Graphic Packaging's Q3 2025 Earnings Call: Contradictions Emerge on Volume, Innovation, and Cost Recovery

Date of Call: None provided

Financials Results

• Revenue: $2.2B, packaging sales down ~2% YOY (excluding FX)
• EPS: $0.58 adjusted EPS
• Operating Margin: 17.5% adjusted EBITDA margin

Guidance:

• 2026 free cash flow target of $700M–$800M.
• Waco mill expected to deliver ~$80M EBITDA uplift in 2026 and another ~$80M in 2027; ramp expected to take 12–18 months.
• Capital spending to normalize to ~5% of sales (capex ~ $450M in 2026 vs $850M in 2025).
• Q4 production balancing actions expected to impact EBITDA by roughly $15M.
• Year-end net leverage target ~3.5x–3.7x; priority on deleveraging and returning cash to shareholders.

Business Commentary:

• Waco Facility Impact:
• The start-up of the Waco recycle paperboard manufacturing facility on October 24 is a significant milestone, contributing to improved surety of supply and reducing waste.
• This facility is expected to provide a competitive advantage by expanding the markets for recycled paperboard and reducing waste, particularly for paper cups.

• The ramp-up to full production is expected to take 12 to 18 months, with the first year's ramp-up projected to deliver an EBITDA improvement of $80 million.

• Market Challenges and Consumer Behavior:

• The company's volumes were down 2% year-on-year, despite outperforming most served markets due to innovation contributing an additional 2%.

• The weak performance was attributed to challenges in consumer purchasing patterns, with upper-income consumers behaving differently and lower-income consumers cutting back due to rising food prices.

• Competitive Pressure and Cost Management:

• Graphic Packaging is experiencing competitive pressure in the bleached packaging market, with competitors offering discounts to match recycled packaging pricing despite profitability issues.
• The company is focusing on cost reduction and efficiency, with plans to take further actions in SG&A and plant costs, and to reduce inventory levels to protect margins and volumes.

• Innovation and Market Expansion:
• Graphic Packaging's innovation efforts are opening new markets for paperboard packaging, contributing to 2% of volume growth in the quarter.
• The company's success is demonstrated by the introduction of paperboard packaging in categories like household products, health and beauty, and produce, with new applications in paper cups and produce punnets.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management repeatedly emphasized confidence in Waco and cash flow: "I'm confident in our ability to generate our targeted $700 million to $800 million of free cash flow in 2026." They highlighted early Waco startup success and controllable levers (CapEx, SG&A, inventory) to protect margins and drive deleveraging.

Q&A:

• Question from Ghansham Panjabi (Baird): Did the end markets track expectations in 3Q and was the difference driven by share shift from bleached board conversion? Will that dynamic change near term?
  Response: No share loss; outperformed customers due to ~$52M (≈2%) of innovation-driven volume, so the quarter reflected customer purchasing patterns rather than share erosion.

• Question from Ghansham Panjabi (Baird): Do you still feel confident in the Waco EBITDA contribution for next year or does it depend on market dynamics?
  Response: Very confident Waco will deliver the ~$80M uplift in 2026; total outcome depends on 2026 volumes and we can manage supply by toggling the Kalamazoo K1 machine if needed.

• Question from George Staphos (BofA): What productivity/cost opportunities exist to reach the $80M+ and how important are they relative to commercial challenges?
  Response: Confidence in the $80M from Waco is high; focus is on controllable levers—CapEx normalization to ~5% (driving ~$350M cash), SG&A reductions and inventory releases (~$30M YTD, ~$20M expected in Q4).

• Question from George Staphos (BofA): What are the foodservice trends into Q4 and the outlook—could foodservice rebound and help margins?
  Response: Fast casual remains under pressure while QSR is steadier; management cannot confidently forecast demand but expects innovation to be the main driver of any foodservice growth.

• Question from Matthew Roberts (Raymond James): How much drag from competitive price pressure on SBS/CRB/CKU in 4Q, duration, and mix shifts expected into 2026?
  Response: No share loss; will not substitute SBS for CRB given cost advantage—CRB is lower cost than bleached—and management expects to protect and likely win share from bleached over time as market imbalances correct.

• Question from Matthew Roberts (Raymond James): Any flexibility in next year's CapEx and can growth projects be deferred to hit the ~5% target?
  Response: Yes—CapEx will be dialed in; management is confident in the ~$350M year-on-year cash impact from capex normalization and will provide more specifics next update.

• Question from Lewis Merrick (BNP): Phasing of Waco startup costs ($65M–$75M)? Are they largely incurred now or step into Q4/next year?
  Response: Startup costs of $65M–$75M are mostly operating pre-start costs; phasing is roughly two‑thirds in the current year and one‑third in 2026.

• Question from Lewis Merrick (BNP): Update on Rainier premium CRB pricing and year-end leverage target to reach 3.5x–3.7x?
  Response: Rainier is a strategic product to defend share vs SBS—pricing may be slightly lower given competitive pricing—but it helps retain share; year-end net leverage target is ~3.5x–3.7x driven by slightly lower EBITDA and opportunistic buybacks.

• Question from Gabe Hajde (Wells Fargo): Any changes to AR factoring/reverse factoring and how will that be managed into 2026?
  Response: No material change expected in AR financing year‑over‑year; AR programs are not a primary enabler for 2026 cash flow—focus is on CapEx reduction, inventory and SG&A control.

• Question from Gabe Hajde (Wells Fargo): Clarify Waco startup cost composition and capitalized interest timing—$65M–$75M now vs $35M next year?
  Response: The $65M–$75M are mainly non-capitalized operating costs to run and train the facility pre-start; capitalized interest ceased once the asset went into service, so capitalization ends upon start-up.

• Question from Arun Viswanathan (RBC): What assumptions underlie the $80M EBITDA uplift in 2026 and is there a volume component; is the second $80M in 2027 volume dependent?
  Response: The $80M in 2026 and another $80M in 2027 are expected; $100M of the total relates to mill closure savings (Middletown/East Angus); some sequencing depends on volumes but Waco/K2 will run high‑priority while K1 can be toggled to match demand.

• Question from Arun Viswanathan (RBC): Do you expect Q4 and 2026 end‑market weakness (beverage, foodservice) to persist and has innovation sales been impacted?
  Response: Q4 resembles Q3; management sees continued unevenness and unusual customer behavior but has not observed a material pullback in innovation—innovation remains a growth lever.

• Question from Mark Weintraub (Seaport Research): How much tonnage will Waco produce in 2026 and how does that net against closures (East Angus, Middletown)?
  Response: Management declined to provide specific 2026 tonnage; net market add is ~75k tons (Waco 550k minus 475k of closures) and Waco is needed to service customers while inventories have been deliberately reduced.

• Question from Michael Roxland (Truist): Please reconcile the $700M–$800M FCF target given YTD negative FCF, capex stepdown, working capital, taxes and interest assumptions.
  Response: The bridge is Q4 working capital unwind (historically strong), ~$400M capex reduction, inventory reductions and SG&A cost control plus Waco contribution; management is highly confident in the $700M–$800M target.

• Question from Anojja Shah (UBS): With large free cash flow in 2026, what are capital allocation priorities—deleveraging, buybacks, M&A or international expansion?
  Response: Top priorities are deleveraging the balance sheet and returning cash to shareholders; bolt‑on M&A or expansion are not primary priorities at this time.

Contradiction Point 1

Volume and Share Expectations

It involves differing expectations regarding the company's volume performance, share position, and the impact of market dynamics on these metrics, which are critical for understanding the company's growth trajectory and investor confidence.

Did the end markets perform as expected in Q3, and why might this dynamic change soon without a significant volume change? - Ghansham Panjabi(Baird)

20251104-2025 Q3: Our expectations in the quarter were aligned with our results. There was no share loss. Outperformance is due to innovation, contributing about 2% of our volume. - Michael Doss(CEO)

Can you discuss second-half volume trends and the risk of further market share loss? - Matthew Burke Roberts(Raymond James & Associates, Inc., Research Division)

2025Q2: We expect to outperform broader CPG and QSR markets. July is consistent with our guide, solid in beverages, mixed in food. Uncertainty remains due to promotional activity and customer behavior. We're not making precise volume calls due to this uncertainty. - Michael Doss(CEO)

Contradiction Point 2

Innovation Impact on Financial Performance

It pertains to the expectations and impact of innovation on the company's financial performance, which is a key driver for growth and investor confidence.

What are the current trends and outlook for the foodservice market? - George Staphos(BofA)

20251104-2025 Q3: The foodservice market trends are mixed. The fast casual sector is under pressure due to consumer income and employment levels. We expect stability in QSR, and our innovation efforts are aimed at capturing market share through new products. - Michael Doss(CEO)

What's the EBITDA margin and growth outlook? What supports confidence in achieving these levels? - George Leon Staphos(BofA Securities, Research Division)

2025Q2: We are encouraged by customer strategies to drive growth, and our confidence is high in delivering low single-digit growth over time. - Michael Doss(CEO)

Contradiction Point 3

Volume Decline and Market Conditions

It highlights inconsistent explanations of the volume decline and market conditions, which are critical for understanding the company's performance and strategic positioning.

Did end markets track as expected in Q3? Why might the dynamic change soon without a volume inflection? - Ghansham Panjabi(Baird)

20251104-2025 Q3: Our expectations in the quarter were aligned with our results. There was no share loss. Outperformance is due to innovation, contributing about 2% of our volume. - Michael Doss(CEO)

Are there any trends in your data indicating that declining volume is due to affordability issues rather than other factors? - Ghansham Panjabi(Baird)

2025Q1: We believe affordability is a key part of the volume decline. GLP-1 drugs create opportunities but also impact snack sales. The MAHA policy is significant for certain CPG products. The reformulation process increases costs, and consumers are buying fewer items. - Mike Doss(CEO)

Contradiction Point 4

Price Cost Turn and Recovery

It involves differing expectations for price cost recovery, which is crucial for assessing the company's financial performance and strategic positioning.

Did the end markets perform as expected in Q3, and why would this dynamic change soon without increased volumes? - Ghansham Panjabi(Baird)

20251104-2025 Q3: We expect no change in our confidence for Waco's ramp-up contributing $80 million next year, but further changes in volumes will impact whether we need to adjust our K1 machine operations. - Michael Doss(CEO)

What are the assumptions for when price costs will turn neutral or positive in 2025? - Ghansham Panjabi(Baird)

2025Q1: Price actions are expected to help margins recover by year-end 2025 and into 2026. We expect to recover the $80 million of inflation seen. We're pursuing multiple pricing mechanisms and expect positive price contributions in 2026. - Steve Scherger(CFO)

Contradiction Point 5

Volume and Market Expectations

It involves changes in the company's expectations for volume growth and market conditions, which directly impact revenue projections and investor sentiments.

Did end markets meet Q3 expectations, and why might the trend change in the short term without a volume inflection? - Ghansham Panjabi

20251104-2025 Q3: Our expectations in the quarter were aligned with our results. There was no share loss. - Michael Doss(CEO)

Have volumes returned to positive in January? - Lewis Merrick

2024Q4: In 2024, the first half was down 2%, the second half up 1%. Growth continued into January. We expect to grow in Q1, consistent with our January performance. - Michael Doss(CEO)