Graphic Packaging Holding Company 2026 Q2 Earnings Call

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. Let me turn the call over to Robert.

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 longstanding 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've 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 periods, 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 food service, 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 detergent, 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. 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 two 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 the unbleached, adjusted cash flow for 2026 is now projected in the range of $600 million-$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. At 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 their mini can multi-packs. 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 six-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 eight 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 showcased 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 food service, as well as enhancements to our packaging machine technology.