Graphic Packaging Holding Company (GPK) Q2 2026 Earnings Report, Transcript and Summary

Greetings. Welcome to the Graphic Packaging Holding Company's Second Quarter 2026 Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Melanie Skijus, Vice President, Investor Relations. You may begin.

Good morning. Thank you for joining Graphic Packaging's Second 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 second 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.

Thank you, Melanie, and good morning, everyone. Our second quarter performance reflects the disciplined execution of our global teams and the resilience of our business model. In a consumer environment that remains challenged and uneven, we delivered results that were in line to modestly above expectations. Our competitive advantages continue to set us apart, including the strength of our diversified portfolio, the breadth of our capabilities, our industry-leading assets and global integrated packaging network and our long-standing partnerships with the world's leading brands, QSRs and retailers. For the quarter, net sales were $2.2 billion. Adjusted EBITDA was $247 million, adjusted EPS was $0.14 and adjusted cash flow was $138 million. Volumes were steady year-over-year despite the impact of higher gas prices on consumer consumption behavior. Importantly, adjusted EBITDA landed at the top of our guidance range with margins expanding sequentially to 11.3%, a direct reflection of stronger cost discipline, operational improvements and agility in the organization we have been building throughout the year. These actions are generating meaningful savings that help us navigate the current inflationary environment with confidence. Adjusted cash flow showed strong improvement from the prior year period, increasing $55 million. Across our end markets, we continued to see strength in food and health and beauty. Outperformance in the Food segment was driven by steady demand for center of the store staples where dry cereal, pasta and snack bars remain affordable choices for value-focused consumers. Within our international business, dry tea sales experienced growth, benefiting from continued consumer interest in wellness-oriented trends. Ready-made grocery meals grew across our domestic and international markets, offering convenience-driven consumers a more affordable alternative to quick service restaurants. The strength of demand for these products despite being priced at a premium to center aisle staples, demonstrates the value consumers place on quick, high-quality meal options. Consumers view these ready-to-eat meals as a premium experience where the value proposition extends beyond the product itself to the time saved on meal preparation, cooking and cleanup. Health and Beauty also remained a bright spot. This business, largely internationally driven for us today, experienced continued strength in the quarter with higher demand for premium personal care products. Strength in food and health and beauty segments was offset by declines in Household and Foodservice, with many consumers delaying purchases of discretionary household goods and shifting their consumption preferences to more meals at home. Our Household segment remained soft as purchases of facial tissue, laundry detergents, food wrapping and storage were pushed out. Pet food was an exception within the segment, and we achieved year-over-year growth for the second consecutive quarter. Whether supporting premium categories like protein, fresh produce and personal care or value-oriented staples like dry mixes, rice and pasta, our competitive cost position, global scale and technical capabilities enable us to work effectively with customers across the full spectrum of consumer demand. Importantly, we are refining and enhancing our approach to capture sustained growth in the marketplace, directing our focus towards opportunities where Graphic Packaging is best suited to win long term, aligning our growth strategy with our operating footprint. We are in the process of conducting a comprehensive market study that will deliver insights to shape our strategy as we strengthen our leadership position. The coordinated effort across our company is designed to ensure future investments, both time and resources are concentrated on the highest growth and highest return markets where we can leverage our competitive advantages and help our customers win in the market. As we continue to advance this work, we are confident it will improve our alignment between strategy, investments and market opportunity. These important insights will help guide our long-term growth priorities. We look forward to sharing additional details on our strategic plans later this year. We have accomplished a great deal so far in 2026. The significant progress achieved in our near-term strategic priorities is encouraging and demonstrates our resolve to build a stronger business. Our near-term priorities include: first, capturing organic growth while providing exceptional customer service; second, driving profitability improvements through cost initiatives, operational efficiencies and select pricing actions. Third, optimizing operations, footprint and portfolio mix to better focus on core competencies. Fourth is a focus on increasing free cash flow generation, supported by inventory rationalization initiatives and capital spending discipline. And finally, utilizing this increased free cash flow to pay down debt and return capital to shareholders. On the cost side, tangible actions have been implemented to improve our cost structure and streamline our processes. With heightened inflation now projected upwards of $150 million for the year, we focused on productivity improvement and cost reduction initiatives. Our hard work is paying off with in-year cost savings now reaching roughly $85 million, which will come through COGS and SG&A lines. These savings are additive to our continuous improvement programs our teams pursue on an annual basis as part of normal business. Following 2 years of suppressed cash flow generation in the business, we have committed to delivering a significant increase in adjusted cash flow in 2026. We are unlocking cash in the business through working capital efficiency improvements and disciplined spending measures, supplementing the cash available from operations that in recent years has been tied up in a substantial capital spend cycle. In the first half of the year, we reduced inventory by approximately $75 million and lowered capital expenditures by roughly $320 million compared to the first half of 2025. Since the beginning of the year, we have emphasized a more disciplined approach to capital allocation, and I am pleased with the progress we have already made in reshaping our approach to project prioritization and capital spend approval. We're tracking better than original capital reduction targets and now expect capital expenditures below $450 million in 2026. While we continue to make meaningful progress on our working capital initiatives, a portion of the inventory reduction originally targeted for 2026 is now expected to be realized in 2027. This timing shift is primarily related to inventory impacts from an elongated maintenance cycle put in place in 2025. Chuck will elaborate further on this in his remarks. Given higher-than-anticipated inflation this year and its impact to adjusted EBITDA, along with unfavorable inventory impacts from maintenance timing in unbleached, adjusted cash flow for 2026 is now projected in the range of $600 million to $700 million. The midpoint at $650 million represents a significant increase from $169 million in 2025 and a use of cash in 2024 of $27 million. We are confident we have the right initiatives in place and the breadth of scope to deliver improved profitability and cash flow generation. Increased discipline in spending and the concerted push by our teams towards greater operational efficiencies will result in higher EBITDA to cash flow conversion rates in the future. Our transformation agenda is focused on the optimization of our operational footprint. During the quarter, we completed the divestiture of our facility in Croatia, and we recently announced the proposed closure of our Lebanon, Tennessee facility, which would consolidate volumes across fewer facilities. Additionally, in alignment with regulatory and consultation requirements, we are evaluating a potential closure of our facility in Winsford, U.K. These strategic decisions simplify our footprint and improve cost efficiency, while proceeds from divestitures will be used to reduce debt. Commercially, we are elevating how we partner with customers. Packaging has become a strategic lever for brands, influencing sustainability outcomes, operational flexibility and consumer choice. Our teams are working closely with procurement, sustainability and executives across our CPGs, QSRs and retailers to help them navigate shifting consumer preferences and execute winning price pack architectures. Over the past decade, the consumer packaging industry has experienced meaningful and accelerated transformation. We have seen notable variations of packaging formats in response to changing consumer trends, consumption behaviors and a broad realization that packaging is a differentiator on the shelf. Packaging drives consumer choice. It also accommodates the entire range of price point preferences. In Graphic, we optimize packaging formats and execute winning price pack architectures for customers. Our functional and attractive packaging solutions elevate brand appeal of customers with graphics and other design elements. As we shared last quarter, our commercial teams are energized, spending time with customers and strengthening partnerships. Recent packaging wins highlight our capabilities and strong service delivery. We are proud to support Polar Beverages with our mini can multipacks. Mini cans have gained popularity in the market and are aligned with increased preferences for smaller portion sizes and less food waste. The 10-pack mini can solution showcases our ability to help customers adapt packaging architecture to evolving consumer preferences. As we partner with customers to navigate changing consumer behaviors, we support their time lines and desire to bring differentiated products to market quickly and effectively. A notable promotional collaboration with Heineken launched during the second quarter. Our team worked closely with the Heineken team to develop a highly differentiated promotional package for the UEFA Champions League in the South African market. The leading beer brand required a quick 6-week turnaround time for the promotion launch. Partnering closely with the customer, we created a unique carton shaped like a soccer ball. It featured a commemorative glass and 8 bottles of beer. Our commercial innovation delivered both premium shelf presence and durable product protection and was a big success in the market. Our commitment to customer service and ability to hit rapid turn deadlines showcase to Heineken why we are the partner of choice. During the quarter, we were also proud to support promotions and packaging in celebration of the World Cup with 24 of our customers. Our commitment to innovation remains central to long-term growth. In the quarter, we filed 24 new patents, strengthening our portfolio of over 3,000 issued patents worldwide. Patents filed in the second quarter were primarily comprised of new packaging features in tray technology and Foodservice as well as enhancements to our packaging machine technology. Our unique portfolio of intellectual property, combined with our long history in packaging innovation provides the tools to address a rapidly evolving regulatory environment. Over the last decade, innovation and demand for more sustainable consumer packaging solutions have remained constant priorities for global CPG and Foodservice companies. Additionally, new restrictions on single-use plastics and growing concerns around micro plastics are gaining momentum. We are both confident in and excited by the growth opportunities in front of us as regulatory tailwinds and ongoing enhancements in recycling and collection infrastructure strengthen our competitive position and increase demand for innovative paperboard-based packaging solutions. Consumer and market studies reflect global preferences that fuel support of the ongoing paperization trends in packaging. A recent GlobalData study of more than 22,000 consumers across 42 countries found that 73% view recyclable packaging as either essential or desirable, reinforcing growth in demand for paperboard-based solutions. Preferences of global consumers are driving the adoption to more sustainable packaging alternatives. It has been encouraging to see broad-based infrastructure improvements beginning to take shape. Advancements, including cup collection and recycling and expanded residential access and updated industry specifications reinforce the attractive long-term positioning and circularity benefits of our recycled paperboard platform. Approximately 20% of the U.S. population has access to residential recycling for both single and double-sided paper cups today. This is a significant increase from 11% access in 2022 and only 5% access in 2017. With a substantial increase in collections that have occurred in less than 10 years' time, we expect momentum will continue. 35 North American mills now accept paper cups, including both our Waco and Kalamazoo facilities, expanding the opportunities to recover and recycle valuable fiber into new packaging. This follows last year's move by the Recycled Materials Association, which officially added paper cups to the inbound residential single stream and dual stream material specifications. These positive industry developments are enabling our mills and the broader industry to accelerate collection programs and recover valuable fiber. In Foodservice, we most recently partnered with a leading Southern inspired QSR chain to support its conversion from plastic to paper cups for cold drinks. The new cup is currently being rolled out to all stores across the U.S. The move to paper cups advances the customers' sustainability objectives and increases its use of renewable materials in packaging. We are proud to help customers transition from plastic to paper and to advance recycling and circularity education in the communities we serve. We are actively doing this through RENEW, our social impact program. During the second quarter, we were honored to receive the Asahi Global Supplier Co-Creation Award, recognizing Graphic Packaging as a preferred innovation partner. In addition, we received 7 gold medals across multiple categories at Pride In Print in New Zealand. These achievements reinforce the strength of our world-class innovation platform and our ability to deliver differentiated solutions for leading global customers. Operationally, our teams continue to execute with discipline. We are driving structural cost improvements, realigning our workforce and maximizing productivity across functions. Our recycled paperboard system, consisting of Waco and Kalamazoo locations in the Southern and Midwest United States will continue to ramp toward full capacity over time. Following our PaceSetter Ridgeline launch announcement last month, we are engaged with existing and new customers and focused on successful ramps in demand for both coated and uncoated recycled grades. Waco's flexibility of production positions us to serve both consumer and industrial applications while improving profitability across our recycled system. The launch reflects our pragmatic entrepreneurial approach to unlocking new sources of demand and maximizing performance of our industry-leading assets. We have identified an addressable URB market of more than 1 million tons across folding carton, lamination and other applications that we can serve immediately. This new incremental demand represents over 100,000 ton opportunity for us over time. Our Waco facility is capable of producing to industry specifications today with no incremental capital required. Expanding into uncoated recycled paperboard broadens our offering, opens doors with new customers and improves utilization and profitability across our recycled platform. It is another example of the agility and execution capabilities that differentiate us. Separately, in the second quarter, we released our 2025 Impact Report, highlighting continued progress we are making on commitments that matter to our customers, our employees and our communities as well as areas where we need to continue our investment. A central theme of the impact report is our partnerships with customers and the support we provide to meet their recyclability and waste reduction goals. Our paperboard-based solutions and ability to provide packaging, that is both functional and a more sustainable option to plastic reinforces our role as a partner of choice. I'm pleased to report our 2025 safety metrics came in better than paperboard and packaging industry averages. Safety is a cornerstone of our culture. We will continue to be unwavering in our commitment to the safety of our employees, and we'll invest accordingly in the resources, training and capabilities to maintain a safe and responsible working environment. As I reflect on the quarter, I'm excited by the strength of our foundation and the enthusiasm we continue to hear from customers about our differentiated capabilities. Looking ahead, we remain focused on deepening customer engagement, elevating our commercial and operational execution improving profitability and maintaining disciplined capital allocation. This strategic reset will position Graphic Packaging for its next phase of growth and long-term value creation. With that, I'll turn it over to Chuck.

Thank you, Robbert, and good morning, everyone. Our performance in the second quarter highlights the resilience of our portfolio and disciplined execution of cost and productivity initiatives to offset higher inflation in the quarter. The momentum we have with cost reduction and productivity initiatives, along with the pricing improvement that I'll discuss, gives us confidence that we'll see margin improvement in the business going forward. Net sales decreased 1% year-over-year to $2.2 billion. Unfavorable pricing impacted sales by $27 million or 1% as last year's third-party change on bleached paperboard flowed through the business, along with more competitive packaging pricing. Volume/mix was flat or down $2 million and foreign exchange and other was favorable by $13 million. Innovation sales growth added $40 million in the quarter, reflecting our strong customer partnerships and their continued interest in innovative, sustainable paperboard packaging. Innovation sales spanned multiple packaging formats and new innovations with customers were evenly distributed across Americas and international. In Americas, innovation was led by strength solutions and cups and containers, while International experienced growth in multipacks and food trays and bowls. Adjusted EBITDA in the second quarter was $247 million, down $89 million from the same quarter in 2025. This decline was largely due to $60 million of commodity input and operating cost inflation, which is $10 million more than we expected at the beginning of the quarter. Inflation was broad-based across logistics, resins, labor, secondary fiber and chemicals. Combined price, volume and mix accounted for a $35 million headwind. Positively, net performance was a favorable $9 million in the quarter and foreign exchange had an unfavorable impact of $3 million. Adjusted EBITDA margin was 11.3%, an increase of 50 basis points from the first quarter. Positive net performance in the quarter was a result of strong operational productivity and cost management. Performance included approximately $25 million of savings from our cost reduction and productivity initiatives and $6 million in lower mill maintenance outage expenses versus the year ago period. This was partially offset by ongoing inventory reduction initiatives through downtime. Adjusted EPS in the second quarter was $0.14, including a tax rate benefit in the quarter relating to a $6 million release of reserves for uncertain tax positions. We continue to expect the full year tax rate to be approximately 25%. Second quarter adjusted cash flow was $138 million, an increase of $55 million from the second quarter a year ago. We expect increases in cash flow in the second half of the year over first half, consistent with the historical seasonality of our working capital and cash flow. During the quarter, we reduced net debt by $100 million, ending with $5.5 billion of net debt and net leverage of 4.7x. In July, we were pleased to see third-party recognition of our $60 per ton price increase for bleached cup stock and $40 per ton for bleached folding carton. The contractual flow-through of these changes will have an approximately $5 million positive impact on 2026 results with the majority of the improvements in price coming through our business in 2027. 2026 pricing will also be favorably impacted by other commodity input cost recovery mechanisms embedded in our contracts. Given the continued inflation we are experiencing, we are also taking pricing actions on the approximately $1 billion of our revenue where pricing is not determined by a contract. Altogether, we expect positive pricing momentum to favorably impact 2026 full year sales and EBITDA by approximately $60 million with fourth quarter benefiting more than third quarter. Pricing actions implemented and recognized will yield an annual run rate of approximately $145 million. We recently announced an additional price increase for both bleached cup stock and folding carton. And yesterday, we announced an increase in the price of recycled paperboard and our second increase on unbleached paperboard. Looking ahead to the rest of the year, we are tracking to achieve full year net sales at the high end of our guidance range, primarily related to the favorable pricing actions. From a volume standpoint, our expectation for full year and the third quarter is consistent with our previous range of down 1% to an increase of 1% year-over-year. We expect the foreign exchange and other bucket to be unfavorable by approximately $20 million in each of the third and fourth quarters. We are seeing a broadening of inflation across other categories such as coatings, adhesives and other materials used in our mills and packaging plants and now anticipate inflation and operating input costs to stay elevated in the second half of this year versus our prior expectations for a moderating trend. Accordingly, we now estimate incremental input cost inflation for the full year totaling approximately $150 million versus our previous estimate of $60 million to $65 million. As mentioned earlier, we drove better-than-expected savings from our cost reduction and efficiency initiatives in the quarter and now expect to deliver approximately $85 million in 2026 versus our previous expectations of $60 million. We now expect full year adjusted EBITDA to be at the low end of our guidance range of $1.05 billion to $1.25 billion, primarily related to the higher-than-expected and prolonged inflation. In terms of the improvement that we see in the second half versus the first half of 2026, we expect the incremental inflation in the second half to be mostly offset by the pricing improvements that I discussed and an improved mix of the business. We do not anticipate a repeat of the downtime caused by the weather that we experienced in the first quarter and expect lower cost of maintenance outages. As discussed earlier, our cost savings will also deliver more benefit in the second half, and we expect other operational and cost improvements. We expect Q3 adjusted EBITDA will be in the range of $280 million to $300 million. Third quarter tax rate is expected to be modestly higher than the full year tax rate. We have updated our full year cash flow outlook to a range of $600 million to $700 million. This change is a result of updated expectations for full year adjusted EBITDA and headwinds to our stated inventory reduction goals for 2026. As Robbert alluded to in his remarks, some of the inventory optimization we had projected for 2026 has been pushed into 2027, and we now expect inventory to be between 18% to 19% of sales. The largest driver of the change is in unbleached paperboard where a combination of the timing of a mill maintenance cycle put in place in 2025 and other production issues resulted in inefficiencies, higher operating costs and challenges with board supply during the 2026 beverage season. We now expect to end the year with relatively higher inventory. While a headwind to cash flow, the buffer inventory will ensure supply-demand mismatches do not recur and that we maintain exceptional customer service. We now expect capital expenditures to be below $450 million following the comprehensive review of our investment plans. As a reminder, cash flow generation is back-end weighted, consistent with the seasonality of our business, timing of capital expenditures, pricing and inflationary cost recoveries. Interest expense is now expected to be approximately $275 million. And as a result, we have revised our adjusted EPS range of $0.65 to $0.90. We are focused on the continued reduction of debt and intend to pay down between $400 million to $500 million of debt in 2026. Accordingly net leverage is expected to be approximately 4.6x at year-end. To summarize, we are gaining positive momentum that will benefit our financial results. The actions we are taking to drive disciplined organic growth, expand profitability with pricing actions and productivity will generate improved free cash flow and result in long-term value creation. 2026 is an important year in our journey as we strengthen the business and position Graphic Packaging for sustainable growth and margin improvement. I will now turn the call back to Robbert.

Thank you, Chuck. We are confident in our future and the long-term strategy in development that will drive sustainable value creation for shareholders. While the macro environment remains dynamic, we are concentrating on items within our control. We are executing with discipline, strengthening customer relationships, driving structural cost reductions, and improving the balance sheet. We are positioned to capture greater upside as market conditions improve. I want to thank our employees around the world for their continued dedication, commitment and outstanding execution. Their efforts are the foundation of our accomplishments this quarter and give me great confidence in the opportunities ahead. With that, operator, let's open the line for questions.

[Operator Instructions] Your first question for today is from Anthony Pettinari with Citi.

You indicated that Waco is ready to produce URB. I'm wondering if your full year guidance assumes any URB sales in '26? And if so, how much? And then just kind of any thoughts on how that business could ramp into '27?

Yes. Anthony, thank you for your question. It does assume a modest, a small amount. We have our first orders in a couple of thousand tons, and we have qualified URB for several other customers, and we're waiting for more orders. URB allows us to enter a large and attractive market. We have an immediate addressable opportunity in folding carton laminations and related applications, such as edge protection, folding carton applications, slip sheets, dividers, laminations. And we've just launched PaceSetter Ridgeline, which is made from 100% recycled fiber. And we do believe there is some meaningful growth potential. We're estimating that to be 100,000 tons or above for the company, supported by both internal demand because we also use URB as a company and incremental external market opportunities. So we see strong interest from the customer. It's early days. Our engagement and qualification efforts are progressing well. And the market receptivity is really supported by very tight industry supply conditions and also lamination qualifications that are expected to conclude in the fall. So as I said, we have a couple of thousand tons of orders filled so far. And it is a natural extension of our recycled platform. We have available capacity, and we have the operational flexibility to serve both CRB and URB. And this will help our production mix at Waco. It will be driven by market demand, return optimization and allows us to balance service levels for the existing CRB customers and capture the growth in URB.

Okay. That's very helpful. And then just shifting gears, I think in inflation expectations, you said we're going from $60 million to $150 million. I'm just wondering if you're assuming any further inflation in OCC and/or freight? Or do you just kind of assume those levels hold flat through year-end?

Yes. This is Chuck. I'll take that. So overall, the way we approach our inflation forecast is, of course, we look at published indexes, forward curves and other market pricing. And so that is -- we do look at all of that. As we talked about in Q1 and looked at inflation in Q1, we had expected more of a moderating based on those trends. And now we expect inflation to stay higher for the rest of the year. So the silver lining in all that is, of course, the surety of supply conversations that have now started with our customers, and they're much more receptive to pricing. But they do see the inflation that we're seeing, and that's in the areas of logistics, converting materials, secondary fiber, and that's all items that are easily visible in the industry.

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

I was hoping to maybe just get a little bit more clarity on the pricing, which you went through pretty quickly. Chuck, I think you referenced $145 million at one point, if I heard correctly. Could you reexplain what that was and how this all breaks down and really trying to get a little -- trying to understand what's included for this year and sort of what our starting point going into next year would be if we just take into account what you're expecting to have in place through the balance of this year?

Yes. So the $145 million is really just the annualized view of the $60 million that we expect to see in 2026. So that includes a few things. That includes the recognized $40 a ton on bleached folding carton, the $60 a ton on cup stock, the contractual price recoveries and then the $1 billion of business that we have where pricing is not determined by a contract. So that's the flow-through of all of that. As I mentioned, we have other pricing in the marketplace, and that's all embedded within the forecast, the outlook, and that's in the $145 million. We have other pricing in the marketplace, as I went through in the prepared remarks. And that -- if all of that were recognized, that would be over $200 million of additional annualized. But based on timing of likely recognition, not expected to have a significant impact on 2026.

Super. So basically, if I understand correctly, so we got basically all the actions in place, $60 million this year, so then another $85 million essentially would show up in next year to get us to the $145 million. And then you have this new set of increases, which, if successful, would be additive to the tune of up to $200 million on an annualized basis.

Yes, you got it. Exactly.

Okay. Great. That's very helpful. And maybe just if I could on this. So certainly, we've heard others in the market out there on SBS. Can you -- are you to your knowledge, the first on the -- and actually on URB as well. But are you the first and only right now to your knowledge on the CUK and on CRB?

On recycled, we just went out yesterday, and I haven't heard that anyone else is out yet. And on the majority of unbleached, yes, we were the first out with that as well. There was -- the uncoated unbleached was -- somebody was out with that previously. But the majority of the unbleached were the first out with that as well for the second round.

Your next question for today is from Detlef Winckelmann with JPMorgan.

Maybe just a follow-up just to make sure I understand. I got the impression that some of the production curtailments had potentially been moved from 2026 into 2027. Firstly, did I understand that and I hear that correctly? And then kind of secondly, on that, can you quantify that?

Yes. So yes, Detlef, this is Chuck. I'll take that. The -- I think the way to think about it is we adjusted our inventory expectations and so -- and then the downtime expectations as well. The downtime expectations, we now expect to be around $90 million for the full year. And -- but the inventory expectations, we also adjusted as a result of the unbleached issues that we talked about where the planned maintenance was in the quarter and then also the January weather impact and the other operational issues that are causing us to take a different strategy towards unbleached at the end of 2026. So a couple of things really going on in the inventory guide, but the downtime is lowered to about $90 million for the full year.

Your next question is from Ghansham Panjabi with Baird.

Robbert, as you look out to the back half of this year, do you anticipate any change in how your customers are approaching their focus on price versus volume, just given the step-up in inflation year-to-date with energy costs and pretty much everything else? I know you maintained your volume outlook for the year, but just in terms of conversations with customers, do you sense any change coming?

Yes, Ghansham, let me give you a high-level customer, and then I'd like to, if you're okay with that, go into quickly into subcategory level. With regards to the overall, we do see the overarching theme remains a strong focus on driving volume and share recovery for the branded players given the private label growth. The secondary theme though, that we are starting to see is pricing to offset higher commodity inflation in the second half of '26 and into 2027. And our customers continue to simultaneously invest in promotions to drive traffic and share. But we do see a focus shifting a little bit from volume growth to profitable growth. What we heard, and I want to refer to a couple of the calls that were just done earnings calls, we heard a very strategic intent to return categories to volume growth, moving from heavy investment in value price points to a focus on innovation-driven mix for the next 12 months. From one of the largest F&B players, we heard leveraging a sophisticated price pack architecture to balance must-buy promotional frequency with a variety of pack sizes as well from another one. So it's a little bit of a combination. Now when you go to the category level, we do see pretty stable demand signals with some pockets of strength. We're seeing select growth across large customers in key segments and particularly in the center of store staples. So Food, Health and Beauty remain growth drivers. We saw a pretty resilient demand for value-oriented staples like cereal, pasta, rice and snack bars. We saw strength in ready-made meals, and we saw strength in premium personal care products. We also saw some growth in the international markets. We saw that with dry tea and premium health and beauty categories, and we see a continued wellness and personal care trend. We also see challenges. Household remains challenged. Foodservice remains challenged as consumers shift more consumption towards meals prepared at home. And then one of the bright spots was pet food. We saw a year-over-year growth for the second consecutive quarter despite some softness across other household categories.

Okay. Great. And then, Chuck, I'm sorry if I missed this, but what are you now assuming for working capital benefit in 2026 relative to your revised free cash flow?

Yes. That's helping us bridge to get to the current cash flow range. So the cash flow is, of course, negatively impacted by the EBITDA driven by the inflation and then also the lower inventory, but we are working other working capital initiatives around payment terms and around receivables to be able to offset that.

Your next question is from Gabe Hajde with Wells Fargo.

I'm curious, as you look at the URB opportunity, I don't know, from a margin perspective or maybe EBITDA per ton, can you talk about maybe what that looks like? Our math maybe suggests something in the $200 to $225 a ton range, but just curious how you guys are looking at it? And then any sort of early read on potential, I guess, impacts from the new distribution partner that one of your peers has for recycled board in North America?

Yes. Let me take those one at a time, if you're okay with that. And Gabe, thanks again for inviting us to your conference. We had a great time. With regards to the margin expectations, we believe that our incremental demand for uncoated recycled board and the rising utilization at the Waco mill will result in higher EBITDA overall. It will drive better margins and faster returns on the investment, and it will drive stronger margins for the recycled platform overall. So really, what it is about is balancing the system to maximize profits. And when you look at the decision we made to get into URB again, remember, we used to make URB at Middletown. The decision really reflects a pragmatic approach to accelerate value creation through flexibility. The flexing between the production of these grades will allow us to maximize both earnings and cash flow as well. And we maintain the long-term value of the asset. The production of CRB and URB are very straightforward, and we have a long-standing experience making URB at Middletown. So we can do both, and it will drive profitability at the system level. It's very low on CapEx. For what we're doing right now, there was no material CapEx required for these folding carton trials. And over time, we could probably expand to other applications like tubes and cores that would require some capital investment. Now with regards to the additional volume coming into the market, we tend not to comment on competitors, but this is existing volume that's been in the market, that's just looking for a new distribution channel. We don't think it's going to affect the market in a major way.

Okay. And then Slide 4, the one thing that kind of jumps out at me was I would have expected Foodservice in the second quarter of '26 to be pretty strong given the on-premise trends that we saw with World Cup. I understand Household, but that was the one that was -- that went more negative. I don't know if there's some -- if this is related to the CUK issue, I don't think it should be. And then maybe just sort of expectations for the second half in Foodservice specifically.

Yes. It's an excellent question. We had hoped for a stronger quarter in Foodservice overall for the industry. We do see a shift back to meals prepared at home that tends to be driven by inflation and overall pressure on the wallet. And as we look forward, customers, we believe, will continue to run promotions in Foodservice and limited time offers to drive volume. And there is this consumer affordability element to the QSR space. And so the way we look at it is we have to play in both food and Foodservice because of these portfolio shifts. We've seen that before over the last 5 years, and we need to be able to grow or at least maintain volumes in both of these scenarios.

Your next question for today is from Hillary Cacanando with Deutsche Bank.

So you're -- just looking at your leverage ratio of 4.7x, it looks like it's getting close to the covenant. Am I right in that your covenant steps down to 4.75x, I guess, after December? And if so, I guess, with that getting just close to covenant, how you plan to address that?

Yes. So a couple of points on that. First of all, our covenant leverage ratio is usually about 25 or 30 basis points better or lower than our printed leverage ratio, just the way the calculation works. So there's some natural headroom there. But just to clarify what the amendment did, we have a 5x covenant until the end of second quarter 2027. So it actually goes out into 2027.

Got it. Okay. Okay. So then after that, after the middle of '27, it goes down to 4.7x, 4.75x?

4.25x back in Q3, and that will, of course, be after we pay down all the debt we expect to pay down this year and then drive the 2027 EBITDA.

Okay. Got it. Got it. And then just going back to URB. I know you said that the volume -- it's not -- it's really existing volume. It's not really going to impact the market. At some point, do you plan on getting much bigger in this space where it could have an impact on the volume?

Yes. The reference to the volume coming into the market was a reference to Mexican volume on coated recycled board that is going to be distributed by one of our competitors that we usually do not provide commentary on. On URB, there's some tightness in the market, and we're entering with our grades to take advantage of the growth in that segment.

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

I had 2 questions. The first is really a bridge to the second half. And then the second one is a question on Waco and where it sits in the industry. In terms of the bridge, Chuck or Robbert, and I appreciate your comments earlier, can you talk a little bit about what the big buckets will be in terms of the step-up, if you can quantify them at all from the first half to the required second half EBITDA that you're targeting. In that regard, can you talk a little bit about how much productivity will add to that? And what the mix effect might be either positive or negative in terms of your end market trends? The reason I bring it up is Foodservice traditionally, I recall being pretty high margin for you relative to center of store. And I'm wondering if that is a drag or not that big of a deal. The second question is with Waco, when the mill came on, obviously, it was positioned as really a primary packaging grade mill and substrate producer. We understand why you want to use some of the capacity for URB. Where would Waco sit on the cost curve relative to the rest of capacity out there for URB? Are the trim widths off that machine good, optimal for what the converters require? Or how would you have to optimize over time?

George, this is Chuck. I'll take the first part and then maybe Robbert take the Waco part. On the bridge from first half to the second half, yes, as you mentioned, we covered that in the prepared remarks, but I'll just build a little bit more and try to give you some quantification. So first of all, several items that are favorably impacting the second half versus the first half and that we don't expect a repeat of the downtime due to weather that we had in Q1. And we also had some other nonrecurring items in the first half, and that all totals about $40 million. And the pricing, as I talked about, would improve, and that's -- we've quantified that at $60 million. And we also, as you said, expect favorable mix. Foodservice is a part of that driver, but just back half mix will overall improve as well. And of course, we'll continue to push for more pricing given that we see continued inflation into the business. We -- the $85 million of cost savings that we talked about, that adds about $15 million in the second half versus the first half. And as you saw us do in Q2, we'll, of course, push for additional cost savings, including procurement opportunities. Maintenance outages are favorable in the second half by about $10 million. And then other operating improvements, including -- I know Robbert is going to comment on Waco. Waco is one of it and then just some of our normal continuous improvement initiatives. Those are all, of course, offset by the additional inflation, about $75 million of inflation first half to second half and then the lower volumes due to seasonality. So lots of moving parts and pieces, but where I think you'll really see it show up in our financials and our bridge is in the performance line.

Okay. And point of clarification, mix will be positive even with Foodservice being weak. Would that be right?

Well, yes, yes. We expect that. I mean, Foodservice hot cup season kicks in, in the back half. And so maybe weaker than last year, but mix still is positive first half to second half.

George, I just want to talk a bit about Waco in your question. So just a quick reminder, we closed Middletown and East Angus. We took about 280,000 tons out of the market. We had already closed Tama and K3 at Kalamazoo. That was another 200,000 tons we took out. So when we added Waco -- when we built Waco, we added 270,000 tons of capacity versus the system that we had in 2025. So that's just a quick reminder of the capacity. We are very flexible, as I said, in Waco. With regards to URB, our caliper is 14 to 30 points. It's -- we call it PaceSetter Ridgeline. It is 100% recycled, and it's got at least 45% of post-consumer recycled content. And that particular grade is really usable due to the caliper profile and the surface appearance as well as the compression to things like edge protection, folding carton applications, slip sheets, dividers and beverage containers and laminations. So that is a relatively sizable addressable market that we can go into without any major capital investments and that we are currently already producing. And as I said, we have a couple of thousand orders already on the books.

Your next question is from Phil Ng with Jefferies.

I guess, first, to kick things off, the incremental price increases you guys have announced for, I believe, CUK, CRB, one, can you give us any color in terms of the magnitude of the increases? And then two, have you seen orders, backlogs or any supply-demand dynamics that gives you perhaps more confidence this go around just because early in the year, you certainly got traction in SBS, but CUK was -- at least the publications didn't pick up on it.

Yes. Phil, this is Robbert. So we do see a tighter market than before. And we see, as a result, the industry fundamentals are improving, and that's resulting in price rolling through and catching up. We see in the recent AF&PA report that there are more and more backlogs across grades, which are really increasing. And we've recently announced our second price increase on bleached cup stock and folding carton and unbleached. And now we've raised prices about $120 a ton on each. We've also announced yesterday a $50 a ton price increase on recycled paperboard. And with the situation that we face, it does warrant price increases and also obviously a reflection of the inflation.

Okay. Helpful color, Robbert. And then there's certainly Section 338 tariffs. We'll see how that all shakes out. But do you guys have any in-house view in terms of what potential impact it had in terms of trade flow and how impactful it could be for different grades, at least first flush, it could be impactful for SBS, unclear on CRB, but any more color you guys are comfortable sharing would be helpful.

Yes. I mean our researchers showed that that's about 200,000 tons of primarily FBB coming in. The impact of it, we'll, of course, see as time plays out, but I think that's the size of potential impact.

Any impact on CRB, Chuck? Is this just more of an FBB SBS dynamic you think?

Yes, there's just not as much that goes across the border. And so not a significant impact.

Our last question comes from Arun Viswanathan with RBC Capital. Our last question for today comes from Matt Roberts with Raymond James.

Chuck, could you just clarify the debt covenant? I thought it was 4.75x through June 30, but please correct me if I'm wrong. And I know that you're not putting out a guide for free cash flow in '27. You did talk about some of the EBIT drivers from incremental price, but are there any other early considerations for '27 free cash flow, maybe how much of a benefit from that inventory shift? And I believe working capital is usually a drag in first half, as you said, given seasonality. So any other puts and takes we should think about for '27 that provides headroom to that leverage target or any other meaningful divestitures you all are considering?

Yes. So yes, the covenant is 5x and has adjusted to that. In terms of the cash flows, yes, 2027, of course, we're not giving a guide, but I'll just give you a couple of items to think about. 2026 EBITDA, of course, has a significant number of onetime items, and then there's some carryover impact from the pricing net of the inflation and the cost savings. So think about that all as $175 million of kind of combination of the onetime items in 2026. So again, not guiding to EBITDA or cash flow, but we do have the $90 million of inventory reduction downtime, $40 million of other onetime items that I talked about. And then we also talked about the unbleached inefficiencies, and that's about $20 million. And then, of course, the pricing, if that -- the carryover there is about $85 million, carryover inflation is about $75 million and the carryover cost savings is about $15 million. So that all -- so there's some tailwinds to -- potential tailwinds for 2027 from all that as well. Then, of course, 2027 will benefit from lower interest costs. We'll keep pushing on capital spending and then the taxes -- cash taxes will continue to be lower in 2027. And there'll be the potential for additional inventory takeout, inventory reduction really as we leverage tools, technology and really take our inventory reduction to the next level. So a lot of items to consider and develop, and we'll come back to you with a 2027 guide.

This concludes the Graphic Packaging Holding Company's Second Quarter 2026 Conference Call. You may disconnect your lines at this time. Thank you for your participation.