Compass Diversified Holdings

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

Thank you, and welcome to Compass Diversified's third quarter 2020 conference call. Representing the company today are Elias Sabo, Cody's CEO, Ryan Fockingham, Cody's CFO, and Pat Mazzarella, COO of Compass Group Management. Before we begin, I would like to point out that the Q3 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 10-Q with the SEC today after the market closed, which includes reconciliations of non-GAAP financial measures discussed on this call and is also available at the Investor Relations section of our website. Please note that reference to EBITDA in the following discussions refer to adjusted EBITDA as reconciled net income in the company's financial filing. The company does not provide a reconciliation of its full-year expected 2020 adjusted EBITDA or 2020 payout ratio because certain significant reconciling information is not available without unreasonable efforts. Throughout this call, we will refer to Compass Diversified as CODI 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 CODI and its subsidiaries. Words such as believes, expects, plans, 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 each forward-looking statement, and some of these factors are enumerated in the risk factor discussion in the Form 10-K, as filed with the SEC for the year ended December 31, 2019, and as further updated in the Form 10-Q, as filed with the SEC for the quarters ended March 31, 2020, June 30, 2020, and September 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 company. 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 third 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. This year has 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. Despite the challenges brought on by the pandemic, I am pleased to report that our third quarter results substantially exceeded our expectations. Including Marucci's results from January 1st, 2019, Proforma consolidated subsidiary adjusted EBITDA of $76.9 million exceeded prior year by 10%. This outperformance was driven by our branded consumer businesses, which produced Proforma consolidated revenue and adjusted EBITDA growth of 15% and 42%, respectively, over prior year. Looking back on the past few months, I am incredibly proud of our team and the work we have done to position our subsidiaries for long-term success while driving value for our shareholders. Notably, we closed on the acquisition of BOA Technologies, our second platform acquisition of the year. As we continue to transform our portfolio, BOA joins our lineup of market-leading branded consumer businesses, including Marucci Sports, which we acquired in April. The ability to source, finance, and close these strategic acquisitions amid the height of the pandemic is a clear testament to our differentiated permanent capital model as compared to the traditional private equity model employed by our peers. Throughout 2018 and 2019, while others in the industry were aggressively deploying capital, our permanent capital approach allowed us to be patient, Instead, we capitalized on favorable market conditions and opportunistically divested two of our subsidiaries and used the proceeds to repay debt and strengthen our balance sheet. Now, in 2020, the pandemic has created market dislocations, and our team has pivoted to a more aggressive acquisition strategy while peers have struggled to access the credit markets. Our strong results in the third quarter and year-to-date period reflect the significant advantages of our model of owning a diverse set of niche, market-leading companies that serve a variety of end markets. The benefits of diversification have never been more pronounced in reducing the volatility in our financial results, and the addition of BOA and Marucci only served to further enhance that diversification and the breadth of end markets served. In addition to our capital allocation accomplishments over the past couple of years, I am also proud of the significant strides we have made in enhancing our management talent and depth across our subsidiary companies. During the third quarter, we promoted Jason Frame to CEO of Ergobaby. Jason is a talented and experienced executive who has worked with Cody for many years, first in his capacity as CFO of Camelback and most recently as CFO of Ergobaby. Additionally, we announced that Craig Carnes would be assuming the role of CEO of the Sterno Group following Don Hinshaw's planned retirement at the end of the year. I want to thank Don for all his contributions to Sterno and Cody over the years. We look forward to continuing to work with him in his capacity as the director of Sterno. We have the utmost respect for both Craig and Jason and are highly confident that both will succeed in their new roles. Our push to digitize our subsidiary businesses has further enhanced our financial results. Across all of our businesses, we have been building our digital presence and, where possible, reducing our reliance on physical infrastructure. The pandemic has created a seismic shift towards digitally-enabled businesses, and our strong performance in 2020 is the culmination of a significant investment of time and resources over the past few years to digitally transform our subsidiaries. We remain focused on further modernizing our subsidiaries and enhancing their digital capabilities as we believe that increased consumer demand for online retail will last long after the pandemic has been contained. While our results exceeded our expectations in the third quarter, our subsidiary companies continue to see the impact of the ongoing pandemic. Certain of our companies have experienced a sudden decline in revenue due to strain on their end markets, while others have experienced a large increase in demand that has caused stress throughout their supply chain. And across most of our subsidiaries, we struggle to hire additional human capital. I would like to thank each of our subsidiary management teams for their exceptional service, leadership, and dedication during these challenging times. Now turning to our financial results. Consolidated subsidiary pro forma revenue for the third quarter increased by 3.9% to $419 million, and consolidated pro forma adjusted EBITDA increased by 10% to $77 million. Of our nine subsidiaries, six showed growth over prior year, and virtually all of our companies exceeded our expectations. And although we did not close on BOA Technologies until after the third quarter, BOA also produced results that were ahead of our expectations. Management estimates that BOA produced revenue and EBITDA growth of 20% and 67%, respectively, during the third quarter. And on a year-to-date basis, revenue is flat and EBITDA is up 5%. We generated $43.5 million of cash flow available for distribution and reinvestment, which we refer to as CAD, during the third quarter of 2020, as compared to $30.2 million of CAD in the third quarter of 2019. This growth of 44% far exceeded our expectations. However, as Ryan will detail in his section, our third quarter CAD was boosted by a cash tax reversal from the second quarter at Velocity Outdoor. Even without this cash tax reversal, our CAD significantly exceeded our expectations. On a year-to-date basis, our CAD of $74.7 million exceeded prior year-to-date of $74 million and covered our distribution payments to common shareholders of $68.3 million. Turning to guidance. Our outlook for the coming months continues to change every day due to the ongoing pandemic, which means continued uncertainty and limited visibility. 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 both Marucci and BOA as if they were acquired on January 1, 2020. For full year 2020, we anticipate pro forma adjusted consolidated subsidiary EBITDA of between $270 million and $280 million. For comparison purposes, excluding BOA, we expect full year 2020 pro forma adjusted consolidated subsidiary EBITDA of between $240 million and $250 million, as compared to previous guidance of between $210 million and $240 million, reflecting an increase of $20 million at the midpoint or an improvement of 8.8%. We anticipate a CAD payout ratio for the year of 100% to 90%, a substantial improvement over previous guidance of 140% to 120%. Notably, we now expect to cover our annual distribution, notwithstanding the economic headwinds that exist due to the pandemic. As Ryan will detail later in his section, we are forecasting an increased amount of capital expenditures in the fourth quarter, as many of our businesses have reduced their capital expenditure spend throughout the year, but now with improved performance are seeking to invest capital in areas that will strengthen their competitive positioning. With that, I will now turn the call over to Pat.