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.

Thanks, Elias. I'll begin with our niche industrial businesses. For the first quarter of 2020, revenues declined by 7% and EBITDA decreased by 10.5% over the comparable quarter in 2019. Advanced Circuits was down 10% in Q1 2020 from the year-ago period. Advanced Circuits EBITDA declines improved sequentially in each month during the first quarter, with March roughly meeting 2019 performance. Thus far in April, Advanced Circuits is performing roughly in line with last year. Foam Fabricators EBITDA was down 3% in Q1 2020 from the year-ago period. Foam Fabricators is benefiting from lower input costs and other cost containment initiatives. In addition, Foam Fabricators is seeing increased demand for its insulated coolers, which are used in food delivery and pharmaceutical shipments, among others. Thus far in April, Foam Fabricators is seeing significantly reduced demand as a result of a reduction in revenue from its appliance customers. However, cost containment measures and lower input costs are expected to somewhat mitigate the effect on earnings. Arnold Magnetics EBITDA was up 7% in Q1 2020 from the year-ago period. Arnold benefited from increased bookings in the back half of 2019 that were scheduled to ship in 2020. We expect these 2019 bookings to continue to benefit Arnold in the second quarter. However, its book-to-bill ratio started to decline in February and has fallen below 1 at the end of March. The Sterno Group's EBITDA was down 19% in Q1 2020 from the year-ago period. Sterno was performing ahead of expectations in January and February. However, as Elias mentioned, demand for its core catering products fell dramatically at the end of the first quarter. We expect the catering and related products business to experience extremely weak demand in the second quarter and weak performance for at least the remainder of the year. As a result, we've made cost cuts in order to right-size the business during this unprecedented time. We've also experienced weakness in Sterno's home divisions. and took actions to substantially reduce fixed costs in the business in early April. Despite the reduced performance of Sterno Home, the consumer division of Sterno Group is performing well, as our line of wax products and essential oils, which are essentially sold through big box retailers, have outperformed expectations. Historically, the consumer portion of Sterno's business has represented roughly 60% of its EBITDA, and we expect it to be flat or improve slightly on a year-over-year basis. We expect the food service business, however, which historically has been 40% of our EBITDA, to be roughly break-even for the remainder of 2020. Now turning to our branded consumer businesses. For the first quarter of 2020, revenues in EBITDA increased by 4.2% and 4.3% respectively over the comparable quarter in 2019. Ergo Baby's EBITDA was down 30% in Q1 2020 from the year-ago period. Ergo Baby has a global footprint and derives a majority of its revenues internationally. so it experienced significantly reduced demand in its Asian and European markets in Q1. These negative trends have accelerated in April and we expect Ergobaby to experience significantly lower demand in all of its markets while its wholesale brick-and-mortar customers remain closed. Domestically, Ergobaby has a strong and growing digital presence to offset some of the declines. Ergobaby demand has historically been tied to global birth rates and less impacted by economic conditions. Therefore, we believe Ergobaby is poised for a strong rebound in operating results later in 2020 as brick-and-mortar retail customers reopen their doors. LibertySafe EBITDA was up 66% in Q1 2020 from the year-ago period. LibertySafe secured distribution with a large farm and fleet customer in mid-2019 that is benefiting the first half of 2020. Liberty's products remain in high demand given the current level of uncertainty. However, many of the brick and mortar stores closed in April, negatively impacting performance. Despite the store closures, Liberty continues to experience solid demand and is expected to outperform Q2 of last year. Velocity Outdoors EBITDA was down 28% in Q1 2020 from the year-ago period. This performance was better than expected as demand for air gun product accelerated in March. As a reminder, we embarked on a restructuring of this business in mid-2019, and expected financial headwinds through most of 2020 as a result of the restructuring. The restructuring efforts are proceeding as planned, and the management team under Kelly Grindle and Tom McGann's leadership is performing extraordinarily well. April trends for this business continue to be very positive on the airgun side. 5.11's EBITDA was up 27% in Q1 2020 from the year-ago period. 5.11 continues to perform ahead of our expectations. Starting in late March, 5.11 closed most of its retail stores to consumer customers. 5.11's products are integral to first responders in fighting this pandemic, so its retail stores remained open to those essential workers. However, to protect our first responders and employees, 5.11 closed store access to the general public. As a result, retail channel sales numbers have been significantly impacted. However, 5.11 is a digitally focused brand, and it experienced increased demand for its products at its e-commerce site. which is up over 100% thus far in April from a year-ago period. Further, revenue in its direct channels of 511tactical.com and its retail stores are up mid-single digits on a month-to-month basis over the prior year, demonstrating the strength of 511 as a consumer lifestyle brand. Despite the improvement in its direct channels, 511 consolidated revenues are trending down thus far in April in the high single digits from the prior year. 5.11 has moved rapidly to cut costs to align the expected temporary demand drop. However, it will continue to invest in certain growth initiatives that enhance consumer experiences and accelerate its digital efforts. We continue to believe that 5.11 is positioned to emerge from this crisis stronger than before as consumers adopt a preparedness mindset consistent with 5.11's mission statement to always be ready. We continue to believe 5.11 will be transformational to the entirety of Compass. With that, I will now turn the call over to Ryan to add his comments on our financial results.

Thank you, Pat. Before I discuss our consolidated financial results for the first quarter of 2020, I want to highlight our first quarter distributions that were recently paid to shareholders. Last week, on April 23rd, we paid shareholders a cash distribution of $0.36 per common share, representing a current yield of approximately 7.2%. Including this distribution... we have paid approximately $19.32 per share in cumulative distributions since Cody's 2006 IPO. This reflects 129% of the IPO price. In addition, today we paid cash distributions of approximately $0.45 per share on our 7.25 Series A preferred shares and approximately $0.49 per share on our 7.78 Series B and Series C preferred shares. All three preferred distributions covered the period from and including January 30, 2020, up to but excluding April 30, 2020. Moving to our consolidated financial results for the quarter ended March 31, 2020, I will limit my comments largely to the overall results for our company 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 March 31, 2020, 2020 was $333.4 million, down 1.6%, compared to $338.9 million for the prior year period. This year-over-year decrease reflects the challenging economic conditions as a result of the COVID-19 pandemic. Strong sales growth at our branded consumer subsidiaries, 5.11 and Liberty, was offset by declines in our other businesses previously discussed. Consolidated net income for the quarter ended March 31, 2020, was $4.9 million. Consolidated net income for the prior year's first quarter was $110.2 million and included a $121.7 million gain recorded in connection with the sale of Manitoba Harvest. CAD for the quarter ended March 31, 2020, was $17.7 million, essentially flat from the prior year period. Our CAD during the quarter was above our expectations. With EBITDA down slightly from prior year, and cash taxes roughly in line with our expectations, the primary driver of our CAD outperformance was the direct actions taken by our subsidiary management teams, reducing CapEx spend in March as a result of the economic conditions. The other factors impacting our CAD during the quarter, as compared to prior year, was lower interest expense and management fees, an increase in preferred share distributions as a result of our Series C issuance in November 2019, and the loss of cash flow from our two divestitures in the first half of 2019. A highlight of our quarterly performance was our ability to generate a slight increase in consolidated cash flow from our existing businesses as compared to the prior year, notwithstanding the loss of cash flow from Manitoba Harvest and Clean Earth and the substantial impact of the pandemic on the global economy beginning late in the first quarter. As previously discussed, we anticipate a challenging second quarter in earnings for our subsidiaries. The lower expected earnings will have a direct impact on our second quarter cash flow generation. As Elias mentioned, we have directed our management teams to reduce capex spend and preserve capital during this challenging time period. Subsequent to the acquisition of Marucci, the recent payment of common and preferred share distributions, and the recent payments of interest, we estimate cash balances today at Cody and our subsidiaries totals between $55 million and $60 million. In addition... we have approximately $400 million available on our revolver and liquidity. We anticipate that this cash and the revolver availability will provide our companies with the financial flexibility and liquidity they'll need in the short and intermediate term. Pro forma for the acquisition of Marucci, we estimate our leverage at just over two times. Our balance sheet is strong, and we stand ready and able to provide our subsidiaries the financial support they need as well as move on compelling investment opportunities in this dislocated market, should they present themselves. In addition to the impact of our lower second quarter expected cash flow, Clean Earth, divested in June of last year, produced a significant amount of CAD in the first half of last year, as it paid no cash taxes and there was no management fee paid in the second quarter of 2019. As a result, when comparing the first half of 2020 to the first half of 2019, the loss of clean earth cash flow will produce negative comparisons in CAD. Turning now to capital expenditures, during the first quarter of 2020, we incurred $3.3 million of maintenance capital expenditures of our existing businesses compared to $3.6 million in the prior year period. The decrease in maintenance CapEx was related to reduced CapEx spend across a majority of our businesses. During the first quarter of 2020, we continued to invest growth capital, primarily in January and February, spending $3.3 million in the quarter, primarily related to 511's long-term growth objectives. Growth capex in the prior year quarter was $2.5 million. Turning to our expectations for 2020, we have revenue and earnings seasonality in certain of our subsidiaries, and absent any new acquisitions or divestitures, we anticipate a majority of our earnings and cash flow to come in the second half of the year. Further, Our quarterly operating and cash flow results can vary materially based on factors such as the timing of shipments of large orders or the timing of certain investments made before or after quarter end. As Elias mentioned, we are withdrawing our previous full-year 2020 EBITDA and payout ratio guidance range. With the amount of uncertainty many of our subsidiaries are facing, we are unable to provide a revised range of full-year 2020 EBITDA today. To the extent we have clarity on our next earnings call, we will provide a revised range then. For maintenance CapEx, we had previously estimated CapEx spend of between 20 and 25 million for the full year of 2020. Our current estimate for maintenance CapEx for the full year of 2020, including Marucci, is between 13 million and 16 million. For growth CapEx, we had previously estimated spend of between 10 and 15 million for the full year of 2020. However, our revised expectation for growth capex is between $6 million and $10 million, primarily at 5.11. A majority of this growth capex spend is expected in the first half of the year as 5.11 builds out storefronts for leases entered into prior to the pandemic and for IT systems to enhance consumer experiences across their numerous channels. For 2020 cash taxes, our expectations were to spend between 6% and 8% of our subsidiaries total EBITDA on cash taxes. However, as a result of the expected decline in taxable income at certain of our companies, we expect cash tax payments will decline. Given our inability to provide an EBITDA guidance range for full year 2020, we are also unable to provide a range for cash taxes. As with EBITDA, we hope to provide a revised range on our next earnings call. With that, I will now turn the call back over to Elias.

Thank you, Ryan. I would like to close by briefly discussing M&A activity and our forward growth strategy. As I mentioned earlier, we took steps in 2019 to prepare for the unexpected. Those decisions have positioned us well to make it through this crisis and emerge as a stronger company on the other side. We continue to believe our hands-on and disciplined approach has and will continue to set us apart and ensure our portfolio is well situated to weather the storm. we are taking deliberate near-term actions to further align interests with shareholders, which will better position us to deliver meaningful value in the years to come. As we have done through other challenging moments in time, we are confident that we have the right strategy, an excellent team in place, and a strong group of subsidiaries to not only preserve, but also find stronger footing on the other side. As difficult as we expect the second quarter to be, we believe that the companies that successfully manage through this turmoil will be stronger and more valuable moving forward. We have the balance sheet strength to support our companies as they operate in these highly unusual times. Our companies are market share leaders in their respective niches and are poised to gain additional market share. Our balance sheet strength has allowed us to pursue growth initiatives unavailable to others as the debt markets close to all but the highest quality issuers. We believe the best opportunity to generate long-term shareholder value occurs by acquiring premium assets during market dislocations like we are currently experiencing. While we will always prioritize the financial health of the company over strategic acquisitions, and this time will be no different, we are constantly evaluating the best ways to enhance our portfolio. We entered the year with significant balance sheet strength and will seek to capitalize on select opportunities while maintaining a balanced approach to risk-taking. Our strategy remains the same going forward. We are intensely focused on executing our proven and disciplined acquisition strategy, improving the operating performance of our companies, opportunistically divesting, enhancing our commitment to ESG initiatives across our portfolio, distributing sizable distributions, and creating long-term shareholder value. With that, operator, please open up the lines for Q&A.

Thank you. Ladies and gentlemen, as a reminder, to ask a question, you will need to press the star, then the one key on your touch-tone telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. And our first question coming from the line of Kyle Joseph with Jeffrey Fiolan is now open.

Hey, good afternoon, guys. Let me start by saying we appreciate the guidance. It's hard enough to model one company in this environment, let alone nine. So much appreciated there. You know, I wanted to start off on 5.11. If we could, can you give us a sense for the breakdown of sales between stores and online? And then just based on the geographic dispersion of stores, give us a sense for the outlook of store reopening. Sure.

Good afternoon, Kyle. It's Elias. First, I would say, you know, between our e-com and retail, and as we said in our script, you know, the e-com and our retail business, when you combine the two, is running up sort of high single digits over last year, which, you know, to be honest with you, we think is just an incredible achievement considering the conditions Our retail stores are running down a little more than 50 percent right now, month to date, in April. It's a little too early to tell on reopening how those will trend. So, we don't have, you know, anything on geographic dispersion yet to share with you. We are, as reopenings happen, we are looking at states where reopening is occurring more quickly. So, take Georgia or Texas. and we are looking at how the stores build, and I think that will help inform us in states that reopen more slowly, like California. So we're accumulating that data right now. Too early to tell. Our e-com business is running well over 100% up year over year, and so what really encourages us, as we've seen 5.11's results, is as our retail has closed to the consumer, that consumer has moved over by and large to our e-com site and, you know, kind of year over year demand for the product in what arguably is the most, you know, unusual time in our lifetime is actually up. So I think it bodes really well for how strong this brand is and how strong this brand will emerge.

That's really helpful. Thanks. And, you know, full disclosure here, I haven't read every single word of the CARES Act, but Did you have any scenarios that would have been eligible for PPP?

Yeah, I'll ask Pat to answer that. Yeah, I mean, holistically with the government initiatives, we have not. You could question, you know, there's some affiliation rules that make us, or we felt it wasn't the right thing to do to apply for the PPP. The only real sort of recovery act that we have, participated in, and it was ever so slightly, was the Families First Coronavirus Relief Act, which, as you know, if an individual employee in a company of less than 500 people, which is in all our companies, which is just some of our companies, has to take a couple weeks off because they have a family member who's sick or something like that, we get an offset for that salary in a tax credit for payroll taxes. I haven't really seen The numbers on where we've used that, if we have used it, it's been very, very sparingly. And that's sort of the only Recovery Act sort of payments that we have taken or will take.

And, you know, Kyle, let me just add one point to that. You know, I think the PPP plan, and we're seeing some backlash to public companies that have access to capital that are taking it. You know, I think that was designed more for smaller private health companies that don't have access to capital. You know, our liquidity is awesome, to be honest with you, and we feel that the earnings power of our company is, on a comparative basis, holding up extremely well. And so, you know, we wouldn't feel morally that it's correct for us to apply for, you know, these programs that are designed for companies that need it and need it just to keep people on their payroll. And so, you know, we have... adequate capital, we have adequate resources to be able to make it through. Our companies are positioned really well and performing, to be honest with you, much better than our expectations if you had asked us four or five weeks ago. And so we don't feel that it would have been morally right to accept those payments even if we were eligible.

That's a great answer, and I think everyone can get behind it. Next, I'll ask Ryan a question just on the balance sheet. Given rate movements in the quarter, can you give us a sense for your cost of funds, you know, obviously given your fixed versus floating liabilities, and just remind us if you have any slide where floors in any of those facilities, and then address potential refi opportunities with lower rates versus wider spreads?

Sure, Kyle. Good afternoon. So, As you recall, because of the substantial sales we had in 2019, we entered the year with really no floating rate. Our revolver was zero. Our term loans were paid off. And the only debt we had outstanding was our bond at $400 million, which is a fixed rate instrument. So now that we've closed on Marucci, last week we have or took $200 million down on the revolver for that acquisition. That today is a LIBOR plus a spread instrument. Our spread today on that LIBOR is $175, and there is no LIBOR floor in that agreement today. So we think our floating rate today, is our variable interest rates are quite low. So, you know, we don't see, you know, a reason to refi today. Is that helpful?

Yes, got it. That's great. And then Elias was trying to write down everything he got said on the call, but I missed some of your commentary on the pipeline in terms of potential acquisitions given market disruptions here. Can you just walk us through, you know, how does the pipeline look in – in mid-March when volatility started, in early April when volatility really peaked, and then subsequent to the equity market recovery, how the outlook for deal flow has really transitioned over the last, call it, 60 days.

Sure. So, Kyle, first I would say, you know, and I just want to emphasize that that we view the Marucci acquisition as being a direct result of the market dislocation. This is a really highly coveted asset, and I think as you guys see this business and its performance over the years and sort of how it was trending, this is a business that came to us by virtue of the fact that COVID had a major impact on financial markets broadly and M&A was shutting down and it gave us a huge leg up. So I only say that because it really is illustrative of how we can use our balance sheet strength right now and our permanent capital model as a massive advantage when others, you know, mainly PE, are sort of frozen out of the market unless they want to equitize the whole thing because you know, availability of debt to finance standalone acquisitions today is near zero. So with that said, you know, in mid-March, I would say the pipeline was pretty robust. We saw, you know, and our pipeline, I would say, over the course of 2019 and coming into this year was really robust. What we kept saying was pricing is just outside of, you know, kind of the range at which we would be willing to transact. Starting in mid-March, I would say there's been a complete freeze in all M&A-related activity, and that's gone on for the last 45 days. There are some companies that we have had reach out to us that we have been talking to where it is pretty much desperate times. They may be working in highly impacted industries. and they're just trying to figure out how to get to the other side. I think there's still right now a relatively large, when M&A markets reopen, a relatively large bid-ask spread. I think us with capital on the buyer's side view prices that need to come down pretty dramatically. But as I've heard people say, asset prices are sort of sticky on the downsides. And so sellers are reluctant to, I think right now, come to grips with the reduction in valuation. That will absolutely change as markets, you know, sort of come back and as we get more price discovery in the next, you know, sort of 60 to 90 days. So we would anticipate... that we'll be reengaging on assets that we think are strategic and provide really good upside to our shareholders. We'll reengage, but at valuations, frankly, that we think are highly opportunistic. And I'll make one other point, Kyle. I think that for our investors and analysts, that is meaningful. In this time of dislocation right now, you know, we see a real unique time. The public markets have come back in much more of a V-shaped recovery. I think we've recovered, you know, most, you know, 60% or something of the losses that we had experienced at our highest point in March. But private markets don't react that quickly. And prices don't fall that quickly, but they also don't react back that quickly. And so as prices in the public market come back, and for issuers like ourselves – who have seen our stock come back, our bonds trading back above par, our preferreds trading back towards par. You know, there's an arbitrage that starts to exist where we're starting to perform much better in our securities, but the private markets and the buyers who would be competing are still frozen out of markets. And we think that creates sort of the ideal condition for us to be able to be active and create value you know, for the long term for our shareholders. So this is, you know, frankly, what we've been waiting for. None of us wanted a pandemic. Let me just start with that. And the health issues around this are absolutely atrocious. But I think the cooling of asset prices due to reduced economic activity was something that we needed, frankly, given the size of our balance sheet and the strength that we had and the inability to find assets to put money to work in. And so although we hate the reason that asset prices are coming down due to a health pandemic, we do think that it is very much beneficial for how we are executing our strategy right now.

That's all very helpful. Thank you guys all for answering my questions. Really appreciate it.

Our next question coming from the line of Larry Sello with CJS Securities. Your line is open.

Great. Good afternoon, guys. Good to hear your voices, and I hope you and your families, too, are all relatively healthy in extraordinary times. Thank you, Larry. Thanks, Larry. Great, thanks. Absolutely. Sticking with sort of the acquisition theme, could you give us just a little more color? Obviously, you just closed on Marucci, and I think this is your first public call since you announced the acquisition. Maybe, you know, discuss... the strategy or sort of what you guys, you know, hope to help, you know, bring to the table to sort of, you know, the company's obviously been growing pretty rapidly the last few years. So maybe what do you think, you know, sort of confidence brings to the table? What's sort of the post-corona outlook, if you will?

Yeah, so Larry, let me start and then I'll ask Pat and Dave to chip in as those guys are the ones that, you know, kind of did all the heavy lifting here. I would say with respect to Marucci, it is our belief that these kind of assets don't come along that often. And we've seen it over history. I would say that this company looks most like Fox Factory in terms of the people that are at the top of the sport are using it and winning with the product. Same sort of dynamic exists with Marucci. And that creates a halo in this aspirational pull that moves down into the broader part of the market, you know, for youth sports or for Fox, for example, with the Weekend Warrior. And so to us, this has the similar attributes. And, again, these kind of companies don't come along all that often. which is why we have so much enthusiasm, notwithstanding the fact that, you know, youth sports and baseball is on temporary pause right now in 2020. So I'll start with that, but then I'll ask Pat and Dave, you know, to pitch in on sort of what we see as growth opportunities and how we see them, you know, being able to help them. Pat?

Yeah, I mean, I would just say, you know, it's a company that has a tremendous brand that we've been following for years. that is underpenetrated internationally as well. I'd say there's been some great, strong, solid trends in baseball participation over the last several years, you know, prior, obviously, to COVID. And lastly, I'd say that, you know, the company, we're thrilled with the management team right now. We think the entire management team is very strong. We think they are, you know, strong leaders, and we think there's a lot of market share that can be gained both internationally and through new products that they're – you know, have introduced or will introduce. Dave, what else would you add?

I think you hit on most of it. It starts with kind of an authentic enthusiast brand, you know, a great management team, and we feel like there's, you know, some good white space to attack, you know, over time. Things take time, but in product extensions, in other baseball categories, in softball, in international sports, direct the team. So a lot of white space to attack over time, starting with the authentic enthusiast brand.

Right. Okay. So no Cat 9 this year, though, I guess, huh? That's a joke. Just switching gears, on Sterno, just to clarify that, 60% of the business or so is consumer. Basically, that's the Canva Rimport side. And then the remaining 40 is thermal heat and the home. Is that right? Or am I getting those numbers a little mixed?

That's roughly correct.

Okay. Okay. So the Campbell side is doing okay. The heat side obviously is going really, you know, not many problems with zero. And then, yeah.

Okay. I think that the... Broadly, we consider the consumer division everything outside of food service, right? The food service division, obviously, is the one we talk to that's highly impacted. In totality, the rest of the business, you know, is solid with some areas of strength and some areas of weakness. But in totality, that's sort of the breakdown we gave you.

Okay. And just on the cost-cutting side, and we can just do it with a broad brush, I get I'm sure it's different at each of these subsidiaries in terms of – you know, where you can cut costs. And you guys obviously run pretty lean operations as is. So are these kind of things more like, you know, work furloughs, slowing, you know, less shifts? Obviously, you don't want to keep yourself well-oiled up for the long term. So I imagine most of the stuff you can roll back, you know, when you have to.

Yeah, I would say, Larry, you know, what we try to do – and it's got to be a case-by-case example – So, you know, some of our portfolio is growing and growing pretty rapidly, right? Like Liberty Safe and Velocity, you know, those businesses are doing really well. We've got, you know, like Advanced Circus and, you know, for right now, you know, 5.11 has been growing. So we have a lot of the portfolio that is growing, and the parts of it that are growing in Q2, we're very careful not to take costs out unnecessarily. because that could impact the growth opportunity. In the parts of the business that are, you know, flat or not growing, I would say it really runs the gamut. It can be anything from furloughing employees and layoffs, which, you know, frankly are the hardest for us to do emotionally, but necessary. It's cutting, you know, things that you would expect, like travel expenses and conferences. Those are easy because nobody's doing them. There's marketing expenses that are getting pulled back. Clearly, CapEx is being brought down to essential levels. So I would say what we have instructed all of our companies, and we really moved very quickly in March as we saw this unfolding, is cut quickly. If there's growth initiatives right now, we just have to be very careful and skeptical that with a GDP that's likely to be down I think the consensus forecast is like 35 or 36% in Q2. We all need to be really careful coming in to how the second quarter is going to look. And therefore, let's take decisive actions now. But understand, number one, we don't want to cut into muscle. Because we want to be able to have these businesses all not only perform through these times, but be able to service our customers well. and frankly take market share on the back side. And, you know, I think unfortunately there's going to be a lot of companies that are exiting the market via bankruptcies and closing down, and the players that remain are all going to emerge stronger and their market share will redistribute. I mean, that's what happens typically, you know, in downturns, and this is the biggest downturn of our life. So we have reminded our companies that, that we need to be able to spool back up and to put all of our employees back and put all of our spending programs back as the economy comes back and as some of that market share as we think will naturally inure to us, we need to be in a position to take it. And I would say we have tried to maintain at the point of attack spending across our portfolio. So where we have had the least cuts have come in sales, marketing, and R&D, new product development, because we think those are the things that will allow us to be aggressive market share grabbers here. But everything outside of that, we're in big cost containment mode, and it's sort of the same playbook we ran in 2009 when we were during the financial crisis.

Got it. Okay, great. I appreciate it. Thanks again, guys.

And as a reminder, ladies and gentlemen, to ask a question on the phone line, please press the start and the one key on your touch-tone telephone. Our next question coming from the line-up, Robert, that would be Raymond James. Your line is now open.

Hi, guys. Again, I hope everybody's doing well. Just a follow-up, well, and then some others, but a follow-up to the last question. On the... Can you give us any rough scale, say, where FTEs were, say, you know, the end of the year? I mean, obviously there's seasonality in it. And where headcount in general is today? I mean, I'm not looking for a company by company count, but can you give us kind of a little bit of context for just how significant that cost-cutting step has been?

Yeah, Robert, that's probably a little bit more granular than what we would like to get into. I would say we expect, if you want to know kind of in dollar terms, we expect millions per month in cost containment initiatives to be rolling through. So, you know, like a 511 is, you know, going to have some pretty significant cost cuts that they've implemented, as has Sterno. And so, you know, it's millions and millions of dollars per month, but we're really not prepared to say, you know, kind of on FTEs. Some of it is furloughed employees versus laid off. So it's a little too early, I think, to start to disclose some of that.

Fair enough. Just looking at, I mean, a couple of the businesses, as you said, I mean, 511 in some elements is doing quite well, Liberty doing quite well. in some areas. I mean, as odd as it is, I think, to ask this, I mean, how's the supply chain to those? Because obviously, I mean, you know, 5.11 does a lot of manufacturing overseas and there's supply chain disruptions over there. So for the products that are selling well, what's your inventory situation, your supply chain situation? Yeah, I mean, how long can this go on? disruption go on and your inventory situation remain okay in the product areas across those businesses that are selling well in this environment?

So I don't want to say there's no issues, but our management team is working through them at each company very well. You know, it's geography by geography. China goes down, China comes back up. You know, Vietnam has stayed up. Bangladesh went down, but now is, you know, starting. I mean, it's geography by geography. Broadly, I would say it's not our biggest concern right now. Our management team is nimble. They've sourced in multiple geographies, you know, throughout company by company. So as of yet, it's not, you know, there's other issues that we went through that we're far more worried about than that right now, Robert.

Right, but fair enough. On the liquidity situation, obviously, you call it $60 million in cash, $400 million available on the revolver. You have two and a half times leverage on kind of trailing EBITDA. Obviously, EBITDA is going to fall and we'll lower trailing. I mean, how much – but at the same time, you know, maybe the opportunity set is improving. You've talked about, you know, you having – the pipeline and maybe share being available to pick up, some of that could be organic, some of that could obviously be acquisitive. Where in this environment would you be willing to take leverage and how much of that liquidity would you be willing to utilize on an acquisition front versus a a reserve, obviously, in case, you know, portfolio companies need, you know, additional support.

Sure. So I'll just start, Robert, high level, and then I'll ask Ryan to, you know, also chip in. You know, as you said, our leverage is, you know, I think a little over two times right now. Ryan, correct me if I'm wrong. It will increase. We've obviously guided to, you know, kind of down 30% to 50%. in the second quarter. And, you know, I would say, frankly, April's tracking a little better than expected. And so, you know, we plan, you know, I would say we feel really good about that range and, you know, hopefully even improving beyond that. But, you know, undoubtedly, leverage is going to come up because the denominator in that calculation is coming down. So, you know, we still think when we stress test our companies that our leverage is below sort of the high end of the target band that we've talked about publicly. And so that provides some availability to be out there. In terms of liquidity, you know, we look at it right now as we have $400 million available on our revolver, but we have a $250 million upsized option should we go out and, you know, choose to exercise that. And our senior leverage is, you know, kind of one time. So I would hope our lending partners are, you know, are excited about providing to a low-risk credit like us. And frankly, you know, we view sort of the debt capital market as being pretty wide open. You know, I think our, as of yesterday, I think we were trading 103 on our bond. And so, you know, the bond market is pretty strong. So I think... For us, we have access to the capital market that would allow us to increase the amount of availability, but obviously we need to work within our leverage covenant. I think as we get three, six months from now and we have a better understanding of earnings trajectory broadly, not just with us, but broadly in the economy, then we could be a little bit more acquisitive and be willing to bring our leverage up to, you know, kind of the high part of, you know, our desired range and potentially even a little bit above that temporarily. But it would be temporary because we believe, you know, we are deleveraging pretty quickly. Ryan, what would you add to that? You obviously work with our capital markets providers all the time.

Yeah, sure. So, you know, a lot of – everything you've said, Elias, I've agreed with just to add some clarity to the numbers. We are a little over two times today, as I mentioned in the prepared remarks pro forma for Marucci. And Robert, as a reminder, we have total debt covenant capacity of five times. We think we're extremely comfortable with our covenant position even with the expected declines in EBITDA and even if we stress test those. In terms of Where we are prioritizing our liquidity today, we've touched on a couple of these, but I will reiterate because I think it's important. One, first and foremost, it's to support our companies through this unprecedented time. We want to ensure that they emerge even stronger. We talked about in their niche markets, if they're a market share leader, if they come out of this, they should have greater market share. And we want to make sure our companies have the financial support to get there. Number two is We will use our liquidity and prioritize our capital allocation, which includes our distributions on our preferred and common. Okay, third, only after the first and the second, you know, have been satisfied will we in, as Elias said, three to six months from now would we be able to think about, you know, finding and investing opportunistically. And in terms of, you know, capital, it's, you know, I think in our minds finding some add-ons to existing companies is a great potential use of capital in the near to intermediate term in that three to six month period. For us today, thinking about a substantially large platform deal in the next three to six months is very low likelihood, just given the uncertainty in the markets, uncertainty in cash flow streams, valuations, et cetera. So I think that's really how we're thinking about it. Hopefully it gives you a decent framework about our liquidity. and, you know, how we prioritize that capital.

Absolutely. I really appreciate that, Carlo, and, yeah, understood. Eliza, I've got to ask a follow-up since you mentioned it. April tracking is slightly better than expected. So can you – any more that you can say about that? Is that particular area, is that the good businesses doing even better, or are there some surprises in there that – something you thought might be a bit weaker is actually doing better. Any color on that one since you opened the door a little bit?

Sure. No, I appreciate that. I mean, you know, as we've been looking at this and we thought, you know, I'll step back and say I think all of us in business have, you know, viewed the orders to stay at home as, as just being so outside of the realm of what we could ever imagine that we probably all have some dark thoughts that go through our minds with respect to how that's going to impact our companies and how do you operate and how is human behavior going to happen. And so, you know, I think it was as we started to see these roll out, you know, it was a scary time, Robert, to be honest. And I think as every week has gone by, we've seen our companies doing broadly better. And, you know, I would say not across the board, but the majority of our companies are doing substantially better than what we would have thought as early as late March. And this is a very dynamic market where things are moving really quickly. And so, you know, as we've put together, here's what our Q2 forecasts, you know, looks like company by company and working with our subsidiaries and understanding, you know, what are their order flows coming in, what's their backlog look like, what cost cuts that they're taking out. I would say, you know, a few of our companies are performing, frankly, a little better than what we thought. You know, if you ask, I would say 511 is one of those categories. It really gets into, you know, kind of the companies with the readiness positioning and So 511, Velocity, Liberty, their performance is holding up much better than what we would have thought. But on the other side, I'll tell you in our industrial portfolio, I look at a company like ACI, which is by far our shortest cycle business. Very little backlog. Everything comes in sort of today. It gets produced tomorrow, three days from now, four days from now. And we're seeing their orders you know, hold up. And as Pat mentioned, you know, they're kind of holding up comparable to a year ago period. And so that is surprising to us. We would have thought a few weeks ago, short cycle business, shutdown of the economy, you know, that's going to be impacted quite severely. And to see it holding up as well as it is, you know, frankly, is really encouraging. So, you know, it is not all eight companies, now nine with Marucci, but the, you know, we have some really good bright spots within the portfolio and pretty much everybody is sort of holding their own. And so, you know, we're encouraged by it.

Pat, do you have any follow-up? I just add our management teams broadly have been very nimble and shown a great deal of skill at the subsidiary level. We always had high expectations of them and know that we are fortunate to work with great people, but they've performed very well and are continuing to perform very well broadly in this environment.

Thank you. I appreciate the cover. Thank you. Thank you, Robert. Stay safe. You too.

I'm not showing any further questions at this time. I would now like to turn the conference call back over to the live table for closing remarks.

I would like to thank everyone again for joining us on today's call and for your continued interest in COTI. We look forward to sharing our progress with you in the future. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may all disconnect.