Graphic Packaging Holding Company

Good day, everyone. Welcome to Graphic Packaging Second Quarter 2025 Earnings Call. At this time, all participants have been placed on the listen-only mode, and the floor will be open for questions and comments after your presentation. It is now my pleasure to turn the floor over to your host, Mark Connolly. The floor is yours.

Good morning.

We have with us today Mike Das, President and Chief Executive Officer of 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 remained 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 billion, adjusted EBITDA was $336 million, adjusted EBITDA margin was 15.3%, and adjusted EPS was 42 cents. Volumes in the Americas were modestly better than expected, driven mainly by an increase in beverage promotion and some targeted promotions. 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 levels in the second half. Turning to slide three, we will bring our Waco recycled 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 paperboard where appropriate. From the vantage point of cost, capital, and consumer appeal, recycled is superior to bleached, and we will continue to keep our footprint in bleach paperboard small and focused. We were pleased by the recent decisions to, for the very first time, include paper cups in their single-stream and dual-stream recycling specifications. Graphic Packaging's own Ed Tucciaroni worked closely with the association and with our colleagues at Closed Loop Partners and the Food Service Packaging Institute to promote and encourage this important update. The association's guidelines are highly influential with waste collectors and with thousands of material recovery facilities in deciding what does and doesn't get collected in municipal recycling and collection systems. As 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 staples remain uneven. A stretched 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 served. 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. Trade marketing activity has also been accelerating, 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 four, the breadth and depth of our consumer staples packaging portfolio is the foundation of our strength. We're 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 five, 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, but pasta, sauces, and prepared foods saw gains as consumers shifted from high-cost alternatives. Our Bordeaux 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, frozen foods saw further declines as consumers shifted to fresh and refrigerated categories, including bakery. Grocery stores generally earn higher margin on freshly prepared food items and are continuing to expand and promote their 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. Beers declined 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. Food service 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 healthcare products also showed improvement. Slide six highlights our five 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 seven, 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 and 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 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 bulk coffee pods is called dump fill. You set up a corrugated box, dump the pods in, and glue the box shut. Our nested pod solution is better from nearly every angle. As you can see in these pictures, by orienting the pods in layers, 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 narrower and taller gives the package more shelf appeal and takes up less space in the consumer's pantry. The taller, narrower box also means that we can stack 26 boxes per layer on a pallet rather than just 16. and are only stacking four layers high rather than five. Moving the opening to the top center made the sides and corners of the package stronger. With fewer layers and a stronger structure, we were able to switch to a layer in our materials. And finally, we replaced the expensive bleach paperboard top sheet with our Paste Center Rainier recycled paperboard. That lowered the cost further and reduced the package's overall environmental footprint with a 100% recycled alternative that provides the same outstanding print quality. This new nested coffee pod solution is on the 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 Waco 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 two new directors to our board in the past year with extensive operational and senior leadership experience in food and healthcare, and we're in the process of declassifying our board. Our commitment to driving shareholder value is stronger than ever, and Vision 2030 is our roadmap. Now let me turn the discussion over to Steve for a review of the company's financial performance and capital allocations.

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 volumes was up approximately 1%, with America's 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 dollars. 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 dollars. 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 costs 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 3.5 times, 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 a quarter 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 30th, availability under share repurchase authorizations 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 costs is not expected to materially affect overall investment returns. Waco'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 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 may be useful for modeling, information on seasonality, and the review of our buyback history, which I referenced earlier. That concludes our prepared remarks. Operator, let's begin the Q&A.

Certainly. The floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on a speakerphone to provide optimum sound quality. In the interest of time, please limit yourself to one question and one follow-up question. Please hold just a few moments while we poll for any questions. Your first question is coming from Anthony Petinari with Citi. Anthony, please pose your question. Your line is live.

Good morning. So I had a question about the increase in terms of the increase in capital spending from 700 to 850. So that impacts free cash flow in 26. I'm just trying to understand kind of the flow through because it looks like you trimmed the 26 free cash flow number. And then is that just completely sort of one time 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 and impacts cash from, you know, 25, 26, 27?

Yeah, Anthony and Steve, I'll take that. 2025 is verticulated, 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'll 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 and $850 million. And that'll 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 range. So that's kind of the path to the updated $700 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 is cash flow, free cash flow expectations.

Got it. Got it. That's, that's very helpful. Um, 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, you know, 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. Yeah, look, it's a couple of things. I appreciate the question. First, labor costs, specifically 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 two and a half year period, we started with a green field. 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 didn't have certain things like the powerhouse, wastewater treatment, those types of things. We had to build them. 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 was 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 inflationary. And so ultimately, you kind of put it together. We pushed out $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 two and a half 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 them. Now, if someone was replicated, so it really creates a bit of a mode around that business. No one likes a cost overrun. 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'll have it done here. It's going to start up on time. And I'm really excited about bringing Waco to life here in the fourth quarter.

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

Your next question is coming from George Staffos with Bank of America. Please pose your question. Your line is live.

Thanks very much, everyone. Good morning. Thanks for the details. 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, you know, maybe not to the penny, but what some of the building blocks are there that give you confidence that you can get there and, you know, what's sustainable into 26 and beyond and how to follow on related to the intermediate term growth outlook for EBITDA?

Hey, George and Steve, I'll take that. And Maybe just do it this way, kind of first half, second half. First half even does $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 two major components to the $100 million price and downtime. being 25 and 60 cumulatively the remaining 15 million is a cross-section of some other inflation FX items so relatively modest so that's really the first half second half conversation and we're very pleased with our inventory reduction efforts through you know from December here through 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 of inventory.

Okay. 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 were holding some extra as you, you know, basically the fleet of machines is changing. You've got Middletown coming out. You've got Waco coming out. I'm assuming that's a little bit of buffer. And then as we think out more to 26 and 27, obviously we have the Waco EBITDA 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 an additional color to that, it would be great. Thanks, and good luck in the quarter.

Yeah, 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 uh very important it's offset by fx george the actual balance sheets in terms of how it gets layered is an fx issue so volumetrically down 12 on inventory offset by um fx and i appreciate you raising that because it's it's important as we look to 2026 the algorithm we have for the company we would expect to uh 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.

Yeah, George, I think the catalyst that Steve outlined in 26 and 27 is bringing Waco to life, 80 and 80, as you well know. It's a really good question, your follow-on there around the confidence and our algorithm around low single-digit growth rate after a disappointing 2024, to be fair, and a first half of 2025 that we played to a draw. You know, and we've driven our innovation. You see that. We had $61 million of innovation. This quarter 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, and consumers are struggling both here and in Europe. And ultimately, you know, the macro uncertainty is something that we have to deal with, and particularly as consumer confidence declines. So as we look out into 26 and 27, we know our customers are working various strategies 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. There's a fair amount of things that are happening as they look to deal with those things. We believe over time, over the medium term for sure, that that stuff gets worked out. It needs to get worked out. We're there to help. We're going to help our customers work through those formulation changes and how they work on the promotional activity. But a big part of our algorithm is getting to that low single-digit growth. And our vision 2030, as you know, as 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.

Okay. Thank you very much. I'll turn it over.

Your next question is coming from Phil Ng with Jefferies. Please pose your question. Your line is live.

morning mike steve this is actually john on for phil uh appreciate all the details here i wanted to actually look a little further out the 2027 guy for free cash flow uh you guys maintain 900 to a billion dollars that implies at the midpoints like a plus 200 type of improvement is 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?

Yeah, John and Steve, what we really did with our long-term free cash flow expectations is we dialed in 2026 a bit, as we just described a couple 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, played itself out over the next several years, along with a second $80 million of EBITDA improvement in 2027 from Waco gives us the opportunity for cash flows to continue to grow from the $700 to $800 million range into that $900 plus range towards the billion that we originally targeted. And so, as Mike said, it's not linear. We've worked through some consumer and inflation realities here in 24-25, but our confidence in the long-term algorithm for the company remains intact and it's 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 $160 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 costs and such things of still flat volumes into some of the outlook at least?

Yeah, 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's saying it falls in that bucket as well. I'll remind you there's also been two other mills for a total of 370,000 tons that have come out in the last 90 days, Middletown being part of that and two additional mills on top of that. So there is probably growth of around 200,000 tons as you kind of look in the outlying years, 27 and 28, as we ramp that facility up. And we expect to, you know, grow as we just talked about. And we're going to need that paperboard, you know, in order to, you know, that 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 and then a portion of it that's growth. But our confidence level in the 80 and 80 is high, and that's why we asked you to model it that way.

Appreciate the details. I'll turn it over. Thanks.

Your next question is coming from Gabriel Haight with Wells Fargo. Please pose your question. Your line is live.

Mike, Steve, Mark, good morning. Point of clarification on something you said, Steve, on I guess I'll call it underabsorbed fixed overhead. You talked about reducing inventories by $50,000 in the quarter. Excuse me, but it costs 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?

Yeah, Gabe, it's Steve. As a reminder, Q2 is our largest planned maintenance downtime quarter. So when you're doing a first half, second half, we pick up 20 or 30 million of the 60 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.

Okay. No, thank you. Maybe two quick follow-ups. One, the maintenance this year, is that a relatively normalized number when you kind of look out in a 26, 27? And then related, well, 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 they're sitting on comfortable levels of inventory, maybe a little less than they need or more than they need as they go into the back half? Thank you and good luck.

Yeah, Gabe, I'll take the first one and Mike can discuss the second. We don't expect any of 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, Dave, we actually have seen a very solid beverage season both in Europe and in North America. In North America, it's a little bit of function of the mix of customers that we're serving. For us, it makes our volume obviously quite good this year. Relative to what customers are holding in 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 is going to back off before the normal occurrence, which, as you know, in the northern hemisphere is basically from Memorial Day to Labor Day.

Thank you. Your next question is coming from Matt Roberts with Raymond James. Please pose your question. Your line is live.

Hey, Mike, Steve, Mark. Good morning. on the second half volumes the first half was up one percent and so flat and probably second half down slightly and so you have the 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 yeah so i'll take that one matt i think from that standpoint it's it's a pretty small number europe was up uh

You know, 2% in our North American business, or America's business, was basically flat in the quarter. That was up from minus 1 and Q1, so we were encouraged to see that. You know, July started off, you know, consistent with the guide that we put out. You know, we see beverage is solid and, you know, food's 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 their... reports, and there'll be a number of them that release over the next week and a half or so. You know, we expect to see volumes that, you know, are down year on year. We're outperforming that with what we're doing, you know, by playing do it draw, which is, you know, 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, you know, relative to try it up, completely call 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 from 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 six 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, so we'll continue to do that. We've got a wide array of portfolio of innovation ideas that will help us, you know, help them, you know, really resonate with the end-use consumer. So that's where our focus is. But I just want to underline, you know, that word again, uncertainty, here 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. Thanks, Mike. Appreciate that, Cutler. 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 a price decrease in February 24. Open market exposure is now de minimis. But I think, Steve, I think you said price in second half is down $25 million. What do you need to see to get that to flatter 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 list in 2026 that you've quantified and are saying there certainly 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. Thank you all for taking the questions.

Matt, thanks. There's a couple of them there. I'm going to answer the first one in regards optionality and things that we would do or wouldn't do. But again, talk about current market conditions. You know, if you look at recycled paperboard and unbleached paperboard, they've been a really good balance for the past several years. Pricing's been pretty stable, and that's certainly in contrast to bleached paperboard. You know, and we've taken some actions to address, you know, the inventories, as you've heard Steve talk about. We took out 50,000 tons here in our second quarter. We're going to continue to be very focused on managing our supply and need, very disciplined in that regard. I've already mentioned 370,000 tons that have come out of the CRB and the unbleached paper board side. I think if you look at the AFP-8 data, the American Forest and Paper Association data that I'm sure you did that came out last Friday, there's some interesting things to take away there. If you look at the recycled and the unbleached, those are the two grades where we're a major player. You know, if you think about where we're going to be post-Waco, 80% of our production is going to be in those two grades of paper. We're a minor player on the bleach side. Primarily, we focus on cup, 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 corner. It's 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 two cities there relative to what the grades are doing. And certainly we're not immune to the impact of that paper board coming online, the supply and demand dynamics I'm talking about with bleach versus two grades that we are well invested in. But in graphics inventories on SPS, I can 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 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, cumulative impact of interest cash taxes working capital we kind of have in the bid 300 million dollar range next year and that'll 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 seven to eight hundred million and then obviously the ability to deploy that for shareholder value creation is 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. There will be some benefits from the tax legislation embedded in that.

Nice. Very detailed.

Thank you all very much.

Your next question is coming from Ganshan Punjabi with Baird. Please pose your question. Your line is live.

Thank you. Good morning, guys. Mike, going back to your comments on consumer affordability, which has been an issue for basically three 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 you know, 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 has gone 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 changing 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. They'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 a new package sale or a different package sale. 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 quickly. 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 in their 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.

OK, 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 paid on it? I think you ended 2Q at 3.7 times net debt to EBITDA. Thank you.

Yeah, thanks, Gautam. Our confidence in 3.5 times 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 impact 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 three and a half times levered range while we see incredible value long term relative to the value of the enterprise you'll see us continue to lean towards cherry purchase you know certainly into that 2026 time horizon assuming that the value of the company continues to be as compelling as it is today. And you saw us begin that process here in 2025. But I think right now our lean would be towards the share repurchase with that very substantial cash flow. If you take the midpoint of that $700 to $800 million, take the dividend out of it, you've got $600 plus million of free cash flow that we can apply. 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 and debt affordability, but we have nothing coming due of substance, and we're borrowing money in the mid-fours currently, 4% range, and so we've obviously got a good outcome relative to the value and the cost of our debt.

Perfect. Thank you.

Your next question is coming from Louis Merrick with BNP Paribas Exane. Please pose your question. Your line is live.

Morning, Mike. Morning, Steve. Thanks for taking the questions. Just one from me, thanks. I'd just like to get your thoughts on the current competitive environment. So when you're going after new tenders and bits of new business for your packaging sales, are you noticing any changes in the competitive dynamics out there in the market, perhaps around levels of price discipline and whatnot? Thank you, and good luck with Q3.

Yeah, Louis, it's Mike. I think I'll go back to a little bit around as I talk to market conditions 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, you know, the AFMPA data that I kind of ran through, so 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 SPS side, a competitor added a big chunk of production our capacity into, uh, the market. They bring, they're bringing that online as we speak. Um, by way of reminder, again, we're a small player in that market. Um, but nonetheless, that's still something that's got to be absorbed. And ultimately, you know, we're encouraged by the fact there's new leadership, uh, at many of the big SBS producers, uh, and also, um, uh, you know, assuming they're going to want to generate returns for their ownership structures and, uh, That'll drive decision-making that ultimately deals with that. We've seen this before. It happens. And there's cycles here that we've got to work through. But in the case of graphic, given our size and our focus on integrated cup and a small position on coated bleach 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 change. 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.

Thank you very much for that. I'll turn it over.

Your next question is coming from Mark Weintraub with Seaport Research Partners. Please pose your question. Your line is live.

Thank you. Steve, first of all, I know you said $700 to $800 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 or what was the number you gave for that?

Yeah, 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 and $850 million. If you break it into two 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 dollars. 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 to $800 million free cash flow next year.

Perfect. I think there may be a little bit of confusion out there. 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 you know, your 700 to 800 to your 750 to 850, and then you would 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 to $800 million of free cash flow begins with $1.5 billion of EBITDA this year growing next year. Okay. EBITDA grows 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 to $850 million of other cash-related items below EBITDA, you'll get to a free cash flow range of $700 to $800 million.

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

Yeah, 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 off our paperboard in Europe, but we export it to our own converting operations. And this new trade agreement imposes no new costs or 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 EUDR, which is the EU Deforestation Regulation, which was looking to be very costly. As you may recall, we talked about this in the past, that we had to geoposition back to where the fiber was harvested within a couple of acres, and very expensive to comply with that without a real clear net 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 FDB imports have received 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 on FVB 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 tariff. 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. So 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 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 in how we're looking at it.

Super.

Appreciate it.

Your next question is coming from Anuja Shah with UBS. Please pose your question. Your line is live.

Hi. Good morning, everyone. You mentioned in the prepared comments and, of course, we've read in the news that one or two of your 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 re-qualify with the new owner? Just a little color on what happens in these cases, please.

That'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, you know, in and out through the years. We don't, You usually have to re-qualify. That would be highly unusual. There is usually a bidding process or re-contracting process that takes place early on. And for that acquisition, you would expect it to be relative to strategic sourcing and spending that your customers would want to be able to do. We go through those all the time, participate in those routinely.

So don't expect any real issues with that.

Okay, thanks.

And I apologize if I... Sorry, go ahead, Anosha.

Oh, yeah, I just had a quick one. Sorry if I missed this, but you have... And I assume it's a health. It's the same. Are you assuming there's inflation in there? And then just quickly that there's still more impact from Augusta for the rest of the year? And I'll turn it over to you.

We have to apologize. You just broke up. We couldn't understand the question you were asking. Oh, sorry. Can you hear me now?

Yeah. 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 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?

Yeah, no, it's Steve. No, you actually 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. It 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 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 lined up modestly. That's a bit FX-driven as well, like we were chatting earlier about the impact on the balance sheet.

Great. Thank you. Thank you.

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

Okay, understood. Your next question is coming from Mike Roxland with Truist Securities. Please pose your question. Your line is live.

Thank you, Mike, Steve, Mark, for taking my questions, squeezing me in here. Hopefully just two 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 of inflation or input cost inflation in the business this year. You wound up at only being $10 million. Can you help us discern what transpired from the time of your earnings call on May 1st to the end of the quarter where input costs moderated to the degree it did?

Yeah, Mike and Steve, you summarized it well. Q1, inflation around $20 million. It did decelerate towards $10 million. Really three 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, were up quite a bit, actually more normalized. 20 million moving down towards 10 million from the quarter. So it was across kind of the resident OCC and logistics fronts. The actual inflation for the quarter was a continuation of some year-over-year inflation, energy, some milk chemicals, our fiber-based packaging materials, so they corrugated. And that was up a bit, but it was offset by 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. You mentioned no change to Waco's projected returns despite the higher spending, I think $150 million called out. Right now, you have $100 million increase in 3Q, bringing total project costs to about $1.25 billion, up from around $1 billion. But why would the project returns remain the same if you're still forecasting RICO's EBITDA to remain flat at $116 million?

Yeah, 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 so as we look out beyond 2027, our expectations are that we'll continue to see returns from the investment. just to maintain some conservatism, $80 million in 26, $80 million in 27. But it's our expectations 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 are OCC costs, 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 dialing it in currently because we're looking out into the Vision 2030 aspirations. Our expectations, 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.

Thank you.

And your next question is coming from Arun Vishwathan with RBC Capital. Please pose your question. Your line is live.

Thanks for taking my question. I hope you guys are well. So 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 yeah, maybe you can just offer your thoughts there. Thanks.

No, no problem, Maroon. 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'd have modestly stronger Q3 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 startup in Q4 because, as we've talked, we'll be in a start-up mode. Those benefits will start to enter positively in 2026.

That's all we've got time for, operator.

Yes, 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 are 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 eight 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 pre-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.