we have the Waco pickup. But can you again -- maybe not to the penny, but help us bridge to what you think some of the more important EBITDA pickups will be next year and thereafter, I'm assuming volume is a big one, but if you can give us some additional color that would be great.

Yes, George, I'll start, and then Mike can add some color into next year. On the balance sheet, you're absolutely correct. The actual inventory numbers are not down. Our inventory volume down 50,000 tons or roughly 12%, very material. That's very important. It's offset by FX, George, the actual balance sheet in terms of how it gets layered is an FX issue. So volumetrically, down 12% on inventory, offset by and I appreciate you raising that because it's important. As we look to 2026, the algorithm we have for the company, we would expect to be on display in 2026. Importantly, our Waco expectations for 2026 remain at $80 million. And then obviously, our overall performance will hinge upon some levels of modest volume growth. But the $80 million on Waco next year remains our expectation for 2026. I think Michael may add a couple of things around the business.

Yes, George, I think, look, the catalyst, as Steve outlined in '26 and '27 is bringing Waco life, 80 and 80, as you well know. It's a really good question. Your follow-on there around -- the confidence in our algorithm are on low single-digit growth rate after a disappointing 2024 to be fair -- in first half of 2025 that while we play in to withdraw. And we've driven our innovation. You see that. We had $61 million of innovation this quarter. It was eaten up by the fact that our customers' volumes continue to go down. We're in a highly unusual time. I mean food prices are very high. Consumers are struggling both here and in Europe.

And ultimately, the macro uncertainty is something that we have to deal with and particularly as consumer confidence decline. So as we look out, into '26 and '27. We know our customers are working various strategies to continue to deal with this. Of course, their stocks aren't working either when their volumes go down. You've seen a fair amount of discussion by customers. Some are buying one another. Some are breaking themselves up. Others are changing leadership. So there's a fair amount of things that are happening as they look to kind of deal with those things. And we believe over time that over the medium term for sure that, that stuff gets worked out, but it needs to get worked out. And we're there to help. We're going to help our customers work through those formulation changes and how they work on their promotional activity.

But a big part of our algorithm is getting to that low single-digit growth and our Vision 2030, as you know, is demonstrated here, it's not linear. But we believe that's still the right model for us over time. That's how we're thinking about it.

Your next question is coming from Phil Ng with Jefferies.

Steve, this is actually John on for Phil. I appreciate all the details here. I wanted to actually look a little further out. The [indiscernible] for free cash flow, you guys maintained $900 million to $1 billion, it implies at the midpoint, like a plus 200 type of improvement. I know you said volumes are expected to recover to more normalized levels, but it just seems like a big jump. Can you just help us bridge that expectation out in 2027 and beyond?

Yes, John, it's Steve. What we really did with our long-term free cash flow expectations as we dialed in 2026 a bit, as we just described a couple of moments ago, $700 million to $800 million. And as Mike just described as our algorithm for low, mid- and high single-digit sales, EBITDA and EPS growth, plays itself out over the next several years, along with the second $80 million of EBITDA improvement in 2027 from Waco, gives us the opportunity for cash flows to continue to grow from the $700 million to $800 million range into that -- in under plus range towards the $1 billion that we originally targeted.

And so as Mike said, it's not linear. We work through some consumer and inflation realities here at '25 but our confidence in the long-term algorithm for the company remains intact and hence not moving off of our 2027 and beyond free cash flow expectations.

Okay. And just to kind of follow up on that a little bit, Mike, I know you just said you're still expecting the $150 million from Waco, but does volume need to recover to get that full 160 over the next couple of years? Or is this mostly coming from lower cost and still flat volumes into some of the outlook at least?

Yes. There's a portion of it, John, that obviously comes from shutting down our smaller higher cost facilities, as you've seen us do with Middletown. Of course, he [indiscernible] falls in that bucket as well. I'll remind you, there's also been to other mills or a total of 370,000 tons that have come out in the last 90 days, Middletown being part of that. 2 additional mills on top of that. So there is probably growth of around 200,000 tons, as you kind of look in the outline years, '27 to '28 as we ramp that facility up.

And we expect to grow as we just talked about, and we're going to need that paperboard in order to a low-cost high-quality paperboard that we'll be making in order to fund that growth and take care of customers. So the answer is yes. There's a portion of it that's fixed -- just a reduction in the import of that growth. But our confidence level in the 80 and 80 is high, and that's why we ask you to model it that way.

Your next question is coming from Gabriel Hajde with Wells Fargo.

Mike, Steve, Mark point of clarification on something you said, Steve, on less, I'll call it underabsorbed fixed overhead. You talked about reducing inventories by 50,000 in the quarter. but it cost you $60 million, which implies sort of $1,100 or so a ton of underabsorbed fixed overhead, it seems like a big number. Is there anything else going on there that we should be mindful of when we think about that?

Yes, Gabe, it's Steve. As a reminder, Q2 is our largest plan of maintenance downtime quarter. So when you're doing a first half, second half, we pick up [indiscernible] $30 million of the $60 million just from less planned maintenance downtime. The remainder is from the actions that we took to take the 50,000 tons out. So it is not $60 million, as I think you're potentially implying. It's a combination of less planned maintenance downtime first half, second half and less market-related drive out inventory first half to second half. So thanks for raising that. I wouldn't want that to be confusing.

No. Maybe 2 quick follow-ups. One, the maintenance this year -- is that a relatively normalized number when you kind of look out '26, '27? And then related -- separately, I should say, on the beverage end market, I know it's difficult to understand exactly what your customers are holding in terms of inventory. But they did promote pretty heavily in the first half. Is it your view that there sitting on comfortable levels of inventory, maybe a little less in the need or more than they need as they go into the back half?

Yes, I'll take the first one, and Mike can discuss the second we don't expect any up substance planned maintenance downtime differences, '25 to '26. So that will play itself out relatively normalized. Obviously, we do not expect to repeat the market-related inventory correction downtime that we took if you look at it on a year-over-year basis.

In regards to the beverage season, Gabe, we actually have seen a very solid beverage season, both in Europe and in North America. And North America, it's a little bit a function of the mix of customers that we're serving. For us, it makes us our volume obviously quite good this year. Relative to what customers are holding and warehouses and the retail, we don't have a lot of insight into that. I can tell you we're busy. We're steady. The demand is strong. We've got no indications from them that it's going to back off before the normal occurrence, which as you know in the Northern Hemisphere is from basically from Memorial Day to Labor Day.

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

On the second half volumes, the first half was up 1%, and so flat implied second half down slightly. So you have a slightly harder comp, but when you spoke in mid-June, I believe you said the quarter 2Q was going to be a flat came in a bit better than that. So maybe some additional color on what you saw exiting June and what you've seen to date here in July.

Yes. So I'll take that one, Matt. I think from that standpoint, it's a pretty small number. Europe was up 2% in our North American business, our Americas business was basically flat in the quarter. That was of minus 1% in Q1. So we were encouraged to see that July started off consistent with the guide that we put out. We see beverages solid and includes a bit mixed, as Steve talked about. Some categories are up, some are down. I would characterize it just there's still a lot of uncertainty. I mean our customers are struggling.

You see there reports and there'll be a number of them that release over the next 1.5 weeks or so. We expect to see volumes that are down year-on-year. We're outperforming that with what we're doing by plan to withdraw, which is really what we have to do, our innovation, as I mentioned earlier to a previous question, we're on track for our 2% this year. We're encouraged by that. But relative to [indiscernible] , completely called the second half of this year. It's very difficult for us to do that right now because we don't have a ton of insight to customers they're telling us that they're going to promote. They told us that last year. We're being very cautious, as you know, because we built inventory last year to accommodate that promotional activity and then we had to burn it off in the first 6 months of this year. So we're not doing that.

We're there and ready to help them with anything that they need in regards to reformulation. That's always an opportunity for us, and we continue to do that. We've got a wide array of portfolio of innovation ideas that will help us help them really resonate with the end-use consumer. So that's where our focus is. But I just want to underline that word again, uncertainty in the second half. And so we're going to be a little cautious in terms of how we're trying to call volumes at a very precise level.

Understandable. Appreciate that color. And maybe if I could ask on price. When I think about the price changes, so you noted beverage demand has remained strong, and I believe we lapped the price decrease in February 24. And open market exposure is now de minimis. But I think, Steve, I think you said price in the second half is down $25 million. What do you need to see to get that to flat or given tightness in certain substrates would another run at a list price increase be warranted. And then just a point of clarification. Steve, I think you said that lower cash taxes in '25 was a $50 million benefit from the big beautiful bill? Is there any lift in 2026 that you've quantified, I understand there said there could be some nuances and when projects are put in place and what qualifies. So if you just help me understand that a little bit better.

Matt, thanks just a couple of going to answer the first 1 in regards to pricing push, you can appreciate I can't talk about forward pricing options or optionality and things that we would do or wouldn't do. But I can talk about current market conditions. If you look at recycled paper for an unbaked paper board, they have been a really good balance for the past several years. Pricing has been pretty stable, and that's certainly in contrast leach paperboard. And we've taken some actions to address the inventories, as you've heard Steve talk about. We talk about 50,000 tons here in our second quarter. We're going to continue to be very focused on managing our supply and demand, making sure we have the paperboard to take care of customers with no more than we need, very disciplined in that regard.

And I've already mentioned the 370,000 tons that have come out of unbleached paperboard side. I think if you look at the APA data, the American Force and Paper Association data that I'm sure you did that came out last Friday, there's some interesting things to take away there. I mean if you look at the recycled and the unbleached, those are the 2 grids we're a major player. If you think about where we're going to be post Waco, 80% of our production is going to be in those 2 grades of paper. We're a minor player on the bleach side, primarily, we focus on comp, as you know, and you mentioned that in your question. Production was down 3% in the second quarter, owing to some of those shutdowns that we talked about, the shipments were up 1%. Year-to-date, production was down 2.5%. Shipments were down 1%. So inventory is down 20% in the quarter, which is a good thing and 30% year-to-date, and backlogs are up. That's a healthy operating environment for both those grades.

And that really contrasts what's going on in bleach paperboard where we are a minor player. If you look at that same data, production was up 5% in the second quarter shipments fell 5%. Year-to-date, production is up 2%, shipments down 2.5%. So inventories are up 8% in the quarter and 20% year-over-year, which means backlogs are down. So it's really kind of a tale of 2 cities there relative to what the grades are doing. And certainly, we're not immune to the impact of that paperboard coming online. The supply and demand dynamics, I'm talking about with bleach versus 2 grades that we are well invested in. But graphics inventories on SBS where actually, I can't tell you, we're actually down in the quarter.

So we're pleased with that. So hopefully, that gives you a little bit of context in terms of how we're thinking about the overall market health what we're seeing, what we're doing to manage our order books. I'll tell you that our order books continue to build on the grades that we're talking about and they did over the quarter, and they have been in July so far.

And Matt, to your second question, embedded in the $700 million to $800 million of free cash flow in 2026. We do expect to see some positive benefits from the tax legislation. So as I mentioned, that cumulative impact of interest, cash taxes, working capital, we kind of have in the mid-$300 million range next year and that will have some benefits from the tax legislation as well.

So our line of sight to cash flow next year is actually quite high. And that's why that conviction around the $700 million to $800 million and then obviously, the ability to deploy that for shareholder value creation and the inflection of the cash flow into a very material level, which gives us an outstanding optionality for share repurchase activity, debt reduction, that inflection is happening. And our confidence in that is extremely high. And there will be some benefits from the tax legislation embedded in that.

Your next question is coming from Ghansham Panjabi with Baird.

Mike, going back to your comments on consumer affordability, which has been an issue for basically 3 years at this point. What, if anything, is different as it relates to how your customer strategy has changed to counter this elongated period of volume weakness. And I'm just kind of going back to your comment on promotional activity, et cetera. Is that something that's incremental? Or is it just sort of seasonal?

Got you. I wish I had a better, more intelligent answer for that question to share with you. I mean I think the biggest challenge, this is going on longer than I've historically seen. Our customers have struggled from time to time over my career and then they retool and they rebound. I think there's change in consumer preferences that are certainly at play. You've got things like GLP-1 that are positives and negatives that are out there in the marketplace, the Maha piece of this hits our customers at a very unopportunistic time. We're already struggling with consumer affordability.

Now they need to reformulate and reformulation almost always means it's more expensive. It does create an opportunity for us, for sure, for our new package sale or a different [indiscernible] sales. So we as I mentioned earlier, we always want to help them through that whole process. I guess, look, as I indicated, I think in my response to George, one of the things that we are encouraged about is we see more urgency on behalf of our customers to look at different things whether they're buying one another, whether they're splitting themselves up or they're making managerial changes. These are things that are done to initiate change and to stimulate growth. And so that's what our belief is right now.

And as I sit here today, that's why I still have to deal with the uncertainty in the second half because I want to believe those things all under benefit. But it's been longer than I would have probably been what we've experienced in the past, perhaps I should say it that way.

Okay. Fair enough. And then maybe a question for Steve on the revised 2026 free cash flow, which obviously is lower implied EBITDA. How does that change your view as it relates to prioritizing share repurchases versus debt pay down? I think you ended 2Q at 3.7x net debt to EBITDA.

Yes. Thanks, Ghansham. Our confidence in 3.5x levered at the end of this year is high given the cash flow that we talked about earlier. We did begin the share repurchase activity. And given what we believe is the long-term value of the enterprise, you should expect to see us to apply the vast majority of our free cash flow to share repurchase, keeping in mind that the balance sheet needs to stay in a reasonable place, but being in that 3.5x levered range, while we see incredible value long term relative to the value of the enterprise you'll see us continue to lean towards share repurchase certainly into that 2026 time horizon, assuming that the value of the company continues to be as compelling it is today, and you saw us begin that process here in 2025.

But I think right now, our lead would be towards the share repurchase with that very substantial cash flow if you take the midpoint of that $700 million to $800 million, take the dividend out of it, you've got $600-plus million of free cash flow that we can apply to that -- to those activities. And certainly, I think you're seeing us lean in one direction right now. Obviously, we'll monitor that relative to debt and debt levels, is that affordability, but we have nothing coming due of substance, and we're borrowing money in the mid-4s currently, 4% range. And so we've obviously got a good outcome relative to the value and the cost of our debt.

Your next question is coming from Lewis Merrick with BNP Paribas Exane.

Steve, just one from me. I'd just like to get your thoughts on the current competitive environment. So when you're going after new tenders and bids for new business or packaging sales, noting any changes in the competitive dynamics out there in the market, perhaps around levels of price discipline and or [indiscernible]

Yes. Louis, it's Mike. I think I'll go back to a little bit around -- as I talked to Mark in there. I mean, what I'm sure you took away from my comments is that our solid bleached market here in North America is oversupplied as demonstrated by the data that the AF&PA data that I kind of ran us I won't do that again. When you have a situation like that, it creates a competitive environment. That's not new for us. We've got the ability to deal with those situations as demonstrated by the fact that we've outperformed our customers in the overall market. But it's certainly something that is on our radar screen. We're watching that.

On the SBS side, a competitor added a big chunk of production or capacity into the market. They're bringing that online as we speak. By way of reminder, again, we're a small player in that market. But nonetheless, that's still something that's got to be absorbed. And ultimately, we're encouraged by the fact there's new leadership at many of the big SBS producers and also assuming they're going to want to generate returns for their ownership structures and that will drive decision-making that ultimately deals with that.

We've seen this before. It happens and there are cycles here that we've got to work through. But in the case of Graphic, given our size and our focus on integrated comp and a small position I [indiscernible] base that's largely 100% integrated we'll be sitting on the sidelines, watching that play out like you will, over the next period of time here. So that's a little bit how we're seeing this market. I'd say Europe is similar. Our innovation is really hitting home in Europe, disproportionately. We continue to see opportunities for innovation and in some cases, some share gain there, too. So ultimately, it's a competitive market.

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

Steve, first of all, I know you said $700 million to $800 million on free cash flow for next year. I'm sorry, could you just repeat again what you said for like CapEx and other. Was that $750 million? What was the number you gave for that?

Yes, Mark, let me repeat it. The cash in total in 2026 required to, in essence, run the company after EBITDA, CapEx, interest, working capital, pension, cash taxes. We would expect to be between $750 million and $850 million. If you break it into 2 components, FX would be roughly $450 million or 5% of sales and all the other items would accumulate up into the mid $300 million, $350 million. try not to provide extreme guidance here. But since you asked, it's like those are the components of why we have confidence in the $700 million to $800 million of free cash flow next year.

Perfect. And I think there may be a little bit of confusion out there. So -- and then if we think about EBITDA, you want to add interest expense back to that correct? Just structurally, and again, not trying to -- recognizing it's early for there to be a specific forecast, but for folks who are trying to work out what EBITDA is, you would then add your $700 million to $800 million to your $750 million to $850 million, and then you'd add cash interest expense. Just want to clarify that because I think there may be a little confusion.

No, I don't think you have that right at all, Mark. Let me just do it again, the walk to $700 million to $800 million of free cash flow begins with $1.5 billion of EBITDA this year growing next year. Okay EBITDA growth next year, it's going to grow next year driven by Waco and driven by the improvements in the business. When you have a growing EBITDA next year and then apply $750 million to $850 million of other cash-related items below EBITDA, you'll get to a -- get to a free cash flow range of $700 million to $800 million.

Okay. I think we're talking about different things here, Steve. I'll clarify with you after it. But -- so just separately, on -- now that we have a little bit more visibility on tariffs, perhaps, can we just get some updated thoughts on any implications?

Mark, it's Mike. So look, the new 15% tariff level is a modest net positive for Graphic Packaging. A couple of things that I'd call out. First one being, as you know, we export more than 200,000 tons to ourselves in Europe. We don't sell up our paperboard in Europe, but we export to our own converting operations. And this new trade agreement imposes none cost and limitations on our ability to service our European operations. So we're excited about that. That's a very good outcome for us.

The other thing that it does is there's a big focus on reducing what I'll call, non-tariff trade barriers, between the U.S. and Europe, and that's also good news for us, principally around EU DR, which is the UD forestation regulation which was looking to be very costly. As you may recall, we talked about this in the past that we had a geo position back to where the fiber was harvested within a couple of acres and very expensive to comply with that and without a real clear that benefit defined. So we're encouraged about that.

The other piece you may want to talk about, and I'll just go there here is the NPB you see a fair amount of press over the last couple of years. By way of reminder, that's roughly 500,000 tons on a 10 million-ton market, so call it 5% total. And those are going to be our understanding at least is those are going to be under the new 15% tariff to be imported into the U.S. And again, the big benefit of FPB was always the yield advantage on the basis weight, which was anywhere between 10% and 15%. So that yield advantage is going to be eroded by the tariffs. And of course, you've seen what's happened to the dollar in terms of devaluation -- so currency is a pretty big headwind for that as well.

So I know there was a lot of concern around investors and analysts around those imports. When you take a step back and think about it from a customer standpoint, you've got those headwinds, you're also still 5,000 miles away from your customer versus local supply, which is usually a couple of hours away by truck. So from a complication standpoint and a risk standpoint, that probably benefits those people that are making that material, including to a small degree, Graphic Packaging. So hopefully, that gives you a little color at least on how we're looking at it.

Your next question is coming from Anojja Shah with UBS.

You mentioned in the prepared comments and of course, we've rather the knees that 1 or 2 of our customers are going through some strategic transactions. Can you talk about what's happened in the past when customers go through an acquisition or a transaction like this? Do you see a temporary dip in promotions or investment and when the transaction is done, do you have to requalify with a new owner? Just a little color on what happens in these cases, please?

Anojja, it's Mike. Thank you for the question. I mean look, it's not new for consolidation to occur with our customers. we've dealt with it in and out through the years. We don't usually have to requalify that would be highly unusual. There is usually a bidding process or recontracting process that takes place early on after that acquisition, as you would expect it to be relative to strategic sourcing and spending that customers would want to be able to do. We go through those all the time, participate in those routinely. So I don't expect any real issues with that.

Yes. Just had a quick one. Sorry if I missed it, you have per better volume. And I assume it's helpful EBITDA is the same. Are you [indiscernible] there -- and then just that there's a little more impact from so the rest of the year?

I apologize. Sorry, please.

Yes, can you hear me now? Okay. Good. Just thinking through the FX benefit -- I assume you're getting an FX benefit on your revenue this year and better volume guidance. So your revenue is going guidance going up. but then your EBITDA is staying flat. I just wanted to talk about the puts and takes there. I assume more inflation, but anything else in there?

Yes. No, it's Steve. No, you actually -- you said it well, the modest increase in revenue on a flat volume assumption is primarily FX driven, as you mentioned, and then also given overall -- no, nothing really new on inflation in terms of incremental inflation that actually was down a bit in the quarter versus what we saw in Q1. It really goes to what we've chatted about earlier around just being very assertive on matched supply and demand. producing at or below our overall needs and kind of keeping the business just very dialed in relative to this overall relatively uncertain demand environment and running to that.

And so that's what's got us maintaining the midpoint of our guide, given that the top line up modestly, that's a bit FX driven as well, like we were chatting earlier about the impact on the balance sheet.

And operator, I don't think there's another call that many of our participants have to jump on. So let's take 2 more questions.

Okay. Understood. Your next question is coming from Mike Roxland with Truth Securities is live.

Hopefully, just 2 quick ones. Last quarter, you guys mentioned seeing significant input cost inflation. I think you called out about $21 million across energy, chemicals, logistics and transportation. -- and that we should expect that you would incur about $80 million inflation or input cost inflation in the business this year. If you wound up at being $10 million, can you help us discern what transpired from the time of your earnings call on May 1 to the end of the quarter, where input costs moderated to the degree it did?

Yes, Mike, it's Steve. You summarized it well. Q1 inflation around $20 million. It did decelerate towards $10 million, really 3 things from a Q1 to Q2 resin was down, in other words, less inflation of around $3 million OCC. We had some reductions in secondary fiber costs and then actually logistics, which we chatted in Q1, we're up quite a bit, actually more normalized. So that was the $20 million moving down towards $10 million from the quarter. So it was across kind of the resident OCC and logistics front. The actual inflation for the quarter was a continuation of some year-over-year inflation, energy, some mill chemicals, our fiber-based packaging materials, the corrugated, and that was up a bit, but it was offset by a favorability obviously, in OCC. But we did see a step down on the inflation front as we kind of went from Q1 into Q2.

Got it. And then one quick follow-up, Steve, just on you mentioned no change to Waco's projected returns despite the higher spending $50 million you called out this right now, you've got a $100 million increase in 3Q, bringing total project cost to about $1.25 billion from around $1 billion. But why are the project returns remain the same if you're still forecasting Waco's EBITDA to remain flat at $160 million?

Yes. Thanks for that, Mike. And I appreciate you raising that. We do -- as Mike said, our long-term confidence in the returns are actually extremely high. And -- and so as we look out beyond 2027, our expectations are that we'll continue to see returns from the investment. So just to maintain some conservatism, $80 million in '26, $80 million in '27 -- but it's our expectation that as we continue to dial in this phenomenal investment that the actual cost to produce advantages and also some things we're seeing in the region where there's actually been some closures of some recycled facilities in the Southern United States that our OCC cost, the actual cost to fiber, the paperboard facility, if you will, are going to be better than expected.

So our long-term outlook is for returns beyond the 80 and 80. We're just not diluted in currently because we're looking out into the Vision 2030 aspirations. Our expectation is this will be at or above our original expectations because of cost and quality advantages and input cost advantages. So thank you for raising that.

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

Just a couple of clarifications on Q2 and the second half guidance. So for Q2, my understanding was the downtime was about a $30 million hit. So maybe if you could confirm that on EBITDA and then as you look in the second half, on Slide 17, you show the typical patterns. Overall, your business is strongest in Q3 with a 4 on those end markets, and then it drops back down in Q4.

So looking at that $800 million second half EBITDA, is that kind of higher in Q3 and lower in Q4? Or does the Waco startup kind of make them more even? And apologies if you had already covered that, but I know there's been a lot of bridge discussion. But maybe you can just offer your thoughts there.

No, no problem, Arun. You actually said it well. Q3 is typically seasonality-wise, is a strong quarter, and we would expect that to be the case here as well. And so you have modestly stronger EBITDA and margins in Q3 and then a more normalized seasonal step down modestly in Q4. We wouldn't expect to get any benefits from Waco start-up in Q4 because as we've talked, we'll be in a start-up mode. Those benefits will start to enter positively in 2026.

The Q&A is now closed. I would now like to turn the floor back over to management for any closing remarks.

Thank you, operator, and thank you for joining us on our call today. The first half of 2025 has been challenging for our CPG and QSR customers and we are encouraged by the discussions we're having around potential strategies to drive growth and protect market share in the quarters ahead. While there are a range of near-term uncertainties, the outlook for demand for sustainable consumer packaging is strong.

At Graphic Packaging, we spent the last 8 years building and expanding our innovation and execution capabilities we are exceptionally well positioned to meet our customers' changing needs and support their growth strategies while generating substantial free cash flow. I want to thank our 22,000 employees for their dedication and our stockholders for their continued confidence in Graphic Packaging. Thank you, and good day.

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

All right. I guess we're top of the 2:15 here. Good afternoon. I'm Gabe Hajde, the Senior Packaging and Containers analyst here at Wells Fargo. The meeting right now is Graphic Packaging. We're joined by Steve Scherger, EVP and CFO; as well as Mark Connelly has joined us in the audience, I think SVP of Investor Strategy and Development. GPK is one of the world's largest folding carton and boxboard manufacturers serving the food and beverage market.

This is intended to be kind of interactive. So to the extent people have questions, please don't hesitate to raise your hand. We actually did have one question from the audience last time.

And with that, Steve, I think you have a couple of prepared remarks. Thank you.

And thanks, Gabe. I appreciate it. Thanks for everybody joining here and those that are joining online via other mechanisms. I appreciate it. And yes, I've just got a couple of slides I thought I'd walk through just to kind of set the context for who we are as Graphic Packaging, provide a little bit of an update on the quarter, a little bit of some activities from an industry perspective.

And just by way of reminder, Graphic Packaging, we're consumer packaging company. Everything that we do is making the actual packages that we as consumers interact within our day-to-day lives, where we're eating, where we're drinking, whether it's at home or on the go, we really are a sustainable consumer packaging business, 95% of everything we do, being making the end package that we interact with.

We do so by making the raw materials that Paperboard gave that you mentioned as a major raw material for our packages, but everything that we've built over the last decade, particularly is about becoming that consumer packaging company that's in your life every day.

If you went back a decade when we were roughly a $4 billion business, we really were that center of the store food and beverage packager. We had great customers. They were the big customers like the Anheuser-Busch and Kellogg's and Kraft Heinz and others, but we really were about cereal boxes and 12 packs. And if you kind of fast forward to our business today, we literally are a bit everywhere when it comes to food, beverage, food service, consumer packaging, both here in North America and around the world, a very large business in Europe as an example.

We've been highly acquisitive. We've been a consolidator. And today, wherever you're eating and drinking, whether it's at home, going through a drive-through, whether you prefer branded products, whether you're a private label consumer, whether you're going through the drive-through multiple times a week or you're shopping for the next month or you're buying tonight's meal, you're feeding your pet, brushing your teeth, we're going to be a part of your life on a day-to-day basis.

And as such, obviously, we're in products in the hands of millions of consumers. We literally make billions of actual packages around the world. We produce those. We make the raw material. We actually create the package itself, deliver it to our customers, and they, of course, turn it into the actual product that you as a consumer and we, as a consumer, take home. You can see the mix of business, about 40% of the company, food packaging, about 1/4 of it beverage packaging, so think 6 packs, 12 packs, basically carrying home the beverages of choice.

Food service is basically the drive through the QSR business. So think about that as Chick-fil-A, McDonald's, Dunkin' Donuts and others. The household, that's the day-to-day life of feeding your pet, changing your air filters, the at-home consumption patterns that we all have. And then we've got a nice health and beauty business that came with the acquisition we completed in Europe AR packaging.

Margin stability has been critical, really through a unique set of times over the last couple of years, positive volumes, some negative volumes, some stability, some instability that all of us have been managing through. We've really constructed a business that has a very high level of margin stability and as such, has cash flow stability as well. And it's something that has really been a big part of the transition to becoming a consumer packaging company over the last decade.

Growth is critical. Innovation is critical. We now have what we've identified as a $15 billion addressable market for innovation, for bringing new packages into the marketplace that are in other alternatives. Most of it is replacing plastic or foam or other resin-based solutions. That's where we see a lot of our growth, whether it's moving out of a foam or a plastic cup into one of our cups or it's moving out of another resin-based solution, into our fiber base. Because they are preferred by consumers, recyclability, renewability, is really at the forefront of everything we do is making a package that we can make one time then have it be recovered in our natural recycling capabilities and then make that product another 6, 8, 10 times a real true example of actually operating in the circular economy.

We developed Vision 2030 after really executing on Vision 2025 several years back, where we really focused on having an algorithm for the business where we grow over time, our top line low single digits organically through our innovation efforts through the day-to-day life of the consumer, have that leverage into mid-single-digit EBITDA growth and then obviously leverage into high single-digit EPS growth.

And we'll talk a little bit about where we're at in that given some of the unique environments that we're in today with a pretty stretched consumer and how some of our customers are managing their volume expectations with us and with all of you. And our cash flow engine is substantial.

We're in the middle of and nearing the end of a capital investment expansion time for us, bringing the world's second low-cost, high-quality coated recycled paperboard facility to life in Waco, Texas. We'll complete that later this year and inflect towards very substantial cash flow generation in 2026 and beyond. Given the margin stability, given the business that we've created as a consumer packaging company.

And so we're excited about that. And we've got great opportunities to allocate cash flow both now and as we look out over the next several years. And so that's just a brief snapshot of the company. Let me just take a minute, Gabe and I know probably we'll match up with some of the questions as well. But just a couple of things I wouldn't mind spending a couple of minutes on.

Typically, we won't talk about industry structure much. But because of some of the activities in coated recycled paperboard, I thought I'd take just a moment and kind of describe the current capacity, the supply-demand environment for coated recycled paperboard. We're making our investment in Waco. We had our Kalamazoo investment to develop differentiation in coated recycled paperboard here.

And one of the things just to kind of provide some context because I'm not sure it is well understood, is the coated recycled paperboard market in North America is about a 2.7 million ton market from a capacity perspective -- from a capacity perspective. Over the last 90 days, there has been three closures announced within the industry. One, we are closing our Middletown coated recycled paperboard facility ahead of starting up Waco and two competitors are closing their manufacturing, some of their manufacturing for coated recycled paperboard as well.

It accumulates up to about 390,000 tons of coated recycled paperboard capacity that's coming out of the market and will fundamentally be out by the end of this quarter. That represents 14% of the capacity of that 2.7 million tons. So it's a very substantial capacity coming out that certainly, given the demand consistency that we have should be driving operating rates, backlogs, et cetera.

And I would expect to see that over the coming quarters. We'll then be bringing to life our Waco facility over a 12- to 24-month period of time and we'll be closing our East Angus facility. So we'll close East Angus about 100,000 tons. So 490,000 tons of capacity coming out of this 2.7 million tons market, and we'll be adding about 550,000 tons over a multiyear basis.

I'm sharing all that with you, because we're going through a period of time where I think there's kind of a thought that Waco just comes up and there's capacity being added and the like. The reality is the supply-demand dynamic will actually have less capacity probably for the next 1.5 years, 2 years and then equalize out as we bring Waco to life. And I wanted to just provide some context there because it's a bit unusual for that much capacity to come out of a market ahead of capacity coming into that market.

And I think it leads to a very constructive industry dynamic as I'm sure we can talk about. Just briefly on the quarter, we've now gotten through 2 of the 3 months of the quarter, just in terms of our full year guide, no change today to the guidance that we have. So no change to the full year expectation as we're watching Q2 play out through May.

Overall, volume is exceeding our expectations a bit. We're running a little more flat on volumes through the first 2 months of the year. We've seen a little bit of promotional activity taking place, probably well chronicled, I know by you and others on the beverage side through the Memorial Day holiday. So volumes are exceeding our expectations a bit more flattish as opposed to the minus 2 that we had talked about with our guide coming out of Q1 results. Inflation probably a little bit modestly less than what we expected as well.

So on that side, little better volume than expected, inflation modestly below the expectations that we had. We are being very aggressive this quarter in taking production out of our infrastructure to drive inventory out of the company. And as you know, we had our maintenance annual outage at our Texarkana facility. On the bleach side, we're taking advantage of that to take about 25,000 tons of capacity production out during the month to drive inventory levels to where we want them to be in that business. We're closing our Middletown facility, as I mentioned.

And so we're being very aggressive to take inventory out of the business, match -- have our production be at or below our demand such that our expectation, we typically don't -- we don't guide for the quarter, but our expectation for the quarter, EBITDA in the $330 million to $340 million range, well positioned on inventory reduction, such that we'll be able to run actually quite full with the majority of our maintenance downtime behind us in the first half and in a position to drive inventory out of the business for the remainder of the year with Middletown closure behind us and be able to run quite full for the rest of the year, which gives us confidence in our full year guide.

So I just want to provide a little bit of an update for you on kind of the mid. And then just in kind of conclusion, we're looking forward to, obviously, the business that we've built and executing on it, but the cash flow inflection that we shared with you in the Vision 2030 aspirations, seeing that come to life, particularly as we exit out, running quite full in the second half of the year would be our expectation and then leading into bringing Waco to life and beginning to see that $160 million of EBITDA improvement coming in, in 2026, in 2027, roughly $80 million a year. So I tried to fill up a little bit of there to get after some of the things I know that we'll talk about. And with that, I'll be glad to jump into questions.

Thank you for all that. There's a lot of moving parts there, Steve, I guess -- and this is -- look, I mean, it's kind of 7 years in the making. You guys have been hard at work. Like you said, there was Vision 2025, but maybe just a point of clarification on bringing up 550. I feel like what I'm hearing from you is Kalamazoo, you installed a new machine in an existing facility. This is a brand new greenfield.

I think initially, kind of two-part question. I think you initially kind of had $1 billion-ish price tag. You talked about maybe $1.1 billion on the Q1 call. So just any adjustments there? And then two, I feel like what you want to leave us with is just because it's nameplate capacity 550, doesn't mean you turn the switch on and all of a sudden, you're going to get all the production day one and then obviously, you're going to be running to demand even -- let's assume that we've got this value-seeking behavior in '26 for whatever reason, that doesn't mean that it's all going to hit in 2026 either.

Yes. That's critical, and thank you for asking that. I mean the 550,000 tons of eventual capacity will be -- it will take 12 to 18 months to kind of ramp up to that. So we'll get to that, as we're kind of exiting out of 2026 into 2027. So you don't flip a switch and have 550 come in. And while that's happening, the 490,000 tons of closures will take place. So the opportunity for the supply/demand dynamic to play out in a relatively balanced way is actually quite high and quite favorable in that regard.

And so we will absolutely only produce to the demand that is there. It's one of the reasons we're driving inventory out of the business so aggressively this year so that we can ramp up nicely -- as we're servicing our customers, and all of this is in the context of servicing our customers with excellence throughout that, so they don't miss a beat in terms of their packaging needs.

And I think one of the things, too, you touched on it with Kalamazoo, it was more of a brownfield investment, meaning we're adding to an existing facility with Waco, it is a greenfield. One of the things we're very fortunate to have is the entire team that we've hired who are now on board are actually in Kalamazoo learning to run the facility on site and it's the same basic facility that we're bringing to life in Waco.

So we're very fortunate to be able to kind of replicate the training, the preparation, the team, the hands on, which gives us very high confidence in the start-up of that. But we'll do it on a metered basis. We'll do it based upon the demand that we have. But overall, we couldn't be more excited and positive about how Waco is coming to life. We're also equally and it was positive on the CapEx inflection back down to 5% of sales as we kind of look out to 2026 and beyond.

Okay. I won't pretend to understand what may happen with inventories in the short term and people selling out as they close facilities and all that stuff. But maybe just high level, I think I know the answer to this, but your competitors choosing to close some facilities, maybe ahead of that factory ramping up even. Can you talk about competitive positioning of graphic relative to the competition in your kind of key grades? .

Yes. I think in coated recycled paperboard, we've made significant investment decisions, as you know. And so we believe that long-term coated recycled paperboard in packaging will be a good, strong growth engine for us, where we will be cost and quality advantaged. I think the competitive moves you're referencing tend to be decisions made around cost quality and integration. And I think those tend to be decisions around is there a long-term viable return from the investments or the assets that competitors have.

I think for us, how we're focused on it is we want to make paperboard the raw material for our packaging where we see cost and quality advantage. And so in coated recycled paperboard we'll have a very large market position in that with cost and quality advantage to make the packages to actually make the packages, in unbleached paperboard where we have a very large market position as well, same. We've got two world-class facilities and coated recycled paperboard, two world-class facilities in unbleached, two world-class facilities in a market that is growing globally, mostly for beverage packaging, where we can see growth for years to come on a quality and cost advantage or competitively consistent basis with the primary competitor.

And then in bleached paperboard, as you know, we really elected to have just one asset in Texarkana, heavily focused on supporting our cup, bowl, and tray business, and we exited from the Augusta facility because we just didn't see for us competitive advantage in making just the paperboard. We wanted -- we want our business to be focused on consumer packaging, making the end package.

And as such, we have one facility that supports our -- primarily our cup business. And as you know, we make about 40% of the paper cups in the U.S. And so that, again, is a decision. Once complete with Waco, we'll have five world-class paperboard manufacturing facilities that will have the appropriate advantages so that we can generate above cost of capital returns when we turn that paperboard into a package.

I thought that's what the answer was, but thank you for that. The last five years have been anything but normal. So right? We had pre-pandemic. We had a spike in demand. We had post-COVID burn-off, et cetera. It seems like CPGs right now are trying to strike an equilibrium between price and volume.

I don't want the question be to necessarily near-term cited, but you mentioned volumes being a little bit better here in the second quarter. Q1 was maybe a little bit disappointing, can you elaborate a little bit? Is this CPGs being -- living hand to mouth a little bit with inventories and maybe their choices around promotions and you talked about even planning coming into 2025. Again, Q1 a little bit disappointing. They said, "Hey, listen, we think we're going to have growth of 2%, 3%" Now maybe it's going to be closer to flattish and maybe it's just more of a response to the consumer.

Yes. No, there's a lot there, and I'll try to touch on it a bit. I mean overall, as you said, I mean, our expectations around promotion and growth kind of starting at the back half of last year working with our customers is that most of them expected to pivot towards some promotional growth Q3, Q4 last year into Q1. What almost across the board with our customers, they've elected to do is to maintain their pricing stability, which has been price increase over the last several years and to be willing to have volumes be modestly down.

And I think one of the things we observed back half of this year, first half -- first quarter of this year is that broadly the level of promotional activity was very low. And as such, almost across our entire network of CPGs, QSRs, we saw volumes down 2%, 3%, 4%, very consistently, which is one of the reasons we elected at Q1 to say, listen, let's make that the working model and the working assumption for the business. If it's better than that, great. But let's make that how we run the business, drive the production down, drive inventory out, get prepared for a future state.

And it's been interesting. Because in core like food markets, a lot of the center of the store, big CPGs. Promotional activity has stayed actually quite low. And so there, we haven't seen some of the positives we were just chatting about where we saw pockets of promotional activity, well chronicled was on the nonalcoholic side of beverage over the Memorial Day holiday, some more pervasive, I'll call it, promotional activity.

Now whether that's driving volume or not is more of a TBD for the year, because you see the promotional activity in the May time frame, whether that will lead through to volume gains and will depend upon kind of June, July and how the summer plays itself out. But it was at least a pocket of promotional activity that's allowed for a modest acceleration of volumes beyond where we had kind of -- it's within the range of what we guided, but a little bit more towards the positive side of that. I think what's going to be interesting to watch is there's so much uncertainty for the CPGs and QSRs right now when it comes to tariffs, when it comes to [ Maha ] implications when it comes relative to their products, whether it's [ SNAP ] implications.

And there's that uncertainty will not having an impact on their volumes necessarily may be having an impact on how they're thinking about promotions. Because if their products are going to cost more to produce eventually because of changing out of materials or ingredients is now the time to promote. So we're seeing pockets, but it's been more limited than we expect, which is why we're choosing to kind of run the business to the volume that we're seeing.

But it is unusual to have volume declines for a couple of years across the CPGs. And that is the unusual part that you're referencing, which is you had post-COVID issues, you had supply chain issues, both those got in the way of volumes and then you had inflation. And now you've got a stretched consumer, and the consumer is, in fact, stretched. So overall, over time, between CPGs and all the private label producers and the like, I have every expectation, we have every expectation that volume for us eating and drinking will stay relatively stable.

And then we'll win with our innovation efforts as you kind of look out over time. And that's why we haven't moved off of our Vision 2030 aspirations, recognizing though that in the short term, we're not at those aspirations, and that's relevant for us. And that's why we've got to obviously stay focused on our innovation efforts, close to our customers so that algorithm for margin stability and growth stays in place and the inflection of the cash flow.

I don't want to drill too deep on volumes, but maybe by category, and I'm trying to remember the arrows that you gave us on Q1, but maybe some of the -- are you seeing any divergence, if you will, by category for some, I'll call it, some of the more semi-discretionary. I'm thinking pet food like, "Hey, I'll just feed them dry food in a bag, instead of getting them the dog treats this month or whatever." Anything in that regard that you'd call out that you're seeing? .

I think what we'd call out is what we're just chatting about a little bit. I think in our 25% of the company, the beverage side of the business, there's more of a global growth momentum. There's a nice move there broadly out of plastic rings out of resin-based packaging, et cetera. So the actual growth profile globally for beverage has good stability to it. And then the promotional activity is obviously modestly favorable. Food service, in many ways, 20% of the company has similar characteristics, because you still have -- we still see conversions net from foam, from plastic into cups into bowls and trays through the drive-thru, through the QSR.

So those two actually continue to have a natural momentum towards modest growth. It's in the categories you're just referencing mostly on the food kind of core center of the store food side and some of the core consumer, pet food, laundry detergent, filter frames, et cetera, where you've seeing less promotional activity, a stretched consumer and kind of more unevenness, if you will, relative to volume.

So pockets of natural favorability, pockets of uneven which is why we guided to where we were kind of in that some of the -- some of the pressures we were seeing that through the CPGs to the customers. But that's how I'd characterize the big pockets. Health and beauty, 4% of the company, mostly in Europe, a little uneven there to better on the health side, a little less on the beauty side where you've got a little less -- you have got more discretionary spend.

Okay. It wouldn't be 2025, if we didn't ask about tariffs, so maybe just other than the uncertainty as it relates to the consumer direct impacts for graphic and then what you're seeing kind of you have a pretty sizable European business? Any implications? .

Yes. Direct impacts today just because you've got a fair amount of things being pushed and the like. So the actual true direct impact is measured in low millions of dollars, and it tends to be a little more just inflationary based upon certain supply lines and the like. So I'd characterize the true direct impact is relatively modest.

The potential impacts that are still kind of in motion, to your point, will primarily be -- how does tariffs, both directions play out mostly to Europe. Because on the one side, let's just assume there were several tariffs going both directions, 10% range or what have you, that that's where this lands. Again, that's just all hypothetical. But if that where this was going, there would be a headwind tailwind inside of that. On the tailwind side, it would probably have an impact on the importation of paperboard from places like Europe, Finland, Sweden, et cetera, into the United States, that would be a natural potential tailwind for imports.

It doesn't really impact our business materially today, but more broadly relative to paperboard. It would then have some implications for the paperboard we send to ourselves in Europe primarily to service our beverage packaging business. So those are the things that we're monitoring. I don't expect those to have material impacts on the company. We're fortunate that our business is pretty regional and it's the nature of it. So while we're not completely insulated from tariffs, the implications compared to other businesses, I'd characterize as relatively modest.

Okay. On the price side, again, I'd kind of be remiss if I didn't ask the question. You guys announced a $40 a ton price increase for two grades back in April. I think it was from May 15 implementation date. I think on the positive side, and we talked about this quite frankly, at length, you all have done a good job of migrating away from some RISI index or indices for your customers.

So I'm assuming those conversations are being had, they understand where the price increases are coming from. It hasn't been reflected in the index -- is that -- I don't want to give you the answer, but perhaps a function of OCC continues or recycled fiber continues to be a little bit soft, maybe demand isn't where the market expected it to be. Just maybe from your vantage point, what your observations are?

Yes. I think at the broader level, you're right. We continue to work with our customers to put in place a new index that we've developed for price change mechanisms when we earn our business with our customers that our customers are finding quite appealing. It's very transparent. It's a known set of commodities. It's a known set of the relationship on how that correlates to our costs over time. And as such, we've got good momentum. But that's a multiyear initiative. And that initiative just is in the early stages, but will really be over the next several years, we will move to that as a transparent price change mechanism to the increases, though, that are relevant to us, as you know, on what we've announced.

There's not traction on those at this point. So what we don't have in our hands today is a little bit of the positive price momentum that we want to have on that front on the paperboard. It can be a series of activities, as you just said, as I was providing the update, there's a lot of moving parts in coated recycled paperboard right now with capacity closures, occurring, you've got activities within the construct of that that's occurring. OCC obviously, maybe to a lesser degree, is modestly down. I think there I think allow the next 3 to 6 months to play out relative to industry backlogs, operating rates it's interesting.

As you know, we don't talk a lot about backlogs and operating rates as much as we may have a decade ago. But actually, backlogs, interestingly enough, 4-coated recycled paperboard and unbleached paperboard are at the highest they've been in 2-plus years. And so that's the current environment. A lot of what we were just chatting about in terms of how this is playing itself out.

So I think that's relevant to this pricing environment because it's important right now, and it's one of the things we're intensely focused on, we're getting some of the pricing to our cost models and the like, but we must pivot to a modestly positive price environment. We are in a modestly negative. And it's modest, minus 1%, needs to be plus 1, plus 2 given bits of inflation that are still existing in the business. But it's a critical priority for us in order for our margins to be in that 19-plus percent range before we kind of bring the benefits on of Waco.

Yes. Well, I was going to shift to Waco Vision 2030. When you look at the arc of the cash flow generation, you guys obviously had to cut guidance this year, maybe starting a little bit behind. Just as you embed in the $80 million, and I'm not asking for guidance next year. You embedded in the $80 million of benefit from Waco Two-part question. One, is there some volume contingency in there maybe on the $80 million in 2027 that we got to look out to and then obviously, the CapEx is pretty easy. We're not building a plant. So we're not spending the capital.

That will inflect. But just I think the $800 million kind of bogey for next year, thinking about cash taxes, working capital, maybe that's why you're being aggressive this year to drive working inventories down. Just thinking about the moving pieces and the arc of the cash flow.

Yes. No. And you saw it in the materials on our -- the arrow chart, if it will. And you're absolutely right. EBITDA is modestly behind the expectations that we established with Vision 2030. We can still see 2026 progression inside of the range of outcomes that are there, probably more in the $800 million range versus the $1 billion. So just because of where the EBITDA is, we can see the path to EBITDA improvement next year. What's good about Waco is of the $160 million of EBITDA improvement, $80 million next year, $80 million a year after. $100 million of that is purely cost takeout and lower cost to produce. So we get the first $100 million on just bringing the facility to life, closing other facilities.

The final $60 million does rely on a reasonable volume environment, matching up with the supply demand that you were chatting and we were chatting about earlier. So that's important. It's an imperative. For us, and that's why this inflection, just modest stability at the consumer level, modest organic volume growth will be an enabler for the return profile there.

I'll squeeze in one last one. We've got about a minute left. You talked about leverage, I think, being 3.5% for 2025. Investors are really excited, again, about the cash flow inflection shareholder-friendly return -- are you guys being a little bit opportunistic now? You talked about kind of maybe pulling some levers on share repo to kind of balance between what you think is the long-term kind of intrinsic value. And then, obviously, as you look forward, just to be clear for everyone, Mark and I were talking about it before, but share repo is kind of like the primary lever that you see as shareholder return over the next 3 to 5 years.

We do, we do. And we announced a $1.5 billion share repurchase authorization. We have $1.8 billion of firepower for share repurchase. That is the next major investment in the company back into the company. We don't need to make another large-scale capital investment. That's great. We elected to, in our guide, take our year-end leverage to 3.5x really to allow for some capacity for share repurchase this year. We won't stay at 3.5x.

We won't go above 3.5x. But if you look kind of down the midpoint of our guide at 3.5x, there's some room to begin the share repurchase activities, particularly given the valuation of the company relative to our expectations going forward. So yes, very high prioritization around that. Still long-term investment grade is going to make sense for the business given all the cash flow, but that's kind of a down the road. We, of course, make those trade-offs between debt reduction and share repurchase based upon the valuation of the enterprise, but we've got room to maneuver now inside of that. .

Excellent. Thank you. I think that concludes the day.

Excellent. Thanks everybody. Appreciate the time.