Compass Diversified Holdings

Good afternoon and welcome to the Compass Diversified's 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 fourth quarter and full year 2022 conference call. Representing the company today are Elias Sabo, Cody's CEO, Ryan Falkingham, Cody's CFO, and Pat Massarello, COO of Compass Group Management. Before we begin, I would like to point out that the Q4 and full year 2022 press release, including the financial tables and non-GAAP financial measure reconciliations for adjusted EBITDA, adjusted earnings, and pro forma net sales are available at the investor relations section on the company's website at compassdiversified.com. The company also filed its form 10-K 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 2023 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 call, we may make certain forward-looking statements, including statements with regard to the future performance of COTI and its subsidiaries, the impact and expected timing of acquisitions, 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 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-K as filed with the SEC for the quarter ended December 31, 2022, as well as in other SEC filings. In particular, the domestic and global economic environment, supply chain, labor disruptions, inflation, and rising interest rates all may have a significant impact on Cody and our subsidiary companies. Except as required by law, Cody 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. I would like to start by recognizing that 2022 was a phenomenal year for Cody. Despite persistent market headwinds driven by rapidly changing monetary policy, supply chain imbalances, and rising inflation, we produced record annual results. For the full year, our branded consumer net sales were up 14% on a pro forma basis, while the net sales of our niche industrial businesses were up 9%. helping to drive record adjusted earning and adjusted EBITDA. These results confirm that our diversified subsidiaries combined with expert operational and financial execution can grow and take share even in a difficult market backdrop. I'd like to acknowledge our recently announced divestiture of Advanced Circuits. We are proud of our partnership and success with their team, which started more than 16 years ago. Cody's permanent capital structure and support throughout this partnership has generated significant value for our shareholders, and we are grateful for their contributions and look forward to their continued success. Jumping back to our 2022 performance, our subsidiaries manage the various macro challenges exceptionally well, and we remain confident in their ability to continue to grow and take market share over the long term. That said, our near-term outlook is clouded by some unique cross-currents. Our branded consumer subsidiaries with exposure to wholesale are experiencing significant inventory destocking headwinds. This is being driven by events that unfolded coming out of the pandemic. In the first half of 2022, we benefited from extremely high demand from customers who needed our product to help manage their own supply chain issues. With the pandemic winding down, and some retailers reckoning with the fact that they over-ordered, it has created a whipsaw effect until inventory is right-sized. For our brands further down the supply chain, like BOA and Primaloft, the destocking headwinds are exacerbated. Pat will walk through specific brand performance shortly, but I will just say that we expect the first half of 2023 to reflect lower performance from some of our companies with a re-acceleration anticipated in the back half as inventory is worked through and comparisons eased. On the other hand, we are seeing no signs of slowing demand with our companies that have material direct-to-consumer components to their business, like 5.11 and Lugano. This gives us confidence that the balance sheet of the affluent customer to which we sell many of our products is healthy. More specifically, It tells us that rising wages and the continued imbalance in the labor market are more than offsetting inflation and rising borrowing costs. Notwithstanding the difficult macro climate and inventory headwinds, we firmly believe our subsidiaries are well positioned to achieve their long-term growth targets. To demonstrate this, I'd like to highlight one of our niche industrial businesses, Arnold Magnetics, as a case study of how we improve value for our shareholders. We acquired the business in 2012 based on Arnold's technology leadership in the permanent magnet subassemblies industry and strong growth tailwinds for the use of permanent magnets to enable the clean energy transformation. In 2016, we made the decision to replace senior management at Arnold, bringing in Dan Miller as CEO of that subsidiary. As a reminder, Arnold is a long cycle business, and Dan was confronted with the reality of some programs going end of life while the pipeline of new opportunities was extremely weak. Restructuring and repositioning a long cycle business is an especially challenging situation. Entering 2022, Arnold's strategic priorities have been successfully repositioned to focus on new end markets like aerospace and defense, among others, which match Arnold's high end, high margin, low volume technical engineering and manufacturing capabilities. Arnold added a tech center to improve its products, advance its technology edge, improve its partnership with its customers, and complete Arnold's transition from a products company to an engineered solutions company. We supported Arnold's acquisition of Ramco Electric Motors to offer turnkey electric motor solutions, further positioning the Arnold business for the green economy. Arnold executed well on this strategy and reported a record-breaking year for bookings and double-digit sales and EBITDA growth. Arnold ended the year with $83 million in backlog and a book-to-bill ratio of 1.13, setting it up for another strong year in 2023. The strength of this business and the long-term runway for growth underscores the power of our diversified permanent capital model, which enables us to make long-term decisions to maximize value creation for our shareholders. In 2022, we launched our first new vertical since coming public. entering into the healthcare vertical with the announcement of Kurt Roth as our leader. Kurt brings over 25 years of experience and a decade-long partnership with Cody, and we couldn't be more excited to have him at the helm. Since his joining, Kurt and his team have been working hard at developing a robust pipeline of M&A targets. Like other markets, deal activity has been suppressed by the macro environment, but we remain proactive and prepared for the inevitable turnarounds. Before turning the call over to Pat, I would like to summarize our performance and outlook. 22 was a record-breaking year despite unprecedented headwinds, proving the strength and durability of our subsidiaries and the power of our permanent capital structure. As we sit here today, the majority of our businesses are performing above our expectations and we believe are well-positioned to achieve their growth potential. A few of our businesses are working through the inventory shock that is making its way through the marketplace in a post-pandemic world. We believe these headwinds will be short-lived and expect a recovery in the back half of the year. Our financial outlook takes into consideration these headwinds. But the power of diversification is real and implicit in this outlook. For example, we expect our niche industrial segment to have another year of robust growth in 2023. And we expect BOA, who is currently in the crosshair of the inventory destocking headwind, to be down versus 2022, but up versus 2021, which was an extraordinary year of growth. 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.