Compass Diversified Holdings

Good afternoon and welcome to Compass Diversified Holdings first quarter 2020 conference call. Today's call is being recorded. All lines have been placed on mute. If you would like to ask a question at the end of the prepared remarks, please press the star key, then the number one on your touchtone phone. At this time, I would like to turn the conference over to Matt Berkowitz of the IGP Group for introductions and the reading of the Safe Harbor Statement. Please go ahead, sir.

Thank you, and welcome to Compass Diversified Holdings' first quarter 2020 conference call. Representing the company today are Elias Sabo, Cody's CEO, Ryan Fockingham, Cody's CFO, and Pat Mazzarello, COO of Compass Group Management. Before we begin, I would like to point out that the Q1 2020 press release, including the financial tables and non-GAAP financial measure reconciliation, are available at the Investor Relations section on the company's website at www.compassequity.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. Please note that references to EBITDA in the following discussions refer to adjusted EBITDA as reconciled to net income in the company's financial filing. Throughout this call, we will refer to Compass Diversified Holdings as COTI 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 COTI and its subsidiaries. Words such as believes, expects, 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 10Q, as filed with the Securities and Exchange Commission for the quarter ended March 31, 2020, as well as in other SEC filings. In particular, the domestic and global economic environment, as currently impacted by the COVID-19 pandemic, has a significant impact on our subsidiary companies. Except as required by law, COTI 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 first quarter earnings conference call. Before discussing our results, I'd like to take a moment to acknowledge the current unprecedented environment. The impact of the COVID-19 pandemic has been widespread around the world, and we are only just beginning to understand the near-term effect on our business. Today I will describe what we are seeing at this time, the additional steps we've taken to position the company for long-term success and further alignment, in addition to providing as much detail as I can about what we are expecting for the second quarter. First and most importantly, the safety and well-being of our employees remains our top priority. We have implemented rigorous procedures at both the manager level and and at our subsidiary companies to protect our employees, such as working remotely when possible, strict social distancing measures when it's not, increasing cleansing protocols, temperature checking, and other best practices as suggested by the CDC. We will continue to take all steps necessary to protect our employees' health and ensure that they feel safe and supported. Turning to the impact of COVID-19 on business. With over 90% of the U.S. population under some form of shelter-in-place orders beginning in mid-March and continuing through most of April, U.S. economic output suddenly dropped and dramatically dropped last month. European and Asian markets are under similar orders, which have significantly impacted the global economy. As a result, our subsidiaries experienced a drop in demand for certain products beginning in mid-March and accelerating in April as the full effect of the shelter-in-place orders took hold. At Cody, we have always managed our business for the long term and the unexpected. While the current situation may have been beyond our wildest dreams last year, our hands-on and disciplined approach have positioned us defensively, and will continue to be a distinguishing factor as we move forward. We've worked tirelessly with our management teams over the last few months to reduce controllable costs and maximize cash flow at our subsidiaries. These moves include short-term actions to reduce labor costs, eliminate nonessential travel, and reduce discretionary spending. We are hopeful that these measures are temporary as we work our way through the COVID-19 crisis, and we have plans in place to restore our employee base and growth initiatives once the pandemic is behind us. We are also proud of how our subsidiary companies have responded to COVID-19 and congratulate 511 on its success supporting first responders, as well as recognize the important work Sterno has done producing cotton masks and hand sanitizers for local hospitals and health care providers. Despite the sudden shutdown of the global economy in March, we exceeded our financial expectations in Q1. During the first quarter, we generated approximately $333 million of revenue, down 1.6% from the prior year's comparable period, and $49.3 million of adjusted subsidiary EBITDA, down 4.7% from prior year's comparable period. We generated $17.7 million of cash flow available for distribution and reinvestment, which we refer to as CAD, during the first quarter of 2020, exceeding our expectations and matching last year's CAD of $17.6 million. Ryan will discuss our financial results in greater detail shortly. During the quarter, we also announced our acquisition of Marucci Sports, which we closed on April 20th. Marucci is a leading designer and manufacturer of premium baseball and softball equipment and apparel. Our permanent capital was a clear competitive advantage in sourcing this coveted consumer products business and moving forward with a platform investment at a time when pandemic-fueled volatility set financial markets on wild swings. and many others were unable to access funding. We are excited to welcome Marucci into the Compass family and are especially looking forward to working with Kurt Ainsworth, Marucci's chief executive officer, in positioning the company for success in the years to come. Much like our prior subsidiary Fox Factory and 5.11, Marucci has created an aspirational brand by appealing to the top performers in its respective markets. Over half of all big league baseball players use equipment by Marucci or its sister brand, Victus. We see strong growth opportunities in continuing to take domestic market share, entering into adjacent product categories, and expanding internationally. While we are excited and encouraged by Marucci's long-term prospects, We expect its financial performance in 2020 to be adversely impacted by the large-scale suspension of sporting events, including Major League Baseball and all youth sports. We anticipate Marucci will be roughly break-even in EBITDA for our ownership period in 2020, with estimated EBITDA losses of roughly $1 million per month in the second quarter. Despite the anticipated reduced financial performance in 2020, and the expected losses in the second quarter, we believe that Marucci is a perfect fit for our consumer business and possesses the attributes that will result in market share growth and shareholder value creation in the long term. While second quarter results broadly will undoubtedly be impacted by the abrupt halt to large segments of the economy stemming from the global response to COVID-19, we believe we are well positioned to effectively operate in a time of market dislocation and remain focused on taking decisive actions that will allow us to emerge even stronger from these unprecedented conditions. Our group of subsidiary companies, on a consolidated basis, continue to produce positive cash flow and earnings thus far in April. We believe our branded consumer companies are largely poised to perform well in this environment, as 5.11, Velocity, and Liberty all benefit from their readiness positioning. Further, we believe that coming out of this crisis, these brands will appeal to a larger audience, potentially positioning them for accelerated growth. Most of our industrial businesses are performing well considering the dramatic drop in global GDP. However, Sterno has faced some challenges. Sterno's core catering line has seen a dramatic reduction in demand as large gatherings and catered events are prohibited throughout most of the United States. Pat will discuss the trends in our consumer and industrial businesses further. Turning to guidance. In light of the current economic uncertainty, we are withdrawing our guidance for 2020. However, for our second quarter of 2020, we currently anticipate pro forma adjusted consolidated subsidiary EBITDAs of between $28 and $38 million, a reduction of 30 to 50% compared to the second quarter of 2019, excluding Marucci. Due to the reduction in Q2 earnings expectations, the manager has decided to waive 50% of its management fee in the second quarter, and our board of directors has agreed to waive 50% of its cash payment due for the second quarter. Although Compass has very strong liquidity and our earnings are holding up comparatively well, the board and manager felt it was appropriate to reduce our compensation levels to align ourselves fully with our shareholders. Additionally, the manager has decided to defer any payment it would be entitled to receive under any five-year anniversary incentive payment for all of 2020. We expect these moves to save the company approximately $10 million in cash flow and in 2020 and offset some of the challenges ahead. Before turning the call over to Pat, I want to emphasize that we are in a strong liquidity position due to the strategic moves we made last year. As many of you know, prior to Marucci, we had not consummated any new platform or add-on acquisition since February 2018 and September 2018, respectively. We have often stated that asset prices were at historically high levels, fueled by an abundance of debt and equity capital, that we were very long in the economic cycle, and that high prices being paid for assets resulted in returns that were below our weighted average cost of capital. With this in mind, we not only remained disciplined in our capital deployment, but we also went one step further and divested two businesses at very attractive valuations, and issued $115 million of preferred stock in order to repay all of our revolver and term loan indebtedness and sit on cash. These strategic decisions allowed us to defensively position the company, and while we knew we would under-earn our balance sheet potential in the short term, we felt it was the appropriate to balance risk and return. As you will recall, manager voluntarily waived management fees of approximately $10 million annually starting in the second quarter last year in a move that aligned our interest with our shareholders, much like the moves we announced today. These decisions to defensively position ourselves last year when others were aggressively accumulating assets has served us well. Not only do we believe we have the liquidity to meet the needs of our subsidiary companies, but we are able also to acquire an outstanding business in Marucci during the midst of this crisis and meet our capital allocation needs by declaring distribution on our Series A, B, and C preferred shares and our common shares. With that, I will now turn the call over to Pat to provide additional detail on our subsidiary company's performance in the first quarter.