Earnings Call Transcript - GPK Q1 2026

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Graphic Packaging Holding Company First Quarter 2026 conference call. Operator instructions were provided. Please note this conference is being recorded. I will now turn the conference over to your host, Melanie Skijus, Vice President of Investor Relations. Melanie, the floor is yours.

Melanie Skijus, Vice President, Investor Relations

Good morning. Thank you for joining Graphic Packaging's First Quarter 2026 Earnings Results Conference Call. 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. We have with us today, Robbert Rietbroek, President and Chief Executive Officer; and Chuck Lischer, Senior Vice President and Interim Chief Financial Officer. During this call, we will reference our first quarter 2026 earnings presentation that can be found in the Investor Relations section of our website at www.graphicpkg.com and company-directed slides if you are participating today through the webcast. Now let me turn the call over to Robbert.

Robbert Rietbroek, President and Chief Executive Officer

Thank you, Melanie, and good morning, everyone. As many of you know, Melanie has just rejoined Graphic Packaging as Vice President, Investor Relations, and we are excited to benefit from her leadership in the role. Over the past four months, I've been getting to know the team, visiting our facilities both domestically and abroad, and meeting with many of our customers around the globe. Separately, I'm pleased to report that we have now completed our 90-day review of the business. Our review has confirmed several important conclusions. First, our foundation is strong in points that are consistently validated during site visits and in discussions with our major customers. Second, we have talented, experienced teams, including world-class operators who support growth with customers. And lastly, our integrated high-quality asset base and production footprint enhance our service capabilities, expand innovation opportunities, and provide a competitive advantage. All in, we see meaningful opportunity ahead. We're taking decisive, focused actions to strengthen our operations and position the business for improved profitability. In the first quarter, we delivered strong performance at the high end of our expectations. Net sales were up 2% year-over-year to $2.2 billion. Volumes were up 1% compared to last year, with volume performance improving as the quarter progressed. Adjusted EBITDA was $232 million. Adjusted EBITDA margin was 10.8% and adjusted EPS was $0.09. While adjusted cash flow was a negative $183 million in the quarter, this represents a significant year-over-year improvement from negative $442 million in the same period last year. As we look at the demand environment this quarter, scanner data across our markets continues to reflect a more selective and value-conscious consumer. Our innovative packaging solutions that span the grocery store from the center of aisle to the perimeter and on-the-go foodservice items meet consumers wherever they go. As we proceed to the first half of the year, we are encouraged to see customers increasingly taking actions to drive volume growth. Looking across our end markets, Food and Health & Beauty were bright spots for us during the quarter, with higher packaging volumes from value products and consumption of everyday essentials. Bars, refrigerated ready meals and yogurt continue to perform better due to more protein products entering the market to satisfy consumers' desire for higher-protein diets. Health & Beauty, which is primarily an international business for us, delivered strong growth consistent with the trends we saw in the second half of 2025 as consumers continue to prioritize small indulgences like skin care and perfume. Our beverage business remains stable, while food service and household reflect ongoing consumer affordability trends. Now I will provide an update on the results of our 90-day review of the business, the decisive actions we have begun taking to achieve our strategic priorities, and an update on our views and expectations for 2026. As I walk through each of these topics, you will note that we are focused on accelerating the pace of execution across our business. That means enhancing operational efficiency and generating free cash flow to drive shareholder value in an evolving market. While we are taking swift action and implementing tactical improvements to drive efficiency, there is still significant work ahead. Our path forward is clear. We're focused on advancing our five near-term strategic priorities. First, we are committed to disciplined organic growth and providing exceptional customer service. Second, we intend to drive profitability improvements through cost initiatives, operational efficiencies and selective pricing actions. Third, we will continue to optimize operations, footprint and portfolio mix to better focus on our core competencies. Fourth, we will generate free cash flow through inventory rationalization and reduced capital spending. And finally, free cash flow will be used to pay down debt and return capital to shareholders. Over the last four months, I have spent time at our Atlanta and Brussels offices, world-class mills and manufacturing facilities, met our talented teams across the globe, and witnessed our technical capabilities and commitment to sustainability in action. I visited four of our five paperboard mills and several packaging facilities: Waco in Texas, Texarkana in Texas, Stone Mountain, Berry and Macon in Georgia, Elk Grove in Illinois, Kalamazoo, Michigan, Cholet, France and Bristol, England. I have met face-to-face with six global CPG customers in North America, Belgium, Switzerland and the Netherlands and engaged with leading QSRs and retailers who deeply value our long-standing relationships. These customers have confirmed the value that Graphic Packaging brings as a trusted partner. We are one of the world's most innovative paperboard packaging companies and hold a leading position with a large addressable market, supported by sustainability trends. With the comprehensive 90-day review completed, we are taking decisive steps to optimize our operational footprint, reduce structural costs and impose discipline across capital and operating decisions. I will walk you through our key takeaways, actions and where we will continue to focus our efforts. Strategically, our review has reinforced our commitment to the core North America and European markets, and we will make selective, disciplined moves to optimize our portfolio while maintaining our scale advantage. That means expanding with customers in our core markets and driving new growth opportunities through innovation. With regard to our portfolio, we have started to simplify and streamline our business and organization. We recently reached an agreement to divest our noncore assets in Croatia. We are in the final stages of the transaction which we expect to complete in the second quarter. Operationally, our transformation office is driving continued improvements in both our operations and cost structure. We are executing this transformation in real time with a focus on network optimization, disciplined capital allocation and aligning our commercial teams to the highest-value opportunities. To increase efficiencies and better align with the business environment, we have taken actions to streamline our global workforce and eliminated over 500 roles. The majority of these roles were salaried, including both employee separations and eliminating vacant roles. These were difficult decisions but the changes we have made are based on structural improvements and alignment to business needs, while maintaining vital frontline operations. Importantly, these actions will not impact our commitment to customer service and growth-focused initiatives. Reductions represent less than 3% of all global roles, though they account for over 10% of global full-time salaried roles. We are instituting a rigorous capital spend process — one that demands every dollar of spend be justified against our highest priorities. As we continue to progress, we are confident we will deliver on our full-year 2026 capital spend commitment of approximately $450 million. To further enhance productivity and operational efficiency, we are deploying AI to streamline areas of our inventory management and procurement processes. We are also utilizing remote monitoring of machine usage and performance, leveraging machine learning to generate predictive analytics and enable proactive maintenance, reducing unplanned downtime. I am confident all these actions will deliver the $60 million in cost savings announced last December and enhance our agility and decision-making, enabling us to move faster, reduce complexity and empower our teams. Continuous improvement is an ongoing effort and we are actively pursuing opportunities for additional cost savings. We will operate with fewer layers, increased focus, more accountability and clear priorities, concentrating on what drives the greatest impact for our customers, our people and our business. Our efforts and the many actions underway at Graphic Packaging reflect a company focused on value creation. We are committed to strong financial discipline, building a more resilient cost structure and accelerating free cash flow. Chuck will elaborate on this further. I would like to focus now on the aspect of our business that I'm very passionate about: our partnership with our customers. We are focused on driving disciplined organic growth by building on our strong customer relationships and capturing new business through our commercialization efforts. In the face of changing customer growth strategies, we are strengthening our position across categories and have recently reorganized our commercial team to better align globally with customers and to support them through different stages and market conditions. Our customers continue to experience a dynamic consumer environment. While demand is relatively resilient, we recognize that consumers are continuing to prioritize value with about 47% of global shoppers now considered value seekers. Shoppers are switching to private label options, opting for value packs or sizing down to smaller pack sizes at lower price points. To appeal to this value-seeking population, consumer brands and retailers are investing in their product quality and value perception, leveraging price-pack architecture and novel pack designs while also focusing on selling through value-oriented channels. Consumer preference for store brands continues to grow, creating meaningful opportunities for our retail partners to enhance their private label strategies and drive sustainable packaging solutions. Recently, we partnered with one of the world's largest retailers to produce packaging for its private label butter using our PaceSetter Rainier recycled paperboard. This is a great example of how we are helping our customers address consumer preferences for more sustainable packaging. By replacing bleached paperboard with a 100% recycled alternative the large retailer is making measurable progress towards its sustainability objectives without sacrificing print quality. The private label butter is expected to reach store shelves in the coming weeks and we are proud to support that journey. Our customers are also looking to drive volume growth and gain market share. We continue to see customers selectively upgrade to our premium packaging solutions as our innovative, differentiated designs allow their products to stand out and win on the shelf. We recently partnered with Keurig Dr Pepper to create a premium package for their Coffee Collective launch. They wanted a premium unboxing experience for consumers to match the elevated coffee blends. We created a custom two-piece box set utilizing our unbleached paperboard for stiffness and applied matte and gloss coatings and foil stamping to enhance the look of the carton and differentiate it on the shelf. This example highlights our innovation, operational capabilities, and commitments to helping customers achieve their goals. In addition to CPG customers, QSR brands are increasing promotional activity and limited time offers in an effort to drive foot traffic and bring consumers back into the restaurants. We are supporting a number of our QSR customers across multiple geographies in these initiatives. My experience leading and growing CPG companies and their brands will supplement and strengthen the team efforts to be an even stronger partner to our customers. We are supporting our customers' pursuit of meeting consumers where they are in order to grow volume and expand market share. There are many ways we partner with our customers to successfully elevate their brands. Customers rely on us to lead with innovation and accelerate their adoption to more sustainable packaging solutions preferred by consumers. A broader understanding of customer economics and their decision-making processes will enable our team to better anticipate customer needs and leverage insights to drive the commercial and innovation engine. Graphic Packaging has a unique ability to partner more effectively on pack design, brand architecture and growth, and we are actively strengthening partnerships, taking a proactive commercial strategy and having conversations with top CPGs, QSRs and retailers around the globe. We continued to build on our strengths and had an exceptional quarter driving packaging innovation. We filed 13 new patents, adding to our portfolio of approximately 3,100 patents. Looking ahead, we remain committed to growth of intellectual property and extending our competitive advantage in serving customers. Our capabilities in sustainable packaging are truly differentiated and position the company for continued leadership. Graphic Packaging is seen as the premier sustainable packaging partner by the brands we serve. We are differentiated with our scale and capabilities, superior innovation and technical expertise and talented people. With a broad portfolio and a strong innovation engine, we are partnering with customers to bring even more innovative products to life. From our childproof laundry pod box to our double wall cups that have retained heat and cold, to our produce packs for fruit and vegetables. Our addressable paperboard packaging market opportunity is an estimated $15 billion with roughly 85% of it plastic-to-paper packaging conversion, representing opportunities we have solutions for right now. Over time, we anticipate regulatory, retailer, consumer and NGO scrutiny on the use of single-use plastics and foam packaging to increase. With the continued customer focus and innovation and an evolving regulatory environment, this market opportunity is expected to grow and will be an area of differentiation for us. We recently commercialized an innovation in partnership with a health-focused emerging brand. We are supporting their transition from plastic to a more sustainable paperboard multipack to better align the packaging with their environmentally conscious consumer base. We developed a custom carton solution for the 10-pack SKU and seasonal formats. The structure optimizes in-store merchandising. The plastic back-to-box transition is available today on shelves at leading retailers. As customers increase commitments and their desire to move to more sustainable packaging, they often evaluate solutions that move away from plastic or greatly reduce its usage. These packaging transitions to paperboard alternatives can increase brand equity without compromising product performance or shelf life. We are proud to help these advancements and for the recognition we have received for our leadership and support of customers on their sustainability journey. In January 2026, two of our solutions earned WorldStar Best of the Best Awards. PaperSeal Shape deployed with leading European retailers delivers roughly an 80% reduction in plastic per tray while maintaining full shelf life performance and runs on existing customer lines. Our Produce Pack PET tray was also recognized for replacing PET with renewable recyclable paperboard, eliminating more than 17 million plastic trays annually in a single retail application. In addition, Enviro Club Duo received an Award of Distinction at the PAC Global Awards for sustainable packaging design, reflecting our continued ability to replace plastic while preserving functionality and shelf appeal. This award was one of eight PAC Global Awards we received. From an operational standpoint, this quarter was marked by a number of wins. At Waco, we continue to make meaningful progress ramping production. Commercial performance is meeting expectations, and we are ahead of plan with customer qualifications. This positions us to better penetrate new geographies and more efficiently support existing geographies while taking advantage of available recovered fiber streams in our Texas triangle. In parallel, we are completing our cogeneration plant projects, strengthening power supply assurance while helping to advance our customers' sustainability goals. We expect Waco to be a durable competitive advantage for us over time. We are excited to help prepare our customers for promotions through the 100 days of summer and large events including the upcoming World Cup. Twenty-four brands across our food and beverage customer base are running promotions for the World Cup and our customers are planning for increased demand from spectators in advance. For large global events like these, customers rely on a consistent, trusted partner who can deliver to time-sensitive deadlines and execute critical graphic changes. We are prepared to provide the excellent customer service Graphic Packaging is known for. We also took a significant step forward in our renewable energy strategy, finalizing a virtual power purchase agreement with NextEra Energy Resources. This agreement increases renewable electricity coverage across our North American operations and supports disciplined execution against our long-term emission targets. The 250-megawatt solar energy plant in West Texas is expected to begin commercial operations at the end of 2027. This agreement better positions us to support our customers, the world's leading consumer brands, in making progress towards their sustainability goals. We continue to build an award-winning culture and be recognized for our values in the way we do business. In March, we were recognized as one of the world's most ethical companies by Ethisphere. This recognition alongside our placement on the 2026 ranking of America's Most Just Companies and Fortune World's Most Admired Companies shows that others recognize the values our people put into action every day. Finally, as we build on our strong foundation, we are also strengthening our team with highly selective new hires to ensure that we have the right talent and leadership roles as we drive performance across our business. As I mentioned at the start of the call, I'm excited that Melanie Skijus has rejoined Graphic Packaging to lead Investor Relations. Additionally, we recently appointed Randy Miller to serve as Vice President of Treasury and Capital Finance. Randy will lead global treasury with a focus on cash flow generation and capital structure optimization. We just announced that Daniel Fishbein will join as General Counsel in June. Daniel brings more than two decades of legal experience having spent his career as a corporate attorney focusing on strategic transactions, corporate governance and securities law matters. He most recently served as Executive Vice President and General Counsel of Corpay, where he oversaw the company's global legal and regulatory function. These leadership appointments and talent upgrades support our priorities. Starting with our commitment to enhancing shareholder value. We aim to deliver greater returns for shareholders by harnessing the significant cash-generative business we operate with our immediate priority to reduce leverage and strengthen the balance sheet while continuing to return capital to our shareholders through our established dividends. Our progress gives me confidence in our strong market position and the many expansion opportunities ahead. Our first priority is to strengthen the balance sheet. We are utilizing our strong capabilities to drive sustained growth through a robust proactive commercial strategy and commitment to innovation. You can expect future investment in growth to be more disciplined and focused on the highest-return opportunities. Looking ahead, we have an opportunity to reduce our operational complexity and improve accountability by focusing on driving profitability and business excellence, including the ramp-up of Waco. We expect to reduce our capital spend to 5% of sales or less and reduce our inventory from 20.5% at the end of 2025 to between 17% to 18% of sales this year toward our long-term goal of 15% to 16% of sales. We will also continue to innovate and develop world-class products for our customers. We remain on track to generate $700 million to $800 million of adjusted free cash flow in 2026. Moving forward, I am encouraged by the opportunity to grow alongside our customers and partner with them to achieve their goals. We are uniquely positioned with our broad product portfolio, strong innovation engine and integrated network — we are on offense. Now I will turn it over to Chuck to provide more details on our financials.

Charles Lischer, Senior Vice President and Interim Chief Financial Officer

Thank you, Robbert, and good morning, everyone. I'm pleased with our performance in the first quarter, including the strengthening of packaging volumes we experienced as we progressed through the quarter. Total volumes were up 1% from the same period in 2025. Top line growth and higher packaging volumes are a direct result of the resilience of our business, the markets we serve and the execution of our team. Sales increased 2% year-over-year to $2.2 billion, driven by the volume increase and a $50 million benefit from favorable foreign exchange, partially offsetting these gains, price experienced a decline of 2% in the quarter. The pricing decline reflects third-party index changes in bleached paperboard that occurred in the fourth quarter of 2025 along with the continuation of unusual competitive packaging pricing experienced in the last few quarters of 2025. Innovation sales growth was $42 million in the quarter, reflecting the strength of our innovation pipeline, continued strong partnerships and engagement with customers. Adjusted EBITDA in the first quarter was $232 million, including a $6 million foreign exchange benefit. This represents a $133 million decline from the first quarter of 2025. Price, volume and mix combined were a $46 million headwind and again were a result of the unusual competitive price environment. Commodity input and operating cost inflation of approximately $37 million was roughly $10 million higher than we were expecting. Unfavorable net performance in the quarter of $56 million was driven by several factors. Severe weather in January across the Central and Eastern United States and the domestic disturbances in Mexico during the quarter caused an approximately $25 million impact from disruption and downtime in our facilities. In addition, heavier scheduled maintenance in the quarter and our decision to curtail production to reduce inventories resulted in additional costs of $20 million each as compared to the year-ago period. Robbert discussed we are executing cost reduction and efficiency initiatives, which drove about $10 million of savings in the quarter. And though these savings were offset in the quarter by the factors mentioned, we will swing to positive overall contribution to earnings from net performance later in the year. Adjusted EPS in the first quarter was $0.09 and included a higher tax rate due to the vesting of employee equity awards during the quarter. We still expect the full-year tax rate to be approximately 25%. In line with historical seasonality of cash flow and working capital, first quarter adjusted cash flow was a negative $183 million which is an improvement of $259 million from the first quarter of 2025. First quarter adjusted cash flow results included heavier capital spending than we expect for the rest of the year, attributed to the work to complete our recycled paperboard mill in Waco, Texas. We ended the quarter with $5.6 billion of net debt and net leverage of 4.4x. As Robbert alluded to, our environment remains dynamic with geopolitical uncertainty and inflation impacting the business. During the quarter, we experienced incremental commodity cost inflation resulting from the conflict in Iran which increased our logistics, energy and resin spend. With energy, we're about 60% hedged for both natural gas purchased in North America and electricity purchased in Europe and have commodity cost recovery mechanisms embedded in many of our contracts. However, these recovery mechanisms can experience lags due to contractual terms. We are proactively addressing the inflation and working on initiatives to offset it. On April 9, we announced a $60 per ton price increase for bleached cup stock effective May 8. While this price increase will be realized in Q2 for non-index-based paperboard sales, most of our affected contracts require price recognition by the industry's third-party index, RISI, before we can pass it through our packaging business. Looking ahead to the second quarter: from a volume standpoint, our expectation for Q2 is consistent with our full-year range of down 1% to up 1%. We see pricing similar to Q1 and expect foreign exchange to be a slight benefit. With adjusted EBITDA, we anticipate certain commodity costs to stay elevated in Q2 before moderating towards the end of the year. Accordingly, we estimate a sequential $10 million incremental inflationary impact in the second quarter versus the first quarter totaling $30 million of incremental inflation in the first half of 2026 compared to our original expectations. Q2 adjusted EBITDA is now expected to be in the range of $230 million to $250 million. We are reaffirming 2026 guidance. Many initiatives that we laid out today in addition to the contractual recovery mechanisms to be realized in the second half of the year and our pricing actions are expected to help offset the incremental inflationary impacts throughout the remainder of the year. As a result of these efforts, we remain confident in our ability to deliver 2026 adjusted EBITDA in the range of $1.05 billion to $1.25 billion, in line with our prior guidance. Our 2026 adjusted free cash flow outlook remains unchanged in the range of $700 million to $800 million, a significant step-up from 2025. Cash flow generation is back-end weighted, consistent with the seasonality of our business, timing of capital expenditures and timing of inflationary cost recovery. We intend to pay down approximately $500 million of debt in 2026 and remain committed to our dividend. We understand that our dividend is important to many of our shareholders and also reflects the confidence that we have in the future cash flows of the business. Capital expenditures in 2026 are expected to be approximately $450 million. As a result of our completed 90-day review, we identified certain projects and investments that no longer align with our operational priorities, so we canceled them. One of these projects, the automated roll warehouses at Texarkana and Kalamazoo, resulted in a one-time primarily noncash write-off of approximately $40 million. Importantly, this decision avoids approximately $200 million of capital spending over the next few years and is a prudent move given the project no longer yields the original return thresholds since we will be operating with less inventory. In conclusion, we are moving out of a heavy investment cycle to a cash harvesting cycle. This is an exciting and much anticipated phase. The past few years have been characterized as building years with capital investments and acquisitions made to differentiate our packaging and service offerings in the marketplace and position the company for long-term growth. Now we are focused on optimizing our footprint and operations, executing disciplined capital allocation, expanding profitability in the business and, to my prior point, delivering the free cash flow we committed to. 2026 will be a foundational year for Graphic Packaging, and we are excited about what our future holds. With that, I will turn it back to Robbert.

Robbert Rietbroek, President and Chief Executive Officer

Thank you, Chuck. To conclude, we see a clear line of sight to long-term value creation, supported by the value we are generating from our near-term strategic priorities. Our confidence is grounded not in aspiration, but in a clear path to execution and operational excellence. We look forward to taking your questions and continued engagement to hear your perspectives as we continue to enhance and streamline the business. Let me take this opportunity to thank our dedicated team around the world for their hard work in delivering a strong start to 2026. With that, operator, let's open it up for questions.

Operator, Operator

Operator Instructions: Our first question today is from Ghansham Panjabi with Baird. ue we are generating from our near-term strategic priorities. Our confidence is grounded not in aspiration, but in a clear path to execution and operational excellence. We look forward to taking your questions and continued engagement to hear your perspectives as we continue to enhance and streamline the business. Let me take this opportunity to thank our dedicated team around the world for their hard work in delivering a strong start to 2026. With that, operator, let's open it up for questions.

Ghansham Panjabi, Analyst (Baird)

First off, welcome back, Melanie, we look forward to working with you. I guess first off, on the heat map on Slide 5, can you touch on if you're actually seeing any sort of inflection in food or just easy comparisons from several quarters of just minimal growth? Just trying to get a sense as to what you're seeing in that market, specifically to that category, which has been weak for several years at this point? And then second, as it relates to the realigned commercial teams, can you just give us a bit more insight into what's going on there?

Robbert Rietbroek, President and Chief Executive Officer

Yes. Thank you, Ghansham, and thanks for welcoming Melanie back. We're very happy to have her back. With regards to your first question on food, let me just reflect on the macro environment for a second, and I'll zoom in on food. What we're hearing from our customers continues to be a focus on growth, gaining share and investing in product quality that specifically applies to food and value perception, pack size and pricing promotions, and there is an increased emphasis across the categories on price-pack architecture as well as novel pack designs and obviously a localized, reliable supply chain. The consumer environment of which food is a part remains very value-driven, and there is a focus on affordability. We are seeing stable demand signals, Ghansham, with certain pockets of strength and we're seeing select growth across larger customers and key segments, particularly in what we call everyday essentials. So food is performing rather well with strength, particularly in protein-driven categories like yogurt, bars, refrigerated meals, and that really reflects underlying consumption trends. If you look at some of the other categories like Health & Beauty, that's performing well as consumers continue to prioritize small indulgences like skin care and perfume; beverages is stable, and foodservice was a little slow due to the weather and consumer affordability trends but is expected to gain momentum throughout the year. So that's how we see food as part of the broader macro environment. With regards to the realigned commercial organization, we are seeing a big need to serve our customers better both at the national level and, in some cases, at the international level where we see more and more procurement teams centralized in locations like Switzerland or the Netherlands or even Ireland. We are organized now in a way where we can serve both the global procurement organizations of our large CPG customers as well as domestic customers with a slightly enhanced organization. And we feel very good about the leadership we put in place under Jean-Francois Roche who is really doing a great job in getting me in front of customers as well. I've met six global customers across different geographies in the first quarter and in the last month as well. And that's really given me a good perspective on how our commercial organization is now organized and how well we are serving customers.

Ghansham Panjabi, Analyst (Baird)

Okay. And then just for my follow-up question. On the EBITDA reconciliation in the press release, what is the $71 million add-back specific to the first quarter of '26, just quite a bit higher than the first quarter of last year. And then just to clarify, as it relates to the commodity cost comment, are you expecting a sequential moderation in commodity costs? Is that what you're assuming in that $30 million incremental impact in the first half? And what would that number be comparable in the second half?

Charles Lischer, Senior Vice President and Interim Chief Financial Officer

Yes, Ghansham, this is Chuck. I'll take those. So on what we have in the special charges bucket, I mentioned in the prepared remarks the $40 million from the automated roll warehouse write-off. So that was the biggest component of it. We also had severance from the actions that we took that we talked about in the quarter — that's about $20 million. And then for the Croatia business that we're divesting, we had about a $13 million write-off of assets, and that's primarily for intangibles that we had acquired with the AR Packaging acquisition. So those components are the majority of what you see in the quarter. On the inflation, yes, what we called out is $10 million of incremental inflation in Q1 and $10 million incremental to that in Q2, so for a total of $30 million versus our original expectations in the first half. And then at this point, we see about the same number, about $60 million to $65 million of incremental inflation for the full year. That environment, of course, remains very fluid and dynamic, so changes every day. But what you see us doing is pulling several levers to offset that inflation. We talked about on the call the contractual recoveries and pass-throughs, and that will account for about one-third of it. I talked about the cup stock price increase, and then we're further evaluating some packaging price increases. And then as Robbert mentioned, we're looking at other cost savings and procurement initiatives to provide a further buffer. So with all of those offsets, we're confident that we can neutralize the inflationary impact that we see.

Operator, Operator

Our next question is coming from Mark Weintraub with Seaport Research.

Mark Weintraub, Analyst (Seaport Research)

Chuck, just a point of confusion for me. So that $71 million, that was on adjusted EBITDA. Was the warehouse and Croatia not noncash write-downs primarily? Or maybe if you could just clarify for us?

Charles Lischer, Senior Vice President and Interim Chief Financial Officer

Yes, it's primarily noncash, but just in the add-back to get to the adjusted number, of course an all-in EBITDA includes those noncash charges before you adjust for them.

Mark Weintraub, Analyst (Seaport Research)

Okay. And then second, and I know you were kind of answering this in Ghansham's question as well. So basically, you have about $200 million of improvement in the second half of the year versus the first half of the year. If you'd be willing, would you kind of share in terms of the way you provide those buckets — volume, price — the big drivers, where the majority of that $200 million would show up?

Charles Lischer, Senior Vice President and Interim Chief Financial Officer

Yes, happy to do that. So broadly, we see the year playing out similar to what we laid out in the original year-end call other than the inflationary impact that I already talked about. But if you look at first half to second half, as you mentioned, there's a step-up second half versus first half. Think about a few things. First of all, our first half includes several unfavorable items as we talked about — the January weather that caused facilities downtime that we don't expect to recur in the second half. Second, our first half has a larger unfavorable impact from several items, including scheduled higher maintenance and then also the market downtime that we're taking to lower inventory levels is higher in the first half. And then finally, the second half has a bigger impact from some of the positive items that we're seeing. For example, we mentioned the contractual cost recoveries, the packaging price initiatives and some of the procurement and other cost savings initiatives. So several moving parts. But of course, with our current expectations for inflation, we are confident that we'll be able to hit our full-year EBITDA guidance.

Mark Weintraub, Analyst (Seaport Research)

Okay. Super. Any chance getting a little bit more granular? I think you talked about weather being $25 million in the first quarter. I think on the last quarter's call, you roughly said downtime would be about $50 million — inventory-related downtime about $50 million lower. Are those numbers about right? And then so if we're kind of left with like $125 million in the drivers you were providing, just round numbers to where they might come from, it's not exact, but trying to get a bit more granular.

Charles Lischer, Senior Vice President and Interim Chief Financial Officer

Yes. I'll just give you a couple more nuggets and then we can talk more offline. The phasing of the cost savings that we called out — $10 million in Q1 — will pick up a little bit in Q2, but then the majority of that will be back-end loaded. You mentioned the downtime. That, of course, is something that we'll be taking more market downtime in the first half than the second half. So we can work through it more offline.

Operator, Operator

Our next question is coming from Hillary Cacanando with Deutsche Bank.

Hillary Cacanando, Analyst (Deutsche Bank)

So just the breakdown that you were talking about to get to your guidance. Last quarter, you actually had guided to a $100 million incentive compensation impact for 2026, and I didn't see that in today's presentation. Is that included anywhere and maybe in net performance in the first quarter? And what type — what phasing should we expect for incentive compensation through the year?

Charles Lischer, Senior Vice President and Interim Chief Financial Officer

Yes, that's all included within the original numbers that we had expected and all included in what we've reported, so we didn't talk about it again. It is a year-over-year factor in performance.

Hillary Cacanando, Analyst (Deutsche Bank)

It's all included in the first quarter. So you're not expecting any additional incentive comp this year for the remainder of the year?

Charles Lischer, Senior Vice President and Interim Chief Financial Officer

Of course, it will roll throughout the year. It's the Q1 impact that we had expected recorded in Q1.

Hillary Cacanando, Analyst (Deutsche Bank)

Okay. And then how much should we expect for the remainder of the year?

Charles Lischer, Senior Vice President and Interim Chief Financial Officer

Again, we embedded about the $100 million in our full-year guide.

Hillary Cacanando, Analyst (Deutsche Bank)

Okay. Got it. And then just on pricing, I know you had asked for a price increase. Does that have to go through RISI? Or is it pretty fast? Is it just between you and the customer? Or is RISI involved in determining the final number or timing? Like what will the lag be in terms of whether there will actually be an increase?

Charles Lischer, Senior Vice President and Interim Chief Financial Officer

Yes, a couple of components to our price. Specifically, what I talked about in the prepared remarks was an increase in cup stock paperboard price, and that is something that will impact our open market business more quickly than it would pass through our foodservice packaging business. That will be once RISI recognizes it and then whatever the contractual period is before it starts getting reflected. And so that is on that side. Then on the other packaging price increases, those would go into effect in our roughly $1 billion of revenue that we have that's not under direct pricing contract.

Operator, Operator

Our next question is coming from Arun Viswanathan with RBC Capital Markets.

Arun Viswanathan, Analyst (RBC Capital Markets)

I guess maybe I can just clarify the walk on free cash flow. So it looks like you kind of harvested some amount of working capital and inventory. But does that maybe reverse as you take some downtime? And then maybe next year also, would you have to kind of rebuild those inventories? And do you expect less contribution from working capital? Related to that point, just kind of curious if you still expect kind of an $80 million uplift from Waco and is that being offset by maybe some downtime at Kalamazoo?

Charles Lischer, Senior Vice President and Interim Chief Financial Officer

Yes. So I'll start with the last part. First of all, on Waco, what we're seeing there is the business case for Waco is indeed playing out in terms of the variable cost benefits. We have recommitted to the specific benefits number because until we're able to cover the fixed cost with the volume, that's when you'll see the additional impact of the fixed cost. But as Robbert talked about on the call, the operations are running well. The ramp-up is going well and everything overall is going very well. And in terms of the first part of your question, inventory will not be rebuilt next year. As Robbert mentioned, we expect to get to 17% to 18% of inventory as a percentage of sales this year on our way towards our longer-term target of 15% to 16%. So we will continue to see some working capital benefit in next year from lower inventory. And then also 2027, if you think about 2027's cash flow, that will continue to benefit from lower cash taxes and then, of course, lower interest expense. So some of the items will come back. And then as we talked about at the year-end call, we still see the post-2027 free cash flow number of $700 million plus.

Arun Viswanathan, Analyst (RBC Capital Markets)

And then if I could ask on supply/demand. So obviously, there's been some changes in SBS. Our understanding is that may not necessarily have the impact to reduce supply enough to get pricing power. Would you agree with that? And are you still kind of facing some pricing headwinds in SBS? And is that weighing on CRB and unbleached as well? Maybe you can just comment on potential pricing across the different substrates to cover inflation.

Robbert Rietbroek, President and Chief Executive Officer

Yes. Let me take that question. With regards to the paperboard grades, the two grades that really matter most to us are recycled and unbleached because that's what we primarily use. And both of those markets are in good balance. With regards to the cross-category dynamics, we're not necessarily seeing a lot of impact of bleached on recycled with regards to cannibalization. So we're not seeing recycled lose volume to bleached, but it does have to respond to price competition. Switching is rare. And with our new PaceSetter Rainier grade, that matches bleached printability but it's 100% recycled and cheaper to make. We continue to believe that PaceSetter Rainier will take volume from bleached over time. And when it comes to the balancing of supply and demand, I just want to remind you that we closed Tama, Iowa, which was a CRB mill in 2023. We decommissioned our K3 machine in Kalamazoo in 2023, and we closed Middletown, Ohio, which was a CRB mill in 2025. Then we closed East Angus in Quebec in 2025 and 2026, and we sold the Augusta mill, as you know. So bleached continues to be oversupplied, but accounts for the smallest part of our business. And we have been very proactive in our approach to supply whilst others have added capacity. What we do here is we actively match our internal supply with our demand profile, and that's supported by our integrated system and our portfolio as a result is structurally advantaged.

Operator, Operator

Our next question is coming from Anthony Pettinari with Citi.

Anthony Pettinari, Analyst (Citi)

Just following up on Hillary's question. If you look at your total tonnage, is it possible to say what percentage is on a RISI index versus like a custom contract? Maybe what the lag is in terms of price increases if it's realized in RISI versus a custom index and then how much of your volumes would be covered by that cup stock price increase that you talked about earlier?

Charles Lischer, Senior Vice President and Interim Chief Financial Officer

Yes, this is Chuck. I'll take that. So in our bleach business, we have more of our packaging tied to RISI than we do in our other models. And so the majority of our packaging volume that is cup stock is tied to RISI. That's for the cupstock business — a couple of hundred thousand tons — and generally would be recognized in price three to six months after it's recognized by RISI depending on the timing during the quarter that it is recognized by RISI.

Robbert Rietbroek, President and Chief Executive Officer

We don't disclose exact details around the percentage of our contracts that are tied to RISI, but Chuck did refer to the roughly $1 billion of noncontractual sales, and we do have a cupstock business as well where we sell a big part of that on the external market. So that should answer your question.

Anthony Pettinari, Analyst (Citi)

Got it. And then fiber is up, diesel is up. You've indicated that you're not seeing big cannibalization of SBS into CRB. I mean, obviously, you can't talk about forward pricing, but can you talk about your philosophy on pricing? Do you expect Graphic Packaging to be a price leader? How do you think about it? We've seen price improvement in other containerboard or graphic paper grades this year. Can you talk about how you think about pricing generally?

Robbert Rietbroek, President and Chief Executive Officer

The majority of our business is converted to finished product packaging, and the majority of that is either recycled or unbleached. So we are not necessarily spending our entire day thinking about paperboard pricing. We continue to focus on customer service, operating excellence and taking share and growing our business by delivering better finished products. That is how we think about pricing.

Operator, Operator

Our next question is coming from Phil Ng with Jefferies.

Philip Ng, Analyst (Jefferies)

Robbert, I appreciate the 90-day post review, volumes are up, so that's great. You got some headwinds this year that you are going to work through, but it sounds like destocking inventory could potentially still be a drag when we think about 2027. So with some of the levers that you may have a better appreciation of now, is there a path where you could grow EBITDA next year with prices going higher? I just want to think through that because, obviously, it's a big earnings reset this year.

Robbert Rietbroek, President and Chief Executive Officer

Yes. Thank you for raising the 90-day review. I just want to give a little bit of color on that and then I'll talk a little bit about how it's all going to impact EBITDA. We have concluded that review and confirmed that we have a strong foundation and an opportunity to drive better financial and operational performance as we talked. We've taken out 500 roles from the organization. As Chuck talked about, that's going to primarily impact the second half of this year. We are advancing some of these capital efficiency initiatives where we're prioritizing higher-return opportunities. We've reorganized the commercial team. We've deployed AI. So we are very confident that the work we're doing is going to allow us to deliver on the cost reduction commitment that we have, which is $60 million. Now there is some inflation, as you know, we have mitigation actions in place which include contractual cost recovery mechanisms; those have some timing lags. There are targeted price actions in the noncontractual business that we just discussed. And then we just announced a recent price increase on cup stock and, primarily, cost reductions and operational efficiency actions. With that and the fact that we're taking obviously an EBITDA hit this year to reduce our inventory and we are resetting the base because we're reinvesting in incentives for our associates, that's the walk that Chuck talked us through. We will continue to rely on productivity and category growth and share growth to drive top line and therefore EBITDA.

Philip Ng, Analyst (Jefferies)

Okay. So it sounds like you feel like you got enough levers to grow next year from an EBITDA standpoint, Robbert? Just quickly summarize...

Robbert Rietbroek, President and Chief Executive Officer

We're not providing guidance for next year at this point. It's early in 2026. Give us a couple of months to get a better understanding, but we're doing all the right things and the right work to set ourselves up for a strong 2027.

Philip Ng, Analyst (Jefferies)

Fair enough. A question for Chuck. Your guidance you reiterated, which is encouraging. Certainly, you're seeing some inflation here. Does that guidance embed the RISI cup stock move? And then some of the packaging price increases that are not tied to RISI — is it embedded that you get price? I asked because in your prepared remarks, you mentioned you've seen some unusual price declines in packaging prices. Have you seen that component stabilize in the last few months?

Charles Lischer, Senior Vice President and Interim Chief Financial Officer

A couple of things there. So we don't embed anticipated RISI moves until they are announced. And so any impact from RISI would not be reflected until it is announced. We will embed what we see in the open market business, of course. From time to time, we would have packaging price actions, but right now, we're still working through exactly the size of all of that, and so we'll embed that as we go. What we see is customers increasingly value supply assurance due to geopolitical uncertainty, and our integrated model sells well to them. It certainly gives us the opportunity to address negative trends or to introduce the idea of a packaging price.

Operator, Operator

Our final question today will be coming from Gabe Hajde with Wells Fargo Securities.

Gabe Hajde, Analyst (Wells Fargo Securities)

Robbert, I'm curious if we can go back to the cup stock announcement. I find it interesting that in the slide you gave us, it's the one category that decelerated, it was pretty strong over the last two quarters. So I guess is there something unique about that supply-demand dynamic in cup stock that would afford you all or the industry to get price? Or maybe something unique about the input cost structure that makes it such that you can recover costs faster than maybe some of the other two grades you participate in?

Robbert Rietbroek, President and Chief Executive Officer

Yes. There is a higher input cost for cup stock, of course. Cup stock is barrier coated with resin, and so there's an impact when you see resin prices increase. So yes, a higher input cost. Historically, cup stock has been a strong grade for us and has seen tighter dynamics.

Gabe Hajde, Analyst (Wells Fargo Securities)

Okay. And then as you have conversations with your customers, as you are trying to reduce inventories, maybe they were looking around the corner at oil above $100 and might anticipate some price increases. Do your sales folks see any prebuying activity that happened into the summer? And then one last one on CapEx. It sounds like the entire $200 million that you called out is specifically associated with those two automated warehouse projects. I remember there were some greenhouse gas initiatives later in the decade, and it seems pretty hard right now to get some projects still on the drawing board. Can you comment?

Robbert Rietbroek, President and Chief Executive Officer

We haven't really seen a lot of stocking in Q1 as a result of anticipated price increases. We are having a lot of conversations with our customers regarding supply assurance, which is primarily related to having multiple sites producing their packaging so that they're not relying on one site in case of a natural disaster, more so than anything related to oil and gas right now. As Chuck said, customers value our integrated business model. Customers want value, they want to balance costs, they want the best performance especially in our beverage sector where you need certain properties in the packaging, they want sustainability, and more recently there is more discussion on assurance of supply. They are focused on cost and are looking for ways to optimize packaging formats, reduce material usage and improve cost. Those are most of the things we're seeing, Gabe.

Charles Lischer, Senior Vice President and Interim Chief Financial Officer

And then Gabe, I'll build on the CapEx point. The $200 million that we called out was related to those two automated roll warehouse projects specifically, but that $200 million was over the next several years — not primarily this year. The $450 million is the capital spend number we originally guided to for this year and we've gone in and shored up our path to get there. We'll continue to look for opportunities to cut further where prudent.

Robbert Rietbroek, President and Chief Executive Officer

With regards to capital, we are implementing a very rigorous and disciplined capital spend review and approval process. We will be evaluating and prioritizing investments that promote safety and fulfill regulatory obligations. We will continue to consider investments that enhance cost efficiency and generate the right returns for our portfolio. There are a number of projects in the future that we are currently evaluating, including the ones you are referring to.

Operator, Operator

Ladies and gentlemen, this does conclude today's Q&A session and also our call. You may disconnect your lines at this time. Have a wonderful day, and we thank you all for your participation.