Compass Diversified Holdings

Good afternoon and welcome to Compact Diversified's first quarter 2023 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 Gatorade 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 2023 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 Q1 2023 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-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 and the following discussions refer to adjusted EBITDA has reconciled the 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 year 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 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. We are pleased to report financial results significantly exceeded our expectations. The strength and durability of our diversified group of subsidiaries was evidenced again in the first quarter as we delivered growth in both revenue and consolidated subsidiary adjusted EBITDA on a pro forma basis. This is an extraordinary accomplishment amidst the backdrop of broad and unique macroeconomic challenges. And as a result, we are raising our full year outlook for both subsidiary adjusted EBITDA and adjusted earnings. I think the obvious question is, how are we able to achieve this? Well, it's no different than what we've said in the past, but perhaps this quarter it's more apparent. Our strategy of assembling a highly diversified group of companies that reach a broad set of end markets, reach a wide set of consumer demographics, and have a strong underlying core growth rate drove the results we reported today. This is highly intentional and can be traced back to 2018 when we made a concerted strategic shift to transform our business towards higher quality, higher growth assets. I'd like to recognize our amazing group of companies and colleagues for allowing us to deliver these strong results today. But despite this, the headwinds we overcame in Q1 are still very much out there and cloud our near-term outlook. Similar to our remarks on our fourth quarter call, some of our branded consumer subsidiaries with exposure to wholesale continue to experience significant inventory destocking headwinds. As a reminder, 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 overordered, It has created a whipsaw effect until inventory is right-sized. Until this happens, our growth in these businesses will be constrained. But fortunately, it is a unique event that we expect to start correcting in the second half of the year. Take BOA, for example. This subsidiary is executing at an extremely high level and continues to take market share. Our products are on some of the strongest selling SKUs for our brand partners. And we continue to accelerate the number of new SKUs we are gaining placement on. But the current rate of destocking is so high that it's actually outpacing the market share gains we are experiencing from product sell-through and SKU count growth. This is obviously a unique phenomenon. And once we get beyond this current inventory destocking cycle, we would expect a significant snapback in revenue growth and profitability. We are also seeing the same broad trends at Primaloft, given its similar position in the supply chain. Taking together with BOA, these represent two of our strongest and fastest growing businesses. They represent our businesses with some of the best value propositions, competitive differentiation, margins, and free cash flow generation. So the fact that they're getting pulled down by an unusual phenomenon, and we are still reporting consolidated growth ties back to the incredible performance our diversified business model facilitates. Outside of these two subsidiaries, we delivered an astounding 15% organic growth in adjusted EBITDA. The majority of our remaining subsidiaries are performing extremely well. This gives us confidence that once the inventory destocking headwinds subside, with BOA and Primaloft reverting back to normalized growth rates, that our overall business will again show strong growth. Before turning the call over to Pat, I'd like to summarize our performance and outlook. While we had an outstanding first quarter that was stronger than anticipated, we expect the negative effects of inventory destocking and other market headwinds to suppress earnings in Q2. End demand for the majority of our goods and services remains strong. However, we experienced some moderation in end market sales as the quarter progressed and April has continued that trend. Notwithstanding a modest slowing, the most affluent consumer continues to spend as evidenced by the incredible performance at Lugano. And as you are aware, we sell the majority of our goods at our consumer businesses to the more affluent consumer, which positions us well during this time of economic uncertainty. Notwithstanding the headwinds we expect to encounter in Q2, The strength of our subsidiaries gives us confidence we will deliver growth in the second half of 2023, leading to growth for the full year. With that, I will now turn the call over to Pat. Thanks, Elias.