Welcome to Wednesday, day three. My name is Matt Roberts, the packaging analyst here at Raymond James. I'm very pleased to welcome Graphic Packaging. Graphic Packaging is no stranger to this conference, an annual attendee. Thank you for the continued support. However, I am honored to welcome a couple new faces with Graphic as well. We have Robbert Rietbroek, President and CEO. Also Chuck Lischer here with me, SVP and Interim CFO, and of course, Mark Connelly is here, SVP of Investor Strategy and Development. Gentlemen, thank you all for your time and being here with us this morning. Robbert, I believe you have some slides to kick it off. Then we'll get to Q&A after that.
All right. Well, thank you, Matt. I want to just thank Raymond James for hosting us at this wonderful conference. It's not my first time. It's a pleasure to be back here. I really have enjoyed it so far. Thank you. Thank you all for coming. Thank you for your interest in Graphic Packaging this morning. Let me just quickly get started. Graphic Packaging is a leading sustainable consumer packaging company. We have significant strengths in our people, in scale and capabilities. We have about 23,000 associates around the world, 100 packaging facilities, more or less, in 26 countries. We have superior innovation and technical capabilities. 3,100 patents. 95% of our sales are from recyclable products. We have an incredibly strong customer base.
We have some of the top global consumer brands and retailers and quick-serve restaurants that we work with. We have a very loyal customer base. We help our customers win by strengthening brand perception and helping to achieve sustainability goals with best-in-class packaging solutions. We have industry-leading, highly integrated asset base. We have a base that's built for a long-term advantage. We have two of the highest quality, most efficient recycled paperboard manufacturing facilities in North America. With regards to our end markets and products, we are the global leader in sustainable consumer packaging. We have a broad portfolio with strong positions across retail and away from home. In food service, we have solutions across cups, bowls, trays and scoops. In beverage, we are the largest beverage packaging producer in North America.
In food, we began in dry food and now expanded across the store to protein, deli, bakery and produce. In household, we are now expanding our presence across product offerings, in particular laundry detergent, home air filtration, toys, tissues and pet care. In health and beauty, we're primarily a European business with opportunities to expand in North America and take our European success and translate that into North America. We are in the hands of tens of millions of consumers every day. We're really in consumers' life multiple times a day. We package life's everyday moments. When you shower in the morning, when you feed the dog, when you brush your teeth or you're preparing a meal with your family. In the past 24 hours, almost everyone in this room has likely interacted with one of our products.
Our key priorities to drive value creation, you know, are, we've communicated those recently. I'd like to reiterate them today. Our manufacturing footprint and our customer relationships are very strong, there is significant work to do. We have five key priorities focused on unlocking Graphic Packaging's full potential to create value for all of our stakeholders. The first one is to enhance profitability through cost actions and operational efficiencies. We really need to control the controllables. The second one is to reduce inventory and capital spend to drive significant free cash flow generation. We are taking immediate actions to introduce more disciplined capital spend governance and reduce the inventory built in preparation for Waco startup and softer than expected demand.
The third is to drive disciplined organic growth with innovation and exceptional customer service, leveraging my consumer goods background to help our customers protect and grow market share by focusing on where we have the right to win. We wanna prioritize free cash flow to reduce our leverage and return capital to shareholders. We would like to pay down half a billion dollars of debt and work to reach investment-grade credit rating by 2030. We also, and that's the fifth priority, are going to conduct a comprehensive business review to optimize our operations and footprint. We will ensure our resources are focused where we can create the greatest value for our shareholders. We also need to enhance profitability through cost reduction and operations efficiency. Our EBITDA margins are compressed from external pricing and demand pressures in our cost structure.
We are planning to optimize the cost base to reduce our 2026 SG&A costs by $60 million while protecting the capabilities and market positions that differentiate GPI. The effort spans SG&A, manufacturing footprint and efficiency, support functions, core processes, and a very broad deployment of AI tools. We have built a transformation office in place to strengthen accountability, drive operational excellence, and deliver productivity and cost savings without disrupting customer service. We are going to take a fresh set of eyes to simplify the organization, improve execution, and eliminate inefficiencies to support a return to profitable growth. Where needed, we will add talent and capabilities to accelerate stronger organic growth. We also want to focus on generating significant free cash flow. After a period of heavy capital investment, our ability to generate free cash flow now increases.
We are reducing capital spending to 5% or below net sales in 2026 with tighter approval and governance standards. I will review and approve almost all spend when it comes to CapEx. Reducing inventory is the next one. Our longer-term goal is to be at 15%-16% of sales. This year, we'll probably get to around 17%, down from 20% in the year-end. Combined with cost actions, disciplined organic growth, and the continued ramp-up at Waco, we expect to generate about $700 million-$800 million of adjusted free cash flow in 2026. Our improved cash profile will give flexibility to reduce leverage, return capital, and reinvest in the business. In conclusion, the mid to long-term shareholder value creation plan is very clear. We will enhance profitability by optimizing our cost structure and driving greater operational efficiency.
We will generate significant free cash flow through inventory reduction and reduce capital spending. We will focus on disciplined organic growth and deliver exceptional customer service. We will reduce debt on our path to investment-grade and return capital to shareholders through dividends and opportunistic stock repurchase. After a thorough review, we will optimize our resources to ensure they are focused where we can create the greatest value for our shareholders. That's really it, Matt. Over to you.
Thank you very much, Robbert. Really appreciate the overview and the message there. Maybe I could start just on a high level. You are, I believe, roughly 60 days into that 90-day review. Maybe first, what attracted you to Graphic Packaging at this time? Is there something about your background or prior experiences that you think this is the opportune time to be at Graphic? You did touch on this on your slides a bit, but maybe in that initial 60-day assessment, granted there's plenty more to go, what is your initial assessment and the largest priorities? How do you think about it? Is it whether a new commercial approach? Is it preserving price and margins, the cost and footprint actions that you alluded to? How do you view those and rank those? It could be something else other than what I mentioned, of course.
Yeah. Thanks, Matt. Yeah, I spent almost 30 years in the consumer packaged goods industry, and started in 1996 at Procter & Gamble. Worked in Europe, South America, North America, and I went to Kimberly-Clark, where I worked in North America and Australia. Joined PepsiCo, ran PepsiCo Australia and New Zealand, and then ended up running Quaker Oats, and then ran Primo Water, and then led the merger to become Primo Brands before I joined Graphic Packaging. You know, I've always been very fond of packaging. In fact, I designed many packs myself, including some new, with the team, of course, some novel ideas that led to patents. I've created three novel design ideas that led to becoming patents for Procter & Gamble.
You know, I've spent an inordinate amount of time in my, in my career working on pack design. I always like to tell people about the fact that I gave Cap'n Crunch his fourth stripe, and his fifth finger, and that's a true story, on the 60th birthday of Cap'n Crunch with Graphic Packaging. Graphic was obviously the vendor that makes Quaker Oats and Cap'n Crunch packaging. I've always known, you know, the quality of the products and worked to produce, procure packs, packaging from obviously Graphic and other vendors. I really have a fondness for it. The sustainability aspect. This is a fiber-based, biodegradable, recyclable packaging business. Really a great business to be part of. It's a great large-scale business with global presence. That plays to my global background.
I've worked across multiple continents and multiple geographies, and so h as Chuck, by the way. He's worked in the U.K. and Brussels. For us, it's really fun to run a global company. With regards to the short-term priorities, you know, obviously we need to control the controllables. We are reducing costs, focusing on operational efficiency, free cash flow generation through inventory reduction, CapEx reduction, and governance around CapEx and debt reduction. Those are really that's the story for 2026. Beyond, we'd like to grow the core, really disciplined growth, really look at our portfolio, our footprint optimization, and have balanced capital allocation to reduce debt and make share purchases beyond 2026. We have some non-negotiables as well. We focus on safety. We are a big, very big manufacturing company.
Exceptional customer service to our, you know, highly valued, CPG and food beverage and QSR customers, and operational excellence. I mean, those are really, table stakes and non-negotiables for me.
Really appreciate all the detail there and now you've also altered my breakfast as I'm gonna look at my Cap'n Crunch box differently and analyze it a little bit differently tomorrow morning. Maybe shifting gears slightly, I know you all just had earnings a couple weeks ago and recognizing there is no update today and generally I would think not a lot of changes in a short period of time. The, you know, the pace at which I check my Twitter account reminds me otherwise, so I'd be remiss if I didn't ask you how 1Q is tracking versus expectations. Were there any impacts in January and February, either from weather outages at your own facilities or with customers and impacts to their volumes?
Given storms, puts and takes in end markets, whether it's food service, offset by food and beverage, just anything you're seeing there or color you could provide.
Yeah.
Yeah. I'll take that one. Q1 volume trends overall consistent with what we were seeing in Q4 and our overall expectations, still dealing with a stretch consumer. We have been pleased, of course, as of late to hear privately in conversations with our customers and then even speaking publicly about our customers' desire to be more aggressive in promotion and drive volume, look forward to the outcome of all that. On the food service, specifically and the other individual aspects, I mean, given the very balanced portfolio we have now, you know, a softness in one area as a result of weather or anything in the short term would really be balanced with the other.
You know, that kinda all balances out to play to a reasonable spot here in Q1 as well. While on the question, I'll go ahead and address EBITDA and you mentioned the storm as well. We of course, had gone out in our year-end call and said that we were working through the impact of the January storm and anticipated that having a $20 million-$30 million impact on the quarter. That ended up coming at the low end of that range. However, we have had a modest impact from some of the recent disturbances down in Mexico, the combination of both of those really kind of plays within that $20 million-$30 million range. Overall we're comfortable with our guides for Q1 full year and overall free cash flow targets.
Appreciate all the detail there, Chuck. And you did touch on a theme, and I've heard it repeatedly through the halls and through other CPGs alike, and that is the potential to invest in value and promotions. Are you seeing any tangible evidence of that yet, or is it really just excitement and optimism at this point? You know, when you think of broader pressures on the consumer, whether that's GLP-1s or just healthier preferences, how do you weigh or measure whether it's an inflationary impact or some other structural impact that would be driving that?
Yeah. We're coming off of a four or five-year period of inflation. There's some fatigue around that with the consumer, which has been reflected in slowing volumes and the algorithms of many of our customers obviously relied more on pricing than volume. We are hearing broadly that value and affordability and household penetration are priorities going forward. We are also reading that in the public statements. We believe that we can play a role in that with really innovative packaging solutions for whether that be a value meal deal or a price pack architecture optimization with smaller packaging. We are very much in service of our customers. When they do well, we do well. We are very encouraged with their prioritizing of volume going forward.
It's early days. For the full year, we're guiding on flat volume, as you know. We're not yet seeing it in our business, but we are hopeful that the multi-year trend will evolve.
Thank you again for that. Maybe think about your own growth profile. I know before you've talked about disciplined growth. How is that different than Graphic of the last couple of years? Does that mean narrowing the focus to fewer markets, whether it's geography or fewer product categories or customers? How do you think about that growth and what does discipline mean there?
Yeah. Discipline means that we are very choiceful in focusing on certain segments. Obviously, we are very big in food. We're the leader in beverage, and we are also growing our household business. We have very strong strategic partnerships with leading consumer packaged goods companies and quick serve restaurants, as well as retailers. Really our priority there is to improve volume growth for them, but also to accelerate speed of commercialization when it comes to new and novel pack designs or price pack architecture, and putting resources into the markets that have the best long-term prospects.
We now have the best cost structure in America, with Waco coming online and we also have terrific quality, so we feel like we are well-positioned to target customers in attractive growth segments who value those advantages, specifically quality, cost, affordability, recycled, sustainable. We have truly demonstrated and continue to demonstrate our commitment to service.
Appreciate that. You, and you mentioned there are two words in there, new, novel, and when I think about my model for whatever that's worth, probably not much, but one thing that has been bankable is the innovation sales target has been very consistent. That line it's been 2% however there for the last couple years. Despite weak overall markets, it's been consistent. Are innovation sales, is that still at a higher price or higher margin point than system average? Why do you think innovation is holding up better than the overall market? Is it sustainability and has that shifted at all, or how do you think about that?
We have 3,100 patents, as we discussed. You know, we have great ideas like the Fridge Pack for beverages, still continues to be a best seller. I was in Perry the other day, I watched the manufacturing of the product and the partnership with our beverage partners, which is exciting to see. Our innovation sits at about 2%. CPGs usually run 5%-10% at least on an annualized basis. Obviously, because we have long-term contracts, we are at a slower pace, so 2% is actually quite significant for the packaging industry. We are looking at very novel, interesting ideas. Some of the ones that I find remarkable are the use of paper with a moisture barrier for meat products in Europe.
It's being rolled out right now in anticipation of the regulatory changes that are coming around single-use plastics. The child-proof laundry pod box that's being rolled out and we're partnering with several of our customers on launching. There's definitely great ideas out there and we tend to focus our innovation around plastic or foam replacement. Double barrier cups is a great example of such an innovation where you can retain heat or cold better. You know, there are obviously price points. Innovation costs, tends to cost a little bit more, but I think many of our customers are willing to pay for that innovation because of their differentiated position and the need for innovation in their end markets. We're very confident in that.
Very good. You did allude a little bit to contracts in there and, I believe in your guide you also have some negative price as well. If I think back, I believe it was Investor Day in 2024, Graphic was one of the first to question the third-party index pricing pass-through and how that works. Maybe now that you've taken a fresh look at it, do you think that pricing strategy is still accurate? Is it still a priority at Graphic to move contracts away from that industry structure? Has there been progress made towards that goal?
Yeah, let me start with that one, then if Robbert wants to build anything, then certainly can. As context, those that are newer to the story, what we're talking about here is not, or is really the price change mechanism within a contract. So at the beginning of a three to five-year contract, we negotiate to market prices with our customer, and then we have a price change mechanism within that three to five-year contracts as to how prices adjust during that time period. There have been third-party sources for that, and we also offer a cost model and an index model is what we had rolled out.
Where we don't see, p rimarily see the inaccuracy in the third party models is mostly in recycled and unbleached, where there's just not a significant amount of open market or sales of pure paperboard because the businesses are so highly integrated, both with us and our competitors. We believe that there's a better model that gets to our customers' goal and our goal of transparency and accuracy. That's what all we're trying to do. Given these are long-term contracts, we've continued to make some progress in moving away from the third party index and to our cost model and our index model. But it's a journey.
That makes sense. One of the big parts of the story, and of course even the slides there, was on the free cash flow and focus on the balance sheet. Last week you did restructure some of your credit agreements in light of the inventory curtailment.
Exactly.
It was leveraging go to 5x in 2026 and in 4.75x in first half 2027. Not that those are your targets, but the covenant ceiling. As I read that, higher in 2026 comes down in first half 2027. How much inventory curtailment is still needed? As I read that, if it comes off in second half 2027, does that mean the inventory curtailment is done after first half 2027? Any color you can give there?
It's a great point, and we did, of course, get an adjustment to our leverage ratio targets last week, as you said. That allows us to take the inventory out in 2026 and we'll see. We'll print the leverage ratio as we said at, you know, somewhere over 4x . We do think that that's of course too high, our short term priorities, as Robbert mentioned, are to pay down debt and pay down that $500 million of debt. We are focused on the inventory reduction in 2026. As Robbert said, our long term target is 15%-16% of sales. In 2026, our guide would get us to about 17%. There'll be a little bit more that continues into 2027 and beyond of the inventory takeout. But looking to get it behind us pretty soon after 2027.
Appreciate the detail there. Also in regard to that credit agreement, how does it impact any allocation towards repurchases or your dividend considerations going forward? As I know that's
Yeah
Certainly been a, you know, stable dividend has been a part of the story as well.
Yeah. In the short term, our capital allocation priority is to pay down debt and get our leverage back into a good spot. In more medium term, we do see the opportunity to have share repurchases and would anticipate that being a part of the story over the medium term once our leverage ratio gets back into a more comfortable range. After kind of in that medium term that we would have a balance of debt pay down and share repurchases on our journey to investment grade by 2030.
Thinking about some of the other puts and takes in that free cash flow profile, you know, how much CapEx going forward is driven by maintenance or growth projects, and what's the current base sustaining requirement? Any examples of discretionary spending projects that you will continue or pull back on to focus on that debt reduction?
Yeah. Overall, I'd say we have a very well invested set of assets. We of course just had a CapEx investment program with our K2 machine, our Waco machine. We have an overall very well invested asset base. Our goal as Robbert talked about, is to lower CapEx, drive free cash flow, and return that to stakeholders through debt pay down, share repurchases. We believe that with sustaining requirements or regulatory requirements and our well invested asset base, that below 5% is a sustainable level for us. That is the target. We will continue to reevaluate every project, make sure it drives an appropriate return.
There are of course productivity projects that we'll invest in to automate our labor force and to continue to improve our operations. Those will have short paybacks and a high return and drive our return on invested capital up.
Thank you, Chuck. I do wanna somewhat round trip this discussion because Robbert, I initially I think said, you know, 60 days into 90 days, and I have the 90-day review going on. You've also alluded to potential divestitures. As you analyze the business as a whole, are there certain categories you're focused on more or potential opportunities, whether that's mills, converting plants, geographies, end markets? You know, are there sacred cows, if you will, within the Graphic portfolio that are just untouchable?
Very good question. Two-thirds into the first 90 days, it's really too early to share any specifics. I would say that, you know, we are a cash flow generating business with a very strong customer portfolio, very loyal customer base, high growth potential over the next coming years, in need of more disciplined spending and operational excellence. I have announced that we're driving productivity, particularly looking at SG&A this year. Beyond that, we're looking at procurement as well, and footprint optimization, potentially in the converting side. We have announced a selective portfolio review.
That's a, asset-by-asset or review of certain assets that we acquired, that we're just trying to understand whether or not they are core or non-core to our business, and then could they play a role in potentially an accelerated debt pay down in the mid to long term. We are in the middle of that assessment, and, you know, obviously we have a lot of work we're doing right now, and we'll keep you posted.
All right. Well, we'll look forward to hearing more on that. With that, I do wanna thank you all for attending the conference and being with us today, Robbert, Chuck, and Mark alike. We will have a breakout session after this downstairs in Cordova. Cordova? My accent's bad. Cordova 5. Again, thank you all for being with us today.
Thank you, Matt.
Thank you.