Compass Diversified Holdings

Good afternoon and welcome to COMPASS Diversified Second 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 and then the number one on your touch-tone phone. At this time, I would like to turn the conference over to Mr. Matt Berkowitz of the IGB Group for the introductions and the reading of the Safe Harbor Statement. Please go ahead, sir.

Thank you, and welcome to Compass Diversified's second quarter 2020 conference call. Representing the company today are Elias Szabo, Cody's CEO, Ryan Fockingham, Cody's CFO, and Pat Massarello, COO of Compass Group Management. Before we begin, I would like to point out that the Q2 2020 press release, including the financial tables and non-GAAP financial measure reconciliations, are available at the Investor Relations section on the company's website at www.compassdiversified.com. The company also filed its Form 10Q 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 filings. Throughout this call, we will refer to Compass Diversified 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 June 30, 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 Szabo.

Good afternoon. Thank you all for your time, and welcome to our second quarter earnings conference call. Before discussing our results, I would like to take a brief moment to acknowledge the continued impact of the COVID-19 pandemic. The last few months have been challenging in many ways for so many people, and we hope that you and your families are well and managing through this period of change. As we said on our last call, the safety and well-being of our employees remains our top priority. We are continuing to follow national, state, and local guidelines and implement industry-wide best practices to protect our employees. We recognize that our teammates are one of our most valuable assets, and we are committed to making sure they feel comfortable and supported during this time. Despite the challenges we experienced during the last few months, I am pleased to report that our second quarter results substantially exceeded our expectations. Excluding Marucci, consolidated subsidiary adjusted EBITDA for the second quarter was $54 million, compared to $55.2 million in the second quarter of 2019. These results were significantly better than the guidance range of $28 million to $38 million provided during our first quarter earnings calls. While the impact of the response to the pandemic has been widespread and continues to pose challenges for each of our subsidiary companies, we have been impressed with the ongoing efforts of our management teams to position our companies for long-term success. Together, we reduce spending and monetize working capital throughout the quarter to maximize cash flow. Our strong results in continued distribution payments demonstrate the benefits of owning a family of diversified, uncorrelated subsidiary companies, the extent of which has never been so pronounced. While some of our subsidiaries have been acutely impacted by the pandemic, with end market demand in certain segments nearly disappearing, others have experienced record levels of demand on a seasonally adjusted basis. During the second quarter, we strategically accessed the capital markets and raised approximately $290 million of additional capital. Coming into the quarter, our balance sheet was already strong, and this capital raise gives us meaningful financial flexibility to execute on growth opportunities that we believe will be abundant coming out of the pandemic. Our unique approach to investing, disciplined allocation of capital, and active management of our subsidiary businesses resulted in upgrades from both Moody's and S&P in connection with our capital raise. Our actions over the past two years have underscored the effectiveness of our permanent capital structure and advantage of our model. We spent much of 2018 out of the acquisition market and were a net divester of approximately $1 billion in assets in 2019. In 2020, we are turning to a more aggressive acquisition strategy and plan to use our strong balance sheet position to accelerate our growth and deliver outsized shareholder returns. We remain focused on continuing to selectively partner with management teams that can benefit from our deep sector knowledge, operational expertise, and permanent capital base as they manage through the near-term uncertainty and position themselves for years to come. One example of our strategy in action came at the end of the quarter when we announced the add-on acquisition of PolyFoam to our Foam Fabricators platform. This acquisition is highly complimentary to Foam Fabricators geographic footprint and increases its cold chain revenues, which are benefiting from long-term secular growth. Additionally, we have supported 5.11 as the company became opportunistic, signing leases again to further expand its retail footprint capitalizing on favorable lease pricing and continued consumer demand. Now, turning to our financial results. Consolidated subsidiary pro forma revenue for Cody for the second quarter, including Marucci, declined by 4.5% to $334 million, and consolidated pro forma adjusted EBITDA declined by 8% to $52 million. Our results were favorably impacted by a surge in demand for outdoor-related products, along with cost management across our subsidiaries. Of our nine subsidiaries, three showed growth over prior year, and virtually all of our companies exceeded our expectations. We generated $13.5 million of cash flow available for distribution and reinvestment, which we refer to as CAD, during the second quarter of 2020, exceeding our expectations. Notably, our cash taxes were significantly higher than expected due to our velocity subsidiary. We expect a majority of these cash taxes to reverse in the second half of 2020. Ryan will discuss our financial results in greater detail shortly. On April 20th, we closed on our acquisition of Marucci Sports, a leading designer and manufacturer of premium baseball and softball equipment and apparel. Despite the shutdown of professional baseball and most youth sports, Marucci performed better than expected in Q2. Although 2020 will be a challenging year for Marucci, we are pleased to own this business and believe it is poised for accelerated growth in the long term. Turning to guidance. While we continue to see uncertainty in the second half of the year stemming from the pandemic, we have enough visibility across our subsidiaries to provide insight into our full-year consolidated EBITDA expectations and our payout ratios. The pandemic continues to change every day, and while continued shutdowns of certain areas of the economy could negatively impact our results more than we currently anticipate, we felt it was important to provide our shareholders and capital partners with some visibility into our expected performance. Please note that our guidance includes Marucci as if it was acquired on January 1st, 2020. For full year 2020, we anticipate pro forma adjusted consolidated subsidiary EBITDA of between $210 million and $240 million. And we anticipate a CAD payout ratio for the year of 140 percent to 120 percent. At the midpoint of our guidance range, we expect to pay out approximately $20 million more in distributions than we earn in CAD for the full year of 2020. Although we strive to always earn more than we pay out, we recognize this year is an anomaly and are well positioned to make the payments despite lowered earnings for the year. In fact, as you know, we opportunistically sold two companies in 2019 and generated approximately $240 million in net gains. We expect to pay out less than 10% of these net gains we generated in last year's divestitures to maintain our distribution levels in 2020, which is a priority for us. Before I turn it over to Pat to provide additional detail on our subsidiary company's performance in the second quarter, I want to update you on two of our internal initiatives started early in the 2020 year. First, we have continued to push forward with our goal of being a leader in terms of ESG, taking numerous steps this quarter to advance this important initiative and integrate ESG considerations further into our investment process from the point of due diligence and through the ongoing management of our subsidiaries. Second, I encourage you all to check out our newly designed website, which launched this week and has more information on our progress in these areas. And now over to Pat.

Thanks, Elias. Before I begin on our subsidiary results for the quarter, which as a whole exceeded our expectations, I want to touch generally on the effects of the pandemic throughout our companies. Broadly speaking, our niche industrial businesses' sales and earnings were impacted more negatively than our branded consumer businesses as work stoppages or disruptions impacted several of the end markets our industrial businesses serve, among them aerospace, appliances, and hospitality. However, our branded consumer businesses benefited significantly from increased consumer demand in outdoor categories, and as a result, experienced strong sales and earnings growth. Now on to our subsidiary results for the quarter. I'll begin with our niche industrial businesses. For the second quarter of 2020, revenues declined by 12.4% and EBITDA decreased by 19.1% over the comparable quarter in 2019. For the year-to-date period, revenues declined by 9.7% and EBITDA decreased by 14.8% over the comparable period in 2019. Advanced circuits continued its steady performance with EBITDA in the quarter growing slightly over prior year. The growth CapEx investment we made last year in a new facility in Chandler, Arizona continues to pay dividends as this manufacturing facility is producing strong growth over prior year. Foam fabricators EBITDA was down 20 percent in the second quarter on a 23 percent revenue decrease. Foam fabricators margins benefited from lower input costs and other cost containment initiatives. During the quarter, Many foam fabricators' customers were forced to temporarily suspend production due to the COVID-19 pandemic, resulting in decreased demand. Revenue strengthened during the quarter, however, and thus far in July, revenues are trending close to year-ago levels. Arnold Magnetics EBITDA declined by 18% in the second quarter from the year-ago period. We believe the longer-term prospects for Arnold remain strong as their product offering is central to companies' continued efforts to become more energy efficient. However, some of the company's end markets, namely aerospace and oil and gas, are challenged due to the effects of the pandemic and are unlikely to rebound in the near term. As a result, we expect Arnold to have a challenging 2020. The Sterno Group's EBITDA was down 29% in Q2 2020 from the year-ago period. Sterno performed much better than our revised expectations early in the second quarter as the company's consumer business experienced record demand on a seasonal basis for its line of wax and essential oil products. The core catering line of chafing fuel and related products, however, experienced a near complete halt in demand. We expect this segment to remain depressed for some time as large gatherings continue to be discouraged given the ongoing pandemic. Despite the reduction in catering-related sales, we want to acknowledge the extraordinary efforts from management, including the painful reductions in personnel, as well as the shift in strategy to develop and produce a line of high-quality, hand-sanitized products in a short period of time. Sterno has been a trusted brand in the food service industry for more than 100 years, and with the increase in hand sanitizer demand in this channel, we believe the company is well positioned to take market share. Now turning to our branded consumer businesses. Our results for Marucci are presented as if we owned it from January 1st, 2019. For the second quarter of 2020, pro forma revenues and adjusted EBITDA increased by 2.5% and 7.5% respectively, over the comparable period in 2019. For the year-to-date period, pro forma revenues in adjusted EBITDA increased by 3.5% and 8.8% respectfully over the comparable period in 2019. Ergobaby's EBITDA was down 4% in Q2 2020 from the year-ago period. Ergobaby benefited from international distributor demand that was ordered prior to the pandemic and fulfilled in the second quarter. Globally, end market demand was weak during the pandemic, and as a result, our distributor partners have excess inventory that needs to be reduced, resulting in expected weakened demand in the third quarter and potentially in the fourth quarter. Despite the lowered expectation for the balance of the year, we are seeing end market demand recover swiftly, and our domestic Ergobaby brand produced roughly flat revenues in the second quarter relative to the year-ago period. Liberty Safety Bataille was up 80% in the second quarter from the year-ago period, Liberty continued to benefit from securing distribution with a large farm and fleet customer in the third quarter of last year. In the upcoming third quarter, Liberty will be comping against this initial load-in. Despite this difficult comparison, end market demand remains robust, and most of Liberty's production capacity is booked through the end of the third quarter. Additionally, end market demand online and at retailers remains strong for Liberty's product, driven by the current elevated levels of uncertainty. Marucci's revenue in the second quarter declined by 60% and EBITDA declined from approximately 1 million in 2019 to negative 2004 in 2020. Please note that our second quarter results only include approximately 800,000 of loss. Despite the negative comparisons, these results were ahead of our expectations. As we expected, end market demand for Marucci's products dropped precipitously as professional baseball and youth sports were temporarily halted and many sporting good retailers were closed for portions of the quarter. Professional baseball, resumed play in the United States in a modified 60-game season last week, and youth sports are starting in parts of the country. Marucci has seen increased demand in its direct channels. However, high inventory levels in its wholesale accounts need to decline before revenues revert to more normalized levels. Despite the ongoing challenges, we remain optimistic about Marucci's future. Velocity Outdoors EBITDA was up 104% in Q2 2020 from the year-ago period. This performance was much better than expected. as demand for all products increased dramatically, driven by a broad trend towards increased outdoor activities. While the rapid surge in end-market demand has placed significant stress on the supply chain and internal production capacity, management and the company's employees have performed admirably in rising to the challenge. Currently, retail channels are low on inventory, and we are working diligently to increase production in order to both meet end-market demand and keep our wholesale partners in stock with adequate inventory levels. Finally, 5.11's EBITDA was down 3% in Q2 2020 from the year-ago period. However, on a year-to-date period basis, 5.11's EBITDA has increased by 9%. 5.11 closed its retail stores to the general public in April, and upon reopening, has been working under modified hours. Additionally, the professional side of the business experienced reduced orders in the second quarter as first responders were focused on securing products most necessary for fighting the pandemic. Orders on the professional side started to recover in June, and bookings have been accelerating thus far in July. Despite the weakness on the professional side, the consumer portion of the business continues to perform significantly ahead of expectations. During the second quarter, our same-store sales, which includes our e-commerce business, grew by approximately 10.5%, an acceleration from 7.5% same-store sales growth in the first quarter of 2020. We believe many macro trends are positively impacting the 5.11 consumer brand and that the company has even stronger opportunities moving forward. Trends positively impacting the 511 brand include increased participation in outdoor activities worldwide, a shift from dress attire to casual wear as companies offer more flexible work schedules and more formal in-person meetings are limited, and an increased preparedness mindset consistent with 511's positioning and its mission statement to always be ready. We continue to believe 511 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 second quarter of 2020, I want to highlight our second quarter distributions that were recently paid to shareholders. On July 23rd, 2020, we paid shareholders a cash distribution of 36 cents per common share, representing a current yield of approximately 8.9 percent. Including this distribution, we have paid approximately $19.68 per share in cumulative distribution since Cody's 2006 IPO. This reflects 131% of the IPO price. Further, tomorrow, we will pay cash distributions of approximately 45 cents per share on our seven and a quarter Series A preferred shares and approximately 49 cents per share on our seven and seven eighths Series B and Series C preferred shares. All three preferred distributions cover the period from and including April 30th, 2020, up to but excluding July 30, 2020. Moving to our consolidated financial results for the quarter end of June 30, 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 end of June 30, 2020 was $333.6 million, down less than 1% compared to $336.1 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, Velocity Outdoor and Liberty, was offset by declines in other of our businesses previously discussed. Consolidated net loss for the quarter ended June 30, 2020, was $7.4 million. Consolidated net income for the prior year's second quarter was was $218.2 million and included a $206.5 million gain recorded in connection with the sale of Clean Earth. CAD for the quarter ended June 30th, 2020 was $13.5 million down from $26.2 million in the prior year period. Our prior year CAD included our results from Clean Earth up until June 30th, 2019, the date of sale. Our CAD during the quarter was above our expectations With EBITDA only down slightly from prior year, substantially above our expectations, and our subsidiary management teams reducing capex spend in light of economic conditions, we would have generated significantly more CAD in the quarter. However, our cash taxes were negatively impacted by more than $6 million at Velocity Outdoor. As we've mentioned many times in the past, our cash taxes are extremely difficult to predict quarter to quarter. However, on an annual basis, it is much easier. We anticipate a large majority of the impact of velocity outdoors cash taxes to reverse in the second half of 2020 and therefore benefit our second half CAD performance. I'll provide more guidance on cash taxes shortly. The other factors impacting our CAD during the quarter as compared to the prior year was lower interest expense, lower management fees as a result of our waiver of 50% of the management fee in Q2, and higher preferred share distributions as a result of our Series C issuance in November 2019. As Elias mentioned earlier, our balance sheet is strong. As of June 30, 2020, we had over $200 million in cash and approximately $600 million available on our revolver. Our leverage is below two times. We stand ready and able to provide our subsidiaries the financial support they need, make distributions to our preferred and common shareholders, as well as move on compelling investment opportunities in this dislocated market as they present themselves. Turning now to capital expenditures. During the second quarter of 2020, we incurred $3.3 million of maintenance CapEx of our existing businesses compared to $4.4 million in the prior year period. The decrease in maintenance CapEx was related to our reduced CapEx spend across a majority of our businesses. During the second quarter of 2020, we continued to invest growth capital spending $3.1 million in the quarter, primarily related to 511's long-term growth objectives. Growth capex in the prior year quarter was $6 million. Turning to our expectations for 2020, as a reminder, 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. Elias provided adjusted EBITDA guidance and our payout ratio expectations for the full year of 2020. I'd like to now provide guidance on CapEx and cash taxes. For maintenance CapEx, we had previously estimated CapEx spend of between 20 million 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 17 million and 20 million. For growth CapEx, we had previously estimated spend of between 10 million and 15 million for the full year of 2020. However, our revised expectation for growth capex is between $13 million and $15 million, primarily at 511. For 2020 cash taxes, our previous expectations were to spend between 6% and 8% of our subsidiary's total EBITDA on cash taxes. We now expect cash taxes will decline to between 6% to 7% of our subsidiary's total EBITDA. Keep in mind, this percentage should be applied to full-year 2020 total EBITDA and not quarterly. As we experience in Q2 with Velocity Outdoor, our cash taxes as a percentage of EBITDA can vary significantly quarter to quarter. 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 go-forward growth strategy. As I mentioned earlier, we took steps in 2019 to prepare for the unexpected, and those decisions have positioned us well to weather the storm and emerge stronger on the other side. We have the balance sheet strength to support our companies as they operate in these highly unusual times. Our companies are leaders in their respective industries and are poised to gain additional market share in the months and years to come. 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 opportunities to generate long-term shareholder value occur during market dislocations like we are currently experiencing, and we are constantly evaluating the best ways to enhance our portfolio while prioritizing the financial health of our subsidiaries. We entered the year with significant balance sheet strength and further solidified it with the capital raised in May. With our enhanced balance sheet position and the resiliency of our subsidiary companies, we feel increasingly prepared to capitalize on new opportunities while taking a patient and disciplined approach to executing our growth priorities. Our strategy has differentiated Cody for more than two decades and remains consistent as we navigate the uncertainty ahead and position our subsidiary companies for long-term success. 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.

That is noted. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Larry Sallow from CJS Securities. Your line is now open.

Great. Thank you. Good afternoon, guys. Good afternoon, Larry. Just a couple on the subsidiaries and then maybe one more general question. Just on Velocity Outdoor, obviously benefiting from the demand for outdoor products and Um, you know, they know they started sort of as COVID sort of came out. These guys were, you guys were sort of doing undergoing a little bit of restructuring there. Um, has that come into play at all? Can you just sort of speak to, you know, velocity sort of mid, you know, midterm outlook and, you know, do you expect sort of this demand and these kinds of performance numbers to continue in the back half of the year?

I realize it's not that easy to get. Yeah. Larry, this is Pat. I think on the management side, Tom McGann, Kelly Grindle, and the team beneath them have really done an exceptional job managing through this, and we couldn't be happier. As it relates to demand, I can't speak to October and November. I can tell you we don't see any slowing down in July and probably August, and we'll see from that. If you remember, Q3 is a big quarter for them. seasonally anyway, as it relates to hunting and outdoor activities. So that's, how's that for, for guidance? That's a, I could talk about the next few months. I can't tell you what December is going to look like.

No, no, no, no. That's what I was saying at the end of my question. And I realized it's not, it's not easy. I get it. I get it. No, that's all I was just curious. And then on Sterno, you know, obviously much better than feared. I'm certainly down year over year, but with, you know, a piece of your business basically being temporarily wiped out or close to zero and Can you speak sort of to Rimports and, you know, the actual year-over-year growth at that business? I've got to imagine it's pretty material.

It's material. There's no doubt it's material, but we've also seen, you know, hand sanitizer sales, some of the outdoor, more camping, fire starter sales help through the retail channels. So I don't think we talk. It is, you know, material growth, but I don't think we speak directly to, you know, subsidiaries or pieces of businesses. But the other part of it is, you know, kind of a transition to hand sanitizer and, you know, some demand for those other non-chafing fuel related product external cells.

Right. And it's pretty commendable to, you know, to be able to shift into that, you know, start making the hand sanitizer just on a qualitative basis. So it sounds like it actually quantitatively moved the needle somewhat and helped performance.

Yeah. And I think, you know, Larry, I think the team really needs to be commended here for this. You know, it isn't easy to bring up a new line. I think everybody's aware, probably a lot of people are aware, there's something like 75, you know, companies that have had hand sanitizer recalled lately by the FDA. You know, a lot of them are imports or they're companies that tried to get quickly you know, into the market. There's actually quite a bit that you have to go through from a regulatory standpoint to be able to do this. And, you know, this is a process that requires special manufacturing conditions like explosion-proof rooms. Sterno had that all available to them, and the management team really moved at light speed to be able to do this. And what excites us you know, about this product category. One is, you know, we think it's now a new category that's here to stay in the hospitality industry. By and large, before it wasn't there because, you know, most restaurants encourage their employees to wash their hands rather than to use hand sanitizer. But now guests are using hand sanitizer. So it's a big change. So this is a new market, you know, that's kind of up and open for grabs. And Sterno's quality has always been number one with Sterno. And we have a 100-year track record you know, of establishing quality product distribution capabilities. And so, you know, as a lot of companies have come in with products that may not be up to spec, you know, our product is and it passes, you know, kind of all the requirements. And so the team has done a great job and we think this is a nice adjacent market that is probably here to stay at some level and will be complementary to the shaping line when that business comes back.

Right, no, good, yeah, absolutely. Okay, 15 years, just quickly, on 5-11, can you give us some models, roughly, normalize what, you know, the percentage of the business that's on the professional side? What is that, roughly, or what was it in 19?

You know, it was, professional was a little greater than 50% of the business, and I'm going to talk about professional being both domestic and international. You know, it was sort of 55% of the business in 2019, and Given the differential in growth rates, we anticipated that 2020 that would reverse. In fact, it has, especially as the consumer business. You know, you see some of these trends. You know, Pat mentioned the growth in same-store sales, which clearly includes e-commerce. But if you compare that to, you know, a lot of household brand names that are out there that sell apparel and footwear, you know, some of these guys are down 30%, 40%. And this company's same-store sales growth accelerated from, you know, kind of 7% to 10% from Q1 to Q2. So it really is a, you know, I think strong testament to this brand and its emergence and how much it speaks to its consumer. But, you know, just in terms of percentages, the consumer business is now running larger than the professional business. So, you know, if it was 55-45 last year, it's sort of flip-flopping this year.

Right, yeah, no, very impressive. And then it sounds like you guys have – I know it looks like store openings were kind of on a little bit of a pause, but it sounds like you've found some new locations and a little bit of CapEx going into, I assume, a restart, maybe a slower ramp, your term on the store openings. Any color to that?

Yeah, we're opportunistically opening up stores. You know, we've authorized some. We won't have the same number of new stores in 2020 likely that we had in 2019. But, you know, there's opportunities out there as landlords are feeling the effect of this market, too. You know, even if, you know, that's what we're doing.

Right. Okay. And then when you guys say transformational to the entire company, that's just sort of the, you know, obviously it's your biggest or your second biggest holding today or, you know, right there with Startup. That's just the growth outlook. Is that potential monetization of the asset? You know, what sort of do you mean by that or any thoughts on that?

Yeah, so Larry, we think this is a company that more likely than not will follow the Fox path if it continues with the growth that it's been on and would be an IPO candidate for us. I think when you consider companies that are you know, more on trend and have, you know, really long term. First off, we talked about the same store sales comps, which, you know, in any type of business like this is going to be, you know, really meaningful to value a company. But if you just think of some of the drivers that are, you know, kind of, and Pat enumerated a few of them that are really aiding in that growth. You think about how early the company is in its rollout of stores and e-commerce continuing to grow along with that. And as we continue to enable more consumer services, we think we're just really early in this consumer component of the company's growth. And as a result of that, we think that multiples are generally pretty high for companies that demonstrate these type of characteristics. Very low cyclicality in the depths of the pandemic. Really high growth rates driven by a lot of white space and kind of just new opportunities to put down retail stores, but then strong same-store sales growth. And when you combine a bunch of those factors, we think this is not just a fast-growing company for us, but it's also a really high valuation multiple based on that. And I think when you look at where some of its competitors or just people broadly in the consumer lifestyle business that are on trend are trading with these type of growth profiles, are trading on a multiple basis, you know, you could easily see how, you know, it could help re-rate, you know, the share price of Cody if it was to be a standalone public company trading anywhere near where some of these other, you know, kind of consumer lifestyle brands are trading.

Right. Got it. Great. I appreciate the call. Thanks a lot. And congrats again on a good quarter. Thank you, Larry.

Appreciate the support.

Your next question comes from the line of Matt Caranda from Roth Capital. Your line is now open.

Hey, guys. Thanks for taking the questions. I just wanted to start on 5.11. Could you guys comment maybe on just the or break out the growth in store sales versus online? It's great to see the comp up in Q2 overall, but how much did that kind of skew toward quite a bit of e-com growth?

Yeah, so Matt, we don't break it out in that level. Typically, I would say we don't break out what our same store sales growth is. We just wanted to do this because it's such a highly unusual time and because companies, I think there was a lot of concern about having a multi-channel retailer, even though this is really an omni-channel company and it's a product company, it does have a retail component. And I know there was a lot of concern out there So we gave more granularity into the growth rates than we typically would. All that being said, I'll try to directionally give you some idea. Our e-commerce business was growing really rapidly, circa double what it was over prior year. Our retail business was down slightly, and you would anticipate that being the case because we closed to the general public for one of the three months, and then when we reopened, we went to extremely limited hours. It was obviously excused towards e-commerce. I think when we talk about CapEx, and I know this isn't part of your question, but just to get out there, a lot of the growth CapEx we're putting in right now is really enabling much more seamless consumer experiences between our e-commerce and our retail. And as those lines get blurrier, frankly, it gets a lot harder to be able to tell where you're generating revenue and Is it coming because of the store? For example, if you order online and have it shipped from store, do you give the store the credit or online? If you order online and pick up from store, you know, does the store get a credit? You know, where do returns come back? Do they go against, you know, kind of online because it's multi-channel or does it go against the store? So this is going to continue to get blurrier and blurrier. And I think that's why the convention has always been to look at same-store sales as e-commerce being one box, but kind of directionally, the e-commerce was growing at a really rapid rate, and we would expect that to continue to, and I think the brands that are more e-commerce native like 5.11, and they have the e-commerce side far in advance of having a consumer retail side, those brands are holding up far, far better than brands that are mostly retail-reliant with small e-commerce percentages.

Very helpful, Collar. Thanks, Elias. And then just to follow up on 5.11, I mean, I guess my expectation would be that, you know, higher NIC numbers generally should translate or correlate in some rough way to your future consumer sales expectations. So could you help us kind of calibrate our expectations around that? Because obviously we've seen a big acceleration in data points there. Help us understand sort of how that does translate to the consumer sales side of 5.11 on a go-forward basis.

Yeah, I would say – You know, your next number, you're talking about background checks and the search and background checks. I'd say we see more of a correlation with that at Liberty than I think we've seen at 511. I mean, I can't speak to, you know, correlation is not causation, right? And when you buy a gun, hopefully you're getting a safe too. It's not quite that direct at 511 is what we see. So I'd caution you from making that, you know, direct comparison.

Okay, fair enough. That's fair. And then just shifting gears, one on foam and then one more follow-up just kind of overall. But on foam, the polyfoam add-on, help us kind of understand the positioning there. It looks interesting kind of with exposure to cold chain storage. But maybe thoughts on does that change sort of the revenue growth outlook profile for foam at all or the margin profile and the way that we should be modeling that going forward?

Not materially. I mean, we're hoping to increase the margins on polyphoma as we move forward. You know, there's some synergies in any acquisition. It is more cold chain related or concentrated than the rest of our business. So if you have a different view on the growth in the cold chain, you know, slightly it could, but it wasn't a huge, I mean, you've seen the financial disclosures, it wasn't a huge acquisition, so I wouldn't think it would change necessarily the profile that significantly.

Okay, got it. And then just on the M&A environment overall, guys, it sounds like obviously taking my takeaway from your prepared remarks is that you're going to be more aggressive in terms of your posture on M&A. I think you said exactly that. But anything you guys can provide in terms of details like bias toward add-ons versus platform, any quantification of the pipeline that you can help out with, and just overall maybe, Elias, what are you seeing on the multiples front? Has anything kind of shaken loose since the pandemic, or is there a lot of money still kind of chasing fewer acquisitions that are available?

Yeah, so it's a great question, Matt, and your observation is correct. We have moved from being, you know, pretty much risk-off and a net divester to now being risk-on and a net investor, and, you know, we think that when you have this kind of volatility that's caused by the pandemic, you know, these are sort of the market dislocations When a dislocation like this happens, it's the most opportune time to put money to work and really benefit our shareholders over the longer term. Generally, what fuels the M&A market, especially with competing private equity firms, is access to credit markets. And the credit markets are really weak right now. I would say if you're a large public company borrower, and the Federal Reserve, as we know, kind of dabbled into some investment-grade bonds, and that obviously pushed money out of IG and into lower-class bonds, capital access has been much stronger. But if you're trying to do a middle-market, one-off acquisition, the market for credit there, I don't want to say it's completely disappeared, but it's severely reduced. And so as a result of that, our private equity peer set is disadvantaged today relative to us, where if you went back a year ago, they were massively advantaged because credit standards were as loose as they've been in the 20-plus years I've been doing this, and it was just fueling kind of a massive run-up in prices. So that's sort of why we look at now as a great opportunity to to be aggressive in M&A. And frankly, it's why we took a lot of balance sheet capital coming into the year and rose more capital because we want to take advantage of these conditions. And we don't know how long these conditions are going to remain. Typically, the public markets, capital markets heal. The private markets will heal with some type of lag. So there's probably a window that exists where this volatility is going to create an opportunity, and then prices likely are going to rise pretty significantly. Now, all that being said, in the second quarter, with a lot of the government programs that got put in place, there wasn't the impetus for companies to be going out and seeking to do a transaction. And so if you had a good company that had liquidity, earnings were holding up, bringing your business out in the midst of the pandemic and testing the waters when who knows what the price discovery would look like, didn't really make a lot of sense. So good companies pulled out of the market. And companies who could be really stretched financially are getting access to government assistance that was keeping them from coming as quickly to the market. Now, what we're starting to see is the beginning stages of that really changed. We're hearing from a lot of the investment banking folks that we work with in the M&A market that there's a lot of pitches that are starting to happen. So that kind of puts a three- to four-month kind of lag as to when we would expect to see significantly more activity coming. But for right now... the markets were relatively muted. Now, for us, you asked whether we have a bias towards add-ons or platforms. We clearly are seeking to grow the number of platforms that we have. I think we've said on numerous occasions, we have the human capital and the organization to be able to move to 12 to 15 platforms. We think that greater diversification is within the portfolio is beneficial. It lowers the volatility of the portfolio. I think as we strive to continue to get ratings upgrades and having lower volatility in earnings is clearly an important component to that. But on top of that, in a market where you're not seeing a lot of new big opportunities come to market, you know, for us to be able to go out and approach add-on acquisitions where we may have already had contact from before to continue to follow up on that is probably more actionable and, you know, kind of the really near term. But, you know, we're looking at both. I would just say that platforms are probably likely going to be a in the year, a little bit farther off in the year. In terms of pricing, it's really hard to say right now because there's no price discovery because M&A has been so, you know, really shut off in the second quarter. I will give you my hypothesis, which is I think pricing may appear high when you look at COVID depressed earnings. And so I think on a multiple basis, what you see transact is going to be significantly lower than what the intrinsic value of the company would have been and significantly lower than a couple of years past. But it may look high on a multiple depending on how much earnings are temporarily down. And so I think there will be good values to be had in the next kind of 12 to 24 months. I think beyond that, when the credit markets come back, I would just tell you private equity capital has not contracted during this time. In fact, it's probably expanding slightly during this time. mostly to the big established firm, but private equity capital is still growing. And so that suggests that as credit markets come back, you know, a year, two years, three years from now, asset prices are likely to revert right back to, you know, kind of levels that they were pre-pandemic.

Super helpful. Appreciate all the color, Elias, and I'll jump back into you guys. Thanks. Thank you, Matt.

Your next question comes from the line of Kyle Joseph from Jefferies. Your line is now open.

Hey, good afternoon, guys. Most of my questions have been addressed. Just one more on Marucci. Obviously, a challenging time for the business, but stepping back, if you can even think about this in this day and age, but kind of ex-COVID, can you give us your expectations for the overall size of that business and, you know, given the addressable market and if you can kind of step back and do that pre-COVID?

Yeah, sure. Kyle, this is Dave. So I would say, you know, clearly some headwinds, you know, this year and I think at least short into the medium term, there'll be a little hangover just in terms of some inventory in the channel and maybe youth tournaments being down a little bit. But to your question, I think we feel even better about kind of the medium term here in particular due to the impact of the current environment on some of our competitors. So we feel like there's some nice opportunity to you know, take some market share, expand the product offering, you know, international opportunities, but, you know, put the hangover from this year in terms of, you know, maybe competitor discounting and inventory in the channel is, you know, likely to last a little while, but so hard to predict, you know, kind of timing, but we would expect, you know, this company to resume its growth profile when that situation remedies.

Sure, thanks. And then one follow-up from me. You talked about e-commerce trends at 5.11, but looking at the other consumer companies, which companies have seen the biggest offset or the most benefit from a shift to e-commerce trends?

Yeah, Kyle, so I would say You know, all of our companies on the consumer side have benefited from their e-commerce side of their business has benefited. And one of the things that I think, you know, when we've chatted before, we've talked to you about, you know, kind of getting our companies aligned and in terms of their distribution channels, making sure that e-commerce was becoming a larger component and really even more so than that, becoming less reliant on a physical footprint. And so, you know, for an Ergobaby and, you know, one of their other brands that's in there, Tula, you know, how do you create communities where, you know, if you're seeing the product walking through a Bye Bye Baby, that's great. But, you know, if that's going to be more limited in the go forward, how do you still get that sense of community there? that you need to have in order to pull and get product sales through that. And we've really been emphasizing that with all of our companies. When we talked about the restructuring that needed to happen at Velocity, you know, part of it was bringing in a management team that understood that we needed to have, you know, we needed to build communities, we needed to be less reliant on the physical footprint that we were going through historically because those channels were just changing. And so... We've been working with our companies for years now in being able to get ready for that, and whether that's using social platforms to build communities or YouTube, which is part of, I guess, social platforms, but all the different aspects of being able to you know, better connect to your customer and do that electronically and then to have distribution capabilities that go along with that has been something that we've been working really aggressively on with our company. So I think it's one of the reasons you saw that our consumer businesses have performed as well as they have performed, right? I mean, as a class, our consumer businesses grew revenues and grew EBITDA year over year in the second quarter, right? And that was enabled because they have done all of these basic foundational things prior to. So, you know, Velocity is working really aggressively there. I'll give you an example of a company that you would say, well, how does this lend itself to electronic distribution? But one of the reasons LibertySafe is doing so well is a couple of years ago, we really kicked off an initiative. And, you know, our management team there, Steve Allred and Justin Buck, have done just such an extraordinary job of being able to drive online sales. And our online sales work a little differently where we actually partner with the dealers that we're working with to fulfill the orders. But we generate something like a third of the orders for our dealer network comes through our website. And for us, it's great because we now are controlling that customer. So there are many benefits that come along with it. But we're talking about something that could weigh upwards of a ton. And you say, well, that doesn't really lend itself to be e-commerce. You're right, it doesn't. But you can still take steps to de-emphasize strictly the in-store experience and bring it more into an online experience and be able to work in that manner. And so, you know, we've been doing it across the board with our companies and all of our companies. experienced really strong growth in e-commerce demand. And I think it's, you know, why the consumer demand and revenue was as strong as it was.

Got it. Very helpful. Thanks very much for answering my questions and congratulations on a good quarter. Thank you, Kyle.

Your last question comes from the line of Robert Dodd from Raymond James. Your line is now open.

Hi, guys, and congrats to you and the companies on a really impressive quarter in a bizarre environment. Some follow-ups, really. On Velocity and Liberty, kind of the outdoor, and we've seen it in, obviously, you know, other data in terms of consumers fully buying a lot of hobby outdoor, et cetera. So, you know, that, in hindsight, is not that surprising that it did so well and versus where we were a couple of months ago. But how confident are you that the demand you're continuing to see now is really end market demand versus inventory rebuild? I mean, in your prepared remarks, you mentioned a couple of times that the inventory channels at the distributors and the wholesalers were pretty thin because of the strength of demand. So how confident are you? Obviously, you say you feel really good about it in July, August. Any information, any data you've got that shows that's really flowing through to end-user purchases versus just restocking?

Yeah, Robert. So, right now, what we're seeing is that the inventory levels of our partners are the lowest we've seen in years. And, in fact, take a velocity, for example, the biggest challenge. And, you know, you're right if you, you know, think about it. It's, you know, probably not surprising that some of the outdoor brands and, you you're limited in what you can do elsewhere was going to grow. So we were all, you know, pleasantly surprised by that. But I would say, you know, we think this is probably a little bit more durable in terms of the demand. Right now, I would say we are very confident that not only is this not just end market demand that's represented in the sales, But our sales don't even represent the full-end market demand because our inventory levels at our distributor partners are so low right now. And so we think there's a considerable period of just rebuilding inventory back up to the right levels. And frankly, what we're seeing even in July right now is that demand at the store level and demand remains really robust and, you know, kind of elevated at levels significantly greater than where it was a year or two or three years ago. So, you know, we feel very confident that this is this end market, this is all end market demand plus some. Now, whether this will, a year from now, we'll still be talking about, you know, if there's a vaccine and there's better therapeutics and things are back to normal, then, you know, we'll address it then. But I would say, For the immediate future, this business looks to have, both of those businesses look to have demand that is there to fulfill and more of the challenges on the supply chain and the manufacturing capacity that we have both at our Velocity and Liberty subsidiaries.

Got it, got it. I really appreciate that. I mean, the obvious follow-up there is how fast can you increase that manufacturing capacity? Is that in the plan? Because obviously it doesn't look like, you know, the growth capex increase sounds like it was mostly at 5.11 rather than putting another line in at velocity, for example. So are there any plans on that front?

Yeah, it takes a little bit longer. I mean, part of it is we have complex supply chains, especially at Velocity. And our supplier partners are fully maxed out as well. And so it's not as easy to ramp up supply. When you're talking about demand growth that has been this material, it takes a little while to ramp it up. So I would say in the near term, sort of 2020, it's going to be difficult to ramp supply up. Now, in Liberty, you know, this is pretty big, you know, pieces of equipment, and you're building safe. You know, there's just constraints in terms of the physical location, getting new equipment in. And I will tell you, we're being a little bit cautious about in that we recognize that the pandemic has created many dislocations that are out there. Look, people aren't traveling right now. They're not doing other leisure activities. So there's more disposable dollars that can be used in other areas. They're doing more outdoor things. I would say what we are being guarded against is investing too much in supply growth to the extent that, you know, some of the demand increase is not long-term sustainable. So, we'd like to, you know, we would rather be more methodical with the way that we plan out the supply growth, the amount of investment that is really required. And so, you know, we will bring on more supply. We're working aggressively to fill all of the demand and make sure that we can be good partners to all of our distributors But at the same time, we want to be responsible and not overbuild, you know, for, you know, given the current condition. And, you know, as we all have to just appreciate, the uncertainty today is greater than it's been, you know, kind of probably at any point in Compass's history right over the last 20-plus years. And so we just need to be a little bit more cautious with the way that we plan supply growth.

Got it. Got it. I appreciate that. On the next one, 5.11, you talked about obviously, you know, increasing growth capacity on the stores, lease signings. Has given this disruption and the opportunity to be opportunistic, I mean, is this creating an opportunity for maybe to change which locations you pick? I mean, are you aiming for, you know, what would have been a more expensive location before, but now lease pricing is more reasonable given the environment. Can you give us any color? Is anything changing about the selections of those and why you're signing the new leases and where you're signing the new leases now?

Yeah, right now we're still looking at the places that have been, the locations that have been proven to work for us, right? So freeway signage, we know the co-tenants that work well for us, stuff like that. We're not yet opening up 511 South Coast Plaza, for example, and nor do I see that as a near term in our future. So I'd say we're able to find these locations easier now and kind of those ideal locations, the same ones that kind of fit our profile easier now, and are able to, you know, drive better lease economics, but we're not yet sort of expanding the aperture to, you know, that other kind of, you know, higher affluence mall.

Got it. Got it. And then one more, if I can. On the acquisition front, I mean, most of these are follow-ups to questions. I mean, you talked about, you know, obviously an additional platform acquisition adds diversification to the portfolio, right? At the same time, a new platform acquisition in this environment, given the level of uncertainty, I think adds more risk to the portfolio versus given there's less known about that business versus an add-on. So, I mean, how would you – I mean, you said obviously that the platforms may be further out – But is that simply because the market and the due diligence for those takes time or you want to wait for more visibility, stability, you know, information about how this pandemic is going to pan out before adding a platform and do the portfolio add-ons just make more sense given more is known about those industries and markets at this point?

Yeah, and that's a great observation, Robert. I mean, clearly add-ons are less risk because we have the management team already in place at the platform we own, and we have systems in place, and we can generally plug those in. know better about the industry. We are thinking about new platforms. I would say right now, the reason I mentioned it may be a little longer to transact on a new platform is because the M&A market for new platforms has really dwindled, and we see fewer opportunities to Right now, just because of the dynamics that I talked about earlier with kind of government stimulus and the banks have taken a much more kind of let's just wait and see approach. giving forbearance to companies and not really forcing action that would generally create a lot of potentially good company, bad balance sheet situations where it forces the business to recapitalize with a new owner such as Compass. That's really the reason that I see it taking longer to do a new platform than an add-on. Now, to your question about about risk profile, clearly I get your point and that's 100% the case. I think if we were to consummate a new platform, it would have to be a really high quality company that we understood really well what the growth drivers were, what its downside risk was, the dynamics of the business, and we would have to get comfortable because as you stated, there's a greater level of uncertainty today than there was, you know, kind of a year or two ago when we had economic conditions that were supportive. Now you've got, you know, kind of, you know, the pandemic. You've got the economy that's more reliant on government assistance. And so there's clearly more risk factors. And so it does raise the bar in terms of what we would need to see for a new platform. But there are some really, you know, and for example, I will just say, we had seen some really high-quality companies pre-pandemic that if they were to come back into the market, we would be really excited because the quality of the company was such and the stability of their earnings were such that we would, you know, transact. I'll point to Marucci because Marucci truly is pandemic-led opportunity that we were able to close on. It was pre-pandemic, but remember, the pandemic was sort of raging throughout China and Asia at that point and was just starting to come into the U.S. And as other buyers were being scared off from the property, I just tell you, this is an asset that we looked at and said, are we comfortable with what the earnings will look like in 2020? And frankly... We thought at one point it would be zero, and so we're much more bullish about it now, and we think it will be significantly greater than zero. So that is a good positive. But when we looked at the dynamics of this business and how strong it was, I mean, this is an A business, and you don't see opportunities like this that come along all the time. And so for us to be able to take advantage of a company of this quality with the type of growth profile, and trust me, when we get out of 2020, we're all going to like the growth profile of Marucci, and it's going to help diversify the growth of the overall business. It will be additive to growth, and it will diversify away from 5.11 being sort of the strongest pillar of growth. so that we have more. If we saw companies like Marucci, we would want to act on those because that's part of the opportunistic advantage that we have with our permanent capital model to be able to bring to bear. So we're out looking for these kind of A-type companies like a Marucci. And I think, you know, in those type of businesses, we think they're the first to rebound. We're already seeing Marucci rebound, and we believe it's much faster than where its competitors are. And that's why Dave said we think that this is actually net positive for Marucci because our competitors are being weakened and we're coming out faster, so we're gaining more market share at their expense. If we can find other platform opportunities like that, that's the stuff that we're looking for right now and we would transact against.

Got it, got it. I appreciate it, and congratulations on an impressive quarter again. Thanks. Thank you, Robert.

I am showing no further questions. I would like to turn the conference back to Mr. Elias Sabo.

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

Ladies and gentlemen, that concludes today's conference call. Thank you for participating. You may now disconnect.