Executive Summary / Key Takeaways

• Graphic Packaging has transformed into a leading sustainable consumer packaging company, shifting focus from paperboard sales to integrated packaging solutions driven by innovation and efficiency.
• Despite recent market headwinds from consumer spending pressure and input cost inflation, the company's diversified portfolio and operational execution have maintained solid margins.
• The strategic investment in the Waco recycled paperboard facility, nearing completion, is the final major asset build of the Vision 2025 plan, expected to drive significant cost and quality advantages and contribute $80 million incremental EBITDA in both 2026 and 2027.
• With peak capital expenditures in 2024, the company is entering a multi-year free cash flow expansion cycle, prioritizing returns to stockholders through a growing dividend and a substantial new share repurchase authorization.
• Innovation in sustainable packaging solutions (e.g., PaperSeal, Boardio, EnviroClip) remains a key growth driver, contributing significant innovation sales growth and positioning the company to outperform end markets and capture share from less sustainable alternatives.

A Transformed Enterprise: Building a Sustainable Packaging Powerhouse

Graphic Packaging Holding Company has undergone a profound transformation over the past decade, evolving from a more commoditized paperboard producer into a global leader in sustainable consumer packaging. This strategic pivot, significantly accelerated since 2016, has centered on building a robust, diversified packaging portfolio and enhancing integrated operational capabilities. The journey involved consolidating within the converting industry and making targeted acquisitions, notably ANR in Europe to bolster innovation and Bell to expand the foodservice platform.

A critical step in this evolution was the divestiture of the Augusta bleached paperboard manufacturing facility in May 2024. This move, while impacting reported sales and EBITDA in the short term, was strategically aimed at shedding an asset lacking the desired competitive advantage and redirecting capital to higher-return opportunities. Post-Augusta, approximately 95% of Graphic Packaging's sales now stem from high-value consumer packaging solutions, underscoring the shift in focus.

The core of Graphic Packaging's strategy lies in its integrated model, where it manufactures a significant portion of the paperboard it converts into packaging. This integration is seen as a source of competitive advantage, driving higher returns on invested capital and enabling more consistent results. The company's investment in its integrated system is exemplified by the new recycled paperboard manufacturing facility in Waco, Texas, expected to commence operations in the fourth quarter of 2025. This facility, alongside the Kalamazoo, Michigan operation, is designed to provide a long-term competitive edge in the production of coated recycled paperboard and coated unbleached paperboard. As part of this network optimization, Graphic Packaging plans to close two smaller recycled paperboard facilities, including the Middletown, Ohio plant in June 2025, consolidating production into larger, more efficient sites.

This transformation positions Graphic Packaging to compete effectively in a dynamic market where consumer preferences are increasingly favoring sustainable packaging and value. The company's broad portfolio spans food, beverage, foodservice, household products, and health and beauty markets, allowing it to adapt to shifting consumer buying habits and channel preferences, such as the growth in private label and mass retail.

Technological Leadership: The Engine of Innovation and Differentiation

At the heart of Graphic Packaging's competitive strategy is its commitment to technological differentiation and innovation in sustainable packaging. The company leverages its integrated paperboard manufacturing capabilities and specialized converting technologies to develop solutions that are more circular, functional, and convenient than traditional alternatives.

Key to this is the investment in modern, efficient paperboard mills. The new Waco facility, modeled after the successful K2 machine in Kalamazoo, represents a significant technological leap. It is designed not only for high-quality coated recycled paperboard production but also incorporates advanced capabilities like the ability to recycle up to 15 million paper cups per day, utilizing cups as a valuable fiber source. This technological feature provides a distinct advantage in sourcing and sustainability. The Waco project, despite a recent increase in expected costs to $1.1 billion due to inflation and process enhancements, is anticipated to deliver substantial cost and quality benefits across North America, contributing $80 million in incremental EBITDA in both 2026 and 2027.

Beyond paperboard production, Graphic Packaging invests in cutting-edge printing and converting technologies. Examples include the Heidelberg XL-106 press in Poland for high-complexity printing and the Heidelberg 3D printing press in Winnipeg, which enhances productivity and design flexibility. Automation projects, such as the finishing goods handling system in Perry, Georgia, further improve operational efficiency and service levels.

The company's innovation efforts are channeled through five key platforms: Boardio, PaperSeal, EnviroClip, BoardWise, and PaceSetter Rainier. These platforms are driving innovation sales growth, contributing $44 million in Q1 2025 and $205 million in 2024, with a target of at least 2% of sales in 2025. These innovations offer tangible benefits:

• PaperSeal: Developed as a replacement for plastic trays and bowls, PaperSeal solutions can reduce plastic content by over 70% while offering excellent barrier properties and recyclability. A recent rollout with McDonald's (MCD) for McFlurry packaging replaced a plastic lid with a paperboard alternative, reducing single-use plastic and improving functionality.
• Boardio: This paperboard canister technology is expanding into new markets, including the U.S. coffee sector, providing a more sustainable alternative to traditional packaging formats.
• EnviroClip Beam: A proprietary, plastic and glue-free solution for PET bottle multipacks, offering stability and superior marketing surface compared to plastic rings or shrink wrap.
• PaceSetter Rainier: A 100% recycled paperboard designed to perform comparably to more expensive bleached paperboard, creating growth opportunities in demanding markets like health and beauty.

These technological advancements and innovation platforms are crucial competitive moats. They enable Graphic Packaging to offer differentiated, value-added solutions that meet growing customer and consumer demand for sustainability, functionality, and convenience. This allows the company to potentially command better pricing and capture market share from competitors offering less advanced or less sustainable options, supporting its long-term growth and margin profile.

Performance and Competitive Standing in a Challenging Environment

Graphic Packaging's financial performance in recent periods reflects the complex interplay of its strategic transformation, operational execution, and challenging external market conditions. In the first quarter of 2025, Net Sales decreased 6% year-over-year to $2.12 billion, primarily impacted by the Augusta divestiture and lower open market paperboard volumes and pricing. Income from Operations saw a larger 21% decline to $221 million, also affected by the divestiture, lower packaging price/mix, and commodity inflation, although productivity gains helped offset some costs. Net Income for the quarter was $127 million, resulting in $0.42 per diluted share.

Despite these pressures, the company has demonstrated resilience in maintaining solid profitability margins. Adjusted EBITDA margins remained strong and steady, registering 19.3% in Q4 2024 and 19.5% in Q3 2024, contributing to a full-year 2024 margin of 19.1%. This consistency, even amidst volume softness and cost headwinds, is a testament to the benefits of the company's transformed business model and operational focus, including strong net performance ($80 million in Q4 2024, $270 million in FY24).

Liquidity remains adequate, supported by cash flow from operations and significant availability under revolving credit facilities ($1.003 billion available as of March 31, 2025). While cash used in operating activities increased in Q1 2025 due to lower income and working capital needs, the company's financing activities, including borrowings under revolving credit facilities, provided ample cash flow. The balance sheet shows net leverage at 3.5x as of March 31, 2025. Management is comfortable with current debt levels and has no significant debt maturities until 2026, having recently extended bank debt and issued senior notes at favorable spreads.

In the competitive landscape, Graphic Packaging operates against a range of players, from large integrated paper and packaging companies like International Paper (IP) and Packaging Corporation of America (PKG) to diversified packaging giants like WestRock (WRK) and Amcor (AMCR), as well as numerous smaller, specialized firms.

Comparing key financial metrics (TTM):

• GPK: Gross Margin 21.70%, Operating Margin 12.25%, Net Margin 7.15%, EBITDA Margin 18.46%, Debt/Equity 1.81.
• IP (2024): Gross Margin 28%, Operating Margin 4%, Net Margin 3%, EBITDA Margin 12.42% (EV/EBITDA), Debt/Equity 0.72.
• PKG (2024): Gross Margin 21%, Operating Margin 13%, Net Margin 10%, EBITDA Margin 13.57% (EV/EBITDA), Debt/Equity 0.63.
• WRK (2023): Gross Margin 18%, Operating Margin -7%, Net Margin -8%, EBITDA Margin 6.41% (EV/EBITDA), Debt/Equity 0.85.
• AMCR (2024): Gross Margin 20%, Operating Margin 9%, Net Margin 5%, EBITDA Margin 11.06% (EV/EBITDA), Debt/Equity 1.85.

While GPK's TTM margins may appear somewhat lower than some peers like IP or PKG, this reflects the impact of recent market headwinds and significant ongoing investments. GPK's integrated model, particularly in the Americas, provides higher integrated margins compared to non-integrated operations. The company's strategic focus on value-added consumer packaging and innovation differentiates it from more commoditized paperboard segments where some competitors have greater exposure. GPK's technological advantages, such as the plastic reduction capabilities of PaperSeal or the quality of PaceSetter Rainier, provide a competitive edge in winning business based on performance and sustainability rather than just price.

The competitive environment is dynamic, with factors like imports (though management notes these are a small percentage of the U.S. market and face cost headwinds), new capacity additions (like on the SBS side), and competitor facility closures (like the recent CRP mill closures by others) influencing supply/demand dynamics. Graphic Packaging's strategy of consolidating its own paperboard production into highly efficient, integrated mills and focusing on its packaging conversion capabilities positions it to navigate these shifts from a position of strength, leveraging its cost position and innovation pipeline. The company actively works to transition customer contracts away from less transparent third-party indexes towards mechanisms that better reflect its cost base and the value of its packaging solutions.

Outlook and the Path to Vision 2030

Graphic Packaging's outlook for 2025 reflects the continuation of challenging market conditions tempered by the anticipated benefits of its strategic initiatives and the nearing completion of major investments. Management has adjusted its 2025 guidance to account for a more cautious view on market volumes and expected input cost inflation.

The base case for 2025 now assumes a 2% volume decline, with a wider range spanning from a 4% decline to flat volumes. This reflects the observed consumer pullback and the lack of significant volume uplift from customer promotional activities seen in Q1 2025. The guidance also incorporates an expectation for continued input cost inflation, estimated at roughly $80 million at the midpoint of the EBITDA guidance, which is expected to be recovered through pricing actions primarily in 2026.

For the full year 2025, the company expects Adjusted EBITDA in the range of $1.4 billion to $1.6 billion, with a midpoint of $1.5 billion. This range reflects the variability in potential volume outcomes and inflation levels. Adjusted EPS guidance reflects the impact of these assumptions.

Capital expenditures are projected to be approximately $700 million in 2025, a significant step down from the peak of $1.2 billion in 2024. This reduction marks the beginning of a multi-year free cash flow expansion cycle. Starting in 2026, capital spending is targeted at roughly 5% of sales, with approximately 2% dedicated to maintenance and the remainder available for growth projects, decarbonization initiatives, and productivity improvements.

This shift in capital allocation is a key component of Graphic Packaging's Vision 2030. With the Waco investment nearing completion as the last major asset build, the focus turns to leveraging the enhanced capabilities and generating substantial cash flow. The company expects to generate significantly more cash than required for reinvestment over the next several years, targeting approximately $5 billion in cash flow from 2024 onwards.

Priorities for deploying this cash are clear: reinvestment in the business (at the 5% of sales level), growing the dividend (a 10% increase to $0.11 quarterly was recently announced), opportunistic share repurchases (supported by a new $1.5 billion authorization, bringing the total available to over $1.8 billion), deleveraging (targeting net leverage below 3.5x by year-end 2025), and tuck-under M&A. Management is comfortable with the current debt levels and sees opportunistic buybacks as a key way to return value.

The Vision 2030 financial model targets low-single-digit sales growth (driven by innovation), mid-single-digit Adjusted EBITDA growth (benefiting from operating leverage, Waco returns, and productivity), and high-single-digit Adjusted EPS growth (enhanced by lower leverage and reduced share count over time). The Waco facility is a critical enabler of this, expected to contribute $80 million in incremental EBITDA in both 2026 and 2027 through cost advantages and consolidation benefits.

Key risks to the outlook include the trajectory of consumer spending and the effectiveness of customer promotional activities in driving volume, the volatility of input costs and the timing of price recovery, and broader macroeconomic and geopolitical uncertainties. However, Graphic Packaging's diversified portfolio, focus on essential consumer goods, integrated model, and commitment to operational efficiency and innovation provide resilience against these headwinds. The company's strategy of running to demand and managing inventory levels is intended to maximize cash flow in the current environment while positioning the business for eventual market recovery.

Conclusion

Graphic Packaging has successfully transformed into a leading sustainable consumer packaging company, strategically shedding non-core assets and investing heavily in its integrated, high-return packaging platform. While the near-term outlook is tempered by challenging consumer demand and input cost volatility, the company's operational execution has demonstrated the ability to maintain solid margins.

The completion of the Waco facility marks a pivotal moment, concluding a period of significant capital investment and initiating a new phase focused on leveraging enhanced capabilities, driving efficiency, and generating substantial free cash flow. The clear capital allocation priorities, including a growing dividend and aggressive share repurchase program, signal management's confidence in the company's future cash generation potential.

Graphic Packaging's technological leadership in sustainable packaging provides a crucial competitive moat, enabling it to partner with customers on innovation and capture growth opportunities driven by evolving consumer preferences and regulatory trends. While competition remains robust across various packaging materials and formats, Graphic Packaging's integrated model, cost-advantaged mills, and customer-centric innovation position it favorably.

Investors should recognize that while current market conditions present headwinds, Graphic Packaging's strategic transformation has built a more resilient business model. The investment thesis hinges on the successful realization of benefits from the Waco facility and planned closures, the continued execution of the innovation pipeline, and the company's ability to translate its growing cash flow generation into enhanced shareholder returns. Monitoring the trajectory of consumer volumes and the effectiveness of pricing actions in offsetting inflation will be key factors in assessing the pace of value creation in the quarters ahead.