Graphic Packaging Holding Company Third Quarter 2026 Conference Call - GRAPHIC PACKAGING HOLDING CO

Explicit Guidance:

• FY2026 Net Sales: Approximately $8.6 billion.
• FY2026 Volume: Flat to up 1% year-over-year; Q4 2026 Volume: Down 1% to up 1% quarter-over-quarter.
• FY2026 Pricing: Expected to see sequential increase in Q4 2026.
• FY2026 Adjusted EBITDA: Approximately $1.05 billion (decreasing ~$20 million vs. prior guidance due to $170M total input cost inflation vs. previous $150M estimate).
• FY2026 Adjusted EPS: Approximately $0.65.
• FY2026 Capital Expenditures: Below $450 million.
• FY2026 Adjusted Cash Flow: Range of $600 million to $700 million, driven by $646M year-over-year improvement in first nine months.
• FY2026 Debt Reduction: Expect to pay down between $400 million to $500 million of net debt, targeting year-end net leverage of approximately 4.7 times.
• FY2026 Inventory: Expected to end the year with inventory at approximately 19% of sales; total downtime costs related to inventory reduction moved to $75 million (down from $90 million prior).
• FY2026 Tax Rate: Effective tax rate expected between 25% and 26%.
• FY2026 Cost Savings: Full-year structural cost reductions of approximately $90 million (up $5 million from prior quarter guidance).
• FY2027 Volume: Expected to be down 1% year-over-year.
• FY2027 EBITDA Outlook: Anticipated inflection to year-over-year EBITDA growth and margin expansion (no specific numeric guidance provided yet).

Business-Segment Outlook:

• Food Segment: Remainder of 2026 expected to be the strongest market, driven by center-of-store staples (bars, confectionery, snacks, frozen meals); international demand noted for dry prepared meals.
• Beverage Segment: Global performance expected to be stable; growth anticipated in energy drinks and emerging categories (wellness, ready-to-drink cocktails).
• Co-Packer Machinery: Demand expected to grow as brands utilize co-packers; 12 machines sold YTD 2026 with 95+ installed; trend supports long-term partnership growth.
• Health & Beauty: Mixed outlook; luxury and OTC health care showing resilience/recovery, while mass market beauty remains challenged.
• Food Service & Household: Continued pressure expected in Q4 2026 and 2027 due to consumer affordability and trade-offs in budget management.
• Unbleached Recycled Paperboard (URB): Target to sell >20,000 tons in FY2026 and >100,000 tons in FY2027; ramp ahead of expectations allowing entry into tubes and cores applications.
• Coated Recycled Paperboard (CRB): Continued strong customer interest driven by circularity; anticipated growth in private label butter and food packaging applications.

Market and Competitive Outlook:

• Demand Dynamics: Consumer demand bifurcated between value-oriented staples and premium experiences; shift from heavy volume investment in value formats to innovation-driven mix in the next 12 months.
• Pricing Strategy: Moving from semi-annual to quarterly pricing openers upon contract renewal to improve responsiveness to cost inflation; targeting $60 million in-year pricing with a $150 million run rate.
• Supply Chain: Paperboard market (bleached and unbleached) remains tight with higher order book backlogs; industry facing inflationary cost pressures from logistics, chemicals, resins, and labor.
• Competitive Position: Leveraging broad portfolio and integrated manufacturing network to serve both value and premium ends of the market; aiming to capture share through innovation and reliability.
• Cost Recovery: Implementation of PPI-based price mechanisms and "inflation recovery escalators" in multi-year agreements to capture non-paperboard inflation.

Macro / Industry Outlook:

• Inflation: Unabated supply chain inflation expected to persist; FY2026 input cost inflation estimated at $170 million (up $20M from prior guidance), with a carryover impact of ~$90 million into 2027.
• Consumer Behavior: Value-oriented consumers driving demand for convenience, smaller portion sizes, and "protein and fiber" focused products (reinforced by GLP-1 medication trends).
• Regulatory/Trade: Tariffs and higher logistics costs influencing global trade flows; no specific regulatory changes anticipated to disrupt operations.
• Interest Rates: 70% of debt is fixed; 30% floating; interest expense estimated at $275 million for FY2026.
• Covenants: Credit agreement amended to provide a prudent risk mitigation cushion; no impact on cash flow priorities.

Strategic Initiatives:

• URB Production Ramp: Waco facility pivot to produce URB ahead of schedule; enabling entry into tubes and cores market with minimal additional capital investment.
• AI Deployment: Early stages of embedding AI in commercial and procurement contracts and inventory management to reduce manual work and improve consistency.
• Structural Cost Reductions: Executing $90 million in savings; actions include headcount reductions (500+ roles), facility consolidations, and process standardization.
• Contract Evolution: Transitioning to quarterly pricing openers to ensure balanced frameworks; targeting "commercial excellence" initiatives for revenue growth management.
• Asset Optimization: Balancing CRB and URB production to maximize asset utilization and margins; focus on high-return markets.
• Innovation: Launching new formats (e.g., glue-free EnviroClip Beam) to support brand equity and sustainability goals; partnerships with major brands (e.g., Barilla, Tudor Drinks).

Risks and Headwinds to Outlook:

• Input Cost Inflation: Elevated logistics, chemicals, resins, secondary fiber, and labor costs; potential for further upside if commodity markets (e.g., crude oil, OCC) spike.
• Inflationary Consumer Pressure: Affordability challenges driving demand toward lower-cost private label formats, impacting volume in specific categories (food service, household).
• Pricing Execution: Risk of inability to fully pass through cost increases if customers resist or if volume declines significantly.
• Inventory Management: Inventory reduction efforts and URB build-ups causing temporary working capital variability and downtime costs ($75 million).
• Contract Renewal Lags: Delays in converting contracts to new pricing mechanisms could limit near-term price realization.
• Macro Uncertainty: Unabated inflation and global trade flows influencing demand and supply dynamics.

Management Tone on the Future:

• Confidence: Cautiously optimistic regarding the "inflection" expected in 2027; confident in the company's ability to generate sustained cash flow and reduce leverage.
• Strategic Focus: Emphasis on "discipline," "right to win," and "commercial excellence"; view current transformation as "tangible" and progressing ahead of expectations (particularly URB).
• Capital Allocation: Prioritizing debt reduction and balance sheet strength; committed to existing dividend while leveraging cash flow for deleveraging before expanding share return capacity.
• Resilience: Highlighting the resilience of top-line performance and margin expansion despite a "dynamic and inflationary" environment.

Miscellaneous:

• Non-Recurring Items: FY2026 includes $40 million write-off from stopping automated roll warehouse project, severance costs, and inventory reduction downtime ($75 million); these are excluded from adjusted metrics.
• Working Capital: Q4 historically strong for working capital harvest; full-year working capital improvement expected to be $275-$325 million (includes expansion of AR sale programs).
• Dividends: Committed to existing dividend policy while actively reducing leverage.
• Debt Structure: Net debt reduced by $148 million year-end 2025; net debt level now lower than year-end 2025 target.