Earnings Call Transcript - GPGI Q4 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the GPGI, Inc. Fourth Quarter 2025 Earnings Conference Call. Please note that today's conference is being recorded. I would now like to hand the conference over to your speaker host for today, Sean Mansouri, Investor Relations for GPGI. Please go ahead.

Sean Mansouri, Investor Relations

Good morning, and welcome to GPGI's conference call today, where we will review GPGI's fourth quarter 2025 financial results. With me on the call are the business leaders from GPGI, Resolute Holdings, CompoSecure, and Husky. We will begin with prepared remarks and then open the call for Q&A. During the call, we will make statements related to our business that may be considered forward-looking, including statements about our growth strategy, customer demand, our ability to maintain existing and acquire new customers; implementation of the Resolute operating system and our guidance for 2026, as well as other statements regarding our plans and prospects. For a discussion of material risks and other important factors that could affect our actual results, please refer to the information in our annual report on Form 10-K and other reports filed with the SEC which are available on the Investor Relations section of our website and on SEC's website at sec.gov. Please note that effective as of February 28, 2025, and the date of the spin-off of Resolute Holdings management and as a result of the management agreement between Resolute Holdings management and GPGI's fully owned subsidiary, GPGI Holdings LLC, the results of operations of GPGI Holdings and the operating companies, which are its subsidiaries are not consolidated in the financial statements of GPGI and instead are accounted for under the equity method of accounting. For more information about our financial presentation, please see our annual report on Form 10-K. In the earnings release we issued earlier today, and in the discussion on today's call. We also present non-GAAP financial measures to help investors better understand our operating performance. The company believes these non-GAAP financial measures provide useful information to management and investors regarding certain financial and business trends impacting the company's financial condition and results of operations. These non-GAAP financial measures should not be considered as an alternative to performance measures derived in accordance with U.S. GAAP and may be different from similarly titled non-GAAP measures used by other companies. A reconciliation of GAAP to non-GAAP measures is available in our press release and earnings presentation available on the IR section of our website. Thank you. And with that, let me turn the call over to Executive Chairman, Dave Cote.

David Cote, Executive Chairman

Good morning, everyone. Before we get into the fourth quarter and full year results, I want to begin with a more detailed overview of what we are building at GPGI to provide more context on the platform and our objectives going forward. Now this is going to be a longer introduction than you can expect in the future as we want to clearly articulate our strategy and structure on this first earnings call as GPGI. There will also be longer presentations from each business for the same reason than you will see in the future. GPGI is a diversified multi-industry platform that was purpose-built to acquire and operate companies that hold great positions in good industries. Following the completion of our acquisition of Husky, GPGI now owns two high-quality, market-leading businesses with best-in-class financials and durable growth profiles. Importantly, we believe Compo and Husky have opportunities to benefit from the systematic deployment of the Resolute operating system, ROS. And that work is already underway at both businesses. Our vision for the GPGI platform is to help Compo, Husky and businesses we may acquire in the future, achieve their full potential by combining GPGI's permanent capital base with the systematic deployment of the Resolute operating system and implementation of a high-performance culture. This idea to marry permanent capital with superior operating practices began years ago when Tom and I first partnered together and ultimately acquired Vertiv. With the creation of GPGI, we are now refining this approach and believe it represents a needed innovation in the marketplace that is well positioned today and for the future. We have our business leaders on the call today, and you will hear directly from both the Compo and Husky teams regarding their respective businesses. Before getting there, I 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% to 100% free cash flow conversion over time. 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. This relationship between GPGI and Resolute Holdings is intentionally inextricably linked. The success of Resolute Holdings is tied to the success of GPGI. We designed the structure to empower the leadership teams of each acquired business to operate with all the benefits of permanent capital but without the constraints that often come with a bureaucracy of typical public company corporate infrastructure. This allows us to help with the efficient implementation of ROS M&A strategy and capital allocation without distracting leadership teams at each business. A final point. I've mentioned on previous calls how confusing the accounting we are required to use is. To keep it simple, you should evaluate GPGI's performance by looking at the core non-GAAP operating results, which includes the deduction from the management fee paid to Resolute. GPGI is the operating company. Conversely, RHLD's results reflect that same management fee income less its own operating expenses. It is the asset management company. It really is pretty simple, entirely complicated by the accounting we are required to use. The value creation playbook at GPGI marries disciplined underwriting from a permanent capital base with operating excellence to drive superior performance. We do this by relentlessly implementing the Resolute operating system, developing a truly high-performance culture at each business and investing with discipline in assets that meet our tried and true six investment criteria. Our structural advantage for acquisitions works effectively. The Resolute operating system with a high-performance culture applied to businesses that have a great position in a good industry works quite effectively. The strategy is not new. It's one we have consistently deployed and delivered across multiple public companies over the years. Establishing a high-performance culture is central to the value creation process. A high-performance culture does not just happen. It involves people and process. It starts with everyone focusing on what is right for the customer. Every company talks about the customer, but few focus their entire culture on it. These are the process pillars of how cultures begin to transform. These are the tools that help foster high-performance cultures and teams, which in turn are what ultimately deliver results. We are intentionally embedding these norms across GPGI and view a high-performance culture as foundational to maximizing the potential impact of ROS in each business. It is not just about a great attitude. You have to have something fundamentally strong to apply it to. Hence, the need for GPGI, great positions in good industries. The Resolute operating system is our proprietary approach to operating businesses. It's an adaptation of the Toyota production system. It really comes down to three areas of focus: growing sales, controlling costs and generating the cash necessary for planning and delivering returns for investors. Our approach is centered around our customers, delivering end-to-end commercial excellence and continuing to innovate on new products and services that meet and exceed customer demand. This strategy is made possible by a capital structure that allows us to prioritize investments in R&D for new products and services and provide support to the go-to-market functions to appropriately cover the markets we serve. Taken together, we improved cash generation with greater profitability, which allows us to invest more back into the business to drive more innovation and growth while concurrently being able to deliver returns for investors. The flywheel begins spinning when these investments drive growth that delivers increasing profit through necessary cost controls, which in turn enables more investment growth than profits. This is the add of making the right decisions for each business today and for the long term at the same time. Shifting to how we think about implementing ROS in our underlying businesses. ROS is the operational cornerstone of every GPGI business, and it consists of three phases. We start with a period of seed planting where we laid the foundation for excellence. This represents the time immediately after we acquire a business where monthly growth days and deployment of our playbook of best practices across all functions begins. The second phase is where we continue making strategic investments to catalyze growth and innovation, implement lean principles and firm up cultural change from top to bottom. The third phase is where everything comes together in a culture of continuous improvement powers the flywheel necessary for a long-term compounding. The key is that ROS is not a one-and-done activity. It is a daily mindset for sustaining performance over time, and it's in every function. We are just beginning this journey with Husky, and while we are encouraged by our early efforts, there remains significant opportunity to continue the work underway at both Compo and Husky. To demonstrate how an operating transformation begins, we have a case study compiled on CompoSecure's performance since we got involved. From the time we made our initial investment in the company, we deployed ROS to catalyze growth, control costs and make strategic investments in the business. We're pleased with this early progress at Compo, but also know there is a lot more to achieve there over time. However, the inflection in performance you've been able to see, both top and bottom line performance is what cultural transformation paired with the deployment of the operating system is designed to do. This is the same approach we are taking at Husky, and we know that deploying ROS consistently across each business, while helping to cultivate a high-performance culture is a winning formula. And one we will apply to all GPGI businesses.

Thomas Knott, Chief Investment Officer

Thanks, Dave. I want to begin this section about our investment philosophy by explaining how we think about acquisitions. Fundamentally, we view acquisitions as opportunities and are focused on using the same discipline that we have used in the past for every opportunity we evaluate in the future. Deals must make sense, both in terms of business quality and in terms of valuation. We built GPGI to encourage the discipline, specifically because we have no deployment targets or timing pressure to acquire new businesses. We are very enthusiastic about the two businesses we currently own and believe in the opportunity to deliver strong organic top and bottom line performance with a continued focus on ROS implementation and cultural transformations underway at each company. Today, we do believe GPGI is uniquely positioned as a structurally advantaged acquirer of the increasing number of high-quality private businesses that need to access the public markets and that can benefit from our operating system. This universe consists of family-owned businesses, non-core divisions of public companies and a significantly growing number of businesses owned by private equity firms. We are confident in our platform's ability to offer superior outcomes for each of these different types of businesses, but we see the largest opportunity today among private equity firms that need to monetize their investments to return capital to their investors. Specifically, we are confident that our platform can deliver transactions that result in a win-win for both GPGI and a selling private equity firm that is superior relative to a traditional IPO. This paired with the excellent organic prospects for CompoSecure and Husky allows us to be selective as we evaluate potential businesses to add to the GPGI platform in the future. Wrapping up my comments, I believe it is important to again review the six investment criteria we use to evaluate businesses. It is how we look at companies, and it's important to discuss so that investors and potential sellers know what is important to us. As we have said before, we want GPGI to be an aspirational home for market-leading businesses, which must operate in a good industry, have a great position in that industry, differentiate with technology, can grow both organically and inorganically and have the potential for significant margin expansion. This list is what we measure for each potential acquisition and it's one that we will remain consistent in applying.

Graham Robinson, CEO of CompoSecure

Thank you, Tom. As announced in January, I recently joined as President and Chief Executive Officer of CompoSecure. In my short time here, it has become quickly evident that this is the most dynamic and compelling business that I have been involved with. The company has already proven its strategy with a differentiated value proposition, and we are now in a position to accelerate growth with disciplined execution. I am delighted to lead our expanding teams on this journey. We delivered strong organic growth and profitability in the fourth quarter and for fiscal year 2025, driven by disciplined execution, operational focus, and the continued support from the Resolute team and the Board on our strategic initiatives. Net sales increased to $462.1 million in fiscal year '25, up 9.9%. We also delivered strong operating performance as pro forma adjusted EBITDA increased significantly in fiscal year '25, up 23.5%. As mentioned, the implementation of the revenue operating system at CompoSecure has created a real inflection in financial performance. With that, let me take a step back and talk about where CompoSecure sits in the market today. CompoSecure is the go-to premium entertainment card with over 200 active made programs. We rank 9 of the top 10 U.S. additions, along with our growing rest of the disruptive context. Our leadership position is reinforced by 1,000 design and utility patents and 25 years of technical expertise. We have built a unique competitive mode that combines proprietary design, engineering, and scaled manufacturing capabilities which enable us to deliver high-quality metal cards at scale. In 2025, we shipped more than 30 million cards to our customers.

Mary Holt, CFO of CompoSecure

Good morning, everyone. Let's turn to our financial performance. In the fourth quarter, CompoSecure delivered non-GAAP net sales of $117.7 million up approximately 17% compared to the prior year, reflecting strong domestic demand and continued momentum across our core customer base. Non-GAAP gross margins in the fourth quarter reached 55.7%, up approximately 360 basis points from last year, as we continue to benefit from the implementation of the Resolute operating system which has led to increased discipline across manufacturing, sourcing, and end-to-end execution. Pro forma adjusted EBITDA for the quarter increased approximately 41% to $43 million, while pro forma adjusted EBITDA margin increased approximately 640 basis points to 36.5%. This performance highlights the operating leverage in our business and the continued benefits from driving operational efficiencies. For the full year 2025, CompoSecure once again delivered across the board. Non-GAAP net sales were up approximately 10% year-over-year to approximately $462 million. Non-GAAP gross margin improved to 56.3% and pro forma adjusted EBITDA increased approximately 24% to $171 million, with pro forma adjusted EBITDA margins expanding more than 400 basis points to 36.9%.

Thomas Knott, Chief Investment Officer

Thanks, Graham. Before we get to the Husky results, I'm excited to introduce Rob Domodossola as the new President and CEO of Husky. Rob brings a long and tremendously successful Husky career to the position and his background in technology, engineering, sales, and marketing adds a lot to our increased growth focus. He is admired internally and externally for his relentless commitment to the customer, and we could not be more excited about working with him in this new role. Rob, over to you.

Rob Domodossola, President and CEO of Husky

Thanks for the kind words. I'm really excited and honored to serve as only the fourth CEO in Husky's 70-year history. What's clear about Husky for the past three years is our passion for innovation with an 18- to 24-month cadence of new product launches that kept us in the lead. Our deep customer intimacy, investments in our go-to-market approach that has strengthened our customer loyalty, while helping us diversify our customer base. I'm really excited about Husky's prospects. For those who are new to Husky, we are the global leader in highly engineered injection molding systems and related aftermarket services. Husky has a globally recognized brand with a long-standing reputation for manufacturing best-in-class systems for over 70 years. We primarily serve attractive food, beverage, and medical packaging end markets and have a large installed base with approximately 65% of our sales coming from recurring high-margin aftermarket parts and services. Husky has a leading competitive position derived from its mission-critical products and a long-standing track record that creates a durable competitive advantage. We have an installed base of approximately 13,500 total systems that drive high recurring revenues from aftermarket parts, tooling, and services. Our installed base is well distributed globally, and we benefit from growth in both developed and emerging markets. Husky maintains its market leadership position because we have the premium product offering in our markets.

Unknown Executive, Husky Executive

Husky's commercial technology focus allows us to be more competitive while maintaining and improving margins. We expect these growth initiatives to accelerate service contract revenues, while also supporting incremental spare part sales through proactive identification of maintenance needs, which increases customer uptime. Our technology focus results in constant improvements so machines today are significantly more productive than ones from 10 years ago. Importantly, this aftermarket revenue stream has demonstrated resilience across economic cycles and carries higher margins than new system sales. As the installed base continues to expand, we see a self-reinforcing flywheel that supports durable long-term aftermarket growth.

John Linker, CFO of Husky

Closing out with Slide 33, we cover Husky's financial performance for the fourth quarter and full year 2025. Net sales increased to $521 million in the fourth quarter, up over 6% from prior year. Fourth quarter volume growth came primarily from China, India, Europe, and Latin America, while North America and the Middle East were flat and Africa declined. Net sales increased to approximately $1.57 billion for full year 2025, up 5% from 2024, due primarily to volume with a small tailwind from FX. Full year 2025 volume growth was driven by strength in Europe, Latin America, the Middle East, and India, while China declined due to a tough year-over-year comp. However, the momentum in sales growth was offset by margin compression in both the fourth quarter and full year 2025. Margins were adversely impacted by three primary drivers unique to 2025 that we have confidence will not recur going forward. First, from a product mix standpoint, we delivered higher sales growth in new system sales versus aftermarket. This transient mix brought down blended margins in 2025, but it also means that we're seeing an acceleration in new systems demand, which grows the installed base and drives margin-accretive aftermarket sales in future periods.

David Cote, Executive Chairman

Well, as I said at the beginning, the formation of GPGI establishes the foundation for a best-in-class diversified compounder that we believe can be a home for market-leading businesses and best-in-class operators. We have a proven value creation plan that implements our operating system to catalyze organic growth, improve margins. It builds a high-performance culture and brings rigorous discipline around capital allocation to pursue accretive inorganic growth. We are operating from a position of strength. The opportunity ahead is substantial, and we're focused on building upon our momentum to deliver long-term value for our investors. So with that, I would like to open up the call for Q&A.

Moshe Orenbuch, Analyst

Great. I was hoping you could talk a little bit on the CompoSecure side about the factors that could drive the difference in terms of your range of expectations for revenue, what sorts of things it takes to get to the higher end of that? And I've got a follow-up, if that's okay.

Graham Robinson, CEO of CompoSecure

So as we look at the CompoSecure business, the key drivers that we look at in terms of growth are how we drive growth internationally and how we ramp up our Arculus business overall. Those three factors really drive what will influence the range in terms of our outcomes.

Thomas Knott, Chief Investment Officer

Yes. Moshe, this is Tom. We would expect total leverage to be below 3x. We're certainly not afraid of leverage in the context of where it is now. We think the business is incredibly durable, both on the demand side and in cash generation side. But you're going to see us bring that down to below 3x. I think that would be pretty comfortable and normal place for us to operate on a go-forward basis.

Reginald Smith, Analyst

You typically disclose card shipments in the U.K., so I was wondering about that. I would really like to explore the gross margin expansion you’ve experienced this year with Compo. Specifically, could you break that down between increases in price per card and reductions in COGS per card? Additionally, could you highlight two or three operational actions you took that contributed to such strong gross margins this year?

Mary Holt, CFO of CompoSecure

If you consider the implementation of the ROS operating system, it aligns well with lean principles being applied across the organization. As we've mentioned, we are focused on yields. When I think about our margin expansion, there is a positive impact from price mix in the 2025 results, but there is also a significant contribution from yields. Therefore, when you look at these two factors together, they are the main drivers of our gross margin expansion.

Reginald Smith, Analyst

Is there a way to frame that? Maybe 1/3, 2/3, like how should we think about those two different components?

Unknown Executive, Husky Executive

We're not going to get into that level of detail here, but just rest assured that we are going to continue to focus on our margin expansion for '26.

Reginald Smith, Analyst

I have one follow-up. I was curious about your ROS system, are there any plans to possibly just license it out to other companies rather than acquire them? And then secondarily, I wanted to give you guys a chance to kind of address the concerns that may relate to potential conflict of interest between RHLD and GPGI shareholders and how you guys are managing those concerns.

Jonathan Wilk, Executive

I mean, the answer is no. I don't see a conflict. The two are inextricable. The success of RHLD comes from the success of GPGI. So I don't see a conflict. We've got a lot of money invested in GPGI. We want to see it grow and be successful. That's where we apply ROS. That's where we work on growing sales, EBITDA, and cash flow because that's the foundation for RHL.

Jacob Stephan, Analyst

Congratulations on closing the deal in Q1. To start, gross margins have improved significantly at Compo. I'm curious about the opportunities at Husky. Are the operating structures and COGS similar to those at Compo, and how do you anticipate margin improvements will differ over the next year?

Thomas Knott, Chief Investment Officer

Yes, the answer is yes, and I would let Rob explain how.

John Linker, CFO of Husky

The single biggest unlock that we have at Husky is really accelerating organic volume growth. This is a business that has performed very well and historically in margins, but has not outgrown the market in terms of volume and with our very high variable contribution margins, if we can accelerate volume growth that alone drops through very meaningfully to the bottom line. Aside from that, the Resolute operating system brings great discipline around the cost side of the business, both on direct and indirect costs, and we've got a good pipeline of cost savings programs that are in place to drive cost out of the business.

Unknown Executive, Husky Executive

One of the biggest initiatives this year for growth is in our aftermarket tooling business. We ran a pilot campaign last year to recapture share in emerging markets, and it was exceptional. So we're doubling down on that at the same time, using the Resolute operating system, we think there's tremendous opportunity to improve our cost competitiveness to make us even more competitive while maintaining and improving margins. But I think those are the biggest drivers. I would just say generally, and we put a little bit of case study in for Compo, which you've been able to see. I think every business we look at has the same fundamentals in terms of the opportunity where we focus on sales, focus on controlling cost and focusing on reinvesting all those together with an appropriate capital structure allows us to really get after that. So we're quite excited about it. Our first priority, we've said several times hasn't changed, and that's to pay down debt. That's going to be our focus.

Operator, Operator

Thank you. And there are no further questions in the queue at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.