Compass Diversified Holdings

Good afternoon, and welcome to Compass Diversified's first quarter 2022 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 Cody Slough of Gateway Group for introductions and the reading of the safe harbor statement. Please go ahead, sir.

Thank you, and welcome to Compass Diversified's first quarter 2022 conference call. Representing the companies today are Elias Sabo, Cody's CEO, Ryan Falkingham, Cody's CFO, and Pat Maciarello, COO of Compass Group Management. Before we begin, I would like to point out that the Q1 2022 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 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, including adjusted EBITDA and cash available for distribution, and is also available at the investor relations section of the company's website. Please know that references to EBITDA in the following discussions refer to adjusted EBITDA as reconciled to net income or loss from continuing operations in the company's financial filings. The company does not provide a reconciliation of its full year expected 2022 adjusted earnings or adjusted EBITDA because certain significant reconciling information is not available without unreasonable efforts. 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 Cody and its subsidiaries, and statements related to the impact of Cody's updated tax structure and the impact and expected timing of acquisitions and dispositions. 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 in the Form 10-Q as filed with the SEC for the quarter ended March 31, 2022, as well as in other SEC filings. In particular, the domestic and global economic environment as currently impacted by the COVID-19 pandemic and related supply chain and labor disruptions has a significant impact on our subsidiary companies. Except as required by law, COTI undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. At this time, I would like to turn the call over to Elias Sabo.

Good afternoon, everyone, and thanks for joining us today on our first quarter 2022 conference call. I'm pleased to report that we carried last year's momentum into the first quarter of the year, where we recorded our fifth consecutive quarter of record results that is enabling us to raise our 2022 outlook. We're extremely pleased with these results, and I want to acknowledge and thank our management teams and employees. They continue to put forth an extraordinary effort that we believe will generate sustainable long-term value for our shareholders. In our last earnings call, we discussed our strong execution against a tough macro environment, and this quarter was certainly no different. Supply chain constraints, inflationary pressures, and the lack of labor were all rising headwinds our companies had to navigate in the quarter. Our ability to execute on our strategy despite these constraints is a testament to the strength of our management teams and the quality of the companies we own. During the quarter, we delivered double-digit sales growth in both our branded consumer and niche industrial businesses. Importantly, our fastest growing business, Boa Technologies, continued to perform above expectations as revenue and adjusted EBITDA growth continued to accelerate. In fact, Boa's $25 million of adjusted EBITDA in the first quarter represents the highest EBITDA-producing quarter a Cody business has ever reported. As we have said on prior calls, Boa's unique combination of disruptive technology, strong intellectual property, relatively low penetration in a very large addressable market, when combined with an extraordinary management team, has led to performance that is significantly stronger than expected when we acquired the business a year and a half ago. One component of the growth story to keep in mind for the first quarter, however, is the elongation of the supply chain. So it's conceivable some of this quarter's demand reflects pull forward from future quarters, but with only 5% penetration in the addressable market, we remain quite optimistic that BOA's long-term growth story remains intact. Lugano continues to perform significantly ahead of our expectations. And as mentioned on our Q4 call, we have seen a historical relationship between inventory investment and highly profitable revenue growth pay dividends. We were excited our investment translated into almost 50% pro forma adjusted EBITDA growth, and we will plan on putting more capital in this business as this correlation is expected to continue. Overall, we did an extraordinary job posting year-over-year growth while preserving margins. In the first quarter, we had only 100 basis points of margin degradation, despite unprecedented supply chain and inflationary conditions. Though we anticipate the economic headwinds that impacted our margins could persist in the short term, we believe that the quality of all our subsidiaries' competitive positioning allows us, in a more stable inflationary environment, to be able to fully recruit all of that margin.