Compass Diversified Holdings

Good afternoon and welcome to Compass Diversified Third 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 Slaw 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 third quarter 2022 conference call. Representing the company today are Elias Szabo, Cody's CEO, Ryan Falkingham, Cody's CFO, and Pat Massarello, COO of Compass Group Management. Before we begin, I'd like to point out that the Q3 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 10-Q with the SEC today after the market closed, which includes reconciliations of certain non-GAAP financial measures discussed on this call and is also available at the investor relations section of the company's website. Please note 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 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, the impact and expected timing of acquisitions and dispositions, and future operational plans, such as ESG initiatives, Words such as believes, expects, anticipates, 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 that 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 September 30, 2022, as well as in other SEC filings. In particular, the domestic and global economic environment, supply chain, labor disruptions, and inflation all may have 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, everyone, and thanks for joining us today on our third quarter 2022 conference call. I am pleased to report that we delivered another exceptional quarter, with third quarter revenue and pro forma combined subsidiary EBITDA increasing by 15% and 16%, respectively, over prior year. Q3 marked our seventh consecutive quarter of double-digit consolidated pro forma subsidiary EBITDA growth. Notwithstanding the difficult macro climate, the strength of our year-to-date operating results is enabling us to raise our 2022 outlook once again. The macro environment has created significant challenges and distortions over the past few years. The effects of the pandemic on the global economy were profound. and we continued to wrestle with headwinds stemming from the pandemic. Throughout much of 2022, we dealt with erratic supply chains, labor shortages, and inflation running at 40-year highs. Despite these challenges, we generated record year-to-date operating results, which is a testament to the competitive positioning and management strength at our subsidiary companies. As we finish 2022 and enter 2023, we face new macro-led challenges. Supply chains are starting to normalize, but labor markets remain unbalanced and inflation continues, particularly in wages. Global demand has eased with Europe showing significant weakness and Asia's growth becoming more erratic due to China's zero COVID policy. Domestic spending has remained strong amongst the more affluent consumer, but we have seen a large decline in discretionary purchases for price sensitive shoppers. Together, These macro issues pose a difficult challenge as we finish 2022 and enter 2023. Despite these challenges, we believe Cody is positioned to outperform in both good times and bad times. We own a collection of subsidiaries with diverse end markets, business cycles, investment cycles, and inventory cycles, amongst others. This diversification proved to be essential during the pandemic. where we produce growth in 2020 against a very difficult macro backdrop. As you are aware, a strategic initiative of ours has been to launch a healthcare vertical. This afternoon, we announced that, effective November 1st, Kurt Roth has joined our team with responsibility over our healthcare initiative. Kurt brings a wealth of healthcare investing and transaction experience, having previously worked closely with the Compass team during his tenure at Robert W. Baird. Most recently, he spent the last seven years as head of corporate development and strategy with Soterra Health, a leading global provider of mission-critical end-to-end sterilization solutions, lab testing, and advisory services for the healthcare industry. During his tenure, Soterra consistently grew revenue and expanded profitability while developing a successful track record of identifying, completing, and integrating strategic acquisitions. We are delighted to have Kurt join our team. Not only does he possess the skills to build our healthcare vertical, but more importantly, he aligns with our culture and values. Healthcare is an important initiative that will allow us to see a significant increase in actionable opportunities. The healthcare industry is large and growing rapidly, and we believe the acyclical nature of the industry will add to the diversification of our subsidiaries and further decrease our financial volatility. As we have also stated on prior calls, the subsidiary company transformation over the past few years has created a much faster core growth rate. I would like to highlight that four of our subsidiaries, BOA, Primaloft, 511, and Lugano, are all rapid market share-taking businesses with low penetration in industries with positive long-term macro trends. These four businesses represent over 50% of our consolidated subsidiary EBITDA. And we believe their ability to continue to take share at a rapid pace will both soften any reduction in demand while accelerating the growth rate in stronger times. Before I turn the call over to Pat, I want to discuss the recent shifts in the capital markets and the implications as we head into 2023. As we are all aware, the Federal Reserve has aggressively tightened monetary policy in an effort to ward off high inflation. This has in part caused a major correction in the stock and bond markets, with the bond market indicating the likelihood of a recession in 2023. Broadly, we have seen a reduction in new orders across our subsidiary companies. However, end market demand for the majority of our goods remains strong. We believe a period of inventory deaccumulation is taking place, first as supply chains are normalizing, and companies are moving back to more just-in-time inventory, and second, as fears of an economic slowdown are causing companies to plan inventory more carefully. Taking these factors into consideration, we are planning for a more challenging demand environment in 2023 with easing supply and inflationary pressures. Notwithstanding a weaker demand outlook, we are confident in our company's competitive positioning and market share growth. and believe we are poised to outperform our peers. With that, I will now turn the call over to Pat.