Elias Sabo - Chief Executive Officer Ryan Faulkingham - Chief Financial Officer Pat Maciariello - Chief Operating Officer Dave Swanson - Chairman of Marucci Matt Berkowitz - The IGB Group

Good afternoon and welcome to the Compass Diversified's Third Quarter 2021 Conference Call. Today's call is being recorded. [Operator Instructions]. At this time, I would like to turn the conference over to Matt Berkowitz of The IGB Group for introductions and the reading of the Safe Harbor statement. Please go ahead, sir.

Thank you and welcome to Compass Diversified's third quarter 2021 conference call. Representing the company today are Elias Sabo, CODI's CEO; Ryan Faulkingham, CODI's CFO; and Pat Maciariello, COO of Compass Group Management. Before we begin, I’d like to point out that the Q3, 2021 press release including the financial tables and non-GAAP financial measure reconciliations are available at the Investor Relations section on the company's website at www.compassdiversified.com. The Company also filed its Form 10-Q with the SEC today after the market closed, which includes reconciliations of non-GAAP financial measures discussed on this call, including adjusted EBITDA and cash available for distribution and is also available at the Investor Relations section of our website. Please note that references to EBITDA and the following discussions referred to adjusted EBITDA as reconciled net income in the company's financial filings. The company does not provide a reconciliation of its full year expected 2021 adjusted EBITDA or 2021 payout ratio, because certain significant reconciling information is not available without unreasonable efforts. Throughout this call we will refer to Compass Diversified as CODI or the Company. Now allow me to read the following Safe Harbor statement. During this conference call we may make certain forward-looking statements, including statements with regard to the future performance of CODI and its subsidiaries and statements related to the impact of CODI's updated tax structure and the impact and expected timing of acquisitions and dispositions. Words such as believes, expects, plans, projects and future or similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ on a material basis from those projected in these forward-looking statements and some of these factors are enumerated in the Risk Factor discussion in the Form 10-Q as filed with the SEC for the quarter ended September 30, 2021, as well as in other SEC filings. In particular, the domestic and global economic environment as currently impacted by the COVID-19 pandemic and related to supply chain disruptions has a significant impact on our subsidiary company. Except as required by law, CODI undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. At this time, I would like to turn the call over to Elias Sabo.

Good afternoon. Thank you all for your time and welcome to our third quarter earnings conference call. I want to start by pointing out the momentous milestone that CODI achieved during the quarter. After over a year of analysis, preparation, documentation and communication that culminated with a shareholder vote, we elected to be treated as a C-Corporation for U.S. Federal Income Tax purposes. I want to thank our entire team for their tireless effort to get that election completed. We are confident the benefits of this selection will be profound and long lasting, and we are already encouraged by the initial reaction in the market. We believe this change in tax structure will allow a wider audience of investors to access our company, provide a lower cost of capital and give us more depth in our capital access. With the lowest cost of capital among our peers, we believe we have built the competitive advantage in the market place that will be a key differentiator as we continue to seek opportunistic acquisitions and build leading businesses. In September we filed a prospective supplement with the SEC to enable share issuance under an at-the-market common share program. We believe this program offers an efficient and cost effective way for us to raise common equity capital to fuel our growth and build towards our goal of $1 billion in EBITDA. In pursuit of that objective, we have reconstituted our portfolio over the past three years to increase the company's core growth rate and provide a tailwind to meet our growth objectives. That said, we are aware we need more than core growth alone. The second part of our business model and critical towards achieving our growth objective is by having a low cost, efficient way to access equity capital. To demonstrate this…

Thanks Elias. Before I begin on or subsidiary results, I want to talk generally about the industry trends we saw throughout the quarter. We believe our branded consumer businesses continue to be well positioned to benefit from the changing consumer landscape. With the exception of ERGO Baby, which had a COVID related shutdown at its Vietnamese manufacturing partner, each of these businesses exceeded our expectations in the quarter. As a group, our niche industrial businesses also performed above expectations. As Elias mentioned all of our subsidiaries continue to experience significant increases in costs in the quarter, and all of them based on supply chain disruptions. Though these disruptions will continue in the fourth quarter, our management teams continue to demonstrate the ability to adjust on a real time basis with the fluid conditions. Because of their adept work, we believe CODI as a whole is comparatively well positioned to weather this challenging season. Now, on to our subsidiary results. I'll begin with our niche industrial business. For the third quarter of 2021, revenues increased by 14.1%, EBITDA increased by 8.8% versus third quarter of 2020. On a year-to-date basis revenues increased by 13.8% and EBITDA increased by 9.6% versus 2020. For the year-to-date period, revenue and EBITDA at Advance Circuits were approximately flat as compared to the first nine months of 2020. Backlog across the company’s three facilities is at near record levels as booking significantly outpaced billings due to continued part shortages, particularly in the company's assembly business unit. Arnold Magnetic’s revenues increased by 33.3%, EBITDA increased by 107% to $16.5 million in the first nine months of 2021 as compared to the prior year. Notably we have acquired Ramco on March 1 of this year and their performance is included in our financials since that time. The majority…

Thank you, Pat. Moving to our consolidated financial results for the quarter ended September 30, 2021, I will limit my comments largely to the overall results for CODI, since the individual subsidiary results are detailed in our form 10-Q that was filed with the SEC earlier today. As a reminder, as a result of the sale of Liberty Safe during the third quarter, our historical Liberty results have been reclassified as discontinued operations in our financial statements. On a consolidated basis revenue for the quarter ended September 30, 2021 was $488.2 million up 25.9% compared to $387.7 million for the prior year period. This year-over-year increase primarily reflects our acquisition of BOA during the fourth quarter of 2020. In addition we had strong sales growth at our branded consumer subsidiaries and our niche industrial businesses on a combined basis. Consolidated net income for the quarter ended September 30, 2021 was $90.2 million, compared to $20.9 million in the prior year. The increase in net income was primarily due to a $72.7 million gain on the sale of Liberty Safe. Cash flow available for distribution and reinvestment or CAD for the quarter ended September 30, 2021 was $42.5 million, a little below prior year. Last year our third quarter CAD benefited from a significant cash tax reversal. Our CAD that we generated during the quarter was above our expectations, primarily due to the outstanding performance at our most recent acquisitions Marucci and BOA, as well as continued strong performance at our consumer and industrial businesses. Other factors impacting our CAD in our third quarter compared to the prior year include higher CapEx spend and increase in cash taxes and higher management fees as a result of the acquisition of BOA in the fourth quarter of 2020. Turning to our balance sheet,…

Thank you, Ryan. I would like to close by briefly discussing M&A activity and our go-forward growth strategy. CODI’s permanent capital structure offers shareholders a unique opportunity. We are able to drive value at every stage of our investments by leveraging our sector expertise to build businesses for the long term. We pride ourselves on being business builders, not asset traders, which is why we have completed nearly 30 of our transactions, four our subsidiary since our inception. We are partners to our subsidiaries and are proud of the flexibility that our permanent capital advantage brings to the table, which enabled us to invest in the future of our subsidiary, regardless of the environment. At the end of the day, this is the core pillar of our approach to sustainable investing, being able to identify platform acquisitions that will benefit from our ability to invest in them through the cycle and then divest them when the time is right for us and them. This is how we turn our permanent capital advantage into long term shareholder value. As we have started to emerge from the pandemic, market conditions have changed rapidly and asset prices have appreciated materially thus far in 2021. An abundance of equity capital, coupled with strong availability of debt capital has driven an increase in M&A activity and an appreciation in asset prices. CODI remains well positioned to succeed in these market conditions as evidenced by our successful series of transactions over the past few months. Our permanent capital structure allows us to be flexible and take advantage of market condition. In addition, the dramatic reduction in our cost of capital over the past few years, allows us to be selectively aggressive on acquisition opportunities, that we deem have potential to enhance shareholder returns. Going forward we will continue to invest in and enhance our subsidiary company’s competitive positioning, which includes supporting them as they build and grow their digital transformation strategy. Our permanent capital structure and differentiated strategy has set us apart for more than 15 years and it remains consistent. In 2021 we remain intensely focused on executing our proven and disciplined acquisition strategy, improving the operating performance of our company, opportunistically divesting, enhancing our commitment to ESG initiatives at CODI and across our portfolio in creating long term shareholder value. With that, operator please open the lines for Q&A.

Certainly. [Operator Instructions] The first question is from the line of Larry Solow with CJS Securities. You may proceed.

Great! Good afternoon guys. Lots of activity, good stuff, maybe to get some cliff notes too with this call. But could you maybe – just first question Elias. I know you touched on it briefly, but you found the Lugano acquisition obviously. It's a very interesting acquisition. A little bit different than I think you know your past companies that you’ve owned. You talked about sort of your growth strategy under the compass just expanding on the salons. I guess I’m just trying to get a little more color on that. I know they only have a few salons and I guess for this kind of a product you probably don’t – it’s a lot of word of mouth and what not, so maybe you don’t need that many salons, so like a Tiffany or something. So just kind of curious you know, what you guys will bring to the table, maybe a little more color on the acquisition and the outlook there.

Yeah I’ll – thank you, Larry, and thanks for the question. Its nice speaking with you this afternoon. It was a busy quarter and it’s been a pretty busy year for us and I'm pleased with a lot of the things that are going on, but specific to Lugano. I’m going to ask Pat to fill in a lot of the blanks. I would say, you know I think it is consistent in terms of, you know this is a premium, in fact in this case a very luxury good consumer good. We have a lot of experience in building luxury good businesses and turning them into really you know kind of iconic brands, even global brand and you’re seeing that in a lot of the businesses that we've done before. One thing I will know and then I’ll as Pat to fill in, is you know this is a business that you know is quite capital intensive and I think for everybody as you think about it, we need to invest a significant amount of capital and working capital principally through inventory to enable growth of this business. You have to have product in order to be able to sell the product and grow revenues. You know I think one thing you'll see is inventory turns relatively slow here. You know it's kind of rule of thumb about one time; it’s a little better than that. But this is all good, very high quality valuable inventory, because it's primarily diamonds and the environment we’re in, which you know has a decent amount of inflation, continued monetary printing, owning hard assets like that probably isn't the worst thing, especially with financing costs being so low. But I do think we all should understand, one aspect of the company's growth that we will be instrumental in, and this has nothing to do with shaping strategy or what Pat will talk about, is simply funding the capital requirement to enable it to grow and I'll tell you, we will specifically call out some of those investments quarter-to-quarter, because they maybe large to the extent the company is growing very rapidly, which it is right now, and I think it's important to call that out. So with that I’ll ask Pat maybe to fill in a little more on what we see as opportunities to continue to build the brand.

Yeah, I would just add that – I mean this is a different business as you hit on them we’re used to buying and used to partnering with and really partnered with Moti and the team there. It is a – at the end of the day these people are artists, very good artists and they create product that’s in demand. At the same time there’s a – you know they have a really deep network of buyers to make attractive purchases when they become available, so it's sort of that combination if that makes sense. Over the next 12 to 24 months I would envision we build two to three more salons and we have sort of identified you know sort of high single digits beyond that over the next four to five years of that makes sense.

Yeah, absolutely! Okay, great. Pat maybe a question for you on the – just on the supply chain issues, inventory issues, labor, rising cost of labor. Obviously in times like, you know like most companies things are gotten worse, we're getting slowly worse not better and you’ve had an ability to stop it, an ability to pass on price. But it does sound like your able to have some price, but you also mentioned that there are some lost revenue opportunities and I suppose at a point you can’t continue to raise prices, right. So is it fair to say that you know your numbers are fabulous and probably would be even better without these supply chain issues, even though you're able to cover a lot of that with the price.

It’s fair to say that our numbers would be better without the supply chain issues, yes. There are certainly places within the portfolio that we could take additional price and there's certainly places where I can imagine, we can't, or probably it wouldn’t be prudent to at this time. Our companies are managing through this and the management team is you know extremely well; sometimes as in the case of ERGO Baby it pushes revenue from one quarter to another. Other times honestly, we don't have quite all the revenue that we would have to sputter a strong performance. So we continue to really be adept and agile and we think we can even work with it and we think we’re better positioned than most.

Okay, that’s fair enough. And just one question, just on BOA, off the chart numbers here again back to the quarters and I know it does sound like some pull forward has probably occurred like you mentioned, but even so it seems like your way out of expectation. Curious, are you seeing more – I know you’ve gotten a lot of new customer wins, is it new shoes wins or what not. Are these from existing customers? Are you expanding the customer base or is it more growth within just new lines and existing customers?

A little bit of all of the above, honestly. I mean this company is meticulously at tracking market share by industry segment and sort of what number of platforms they are on versus what number of platforms that are out there. And its preponderance of growth has been driven by sort of what I call increased market share, for their order products, for their products working again in existing markets. There are examples of where we're growing in new markets. In Asia I can think of one or two specifically and then there are several examples of where we’re, where we plan to grow in new markets over the next several years that are exciting as well. So it's all of the above, I would say the most of this growth is driven by market growth and increase market share for both products.

Right, got it. Okay, great I appreciate all the color guys. Thanks again.

Thank you, Larry.

Thank you Mr. Solow. The next question comes from the line of Matt Koranda with ROTH Capital. You may proceed.

Hey guys! Thanks for taking the questions. Just wanted to start off, I mean there are lot of moving pieces I guess, with the balance sheet heading into yearend here, with the divestiture of ACI and some of the tuck-ins that you’ve made. So just wondered, if maybe you could help us kind of raise your cash and revolver our debt position to the year end 2021 number pro forma. Just assuming I guess that we get ACI divested and assuming that all the capital outlays from recent tuck-in’s that you’ve done kind of go through and then if there are any other incremental balance sheet items we should be considering through the year in 2021.

Yeah, sure. Matt, this is Ryan. Thanks for the question. So yes, so from September 30 there has certainly been a number of balance sheet transactions. We did the Altor Solutions add on, we done the Marucci add on as well. The amount of the Altor purchase price was disclosed around 60, Marucci was not, but you’ll see that in the 10-Q just under $50 million roughly so. That’s been about $110 million of deployed capital. We have of course working capital movements plus or minuses just depending on subsidiary cash flows that come up to us. But those are the two substantial transactions. There are other small ones, such as our bond interest payment was due in October, of course our distributions as well, so those are all quantifiable. And then Advanced Circuits will be a 2022 transactions. So as we roll through December 31, you know that will not necessarily reduce our revolver outstanding. I can tell you though, we expect the cash receipts from our companies and in addition as we highlighted on the script, we do have our ATM program that would you know open up after earnings to the extent, raising equity capital at a good price makes sense, you know we’ll do that. So can't give the exact dollar of course, but those are the large items to consider.

Okay, that’s very helpful, thanks Ryan. And then just a broader question probably for Elias here. I wondered if you could speak for a moment on the pipeline, the potential acquisition. So just any update on the maturity of some of the acquisitions that are in the funnel, relative size of some of the platform opportunities that you're seeing currently. Just any commentary on sort of how acquisitions may skew between platform versus tuck-in on a go forward basis. I know you mentioned some stuff at the end of the call that was interesting, but maybe you could expand upon sort of the commentary that you had there. That would be helpful.

Sure, Matt. So I would say just in general the M&A markets are robust, maybe a bit of an understatement. But there is you know significant increase in the number of transactions that we are seeing right now. Now that being said, I would say there is a kind of equal or even higher increased and acquisition multiples that are being paid. And if you could just think about the landscape, we still have the number of stacks that were raised obviously that are competing in the market for assets. But even more so, you have private equity firms who by and large sat on the sidelines during 2020 and now losing a year against what is already a relatively short time line to put money to work, right. Typically these vehicles have five years to put capital to work. If you lose one of those years, all of a sudden you're down to four. That’s a material increase in the activity that you need to kind of go forward with. And so we are seeing this high end demand principally from PE firms drive asset prices incredibly high. And so as a result of that, obviously we have to pick our spots. And the pipeline is strong, but we are remaining disciplined and on some of the larger platform opportunities that we're looking at, I would say you know in many instances pricing is beyond where we want to reach. Now that being said, you ask you know kind of size of things that we're looking at. In general consistent with our philosophy and where we are trying to build the business, we are looking slightly larger. And so I would say there's numerous transactions that sort of are in that $40 million, $50 million EBITDA range. That seems…

Okay, very detailed and that’s helpful. That’s kind of the overview there Elias, I appreciate it. And then I think last one from me, maybe Pat could help with this one. But just curious to get a little bit more of a view on some of the synergies you see what Marucci and Lizard Skins, that it just seems notable to me that they have a number of verticals that they play in beyond Diamond sports and if at the strong presence there as well. But wondering if this gives Marucci sort of the right to play and some additional verticals or if you are just going to kind of keep the Lizard Skins brand stand alone and just a little more color on that would be great.

Obviously the first opportunity is putting Lizard Skins and Marucci back right. But I’ll take that with that and I’ll actually take your question over to Dave Swanson who is the Chairman of Marucci and he can give you a more detailed answer.

Yeah, I think your right. The biggest synergies we see are obviously in Diamond Sports and I would expand beyond baseball to softball. So that I would say is the main appeal or transaction in my work, you know really excited about it. But as you mentioned, they also have a nice presence in bike and small presence in hockey and e-sports. And so I’d say we are probably play that one more by ear. I think it could become an opportunity over time. But I would say that wasn’t kind of the rational in the transaction. We think just from the Diamond Sports perspective it makes a lot of sense, but potentially some feature opportunities in other areas for Marucci as well.

Great! Makes kind of sense. I appreciate all the answers guys. I’ll jump back in queue.

Thank you, Matt.

Thank you, Mr. Koranda. [Operator Instructions] The next question comes from a line of Cris Kennedy with William Blair. You may proceed.

Hey guys! Thanks for taking the question. Congratulations on all the activity and I appreciate the details. Two quick ones, Lugano, can you talk about kind of the seasonality of that business, you know over quarters as what should we think about their?

It's not that seasonal. I mean it’s – management would say it’s really not seasonal at all and that its relative even over the foreclose.

Got it, okay. And then Elias, I think I always asked this question, but give an date on potentially expanding beyond the consumer and the niche industrial verticals, kind of where are you and your thought process and in that journey. Thanks a lot guys.

Yeah Chris, and thank you for the question. Nice talking to you this afternoon. We continue to make progress. As we said, we are looking to and are into the healthcare vertical. Given how kind of unique that vertical is and the skill sets that are needed, you know we have taken our time to identify individuals who could come in and be a leader. We don't think that we could do this without having some sector expertise at the top to lead the effort. We made some pretty good progress, not to a point where we want to announce anything yet, but I would say we continue to make progress with kind of at least A- Canada [ph] and a couple that are in the system and I would think in the neck, because it is very senior the position. The skill set needs to be very specific and the cultural fit has to be right when you are coming in at that level to our firm. It sort of takes on a different level of kind of recruiting and so with all that said, we feel good about where we are. We feel in 2022 we will be able to execute on launching that new vertical around a new individual and we are in the final pros we think of kind of securing someone in the next you know call it three to six months.

Great to hear. Thanks a lot. [End of Q&A]:

Thank you, Mr. Kennedy. There are no additional questions leading at this time. I would like to pass the conference back over to Elias for any closing remarks.

Thank you, operator. As always, I'd like to thank everyone again for joining us on today's call and for your continued interest in CODI. We look forward to sharing our progress with you at our Investor Day on December 9th.

That concludes the Compass Diversified Third Quarter 2021 conference call. I hope you all enjoy the rest of your day.