Graphic Packaging Holding Company

to four major cities. Our team also developed an internal fiber sourcing plan which allows us to bring scrap paper board from our packaging facilities to Waco. This is exceptionally clean and very low cost fiber. True circularity isn't just about the environment. It's done right. It's also about sound 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 cup collection ramps up, graphic packaging will play a key role in assuring this high-value fiber source is 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 startup 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 30th, We formally announced that our East Angus recycled paperboard manufacturing facility will cease production December 23rd. Taken together with our earlier Middletown closure and the recent closures by others, 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 the startup of Waco to materially impact recycled paperboard market balance. Graphic packaging has long and consistent practice of matching our board production to our demand for our packaging. Turning to slide four, the pressure on the consumers is evident by the grocery volumes. Increasingly, we hear from our CPG customers that the consumer market has bifurcated. Upper income consumers are still spending, but 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, but we continue to see highly unusual competitive pressure from bleached packaging producers who normally wouldn'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 prices apply. Given that bleach capital costs and annual sustaining capital requirements are dramatically higher, we don't believe that this 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 costs 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 three 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 bleach paperboard in a range of markets. As we discussed last quarter, we are not a meaningful participant in open market bleach paperwork. But the impact of a large imbalance in that market has been to reduce the pricing power in recycled and unbleached packaging. Recycled and unbleached are our primary markets, and both are healthy and in 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 food service 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 food service remains highly targeted, an approach which has not driven meaningful volume for foot traffic. Mass retail, super stores, and discount grocers continue to take share from traditional grocers. That is one of the driving forces behind the surge in private label offerings, although traditional grocers have increasingly embraced store brands as well. In the past two 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 new markets for our paperboard packaging, from household products to protein to produce. Turning to slide five, 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 at every grocery aisle 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 and health and beauty, as customers increasingly embrace our paperboard as a less expensive, more responsible choice that consumers perform. Turning to slide six, excluding the effect of FX, third quarter packaging sales 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, no clear category trends are emerging. We see targeted promotion as shifts from product to product and brand to brand, but it's 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 of $4.50 to $4.75 may not cause a big change in demand, but a $0.25 increase of $4.75 to $5 might cause a 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. In beverage, we saw a welcome return to a more normal promotional activity this summer, which helped drive soft drink multi-pack demand. The longer-term trend towards less beer consumption continued, both in the Americas and in international markets. Keep in mind that while trends in multi-pack demand do track references like Nielsen over the medium term, feeds and legs can vary, particularly when beverages are purchased and when they're conserved. A 12-pack, for example, will tend to be consumed more quickly if it goes directly into the refrigerator, so when you have a two-for-one 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 and sizes, with multi-packs for cans, bottles, and plastic. Over time, we expect to outperform the overall beverage market, both in the Americas and in our international business, thanks to our innovation portfolio and the strength of our integrated beverage packaging model. Food service results are broadly weaker, as has been well telegraphed by the media. While affordability has been the primary challenge to food traffic and volumes, This is also the category with the most bleach paperboard packaging, and bleach packaging is where we have seen the most unusual additive behavior, which is affecting sales as well as profitability. Our smaller international food service business continues to perform very well, with new product innovation and strong execution 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 mostly international business for us that has significant potential to grow over time in the Americas. Slide seven highlights our five 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 into meat protein, freshly prepared food, ready meals in Europe, brown 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 eight, we highlight an innovation that demonstrates our market expansion. In the produce aisle, and especially with small fruits and vegetables, plastic pundits are the traditional plant packaging standard. But while plastic pundits are cost-effective, Their performance and consumer appeal is mixed at best, 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 that use up to 95% less plastic and are recyclable in most existing programs. On this slide, we highlight our produce pack, top-sealing punnets. These examples are from two of our large store-brand customers, Marks & Spencer and Tesco in the UK. Fruits and vegetables are packed in many different ways depending on the grower, the scale, and the market. So we design our punnets 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 clamshell design, for example, serves a hand-packed market, but unlike the plastic clamshell, Ours can be locked into a closed position with one hand, improving labor efficiency. When we began this project, our team studied the science of food ripening and developed containers that have a meaningfully positive impact on how long some fruits and vegetables stay fresh. In cherry tomatoes, for example, a third party has verified an increase in shelf life of more than three days, a really big advantage for highly perishable products. Other testing demonstrated that our paperboard punnets slowed the mold growth compared to plastic alternatives. Our punnets also offer outstanding printability inside and out, something you can't get with plastic. That gives the growers and retailers a way to increase their brand marketing impact 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 seal line, are perfect filled with today's trends towards healthier eating and the growing use of GLP-1. And they're great examples of just how effectively graphic packaging improves with the consumer. Turning to slide nine, 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 facing sequential price and 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 the 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% 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 today and our best view of what's been an increasingly difficult to predict volume output. 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 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 re-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 either dollar. 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 modestly. 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 year-end completion, we expected and will 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 a recent 8K, we ventured 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 of 2027. This new financing addresses the upcoming bond maturity while giving us more time to decide whether 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 to $800 million pre-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 continues to focus on delivering results for our customers and our stockholders. We have everything we need. And the next five 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.

Certainly. Ladies and gentlemen, the floor is now open for questions. If you wish to join the queue to ask a question at this time, please press star 1 on your telephone keypad. Should you wish to remove yourself from queue, you may press star 2. In the interest of time, we do ask that you limit yourself to one question and one follow-up. Once again, that will be star 1 on your keypad at this time if you wish to join queue to ask a question. Please hold a moment while we poll for questions. And the first question today is coming from Gansham Punjabi from Baird. Gansham, your line is live. Please go ahead.

Thank you, operator. I guess first off, just wanted to congratulate Steve. Wish him the best for the future. Obviously, great run of the company and look forward to your next role. So congratulations again. So my first question, Mike, you know, 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 bleach board conversion and you know, related to that, why would that dynamic change near term barring some sort of inflection higher in volumes?

Thank you, 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 them, which has been just a wonderful and honorable experience. Probably looking ahead, though, as 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 looking forward to what lies ahead as well. So thanks for that, Mike.

Thank you, Steve. It's been a real honor. To your question, Gancham, 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, 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, for the first $100 million, of those savings was really a function of the mill closures. Middletown, which was closed 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, the 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 would be our most efficient paperboard 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.

Thanks, Mike. Thank you.

Thank you. Your next question is coming from George Staffos from B of A. George, your line is live. Please go ahead.

Thanks so much. Appreciate all the details. Also want to make a quick shout out to Steve. Really important driver, as you mentioned, Mike, of what graphics become the last 10 years. And really 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 our research on graphics. So, Steve, thanks so much. You know, 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. You know, 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 additive? And then how to follow on.

I think the big part of that, my confidence in the 80 on the Waco ramp-up for 26 is very high, George. 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 and 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 are the things that we can control. So we've got some unusual competitive activity going on right now, as I mentioned, around bleach 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, you know, 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 are kind of in order. Our first thing is, you know, CapEx is going to revert back to a more normalized level, to 5% or below. That's going to generate, you know, 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 stuff internally here, so we'll continue to do that. And ultimately, taking a look at our inventory situation, you've seen we've had a capital release So far this year, we're about $30 million. We expect upwards of another $20 million here in Q4. And as we go into next year, that'll be another area we're really looking at hard because with Waco and Kalamazoo online, if you think about it, we now have five 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 levers that we really have in our control. That's how I'm thinking about it. As I mentioned to Gansham, if we need to, you know, take a, to manage our supply and demand on our coated recycled paperboard as Waco really ramps up quick, you know, we can toggle our K1 machine. We're able to do that. We're able to do it cost effectively.

Thanks, Mike. My other question, just more of an end market question. So food service, I think from the chart was one of the end markets that wasn't doing as well for you in the quarter. Food service has been kind of an interesting market from our observations, right? You've had fast casual not doing so well, but quick service 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 food service there. And if that picks up, it's actually a relatively higher margin and market for you. Thanks so much. Good luck in the quarter. And again, Steve, thanks so much.

Thanks, George. Thanks for that question. I think you said it well. I mean, the fast casual is definitely under pressure. I mean, last week at Chipotle release, I won't go through all the comments, but the CEO really talked about you know, 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 shit 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. And we're there. And we also think that we've got a number of innovation ideas that we're working with those customers that ultimately will allow us to continue to earn a place at the table and grow our volume. 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?

Boy, you know, I'd like to believe so. But, you know, again, George, it's just difficult for me to talk about demand. I never think about a quarter. for us, it would be most likely because of innovation.

Okay. Thanks so much. Thank you. Your next question is coming from Matt Roberts from Raymond James. Matt, your line is live. Please go ahead.

Mike, Steve, Mark, good morning. 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 cede the floor to you. um but maybe maybe on the 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 cup stock are you able to sell incremental sbs or cuk similar to your competitors at the expense of crb given that price spread or how is 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. Thank you again.

Yeah, thanks, Pat. So I'm going to address the SPS, you know, CRBC, UK, you know, comments. We've had a fair amount of inbound in that, as you can imagine, over the last week or so. So, you know, the first thing you need to know, you see in our volumes, we have not lost any 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 SPS, and we make it. We've got a mill that does it, Texarkana, so we know the cost structure on that. It's much more expensive to make than totally recycled paperboard. So from our standpoint, we would never subsidize with SPS for CRB, given the cost advantage we have. In fact, it's lower cost to make CRB on a recycled paperboard than it is to make a paperboard. So the margin profile is a simple arithmetic there in terms of what that looks like. And again, we're operating that mill, and we operate Kalamazoo and Waco. And what I'll tell you is that the CapEx requirements of a virgin paperboard are manufacturing facility are four times what they are, you know, a coated 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, you know, because the cost of capital returns start to get in the way there. And ultimately, that's something that, you know, needs to find its own level. I think RISC in their last article or so talked about 500,000 tons of excess police capacity in the North American market. We'd agree with that, if not a little bit more. So that's got to be dealt with. That's really not something that Graphic will deal with, as you know. Our focus is on package sales. We make cartons. We make wraps. We make cups. We sell value-added packages. 95% of everything we do is in that area. So from our standpoint, I mentioned this in my prepared comments, most of this was on the package price and not on the actual paper board level itself, which makes sense given the dynamic we saw 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 pulp platform. So hopefully that gives you a little bit of color into how we're thinking about it.

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

Yeah, it's a, you know, we're looking at all that as you'd expect, and we'll dial that in next time we talk to you. We'll give you a little bit, you know, clear view into kind of what that looks like for 2026, obviously. But it's a good question and something we're looking at all the time.

You know, but what I'm very confident in is the $350 million collection that will occur. You're on here.

Thank you. Your next question is coming from Charlie Muir-Sands from BNP. Charlie, your line is live. You may go ahead.

Good morning, guys. Thank you for taking my questions. Just firstly, on Waco, can you just give some clarification around the phasing? You've obviously guided the startup cost, the $65 to $75 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, effectively, is the step up reverse of what is plus the 80 million, or would that be double counting? That's the first question. Thanks.

Charlie, good afternoon to you. My apologies if I don't hit this properly. I'm having a difficult time hearing you. I think your question was from the phasing of the one-time cost associated with Waco, which is outlined in the materials to be $65 to $75 million. Assuming that was your question, the phasing of that is like a two-thirds this year, one-third 2026. If I didn't get it right, please come back.

Great, yeah, thanks very much. And 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 a specific price premium for that now? And then one final piece is, Can you just talk about the deleverage that you're expecting in the fourth quarter to get to the 3.5 to 3.7 times net debt at the year end? Thank you.

Yeah, thanks for that. So I'm going to address the question around Rainier first, then I'll cover the leverage. On Rainier, it's a great product. One 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 cutters on all three of our paper machines that give us the ability to really have brightness that approaches bleach paper board levels. Now, Rainier is one of the tools we're using to make sure we don't lose any shares. as we're competing against the SPS 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 to do it. So I really am happy that we've got that great in our portfolio of mix. And relative to Year-end leverage, yeah, we've got a range of 3.5 to 3.7, you know, for year-end numbers in terms of overall debt. You know, 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 talked to our board about that, and given the ultimate, you know, 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 de-lever as well as return cash to shareholders in a way that makes sense and 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 the range we're looking for.

Right. Thanks. Thank you. Your next question is coming from Gabe Haida from Wells Fargo. Gabe, your line is live. Please go ahead.

Mike, good morning. Steve, pleasure working with you. Mark, good morning as well. I had a question about working capital and cash flow as well in the 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?

Hey, Mark, why don't you handle that question if you would? Yeah, Mark, we'll let Mark handle it.

Oh, I'm sorry. This is Steve. The question is around AR finance, council 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 to $800 million. So it won't be around, it won't be about accounts receivable programs being materially different.

And just to clarify, Gabe, CapEx this year running $850, $450 next year.

So that delta is $400 million cash flow reflection. Okay.

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

Okay, so there's a number of things to unpack there. The $80 million EBITDA run rate, so that's out on the EBITDA line into next year. The $65 to $75 million, we've talked about this a number of quarters now, are the one-time cash costs associated with the startup of the machines. Charlie's question was, you know, what's the phasing of that? That's $65 to $75 million. Two-thirds of that's in this year. One-third of it is next year. And I'm going to ask Chuck this year 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.

Yeah, 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 – 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 to $75 million. And yeah, that is a multi-year number, not just a single year number, the $65 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 construction

capitalized interest again in 2026. Okay. Or in Q4? Well, a little bit potentially.

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

Thank you. You're welcome. You're welcome.

Thank you. Your next question is coming from Arun Viswanathan from RBC. Arun, your line is live. Please go ahead.

Great. Thanks for taking my question.

Steve, great work 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 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 related matter, I guess, you know, do you still feel the same way about 27 as well, another 80 million uplift, or is that also somewhat volume dependent? Thanks.

So, Arun, 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 in waste poison ramps up next year. And then in 2027, there'd be another $80 million. By way of reminder, that's $160 million in total. You know, $100 million of that, as I mentioned, is focused on kind of the fixed costs 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 for next year is very high. We had always said that as we kind of brought it online in the outlying years, we'd need 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 one we just operated now for the last four 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 three 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 is 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, thanks for that, Mike. Just on the markets then, it sounds like beverage was a little bit weaker in Q3 and food service 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. 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 test 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. Thanks.

Yeah, 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 know, you get to read, you know, our customers' excerpts as I do. And as I talked about earlier, fast casual is down a little bit. You know, 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, I know every one of these customers, as we talk to them all, are very focused on getting their volumetric performance back. They've 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, you know, that are going on. We see, you know, agitation at different levels. So hopefully that unnerves itself in biometric performance as we head into 2026, you know, for sure. I would just add a couple of things. Bruna, I'd just add a couple of things to 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 July 4th. 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 one 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.

Thanks for that, Mark. 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?

Yeah, that's exactly right.

Thanks. Thank you. Your next question is coming from Mark Weintraub from Seaport Research. Mark, your line is live.

Please go ahead. Thank you, 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?

Yeah, Mark, I'm not going to call that out. I mean, it's going to be, as you can think about it, though, you know, we put it into service here in October. It's a 12 to 18-month ramp. So that's pretty quick, you know, 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 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 tons, what they fill in for, and or is there a little bit of growth that does just to meet the full production that you're expecting to have from Waco next year, and that'd 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'll shut down the end of the year, and our Middletown facility, which closed 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 APA data. Inventories are down pretty dramatically on CUK and CRB. That's a deliberate plan on our behalf here relative to what we did. So we need those funds coming off the Waco machine to help service our customers and make sure that we can take care of our overall demand. But you had a good note out earlier this week. You talked a little bit about K2 and Kalamazoo and Waco and balancing that production with our K1 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 in any way here, but implicit in what you're saying is that you basically have gotten a lot of the business from the other capacity that was shut. Or is there something I'm missing? 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 it.

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 help 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. And that swing machine will be our K1 machine in Kalamazoo.

Okay. Appreciate it. Thank you.

Thank you. Your next question is coming from Mike Rockland from Truist Securities. Mike, your line is live. Please go ahead.

Yeah, thank you, Mike, Steve, Chuck, and Mark for taking my questions. And I'll just echo what everybody else has 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 to $800 million of free cash flow next year. Just try to get some more color around it because year-to-date adjusted free cash flow, as you pointed out in your press releases, minus $332 million. So you have the $400 million of CapEx step down. So you're looking at a starting point of $68 million in terms of free cash flow. I know you get a $500 million of free cash flow in 4Q due to working capital unwinds. But also you are contending with, I think, a higher working capital cash taxes and interest. But you called that on your call last quarter of about $300, $350 million. So can you help me reconcile those moving pieces I just mentioned with the $700, $800 million you're still confident you will achieve next year?

Yeah, I'm going to focus in on 2026 and give you a little bridge. You have to remember, Michael, 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 five 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, Mike. So we'll be safe to say... I'm sorry, guys. Hey, this is Chuck.

I was just going to add that this is one 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're going to pull them. In addition to that, cash, federal cash taxes are going to be very favorable for us next year near zero. And so we know what the levers are. We're ready to pull them. And we have a high level of confidence in the numbers.

Thank you for that, Chuck, and I didn't mean to interrupt you there. So it sounds like, you know, last call you mentioned $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 offline, Michael.

You know, let's do that. Again, I'm focused, and as I said, the levers that we're pulling here in the $700 to $800 million, we'll help you get your model right so that it works, but let's take that offline after the call.

No problem. One quick follow-up. I know we're running out of time here. Just in terms of the 550,000 tons for Waco, 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, you know, 12 months from now? And so just, I want to get to, it's a lot of capacity. I stand on a net basis of $75,000, I guess that, but The market itself, as you pointed out, your competitors are acting irrationally. Do you tend to bring this, the 550 folding on bikes, to anything much, or do you have flexibility to basically push that out further if SBS, the folding cars, 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. As I've mentioned a number of times here now, If I need to match my supply and 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 deal with some of that behavior by some of the bleach board producers in a way that allows us to protect our industry-leading margins. So you want us to do that. It really makes sense to do so. Look. You'd love to bring a brand new machine on like we brought the K2 machine on into a really snug market. But you make a decision. It takes a number of years, in our case, two and a half 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 what our focus is.

Thank you. Thank you.

Thank you. Next question is coming from Anuja Shah from UBS. Anuja, your line is live. Please go ahead.

Oh, hi, guys. Good morning. Just one quick one 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 goes down significantly. Is there anything else in there we should be thinking about? Like, I don't know, is there room for bulletin M&A or expansion international markets? How are you thinking about it?

From my standpoint, it's really two things that are our priorities.

It's delivering our balance sheet, which we've talked about, as well as returning cash to shareholders. That's our focus. Great.

Thank you very much.

Thank you. 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 Waco up and running, we have five of America's very best paperboard manufacturing facilities, the strongest and most capable global packaging manufacturing network, and the world's best 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.