Good afternoon and welcome to the Compass Diversified's Fourth 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 fourth 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 Q4, 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-K 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 or loss from continuing operations in the company's financial filings. The company does not provide a reconciliation of its full year expected 2021 adjusted earnings or adjusted EBITDA, 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-K as filed with the SEC for the quarter ended December 31, 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 and labor 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 fourth quarter earnings conference call. I want to start by recognizing that 2021 was an outstanding year for CODI. Our four consecutive quarters of record results have led to the best year in our history. And I couldn't be prouder. We continue to offer investors a unique opportunity to own a collection of diverse businesses across the consumer and industrial segments and soon potentially healthcare. As we detailed at our Investor Day, we view healthcare as a natural next vertical to bring value to our shareholders. Ultimately, the quality, competitive position and extraordinary management teams of our current subsidiaries demonstrate how our strategy to patiently deploy capital continues to define our success. In 2021, we continued our efforts with a number of significant transactions. At a platform level, we acquired Lugano Diamonds & Jewelry, which is a designer, manufacturer and marketer of ultra high end, one of a kind jewelry. Lugano has a disruptive business model that brings significant value to its customers and we believe builds on our transformation to accelerate the collective growth potential of CODI. Throughout the year, we also built on our long track record to being business builders. Our permanent capital advantage allows us to invest in the future of our subsidiaries. And this year, we consummated three add-on acquisitions: Ramco into Arnold Technologies, Lizard Skins into Marucci Sports, and Plymouth Foam into Altor Solutions. We have now completed 31 add-on transactions for our subsidiaries, since our inception. All four of our acquisitions this year are meeting or exceeding our expectations and are on track to continue their growth trajectories. In 2021, we also sold Liberty Safe and announced the divestiture of Advanced Circuits. At Liberty Safe, we had made transformative investments during…

Thanks Elias. Before I begin on our subsidiary results, I want to talk generally about the industry trends we saw throughout the quarter. Revenue and EBITDA in our branded consumer businesses, as a whole, exceeded our expectations. Even as in many cases, our businesses cannot fully meet the demand for their products due to supply chain constraints. Similarly, our niche industrial businesses also performed above expectations as a group. In certain instances, margins and EBITDA performance were strong, lag revenue growth. These lags were driven predominantly by the extraordinary measures taken by our companies to meet or exceed the expectations of their end customers. In Q4, this pursuit often required increased air freight and expedited shipping among other increased costs. In each case, our management teams performed admirably. Now onto our subsidiary results. I'll begin with our niche industrial businesses. For the fourth quarter of 2021, revenues increased by 15.8% and EBITDA increased by 15.3% versus the fourth quarter of 2020. For the year, revenues increased by 14.4% and EBITDA increased by 11% versus 2020. For the full year 2021, revenue at Advanced Circuits increased 2.7% versus 2020. The company experienced a strong fourth quarter and backlog caused by supply delays in Q3 mitigated the modest December slowdown typically experienced by the company. The management team in Advanced Circuits worked effectively in 2021 to limit the impact of pandemic related supply chain issues and backlog across the company's three facilities remains strong. We believe the closing of the Advanced Circuits transaction remains on track and is expected to occur early in the second quarter of this year. Arnold Magnetic's revenue increased by 41.4% and EBITDA more than doubled to $21.6 million for the full year of 2021. Notably, we acquired Ramco on March 1st, 2021, and their performance is included…

Thank you, Pat. Moving to our consolidated financial results for the quarter ended December 31st, 2021, I will limit my comments largely to the overall results for CODI since the individuals subsidiary results are detailed in our Form 10-K 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. In addition, Advanced Circuits is being treated in our financial statements as held-for-sale, given the potential sale expected early in the second quarter of 2022. As a result Advanced Circuits assets and liabilities have been reclassified on the balance sheet to held-for-sale and its results of operations and cash flows have been reclassified to discontinued operations in the current quarter and all prior periods. On a consolidated basis, revenue for the quarter ended December 31st, 2021 was $536.6 million, up 27.3% compared to $421.6 million for the prior year period. This year-over-year increase primarily reflects our acquisition of Lugano during the third quarter of 2021. 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 December 31st, 2021 was $25.9 million compared to $8.8 million in the prior year. The increase in net income was primarily due to an income tax benefit recorded at corporate associated with Advanced Circuits held-for-sale accounting, offset by an increase in interest expense. We are introducing adjusted earnings as a new non-GAAP financial measure this quarter. This new metric will allow investors to assess our operating performance in a more meaningful and transparent way. To provide this transparency, we have provided reconciliations from net income as well as reconciliations to…

Thank you, Ryan. I would like to close by briefly discussing 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, while leveraging our sector expertise to build businesses for the long-term. We pride ourselves on being business builders, not asset traders, true partners to our subsidiaries as we bring the financial flexibility and scale of our strong balance sheet to the table. This advantage enables us to invest in the future of our subsidiaries, regardless of the environment. One recent example is at Marucci where the team chose to air freight product to its retail partners that were offering additional shelf space in the store. Although, this decision temporarily depressed margins in the fourth quarter, we believe that this investment will pay dividends through increased revenue opportunities going forward. At the end of today, this is the core pillar of our approach to sustainable investing. Being able to identify platform subsidiary acquisitions that will benefit from our ability to invest in them through the cycle and opportunistically divest such subsidiaries to promote their or our long-term growth strategy. Furthermore, we continue to take the necessary steps at a corporate level to lower our cost to capital and strengthen our capital structure, making us even more competitive. This is how we turn our permanent capital advantage into long-term shareholder value. As we enter 2022, market conditions are changing rapidly. The Federal Reserve has indicated that monetary accommodation will be reduced and interest rates are expected to increase materially. The stock market has experienced an increase in volatility and stock prices have fallen. That being the case, I would like to point out that private market valuations move more slowly and methodically. There remains an abundance of equity and available to pursue M&A activity and asset prices remain elevated. We expect these conditions to remain in effect for the foreseeable future. CODI remains well-positioned to succeed in these market conditions, as evidenced by successful series of transactions over the past few years. Additionally, the dramatic reduction in our cost of capital over the past few years allows us to be selectively aggressive on acquisition opportunities that we believe will ultimately enhance shareholder returns. Going forward, we will continue to invest in and enhance our subsidiary companies competitive positioning, which includes supporting them as they build and grow their digital transformation strategies. Our permanent capital structure and differentiated strategy has set us apart for more than 16 years. And it remains consistent. In 2022, we remain intensely focused on executing our proven and disciplined acquisition strategy, improving the operating performance of our companies, enhancing our commitment to ESG initiatives at CODI and across our subsidiaries and creating long-term shareholder value. With that, operator, please open up the lines for Q&A.

Thank you very much, Elias. [Operator Instructions] And our first question is from Cris Kennedy from William Blair. Cris, your line is now open if you'd like to proceed with your question.

Hey, guys. Thanks for taking the question. Elias, you mentioned that, just wanted to dive a little bit more into kind of the updated pipeline looking into 2022, more platform deals or add-ons, what are you seeing out there in the market?

Yeah. Cris, good afternoon, and thanks for being on our call. The market is really fluid right now. I would say we -- we're hearing about a number of transactions that were likely to come to market in early 2022. And we were prepared for, I would say, a larger than usual number of platform acquisitions to be looking at. Now, as we're all aware, market conditions are really fluid right now. So, we can look at what's happening in the debt and equity markets, which are less than accommodated, obviously to M&A, but also just what's happening to operational performance across most companies with kind of the supply chain, the number of factors that we're dealing with, companies throughout, the country are dealing with the same problem. So, I would say we're seeing some of the platform opportunities that we expected to come in, be put on hold right now, I would anticipate that the beginning part of the year is going to be muted in terms of new platforms. I do, however, think there are a number of companies that are ready to come to market and will come to market, but it's likely to be later in the year. In terms of add-ons, we're always looking for add-ons. We had a good successful year last year, completing three. We think there's a number of opportunities within our portfolio companies right now to complete some small add-on acquisitions. So, we continue to stay focus. But as you know, Cris, it's hard to give you a direct answer on whether it will be platform or add-ons. We're always out and our teams are constantly pounding the pavement looking for opportunities. But I would say, I would be surprised if there's platform acquisition that we consummate here early in 2022, just given the backdrop of market conditions.

Understood. Thank you. And then just one follow-up. If you could just give us a little bit more clarity on the whole supply chain issue that you guys are having and then your ability to pass on higher prices to consumers. So any elasticity of demand, if you could? Thanks a lot, guys.

Sure. So, supply chain has been a major problem. You hear about -- we talk about inflation supply chain in labor, if I were ranking them in terms of problem, supply chain would probably be number one, two, and three, and then everything else would start beyond that. It is very difficult to quantify when you will get product, when even if product gets unloaded off of containerships, it sits at ports for extended times, there's limited trucking capacity, that's out there. And as you guys can appreciate, we are trying to anticipate product coming in. If it doesn't come in, we have labor in our warehouses and it becomes incredibly inefficient. So the challenges are as bad as we've ever seen. We saw January probably be the low point in terms of supply chain across the entire portfolio. The issue is raising prices, which we are doing by the way. Doesn't really help with that. If we have just unavailable product to sell, because it's in-transit rather than in our warehouse, we just can't create revenue from that. But we do have some of the expenses for the expected shipping either incoming or outgoing of that product. So, it's been a real challenge, Cris. And I would say, we hope that it's going to get better, but it's not something that's within our control. We just need to see some of the surge and product that's coming through the port. The -- reduced shipping capacity. We need to see some relief there. I will tell you that February has been a little bit better than January, but it's nowhere near normal. Now our teams are doing an extraordinary job of trying to compensate for it, frankly, in a really low carrying cost environment like we're in right now. And…

Great. Thanks a lot, guys.

Thank you, Cris.

Thank you for your question, Cris. [Operator Instructions] And it appears, we have no questions being registered at this time. So hand back to Elias for any further 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. Thank you for your continued support. That concludes our call.

Thank you to everyone who has joined us today. This concludes the conference call, and you may now disconnect your lines.