GPGI, Inc. 2026 Q2 Earnings Call

Please go ahead. Good morning, and welcome to GPGI's second quarter conference call.

This morning's remarks will include forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially, including those disclosed in our SEC filings, available at sec.gov and on our IR website. Additionally, definitions and reconciliations of non-GAAP measures used today appear in today's press release and earnings presentation, which are available in our SEC filings and on our IR website. As a reminder, following the Resolute Holdings spin-off, GPGI accounts for GPGI Holdings, including our CompoSecure and Husky businesses under the equity method of accounting in accordance with GAAP. With that, I will turn over the call to Executive Chairman Dave Cote.

Morning, everyone. GPGI continues to execute with discipline and focus with our customers at the center of everything we do. In the second quarter, we continued to see progress across the platform and delivered results that were consistent with both our expectations and the guidance range we introduced last quarter. The results were driven by continued strength at CompoSecure and some indications of relief as we continue to navigate transient market headwinds at Husky. Starting with CompoSecure, we're seeing the continued transformative impact of ROS on growth and operations, delivering record sales, strong operating performance in both year-over-year and sequential margin expansion. With robust demand from a broadening base of customers, CompoSecure is well-positioned to continue accelerating organic growth and improving profitability in the second half of the year.

CompoSecure is one year ahead of Husky in the deployment of ROS, and we are seeing how cultivating a high-performance culture and making strategic investments enable a sustained inflection in financial performance. Turning to Husky, we're navigating through transient market headwinds caused by volatile resin prices and shipping disruptions related to the conflict in the Middle East, and continued tariff uncertainty. The macro environment has improved marginally since we last spoke to you, as oil and resin prices have come off their previous peaks set in late April, and our customers are beginning to have a bit more confidence in making purchase decisions. However, the second quarter was still impacted by macro uncertainty, and we're beginning to see pockets of demand recovery and continue to expect a strong second half that is consistent with historic seasonal trends.

In addition to demand gradually returning, we expect improved operating leverage and discrete cost actions to drive margin expansion, both sequentially and year-over-year through the second half. Importantly, we're starting to see initial signs of ROS taking hold at Husky and are aggressively accelerating its implementation to drive durable organic growth and sustainably higher margins. As a reminder, ROS is the cornerstone of how we operate GPGI. It represents an end-to-end commitment to grow sales, control costs, and generate the cash necessary for seed planting, accretive investing, and compounding returns for investors. ROS is how we translate strategy into results, be it operating metrics, financial performance, or strategic breakthroughs. I'll let Graham and Rob provide specific examples of how ROS is moving the needle at CompoSecure and Husky, but we'll note how this daily mindset compounds performance over time and builds the next generation of world-class operators.

Looking at CompoSecure, we clearly see the inflection in growth and profitability enabled by our investments in the sales force and R&D over the past 21 months. This demonstrates the multifaceted focus of ROS well beyond just managing costs. The ROS flywheel specifically requires cultural change to catalyze operational change. That is why I'm so pleased we announced the appointments of Mohammad Kanaan as Chief Financial Officer and Karen Stone as Chief Human Resources Officer of Husky. Mohammad and Karen are proven leaders with significant global experience that will accelerate the cultural transformation Rob is leading across the business, and both will be integral to our next phase of growth. Change agents make a difference. I also want to highlight how we think about GPGI's long-term growth algorithm.

Specifically, we're focused on delivering mid to high single-digit annual organic growth over 100 basis points of annual margin expansion through the deployment of ROS, double-digit plus annual EBITDA growth, and 90%-100% free cash flow conversion over time. This is happening while we are strategically investing in the businesses, doing the seed planting today that is necessary for them to achieve their potential tomorrow. The plan is simple. We intend to grow GPGI's earnings and cash flow faster than the market to deliver superior, durable through the cycle returns for our investors. To conclude, we're extremely focused on execution, remain well positioned to deliver in the second half, and are reiterating our full-year guidance. We're also continuing to pursue critical seed planting initiatives to deliver in 2026 and accelerate into 2027.

This includes strategic investments and operational improvements that position GPGI to capture incremental sales and margin as Husky's markets rebound. Overall, our thesis remains firmly intact and we're excited about the path GPGI is on. With that, I'll turn it over to Tom Knott, our CIO.

Thank you, Dave, and good morning, everyone. Going to slide four, GPGI delivered pro forma adjusted net sales of $473.2 million, down approximately 4% from the prior year. Pro forma adjusted EBITDA of $113.9 million, down approximately 13% from the prior year, and pro forma adjusted EBITDA margins of 24.1%, down approximately 230 basis points from the prior year. Despite the market headwinds at Husky, GPGI also generated approximately $63 million in pro forma adjusted free cash flow in the second quarter, significantly higher than the prior year. As Dave mentioned, these results were in line with our expectations. Turning to slide five, we are reiterating our full year revenue, adjusted EBITDA, and free cash flow guidance.

We continue to expect pro forma net sales between $1.95 billion-$2.1 billion, pro forma adjusted EBITDA between $550 million-$610 million, and pro forma adjusted free cash flow between $275 million-$325 million, which we define as cash from operations less capital expenditures, adding back one-time Husky transaction expenses on a full-year pro forma basis. While these guidance ranges remain the same, we are adjusting our pro forma adjusted EBITDA margin guidance to between 27%-29% to reflect tariff pass-through revenues and the potential mix impact at Husky from stronger system performance through the remainder of the year than we anticipated last quarter. Our full year 2026 guidance translates into roughly flat year-over-year revenue and approximately 7% pro forma adjusted EBITDA growth in the midpoint, even with the market-driven weakness at Husky, highlighting the resilience of the combined GPGI platform.

Relatedly, I want to address the key components for the second half's performance. Starting with CompoSecure, we expect strong revenue growth and margin expansion to continue through the rest of the year. For Husky, we expect a second half consistent with historical seasonality, coupled with improved labor and fixed cost absorption and ROS-led efficiency gains and full realization of savings from discrete cost actions to support anticipated sequential and year-over-year margin improvement. With respect to our capital structure, we remain focused on debt paydown and are still targeting three times leverage by the end of 2026. Our long-term leverage target at GPGI is between two and two and a half times, excluding potential one-time step-ups for strategic acquisitions.

We continue to view 2026 as a critical year of cultural change, ROS implementation, and strategic seed planting at both businesses to position us for best-in-class top-line growth, margin expansion, and free cash flow generation across GPGI. This remains our focus, and we are confident in the work that is underway. Moving to slide six, I want to take a moment to discuss our philosophy regarding capital allocation at GPGI. First and foremost, we are focused on acquiring and operating companies with great positions in good industries, as the company's name suggests. These businesses, like CompoSecure and Husky, should all generate high returns on invested capital because that is what results from having a great position in a good industry. We then aggressively deploy the Resolute Operating System into each owned business, taking a systematic approach to operational improvements that both accelerate growth and drive margin expansion.

This results in even higher returns on capital and accelerating growth in earnings and cash flow. With this cash flow, we first prioritize organic investments and bolt-on acquisitions, as these investments usually have the highest returns on capital and serve to further bolster the competitive moats of each owned business. This is how we are building CompoSecure and Husky today. We are aggressively deploying ROS, actively making significant organic investments, and consistently evaluating bolt-on acquisitions for both companies. While early days, this is the organic flywheel we expect will create compounding returns at GPGI. We are excited about the prospects for GPGI with just the two businesses we own today. CompoSecure and Husky each have their own high-return investment opportunities, and we have the luxury of not needing to acquire any new platform businesses.