Graphic Packaging Holding Company (GPK) Earnings

Management highlights

### Core Strategic Priorities - Capture organic growth while maintaining high-quality customer service - Drive profitability improvements via cost initiatives, operational efficiencies, and targeted pricing actions - Optimize operations, operational footprint, and portfolio mix to refocus on core competencies - Increase free cash flow through inventory rationalization and strict capital spending discipline - Use expanded free cash flow to pay down debt and return capital to shareholders ### Operational Progress & Cost Initiatives - Delivered adjusted EBITDA of $247 million at the top of management's guidance range, with sequentially expanding margins of 11.3%, driven by strong cost discipline and operational improvements - Achieved $85 million in in-year cost reductions (exceeding the original 2026 target of $60 million) from productivity and streamlining initiatives, offsetting a portion of higher-than-expected inflation - Reduced inventory by $75 million in H1 2026, and cut capital expenditures by ~$320 million year-over-year in H1 2026, outperforming original capital reduction targets - Completed the divestiture of the Croatia facility, announced the planned closure of the Lebanon, Tennessee facility, and is evaluating potential closure of the Winsford, UK facility to simplify the footprint and improve cost efficiency ### Commercial & Innovation Highlights - Secured multiple notable customer packaging wins, including mini can multipacks for Fuller Beverages, a custom UEFA Champions League promotional carton for Heineken South Africa, and supported World Cup promotions for 24 total customers, demonstrating fast turnaround and custom design capabilities - Filed 24 new patents in Q2 2026, expanding the global intellectual property portfolio to over 3,000 issued patents, focused on tray technology, food service packaging, and packaging machine enhancements - Won the Asahi Global Supplier Co-Creation Award and seven gold medals at Pride of Print in New Zealand, recognizing innovation and product quality ### Sustainable Packaging Positioning - Benefiting from growing regulatory and consumer demand for paper-based alternatives to plastic packaging: a recent global study found 73% of consumers view recyclable paperboard packaging as essential or desirable - Expanded U.S. residential recycling access for paper cups to 20% of the population (up from 11% in 2022 and 5% in 2017), with 35 North American mills now accepting paper cups for recycling - Completed a conversion from plastic to paper cold drink cups for a major Southern U.S. QSR chain, currently rolling out to all U.S. locations ### URB Market Entry - Launched uncoated recycled paperboard (URB) production at the Waco facility with no incremental capital required, leveraging existing available capacity and operational flexibility to balance production of URB and existing coated recycled board (CRB) - Identified an addressable URB market of over 1 million tons, with an estimated long-term growth opportunity of over 100,000 tons for the company across folding carton, lamination, and other applications

Guidance

- **Net Sales**: Full-year 2026 net sales are now expected to land at the high end of the prior guidance range, driven by recently implemented pricing actions. Full-year volume is expected to remain in the prior range of a 1% year-over-year decrease to a 1% year-over-year increase. - **Inflation**: Full-year incremental input cost inflation is now estimated at $150 million, a significant upward revision from the prior forecast of $60-$65 million, as inflation has remained broader and more persistent than originally expected. - **Adjusted EBITDA**: Full-year 2026 adjusted EBITDA is now expected to land at the low end of the prior guidance range of $1.05 billion to $1.25 billion, driven by higher-than-expected persistent inflation. Q3 2026 adjusted EBITDA is guided to $280 million to $300 million. Management expects incremental second half inflation to be mostly offset by pricing improvements and better operational performance. - **Pricing**: Recently implemented pricing actions are expected to contribute $60 million to 2026 full-year sales and EBITDA, with an annual run-rate value of $145 million once fully implemented. Newly announced incremental price increases for bleached cup stock, folding carton, unbleached, and recycled paperboard are not expected to have a material impact on 2026 results, with most benefits flowing to 2027. - **Adjusted Cash Flow**: Full-year 2026 adjusted cash flow guidance is revised to $600 million to $700 million, down from prior expectations, as a portion of planned 2026 inventory reductions have been pushed to 2027 due to timing impacts from the 2025 elongated unbleached paperboard mill maintenance cycle. - **Capital Expenditures**: Full-year 2026 capital expenditures are now expected to be below $450 million, reflecting strict capital spending discipline and project prioritization. - **Adjusted EPS**: Full-year 2026 adjusted EPS is revised to 65 cents to 90 cents, and interest expense is now expected to be approximately $275 million for the full year. - **Debt Reduction & Leverage**: Management expects to pay down $400 million to $500 million of debt in 2026, resulting in a year-end net leverage ratio of approximately 4.6x.

Segment performance

The company reports net sales of $2.2 billion for Q2 2026, a 1% year-over-year decrease. Segment performance across end markets is as follows: - Food segment: Outperformed expectations, with steady demand for value-oriented center-of-store staples (dry cereal, pasta, snack bars), growing ready-made grocery meals across domestic and international markets, and growing international dry tea sales driven by wellness trends. This segment is a core growth driver for the company. - Health and beauty segment: Remained a strong performer, with continued growth driven largely by international demand for premium personal care products. - Household segment: Experienced overall year-over-year declines, as consumers delayed purchases of discretionary household goods including facial tissue, laundry detergent, and food wrapping/storage products. Pet food was an exception, achieving year-over-year growth for the second consecutive quarter. - Food service segment: Experienced declines, as persistent inflation drove a consumer shift toward preparing meals at home rather than dining out, offsetting expected World Cup-related seasonal strength. Food service remains marginally stronger than household overall but is weaker than core food and health and beauty segments.

Risks & headwinds

- Persistent broad-based inflation across key input categories including logistics, resins, labor, secondary fiber, chemicals, coatings, and adhesives has exceeded original forecasts, creating ongoing pressure on margins and profitability. - A portion of planned 2026 inventory reductions have been delayed to 2027 due to inefficiencies and production issues stemming from the 2025 elongated unbleached paperboard maintenance cycle, resulting in 2026 lower-than-expected cash flow generation and higher ending inventory. - Soft consumer demand for discretionary household goods and continued consumer preference for at-home food preparation has created ongoing headwinds for the household and food service segments. - Ongoing macroeconomic pressure on consumer wallets may continue to shift demand away from higher-margin discretionary categories, pressuring overall segment mix and margins. - Current net leverage of 4.7x is relatively close to future debt covenant step-downs, requiring continued debt reduction to maintain sufficient covenant headroom.

Analyst Q&A

• Q: How much 2026 URB sales are included in guidance, and what is the expected ramp for 2027? /

  A: Guidance assumes a small, modest amount of URB sales in 2026, with only a couple thousand tons of orders filled to date. URB allows Graphic Packaging to enter a large attractive market, with a total long-term opportunity of 100,000+ tons, driven by both internal use and external customer demand. Customer qualification is progressing well, with lamination qualifications expected to conclude in fall 2026, and existing Waco capacity allows flexible production of both URB and CRB. URB will improve production mix profitability for the Waco facility while balancing service levels for existing CRB customers. (212 characters)

• Q: Can you clarify the $145 million annualized pricing figure, what it includes, and how much will flow to 2026 vs 2027? /

  A: The $145 million annualized figure includes all recently implemented pricing actions: the $40 per ton bleached folding carton increase, $60 per ton bleached cup stock increase, contractual commodity price recoveries, and new pricing for the $1 billion of non-contract revenue. Only $60 million of this total is expected to flow to 2026 results, with the remaining $85 million flowing to 2027. Additional newly announced price increases have a total potential annualized value of over $200 million, but most benefits will not hit in 2026 due to timing of recognition. (304 characters)

• Q: What is the expected EBITDA step-up from H1 2026 to H2 2026, broken down by key drivers? /

  A: Key positive drivers that add to H2 EBITDA include: no repeat of Q1 weather-related downtime ($40 million benefit), $60 million from new pricing actions, $15 million in incremental cost savings, $10 million from lower maintenance outage costs, and positive seasonal mix improvement. These positives are partially offset by $75 million in incremental inflation in H2 and lower seasonal volumes. Food service is still expected to contribute positive mix improvement H1 vs H2, despite being weaker year-over-year. (273 characters)

• Q: What is the magnitude of the recent incremental price increases, and what supply-demand dynamics support these increases? /

  A: Recent incremental increases are $120 per ton for bleached cup stock, bleached folding carton, and unbleached paperboard, and a $50 per ton increase for recycled paperboard. Industry fundamentals have tightened, with growing backlogs across most grades reported in recent industry data, and price levels are still catching up to persistent inflation. This tighter market dynamic has made customers more receptive to new pricing increases. (196 characters)

• Q: What are the key potential tailwinds for 2027 free cash flow following the 2026 inventory timing shift? /

  A: 2026 has a number of one-time headwinds that will not repeat in 2027, including $90 million in downtime costs, $20 million in unbleached production inefficiencies, and delayed inventory reductions. There will also be $85 million in carryover benefit from recently implemented pricing, partially offset by $75 million in carryover inflation and $15 million in carryover cost savings. 2027 will also benefit from lower interest costs, continued strict capital spending, lower cash taxes, and additional inventory reduction that was delayed from 2026. (269 characters)