Graphic Packaging Holding CompanyGPKNYSE
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Operator: Good morning, and welcome to the Graphic Packaging Third Quarter 2025 Earnings Call. [Operator Instructions] 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.
Mark Connelly: 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.
Michael Doss: 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 our 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 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 as 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 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 that 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 paperboards 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 [indiscernible]. 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 concerned. 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 own 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 is mixed at best and recycling rates are low. As our customers look for better functionality and greater consumer appeal, we have developed a family of paperboard punnets, including open, top seal and clamshell designs that use up to 95% less plastic and are recyclable in most existing programs. On this slide, we highlight our 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 handpacked 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 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. And 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. And we have far greater control over our ability to generate free cash flow than we did a year ago. While competitors are restructuring spending and lately making short-term deals that don't generate cost of capital returns, Graphic Packaging continues to focus on delivering results for our customers and our stockholders. We have everything we need, and the next 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.
Operator: [Operator Instructions] And the first question today is coming from Ghansham Panjabi from Baird.
Ghansham Panjabi: 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?
Stephen Scherger: 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.
Michael Doss: 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.
Stephen Scherger: Okay. And then in terms of -- with all the dynamics that are occurring, do you still feel confident with the Waco EBITDA contribution specific to next year? Or does that depend on some of the dynamics in the marketplace that are taking place at this point?
Michael Doss: No, thank you for that. Look, I'm very confident in Waco's ramp-up in delivering the $80 million that we talked about. And obviously, there's another $80 million behind that. By way of reminder, the first $100 million of that -- those savings was really a function of the mill closures, Middletown, which was closed at the end of May, as you know, and now we formally announced our East Angus facility in Quebec will close by year-end. So that's all in line. Relative to the total impact of that in 2026, we have to see kind of what the volumes look like as we go into 2026. I mean if volumes are largely flat year-on-year, that's a different outcome than when they're down 2%. So if they're down a little bit next year, then we will need to look at our Kalamazoo K1 machine, and we'll run that in a way that allows us to optimize operating our K2 machine in Kalamazoo, which is our most efficient and Waco, which will be our most efficient paperboard manufacturing facility. And if we do need to toggle a little bit, we can take some downtime on our K1 machine, and we're able to do that at a very reasonable cost.
Operator: Your next question is coming from George Staphos from BofA.
George Staphos: Appreciate the details. Also want to make a quick shout out to Steve. Really important drivers, as you mentioned, Mike, of what Graphics become the last 10 years and really thank -- want to thank him for all the support he's had given us all on this phone, both in terms of our industry research and our research on graphics. So Steve, thanks so much. In terms of my questions, you mentioned, Mike, the opportunity perhaps to further improve productivity and the like. And that's my phrasing, not necessarily yours. What opportunity do you think you have? How important is that in terms of Waco and the commercial opportunities and to some degree, the commercial challenges now that you're facing in the market to getting to that $80 million plus? How much of that additional cost reduction, SG&A and so on is required? Or would it be additive? And then I had a follow-on.
Michael Doss: I think the big part of that, my confidence in the $80 million on the Waco ramp-up for '26 is very high, George. I mean the facility, as I said in my prepared comments, has come up a little faster than we even expected. We're very happy with what we see so far. So that's there. I think the bigger question is around our visibility and what the end-use markets are doing as we head into 2026. And as I said in my prepared comments, what we're really going to focus in on the things that we can control. So we've got some unusual competitive activity going on right now, as I mentioned, around bleached paperboard. We don't necessarily control that. We don't necessarily control what the overall volumetric performance of our customers are. They're working very heavily on that. You hear and read about the things they're trying to do to get their businesses going in the right direction. So we're obviously cheering for them. But in the meantime, we've got a number of levers that we can pull to really make sure that we operate the business as efficiently and effectively as possible. And those kind of in order are -- first thing is CapEx is going to revert back to a more normalized level to 5% or below. That's going to generate in excess of $350 million of free cash flow just by that. And ultimately, even though, as you well know, we've got a very low cost structure here, we're looking at every cost, SG&A and plant costs that really allow us to make sure that we don't impact customer service levels -- but given some of the realities we've got going on in the market, we've got to challenge all those things. And we're doing that stuff internally here. So we'll continue to do that. And ultimately, taking a look at our inventory situation, you've seen we've released -- had a capital release so far this year of about $30 million. We expect upwards of another $20 million here in Q4. And as we go into next year, that will be another area we're really looking at hard because with Waco and Kalamazoo online, if you think about it, we now have 5 very well-capitalized paperboard manufacturing facilities. And that gives us a unique perspective to be able to look at our overall system, look at our supply chains, take a step back and really make sure that we're challenging kind of where we're at and what we can do. So those are the levers that we really have in our control. That's how I'm thinking about it. As I mentioned to Ghansham, if we need to take a -- to manage our supply and demand on our coated recycled paperboard as Waco really ramps up quick, we can toggle our K1 machine. We're able to do that and we're able to do it cost effectively.
George Staphos: My other question, just more of an end market question. So foodservice, I think from the chart was one of the end markets that wasn't doing as well for you in the quarter. Foodservice has been kind of an interesting market from our observations, right? You've had fast casual not doing so well, but quick service has been picking up some steam. What kind of trends were you seeing into the fourth quarter? And to the extent the customers can know and you can share, you might be limited in either ability, what do you think -- ability to talk about it, what do you think is the outlook for foodservice there? And if that picks up, it's actually a relatively higher-margin end market for you?
Michael Doss: Thanks for that question. I think the -- you said it well. I mean the fast casual is definitely under pressure. I mean, last week, you had Chipotle release. I won't go through all the comments, but the CEO really talked about the 25- to 35-year-old consumer, unemployment levels being higher, disposable income being lower. And in his words, that was driving them back into the grocery store. And again, I think that's a worthwhile comment to make, and I bring it up because, as you know, we've built our portfolio to move with the consumer. So if that shift happens, given we're in every aisle of the grocery store, we actually are okay. We do see that trend around more of the QSR impact, which makes sense given the price points of QSR versus fast casual, and we're there. And we also think that we've got a number of innovation ideas that we're working with those customers that ultimately will allow us to continue to earn a place at the table and grow our volumes. So that's how we're thinking about that dynamic.
George Staphos: Do you think it grows, Mike, next year, I guess, just to draw a bow on it or tie a bow on it?
Michael Doss: 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.
Operator: Your next question is coming from Matt Roberts from Raymond James.
Matthew Roberts: 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.
Michael Doss: Yes. Thanks, Matt. So I'm going to address the SBS, CRB, CUK comments. We've had a fair amount of inbound in 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 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. And 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. And what I'll tell you is that the CapEx requirements of a virgin paperboard manufacturing facility are 4x what they are coated recycled paperboard facility. That is, again, part of the decision we made when we invested so heavy in Kalamazoo and in Waco because of that phenomenon. So over the medium to long term, we're highly confident that we can continue to not only protect our share but win share from bleached because the cost of capital returns start to get in the way there. And ultimately, that's something that needs to find its own level. There's -- I think 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, 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. So hopefully, that gives you a little bit of color on how we're thinking about it.
Matthew Roberts: 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?
Michael Doss: Yes. It's -- we're looking at all that as you'd expect, and we'll dial that in next time we talk to you, we'll give you a little bit clear view into kind of what that looks like for 2026, obviously. But it's a good question and something we're looking at all the time. But what I'm very confident is the $350 million of inflection that will occur year-on-year.
Operator: Your next question is coming from Charlie Muir-Sands from BNP.
Charlie Muir-Sands: 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.
Michael Doss: 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 onetime 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.
Charlie Muir-Sands: 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?
Michael Doss: Yes. Thanks for that. So I'm going to address the question around Rainier first, and then I'll cover the leverage. Listen, on Rainier, it's a great product. And one of the great things we have is we've got the most modern cleaning systems in both Kalamazoo and in Waco that give us tremendous competitive advantage over anybody else in the North American market. We've got curtain coaters on all 3 of our paper machines that give us the ability to really have brightness that approaches bleached paperboard levels. Now Rainier is actually used -- it's one of the tools we're using to make sure we don't lose any share as we're competing against the SBS guys. Now ultimately, that does have some margin impact. The pricing we would expect to get is a little lower, as you would appreciate because they're lowering their packaged prices to compete with CRB. So that's something we have to work our way through, but we have the levers to pull and we have the capabilities to do it. So I really am happy that we've got that great in our portfolio of mix. And relative to year-end leverage, yes, we've got a range of 3.5 to 3.7 for year-end numbers in terms of overall debt. That's really a function of a little bit of reduced EBITDA number, as you can imagine, and the fact that we wanted to be opportunistic to buy back some shares this year given the dislocation. We talked to our Board about that and given the ultimate inflection of free cash flow that will happen here in 2026, that made sense to do. And as I said in my prepared comments, as we go into 2026 with that free cash flow, we'll be looking to delever as well as return cash to shareholders in a way that makes sense and drives long-term shareholder value.
Mark Connelly: 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.
Operator: Your next question is coming from Gabe Hajde from Wells Fargo.
Gabe Hajde: 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?
Michael Doss: Mark, why don't you handle that question, if you would?
Stephen Scherger: Yes, Mark -- we'll let Mark handle it. This is Steve. The question is around AR finance, accounts receivable financing. There won't be any material changes year-over-year relative to that in terms of the expectations of where we would be at the end of '25 versus '26. That's not really an enabler for cash flow in '26. As Mike mentioned in his comments, the '26 cash flow enablement is really about reduced CapEx, reduced inventory levels, also some managing of SG&A costs. Those are going to be the levers that will be pulled to drive cash flow, that confidence in the $700 million to $800 million. So it won't be around -- it won't be about accounts receivable programs being materially different. And just to clarify, Gabe, CapEx this year running $850 million, $450 million next year. So that delta is $400 million cash flow inflection.
Gabe Hajde: Okay. And then unfortunately, I feel like there's still some confusion around the start-up costs, the $65 million to $75 million. Can you give us a little bit more specificity around if that's capitalized interest costs, if those are kind of, I'll call them, wasted tons, but rolling test tons off and recycling them through. And if I heard you right, Mike, there's $65 million to $75 million this year, and that reduces down to $35 million next year, so for a net positive of $30 million. And again, is that -- is that the same as the $80 million that we're talking about in terms of contribution from the investment?
Michael Doss: Okay. So there's a number of things to unpack there. The $80 million EBITDA run rate. So that's on the EBITDA line into next year. The $65 million to $75 million, and this is -- we've talked about this a number of quarters now, are the onetime costs, cash costs associated with the start-up of the machine. Charlie's question was what's the phasing of that? Of that $65 million to $75 million, 2/3 of that in this year, 1/3 of it is in next year. And I'm going to ask Chuck Lischer to give a little bit of detail on the breakdown of that just high-level buckets so that you kind of understand what we're talking about there, Gabe.
Charles Lischer: 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.
Gabe Hajde: Okay. Or in Q4?
Charles Lischer: Well, a little bit -- potentially a little bit in Q4 as the asset came in service during Q4. And there's a little bit of continued spend, but -- and then just regular capitalized interest. But for the primary Waco asset, then that would cease.
Operator: Your next question is coming from Arun Viswanathan from RBC.
Arun Viswanathan: 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?
Michael Doss: 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. And 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. And the way we're going to deal with that, as I mentioned to George earlier, is we'll toggle between running our K2 machine in Kalamazoo, which is the new one we just operated now for the last 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. And of course, we'll be working quickly to make sure that we fill that out. A lot of it depends on kind of our customers' volumetric performance, as I mentioned earlier, if they're able to get back to at least flat volumes in 2026, that's a big deal for us because our innovation has consistently added close to 2% of volume. And so that's really how to think about Waco and how we're planning for '26 and beyond.
Arun Viswanathan: Okay. Just on the markets then, it sounds like beverage was a little bit weaker in Q3 and foodservice was as well. Do you expect that to continue to remain weak as you move into Q4 and '26? And maybe you can also comment on some of the other markets, food and household and health and beauty. I guess -- and have you seen any change in innovation sales in those markets? We've been hearing anecdotally that there may be some trade down amongst the consumer packaging companies into traditional substrates, maybe a little bit less willingness to assess the waters with some new innovation-led products. I don't know if that's what you're hearing as well, but maybe you can just comment on what you're seeing on that side.
Michael Doss: 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. And 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. And I said that in my prepared remarks, given some of the things that they're doing to manage their balance sheets and production schedules around the holidays and so on and so forth. So that's part of why we're being a little bit deliberate in calling that out. As we head into 2026, 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 [indiscernible] itself in volumetric performance as we head into 2026, for sure.
Mark Connelly: I would just add a couple of things -- Arun, I'd just add a couple of things. This is Mark. In the beverage market, typically, you see promotion activity in the fourth quarter, but we also saw some changes in production schedules by our customers, sometimes taking downtime around the July 4 -- that didn't happen to all of our customers this year. Some of that may happen in the fourth quarter. So that adds a little bit of variability. We're also certainly in the food business, continuing to see a lot of unevenness, customers moving from one category to another to try to save money and not so much destocking by the food suppliers, but strategic stocking, as Steve -- as Mike mentioned, in terms of trying to get their year-end numbers and cash where they want it. So a lot of unusual behavior, but no real change in any of the trends.
Arun Viswanathan: 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?
Mark Connelly: Yes, that's exactly right.
Operator: Your next question is coming from Mark Weintraub from Seaport Research.
Mark Weintraub: 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?
Michael Doss: Yes, Mark, I'm not going to call that out. I mean it's going to be -- as you can think about it, though, we put it into service here in October. It's a 12- to 18-month ramp. So that's pretty quick -- coming up.
Mark Weintraub: For sure. And so let's say we were to assume it's 400,000 to say something. So I guess what I'm just trying to think through is that East Angus is 100,000 tons. Middletown, I think a little less than 200,000, but was down for about half the year, correct me if I'm wrong. So we're talking about like 200,000 tons of replacement board effectively. And so I just -- is the rest because you're bringing down inventory this year? Or maybe if you can just kind of walk through the math on where the Waco tons, what they fill in for? And/or is there a little bit of growth that does just to kind of to meet the full production that you're expecting to have from Waco next year? And that would be super helpful.
Michael Doss: 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 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 funds 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.
Mark Weintraub: Okay. And I fully appreciate that once everything is reset, we should be at the target levels of profitability. I'm just trying to make sure that I fully understand the transition period though, as we go hopefully into kind of a better 2027 demand environment, et cetera, and everything is sort of kicking into gear. And I guess I'm a little -- I just want to clarify because implicit in what you're saying, and I don't mean to be oppositional anyway here, but implicit in what you're saying is that you basically have gotten a lot of the business from the other capacity that was shut. And I'm not -- or is there something I'm missing? Is it -- again, is it that inventory reduction, which you're doing this year, and therefore, you're not doing it next year. And so that's why -- because those would be pretty big numbers. So just trying to fully understand.
Michael Doss: 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.
Operator: Your next question is coming from Mike Roxland from Truist Securities.
Michael Roxland: 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 of 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?
Michael Doss: 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.
Michael Roxland: So -- I'm sorry, go ahead.
Charles Lischer: This is Chuck Lischer. I was just going to add that this is one of the areas that I've dug into over the last few weeks, and I share Mike's high level of confidence in this area. He mentioned the levers. We know what they are. We're going to pull them. In addition to that, cash -- federal cash taxes are going to be very favorable for us next year, near zero. And so we know what the levers are. We're ready to pull them, and we have a high level of confidence in the number.
Michael Roxland: 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.
Michael Doss: We're going to have to take that bridging offline, Michael. Let's do that. Again, I'm focused. And 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.
Michael Roxland: No problem. One quick follow-up. I know we're running out of time here. Just in terms of the 550,000 tons for Waco, I mean, how comfortable are you bringing on that full amount of capacity over the next 12 to 18 months in a market that's depressed? Or are you assuming that we're not going to be in the same place 12 months from now? And so just -- it's a lot of capacity. I understand on a net basis, it's 75,000 tons, I get that. But the market itself, as you pointed out, your competitors are acting irrationally. How would you -- I mean, do you intend to bring this the 550,000 tons in 18 months? Or do you have flexibility to basically push that out further if SBS folding cards does not improve materially in the near term?
Michael Doss: We're going to ramp Waco as fast as we can. It's our lowest cost, highest quality mill along with our K2 machine in Kalamazoo. And as I've mentioned a number of times here now, if I need to match my supply and our demand, we'll do it on our K1 machine. So I want to bring it on as fast as we can. It's a great facility. It's going to allow us to compete in markets that, quite frankly, we haven't been able to compete in before. And it's going to help us deal with some of that behavior by some of the bleached board producers in a way that allows us to protect our industry-leading margins. So you want us to do that. It really makes sense to do so. Look, you'd love to bring a brand-new machine on like we brought the K2 machine on -- into a really snug market. But you make a decision, it takes a number of years, in our case, 2.5 years to bring it on. This is what we've got. And we've got a lot of levers to pull and our confidence level is high to deliver the free cash flow next year. And that's really what our focus is.
Operator: Next question is coming from Anojja Shah from UBS.
Anojja Shah: 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?
Michael Doss: Look, from my standpoint, it's really 2 things in our priorities. It's delevering our balance sheet, which we've talked about as well as returning cash to shareholders. That's our focus.
Operator: That was all the time we have for questions. I would now like to pass the floor back to Mike Doss for closing remarks.
Michael Doss: 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.
Operator: 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.