Graphic Packaging Holding Co Q2 FY2025 Earnings Call

Good day, everyone. Welcome to the Graphic Packaging Second Quarter 2025 Earnings Call. It is now my pleasure to turn the floor over to your host, Mark Connolly. The floor is yours.

Good morning. We have with us today Mike Doss, President and Chief Executive Officer; and Steve Scherger, Executive Vice President and Chief Financial Officer. During this call, we will reference our second quarter 2025 earnings presentation available through this webcast and on our website at www.Graphicpkg.com. Today's presentation will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in today's press release and in our SEC filings. Now let me turn the call over to Mike.

Thank you, Mark. Good morning, everyone, and thank you for joining our call today. Graphic Packaging is a global leader in sustainable consumer packaging. In the second quarter, we saw a continuation of uneven volumes as consumers remain stretched. Promotional activity helped drive modest volume improvement in some categories. Conversations with our customers suggest potential for an increase in focus on volume growth and protecting their market share in the quarters ahead. Meanwhile, the last major investment in our Vision 2025 is nearing completion, and we expect to generate cash substantially in excess of our needs beginning in 2026. In the second quarter, Graphic Packaging sales were $2.2 billion. Adjusted EBITDA was $336 million. Adjusted EBITDA margin was 15.3% and adjusted EPS was $0.42. Volumes in the Americas were modestly better than expected, driven mainly by an increase in beverage promotion and some targeted promotional activity in food and foodservice. Our decision to curtail production to further reduce inventory levels did impact our adjusted EBITDA margin, but positions us to operate much closer to normal levels in the second half. Turning to Slide 3. We will bring our Waco recycled paperboard investment to life in the fourth quarter. While the project remains on schedule, we are experiencing higher costs, principally labor and final engineering and design costs related to permitting and insurance requirements. We are now estimating 2025 capital expenditures of $850 million. In 2026, capital spending will decline to 5% of sales, consistent with our original targets. The higher spending in 2025 will be offset by lower cash taxes after recent federal tax law changes and lower working capital as we reduce inventories. So we expect no net impact on estimated 2025 free cash flow. With Waco set to begin production later this year, we closed our Middletown, Ohio paperboard manufacturing facility in May. We are now serving those customers mainly from existing inventory. Waco is the last major investment of our Vision 2025 transformation program. Recycled paperboard has by a wide margin, the lowest environmental footprint, the lowest upfront capital and sustaining capital requirements and with our quality advantage can replace more expensive to produce bleached paperboard in a wide range of applications. When you look at the numbers from an investor standpoint, there is just no comparison. We will continue to utilize bleached paperboard where appropriate. From the vantage point of cost, capital, and consumer appeal, recycled is superior to bleached, and we will continue to keep our footprint in bleached paperboard small and focused. We were pleased by the recent decision of the Recycled Materials Association to, for the very first time, include paper cups in their single stream and dual stream recycling specifications. Graphic Packaging's own efforts worked closely with the association and with our colleagues at Closed Loop Partners and the Foodservice Packaging Institute to promote and encourage this important update. The association's guidelines are highly influential with waste collectors and with thousands of material recovery facilities in deciding what does and doesn't get collected in municipal recycling and collection systems. As the largest producer of paper cups in North America and a major user of recovered fiber, this update has particular significance to us. We designed Waco to take full advantage of this high-quality underutilized fiber source, which today mostly ends up in landfills. I've already mentioned our action on inventory. Steve will discuss capital allocation in his comments in a few minutes. As expected, volumes across consumer staples remain uneven. A stretched consumer is spending more money on groceries, but leaving the store with fewer items than they did a year ago. Our volumes in the Americas were roughly flat, modestly better than expected, and we again outperformed the broader CPG and QSR markets we serve. Our international results remain positive, but growth slowed modestly, confirming that consumers in those markets are also stretched as we cautioned last quarter. Private label and store brands continue to gain traction in select food categories. Trademarking activity has also been accelerating, suggesting that private label offerings will continue to expand across more grocery and other consumer staple categories. We have an excellent position with retailers and co-packers and have been particularly pleased with the reception our innovation portfolio is getting from these customers. We delivered innovation sales growth of $61 million in the second quarter and are on track to reach our 2% of sales growth target for the full year. While we have seen a few customers scale back their packaging innovation plans in the near term, most customers remain committed to reducing the environmental footprint of their packaging and our innovation sales pipeline remains robust. Turning to Slide 4. The breadth and depth of our consumer staples packaging portfolio is the foundation of our strength. We are in every aisle of the supermarket and are a major packaging supplier to quick service restaurants. Over time, we expect to grow our presence substantially across household products and health and beauty as customers increasingly embrace recycled paperboard as a less expensive, more logical, and more appealing alternative to bleached paperboard. Turning to Slide 5. Overall second quarter packaging sales were roughly flat year-over-year. Food results remained uneven. Snacks are among the more discretionary grocery items and saw pressure, although bars continue to benefit from wellness trends. Cereal saw continued weakness, but pasta, sauces, and prepared foods saw gains as consumers shifted from high-cost alternatives. Our Boardio container is driving solid growth for us in coffee, where we are also benefiting from a trend towards more home and office consumption. In the Americas, frozen foods saw further declines as consumers shifted to fresh and refrigerated categories, including bakery. Grocery stores generally earn higher margins on freshly prepared food items and are continuing to expand and promote their fresh offerings. In Europe, frozen food results remain solid as consumers in those markets continue to prioritize convenience. After solid beverage seasons in 2023 and 2024, we are encouraged to see 2025 again off to a very good start. Beer’s decline moderated for us and carbonated soft drinks saw good growth on the back of higher promotional activity around Memorial Day. July and August are the heart of the beverage season, and July results have been very good. Energy drinks, flavored seltzer, and wellness beverages are continuing to gain in popularity with consumers. Foodservice results were relatively unchanged despite some aggressive, but targeted promotional activity. We are actively engaging with our QSR customers on their strategies to drive higher foot traffic. Promotional activity in Europe continues to drive volume more successfully than it has in the United States to this point. Household product results were relatively unchanged overall with tissue products turning positive and food storage remaining strong. Health and beauty is still mostly an international business for us, although we expect that to change over time. Fragrances are showing further recovery after a good result last quarter, and health care products also showed improvement. Slide 6 highlights our 5 packaging innovation platforms, which are key to generating top line growth over time. We are seeing good opportunities across each of these areas, and every new product launch adds to our insights and to the value we bring to our customers. On Slide 7, I want to highlight an innovation specifically designed for club store customers. Most of the innovations we have highlighted recently are focused on plastic replacement, but sometimes innovation means taking a fresh look at traditional packaging solutions and creating something better. One of our largest CPG customers asked us to help them develop a more cost-effective bulk packaging solution for coffee pods. Working closely with their product development and marketing teams, we developed a solution that reduces materials, cuts production and material handling costs, improves on-shelf marketing impact, and delivers a superior customer experience. The traditional packaging method for bulk coffee pods is called dump fill. You set up a corrugated box, dump the pods in, and glue the box shut. Our nested pod solution is better from nearly every angle. As you can see in these pictures, by orienting pods in layers, the new design eliminated the dead space at the top and fit the same number of pods into a 21% smaller package. It also uses 30% less material per package. Reorienting the container to be narrower and taller gives the package more shelf appeal and takes up less space in the consumer's pantry. The taller, narrower box also means that we can stack 26 boxes per layer on a pallet rather than just 16 and are only stacking 4 layers high rather than 5. Moving the opening to the top center made the size and corners of the package stronger. With fewer layers and a stronger structure, we were able to switch to layers in our materials. And finally, we replaced the expensive bleached paperboard top sheet with our Pacesetter Rainier recycled paperboard that lowered the cost further and reduced the package's overall environmental footprint with a 100% recycled alternative that provides the same outstanding print quality. This new nested coffee pod solution is on the store shelves right now and represents the gold standard for coffee pod packaging. Turning to Slide 8. Our vision for Graphic Packaging is clear. Our focus on innovation, culture, and commitment to sustainability is how we generate best-in-class results for our customers and for all our stakeholders. When our Waco investment is complete, we will have everything we need to reach our Vision 2030 goals. On the governance front, I'm happy to report that we recently published our 2024 impact report. We've added 2 new directors to our Board in the past year with extensive operational and senior leadership experience in food and health care, and we are in the process of declassifying our Board. Our commitment to driving shareholder value is stronger than ever, and Vision 2030 is our road map. Now let me turn the discussion over to Steve for a review of the company's financial performance and capital allocation.

Thank you, Mike. Turning to Slide 9. Sales for the second quarter of 2025 were $2.2 billion. If we exclude the impact of the Augusta divestiture and the impact of foreign exchange in the quarter, packaging sales were roughly flat. Packaging price was approximately 1% lower, which mainly reflects the impact of third-party price recognition from 2024. Overall volume was up approximately 1%, with Americas basically flat and international modestly positive. Adjusted EBITDA was $336 million, in line with the commentary we provided in June. The second quarter is our biggest maintenance quarter, and we took aggressive action to manage inventories, which had an incremental impact on our reported margin but positions us to run at more normal levels in the second half. During the second quarter, the impact of lower prices, input cost inflation, labor and benefits inflation and the Augusta divestiture reduced EBITDA by approximately $64 million. Our actions to reduce inventory drove net performance negative in the quarter, more than offsetting a modest benefit from higher volume for a combined net negative $13 million. Inflation did moderate in the second quarter with lower resin, recovered fiber and logistics costs compared to the first quarter. Foreign exchange was an $11 million tailwind. Slide 10 highlights the still challenging consumer packaging environment on the left and the strength of our business model and execution on the right. While inflation and our inventory management decisions pushed our margins below normal this quarter, less maintenance and the actions we have taken on both costs and production should push margins closer to normal levels in the second half, and we will see the Waco investment benefits starting in 2026. Turning to Slide 11. We repurchased 1.6% of the company's outstanding shares during the second quarter at an average price of $22.26 per share. We allowed net leverage to rise modestly in the quarter, taking advantage of what we believe was an unusually attractive stock price. We expect to end the year with net leverage below 3.5x, in line with our guidance. In the appendix to today's presentation on Slide 18, we highlight the company's strong record of opportunistic share repurchase. Since 2018, when we completed the combination with International Paper's Consumer business, Graphic Packaging has repurchased nearly 1/4 of the company, while we doubled in size and completed the transformation into a global consumer packaging leader. With the Waco investment nearing completion, free cash flow will rise substantially. And as of June 30, availability under share repurchase authorizations was approximately $1.75 billion. Turning to the outlook on Slide 12. We have updated our guidance to reflect performance to date and a somewhat narrower range of outcomes with no change to the adjusted EBITDA midpoint. Volume uncertainty remains elevated given the stretched consumer and the targeted promotional activity we are seeing, particularly in food packaging, our biggest market. Many, if not most of our CPG and QSR customers continue to express caution about their own near-term volume outlooks. As I mentioned, we expect second half adjusted EBITDA margins to be meaningfully better than first half as a result of actions we have taken to reduce inventories, less scheduled maintenance and normal seasonality. As Mike mentioned, the increase in capital spending in 2025 is offset elsewhere. And so our expected 2025 free cash flow remains unchanged. This late-phase increase in project costs is not expected to materially affect overall investment returns. Waco's economic and quality advantages are expected to be even stronger than they were in our previous estimates. Slide 13 summarizes the company's Vision 2030 base financial model and capital allocation priorities, which are unchanged. As we move toward 2026, Graphic Packaging will return to a more normal level of reinvestment for growth and productivity, which is included in our 5% of sales CapEx target. We expect to generate free cash substantially in excess of our needs over the next several years, and we plan to return significant capital to stockholders while also reducing debt levels. We remain committed to an investment-grade credit rating by 2030. On Slide 14, given the weaker near-term volumes and their impact on 2025 adjusted EBITDA, we've adjusted our expectations for 2026 free cash flow to $700 million to $800 million. As volume moves back to more normal levels, we expect to achieve our original free cash flow targets in 2027 and beyond. In the appendix that begins with Slide 15, you will find additional information that may be useful for modeling, information on seasonality and the review of our buyback history, which I referenced earlier. That concludes our prepared remarks. Operator, let's begin the Q&A.

Your first question is coming from Anthony Pettinari with Citi.

I have a question about the increase in capital spending from $700 million to $850 million, which affects free cash flow in 2026. I'm trying to understand the flow-through because it seems you reduced the 2026 free cash flow estimate. Is this change one-time in nature? For 2027, are you starting from a lower base? Can you clarify how this affects cash from 2025, 2026, and 2027?

Yes, Anthony, it's Steve. I'll take that. In 2025, as we previously mentioned, capital expenditures will be $850 million, which includes a reduction in working capital by $150 million, driven by benefits from recent tax legislation amounting to about $50 million. We have significantly reduced our working capital, so there will be no change in our free cash flow for 2025 and, consequently, no change in our expectations for year-end leverage. For 2026, we have updated the cash flow based on our expectations for this year's EBITDA, estimating 2025 EBITDA at the midpoint of 1.5. We expect this to grow next year. The cash needed to operate the company in 2026 remains consistent with our previous disclosures. Total cash for capital expenditures, interest, taxes, and working capital will be between $750 million and $850 million, with capital expenditures representing 5% of sales, which translates to around the mid-$400 million range, while the other items will be in the mid-$300 million range. This outlines the path to our updated expectation of $700 million to $800 million in free cash flow for next year. We've taken this opportunity to revise our projections based on this year's capital expenditures and cash flow consistency, and also to update expectations for free cash flow in 2026.

Got it. That's very helpful. I have just one follow-up. Regarding the higher permitting costs, insurance costs, and labor in Waco, were these costs consistently increasing throughout the year, or did you notice a significant change in the estimate for specific aspects of the project during the quarter? I'm trying to understand what is driving those costs, whether it's a combination of smaller factors or a notable change related to the project.

Anthony, it's Mike. Yes. Look, it's a couple of things. I appreciate the question. First, labor costs, specifically electricians. And as you can appreciate, we've got about 600 electricians working to finish up the project here as we speak or in the final phases of it. That portion of the labor came in a little higher than what we expected. That's really a function of the fact, as you're well aware, there's a real boom on data centers and other construction that's bid up by the cost of that labor. So we had to deal with that. I think if you take a step back and look at it over a 2.5-year period, we started with a greenfield. And of course, we had the engineering done on certain aspects from Kalamazoo. We built the same machine hall. There were other elements that were different because we did tend to have certain things like the powerhouse, wastewater treatment, those types of things, we had to build. And that comes with what we had initial permits and insurance understanding. Some of that stuff evolved over the course of construction. You try to deal with those as they come in. In some cases, there were some rework that was required on things that we had already done in order to get the final permitting, as I alluded to in my prepared remarks. And all of it was inflationary. And so ultimately, you kind of put it together, we pushed out the $150 million we talked about today. If you add up where we're over on that project, it's around 20% from our original commitments that we made about 2.5 years ago. And what I'll tell you is that I'm more encouraged than ever around our ability to really deliver on the returns of that project. The capabilities are going to be fantastic, both in terms of quality and cost. When you put Kalamazoo and Waco together, the replacement costs of both of those assets are substantially above what we paid for now if someone was replicated. So it really creates a bit of a moat around that business. No one likes a cost overrun. We take those things seriously. And obviously, we try to deal with them as you've seen us do here by managing other aspects of our business to make sure we deliver our free cash flow. But we had to get the project done. We'll have it done here. It's going to start up on time. And I'm really excited about bringing Waco to life here in the fourth quarter.

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

I guess as we look out nearer term in terms of margin and the implied, as we're doing the math, 19% margin or so for the second half of this year. Mike and Steve, can you talk to us about maybe not to the penny, but what some of the building blocks are there that give you confidence that you can get there? And what's sustainable into '26 and beyond? And then I had a follow-on related to the intermediate-term growth outlook for EBITDA.

George, it's Steve. I'll take that. Let me break it down this way: for the first half, EBITDA was $700 million, while the midpoint for the second half is projected to be $800 million. There are a couple of factors contributing to this. One is our pricing, which was about $50 million negative in the first half but should improve to around $25 million in the second half, making for a $25 million improvement. The larger part of this improvement, approximately $60 million, comes from reduced planned maintenance downtime and less market-related downtime, as we eliminated over 50,000 tons of inventory in the first half, which won’t need to be replicated in the second half. So, the main contributors to the overall $100 million improvement in pricing and performance are the $25 million and $60 million increases. The remaining $15 million stems from various minor inflation and foreign exchange factors. Overall, we're pleased with our inventory reduction efforts from December to June, and there's more inventory reduction expected in the second half due to the Middletown closure, though the economic impact should be limited as we continue to aggressively sell from our inventory.

Thank you, Steve. I wanted to clarify something. I noticed that inventory levels didn't change much from the first quarter to the second quarter. It seems like you are maintaining some extra inventory because the fleet of machines is being updated, with Middletown closing and Waco opening soon. This appears to serve as a bit of a buffer. Looking ahead to 2026 and 2027, we expect to see an EBITDA increase from Waco. Could you provide some insight into the expected EBITDA contributions for next year and beyond? I assume volume plays a significant role, but any additional details would be appreciated.

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

Yes, George, I think, look, the catalyst as Steve outlined in '26 and '27 is bringing Waco to life 80 and 80, as you well know. It's a really good question, your follow-on there around the confidence in our algorithm around low single-digit growth rate after a disappointing 2024 to be fair. And a first half of 2025 that while we played to a draw. And we've driven our innovation. You see that. We had $61 million of innovation this quarter. It was eaten up by the fact that our customers' volumes continue to go down. We're in a highly unusual time. I mean food prices are very high and consumers are struggling both here and in Europe. And ultimately, the macro uncertainty is something that we have to deal with, particularly as consumer confidence declines. So as we look out, into '26 and '27. We know our customers are working various strategies to continue to deal with this. Of course, their stocks aren't working either when their volumes go down. You've seen a fair amount of discussion by customers. Some are buying one another, some are breaking themselves up. Others are changing leadership. So there's a fair amount of things that are happening as they look to kind of deal with those things. And we believe, over time, that over the medium term for sure that, that stuff gets worked out. It needs to get worked out. And we're there to help. We're going to help our customers work through those formulation changes and how they work on the promotional activity. But a big part of our algorithm is getting to that low single-digit growth. And our Vision 2030, as you know, as demonstrated here, it's not linear, but we believe that's still the right model for us over time. That's how we're thinking about it.

Your next question is coming from Philip Ng with Jefferies.

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

Yes, John, it's Steve. What we really did with our long-term free cash flow expectations is we dialed in 2026 a bit, as we just described a couple of moments ago, $700 million to $800 million. And as Mike just described, as our algorithm for low, mid- and high single-digit sales, EBITDA and EPS growth plays itself out over the next several years, along with a second $80 million of EBITDA improvement in 2027 from Waco gives us the opportunity for cash flows to continue to grow from the $700 million to $800 million range into that $900 million-plus range towards the $1 billion that we originally targeted. And so as Mike said, it's not linear. We've worked through some consumer and inflation realities here in '24, '25, but our confidence in the long-term algorithm for the company remains intact and it's not moving off of our 2027 and beyond free cash flow expectations.

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

Yes, part of this comes from closing our smaller, higher-cost facilities, like Middletown, and East Angus. Additionally, there have been two other mills shut down recently, totaling 370,000 tons, with Middletown included in that. We anticipate an increase of about 200,000 tons in the upcoming years, specifically in 2027 and 2028, as we enhance that facility. We believe we'll need the low-cost, high-quality paperboard we will produce to support that growth and serve our customers. So, there is a fixed portion resulting from reductions and a growth component. Our confidence in achieving the projected figures is strong, which is why we encourage you to model it accordingly.

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

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

Yes, Gabe, it's Steve. As a reminder, Q2 is our largest planned maintenance downtime quarter. So when you're doing a first half. Second half, we pick up $20 million or $30 million of the $60 million just from less planned maintenance downtime. The remainder is from the actions that we took to take the 50,000 tons out. So it is not $60 million as I think you're potentially implying. It's a combination of less planned maintenance downtime first half, second half and less market-related to drive out inventory first half to second half. So thanks for raising that. I wouldn't want that to be confusing.

I have a couple of quick follow-up questions. First, regarding maintenance this year, is it in line with normalized numbers when looking ahead to 2026 and 2027? Additionally, on the beverage market, while I understand it’s tough to gauge your customers' inventory levels, I noticed they had significant promotions in the first half. Do you think they are holding comfortable inventory levels, or do they have less or more than needed as they enter the second half?

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

In terms of the beverage season, we have experienced a strong season in both Europe and North America. In North America, the performance is influenced by the customer mix we serve, which contributes positively to our volume this year. We lack detailed insight into how much inventory customers are holding in retail warehouses. However, I can assure you that we remain busy and steady, with strong demand. We have not received any signals indicating that demand will decrease before the typical seasonal pattern, which in the Northern Hemisphere spans from Memorial Day to Labor Day.

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

Regarding the volumes for the second half, the first half was up 1%, so being flat suggests a slight decline in the second half. This indicates a tougher comparison. When you spoke in mid-June, you mentioned that the second quarter would be flat, but it actually performed a bit better than expected. Can you provide some additional insights on what you observed at the end of June and what you've noticed so far in July?

Yes, I'll address that, Matt. From that perspective, it's a relatively small figure. Europe experienced a 2% increase in our North American business, while our Americas business was essentially flat this quarter, improving from a 1% decline in Q1, which we found encouraging. July has started off in line with our guidance. We consider beverages to be performing well, though food categories are mixed, as Steve mentioned, with some showing growth and others declining. I would say there remains considerable uncertainty as our customers face challenges. Their reports will be coming out in the next week and a half, and we anticipate year-on-year volume decreases. However, we are exceeding expectations by focusing on a draw, which is essential for us. Our innovation efforts are on track for the expected 2% growth this year, which is encouraging. But looking ahead to the second half, it's difficult to predict as we lack substantial insights from our customers. They have indicated plans to promote, as they did last year. We are proceeding with caution because we built up inventory last year for that promotional activity and ended up needing to reduce it in the first half of this year. We're ready to assist them with any reformulations they may need, as that's always an opportunity for us. We have a broad range of innovative ideas in our portfolio to help them connect with end consumers. Our focus remains there, but I want to emphasize the uncertainty we face in the second half. Therefore, we will approach volume predictions with careful consideration.

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

Matt, thanks. There's a couple of there. I'm going to answer the first one in regards to pricing. Of course, you can appreciate, I can't talk about forward pricing options or optionality and things that we would do or wouldn't do. But I can talk about current market conditions. If you look at recycled paperboard and unbleached paperboard, they've been a really good balance for the past several years. Pricing has been pretty stable, and that's certainly in contrast to bleached paperboard. And we've taken some actions to address the inventories, as you've heard Steve talk about. We took out 50,000 tons here in our second quarter. We're going to continue to be very focused on managing our supply and demand, making sure we have the paperboard to take care of customers, but no more than we need, very disciplined in that regard. And I've already mentioned the 370,000 tons that have come out of the CRB and the unbleached paperboard side. I think if you look at the AFPA data, the American Forest and Paper Association data that I'm sure you did that came out last Friday, there's some interesting things to take away there. I mean if you look at the recycled and the unbleached, those are the 2 grades where we're a major player. If you think about where we're going to be post Waco, 80% of our production is going to be in those 2 grades of paper. We're a minor player on the bleached side. Primarily, we focus on cup, as you know, and you mentioned that in your question. Production was down 3% in the second quarter, owing to some of those shutdowns that we talked about, but shipments were up 1%. Year-to-date, production was down 2.5%, shipments down 1%. So inventory is down 20% in the quarter, which is a good thing and 30% year-to-date, and backlogs are up. That's a healthy operating environment for both those grades. And that really contrasts to what's going on in bleached paperboard, where we are a minor player. If you look at that same data, production was up 5% in the second quarter. Shipments fell 5%. Year-to-date, production is up 2%, shipments down 2.5%. So inventories are up 8% in the quarter and 20% year-over-year, which means backlogs are down. So it's really kind of a tale of 2 cities there relative to what the grades are doing. And certainly, we're not immune to the impact of that paperboard coming online, the supply and demand dynamic that I'm talking about with bleach versus the 2 grades that we are well invested in. But Graphic’s inventories on SBS were actually, I can tell you, we're actually down in the quarter. So we're pleased with that. So hopefully, that gives you a little bit of context in terms of how we're thinking about the overall market health, what we're seeing, what we're doing to manage our order books. I'll tell you that our order books continue to build on the grades that we're talking about, and they did over the quarter, and they have in July so far.

And Matt, to your second question, embedded in the $700 million to $800 million of free cash flow in 2026, we do expect to see some positive benefits from the tax legislation. So as I mentioned, that cumulative impact of interest cash taxes, working capital, we kind of have in the mid-$300 million range next year, and that will have some benefits from the tax legislation as well. So our line of sight to cash flow next year is actually quite high. And that's why that conviction around the $700 million to $800 million and then obviously, the ability to deploy that for shareholder value creation and the inflection of the cash flow into a very material level, which gives us an outstanding optionality for share repurchase activity, debt reduction. That inflection is happening and our confidence in that is extremely high. And there will be some benefits from the tax legislation embedded in that.

Your next question is coming from Ghansham Panjabi with Baird.

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

Ghansham, I wish I had a more insightful answer for your question. The biggest challenge we're facing is that this situation has been ongoing longer than I've typically seen. Throughout my career, our customers have faced struggles, but they usually manage to adapt and recover. There are definitely shifting consumer preferences influencing the market. Factors like GLP-1 have both positive and negative effects out there. Economic conditions are impacting our customers at a particularly challenging time when they're already dealing with consumer affordability issues. They now need to reformulate, which usually comes with higher costs. However, this does create opportunities for us, whether it's through new packaging or different sales strategies. As I mentioned earlier, we always strive to assist our customers during this process. I also want to highlight that we are seeing increased urgency among our customers to explore various options, such as pursuing acquisitions, restructuring, or making management changes. These steps are aimed at driving change and promoting growth. While I am hopeful about the benefits of these actions, I still need to navigate the uncertainty in the latter half of the year because this situation has extended longer than what we've encountered before.

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

Thank you, Ghansham. We are very confident about ending this year with a 3.5x leverage ratio, considering the cash flows we discussed earlier. We have started share repurchase activities, and based on our belief in the long-term value of the company, we plan to use most of our free cash flow for share repurchase. We need to maintain a healthy balance sheet, but with our leverage at 3.5x and the significant long-term value we see, we will continue to prioritize share repurchase as we move towards 2026, assuming the company's value remains strong. We began this process in 2025. Right now, we are focused on share repurchase due to our substantial cash flow. If we consider the midpoint of our $700 million to $800 million projection and exclude the dividend, we have over $600 million in free cash flow available for these activities. We are leaning towards this direction, but we will keep an eye on our debt levels and affordability. Currently, we don't have any major debt obligations, and we are borrowing at rates in the mid-4% range, which gives us a favorable outcome given the value and cost of our debt.

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

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

Yes, Lewis, it's Mike. I'll return to the market conditions. As you gathered from my previous comments, our solid bleached market in North America is currently oversupplied, as shown by the AFPA data. This oversupply creates a competitive environment, which is something we are equipped to navigate, as evidenced by our outperformance compared to our customers in the overall market. We are keeping a close eye on the situation. On the SBS side, a competitor has recently increased production capacity, which is being brought online now. Although we are a smaller player in that market, it still needs to be addressed. We are optimistic about the new leadership at several major SBS producers, who are likely to seek returns for their stakeholders, influencing decision-making to manage this surplus. We have experienced similar cycles before and will continue to work through them. Regarding Graphic, due to our size and focus on integrated cup production, with a limited position in coated bleached that is mostly integrated, we will observe how this situation unfolds. The European market is comparable, and our innovations are making a significant impact there. We continue to find opportunities for innovation and some market share growth as well. Ultimately, it remains a competitive market.

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

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

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

There may be some confusion regarding EBITDA. To clarify, you should add interest expense back to it. Although it's early to give a specific forecast, if you're calculating EBITDA, you would combine the range of $700 million to $800 million with the range of $750 million to $850 million, and then add cash interest expense. I wanted to make this clear, as it seems there might be some misunderstanding.

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

I believe we're discussing different topics, Steve. I'll provide clarification later. However, now that we have better insight on tariffs, could we get some updated thoughts on any potential implications?

Mark, it's Mike. The new 15% tariff level is a modest net positive for Graphic Packaging. I want to highlight a couple of points. First, we export over 200,000 tons to our own operations in Europe. While we don’t sell our paperboard in Europe, we export it to our converting facilities there, and this new trade agreement does not impose any extra costs or restrictions on servicing our European operations, which is encouraging for us. Additionally, there is a strong emphasis on minimizing non-tariff trade barriers between the U.S. and Europe, which is also beneficial for us, especially regarding the EU Deforestation Regulation that previously posed significant costs. You might remember we mentioned the need to track where our materials were sourced with a high level of detail, which was costly and lacked clear benefits. We feel positive about the changes in that area. Another topic that has received a lot of attention is imports, which account for about 500,000 tons out of a 10 million ton market, or around 5% in total. We understand these imports will also be subject to the new 15% tariff. Historically, the advantage of these imports came from their yield advantage based on weight, which was around 10% to 15%. However, this advantage will be diminished by the tariff. Furthermore, with the dollar's devaluation, currency fluctuations present another challenge for these imports. I know investors and analysts have been concerned about them. When viewed from a customer perspective, these imports face challenges. They are also located 5,000 miles away from the customer while local supplies are often just a couple of hours away by truck. This distance adds complications and risks, which ultimately benefits manufacturers like us, including Graphic Packaging to some extent. I hope this provides some insight into our perspective.

Your next question is coming from Anojja Shah with UBS.

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

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

Okay. And I apologize...

Anojja, we have to apologize. You just broke up...

Yes. Can you hear me now? Okay, good. I was thinking about the foreign exchange benefit and assuming you're experiencing a positive impact on your revenue this year along with better volume projections. Your revenue guidance is increasing, but your EBITDA remains unchanged. I wanted to discuss the factors influencing that. I assume inflation has played a role, but is there anything else to consider?

Yes, it's Steve. You expressed it well. The slight rise in revenue under a flat volume assumption is mainly due to foreign exchange, as you mentioned. Furthermore, there's nothing significantly new regarding inflation; it actually decreased slightly in this quarter compared to what we observed in Q1. This aligns with our earlier discussions about being proactive in balancing supply and demand, producing at or below our overall needs, and maintaining a focused approach amidst a somewhat uncertain demand environment. This is why we are keeping the midpoint of our guidance, especially since our top line has seen a modest increase, which is partially driven by foreign exchange, similar to what we talked about regarding its impact on the balance sheet. Operator, I believe there aren't any additional calls that most of our participants need to join, so let's take two more questions.

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

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

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

Got it. And then one quick follow-up, Steve. Just you mentioned no change to Waco's projected returns despite the higher spending, I think $150 million you called out right now, you have $100 million increase in 3Q, bringing total project cost to about $1.25 billion, up from around $1 billion. But why would the project returns remain the same if you're still forecasting Waco's EBITDA to remain flat at $160 million?

Yes, thank you for the question, Mike. I appreciate you bringing that up. Our long-term confidence in the returns is indeed very high. Looking beyond 2027, we expect to continue seeing returns from this investment. To remain conservative, we are estimating $80 million for both 2026 and 2027. However, we believe that as we refine this impressive investment, the actual costs related to production and some regional developments, including closures of recycled facilities in the Southern United States, will lead to lower costs for fiber at the paperboard facility than previously anticipated. Our long-term outlook suggests that returns will exceed the $80 million projections. We're just not adjusting those figures at the moment as we focus on our Vision 2030 goals. We anticipate that this will meet or surpass our initial expectations due to cost efficiencies, quality improvements, and favorable input costs. Thank you for your question.

And your next question is coming from Arun Viswanathan with RBC Capital.

So just a couple of clarifications on Q2 and the second half guidance. So for Q2, my understanding was the downtime was about a $30 million hit. So maybe if you could confirm that on EBITDA. And then as you look in the second half, on Slide 17, you show the typical patterns. Overall, your business is strongest in Q3 with 4 on those end markets and then it drops back down in Q4. So looking at that $800 million second half EBITDA, is that kind of higher in Q3 and lower in Q4? Or does the Waco start-up kind of make them more even? And apologies if you had already covered that, but yes, maybe you can just offer your thoughts there.

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

Thank you, operator, and thank you for joining us on our call today. The first half of 2025 has been challenging for our CPG and QSR customers, and we are encouraged by the discussions we are having around potential strategies to drive growth and protect market share in the quarters ahead. While there are a range of near-term uncertainties, the outlook for demand for sustainable consumer packaging is strong. At Graphic Packaging, we spent the last 8 years building and expanding our innovation and execution capabilities. We are exceptionally well positioned to meet our customers' changing needs and support their growth strategies while generating substantial free cash flow. I want to thank our 22,000 employees for their dedication and our stockholders for their continued confidence in Graphic Packaging. Thank you, and good day.

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