Compass Diversified Holdings

Good afternoon, and welcome to Compass Diversified's first quarter 2021 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 Berkelwitz of the IGB Group for instructions and a reading of the Safe Harbor Statement. Please go ahead, sir.

Thank you and welcome to Compass Diversified's first quarter 2021 conference call. Representing the company today are Elias Sabo, Cody's CEO, Ryan Fockingham, Cody's CFO, and Pat Massarello, COO of Compass Group Management. Before we begin, I'd like to point out that the Q1 2021 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 references to EBITDA in the following discussions refer to adjusted EBITDA as reconciled net income and the company's financial filings. The company does not provide a reconciliation of its full-year expected 2021 adjusted EBITDA or 2021. 21 payout ratio because certain significant reconciling information is not available without unreasonable efforts throughout this call we will refer to companies diversified as cody 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 cody and its subsidiaries and statements related to cody's future tax structure 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 these forward-looking statements, and some of these factors are enumerated in the risk factor discussion with Form 10-Q as thought of the SEC for the quarter ended March 31, 2021. as well as in other SEC filings. In particular, the domestic and global economic environment that's 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 first quarter earnings conference call. Before discussing our results, I would like to take a brief moment to acknowledge our employees. Our performance over the last year since the onset of COVID-19 is a testament to their extraordinary efforts. Despite the ongoing challenges brought on by the pandemic, I am pleased to report that our first quarter results dramatically exceeded our expectations. Including Boa and Marucci, as if we owned them from January 1st, 2020, pro forma consolidated revenue grew over 20% and adjusted EBITDA grew more than 45% over prior year's quarter. Our first quarter results were exceptional and reflect the incredible work of each of our subsidiary companies' management teams. Though we continue to experience certain challenges and uncertainties stemming from the pandemic, such as changes in demand patterns, supply disruptions, shortages in labor, and inflationary pressures at levels not previously experienced, our subsidiaries team continue to expertly maintain our operation to deliver record results. Our outstanding first quarter results build on the positive momentum from the second half of 2020. Our branded consumer businesses grew at a rapid pace driven by continued increased participation by consumers in outdoor activities. We have seen significant structural shifts since the onset of the pandemic that have benefited outdoor activities, including trends toward de-urbanization and remote work. At the same time, disposable spending has been supported by historic levels of transfer payments globally and a shift in spending patterns towards goods and away from services. While these trends have proven to be durable, it remains unclear for how long and the extent to which these consumer habits will continue as the economy gradually reopens and lockdowns ease. At this time, end market demand continues to rise, along with our bookings and backlog, and we are seeing strong levels of growth in our consumer goods businesses thus far in 2021, including early in the second quarter. We believe our subsidiary companies are well positioned to maintain market share gains even following the effects of the pandemic. We are also pleased to report that our industrial businesses, which had experienced a dramatic decline in demand at the onset of the pandemic, have stabilized in the first quarter. and we now anticipate our industrial businesses will remain stable through 2021 with a possible return to growth as the economy reopens and comparable periods in the prior year become easier to lap. Notwithstanding the extraordinary first quarter results, I want to emphasize that the macro environment remains uncertain. Even with the global economy starting to normalize, the effects of the pandemic have proven to be long-lasting. with shortages in components and shipping capacity becoming acute. In addition, commodity costs have risen rapidly and labor shortages continue. We now find ourselves in a highly inflationary environment with rising costs, which we will seek to pass through via increased prices based on market conditions. However, we may experience modest margin compression in the near term as commodity-driven price increases typically lag in implementation through the supply chain. In light of our extraordinary first quarter results and our expectations for the balance of the year, we now expect to produce consolidated subsidiary adjusted EBITDA of between $325 million and $345 million, representing growth of 11% to 18% from prior years, and a payout ratio of between 70% and 60% based on our historic distribution rate of $0.36 per share each quarter. The strength of our balance sheet enabled our subsidiary companies to take market share during the pandemic as we focused most of our cost containment activities on non-revenue generating functions. Moving forward, we plan to increase spending at a number of our subsidiary companies in order to compensate and continue to take market share. These increases are built into our financial expectations for the balance of the year. Our first quarter results showed the strength across our portfolio, and in particular, both of our 2020 acquisitions, Marucci Sports and BOA Technologies, produced outstanding growth. We believe our permanent capital model again proved to be a substantial competitive advantage relative to traditional private equity, allowing us to acquire these two outstanding businesses while others were unable to compete due to limited availability of debt financing. On a combined basis, these two companies produced 104% year-over-year pro forma adjusted EBITDA growth in the first quarter. and significantly increased our growth rate up from 30% excluding these acquisitions to 46% when including them. Although we expect this magnitude of growth to recede, we do believe these acquisitions will continue to benefit the core growth rate of the portfolio. We believe our permanent capital approach to private equity-like investing not only provides a substantial competitive advantage in capital allocation, as we have seen over the past few years, but also in our cost to capital. We are pleased that in the first quarter we successfully refinanced our bonds that were originally issued in 2018, increasing their amount, extending their duration, and lowering our cost. Our new bond carries an interest rate of 5.25% compared to the previous 8%, a decrease of 33%. The outcome of our bond refinancing was meaningful in terms of lowering our weighted average cost of capital. However, we remain relentlessly focused on exploring additional options to reduce our WAC and further strengthening our competitive advantage. To this end, we continue to analyze the potential change in our tax classification, including potentially checking the box to elect to be taxed as a C corporation instead of a partnership, which would eliminate the cumbersome K1 and UBTI. Pursuant to our significant and ongoing analysis, The historical tax benefits of our pass-through structure have waned in recent years, and we believe the holistic tax paid on average by individual shareholders as a partnership or as a corporate taxpayer is approximately the same. We believe a move to be taxed as a C-Corp will allow more institutional and retail shareholders to consider an investment in our company and may allow for inclusion in passive electronically traded funds. Ryan will walk through the details of this potential change in tax classification along with the process and expected timing to achieve such classification. Before turning the call over to Pat to review our subsidiary results, I would like to take a minute to discuss our ongoing ESG efforts. Over the course of the past year, we have made significant strides in our ongoing efforts towards becoming a best-in-class ESG company. including redirecting to employees at the manager to focus on ESG initiatives, elevating ESG to become a recurring topic of board oversight, incorporating ESG considerations into our investment process, and working with our subsidiary management teams to push ESG initiatives forward at the subsidiary level. We encourage you to visit our website to see the progress we are making in this incredibly important work. and we will continue to highlight ESG accomplishments in our investor communications. Specifically, during the first quarter, we increased the amount of recycled plastic materials used in our BOA dials, and we had our first full quarter of sales of the Ergobaby Heirloom, a premium carrier that uses over 80% post-consumer recycled polyester yarn. Each of these carriers is composed of up to 26 plastic water bottles, and we are proud of Ergobaby's leadership in this category. With that, I will now turn the call over to Pat.