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Compass Diversified는 사모펀드로서 후기 단계 및 미들마켓 투자를 전문으로 한다. 회사는 레버리지드 바이아웃, 업종 통합 노력, 재자본화, 전략적 애드온 인수 등 다양한 ...
Compass Diversified는 사모펀드로서 후기 단계 및 미들마켓 투자를 전문으로 한다. 회사는 레버리지드 바이아웃, 업종 통합 노력, 재자본화, 전략적 애드온 인수 등 다양한 ...
Operator: Good afternoon, and welcome to Compass Diversified's Fiscal 2026 Second Quarter Conference Call. Today's call is being recorded. [Operator Instructions] At this time, I would like to turn the call over to Ben Tapper, Vice President, Investor Relations. Ben, please go ahead. Ben Avenia-Tapper: Thank you, and welcome to Compass Diversified's Second Quarter 2026 Conference Call. Representing the company today are Elias Sabo, Chief Executive Officer; Zach Sawtelle, Chief Operating Officer; and Stephen Keller, Chief Financial Officer. Before we begin, I'd like to remind everyone that during the course of this call, CODI will make certain forward-looking statements, including discussions of forecasts and targets, future business and divestiture plans, future liquidity and leverage positions, plans to return capital to shareholders, future performance of CODI and its subsidiaries and other forward-looking statements regarding CODI and its financial results. 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 many risks and 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 in some of these -- some of these factors are enumerated in the risk factor discussion in the company's Form 10-K as filed with the SEC on February 27, 2026, as well as in other SEC filings and press releases. Except as required by law, CODI undertakes no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events or otherwise. During today's call, we will refer to certain non-GAAP financial measures. Definitions of these measures, reconciliations to the most directly comparable GAAP measures and additional information regarding their use are included in today's earnings release, which is available in the Investor Relations section of the company's website at www.compassdiversified.com. Please note that references to EBITDA in our prepared remarks refer to adjusted EBITDA. Unless otherwise indicated, year-over-year comparisons of net sales and subsidiary adjusted EBITDA exclude Lugano from the prior year period and exclude the divested Sterno's Foodservice business from both the current and prior year periods. Our full year 2026 outlook is presented on a different basis and includes the adjusted EBITDA generated by the Sterno's Foodservice business prior to its sale. CODI has not reconciled its full year 2026 subsidiary adjusted EBITDA outlook to the most directly comparable GAAP measure because CODI does not provide guidance for income or loss from continuing operations and management cannot predict with sufficient certainty all of the inputs necessary to provide such a reconciliation without unreasonable effort. Additional information regarding this limitation is included in today's earnings release. Throughout this call, we will refer to Compass Diversified as CODI or the company. At this time, I would like to turn the call over to Elias Sabo. Elias? Elias Sabo: Thank you, Ben, and good afternoon, everyone. In the second quarter, our subsidiaries delivered double-digit adjusted EBITDA growth and strong cash flow. Based on our first half performance and current expectations for the remainder of the year, we are maintaining our fiscal 2026 total subsidiary adjusted EBITDA outlook. Zach and Stephen will provide detail on our operating performance and outlook shortly. Beyond subsidiary performance, we took concrete actions to strengthen our balance sheet and improve alignment with shareholders. In May, we completed the previously announced sale of Sterno's Food Service business at an attractive valuation, applying more than $280 million of the proceeds to debt reduction. We also amended our management services agreement. The amendment followed a Board-led review that considers investor perspectives and market practices. It lowers fees and ties more of the manager's compensation to shareholder returns and operating performance. Let me provide some additional details. Effective January 1, 2027, the amended agreement reduces the base management fee from 2% to 1.25% of average adjusted net assets on the first $3 billion in assets and caps the 2027 base fee at $30 million. It also establishes 2 additional awards, each equal to 12.5 basis points of average adjusted net assets. One is designed to increase the manager's ownership of CODI shares and the other is tied directly to shareholder returns and operating performance. Even assuming full payout of both awards, we expect the amended agreement to reduce 2027 fees by approximately $20 million compared with the prior management fee formula. While the Sterno's sale and MSA changes are important milestones, our work is not done. Our shares continue to trade at what we believe is a meaningful discount to intrinsic value, and we remain focused on closing that gap. Before I hand the call over to Zach, I want to briefly address the leadership transition we announced in June. I will retire as Chief Executive Officer at the end of this year, and Zach will succeed me. CODI has been the focus of my career, and I am proud of what we have accomplished. The challenges following Lugano made the past year one of the most difficult periods in our history. I wanted to remain in place through the most acute phase of that work and help put CODI in a position to move forward. With the progress we have made and Zach ready to lead, I believe this is the right time for the transition. I have worked with Zach for 17 years. He understands our businesses, our people and our model, and I have complete confidence in him. Over the remainder of the year, Zach and I will continue working closely to ensure a smooth transition. With that, I'll turn the call over to Zach. Zachary Sawtelle: Thanks, Elias. I appreciate your confidence, and I look forward to working closely with you through the transition. Our near-term priorities are straightforward: drive profitable growth across our subsidiaries, pursue divestitures where we can realize attractive value, further reduce debt and as our balance sheet strengthens, efficiently return capital to shareholders to close the valuation gap in our current share price. We are moving with urgency and discipline to realize value for our shareholders. Turning to the quarter. Our strong operating performance was broad-based. Every one of our branded consumer businesses grew adjusted EBITDA. BOA grew adjusted EBITDA 27% on growth across all primary segments with expanding gross margins. The Honey Pot grew adjusted EBITDA 32% on expanded period care distribution across grocery, drug and mass, where it is significantly outpacing the broader category. PrimaLoft returned to growth with adjusted EBITDA up 28%, supported by strong demand from our Asian brand partners. 5.11 grew adjusted EBITDA by 14% on expanded margins of more than 200 basis points through more disciplined promotional activity and tariff refunds. We estimate that some of the second quarter strength at BOA and PrimaLoft reflected the timing of customer orders. We have considered that timing in our expectations for the remainder of the year. Within Industrial, Arnold delivered a standout performance with adjusted EBITDA up nearly 50%. Backlog remains strong, supported by demand for rare earth magnets sourced outside China and continued progress at our Thailand facility. Rimports, our home fragrance business, benefited from tariff refunds while absorbing separation costs related to the Sterno's Food Services divestiture. As discussed last quarter, lower expected volume from a large customer will weigh on results in the second half. Altor is where we have work to do. Adjusted EBITDA declined roughly 50% in the quarter. Tariff-related disruption weighed on white goods, while softer vaccine demand affected the cold chain business. Higher input costs and competition added further pressure. Those are real market factors, but they are not the only issue. Our commercial execution has not been good enough, and we are urgently working to correct this issue. The team is focusing its commercial efforts on the end markets where Altor is strongest and taking costs out to match current demand. This will take several quarters. Taken together, the quarter reinforced our confidence in our businesses and the teams running them. With that, I'll turn the call over to Stephen to review our financial results, balance sheet and outlook. Stephen Keller: Thanks, Zach. As Ben noted in the introduction, the year-over-year comparisons are complicated by the inclusion of Lugano in the prior year period and the sale of Sterno's Food Service business during the quarter. I will begin with our reported GAAP results and then discuss our results on a more comparable basis. For the second quarter, GAAP net sales were $424 million compared with $479 million in the prior year period. Income from continuing operations was $82 million compared with a loss of $81 million last year. Basic earnings per share were $0.86 compared with a loss of $0.88 in the prior year period. The current quarter results included a $182 million gain on the sale of Sternos' Food Service business and a $58 million reduction in the fair value of our receivable from Lugano. Turning to the operating results of our continuing subsidiaries, which exclude Lugano and divested foodservice business, net sales were approximately $411 million, roughly flat with the prior year. Branded Consumer net sales increased 7.2%, while industrial net sales declined 11.5%. On the same basis, subsidiary adjusted EBITDA was approximately $92 million, an increase of 12.6% Branded Consumer adjusted EBITDA increased 24.2%, while the adjusted EBITDA for Industrial declined 12.8%. It's important to note that these results benefited from IEPA tariff refunds received across several of our businesses during the quarter. As Zach described in detail, strong performance across our branded consumer businesses and at Arnold more than offset the challenges at Altor. On a reported basis, including Sterno's Food Service business, which generated approximately $2 million in adjusted EBITDA through the May 1 sale date, subsidiary adjusted EBITDA was approximately $94 million. Corporate expenses were approximately $29 million, resulting in total adjusted EBITDA of approximately $66 million. Corporate management fees, excluding fees paid by our subsidiaries, were $12.3 million for the quarter as reflected in our income statement. Actual cash payments related to second quarter fees were $6.2 million, roughly half that amount. We continue to expect corporate cash management fees paid to the manager to be between $25 million and $30 million for the full year, reflecting the manager's repayment of the remaining management fees overpaid in connection with the Lugano restatement. Public company costs were approximately $16 million in the quarter. This includes more than $12 million of Lugano related and other onetime costs. We do not add these costs back in calculating adjusted EBITDA. They are included in corporate expenses and reduced total adjusted EBITDA. These costs remain elevated due primarily to ongoing professional fees associated with Lugano and the related litigation, investigation and bankruptcy proceedings. To date, D&O insurance recoveries have offset only a small portion of the related cash outlays. Year-to-date, we have received around $2 million of D&O insurance reimbursements. We have submitted additional claims and expect significant further recoveries, though the timing and amount are not fully within our control. I'm accountable for both and I'm focused on recovering more and spending less. Cash generation improved substantially. We generated approximately $30 million of operating cash in the second quarter, bringing year-to-date operating cash flow to more than $50 million compared with an operating cash outflow of approximately $65 million in the first half of 2025. Capital expenditures were $6 million in the quarter and $11 million year-to-date, roughly half the prior year level. We ended the quarter with $87 million of cash and near full availability on our revolver. Total debt was approximately $1.6 billion, down nearly $300 million from year-end, primarily reflecting the application of the Sterno's sale proceeds to our term loan. Our covenant leverage ratio was 4.8x, down from 5.3x at the end of the first quarter. Our senior secured net leverage was 0.66x. Subsequent to the quarter end, we amended our senior credit facility to extend all of our term loan and $54 million of our revolving commitments to January 12, 2028. We have rightsized the revolver to reflect our expected liquidity needs, strong cash generation and continued focus on reducing debt. We believe the amended facility provides the financial flexibility we need. Reducing leverage remains a top financial priority. We made real progress during the first half, but there is more work to do. Before turning to our outlook, I want to provide a brief update on Lugano. During the quarter, we announced a settlement with the unsecured creditors committee intended to facilitate the orderly liquidation of Lugano's assets, preserve value in the state and accelerate a portion of our recovery. Under the settlement, we currently expect to receive nearly $20 million in recovery by early fall, which we intend to apply to debt reduction. We expect additional recoveries over time, although the timing and amount remains uncertain. We will continue to update investors as appropriate. Turning to our outlook. We are maintaining our fiscal 2026 total subsidiary adjusted EBITDA outlook of $320 million to $365 million. One note on the outlook, it includes the roughly $9 million of adjusted EBITDA generated by the Food Service business before the sale because that is how we report the full year. The quarterly year-over-year comparisons I gave you a moment ago exclude it. We now expect Branded Consumer adjusted EBITDA of $235 million to $270 million. For Industrial, we expect $85 million to $95 million. This reflects a stronger outlook for our branded consumer business and a softer outlook for Industrial. For modeling purposes, we continue to assume capital expenditures of $30 million to $40 million for the full year. Our outlook incorporates the order timing at BOA and PrimaLoft that Zach discussed as well as the current operating environment at Altor. It does not assume any additional acquisitions or divestitures or significant changes in the current trade environment. With that, I'll turn the call back to Zach. Zachary Sawtelle: Thanks, Stephen. I want to close by emphasizing 2 things. First, we have great businesses led by strong management teams. We will continue to support our teams with the resources and flexibility they need to perform. We are focused on ensuring that our businesses deliver long-term shareholder value. Second, our priorities are unchanged: drive profitable growth across our subsidiaries, pursue divestitures where we can realize attractive value and reduce debt. As our balance sheet strengthens, we intend to efficiently return capital to shareholders. We believe that our continued execution against these priorities will narrow the gap between our share price and the underlying value of our business. Thank you for your time. Elias, Stephen and I will now take your questions. Operator, please open the line. Operator: [Operator Instructions] And our first question comes from the line of Chris Kennedy with William Blair. Cristopher Kennedy: Zach, you've had a large role at Compass over the years. Can you just provide some perspective as to what you think the consumer and the industrial subsidiaries can grow over the long term? Zachary Sawtelle: Sure. Absolutely. Thank you for the question. I think we have a carefully curated portfolio of very high-quality consumer and industrial businesses that are well positioned in their respective markets. And as we've outlined in prior earnings calls, I think across the spectrum, the consumer businesses vary from high single-digit to double-digit profitability growth opportunities. And I think on the industrial side of the business, the opportunity remains in the mid-single-digit to high single-digit growth opportunities in the future. Cristopher Kennedy: Got it. And then any update on free cash flow guidance for this year? Clearly, it's improving. Just are we at a sustainable level going forward? Zachary Sawtelle: I'm going to let Stephen answer that question. Stephen Keller: Yes. No, I think no significant changes here. I mean, again, obviously, short of any divestiture that we may do during the second half of the year, which would substantially change it. But I think we're still on track for the way that we have described it, still kind of in that $50 million range given where we're at, and that's after all payments. Operator: And our next question comes from the line of Lance Vitanza with TD Cowen. Lance Vitanza: A couple, if I can. The first is on the corporate cost structure. I think that's an area that appears increasingly important to the equity story. And as investors look toward 2027, should we be thinking about total corporate expense, including management fees and public company costs as being closer to $50 million than the levels we've seen historically? And are there additional opportunities over the longer term beyond the MSA amendment that might further reduce corporate overhead over time? Stephen Keller: Yes. I think, the way to think about it, I think a little bit higher than $50 million is probably the right way. There is a -- on the base fees next year, there is a -- from the management fee, there is a $30 million cap. We're targeting this year to have about -- excluding the onetime fees on public company costs, we're talking about $25 million this year, but I would expect those to come down next year, as we kind of deal with some of the -- as we deal with some of the auditor changes, et cetera. So I think somewhere for corporate costs, somewhere around $20 million is probably the right number to think about it. And then for management fees, think in that $30 million to $35 million is probably the right way to think about it. Lance Vitanza: Okay. That's helpful. And then on Altor, you mentioned in the prepared remarks that the work to improve performance remains fairly comprehensive, and it sounds like it's going to take several quarters to execute. EBITDA down obviously quite a bit in the second quarter. As we think about the next few quarters, what milestones can we be watching for to gauge whether the turnaround is progressing as expected? And how should we think about the cadence of improvement from here, both towards stabilizing results and then ultimately returning the platform to growth. Is it going to be sort of like the proverbial straight line towards flat and then growth? Or do we have a few more really tough quarters to come and then a big hockey stick up higher in 2 or 3 quarters' time? How would you sort of describe that? Zachary Sawtelle: Lance, this is Zach. Thank you for the question. Our assumption is a gradual improvement over the next 4 to 5 quarters. Q2 was a very challenging quarter, some external factors, some internal factors of note with high oil prices, our primary raw material has inflated and that is squeezing margins, and we do not anticipate that to abate for several quarters. So I would anticipate the recovery to stretch modestly over a handful of future quarters. Lance Vitanza: So if I could just get one -- if I could just get one more in before I jump back in the queue. You've talked a lot, including today about the substantial discount to intrinsic value, we agree. And you've made progress over the past year with the Sterno's transaction, balance sheet is in much better shape, et cetera. As you think about closing the discount from here, do you believe additional asset sales remain the primary catalyst? Or can continued operating performance and deleveraging begin to narrow the gap even absent another transaction? Zachary Sawtelle: Great question. We are still highly committed to an additional divestiture in order to accelerate the deleveraging process. and that hasn't changed. And we are continuing to evaluate multiple opportunities to pursue what would be an attractive divestiture and realization for our shareholders. We still think that is an important part of the next steps in order to close that gap between our intrinsic value and where the share price is currently trading. Operator: And our next question comes from the line of Larry Solow with CJS Securities. Lawrence Solow: Zach, just want to welcome you. I know you've been with the company for a while, but welcome to your new role or your pending new role -- well, I guess, COO is a new role, you're welcome. I guess just a follow-up on that question. I think we all agree probably the fastest way to close that gap in underlying value and value we see in the market today is through an asset sale. Just your thoughts, kind of big picture, thinking outside the box, any other levers the size of an asset sale at a good price, which I think is an obvious way to hopefully improve the value there. But just any other thoughts? Clearly, you're going to run by this -- the playbook is probably going to be run pretty much the same. I don't expect you to come in there and upend everything. But just any thoughts on how -- other ways to sort of narrow that gap over time? Zachary Sawtelle: Certainly. There are alternative methods, but I do believe that the most prudent way, given where we're -- our share price is currently trading would be to monetize an asset, whether that is a full monetization or a partial monetization. And we're evaluating everything across the spectrum with the North Star being what is the best way to create value in the share price for our shareholders. Lawrence Solow: Okay. Okay. And just more operational question. It sounds like just general broad brush, the consumer, more specifically the consumer as it relates to your businesses. It sounds like the businesses are still doing -- marching along doing pretty well. There was maybe a little bit of some pull forward this quarter, but general broad brush, have you seen any change since the beginning of the year relative to today across at least your branded businesses? Zachary Sawtelle: Generally speaking, we are seeing a strong consumer through our businesses in the data that we see. And I would generally characterize Q2 performance in the consumer side of our subsidiaries at or slightly above expectations. So we are not seeing weakness in the consumer and probably performing, again, modestly better than expectations set in January of this year. Lawrence Solow: Got it. And just lastly, tariff refunds total, can you give us just an idea? I think you mentioned Rimports and 5.11 benefited from them. Can you kind of give us a thought on what it was in the quarter? And I assume there's a number you have kind of baked into guidance? Or is that just for what it was in the quarter? Zachary Sawtelle: Yes, that's correct. I would characterize IEEPA tariff rebates in Q2 as relatively modest, mid-single-digit millions. And I would characterize expected tariff refunds for the business modestly more than that in the back half of the year. Lawrence Solow: Okay. And is that -- that's already in the guidance or not? Zachary Sawtelle: That's correct. It is included in the guidance. Operator: [Operator Instructions] And our next question comes from the line of Timothy D'Agostino with B. Riley Securities. Timothy D'Agostino: Just on leverage and then obviously deleveraging going forward, I'm looking at the 10-Q and for the covenants -- it seems you within your range for all 3 on those covenant ratios. So I guess, thinking to the end of '26 and into '27, is there a certain leverage ratio you're targeting getting to? And then could you maybe just provide some color or commentary on your focuses -- your focus for deleveraging through the end of '26 and maybe how we should think about it for '27? Stephen Keller: Sure. Look, again, number one, we've always said that we would like to be operating around 3 to 3.5x. So I think that's the right level. And so to get there, we clearly need to do a divestiture, which is what Zach has been talking about is one of the key focus areas. Outside of that, the things that we're doing is, one, driving the businesses forward and also trying to maximize our recoveries from Lugano and some other areas. We think excluding a divestiture, which is lumpy and happens -- it happens when it happens, we would -- we think we can get down to kind of close to around 4.5x by the end of the year on an organic basis. And then we would -- like I said, we would like to add additional inorganic, whether it's asset sales, business sales, et cetera. And so that is -- those -- getting that leverage down is a key focus and driving cash flow. Ultimately, given our businesses, though, we do have really strong free cash flow generating businesses, and that's going to be a key point for organic deleveraging this year and into next year. Timothy D'Agostino: Okay. Great. And then if we just think about maybe potential other ways of capital or just returning capital to shareholders in terms of maybe a dividend or share repurchases. Should we really not start to think about that until you get within that leverage target you're focusing on? Or could we see that even if you do get to a 4x leverage, let's say? Stephen Keller: I think you'd see us under 4x, I think you would see us start thinking through how to return capital efficiently to shareholders. Obviously, we have to work with the Board to get to do that. But that -- I think under 4, we would see ourselves in a position to probably return capital and again, with a focus on getting -- closing the gap to intrinsic value. Operator: [Operator Instructions] And our next question comes from the line of Robert Dodd with Raymond James. Robert Dodd: Welcome Zach to public company conference calls one-on-one. On the kind of -- on Lugano, right, and you gave us right, you've got a $20 million recovery coming by the fall and maybe more ultimately. Can you give us -- and I'm not asking -- I mean, are there potential recoveries beyond that -- I mean, is there another 0 to $20 million? Or is it a 0 to $100 million? I mean, can you give us any kind of idea about the scale there? Because obviously, any recovery from Lugano straight to debt is 3, quotes around 3, deleveraging. So any qualitative idea you can give us about the relative scale? Zachary Sawtelle: It's a similar amount of money from tax. That $20 million that we're talking about would primarily come from the Gordon Brothers guarantee that was related to the inventory. The additional recoveries that we have line of sight to would be tax refunds. Those are just hard to predict when. It's not entirely clear -- it's hard to predict when the IRS will refund the money, but you would expect another $20 million or so coming in from that over the next couple of years or so. And then there are other things -- there are lots of other recoveries that we would expect the liquidity trust or the final state to go after. They are very hard to predict, both the amount and the timing. And so I think we would expect some additional recovery. It's just hard to quantify. And so we wouldn't want to -- we're operating that those would be 0. And then if there are more, we'll be -- to your point, we'll use that to pay down debt immediately or return capital to shareholders. Robert Dodd: Got it. Got it. On an operating target, BOA and PrimaLoft, obviously, a good quarter this quarter, and that's the seasonality, right? I mean, customers stocking up, so to speak, before the manufacturing season for the back half of the year, however exactly you want to turn that. How confident are you that this is normal seasonality, which you have built into the guidance already versus -- is there a risk that this is inventory overstock again that the customers are worried about other tariffs or whatever and so they're overstocking. And is there a risk that this has a kind of a negative effect in '27? Or is it just -- it's normal and it's just SKU growth, et cetera, et cetera? Zachary Sawtelle: Thanks for the great question. So I would not characterize it as normal seasonality per se. As we noted in the prepared remarks, we do think that the Iran conflict did cause some B2B partners likely to modestly accelerate some orders into Q2. However, I do want to emphasize, we believe that to be modest, and that is reflected in our projections for the back half of the year, and we remain confident in the business' performance for the back half of the year. So we think that they did perform modestly above expectations as a result of some pull forward. But despite that tailwind, the businesses are really well positioned for a strong back half of the year. Robert Dodd: Got it. Got it. And then just on 5.11, you mentioned more moderate promotional activity, which obviously contributed to margin expansion. I mean some kind of question. Is there -- how moderate and is there any risk to impairing end-user relationships who like their coupons, et cetera? I mean, thoughts on trimming back sometimes on promotional activity might annoy an end customer and what your view is there? Zachary Sawtelle: Sure. We think moderating the promotional activity is the right decision to create long-term value in the business to ensure that we're getting the right customer that's paying full price for a great quality product. And so it is striking the right balance of ensuring that we are not disappointing our customer in a tough market environment, but also ensuring that we're realizing the appropriate value for the great products that 5.11 is delivering. I would also call out that the professional business, which is the heritage of the business, the B2B portion of the business is performing incredibly strong and is seeing a robust demand, both in North America and across Europe, in particular, somewhat driven by the increase in conflicts, both in Europe and the Middle East. Operator: And with no additional questions, I would now like to turn the conference back over to Zach Sawtelle for closing remarks. Zachary Sawtelle: Great. Well, thank you, everyone, for your time, and we look forward to discussing Q3 with you in the future. Take care. Operator: Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.