Graphic Packaging Holding Company Q2 FY2025 earnings call

• Vision 2025 is nearing completion, and the company anticipates generating significantly more cash than needed starting in 2026. • The Waco recycled paperboard investment is scheduled to commence production in the fourth quarter, though it is encountering higher costs, mainly in labor and final engineering/design related to permitting and insurance. The estimated 2025 capital expenditures stand at $850 million. • Inventory management involved reducing production to cut down on inventory levels, which affected the adjusted EBITDA margin but positioned the company to operate closer to normalcy in the second half. • The broad and deep consumer staples packaging portfolio is a cornerstone of the company's strength, with expectations to expand its presence in household products and health and beauty as recycled paperboard gains favor. • Innovation sales rose by $61 million in the second quarter, and the innovation sales pipeline remained robust despite some customers scaling back near-term plans. • Private label and store brands are gaining ground in select food categories, and trademarking activity is accelerating.

In the second quarter of 2025, Graphic Packaging's sales amounted to $2.2 billion. Adjusted EBITDA was $336 million, with an adjusted EBITDA margin of 15.3% and adjusted EPS of $0.42. Volumes in the Americas were somewhat better than anticipated, primarily driven by an upswing in beverage promotion and specific promotional efforts in food and foodservice. International results were positive but saw a slight deceleration in growth. Overall packaging sales for the second quarter were roughly flat compared to the previous year. Food results were inconsistent; snacks faced pressure, while categories such as pasta, sauces, and prepared foods recorded gains. Household product and health and beauty results were relatively stable overall, with certain segments showing positive trends. Innovation sales grew by $61 million in the second quarter and were on track to meet the full-year target of 2% of sales growth.

• The guidance for 2026 free cash flow has been adjusted to $700 million to $800 million due to the impact of weaker near-term volumes on 2025 adjusted EBITDA. • The 2025 capital expenditures are estimated at $850 million, with the higher spending offset by lower cash taxes and a reduction in working capital, and no net effect on 2025 free cash flow is expected. • It is expected that second half adjusted EBITDA margins will be notably better than those in the first half because of inventory reduction, less scheduled maintenance, and normal seasonality. • The economic and quality advantages of the Waco project are projected to be more pronounced than previously estimated.

• The stretched consumer and uneven volumes present uncertainty, especially in the food packaging market which is the largest market. • Higher costs for the Waco project, including labor and engineering/design costs, could influence the project's financials. • Competitive dynamics in the packaging market, particularly in the solid bleached market where oversupply and the addition of new capacity are factors to keep an eye on.

Q: About the increase in capital spending from $700 million to $850 million and its impact on 2026 free cash flow.

A: Steve Scherger explained that in 2025, the capital expenditures are $850 million, with cash taxes and working capital factors offsetting it, and the 2026 free cash flow is expected to be in the range of $700 million to $800 million.

Q: Regarding the higher costs in the Waco project, such as labor and permitting.

A: Mike Doss stated that labor costs, particularly for electricians, were higher due to construction booms in other sectors, and there were rework and additional construction elements leading to cost increases.

Q: On inventory and EBITDA margin.

A: Steve Scherger mentioned that Q2 was a major maintenance quarter, with the first half EBITDA affected by maintenance and inventory actions, but the second half is expected to be better with less maintenance and inventory reduction.

Q: On 2026 and beyond EBITDA pickups.

A: Steve Scherger and Mike Doss discussed the EBITDA contribution of the Waco project in 2026 and beyond, with volume recovery and cost advantages playing important roles.

Q: On price and market conditions.

A: Michael Doss discussed the market conditions for different paperboard grades, with SBS and recycled grades having distinct supply and demand dynamics, and Steve Scherger talked about the FX impact on revenue and moderation in inflation