Good afternoon, and welcome to Compass Diversified's Second Quarter 2023 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 would like to point out that the Q2 2023 press release including the financial tables and non-GAAP financial measure reconciliations for adjusted EBITDA, adjusted earnings and pro forma net sales are available at the Investor Relations section on the company's website at compassdiversified.com. The company also filed its Form 10-Q with the SEC today after the market closed, which includes reconciliations of certain non-GAAP financial measures discussed on this call and is also available at the Investor Relations section of the company's website. Please note that references to EBITDA and the following discussions refer to adjusted EBITDA as reconciled to 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 2023 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 call, we may make certain forward-looking statements, including statements with regard to the future performance of CODI and its subsidiaries, the impact and expected timing of acquisitions, and future operational plans, such as ESG initiatives. Words such as believes, expects, anticipates, plans, projects, should 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 year ended December 31, 2022, as well as in other SEC filings. In particular, the domestic and global economic environment, supply chain, labor disruptions, inflation and rising interest rates all may have a significant impact on CODI and our subsidiary companies. 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, everyone, and thanks for joining us today. We are pleased to report that our second quarter results exceeded our expectations, as we continued to benefit from a strong and diversified set of subsidiary businesses, but during the quarter, pro forma consolidated revenue and adjusted EBITDA, declined by 3.4% and 5.5%, respectively, given the headwinds we saw three months ago, we are encouraged by these results. Last quarter, we detailed our strategy of assembling a highly diversified group of companies that reach a wide set of customer demographics and end markets, each with strong underlying core growth rates, and we discussed how this strategy has driven resiliency in our performance. This quarter is no different. We face the same macro challenges, several of which are lasting longer than we originally anticipated. Nonetheless, our results continued to hold up very well. Looking at our niche industrial businesses, unit sales remained strong, but the easing of inflationary pressures negatively impacted revenue, while positively impacting margins. Our industrial businesses continue to perform above expectations, reporting high single-digit EBITDA growth for the quarter and growth of 12% year-to-date. Notwithstanding the macro headwinds and slowing global economy, we expect our industrial businesses to continue to produce solid growth and adjusted EBITDA over the remainder of the year. In our consumer businesses, inventory destocking headwinds have lasted longer than anticipated and continue to impact our brands further down the supply chain. Regardless, end market sales continue to hold up remarkably well, and for our brands where there is not a large inventory overhang, we are experiencing strong performance. For example, Lugano's results indicate that the ultra-affluent customer continues to spend, as they delivered 56% growth in revenue in the second quarter, an acceleration from 36% growth in the first quarter. Marucci has also bucked the…

Thanks, Elias. Throughout this presentation, when we discuss pro forma results, it will be as if we own PrimaLoft from January 01, 2022. As Elias mentioned, in the quarter we continue to face headwind in several areas due to correcting inventory levels in the supply chain. Yet, in select spots, these headwinds appear like they are starting to ease. Our velocity subsidiary continues to see pressure in both of its major end markets due to a combination of reduced cell through and tight inventory controls put in place by hunting and fishing focused retailers. As we have discussed repeatedly, velocity benefited greatly from demand pull-forward during the pandemic, as outdoor activity levels increased dramatically. As anticipated, the company is now paying the cost for this and demand is declined significantly below what we see as in what historically been, trend line levels. The impact of this bull whip effect is having an outsized and we believe short-term impact on our consolidated financials. Despite these significant headwinds, strengths in our other subsidiaries lead to only modest declines in consolidated pro forma revenue and EBITDA. In fact, when we exclude velocities performance, CODI as a whole show growth in the quarter, both in terms of revenue and adjusted EBITDA. Now, on to our subsidiary results. I'll begin with our niche industrial businesses. For the year-to-date period, ending June, 2023, revenues declined by approximately 4% and adjusted EBITDA increased by 12.3% versus the same period a year ago. Similar to the first quarter, each of our niche industrial businesses expanded margins in the second quarter, and aggregate adjusted EBITDA margins expanded by over 250 basis points versus prior year. Arnold showed solid growth in revenue in EBITDA, and once again, had strong bookings in the quarter. The company continues to gain traction securing…

Thank you, Pat. Moving to our consolidated financial results for the quarter ended June 30, 2023, 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. On a consolidated basis, revenue for the quarter ended June 30, 2023, was $524.2 million, up 2% compared to $515.6 million for the prior year period. This year-over-year increase primarily reflects our acquisition of PrimaLoft during the third quarter of last year. Consolidated net income for the second quarter was $17.1 million compared to net income of $31 million in the prior year. The decrease was primarily due to an increase in interest expense as a result of financing the PrimaLoft acquisition and rising interest rates. Adjusted EBITDA in the second quarter was $90.1 million, up 3% compared to $87.4 million in the second quarter of 2022. The increase was due to the benefit of the PrimaLoft acquisition. Adjusted earnings for the second quarter was above our expectations at $35.6 million, down from $39.3 million in the prior year quarter. The decline was primarily a result of higher interest expense. Now on to our financial outlook. For the full year 2023, we continue to expect consolidated subsidiary adjusted EBITDA to range between $400 million and $460 million. For the full year 2023, we continue to expect adjusted earnings to range between $110 million and $135 million. This is the same guidance we had provided last conference call. Turning to our balance sheet. As of June 30, 2023, we had approximately $67.4 million in cash, approximately $506 million available on our revolver and our leverage was 4.08x, just under 4.1 million. We have substantial liquidity and as previously communicated, we have the ability to…

Thank you, Ryan. I would like to close by briefly providing an update on the M&A market and our strategic initiatives. In terms of M&A, deal activity has remained suppressed below historic levels for some time now. However, we started to see some increased activity in the second quarter that we expect to gain momentum over the balance of the year. On the ESG front, we continue to advance our key initiatives and execute our strategy. Our approach to ESG is directly tied to our business model, and ESG is becoming increasingly important to potential employees seeking new opportunities. For these reasons, it is critical that we consistently and clearly communicate our ESG philosophy and practices both internally and externally. To reflect the work in progress that has occurred across the organization over the past 12 months, we have updated the sustainability page on our website. We have spent significant time working with our subsidiaries to understand how our overarching ESG framework will be implemented and our companies to facilitate value creation and our web page as a source to tell this story. We aim to generate measurable benefits that align with our values and create strong financial returns for our stakeholders. We believe that the environmental, social and governance factors that we use to build our framework over time will allow us to deploy capital in a different way than many in the marketplace reflecting risk more appropriately. The volatility that we face today only underlines the importance of businesses like ours stepping up with purpose. We are committed to driving positive change and leading the industry to become the model of choice. An example worth discussing comes from one of our niche industrial subsidiaries, The Sterno Group. In June of 2023, Sterno's Texarkana manufacturing facility achieved the true…

[Operator Instructions] Your first question comes from the line of Larry Solow from CJS Securities. Please ask your question.

Great. Thanks so much and good afternoon, good evening, guys. I guess just a couple of general questions and then I'll come to specific one. Just I guess on the -- the quarter seems like it was certainly a little bit better than expected. I think it was basically flat or close to it sequentially EBITDA. I think you had called out kind of a mid-to-high single-digit drop expected, I guess, last quarter. Just as I parse through kind of, is the reason why you're kind of not increase the guidance basically just operations are running better, but inventory draws are a little bit heavier or going to persist a little longer really into Q3? Is that kind of a good way to sum it?

Yes, Larry, I think you're spot on. We did better in the second quarter than we had forecasted on our first quarter earnings call. But we didn't raise our guidance. And the reason behind that is, as you've identified, the inventory headwinds are a little more persistent than we thought, and they're going to bleed forward. a little bit longer. As I said, we're starting to see some shoots by stabilization of new orders at PrimaLoft. We haven't seen that in some of our other consumer-facing businesses. So I think as a result of that, we're just being a little bit more prudent. Although there's some positive signs in the portfolio as well. So I would really caution or position this more as us being incredibly conservative right now because the business is performing better than we have anticipated.

No, that's a fair explanation and good color there. A question for you guys on Sterno, I guess what was there any -- was the impetus for the management change, was that brought on by anything? And then I guess a second and just greater question, just on Sterno itself was I think EBITDA is running sort of in the $40 million, $45 million range. But if I remember correctly, the [indiscernible] business itself, pre-COVID used to do close to that. I know you acquired imports [ph] and that's probably not nearly -- not doing quite as well as it was doing probably in its heyday during COVID and I know with Walmart, a large big box customer, maybe you're losing some shelf space there. But can you just give us I guess, two questions. The reason for the management change or the impetus there and what sort of -- what is imports? Can you kind of give us an idea of what imports is doing today versus the candy business?

Okay. Hi Larry. I would just say, as is typical, people retire Craig Carnes, who is long-term colleague of ours at the firm decided to retire, and we believe we found a great replacement for him in Jeff, and we're excited by that. As it relates to kind of the breakout, we don't say the breakout. I would tell you your numbers are kind of a little bit off in that you're right conceptually but you're a little bit off. The candy business on its own or the chafing fuel business never got north of 30. It was always below 30 even at its peak -- even at the peak years. So I will let you kind of read into that one, but you're also right that the -- sorry, go ahead.

No, I was saying the can heat and someone like Sterno Home, those combined before you bought imports, I would say.

We faced some pressures, but it was never quite as high as I would say. The wax business, it's a lumpy business. And it's a business that has some great quarters and some weaker periods. We bought it at a very attractive price for the company, and we continue to see it performing for the shareholders, and we continue to see it performing.

And Larry, just one point -- I'll just make one other point, as you've identified with kind of a large customer of that business, if you think about where inflation has really impacted consumer spending, it's been on the kind of consumer that has the least disposable income. And these products are generally going through a channel where it's targeting that customer. And so as inflation eases and kind of real wages start to grow, we would expect the scented kind of wax part of our business to start performing a little bit better and no longer be a drag on earnings at that company. But inflation kind of at that customer was a really significant headwind that the company was suffering from.

Fair enough. And then just to end on a more positive note, then, just on -- we're getting lots of questions on Lugano over the last few months, especially. Some question sounds around sort of it's a business lead by its Founder Moti Ferder how much can the business grow being -- how much have built the infrastructure around them to support them. So just kind of questions there. The growth has been -- was so rapid last year and now you're up another 45% year-to-date this year. So I know you don't have a crystal ball, but I guess the questions are, what makes this business so different special from other high-end dealers? And what could this business be in 5 years?

Yes. So Larry, I think it's a good question. Obviously, when you see a company that has this kind of rapid growth, the natural question is how long can it sustain this kind of growth? And is it experienced something that is making it more temporary, right? Like the pandemic had obviously positive impacts on a company like Velocity that now is getting paid back. I think that's a natural question to wonder if that's happening to Lugano. Actually, quite to the contrary, I think the market that Lugano was going after and the approach that they have created, which is very unique and distinct in the industry is one that is generally underserved. And I know that may sound a little bit strange, but this kind of customer subset is one that hasn't been targeted at the same level by a lot of the major players in the industry. It is much more of a one-off unique kind of jewelry that has created versus a lot of the competitors that want something that can be much more mass and have the same piece sold throughout multiple of their outlets. So the model is completely different. And it's something that, given the community-type aspect that our founder has built the business around with his customers, has significantly greater room to run in our opinion, a lot of the limitations on the growth of this business was really predicated on investment, how much capital was available to put new salons in place, how much capital was available for inventory to create these pieces. And so when we partner with Moti to kind of drive this business forward, we were able to solve a lot of those capital issues. And what you've seen is an acceleration in the company's growth because of…

The next question is from Matt Koranda from ROTH Capital Partners. Please ask your question.

It's Mike [ph] on for Matt. Maybe just on the Industrial segment. Really encouraging to see the sizable margin expansion in the industrial businesses. Last quarter, we mentioned an expectation for bookings to continue to slow and it looks like it might have. So maybe just an update on how bookings in the industrial segment have trended since last call. And then specifically on Altor, just how sustainable are these margins? Should we be pulling forward a north of 20% EBITDA margin going forward? Or should margins come in a bit as the booking environment slows?

So first one is on bookings. I'd say, in general, the business in our industrial, as I think through industrial, those longer-lead businesses that we have that actually bookings have a large sort of spans of time between bookings and shippings, we actually saw an increase in -- or excuse me, bookings were higher than revenue. So there was a book-to-bill rate of over 1. So solid there. I think your second question was on Altor and if we should see expanding margins. We think we'll continue to see efficiency gains there. We believe we will look to add on acquisitions that we can then also add more efficiency gains too. This management team is very good. Terry and his team have done it before, and we've been impressed by them. We think at a minimum, this sort of margin level is sustainable, absent sort of price increases. Remember, we pass on sort of the raw material price increases to our customers with a lag, right? So even though we'll be making the same sort of dollar contribution on a per pound basis, the margins may go down if EPS and other raw material prices increase, if that makes sense.

Got it. Makes a lot of sense. I guess moving to Marucci is one of the stronger businesses in the quarter, both top and bottom line relative to our expectations. So maybe just a little bit more color on what drove the outperformance? Are we still seeing strong CAD sell-through? And then further, what type of margins are baked into the guide for the back half of the year? Should we expect something similar to last year in the mid-20% range?

I would expect margins similar to the first half of this year. And as it relates to what drove the revenue growth, we continue to have strong sell-through on Cat X. We also continue to expand into new categories. We mentioned fielding gloves, which is a big category that we're getting a lot of traction in. If you -- and then we just have strength kind of really across segments were growth in Japan. We have growth in softball. If you looked at many of the hitters in the home run derby, we're using Victus bat or Marucci bat. So there's just sort of -- it's a great brand that continues to gain traction.

Got it. Makes sense. Last one for me. Along similar lines on Marucci, maybe just touch on the BAM acquisition, quarterly performance, any trends you're seeing in DC and just overall commentary on the integration process and plans for the future for Bob.

Sure. We think we can grow BAM. They were capacity constrained. We're not -- I'm not going to touch on sort of specific financial performance. Ryan has said we borrowed, I think, $20 million as far as the use of proceeds for that. And I think it was us so you can get your head around sort of the -- about the purchase price. But we're -- we will be adding capacity for BAM in 2024 likely I don't know if that will be the biggest driver of growth for the company, but it will be another driver of growth. And our DTC, both at Marucci and at BAM remain strong.

Got it. That's it for me, guys. Thanks.

Your next question is from Mark Falkman from William Blair. Please ask your question.

This is Mark [ph] on for Chris Kennedy. Just wanted to ask on Velocity. I know you had mentioned it, but could you talk about any of the initiatives that are in place to turn that business back to growth on the revenue line and then also improve margins there?

Yes, Mark, I think with Velocity, you just have to -- and we should all expect and I think we've been pretty clear about this over the last couple of years. This was a company that experienced a dramatic growth in participation and revenue and earnings through the pandemic. And if you just think about it, people were staying home. This was an activity that people could go out and do. Hunting really exploded as a category. And if it's on the archery side, these are really big CapEx or big kind of durable items that are being purchased. Some cases, it's $2,500, $3,000 per item. And for an individual to do that, they're just not -- it's not a consumable that you're going to go out and buy year in and year out. And so with this businesses, we experienced a dramatic uptick in the pandemic. And then, of course, there was not enough supply available. So we were rushing to get as much product as possible to our retail partners. It carried over into 2021 as having a banner year, but I think we had been very careful to say. We don't expect this to be a normalized level of earnings for this company. And this is benefiting disproportionately from anything else in our portfolio from the pandemic. Now it was fun to experience that, and it's nice when you're getting an earnings tailwind like that. But inevitably, there's going to be a payback and we're suffering through that payback right now. So it's hard to say what can we do to stimulate demand. We're doing everything that we can do to stimulate demand. The reality is out in the field, there's more inventory on shelves than what's needed and foot traffic coming into our retail partners is…

Great. Helpful there. And then I guess on PrimaLoft, I know when you guys acquired it, and since then, you've talked about some of the additional markets and additional revenue opportunities there like ThermoPlu or the licensing opportunity of increasing the consumer-facing image of PrimaLoft. Can you talk about any of those initiatives there beyond just synthetic down?

Yes. No. One of the large initiatives we're pushing it is our new Pure initiative, which is -- I forget exactly what the things were, but is produced using reduced emissions, I believe. And we are working very hard to kind of work through the supply chain to give our end customer a product that they can trust using as few emissions as possible to create that product and that is having -- that has significant interest from many of our end customers right now as an example.

[Operator Instructions] The next one is from Derek Sommers from Jefferies. Please ask your question.

Hi. Good afternoon, everyone. I was just wondering if you could share any commentary on how international performance has been at the portfolio of companies. We started to see a little bit of volatility coming out of macroeconomic data and some policy decisions there and just wanted to hear your input.

Yes, sure. I can't say there's been any huge trends. I mean, obviously, China is coming back slower than anticipated, and everybody is looking for stimulus there, right? And so we have seen that -- we have seen that in our distributor customers. We have seen that in places where we have sales to China. And we have seen that when we've had people visiting retail in Asia. We have seen that sort of at stores there. I'd say Europe is muted and North America is pretty strong in general, by the end consumer, right? So it's kind of -- those are the three -- but no sort of big sea changes right now or at least in this last quarter.

Your last question is from Matthew Howlett from B. Riley. Please ask your question.

Just on the guidance, did I hear you right that 3Q adjusted EBITDA would be dollar amount equal to the second quarter?

Yes, roughly in line with the dollar amount we just posted.

So I look at it basically with the midpoint of your $430 million to $460 million, excluding the corporate G&A, you're talking about 111 third quarter than something like 115, 116 in fourth quarter. Is that how we sort of should think about the gross EBITDA?

I think that's a good way to think about it.

Yes.

Okay. Great. And then last thing I was intrigued by that you had the comments in there about '24. I know you don't provide guidance for '24, so I'm not trying to ask you, but you sort of touched on how it could be really snapped back. I think historically, you said 10% growth for your portfolio of companies, could we possibly be thinking about something much better than that in '24 in a snapback scenario?

Yes. I think what we're trying to highlight is the kind of -- if you just think about what's happening right now and Pat alluded to this, and we keep talking about inventory destocking. But end market sales for virtually all of our companies that are in the consumer space and are going through the wholesale channel are being muted or the end market sales are stronger than what our selling. And so our revenues are being muted. Probably the notable exception to that, Matt, is if you look at Marucci, obviously, where inventories didn't overhang as much and they had a better opportunity to be able to match kind of sell in to sell through. And so if there's a company that its sell-through is $20 million or $30 million greater than sell-in just by no longer having inventory destocking, you could have a pretty material impact on revenue growth without even having revenue growth come from the kind of initiative that we have in place. And so if you think about a company like BOA, just take it as an example, we know there is a huge differential between the amount of sell-through and the amount of sell in. Now on top of that, BOA has done an extraordinary job of continued continuing to proliferate on the number of new platforms. And so we know that we have a ton of new platforms in the market compared to where we were in, let's say, 2021 -- and we know the products that we're on are the on-trend products that are growing above the industry growth rate. So that should lead to really strong growth absent any differential between sell-in and sell-through. And so we look at it and we say, okay, that's a business that if it just…

The way you explained it makes it very clear now the headwinds that the destocking is causing that normalization is going to give you just a pop the bat as it goes back towards normal growth rate. So that makes a lot of sense. I usually get -- I don't think anyone asked on the health care. I know you gave the update on M&A. Does anything new on that front? Is continue to look at deals, just an update there.

Kurt is active, and I think we are -- in terms of we're in a really weird market backdrop, I mean this has been one of the slowest M&A markets that I've seen in 25 years of being involved in middle market M&A. And I'd say it kind of is matching or even probably longer duration than the pandemic and the financial crisis in terms of how long is lasting in terms of kind of muted M&A activity. So against that backdrop, it's really hard in any industry to think there's going to be a lot of activity happening. Sellers are just hesitant for price discovery. So I think Kurt is doing an outstanding job. We look at the funnel of potential opportunities that fit within sort of the core critical outsourced services space that have kind of the right economic moat around the businesses, that have the right size, but there's no catalyst to bring those to market. All we can do is track those, know those are out there, know they will be coming and get in position to be able to execute when one or multiple of those businesses come out. And I can tell you, the list is very robust. So we can only control what is within the span of our control and that is to be tracking and understanding the companies that we'd like to execute against. And as those companies and those sellers start to feel more confident, then I think we're going to have a really robust opportunity to put money to work in that space. If anything, I'm probably more encouraged by the breadth and number of opportunities that we currently have on our target list. And it leads me to believe that this absolutely is the right vertical. We should be in this space. And I think there are some initial green shoots there that are emerging. I mean, look, we saw the IPO market open up not with respect to health care, but just in general, we saw a restaurant group that got out there in the consumer space and did really well. Some of these initial signs of, okay, the IPO markets are opening, financing is starting to come back to the market, that gives people more confidence to say, you know what, the M&A markets are coming back. I postponed and waited for a year or in this case, maybe 1.5 years, it now time to come back into the marketplace. And so we're getting increasingly more bullish that in the back half of this year and into '24, there's going to be a material uptick in M&A activity and I think we're positioned really well. And in particular, in health care, we're positioned really well to be an active buyer in the space.

There are no further questions at this time. I would now like to turn the conference back to Mr. Elias. Sir?

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.

Thank you. This concludes Compact Diversified conference call. Thank you, and have a great day.