GPGI, Inc. (GPGI) Earnings

Management highlights

• CompoSecure performing better than expected, with excellent implementation of Resolute Operating System for growth and operations. • Husky encountered unanticipated market headwinds due to oil market volatility and tariffs, with customers delaying orders and reducing new orders. • Husky leadership aggressively tackling ROS implementation for growth and operations. • ComposeSecure's new leadership energized the team, improved culture, and has better commercial prospects. • Continued to fund R&D expansion as it benefits future business. • Kevin Moriarty stepped in as Husky's acting CFO. • Focus on navigating market headwinds, implementing ROS, increasing R&D and commercial excellence. • CompoSecure is 18 months into Resolute Operating System implementation with positive cultural and operational impact. • Husky's installed base of 13,500 systems drives aftermarket revenue, and its products offer low total cost of ownership. • Husky implementing targeted furloughs, managing indirect spend, reinvigorating sales force, and focusing on ROS implementation. • ComposeSecure saw strong revenue growth with new program wins across fintechs and traditional financial institutions.

Guidance

• For 2Q26, expect net sales between $425 and $475 million, pro forma adjusted EBITDA between $105 and $120 million, and pro forma adjusted EBITDA margins between 24.7% and 25.3%. • For FY26, now expect pro forma net sales between $1.95 and $2.1 billion, pro forma adjusted EBITDA between $550 and $610 million, and pro forma adjusted EBITDA margins between 28.2% and 29%. • Expect pro forma adjusted free cash flow between $275 and $325 million. • Anticipate ending the year with approximately three times total leverage.

Segment performance

GPGI delivered pro forma adjusted net sales of $421.2 million, up ~3% from prior year. Pro forma adjusted EBITDA was $82.1 million, down ~16% from prior year, with pro forma adjusted EBITDA margins of 19.5%, down ~430 basis points. ComposeSecure had record sales, with pro forma net sales of $130.4 million, up 26% YOY, and pro forma adjusted EBITDA of $47.6 million, up 37% YOY. Husky had pro forma adjusted net sales of $290.8 million, down 5% YOY, and pro forma adjusted EBITDA of $38.2 million, down 40% YOY. ComposeSecure's ROS initiatives led to step change in manufacturing yields and operational efficiencies. Husky faced market headwinds due to oil market volatility and tariffs, with orders and backlog affected. Pipeline at Husky grew 4% YOY through first quarter and 7% YOY through April.

Risks & headwinds

• Market headwinds for Husky due to oil market volatility and tariffs, causing customers to delay orders and reduce new orders. • Uncertainty regarding how long the market headwinds for Husky will continue. • Tariff policy pivots adding uncertainty to customer order placement, although US market represents less than 27% of total sales.

Analyst Q&A

• Q: Hey guys, appreciate you taking the questions. I just kind of want to understand on the guidance a little bit better and make sure I have clarification on the slide 13. You have kind of two arrows pointing to the high end and the low end. So the low end represents, you know, Iran conflict being delayed with the straight disrupted and the high end would be if the conflict is resolved. I guess, you know, if you could give a little bit better sense on, you know, like timing, you know, does the low end of the range, I guess, assume the conflict lasts the remainder of the year or, you know, does the high end assume that this is over to borrow? Any kind of comments you can give there?

  A: Yeah, the way I would look at it is what we're trying to reflect is the impact of delays. So if the delays continue because the Iran conflict keeps going, then those delays are going to cause us to come into the lower end of the range. To the extent that our customers let go of those delays, and maybe even if the conflict is continuing, but they stop delaying because they need the aftermarket or they need the machines, then we'll end up towards the higher end of the range. So it's more a reflection of what do we think could happen on customer delays, today driven by the Iran conflict and tariffs.

• Q: And then I guess, you know, just kind of continuing on the guidance factor, you know, when you look at kind of the second half for adjusted EBITDA, you know, I think it implies relatively, you know, higher adjusted EBITDA in the second half. I know Q4 is a strong quarter for Husky, but, you know, we're looking at kind of 450 to 550 million of EBITDA in the back half versus the first half. So I guess any color there, especially when you kind of talk about the, you know, the margins compressing on Husky a little bit.

  A: This is Kevin. If you look at our first half, second half, seasonally, second half represents roughly 60% of our revenue base. And again, with the cost better cost absorption, variable contribution margins improving, as well as the cost actions, we feel that the second half will be stronger.

• Q: And then just lastly, on Compost Secures, on the core business there, I'm wondering if you could touch on the, I guess, new card launch pipeline. Is that strong looking at the kind of the last three quarters of the year?

  A: Yeah. The pipeline continues to be quite strong, and we see it in a number of different dimensions. The programs that we have with our existing customers, those customers are also continuing to create and generate new programs also. And then lastly, we continue to penetrate a new customer base, both internationally and domestically, and also with fintechs and with our traditional banks. So we continue to be quite optimistic about the strength of the pipeline that we have and what we're seeing going forward.

• Q: Good morning, everyone. Morning. Thank you for taking my questions. I'd like to ask about the Huskies margin declined by 770 basis YOY in first quarters. So looking ahead to second quarter and reminder of the year, what specific factors or initiatives do you expect will drive margin improvement toward your full year guidance? Could you clarify the key assumptions for margin recovery in the back half, please?

  A: Sure. So as I alluded to, the first quarter is historically our lower revenue number. So as we sequentially go through the year, revenue will grow, which has been our historical pattern, every year weighted to the third and fourth quarters. So the variable contribution margin we're expecting on that is going to, again, sequentially improve the margin rate. driving the ROS initiatives internally, which we expect to provide some lift, as well as we've commented on cost actions that we're taking. We institute some furloughs, as well as some indirect cost actions that we're also expecting to provide some lift.

• Q: And a follow-up regarding leveraging the ROS to drive the margin improvement for Husky. Could you share some examples of the cultural changes and operational opportunities being executed to enhance resilience and profitability, please?

  A: Sure. Maybe I'll start. It's Robert. One of the biggest things is what I mentioned, the SAOP process is really intended to level out the factories. It's hard to keep your costs under control if you have peaks and valleys, but with level loading of the factories, it's much easier to get the labor and material costs aligned with the volume that's coming out of the factory. So that's one of the biggest initiatives that we have right now. With reduced lead times, that also helps to level load the factories, not just making us more competitive, but more profitable as well. We have a significant focus on the supply chain and procurement excellence. that's helping with material cost reduction. And finally, on the commercial excellence side, our whole go-to-market approach, we are taking steps to have some very effective value propositions globally rolled out, especially with regards to our new product launches.