GPGI, Inc. (GPGI) Earnings

Management highlights

### Core Operating System (ROS) Deployment - ROS is the company's end-to-end operational framework focused on growing sales, controlling costs, generating cash, and driving cultural transformation to enable sustained margin and growth improvements. Composecure is one year ahead of Husky in ROS rollout, with the framework already delivering a clear inflection in growth and profitability for the segment. - At Husky, which is in the early stages of ROS deployment, the framework is already driving measurable operational improvements: daily cross-functional meetings to improve factory loading, reduce lead times, and increase output; stronger commercial focus for aftermarket growth; and disciplined indirect spend rationalization. - New CFO Muhammad Kanaan and CHRO Karen Stone were appointed to Husky's leadership team to accelerate the company's cultural and operational transformation, alongside promoted SVP of Operations Benoit Jean-Jo, who brings deep operational expertise to deepen ROS deployment across Husky's global footprint. ### Composecure Strategic Progress - Composecure serves a growing diversified base of over 200 active card programs, with recent high-profile program wins including Samsung, US Bank Amazon Business, and American Express Delta SkyMiles Reserve. It won five Elon Awards of Excellence for product design and innovation at the 2026 ICMA Expo. - Growth pillars are accelerating organic penetration of the debit card market, expanding international operations (supported by a new London design center), growing adoption of the Arculus product platform, and exploring new verticals beyond payment cards. Industry fundamentals are supported by growing global adoption of premium metal payment cards, driving durable recurring revenue from card issuance, reissuance, and upgrades. ### Husky Business Model and Strategic Initiatives - Husky serves essential non-discretionary packaging end markets (beverage, food, medical) that are resilient across economic cycles, with a diversified revenue mix: 30-35% from new systems, 40% from aftermarket tooling, and 25-30% from recurring service. It has a global installed base of ~13,500 systems, supporting stable recurring aftermarket revenue. - Current market weakness is characterized by temporary demand deferral (not cancellation) driven by macro uncertainty, volatile resin prices, geopolitical tension, and tariff policy uncertainty. The company sees early signs of stabilization and growing pipeline activity across systems and aftermarket tooling. - Discrete cost actions implemented in Q2 focus on improving productivity, optimizing labor, reducing discretionary spending, and tightening SG&A discipline. These actions have already begun delivering savings, with full benefits expected in H2 2026, while preserving capacity to capture growth when demand recovers. - Long-term growth is supported by structural tailwinds including sustainability-driven lightweighting and plastic circularity regulation, growing demand for PET packaging, and an aging global installed base. Recent product innovations include a new packaging machine platform, upgraded aftermarket tooling, and a tiered digital Advantage Plus service platform to expand recurring revenue. ### Long-Term Growth and Capital Allocation Framework - GPGI's long-term targets are mid-to-high single-digit annual organic growth, over 100 basis points of annual margin expansion from ROS, double-digit annual EBITDA growth, and 90-100% free cash flow conversion over time. - Capital allocation prioritizes organic investments and bolt-on acquisitions for existing portfolio companies, which generate the highest returns on invested capital and strengthen competitive moats. New platform acquisitions are only pursued if they meet strict criteria: durable high ROIC business positioned to benefit from ROS, acquired at a fair price that delivers accretive returns. - Management notes a large and growing pipeline of large PE-owned businesses that lack a viable exit path via traditional IPO, creating a structural market opportunity for GPGI to acquire attractive assets. GPGI has no mandatory acquisition targets or deployment requirements, and will remain disciplined in evaluating new opportunities.

Guidance

- Management reaffirms full year 2026 guidance for pro forma net sales in the range of $1.95 billion to $2.1 billion, pro forma adjusted EBITDA between $550 million and $610 million, and pro forma adjusted free cash flow between $275 million and $325 million. - Full year pro forma adjusted EBITDA margin guidance was adjusted to a range of 27% to 29%, to account for tariff pass-through revenues and stronger-than-expected system performance at Husky for the remainder of the year. - The reaffirmed full year guidance translates to roughly flat year-over-year revenue and ~7% pro forma adjusted EBITDA growth at the midpoint, even with market weakness at Husky, demonstrating the resilience of GPGI's combined platform. The guidance does not assume material further improvement in macro conditions, and management confirms it can hit targets with current market conditions holding. - Management expects Composecure to deliver continued strong revenue growth and margin expansion through the second half of 2026. For Husky, management expects revenue to be flat to slightly up year-over-year in H2, with sequential and year-over-year margin expansion driven by seasonal strength, improved fixed cost absorption, ROS efficiency gains, and full realization of discrete cost savings. - GPGI maintains its target of 3x net leverage by the end of 2026, with a long-term target leverage range of 2x to 2.5x (excluding temporary step-ups for strategic acquisitions).

Segment performance

GPGI overall delivered pro forma adjusted net sales of $473.2 million, a 4% year-over-year decline, with pro forma adjusted EBITDA of $113.9 million, a 13% year-over-year decline, and a pro forma adjusted EBITDA margin of 24.1%, down 230 basis points year-over-year. It generated $63 million in pro forma adjusted free cash flow, which was significantly higher than the prior year. - Composecure: Delivered record adjusted net sales of $133.6 million, up 12% year-over-year, contributing ~28.2% of GPGI's total Q2 net sales. Record adjusted EBITDA came in at $55.2 million, up 14% year-over-year, with an adjusted EBITDA margin of 41.3%, up 70 basis points year-over-year. - Husky: Delivered adjusted net sales of $339.6 million, down 9% year-over-year, contributing ~71.8% of GPGI's total Q2 net sales. Adjusted EBITDA was $64.9 million, down 23% year-over-year, with an adjusted EBITDA margin of 19.1%, down 330 basis points year-over-year. The segment expanded margin 590 basis points sequentially quarter-over-quarter due to improved volume and better fixed cost absorption.

Risks & headwinds

- Husky faces transient headwinds from macroeconomic uncertainty, volatile oil and resin prices, Middle East shipping disruptions, ongoing tariff policy uncertainty, and foreign exchange headwinds, which have driven temporary customer demand deferral for new systems and aftermarket tooling projects. - Elongated sales cycles at Husky, driven by customer wait-and-see behavior amid market volatility, could lead to further delayed conversion of the strong project pipeline if macro conditions do not stabilize. - While the company's diversified global manufacturing footprint helps mitigate tariff impacts, evolving trade policies continue to influence customer purchasing timelines, creating uncertainty for near-term revenue and order timing. - ROS deployment at Husky is still in early stages, and full transformation and margin improvement may take longer than currently expected, even with recent leadership additions to accelerate change.

Analyst Q&A

• Q: For Husky, management says deferred demand rather than canceled demand. Can you share pipeline conversion details, and what leading indicators you are watching to confirm H2 acceleration versus further delay into 2027? /

  A: Management declined to share specific pipeline conversion numbers, but noted the overall pipeline has grown double-digits since the last earnings call, with stronger order growth than previously expected. Growth is broad-based globally across both PET systems and packaging machines, with recent acceleration also seen in aftermarket tooling pipeline growth, a positive sign for upcoming demand.