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.