Good morning or good afternoon, and welcome to the Graphic Packaging First Quarter 2024 Earnings Call. My name is Adam, and I will be your operator today. I will now hand the call to Melanie Skijus to begin. So Melanie, please go ahead when you are ready.

Good morning, and welcome to Graphic Packaging Holding Company's First Quarter 2024 Earnings Call. Joining us on our call today are Mike Doss, the company's President and CEO; and Steve Scherger, Executive Vice President and CFO. To help you follow along with today's call, we will be referencing our first quarter earnings presentation, which can be accessed through the webcast and also on the Investors section of our website at www.graphicpkg.com. Before I turn the call over to Mike, let me remind you that today's press release and the presentations made by our executives 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 the release and in our filings with the Securities and Exchange Commission. With that, let me turn the call over to Mike.

Thank you, Melanie. Good morning, everyone, and thank you for joining us on the call today. As those who joined us for our Investor Day in February are aware, Graphic Packaging's transformation to a global leader in sustainable consumer packaging is well advanced. We spent the last 8 years building a stronger, more diverse consumer packaging portfolio capable of delivering more consistent results, solid growth, and substantial cash flow. During the first quarter, the strength and balance in that portfolio was on full display as consumer purchasing patterns continue to shift, and we moved with them. We are seeing volume improvement in certain markets and customer categories. Excluding the impact of the Augusta bleached paperboard manufacturing facility sale, we expect to generate positive full-year sales growth in 2024 as we partner with our customers to deliver the sustainable packaging solutions that consumers prefer. Let's start with a brief overview of results. In the first quarter, Graphic Packaging sales were $2.3 billion. Adjusted EBITDA was $443 million and adjusted EPS was $0.66. As Steve will discuss later, the biggest part of the sales decline and essentially all of the EBITDA decline was a function of our decision to reduce production of bleached paperboard to match demand. In the context of that decision, an adjusted EBITDA margin down just 30 basis points at 19.6% is an outstanding result and demonstrates the strength of our portfolio and the strong execution our team delivered. Holiday timing and fewer shipping days accounted for about 2% of the sales decline. Turning to Slide 3. At our Investor Day in February, we introduced ambitious targets that are better aligned with the sustainable consumer packaging leader that we have become. You can find a replay of each presentation on the Investor Relations website, and I encourage you to listen if you weren't able to join us. Also in February, we announced an agreement to sell our Augusta bleached paperboard manufacturing facility to Clearwater Paper. We expect that sale to close tomorrow, May 1. At that point, open market paperboard sales, which have historically been a significant source of earnings volatility for us, will become a very small part of the business. Turning to our recycled paperboard system, Steve and I visited our Waco recycled paperboard manufacturing facility site a couple of weeks ago, and I am pleased with the progress the team there is making. The Waco machine and supporting systems will be nearly identical to what we have at our Kalamazoo facility. That was a strategic decision we made to further increase our competitive advantage in recycled paperboard. This decision not only significantly shortens the project timeline and reduces engineering costs, but it also creates real and valuable synergies in training and operations. In fact, an operator from our Kalamazoo K2 operation could almost immediately step into the same job at Waco, and we plan to train many of our Waco teammates at Kalamazoo prior to Waco startup. Meanwhile, Waco will utilize high-value scrap from our wood fiber paperboard manufacturing facilities as well as numerous packaging facilities in the region. We are also progressing our plans to collect paper costs, another high-value fiber source within a radius around the Waco facility. We see Waco as a $1 billion investment in long-term competitive advantage, taking the advantage we already have in Kalamazoo across all of North America. A broad and diverse portfolio of sustainable consumer packaging solutions really does move with the consumer, allowing us to deliver consistent results even as consumer purchasing patterns and economic conditions change. That was evident in our first quarter results with continued strength in food service and stronger beverage volumes, helping to offset weaker results in certain food categories and household products. Some consumers have responded to inflation by shifting to private label products, and we were able to offset some of the declines we saw in grocery with gains in the club channel. The diversity of our product portfolio, combined with the agility and execution strength of our team to offset the weakness in one market or channel with the strength in another is exactly what we intended to build, and it is working. Within food and household products, we did see pockets of year-over-year growth. But for those of you who follow consumer product markets, know that volumes remain sluggish across many consumer staple categories. I do expect to see volumes improve further in the second quarter and anticipate a material acceleration in volume growth in the second half with new innovation wins, product launches ramping up, and a broader return to growth across our customers' businesses. We delivered $37 million of innovation sales growth in the first quarter, with contributions across all five of our innovation platforms. Key contributions came from our new Nissin Noodles Cup and our Chick-fil-A Cold&Go Cup, as well as Boardio paperboard canister solutions. The cups are replacing foam, while Boardio in these instances is replacing plastic. Our innovation pipeline is robust, and while we don't control the timing of customer product launches, I'm confident that we will meet our 2% innovation sales growth target for the year. Slide 4 is a reminder of how broad our packaging portfolio has become. We serve five markets, with food being the largest, beverage next, and our growing food service category not far behind. Our investments in new capabilities have taken us further into household products and provide entry into new health and beauty markets, further enhancing our portfolio balance, growth opportunities, and consistency. Let's go a little deeper into our sales results with Slide 5. We don't aim to adjust the arrows on this chart because we want you to be able to see the performance versus the reported sales. If we did adjust for days, the total sales arrow at the bottom right would be sideways. Our days adjusted consumer packaging sales overall were down about 1%. As in the fourth quarter, our portfolio offset weaknesses in some of the markets with strength in others. I want to take a moment to reflect on that because 8 years ago, we couldn't do that. Our portfolio was too narrow, and our exposure to a handful of customers was too concentrated. Today, our portfolio is much better diversified across consumer markets, customers, and geographies. This allows us to deliver more consistent results across a wide range of economic conditions. Foods saw some modest weakness in the first quarter with categories like cereal and frozen pizza being weaker in both Americas and in our international business. There were some bright lights too; we saw improvement in dry foods, including prepared foods and bakery items. Beverage results showed a rebound even with the impact of fewer shipping days. We saw year-over-year growth in both beer and soft drinks across both the Americas and international markets. Food service results were strong, marking the ninth consecutive quarter of strong results for us. As you've heard me say before, a third party's lower price declaration and paperboard for cups is 180 degrees removed from the reality of a consistently strong and healthy market. Our customers ultimately want the same thing we want: accurate and transparent pricing. We plan to eliminate third-party indices as a price change mechanism from our customer contracts over time. Turning to packaging for everyday household products, we have seen growth in some pet care categories and in home air filter frames, offset by declines in tissue, soaps, and cleansers. Health and beauty is the smallest of our five markets, but it offers very attractive growth opportunities. Most of our current business in this market is in Europe, where we supply many of the leading local brands. As we saw in Q4, there's been a pullback on the health care side broadly, with some offsetting strength in beauty markets. Yet if we look to the future, our pay center Rainier 100% recycled paperboard has opened up a whole new range of customer opportunities here in the Americas, markets that are currently served almost exclusively by bleached paperboard. With pockets of improvement across our portfolio and a high level of engagement with our customers, we are optimistic that these results will improve as the year progresses. I want to spend a little more time with you on our sales results and where they differ from our expectations. If you join me on Slide 6, the chart at the top of the page is a summary of typical seasonality across our five markets. And while there are some modest differences in seasonality between our Americas and International businesses, this chart won't change much if we looked at those markets separately. Food sales, for example, aren't especially seasonal, but there is a dip most years in the second quarter and a pickup in the third. Again, these are a matter of a couple of percent, so they aren't huge, but they are real and they are persistent. Beverage seasonality probably won't surprise you. People tend to drink more in warmer drier months and less in colder weather months. The second quarter tends to be somewhat stronger than the third quarter, but both tend to be stronger than the colder parts of the year. So our positive first quarter performance is setting us up well as we move into the strongest part of the beverage selling season. Foodservice has the most pronounced quarterly seasonal variation of any of our five markets, which is mostly a function of consumers eating more meals at home during the colder months and after the winter holidays. The fact that for the third year in a row, we have had strong results in what's typically the weakest quarter confirms that the innovation we are bringing to the market is driving real value. Right now, new product introductions like the Chick-fil-A Cold&Go Cup are important growth drivers. One thing we really haven't talked about much in the past is the degree to which sales in a particular month can shape the quarter. February is a shorter month, but even if we adjust for that, February tends to be a slower month. March, on the other hand, usually has an extra day or two and is nearly always the best month of the quarter. But this year, March had an extra weekend, and with the timing of Easter and particularly Good Friday negatively impacting our results in both the U.S. and Europe. Looking ahead, reports that consumers are feeling the impact of price inflation and are more focused on value are consistent with what we hear from our customers. They tend to correlate with higher at-home food and beverage consumption, which is good for us. Meanwhile, as more consumers return to the office, they have less time to prepare meals at home, and that tends to support a pickup in prepared foods, convenience sites, and on-the-go meal options. We are beginning to see that in our order patterns. Now let's turn to innovation. Slide 7 comes from our Investor Day presentation, and I included it here as a reminder of just how big our growth potential is; the figures represent market opportunities in categories where we already have a packaging solution in the market or that will be commercialized very soon. Last week, the European Union passed a new packaging and packaging waste regulation called PPWR that will dramatically reshape the European consumer packaging industry. PPWR comes with significant new restrictions on single-use plastic and a range of other materials and containers. We talked about PPWR at our Investor Day and highlighted our significant investments in innovation and execution capabilities, including our acquisition a few years ago of Europe's best consumer packaging innovator, AR packaging. Those investments have positioned us very well to partner with customers to deliver the new and better packaging solution our customers will need to comply with the new regulations. On Slide 8, I want to highlight one of the more exciting innovations from our European team that contributed to our innovation sales growth. Our Boardio paperboard canister was first developed for a French infant formula customer. We then adapted the package for candy and gum, and more recently developed a third-generation package specifically for coffee. Last week, we announced a partnership with Mother Parkers, the largest coffee supplier to private label brands in the United States. Mother Parkers will bring our Boardio paperboard coffee canister to the U.S. coffee market for the first time through large mass retailers. Our growing penetration of the coffee market really demonstrates the Boardio value proposition. For our customers, Boardio reduces transportation and warehouse space. Meanwhile, our integrated degassing belt keeps coffee pressure longer. Boardio for coffee reduces plastic by roughly half, and our container has been verified to be recyclable by two of the leading recycling authorities. So consumers get an attractive convenient new package that keeps the coffee pressure with a built-in lid and can be tossed in with the rest of your recyclables. Finally, before I turn it over to Steve, I want to spend just a moment on Slide 9, which summarizes the four pillars that define who we are and what we aspire to accomplish. We are a results-driven company with unmatched capabilities and scale and substantial competitive advantages. We really do package life's everyday moments for a renewable future and our products are in consumers' hands throughout the day. I'm excited by what I see ahead of us in 2024 and confident that we will drive tremendous value for investors and for all our stakeholders in the years ahead. Now let me turn it over to Steve. Steve?

Thank you, Mike. Turning to Slide 10. In the first quarter, our portfolio did what it was designed to do, driving consistency in overall sales while managing changing consumer purchasing patterns. More than half of the 7% drop in reported net sales reflected our decision to produce and sell less paperboard in the open market. But somewhat unusual first-quarter calendar with fewer shipping days, even with leap year, and the timing of the Easter holiday reduced our packaging volumes by about 2%. The normal pass-through of input costs in our European business reduced sales by approximately 1%. On a days adjusted basis, our sales were down about 1% year-over-year, a good improvement sequentially, but modestly shy of the flattish result we were expecting. Turning to EBITDA, effectively, all of the decline was a function of our decision to reduce production and open market sales of bleached paperboard in the carbon market consistent with our practice of matching supply with demand. Even with that negative impact, we delivered a 19.6% adjusted EBITDA margin, just 30 basis points lower than a year ago, when our open market paperboard sales were much stronger. That kind of margin consistency is the result of a strong and balanced portfolio with solid execution and cost control. Turning to Slide 11. Let me take a few minutes to provide an update on some of our operations and capital investments. As we grow our sales and global capabilities, we regularly review our network to make sure it matches our needs. We discussed at Investor Day the strategic rationale for the Augusta sale, so I'll not repeat that here. We have always run our bleached paperboard manufacturing facilities as a system. During the quarter, we made the necessary preparations to separate Augusta and to align the Texarkana facility to support our internal needs. As Mike pointed out earlier, Waco is moving ahead well. Foundations are largely complete. Buildings that will handle incoming fiber and outgoing paperboard are well advanced and already in use at staging and assembling facilities for the rest of the construction activity. The infrastructure for our new recycled paperboard machine is being moved into place, and framing for that building is on track. As a reminder, once Waco is up and running, we anticipate shutting down our Middletown and East Angus recycled paperboard manufacturing facilities, which will lower our overall costs and reduce future capital requirements. We continue to expect the Waco investment to deliver an incremental $80 million in EBITDA in each of 2026 and 2027. Our packaging facilities are delivering the results we and our customers expect with excellent performance and cost discipline. One of our key initiatives this year is the build-out of capacity to support our Cold&Go Cups, Chick-fil-A as well as our new Nissin Noodle Cup. We are among a select few consumer packaging companies capable of investing at the scale needed to support major consumer product launches. In Europe, we have opened a new beverage packaging and innovation facility in Bristol, U.K., which is about twice the size of our previous location and is well-suited to support our expanding beverage business in the region, where products like our alternatives are gradually taking the place of plastic grain carriers. Having our beverage packaging innovation team located alongside the new modern production facility enables us to demonstrate our capabilities to customers more frequently. Additionally, the acquisition of Bell, finalized in the third quarter of 2023, has greatly increased our reach and enhanced our capabilities in the food service market. Bell also presents us with significant growth opportunities in both markets, with ample potential to ramp up volumes at those sites without major capital investments. Looking ahead, we anticipate a rise in volumes as the year unfolds and positive sales growth for the entire year, excluding the impact of the Augusta sale. As Mike noted, our innovation sales are performing exceptionally well, and we are on track to achieve $200 million in innovation sales growth this year. The Augusta sale is expected to finalize tomorrow, May 1, with anticipated net proceeds of around $550 million. We've made some updates to our guidance on Slide 13. As a reminder, the guidance we provided in February included a full year of Augusta production. With the sale expected to close tomorrow, we have updated guidance to reflect expected results for the four months that we will have owned Augusta. Again, keep in mind that we historically operated our bleached paperboard manufacturing facilities as a system and sold $100 million and $33 million of adjusted EBITDA at the midpoint represents the book of business that we are selling along the Augusta facility rather than how Augusta might have performed independently. We have also narrowed the guidance range for the business. As such, the only change to the midpoint is to reflect the partial year of ownership of Augusta. And while we don't provide quarterly guidance, I do want to point out that we expect our second quarter EBITDA to be impacted by roughly $50 million versus the year ago quarter, which includes approximately $40 million related to the sale timing and the exclusion of 2 months of contribution from Augusta and approximately $10 million of higher planned maintenance costs that will impact the second quarter EBITDA margin. But we continue to expect full year margins consistent with our guidance and the targets we established with our Vision 2030 long-term financial model. Turning to Slide 14 and stepping back for a moment. Let me remind you of those Vision 2030 financial targets. Our base financial model is about consistency. Reflecting the strength of the consumer packaging business we have built, low single-digit sales growth, mid-single-digit adjusted EBITDA growth, and high single-digit adjusted EPS growth capture our outlook for the business over the next several years. Our customers decide the timing of product launches. Therefore, innovation sales can be lumpy. So we could be a little higher or lower than these annual targets in any given year. We have the assets and the capabilities we need to reach these goals and our 5% of sales target for capital spending leaves plenty of room for discretionary investments that will make us a better and more capable consumer packaging leader. Turning to Slide 15. We are in transition between Vision 2025, substantial investment programs and Vision 2030's focus on execution and cash flow. That shift really becomes clear as we move past peak CapEx this year. In 2025, the drop in CapEx alone should drive a $200 million improvement in cash flow. In 2026 and 2027, we will see the incremental EBITDA benefit from the Waco investment. Through 2030, we expect to generate upwards of $5 billion of cash. We will deploy that cash to drive returns for our stockholders with benefits for all our stakeholders. Reinvesting to keep our business strong and to maintain our leadership position will always come first. We believe the solid dividend that grows over time represents appropriate and responsible capital allocation. Equally important is maintaining a strong financial position. I want to be clear about how we think about leverage. With the substantial and increasing cash flow we expect to generate, we plan to reduce leverage over time, but we will remain opportunistic so our debt levels may fluctuate. You saw them rise modestly this quarter, for example. As we see it, we already have a business capable of being investment grade. We will only pursue an investment-grade credit rating when doing so brings the most benefit for our stockholders. We view share repurchase as an attractive way to return excess cash to stockholders, and we continue to review every potential capital deployment against the alternative of share repurchase. As I said long ago, we have the assets and capabilities we need to reach our financial targets. We will, of course, always consider tuck-under M&A that can make our company's sustainable consumer packaging portfolio even stronger. As we have discussed, the bar for M&A is set fairly high right now. We've included some supplemental information as an appendix for your use in modeling. That concludes our prepared remarks. Let's turn the call back to the operator to begin the question-and-answer session.

Our first question comes from Mark Weintraub from Seaport Research Partners.

First, a real quick simple math question. So it seems that Augusta balance for the year, $65 million to $70 million impact on EBITDA since you highlighted $40 million in the second quarter, does that mean the second half is only $25 million to $30 million?

Mark, it's Steve. I think your math is directionally right. Most of the earnings profile last year with our bleached paperboard facilities incurred in the first half of the year. We took very meaningful market-related downtime in the second half of the year. We had almost $100 million of market-related downtime in the second half of the year. So yes, second half EBITDA is much more modest. Most of the comparisons relative to the earnings decline here in Q1, as well as in Q2 where we also began to not own the facility is where you see most of the reduction.

Okay. And then second, at the start of the year, you guys announced February price hikes on CUK and CRB. To date, these increases have not been reflected in Pulp and Paper Week. So kind of two related questions on that. One, how do business dynamics look to you now versus how they did when you made those announcements? And then second, I'm practically speaking, if they still look as good or better than they did then, would you need to be announcing again? Or do you consider the February increases to still be live?

Yes, it's Mark. We expect continued improvement in the second quarter and the second half of the year based on our market overview. When we refer to markets, we're discussing the majority of what we sell that might have been packaged, not just paperboard. It's important to note that starting tomorrow, the Augusta mill will no longer be part of our operations. We opt to produce paperboard in areas where we see higher return on invested capital and competitive advantages, but we also source a significant amount of paperboard from the open market, both domestically and in Europe. This context should guide your future modeling in light of earlier announcements. We are actively working on these initiatives and have seen successful outcomes. I won't discuss future pricing actions, but generally speaking, our strategy has resulted in a 19.6% EBITDA margin in the first quarter, indicating our effectiveness. We are aligning with consumer demand and finding ways to transfer input cost inflation to our customers over time, which is expected.

Okay. I appreciate this. Just to clarify, if I just could, because I know you talked about, you're moving towards eliminating third-party indexes as well. Not clear necessarily from the outside how much of that's been accomplished and what replaces it. But am I right to understand that with the price increases that you've announced that perhaps some of them you might be getting from your customers, whether or not it's reflected by Pulp and Paper Week and that being distinct from cost inflators and things like that, but from price increase announcements that you come to them with?

That would be a safe assumption for you to make. And again, all those relationships are proprietary. So we're not for breakout percentages, but we are actively implementing those increases where we have the opportunity to do so.

The next question comes from Lewis Merrick from BNP Paribas.

Two, if I may. Focusing on the foodservice end market. We've heard from some of the major foodservice players talk about this slowdown in customer traffic growth and a shift to cheaper menu items. How does the shift from the premium end of foodservice to the more value end of foodservice impact you? And I'll be my follow-up to ask this question.

Okay. So from our standpoint, Lewis, as you saw in Q1, we still are seeing an acceleration; our ninth quarter in a row of quarter-on-quarter gains in sales in that category. So we have not seen a trade down there per se, at least in the products that we're selling to our customers.

Okay. Clear. And also, you find that Waco will be $160 million EBITDA run rate after 2 years of operations. Is that the fully ramped contribution? Or can we expect a bit more trailing into the third year for that project?

Lewis, it's Steve. The $160 million is what we have direct line of sight to in the first 2 years of the ramp-up, similar to what we saw with Kalamazoo. We see the kind of vertical ramp that we saw with Kalamazoo occurring in Waco. It will be a combination of cost to take out, overall lower costs to produce, and to support some of our growth. Beyond that, as you would expect, we will continue to improve upon the business year-over-year through our own productivity initiatives and more efficiencies. But the line of sight to that first $160 million over the first 2 years is what we can see through cost and supportive of our growth.

The next question comes from Ghansham Panjabi from Baird.

So I guess if we go back to Slide 5, we have all the breakdown across the end markets and so on. Beverage and foodservice, clearly, were improving in the first quarter at least year-over-year. But are you surprised, given the level of destocking that was in food and some of the other categories like household, et cetera, that Q1 did not track a little bit better?

Well, certainly from the standpoint, we're 1% off of where we kind of indicated we would be, yes. I mean, there was a little bit there that was specifically on the food side of the business. We saw a little weaker cereal and frozen pizza market, both in the Americas and international. We did see some improvement, though, in dry foods and bakery items. So it was kind of a little bit of a mixed bag there for sure. But yes, I think as we look at it, Easter was really just the way it played out this year. In some years, Easter is really busy. Good Friday, where shipping was strong and hard. Our customers are running. This year they did not, and so it impacted us in the quarter. But we've seen a good correction on that here in April, and our confidence side will inflect growth in the second quarter and the second half of this year, Ghansham.

Okay. And then in terms of inflation, so clearly, we're seeing a sort of a sequential pulse inflation across many different upstream inputs: OCC, energy, and so on and so forth. What are the offsets? I mean, I know you're sort of reiterating guidance on an EBITDA basis for the rest of the year, if you just have for Augusta, et cetera. But if inflation is a little bit higher, maybe volumes are tracking a little bit lower. What are the positive offsets that give you comfort on the EBITDA?

Yes, Ghansham, it's Steve. I think you touched on it. In the first quarter, as an example, we had inflation, as you noted. OCC obviously, and some logistics costs were up. For us, those were more than offset by deflation that we saw in wood, energy, primarily natural gas, and overall in our chemicals and resin. So those were playing relatively modest. The mark-to-market today remains relatively modest. That being said, you're correct; there is some inflation out there that we're actively looking into and will continue to manage. As Mike said, volumes were about 1% shy of our expectations. Overall, everything else on the top line played out as we expected, and we were very pleased with the nearly 20% EBITDA margins. Inside of the business, overall productivity was very good. Obviously, we were matching demand with supply on the open market paperboard side, which was well chronicled, but the core packaging business performed very well across our packaging platforms. Productivity was strong and it successfully offset other inflationary items.

And I think maybe just a little bit to add on to that. We try to give you a little insight, Ghansham, into the seasonality of our business, which is kind of distinct. It's not major in a normal year, but the '23-'24 setup really, because of the destocking that occurred in '23, really kind of sets us up a little bit more than we usually do for first half, second half for our business. And that's one of the things that gives us a fair amount of confidence too because as you heard Steve say, we took a fair amount of market-related downtime, economic downtime in the second half of last year. And based on what we see now and on the back orders that we have and how we're running, we don't see that. And again, an exposure to bleached paperboard on the open market side is not going to be something that we manage going forward with. So you put all those things together, and we see a nice setup for the balance of the year.

The next question is from Phil Ng from Jefferies.

This is John Dunigan speaking on behalf of Phil. I wanted to start by asking about the visibility you have into the innovation sales. It seems a bit lighter than I expected at the beginning of the year, but I understand it must be increasing. You mentioned some of the wins you have already secured. Are those confirmed, or are there ongoing discussions that provide assurance for the pipeline in the latter half of the year?

I appreciate the question, John. I mean in terms of those kind of sales and innovation sales and you mentioned $37 million we achieved in Q1. The selling cycle on that is out 6 to 9 months. So we've got really good visibility into kind of the flow-through of what that looks like. And our confidence level is high; we'll meet our $200 million number that we put out there for 2024.

Okay. Great. And then on the Augusta sales, if I remember correctly, the transaction value was at $700 million, and I think you were expecting a little bit over $100 million in tax; the net proceeds you're calling out now of $550, a little bit lower than I had been expecting. Although I know the number was supposed to be somewhere in the $500 range, I was thinking more high 5s. Is there something that changed there? Anything to note or call out? Or that was kind of in line with your expectations originally?

Yes, John, it's Steve. I think at our Investor Day, we were at $550 million in net proceeds and no change to that. So $700 million transaction, $550 million after the taxes associated with the tax gain on the business. So no change relative to the $550 million that we'll have available to us tomorrow.

The next question comes from George Staphos from Bank of America.

Thanks. I guess maybe a different take on a similar question you've had earlier today. As you look at the first quarter and the volume that you ultimately had across the end markets, where was the biggest surprise? And what do you attribute it to? And you said you've had a nice rebound into April and the second quarter. Can you tell us what types of volumes you're seeing early in the quarter across your big end markets?

Yes, I can give you a little insight into that, George. So again, at a high level, we talked about in our prepared comments and with Ghansham, we saw stronger foodservice and beverage. Beverage was a strong quarter for us. We've got a couple of things e-mailed into us around was that some pull forward. The reality today is for us, it was pretty de minimis. So our beverage is off to a very solid start into the second quarter. So we expect that to be good. Foodservice continues to ramp up. I mean, it's really above food in many ways. And Ghansham said with the destocking, being largely behind us, why didn't you see more. And all I can tell you is that the categories, as I mentioned, cereal and frozen pizza, usually, those are big categories for us. They were a little slower in Q1. We expect them to bounce back during the course of the year; consumption doesn't change that much. Sometimes it can be how our customers choose to run their production schedules and those types of things. So that can have an impact on it. In terms of household, we saw some declines in tissue, soaps, and cleansers; a little more detail than we usually give you there. But on the other side of that, we saw a strong market for air filter frames. So there tends to be a bit of a mixed bag. And I think it's important to remember relative to where we were in the middle of February, we're off about 1% from what we thought we'd be, which is pretty darn close at the end of the day.

I'm not picking, Mike, if I may. I'm not trying to pick at you guys were on or off from the forecast. I'm trying to figure out from what you reported what may be going on underneath the hood from your customers' perspective so that we model on a going-forward basis. So it sounds like cereal and frozen were weak, but your customers don't see, and this is really what I'm getting at, don't see a change in underlying consumption from what they're seeing, i.e., versus relative inflation or anything like that? I'm sorry, go ahead.

No, that's a fair statement. That's what we've heard. And of course, we, like you, read many of their leases and their prints that have been coming out here over the last week or so, and we'll see some more over the next week. We've not seen anything to suggest a difference from kind of the recovery from the destocking that occurred in 2023, largely for many of those customers. I think the question becomes how fast does it bounce back? I know everybody wants it to bounce back really quickly. From our standpoint right now, we've kind of modeled in a steady state. In the second quarter, we'll see some improvement. We do expect that to accelerate quite a little bit in the second half of the year. And again, that's off of a lot easier comps. I mean, if you remember, last year our comps were 5%, I think, 6%, respectively, in Q3 and Q4 year-on-year. So when you model that in and put 3% to 4% bounce back for 2024, which is kind of how we're thinking about it. Yes, it's a pretty conservative view.

Okay, Mike, just to clarify, when you mentioned steady state, should we understand that in April you're relatively flat or possibly seeing a slight increase? And for my second question, given the impact from Augusta, you're anticipating a $50 million effect on EBITDA. When we compare this year to last year or look at sequentially against the first quarter, are you expecting EBITDA to be in the low $400 millions for the quarter?

Yes. Thanks, George. I'll take the first part of it. And the answer is yes, we're up a little bit here in April as we expected it to be kind of coming on the Easter holiday weekend. And I'll let Steve for a little finer point on Q2.

Yes, George, you summarized it; we expect low $400 millions in EBITDA for Q2. Just a reminder, this quarter involves significant plant maintenance downtime for us, including planned maintenance at two of our wood fiber facilities, one of which is in Texarkana. This is typical for the quarter. In the second half of the year, we anticipate very limited plant maintenance downtime and expect to eliminate most market-related downtime, unlike the significant amount we experienced last year. Therefore, if you look at the midpoint of the EBITDA, it aligns with what Mike mentioned regarding 3% to 4% volumetric growth, solid productivity, and the capability to adjust our overall manufacturing facilities to meet demand. This reinforces our confidence in maintaining the midpoint of our guidance and our expectations for margins to remain around 20% on EBITDA.

Next question comes from Matt Roberts from Raymond James.

Thanks for the question. If I could touch a little bit on the pricing strategy, have you seen any near-term impact on your market share? Or has there been any near-term trade-off in volumes for price? And when you do present new initiatives to customers, are there any certain metrics or cost inputs that you're able to demonstrate to warrant those price changes?

Yes. So the way I'd answer that question, Matt, is, look, it's a competitive marketplace. We compete with a variety of different substrates and with different competitors that make the same things that we do. But that's not new. That's really been the backdrop that we've faced ever since I started in this industry, almost 35 years ago now. So what we have is, we've got a very broad-based converting network that tends to be able to take care of what our customers need, have the capabilities in those package manufacturing facilities to be able to sell them the wraps, the trays, the cartons, different things that they need, and really provide them exceptional service and quality. Beyond that, as we talked about, where it makes sense, we can drive higher ROICs and create a competitive advantage. We've invested in paperboard manufacturing. The grades that we manufacture post-Augusta, we are clearly the low-cost producer of those grades, and that allows us to be able to get acceptable cost of capital return, the types of margins that Steve talked about, and be able to deal with competitive situations that we do each and every day. And so in terms of share loss, it's pretty de minimis. There are some of those things that you take a few mix here or there. You also get some wins. From that standpoint, I won't spend a lot of time thinking about that dynamic. It's really our future and our success will be driven by our innovation and our ability to drive new product sales. As you know, our target this year is $200 million that we've got going there. The balance of that is something that we just kind of do day in and day out.

That's helpful, Mike. I appreciate that. Maybe I think a little longer term about Waco. You talked about the $50 million cut per day recycling capabilities. What percent of your output does that represent? And what's the cost trade-off like versus existing procurement methods? Are there any incremental costs with procuring those cuts that we should consider? I'm trying to think about the potential margin trade-offs there.

Take a step back and really think about how we price for value with our customers. Ultimately, the end-use consumer and our customers are driving for more circularity, more sustainability, and more convenience. Our ability to work with our customers. In the case of Waco, think about that Texas triangle; we've talked about collecting the cups that are within that region. Our customers will get some revenue, just like the retailers get some revenue for OCC. So that's a positive for them. They like that because it's also an answer for an ability to show their consumers that they've got a license to use that cup without feeling guilty about it not being recycled. It's going to go back to us and Waco. I think the part of it that's really not completely understood at a high level is that's going to be the first fiber source that we put down. When we cleaned that paper cup of its incredibly high value bleached fiber, and we lay that fiber down on the very top of the paperboard that we're manufacturing in Waco. Historically, producers that make coated recycled paper would have had to buy office paper, and office paper is increasingly becoming difficult to get; and when things get difficult to get, it gets more expensive, which is exactly what has been happening. So from our standpoint, over a multi-decade period of time, our ability to control our own destiny with stable pricing, helping our customers with their circularity and their sustainability goal really helps us create competitive advantage there. It's a very differentiated model from any of our competitors. That's really what gets us so excited. We'll see some cost stability there. We work with our customers and ultimately create a more sustainable package, and it's really exciting.

The next question comes from Arun Viswanathan from RBC Capital Markets.

I just wanted to get your thoughts on, again, going back to some of the volume developments that we've observed and how you think about the rest of the year. So it seems like there was a little bit of a slowdown versus your commentary in February at the Investor Day in certain of these categories, maybe including, as you noted, frozen and food and so on. As you look out into the rest of the year, are you hearing from your customers that potentially that was transitory and maybe that there will be some increased promotional activity? And related to that point, when you think about the rest of the year, do you think that Q2 is going to look a lot like Q1, and maybe the second half is going to be higher as you get some of those gains back on the volume side? Or will it be different just given the sale of Augusta?

So from our standpoint, really, our miss to our expectation that we talked about at the Investor Day, the 1% was really all about Easter. I mean at the end of the day, it was around customers seeing a little bit more production downtime around the Easter holiday than we had anticipated they would bounce back here in April, as we talked about. We expect the second quarter to be sequentially stronger than Q1, but our strongest quarters will be in Q3 and Q4. And you'd expect that to be the case given the comps that I kind of ran through for George a few minutes ago. The second half will definitely be biometrically our strongest year, and that's a little unusual. As I mentioned to Ghansham, but it's really a function of the '23-'24 destocking phenomenon that occurs. Based on everything that we've heard from our customers, and we're pretty close with them, in terms of managing their supply chains, making sure they have what they need, driving innovation, and new products that we're selling to them, that all seems to square pretty well.

Great. And then if I could just have one follow-up. So you will be getting the cash from Augusta. I guess you're going to be winding down the Waco investment over the next year or two. So as you look out in the future, I guess, you've laid out a nice Vision 2030 plan, it's potentially more aggressive. How does that relate to maybe how you're thinking about leverage and capital return? So you think next year, you could pivot to maybe a stronger capital return profile? Or what are your thoughts there?

Yes. Arun, it's Steve. I think as we discussed in the prepared remarks, obviously, we measure our capital allocation decisions against share repurchase, as we always have. In the context of the funds from Augusta, as an example, sitting here today with the confidence that we have in the business and the forwards that we're conveying you today, we're comfortable with our debt levels. We will, of course, make decisions around debt for repurchase as we always do, whether it's from funds that come in tomorrow or on a go-forward basis, primarily supported by the very significant cash flow generation that we are on the way to generate more in 2025 and then significantly more in '26 and beyond. But overall, we are comfortable with the debt level that we have today. That's a good thing because it gives us the optionality that we've shared with you around capital allocation trade-offs.

The next question comes from Anthony Pettinari from Citi.

We've heard a lot about imports impacting SBS. And I'm just wondering if you've seen any meaningful impact on CRB or CUK from imports of those or other grades, and with the boxboard hikes not being reflected in Pulp and Paper Week, I mean the CRB and CUK, I mean this really a relatively small number of domestic producers. So I'm just wondering if there's anything about the competitive environment that's different and if the import dynamic is meaningful or different than in previous years?

Thanks for the question, Anthony. To provide a thorough response, let's look at the imports, which primarily come from Nordic countries, where wood, energy, and transportation costs are all rising. The producers we discussed in our first-quarter call and throughout last year are facing significant changes in wood costs in those markets. It’s important to note that this year, due to some port issues, imports as a whole actually declined year-on-year in Q1. Additionally, many of those grades do not even compete in our market space, so they are different categories altogether. For instance, there’s a notable item that comes in that you may be familiar with. In terms of our operations, you and RISI analyze this much more than we do. We procure FBB in Europe, and we use standard pass-through mechanisms in our contracts. This quarter, those were slightly down as prices had decreased, but they are beginning to announce price increases, and our established pass-throughs in Europe will enable us to adjust accordingly, as usual. In North America, we rarely encounter competition in this area, and when we do, it's often from small packaging converters for specific reasons, but that represents a minor segment of our business. Thus, I don't foresee any impact on our coated recycled paperboard or our unbleached paperboard markets as asked. Earlier, I mentioned that we are proactively applying the price increases we've announced. That’s our strategy, and we’re managing it effectively. There are always ups and downs in this process. It’s also worth noting that we managed to achieve a significant revenue growth and a 19.6% EBITDA margin amid these challenges. This is crucial when considering the evolution of our company, especially since 95% of our sales come from various packaging forms, whether trays, bowls, wraps, or folding carton cups. Our primary focus is on these products rather than solely on supply and demand fluctuations. In some instances, we can take advantage of market dislocations due to the operational changes we've implemented. It’s a different scenario than in the past, and it may take some time for you all to fully grasp this. But important developments are on the horizon for us.

Got it. That's very helpful. And then just quickly on your European business in the quarter. I mean, you talked a little bit about, I think, a health care pullback in EU. Generically, like how has that business performed in terms of sort of end market demand year-to-date, Europe specifically?

You can appreciate that health care, in general, tends to be pretty stable. I asked our European President, Joe Yost, a little bit about that. His view is this was just largely timing in how they chose to produce. We don't expect it to materially change with the demographics of people continuing to age in both North America and Europe. Those are going to be good markets going forward.

The next question comes from Gabe Hajde from Wells Fargo.

Steve, I wonder if this is a price concept. And I appreciate that they're proprietary and on an individual basis. But just for the benefit of all of us on the outside world, can you describe for us how much of your domestic converting business is today conducted on an index versus non-index based? And then as you do find success with your strategy to migrate away from these, when do you envision maybe not having to announce public price increases for third-party recognition?

Yes. Look, I think you answered the second part of the question accurately. That's exactly how we expect it to play out. In regards to pricing game, as we talked about at our Investor Day, we're just not planning to disclose percentages anymore relative to how it all works, whether it's a cost index model that we've got with our customers or some other form of index model that we work with them because we do view them as proprietary. I think it's demonstrated by the fact it's working. Take a look at our EBITDA margin, how we've been able to have consistency there and continue to perform at the type of targets that we put out there, the 20% target that we've got as part of our Vision 2030. It's going to be a variety of things. Maybe the best way to give you a little more color is just talk about how it works. If the mechanism itself isn't something, that is the first thing we talk about with customers. We contract with customers on a renewal or in a new situation with pricing that we establish, both with them and with us. What we're really talking about is how input cost inflation moves over time, up or down, and there's a variety of different methodologies to do it. We've been moving away from third-party indexes for years. As you know, we've been very public about that. Now we're just going to accelerate that process going forward. We're working with a number of customers and different ideas we have, and they have for how to provide better transparency between the two parties, more accuracy between the two parties, and an agreement that shares the value that we bring and that they ultimately want from us.

I appreciate the comments on margins. I have a quick clarification, Steve. Did you mean 100,000 tons of downtime when you referenced $100 million of EBITDA for the Augusta mill? I apologize for missing that.

Last year, we had about $100 million of market-related downtime in the second half of the year that we do not expect to repeat this year. I think to Mark Weintraub's question, Mark was just providing some context around kind of the earnings profile for first half, second half last year. The bleached paperboard business as we ran as a system generated significantly more profitability in the first half of the year than the second half of the year. Hence, the negative comp here that we're managing through in the first half, which becomes much more de minimis in the second half of the year as we operate what will be the Texarkana facility with our own internal needs being run quite fully to support our own packaging needs from that facility effective literally tomorrow.

Our final question today comes from Adam Samuelson from Goldman Sachs.

There's been a lot of ground covered today, so I'll try to be brief. As we consider the innovation sales growth for the year, which is projected at $200 million and includes $37 million realized in the first quarter, this suggests a ramp-up for the latter half of the year. Can you share how much of that is attributed to PaceSetter Rainier at this point, given that some of the larger items like Chick-fil-A, Nissin, or Boardio may not be relevant? Additionally, are you seeing any incremental value uplift from PaceSetter Rainier now, or is that expected to come later and possibly rely on a second source of supply in Waco?

Yes. Thanks for the question, Adam. We are seeing traction with PaceSetter Rainier. We currently have three commercial applications. We expect to reach $200 million total, and while it won't be a significant portion in 2024, momentum is building for 2025 and 2026. The remaining part of the $200 million comes from areas like foam to paper conversions for cups, trays, and bowls, as well as Boardio. We're very excited about Boardio, which started as a French formula, and is suitable for granular items like coffee or rigid ones like gum and confectionery products. We're confident in achieving over $200 million in sales for that category alone in the next few years. It involves a sticky sale, where a machine assists our customers with merchandising and brand needs. That's where our focus is. Yes, we are very excited about PaceSetter Rainier, and as you pointed out, in 2026 we will have another paperboard machine that will enable us to produce greater paperboard, which is thrilling. Thank you all for joining us on the call today. I'm optimistic about our growth outlook and pleased with the progress we are making with innovation sales. Vision 2030 is about execution, and we are off to a good start. As I mentioned earlier, if you missed our Investor Day, I hope you'll take the time to listen to the replay, which you can find on our Investor Relations website. Graphic Packaging is a much different company today than it was just a few years ago, and I truly believe our value creation story is just getting started. Thank you. Have a safe and a very good day.

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.