管理層發言
Greetings. Welcome to the Graphic Packaging Holding Company's Second Quarter 2026 Conference Call. The conference is being recorded. I will now turn the conference over to your host, Melanie Skijus, Vice President, Investor Relations.
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 timelines 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 customer's 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.
分析師問答
Operator provided instructions for the question-and-answer session. 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 any thoughts on how that business could ramp into '27?
Yes. Anthony, thank you for your question. It does assume a modest 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. We've launched PaceSetter Ridgeline, which is made from 100% recycled fiber. We believe there is 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. We see strong interest from customers. It's early days. Our engagement and qualification efforts are progressing well. Market receptivity is supported by tight industry supply conditions and 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. 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. 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 existing CRB customers and capture the growth in URB.
Okay. That's very helpful. Then, shifting gears, you said inflation expectations increased from $60 million to $150 million. Are you assuming any further inflation in OCC and/or freight? Or do you assume those levels hold flat through year-end?
Yes. This is Chuck. Overall, the way we approach our inflation forecast is to look at published indexes, forward curves and other market pricing. As we talked about in Q1, we had expected moderating. Now we expect inflation to stay higher for the rest of the year. The silver lining is that the surety-of-supply conversations have started with our customers, and they're more receptive to pricing. They do see the inflation that we're seeing in logistics, converting materials, secondary fiber, and those items are easily visible in the industry.
Your next question is from Mark Weintraub with Seaport Research Partners.
I was hoping to get more clarity on the pricing. Chuck, I think you referenced $145 million at one point. Could you reexplain what that was, how this breaks down, what's included for this year and what the starting point would be going into next year if we just take into account what you're expecting to have in place through the balance of this year?
Yes. The $145 million is the annualized view of the $60 million we expect to see in 2026. That includes the recognized $40 a ton on bleached folding carton, the $60 a ton on cup stock, the contractual price recoveries and pricing on the roughly $1 billion of business where pricing is not contractually determined. That's the flow-through of all of that. We have other pricing in the marketplace beyond that, and if all of that were recognized, it would be over $200 million of additional annualized pricing. But based on timing of likely recognition, the additional amount is not expected to have a significant impact on 2026.
So basically, you have $60 million of actions in place for this year, then another $85 million shows up next year to get to the $145 million annualized, and the new set of increases, if successful, could be additive up to roughly $200 million on an annualized basis?
Yes, that's correct.
Your next question is from Detlef Winckelmann with JPMorgan.
Maybe just to confirm: I got the impression that some of the production curtailments or downtime had been moved from 2026 into 2027. Did I understand that correctly? And can you quantify that?
Yes. The way to think about it is we've adjusted our inventory expectations and our downtime expectations. We now expect downtime to be around $90 million for the full year. Inventory expectations were adjusted as a result of the unbleached issues where planned maintenance occurred in the quarter and other operational issues caused us to take a different strategy toward unbleached at the end of 2026. A couple of things are going on in the inventory guide, but downtime is lowered to about $90 million for the full year.
Your next question is from Ghansham Panjabi with Baird.
Robbert, as you look to the back half of this year, do you anticipate any change in how your customers are approaching focus on price versus volume, given the step-up in inflation year-to-date? I know you maintained your volume outlook for the year, but in conversations with customers, do you sense any change coming?
Yes, Ghansham. At a high level, we continue to see branded players focused on driving volume and share recovery given private label growth. A secondary theme is increasing focus on pricing to offset higher commodity inflation in the second half of '26 and into 2027. Customers continue to invest in promotions to drive traffic and share, but we do see a shift toward profitable growth. From customer earnings calls, we heard a 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. At the category level, demand signals are relatively stable with pockets of strength. Center-of-store staples, Food and Health and Beauty remain growth drivers. We saw resilient demand for cereal, pasta, rice and snack bars, strength in ready-made meals, and premium personal care products, plus international growth in dry tea. Household remains challenged and Foodservice remains pressured as consumers shift to meals at home. Pet food was a bright spot with year-over-year growth for the second consecutive quarter.
Okay. And Chuck, what are you now assuming for working capital benefit in 2026 relative to your revised free cash flow?
That's helping us bridge to the current cash flow range. Cash flow is negatively impacted by EBITDA driven by inflation and then by the lower inventory reduction, but we are working on other working capital initiatives around payment terms and receivables to help offset that impact.
Your next question is from Gabe Hajde with Wells Fargo.
As you look at the URB opportunity from a margin perspective or EBITDA per ton, can you talk about what that looks like? Our math suggests maybe $200 to $225 a ton. Also, any early read on potential impacts from the new distribution partner that one of your peers has for recycled board in North America?
Let me take those one at a time. On margin expectations, we believe incremental demand for uncoated recycled board and rising utilization at Waco will result in higher EBITDA overall. It will drive better margins and faster returns on the asset, and stronger margins for the recycled platform overall. The decision reflects a pragmatic approach to accelerate value creation through flexibility. Flexing between CRB and URB production will allow us to maximize earnings and cash flow and maintain long-term asset value. Production of CRB and URB is straightforward for us; we have long-standing experience making URB at Middletown historically. For what we are doing right now, there was no material CapEx required for these folding carton trials. Over time, we could expand to other applications like tubes and cores that would require some capital investment. Regarding additional volume coming into the market, we tend not to comment on competitors, but this is existing volume looking for a new distribution channel. We don't think it's going to affect the market in a major way.
Slide 4 showed Foodservice negative in the second quarter. I would have expected Foodservice to be stronger given on-premise trends surrounding the World Cup. Is this related to the CUK issue? And what are expectations for the second half in Foodservice?
We had hoped for a stronger quarter in Foodservice. We see a shift back to meals prepared at home driven by inflation and pressure on consumer wallets. Customers will continue to run promotions and limited-time offers to drive volume, and QSR affordability remains a factor. We need to serve both grocery and Foodservice given portfolio shifts. We've seen cycles like this before, and we must be able to grow or maintain volumes across both scenarios.
Your next question is from Hillary Cacanando with Deutsche Bank.
You're at a leverage ratio of 4.7x. I thought the covenant steps down to 4.75x after December. With leverage getting close to covenant, how do you plan to address that?
A couple of points: our covenant leverage ratio calculation typically provides about 25 to 30 basis points of natural headroom versus the printed leverage ratio. To clarify the amendment, we have a 5.0x covenant through the end of second quarter 2027, so the covenant relief extends into 2027.
So after mid-2027 it steps down to 4.25x following expected debt paydowns and EBITDA improvements?
Yes, it steps down to 4.25x after we pay down debt and drive EBITDA improvement. We expect to pay down $400 million to $500 million of debt in 2026, which will help.
On URB, at some point do you plan on getting much bigger in this space where you could materially impact volume?
The earlier reference to volume coming into the market was about Mexican coated recycled board volume finding a new distribution channel. On URB, the market is tight and we are entering with grades to take advantage of growth in that segment. We will scale based on market demand and returns.
Your next question is from George Staphos with Bank of America.
Two questions. First, can you talk about the bridge from the first half to the second half and quantify the major buckets—how much productivity will add, and what mix effect you expect given end market trends? Second, regarding Waco, where does it sit on the cost curve for URB and are its trim widths optimal for converters?
I'll take the first part. Items favoring the second half versus the first half include no repeat of Q1 weather-related downtime and other nonrecurring items totaling about $40 million. Pricing improvement is quantified at about $60 million. We expect favorable mix in the back half versus the first half. The $85 million of cost savings adds about $15 million benefit in the second half versus the first half. Maintenance outages are favorable by about $10 million. Other operating improvements, including performance gains, also help. Those are offset by additional inflation of about $75 million from first half to second half and lower seasonal volumes. You'll see these show up in the performance line.
To confirm: mix will be positive even with Foodservice being weak?
Yes, we expect mix to be positive first half to second half. Foodservice hot cup season kicks in in the back half, so while it may be weaker than last year, mix overall improves.
On Waco: we closed Middletown and East Angus and took roughly 280,000 tons out of the market, plus other closures that removed about 200,000 tons previously. When we built Waco, we added about 270,000 tons of capacity versus the 2025 system. Waco is flexible. Our PaceSetter Ridgeline caliper is 14 to 30 points, is 100% recycled and has at least 45% post-consumer recycled content. It's usable for edge protection, folding carton applications, slip sheets, dividers and beverage containers and laminations. This is a sizable addressable market we can serve without major capital investment, and we're already producing product with orders on the books.
Your next question is from Phil Ng with Jefferies.
Regarding the incremental price increases you announced for CUK and CRB, can you give color on the magnitude? Have you seen orders, backlogs or supply-demand dynamics that give you more confidence this go-around compared to earlier in the year?
We see a tighter market and improving fundamentals which warrant price increases. We have recently announced second price increases on bleached cup stock and folding carton and unbleached. Overall, we've raised prices about $120 a ton on each. We also announced yesterday a $50 a ton price increase on recycled paperboard. The situation and inflation justify these increases, and backlogs across grades in recent industry reports are increasing.
Our research indicates roughly 200,000 tons primarily of FBB could be impacted by Section 338 tariff dynamics. We'll see how that plays out over time, but that's the approximate size of potential impact.
Any impact on CRB, or is this primarily an FBB/SBS dynamic?
There isn't as much cross-border trade for CRB, so we don't expect a significant impact there.
Our last question for today comes from Matthew Roberts with Raymond James.
Chuck, could you clarify the debt covenant? I thought it was 4.75x through June 30. Also, while you're not putting out a free cash flow guide for '27, any early considerations for 2027 free cash flow — how much benefit might come from the inventory shift, seasonality, other puts and takes we should consider for leverage headroom, or any meaningful divestitures you're considering?
To clarify, the covenant is 5.0x and has been amended to that level through the end of second quarter 2027. For 2027 considerations: 2026 EBITDA includes a number of one-time items and there is carryover from pricing net of inflation and cost savings. Think of roughly $175 million of combinations of one-time items in 2026. Items to consider include $90 million of inventory reduction downtime, $40 million of other one-time items I mentioned, and about $20 million of unbleached inefficiencies. Carryover pricing is about $85 million, carryover inflation is roughly $75 million, and carryover cost savings about $15 million. 2027 should benefit from lower interest costs, continued capital discipline, lower cash taxes and potential additional inventory reduction. We'll provide a 2027 guide when appropriate.
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.