Graphic Packaging Holding Co Q3 FY2025 Earnings Call

Good morning, and welcome to the Graphic Packaging Third Quarter 2025 Earnings Call. It is now my pleasure to turn the floor over to your host, Mark Connelly, Senior Vice President of Investor Strategy and Development. The floor is yours.

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

Thank you, Mark, and good morning and good afternoon. Thank you for joining our call today. I want to start by taking a moment to acknowledge the enormous contributions that Steve Scherger has made over the past decade as Graphic Packaging's Chief Financial Officer. As announced last month, Steve has decided to leave Graphic Packaging to take on a new challenge. He has stayed with us through this week to close the books on our third quarter, and I appreciate that. Steve was my partner in the development and execution of our business transformation from the acquisition of International Paper's consumer business and more than a dozen acquisitions to our Kalamazoo and Waco investments. His impact on the team we have built and the culture we have created at Graphic Packaging will shape our company for years to come. I will miss his counsel. I'm pleased to introduce Chuck Lischer, who Steve hired in 2019 as our Chief Accounting Officer. Chuck will take on the new role of Interim Chief Financial Officer. Chuck has been a key member of our leadership team and involved in every major decision Steve and I have made. We are fortunate to have someone with Chuck's deep knowledge stepping in as we pivot from Vision 2025's investment to Vision 2030's free cash flow. Now let's turn to the quarter. Graphic Packaging sales were $2.2 billion. Adjusted EBITDA was $383 million, adjusted EBITDA margin was 17.5% and adjusted EPS was $0.58. While the challenges of a stretched consumer and the impact on grocery volumes is well chronicled, we are focused on what we can control. We executed well in the quarter, made progress on costs and reduced inventory. Meanwhile, our innovation platform continues to open up new markets for paperboard packaging, once again allowing us to outperform the broader markets we serve. Turning to Slide 3. I'm pleased to announce that we produced the first commercially saleable rolled paperboard at our Waco recycled paperboard manufacturing facility on October 24. That was significantly earlier than our plan and faster even than our highly successful K2 start-up in Kalamazoo in 2022. I could not be more proud of our team, many of whom were part of the team that built our Kalamazoo K2 machine. I want to thank our contractors, and I'm incredibly grateful for the strong support we received from the Waco community from Governor Abbott and the State of Texas. Waco was Graphic Packaging's largest capital investment and extends our economic and quality advantage in recycled paperboard across all of North America. Waco is a critical enabler for the consumer packaging we sell, improving surety of supply, reducing waste, allowing us to only offer the highest quality packaging materials and expanding the markets our recycled paperboard packaging can serve. Having Waco in our system gives us a competitive advantage that will last for decades. The Waco facility sits in the Texas Triangle, which is a highly attractive location for recovered fiber sourcing given its proximity to 4 major cities. Our team also developed an internal fiber sourcing plan, which allows us to bring scrap paperboard from our packaging facilities to Waco. This is exceptionally clean and very low-cost fiber. True circularity isn't just about the environment; done right, it's also about sound business economics. By closing the loop between our own manufacturing system scrap and Waco's recovered fiber sourcing, we dramatically reduce overall system waste while simultaneously improving our production economics. And with the inclusion of paper cups in the Recycled Materials Association's recently updated guidelines, a key strategic investment we made at Waco looks even better. We designed Waco to have the capability to process up to 15 million paper cups a day. And as cup collection ramps up, Graphic Packaging will play a key role in ensuring this high-value fiber source is put to good use rather than ending up in landfill. As previously announced, the ramp-up to full production at Waco is expected to take 12 to 18 months. The start-up of Waco marks the end of our Vision 2025 transformation program. We now have everything we need, strong positions across a wide range of markets to drive top-line consistency, the packaging industry's best innovation team to open new markets for paperboard, and an integrated packaging platform with durable, substantial long-term competitive advantage. On October 30, we formally announced that our East Angus recycled paperboard manufacturing facility will cease production, December 23. Taken together with our earlier Middletown closure and the recent closures by others, Waco will add just a couple of percent to total capacity, only about 75,000 tons more than the industry had at the start of 2025. As was the case in Kalamazoo, we do not expect the startup of Waco to materially impact the recycled paperboard market balance. Graphic Packaging has a long and consistent practice of matching our board production to our demand for our packaging. Turning to Slide 4. The pressure on the consumers is evident by the grocery volumes. Increasingly, we hear from our CPG customers that the consumer market has bifurcated. Upper-income consumers are still spending, but are spending differently and more carefully. Lower-income consumers continue to cut back as food prices rise further. And in the third quarter, we also saw more of our CPG customers timing their purchases as a way to manage cash, which has made order flows less predictable. In the third quarter, our volumes were down 2% year-on-year, again, outperforming most of the markets we serve. We also saw some incremental price deterioration, not so much in paperboard, but in packaging pricing. Recycled and unbleached packaging markets are in good balance, but we continue to see highly unusual competitive pressure from bleached packaging producers who normally wouldn't choose to compete directly with recycled because their costs are so much higher. Yet we are seeing competitors offering discounts on bleached packaging that essentially matches recycled packaging pricing despite the obvious lack of profitability at those kinds of prices apply. Given that bleached capital costs and annual sustaining capital requirements are dramatically higher, we don't believe that the situation is sustainable. With the investments we have made at Kalamazoo and Waco, we can match bleached paperboard's appearance and print performance with a sheet that costs significantly less to make on equipment that requires a fraction of the capital to maintain. We believe that our investments have put us in the sweet spot for all 3 packaging substrates and that our economics and quality create a durable long-term competitive advantage. Over time, we expect our recycled paperboard to replace more expensive bleached paperboard in a range of markets. As we discussed last quarter, we are not a meaningful participant in open market bleached paperboard. But the impact of a large imbalance in that market has been to reduce the pricing power in recycled and unbleached packaging. Recycled and unbleached are our primary markets, and both are healthy and in good balance. So this is really about margin pressure rather than market share. Looking at our markets. Food and household products were steady overall, while beverage and foodservice were weaker. Health and Beauty, which is mostly a European business for us, was again solid. Beverage promotion returned to a relatively normal pattern this year, but promotional activity for food and foodservice remains highly targeted, an approach which has not driven meaningful volume of foot traffic. Mass retail, superstores, and discount grocers continue to take share from traditional grocers. That is one of the driving forces behind the surge in private label offerings, although traditional grocers have increasingly embraced store brands as well. In the past 2 years, literally thousands of private label and store brand SKUs have been introduced, and trademark data suggests the trend will continue into 2026. Meanwhile, our innovation portfolio continues to expand. Innovation is steadily opening up in new markets for our paperboard packaging from household products to protein to produce. Turning to Slide 5. The breadth and depth of our consumer staples packaging portfolio is especially important in times like these, where consumer purchasing patterns are rapidly evolving. We are in every grocery aisle in supermarkets and superstores and are a major packaging supplier to quick service restaurants. We are introducing recycled paperboard packaging to more markets and more categories, including household products and health and beauty as customers increasingly embrace our paperboard as a less expensive, more responsible choice that consumers prefer. Turning to Slide 6. Excluding the effect of FX, third quarter packaging sales were down approximately 2% year-over-year, a modest deceleration from second quarter market trends. Food results were roughly flat overall with continued uneven performance in the Americas, partially offset by strength in international, although as we have previously noted, consumers in our international markets are also feeling the stress of high prices. As in past quarters, no clear category trends are emerging. We see targeted promotion that shifts from product to product and brand to brand, but has been insufficient to drive overall volumes higher. As our customers evaluate the effectiveness of promotion, they are also developing clear insights into price points where customer purchases either grow or decline rapidly. So for example, a $0.25 price increase of $4.50 to $4.75 may not cause a big change in demand, but a $0.25 increase from $4.75 to $5 might cause a major decline in sales. Getting a better handle on that sort of price sensitivity should help our customers as they work to reposition, resize, and reformulate. In beverage, we saw a welcome return to a more normal promotional activity this summer, which helped drive soft drink multipack demand. The longer-term trend towards less beer consumption continued both in the Americas and in international markets. Keep in mind that while trends in multipack demand do track references like Nielsen over the medium term, leads and legs can vary, particularly when beverages are purchased and when they're consumed. A 12-pack, for example, will tend to be consumed more quickly if it goes directly into the refrigerator. So when you have a 2-for-1 promotion, it can be a bit harder to predict when consumers will be back to buy more. Some of the normal second-quarter beer production shutdowns that typically occur around the 4th of July holiday were deferred this year and are now scheduled for the fourth quarter. The impact of that shift is difficult to predict, but represents an effort by our customers to match their production to demand. We serve beverage producers of all kinds and sizes with multipacks for cans, bottles and plastic. Over time, we expect to outperform the overall beverage market, both in the Americas and in our international business, thanks to our innovation portfolio and the strength of our integrated beverage packaging model. Foodservice results are broadly weaker as has been well telegraphed by the media. While affordability has been the primary challenge to foot traffic and volumes, this is also the category with the most bleached paperboard packaging and bleached packaging is where we have seen the most unusual competitive behavior, which is affecting sales as well as profitability. Our smaller international foodservice business continues to perform very well with new product innovation and strong execution driving continued volume improvement. In household products in the Americas, we see consumers reducing purchases and shifting to private label alternatives. Our international business continues to provide a significant offset, largely driven by our product innovation. Health and beauty is a relatively small and mostly international business for us that has significant potential to grow over time in the Americas. Slide 7 highlights our 5 packaging innovation platforms. Innovation is a critical component of our strategy because our innovation team is opening up entirely new markets for paperboard packaging. In the past couple of years, our innovations have taken us into meat protein, freshly prepared food, ready meals in Europe, ground coffee and a host of markets which were traditionally dominated by plastic and foam. Innovation is why we are confident in our ability to grow faster than the QSR and CPG markets we serve. On Slide 8, we highlight an innovation that demonstrates our market expansion. In the produce aisle and especially with small fruits and vegetables, plastic punnets are the traditional packaging standard. But while plastic punnets are cost-effective, their performance and consumer appeal are mixed at best and recycling rates are low. As our customers look for better functionality and greater consumer appeal, we have developed a family of paperboard punnets, including open, top seal and clamshell designs that use up to 95% less plastic and are recyclable in most existing programs. On this slide, we highlight our ProducePack top-selling punnet. These examples are from 2 of our large store brand customers, Marks & Spencer and Tesco in the U.K. Fruits and vegetables are packed in many different ways depending on the grower, the scale, and the market. So we designed our punnets to work on the same automated lines as plastic punnets and minimize switching costs and to be superior plastic alternatives where more handling is involved. Our clamshell design, for example, serves a hand-packed market. But unlike the plastic clamshell, ours can be locked into a closed position with one hand, improving labor efficiency. When we began this project, our team studied the science of food ripening and developed containers that have a meaningfully positive impact on how long some fruits and vegetables stay fresh. In cherry tomatoes, for example, a third-party has verified an increase in shelf life of more than 3 days, a really big advantage for a highly perishable product. Other tests being demonstrated that our paperboard punnets slowed the mold growth compared to plastic alternatives. Our punnets also offer outstanding visibility inside now, something you can't get with plastic. That gives the growers and retailers a way to increase their brand marketing impact to distinguish more easily between products and quality levels and to educate consumers about what they are buying. Our paperboard punnets, along with other new innovations like our PaperSeal line, are a perfect fit with today's trends towards healthier eating and the growing use of GLP-1. They are great examples of just how effectively Graphic Packaging moves with the consumer. Turning to Slide 9. Our vision for Graphic Packaging is clear, and my confidence in our business model remains strong. Innovation, culture, and the commitment to making packaging that is better for the planet are fundamental to driving best-in-class results for our customers and for all of our stakeholders. With Waco now ramping up, we have everything we need to reach our Vision 2030 goals. And that means we can turn our full attention to execution and driving cash flow. On Slide 10, we summarize our financial results. I've already described the big drivers of sales and margin performance. Slide 11 highlights the still challenging consumer packaging environment on the left and the strength of our business model and execution on the right. Delivering margin improvement in the face of sequential price volume pressure is a testament to the strength of our model and the value we bring to our customers. While we are not satisfied with the current results, we are confident that we can meaningfully improve margins as demand and competitive behavior normalize. Turning to Slide 12. We used $150 million to repurchase approximately 6.8 million of the company's outstanding shares year-to-date, reducing shares outstanding by 2.3% in 2025 after a similar reduction in 2024. We have repurchased approximately 24% of the company since 2018. Turning to the outlook on Slide 13. We have modestly revised our guidance to reflect performance to date and our best view of what's been an increasingly difficult to predict volume outlook. In this environment, we are focused on the things we can control, and that includes cost and inventory. We are assessing opportunities to further reduce SG&A and finding other opportunities to reduce costs, which I believe will further cement our significant efficiency and margin advantage over competitors. You saw us take action to reduce inventory in the second and third quarters, and we will continue to drive inventory out of our system as we reoptimize around Waco and Kalamazoo. In the fourth quarter, we will take further action to balance production with customer demand, which we expect to have approximately a $15 million impact on EBITDA. These decisions are intended to protect our margin profile and to protect our volume. At a time when competitors are running for cash and signing contracts that we believe carry margins well below the cost of capital, we are focused on protecting our industry-leading margins and protecting share where we are the best and most logical supplier in the medium and long term. We are using this period of unusual competitive behavior to align our order books with customers who understand the durable competitive advantages that we have in innovation, cost, efficiency, and quality. Our year-end leverage target is up modestly. That is mainly a function of the change in our EBITDA expectations as well as our decision to take advantage of the dislocation in our share price with additional share repurchases in the third quarter. Graphic Packaging has doubled in sales and EBITDA since 2017 and maintaining prudent debt levels has always been a major factor in the company's success. With our Waco investment nearing completion, we expect a significant free cash flow inflection and we will prioritize deleveraging alongside our other uses of cash in 2026 and beyond. In keeping with our commitment to prudent use of leverage and maintaining financial flexibility, we made an important financing transaction in October. As detailed in a recent 8-K, we've entered into a $400 million delayed draw term loan, which will be used to repay the bonds maturing in April of 2026. This loan has a floating rate 35 basis points lower than our revolver and matures in June of 2027. This new financing addresses the upcoming bond maturity while giving us more time to decide whether longer-term financing is needed. Given the substantial cash flow we expect to generate in 2026 and beyond, the flexibility of prepayable debt is particularly attractive now. Our current cost of debt is approximately 4.5%. As a reminder, with the Waco investment effectively complete, our capital spending will decline significantly to approximately 5% of sales. Capital spending is the largest driver of our expected cash flow inflection. With the team we now have in place and the levers we have to pull, I'm confident in our ability to generate our targeted $700 million to $800 million of free cash flow in 2026. Let me be very clear about this. We can't control demand and lately, we can't predict it any better than our customers or our competitors can. But Graphic Packaging is at a very different place today. With Waco complete, we have the industry's best assets and best cost position. We have far greater control over our ability to generate free cash flow than we did a year ago. While competitors are restructuring spending and lately making short-term deals that don't generate cost of capital returns, Graphic Packaging continues to focus on delivering results for our customers and our stockholders. We have everything we need, and the next 5 years are about innovation, execution, and free cash flow. Graphic Packaging is in a better place to create lasting value for our stockholders than ever before.

In the appendix that begins with Slide 15, you'll find some additional information you may find helpful. That concludes our prepared remarks. Operator, let's begin with Q&A.

And the first question today is coming from Ghansham Panjabi from Baird.

I guess, first off, just wanted to congratulate Steve. I wish him the best for the future. Obviously, a great run at the company and look forward to your next role. So congrats again. So my first question, Mike, just kind of looking back at 3Q, did the end markets track pretty much what you thought, but the difference was just the share shift because of the bleach board conversion? And related to that, why would that dynamic change near term, barring some sort of inflection higher in volumes?

Ghansham, it's Steve. Just thank you for those very kind words, and I'll let Mike jump into the response here in a moment. But it has been just a phenomenal opportunity over the last 10 years. I want to thank Mike personally, just a phenomenal partnership, a true opportunity to work hand-in-hand with him, which has been just a wonderful and honorable experience. Probably looking ahead, though, as excited for the business as it could be if you look out now with the investments that have been made, Waco coming to life, above cost of capital returns out into the future, the business is incredibly well positioned for success going forward and the cash flow inflection that's happening as we sit here on this call with you today is outstanding. So my thanks to Mike personally for all that we did together and look forward to what lies ahead as well. So thanks for that, Mike.

Thank you, Steve. It's been a real honor. To your question, Ghansham, in terms of expectations in the quarter versus the results we realized, first, I want to clarify there was no share loss for us there. That was really a function of customer purchasing patterns. And when you look at their volumetric performance through second quarter and into third quarter and the third quarter material that's been released so far by a handful of our larger customers, it shows we're actually outperforming their overall volumetric performance, and that's really a function of our innovation. Our innovation in the quarter was another $52 million, roughly 2%. So that's helping us kind of outperform some of the challenges that they're seeing in terms of their volumetric performance.

In light of the current dynamics, do you still have confidence in the Waco EBITDA contribution for next year, or is it influenced by the ongoing marketplace developments?

No, thank you for that. I’m very confident in Waco’s ability to deliver the $80 million we discussed. There is also another $80 million to follow. To remind everyone, the first $100 million of savings was primarily due to the mill closures, including Middletown, which closed at the end of May, and our East Angus facility in Quebec, which we’ve now formally announced will close by year-end. Everything is on track. Regarding the total impact in 2026, we need to assess what the volumes will look like as we move into that year. If the volumes remain largely flat compared to the previous year, it will yield a different outcome than if they decrease by 2%. If there is a slight decline next year, we will need to evaluate our Kalamazoo K1 machine and adjust operations to optimize our K2 machine in Kalamazoo, which is our most efficient, as well as Waco, our leading paperboard manufacturing facility. If necessary, we can take some downtime on our K1 machine, and we can do that at a very reasonable cost.

Your next question is coming from George Staphos from BofA.

I appreciate the details and want to take a moment to acknowledge Steve. He has been a crucial contributor, as you mentioned, Mike, to the evolution of Graphics over the last decade, and I want to express my gratitude for all the support he has provided us on this call, especially regarding our industry research and graphics. So, thank you, Steve. Regarding my questions, you mentioned, Mike, the potential to enhance productivity further. How do you perceive this opportunity? How significant is it for Waco regarding the commercial opportunities and challenges you currently face in the market as you aim for that $80 million target? What level of additional cost reduction or SG&A adjustments would be necessary, or would they be supplementary? I also have a follow-up question.

I have a high level of confidence in achieving the $80 million from the Waco ramp-up by 2026. The facility is progressing even faster than we anticipated, and we are pleased with the results so far. The bigger concern lies in our visibility and the state of end-use markets as we approach 2026. We will concentrate on what we can control. Currently, there are some unusual competitive pressures in the market, particularly with bleached paperboard, which are beyond our control. We also can't dictate how our customers are performing volumetrically, but we support their efforts to improve their businesses. Meanwhile, we have several measures to ensure we operate efficiently and effectively. First, we plan to bring our capital expenditures back to a more normal level of 5% or lower, which is projected to yield over $350 million in free cash flow. Despite having a low cost structure, we are scrutinizing all costs, including SG&A and plant expenses, to maintain customer service levels while addressing market realities. We are actively pursuing these internal measures. Furthermore, regarding our inventory, we've released about $30 million in capital this year and expect an additional $20 million in Q4. As we move into next year, this will remain a focus, as we now have five well-capitalized paperboard manufacturing facilities following the Waco and Kalamazoo ramp-ups. This positions us to evaluate our entire system and supply chains effectively. These are the strategic levers at our disposal. If necessary, to manage the supply and demand of our coated recycled paperboard as Waco scales up rapidly, we can adjust our K1 machine accordingly, and we can do so cost-effectively.

My other question is about the end market. In the foodservice sector, it seems from the chart that it didn't perform as well for you this quarter. Foodservice is an intriguing market; while fast casual has struggled, quick service has gained some momentum. What trends are you noticing as we head into the fourth quarter? Additionally, to the extent you can disclose information, what is your outlook for foodservice? If it improves, that market could actually provide higher margins for you.

Thank you for your question. You've articulated it well. The fast casual sector is definitely facing challenges. Recently, Chipotle released their comments, and the CEO highlighted that younger consumers, particularly those aged 25 to 35, are experiencing higher unemployment and lower disposable income, which is driving them back to grocery stores. This is an important observation, and I mention it because our portfolio is designed to adapt to consumer behavior. If there is indeed a shift, our presence in every aisle of the grocery store positions us well. We are also noticing trends impacting quick service restaurants, which is understandable given the pricing differences between QSR and fast casual. Additionally, we have several innovative ideas we're collaborating on that will help us maintain our relevance and grow our volumes. This is our perspective on the current dynamic.

Do you think it grows, Mike, next year, I guess, just to draw a bow on it or tie a bow on it?

I'd like to believe so. But again, George, it's just difficult for me to talk about demand. I mean I think about a quarter, our customers have a hard time doing it. If it does for us, it will be most likely because of innovation.

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

Steve, I'll echo everybody else's thanks. Appreciate your comments and all the time over the years. And if you want to get a RISI comment on this last question, I'll cede the floor to you. But maybe on the competitive price pressure on SBS and CUK on CRB, I apologize if I missed it. How much of a drag was that in 4Q? How long are you expecting it to last? And while I believe your SBS is mostly cup stock, are you able to sell incremental SBS or CUK similar to your competitors at the expense of CRB given that price spread? Or how has your own sales mix by paper types changed in this environment? Or do you expect any shift in 2026? Any incremental color on how the tons from Waco layer in over 2026 and that impacts your mix would be helpful.

Yes. Thanks, Matt. So I'm going to address the SBS, CRB, CUK comments. We've had a fair amount of inbound on that, as you can imagine, over the last week or so. So the first thing you need to know, and you see it in our volumes, we have not lost any share. And we're going to be very focused on making sure we don't lose any share because of that. If you think about it, you've got a product in making SBS and we make it. We've got a mill that does it in Texarkana. We know the cost structure on that. It's much more expensive to make than coated recycled paperboard. So from our standpoint, we would never substitute SBS for CRB given the cost advantage we have. In fact, it's lower cost to make CRB, coated recycled paperboard, than it is to make bleached paperboard. So the margin profile, just simple arithmetic there in terms of what that looks like. And again, we're operating that mill, and we operate Kalamazoo and Waco. What I'll tell you is that the CapEx requirements of a virgin paperboard manufacturing facility are 4 times what they are for a coated recycled paperboard facility. That is, again, part of the decision we made when we invested so heavily in Kalamazoo and in Waco because of that phenomenon. So over the medium to long term, we're highly confident that we can continue to not only protect our share but win share from bleached because the cost of capital returns start to get in the way there. Ultimately, that's something that needs to find its own level. RISI in their last article or so talked about 500,000 tons of excess bleach capacity in the North American market. We'd agree with that, if not a little bit more. So that's got to be dealt with. That's really not something that Graphic will deal with. As you know, our focus is on package sales; we make cartons, we make wraps, we make cups. We sell value-added packaging. 95% of everything we do is in that area. So from our standpoint, and I mentioned this in my prepared comments, most of this was on the package price and not on the actual paperboard level itself, which makes sense, given the dynamic we saw and what you saw happen with pricing in the quarter. We're confident in our ability to, over time, not only protect our share but continue to grow it with the high-quality, low-cost material we have coming out of our coated recycled platform.

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

Yes, we are considering all of that, and we will provide a clearer perspective on what to expect for 2026 in our next conversation. It’s a great question, and it’s something we consistently monitor. However, I am very confident in the $350 million increase we anticipate year-on-year.

Your next question is coming from Charlie Muir-Sands from BNP.

Just firstly, on Waco, can you just give some clarification around the phasing? You've obviously guided the start-up costs of the $65 million to $75 million. Have they been largely incurred now? Or do they step up sequentially into the fourth quarter? And how should we be thinking about those in this year versus next year? I mean effectively, is the step-up reversal of those plus the $80 million? Or would that be double counting? That's the first question.

My apologies if I don't hit this properly. I'm having a difficult time hearing you. I think your question was around the phasing of the one-time costs associated with Waco, which is outlined in the materials to be $65 million to $75 million. Assuming that was your question, the phasing of that is like a 2/3 this year, 1/3 2026. And if I didn't get it right, please come back.

Great. Hopefully, you can hear me. Can you also give us an update on the progress in selling your PaceSetter Rainier premium CRB? Are you achieving specific price premium for that now? And then one final piece is, can you just talk about the deleverage that you're expecting in the fourth quarter to get to the 3.5 to 3.7x net debt to EBITDA at year-end?

Thank you for that. I'll start with the question about Rainier and then move on to leverage. Rainier is an excellent product, and we have advanced cleaning systems in both Kalamazoo and Waco, providing us a significant competitive edge in the North American market. Our paper machines are equipped with curtain coaters that enable brightness levels close to bleached paperboard. Rainier is one of the strategies we’re employing to maintain our market share against the SBS competitors. This approach does affect our margins, as we anticipate slightly lower pricing due to them reducing their packaged prices to compete with CRB. It's a challenge, but we have the tools and capabilities to manage it effectively, and I'm pleased with our position in this area. Regarding year-end leverage, we project a range of 3.5 to 3.7 for overall debt, primarily influenced by a modest decrease in EBITDA and our decision to opportunistically buy back shares this year due to market conditions. We discussed this with our Board, and it makes strategic sense considering the anticipated increase in free cash flow in 2026. As mentioned in my previous comments, we plan to reduce leverage and return cash to shareholders in a responsible manner that enhances long-term value.

Charlie, this is Mark. You'll recall that Q4 is typically a positive free cash quarter for us. And so that will help us get that leverage down to the range we're looking for.

Your next question is coming from Gabe Hajde from Wells Fargo.

Steve, pleasure working with you. I had a question about working capital and cash flow as well into next year. Steve, can you help us with some of the AR factoring that's been done or reverse factoring? Just give us a sense for what that looks like and maybe how that will be managed into 2026?

Why don't you handle that question, if you would?

Yes, we'll let Mark handle it. This is Steve. The question is about accounts receivable financing. There won't be any significant changes year-over-year regarding our expectations for the end of '25 compared to '26. This won't significantly contribute to cash flow in '26. As Mike highlighted, the focus for cash flow enablement in '26 is primarily on reduced capital expenditures, lower inventory levels, and managing SG&A costs. Those will be the key factors driving cash flow and our confidence in the $700 million to $800 million range. So, it won't involve major changes in accounts receivable programs. To clarify, CapEx this year is projected to be $850 million and $450 million next year, indicating a $400 million difference impacting cash flow.

I feel there is still some confusion regarding the start-up costs of $65 million to $75 million. Could you provide more details about whether this includes capitalized interest costs or if it pertains to recycling test tons? Mike, if I understood correctly, the amount is $65 million to $75 million this year, which will decrease to $35 million next year, resulting in a net positive of $30 million. Also, is this the same as the $80 million we discussed concerning the investment contribution?

There are several points to address. The $80 million EBITDA run rate will carry into next year. The $65 million to $75 million refers to the one-time cash costs related to starting up the machine, which we've discussed over several quarters. The phasing for this amount is two-thirds this year and one-third next year. I will ask Chuck Lischer to provide more details on the breakdown of these costs at a high level so you can better understand what we mean.

Yes. That's mostly just the operating costs associated with running the facility prior to startup. So as we train the team and bring the team on board to have the facility ready to be up and running. Anything that does not get capitalized is what we've been capturing in that $65 million to $75 million. And yes, that is a multiyear number, not just a single year number, the $65 million to $75 million. The other point on the capitalized interest, that, of course, is something that we do during the period of construction. That will, of course, stop once the asset comes into service. So we won't see capitalized interest again in 2026.

Okay. Or in Q4?

Well, there may be a bit of spending in Q4 as the asset comes into service during that time. There will also be some ongoing expenditures along with the regular capitalized interest. However, for the main Waco asset, that will come to an end.

Your next question is coming from Arun Viswanathan from RBC.

Steve, great working with you. Thanks for all the help and insight over the years and look forward to the next chapter as well. So I guess my question is around maybe initial thoughts on '26 and specifically around Waco, maybe you can just kind of give us some of the assumptions underlying the $80 million EBITDA uplift and if those are still intact. I believe most of those are around cost per ton. But is there any volume component? And then related matter, I guess, do you still feel the same way about '27 as well, another $80 million uplift? Or is that also somewhat volume dependent?

So Arun, I'm going to kind of take a step back and make sure I kind of walk through this again so that I want to make sure that my points are clear here. We're very confident in our ability to deliver $80 million in Waco as it ramps up next year. Then in 2027, there'll be another $80 million. By way of a reminder, that's $160 million in total. $100 million of that, as I mentioned, is focused on kind of the fixed cost of not running Middletown and East Angus. So that will come in there next year. We'll be ramping up. We won't be at full run rate, as I said in my prepared remarks, from a volumetric standpoint for 12 to 18 months, but our confidence level in the $80 million for next year is very high. We had always said that as we kind of brought it online in the outlying years, we need some volumetric growth. That hasn't changed. The way we're going to deal with that, as I mentioned to George earlier, is we'll toggle between running our K2 machine in Kalamazoo, which is the new one we just operated now for the last 4 years, the Waco mill, those are going to run wide open, and we'll service our business on our lowest cost assets, highest quality, lowest cost. We'll use our K1 machine, which is the smaller of the 3 machines to take any downtime that we need to take to make sure that we match our supply and our demand. Of course, we'll be working quickly to make sure that we fill that out. A lot of it depends on our customers' volumetric performance, as I mentioned earlier; if they're able to get back to at least flat volumes in 2026, that's a big deal for us because our innovation has consistently added close to 2% of volume. So that's really how to think about Waco and how we're planning for '26 and beyond.

On the markets, it appears that beverage and foodservice experienced some weakness in Q3. Do you anticipate this weakness will persist as you transition into Q4 and 2026? Additionally, could you provide insights on other sectors like food, household, and health and beauty? Have you noticed any shifts in innovation sales within those areas? We have heard that there might be a trend where consumers are opting for traditional products over new innovation-driven options. Is that something you’re also observing? Please share your perspective on this.

Yes. I'll start by saying I don't expect to see much change in Q4 versus what we saw in Q3. I mean, October started off substantially similar to what we saw in Q3. You get to read our customers' as I do. As I talked about earlier, fast casual is down a little bit; QSR may be a little better. It's hard for us to know exactly what our customers' volume performance is right now. As I said that in my prepared remarks, given some of the things that they're doing to manage their balance sheets and production schedules around the holidays and so on and so forth. So that's part of why we're being a little bit deliberate in calling that out. As we head into 2026, look, I know every one of these customers as we talk to them all, are very focused on getting their volumetric performance back. They got to grow, and they're doing the things that they believe are required to do that. We see a lot of new CEOs. We see a number of restructurings that are going on. We see agitation at different levels. So hopefully that will manifest itself in volumetric performance as we head into 2026, for sure.

I would just add a couple of things. This is Mark. In the beverage market, we typically see promotional activity in the fourth quarter, but we also noticed some changes in production schedules from our customers, with some taking downtime around July 4, although that didn't apply to all of them this year. Some of that may occur in the fourth quarter, which adds a bit of variability. In the food business, we're also experiencing a lot of inconsistency, with customers shifting between categories to save money. There's not as much destocking by food suppliers, but rather strategic stocking, as they aim to meet their year-end numbers and manage cash flow. There's a lot of unusual behavior, but no significant changes in the overall trends.

And just to clarify, so it sounds like you will have the $80 million next year. And then aside from that, it's mainly volume and price that we should be keeping in mind as far as what the drivers are for any kind of EBITDA bridge. Is that correct?

Yes, that's exactly right.

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

Steve, for your help over the last few years. So I just wanted to revisit again on Waco, in terms of the ramp, order of magnitude, how much tonnage would you be expecting to produce in 2026?

Yes, Mark, I'm not going to specify that, but as you can consider, we put it into service in October. It's a 12-to-18-month ramp, so it's progressing quite quickly.

For sure. Let's assume it's 400,000 tons. I'm trying to think through that East Angus is 100,000 tons and Middletown is a little less than 200,000 but was down for about half the year. So we're discussing about 200,000 tons of replacement board. Is the rest due to bringing down inventory this year? Could you walk through the math on where the Waco tons fit in? Is there some growth to meet the full production expected from Waco next year? That would be really helpful.

Thanks for the question. Here's the math I'm going to walk you through. If you really look at East Angus, which is our facility, it will shut down at the end of the year and our Middletown facility, which closed at the end of May and then what others have announced that they're closing, it's 475,000 tons. Waco, of course, adds 550,000 tons to the overall market. So on a net basis there, it's about 75,000 tons of additional capacity that's coming online. I'll tell you this, Mark, I need Waco to come up right now to make sure that I'm able to service my customers. You saw the APA data. Inventories are down pretty dramatically on CUK and CRB. That's deliberate plan on our behalf here relative to what we did. So we need those tons coming off of the Waco machine to help service our customers and make sure that we take care of our overall demand. Look, you had a good note out earlier this week. You talked a little bit about K2 and Kalamazoo and Waco and balancing that production with our K1 machine. I think you got it pretty right. So I don't have a whole lot more that I think I need to add.

I understand that once we reset everything, we should reach our target profitability levels. I want to make sure I fully grasp the transition period as we anticipate a better demand environment in 2027 and everything starts to align. I would like to clarify something because it seems that you’re indicating that much of the business has come from the other capacity that shut down. Am I missing something? Is it the inventory reduction you’re working on this year that won’t happen next year? These could be significant numbers, so I’m just trying to understand better.

CRB, I think that's fair. We have work to do, in our opinion, with some of the other optionality with some of the other substrates we have and Waco and Kalamazoo help enable that as well relative to our overall supply chain. But I think, like I said, you've got the math pretty well set, and we're going to match our supply and our demand on CRB like we always do, and that swing machine will be our K1 machine in Kalamazoo.

Your next question is coming from Mike Roxland from Truist Securities.

I'll just echo what everybody else has said. Steve, thank you for all your help over the years and wishing you the best of luck in the future. In terms of the '26 free cash flow bridge, obviously, you guys have expressed confidence in the $700 million to $800 million of free cash flow next year. Just trying to get some more color around that because year-to-date, adjusted free cash flow, as you pointed out in your press release, is minus $332 million. So you have a $400 million CapEx step down. You're looking at a starting point of $68 million in terms of free cash flow. I know you got a $400 million of free cash flow in 4Q due to working capital unwind. But also you are contending with, I think, a higher working capital, cash taxes, and interest, but you called out on your call last quarter of about $300 million, $350 million. So can you help me reconcile those moving pieces I just mentioned with the $700 million to $800 million you're still confident you will achieve next year?

Yes, I'm going to focus in on 2026 and give you a little bridge. You have to remember, Michael, and you know this, Q4 is always our big cash quarter. So we'd expect that gap to close dramatically as it always does every year. And as we look at next year, we've got the contribution from Waco. We've already talked about that. And then the bridge is really pretty straightforward. It's around the CapEx reduction, which we've already talked about, which is close to $400 million here, as Mark just mentioned. We've got cost control that we've got at our disposal, both in terms of SG&A as well as things we would do at the plant levels and discretionary spending. And we've got inventory that we're really going to focus in on, too. And like I said, I'm really excited about our new platform with 5 large, well-capitalized paperboard manufacturing facilities that there's more capital release that we can work on, both in terms of roll stock as well as finished goods as we roll into next year. And that's the bridge. And that's what gives me really a high level of confidence in the $700 million to $800 million next year.

This is Chuck Lischer. I want to emphasize that I have been looking into this area over the past few weeks, and I share Mike's strong confidence here. He spoke about the levers, and we understand what they are. We are prepared to activate them. Additionally, federal cash taxes are expected to be very favorable for us next year, nearly at zero. We are aware of the levers, ready to utilize them, and we have strong confidence in the projected figures.

I didn't interrupt you there. So it sounds like last call, you mentioned $300 million, $350 million of interest, cash taxes, working capital. That sounds like that's coming down significantly as well.

We're going to have to take that bridging offline, Michael. Let's do that. Again, I'm focused. As I said, the levers that we're pulling here in the $700 million to $800 million, we'll help you get your model right that it works, but let's take that offline after the call.

No problem. I have a quick follow-up. I know we're short on time here. Regarding the 550,000 tons for Waco, how comfortable are you with bringing on that full capacity over the next 12 to 18 months in a depressed market? Are you assuming that the market will not be in the same position a year from now? It's a significant amount of capacity. I get that on a net basis it's 75,000 tons. However, as you mentioned, your competitors are acting irrationally. Do you plan to bring in the full 550,000 tons within 18 months? Or do you have the option to delay that if SBS folding cards does not improve substantially in the near future?

We're going to ramp up Waco as quickly as possible. It’s our lowest cost, highest quality mill along with our K2 machine in Kalamazoo. As I've noted several times, if I need to align my supply with our demand, I'll do it on our K1 machine. I want to accelerate that process. It’s an excellent facility that will enable us to compete in markets we haven't been able to enter before. It will also help us manage some of the actions taken by bleached board producers in a way that safeguards our industry-leading margins, which is what you want us to do. It truly makes sense to proceed this way. Bringing on a brand-new machine like the K2 into a tight market is appealing, but decisions like that take time, in our case around 2.5 years to implement. This is our situation. We have plenty of options available, and we are confident we can generate free cash flow next year. That’s our primary focus.

Next question is coming from Anojja Shah from UBS.

Just one quick one for me. When I think about capital allocation priorities next year, you're going to have a lot of free cash flow. You've talked about deleveraging, of course, share repurchases, CapEx goes down significantly. Is there anything else in there we should be thinking about? Like I don't know, is there room for bolt-on M&A or expansion in international markets? How are you thinking about it?

Look, from my standpoint, it's really 2 things in our priorities. It's deleveraging our balance sheet, which we've talked about, as well as returning cash to shareholders. That's our focus.

That was all the time we have for questions. I would now like to pass the floor back to Mike Doss for closing remarks.

Thank you, operator, and thank you, everyone, for joining us on our call today. With Waco up and running, we have 5 of America's very best paperboard manufacturing facilities, the strongest and most capable global packaging manufacturing network and the world's best packaging innovation team. We are uniquely positioned to deliver exceptional results for our customers and to generate strong, steady cash flow across the next half-decade and beyond. I want to thank our employees for their dedication and our stockholders for their confidence in Graphic Packaging. Thank you, and have a great day.

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