Compass Diversified Holdings

And welcome to Compass Diversified's second quarter 2023 conference call. Today's call is being recorded and 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 touchstone 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 second 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'd like to point out that the Q2 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 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, should, 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 31st, 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. We are pleased to report that our second quarter results exceeded our expectations as we continued to benefit from a strong and diversified set of subsidiary businesses. During the quarter, pro forma consolidated revenue and adjusted EBITDA declined by 3.4% and 5.5%, respectively, Given the headwinds we saw three months ago, we are encouraged by these results. Last quarter, we detailed our strategy of assembling a highly diversified group of companies that reach a wide set of customer demographics and end markets, each with strong underlying core growth rates, and we discussed how this strategy has driven resiliency and our performance. This quarter is no different. We faced the same macro challenges, several of which are lasting longer than we originally anticipated. Nonetheless, our results continued to hold up very well. Looking at our niche industrial businesses, unit sales remained strong, but the easing of inflationary pressures negatively impacted revenue while positively impacting margins. Our industrial businesses continued to perform above expectations. reporting high single digit EBITDA growth for the quarter and growth of 12% year to date. Notwithstanding the macro headwinds and slowing global economy, we expect our industrial businesses to continue to produce solid growth and adjusted EBITDA over the remainder of the year. In our consumer businesses, inventory destocking headwinds have lasted longer than anticipated, and continue to impact our brands further down the supply chain. Regardless, end market sales continue to hold up remarkably well. And for our brands, where there is not a large inventory overhang, we are experiencing strong performance. For example, Lugano's results indicate that the ultra-affluent customer continues to spend. As they delivered 56% growth in revenue in the second quarter, and acceleration from 36% growth in the first quarter. Marucci has also bucked the trend, reporting 35% revenue growth in the quarter. Marucci's end markets are not suffering from an inventory hangover, and their strong product lineup has demonstrated that the consumer is still spending for on-trend products. Despite the aggressive Fed tightening cycle and slowing global growth, The performance of our industrial businesses, coupled with performance from Lugano and Marucci, give us confidence that our company is well positioned, and when distortions from the pandemic are behind us, we expect to deliver solid growth. Our subsidiaries that are suffering the most from the destocking headwind, BOA and Primaloft, are also two of our historically fastest growing, and we believe, best-positioned businesses. Once destocking subsides, we expect these businesses to return to their historic growth rates, and we believe we could experience above-trend growth in 2024 as part of this normalization process. During the second quarter, we started to see some green shoots emerge, giving us confidence that the destocking issues will come to an end in 2023. Specifically, Bookings for Primaloft improved in the second quarter and grew marginally over prior year. This compares to double digit declines experienced in the first quarter. And although one quarter does not make a trend and we expect bookings to be choppy over the course of the year, this is the first positive sign we have seen in bookings over the course of the past 12 months for Primaloft. Digging deeper, we know Primaloft began experiencing booking weakness three to four months before our other consumer businesses, including BOA. As we look for the bottom of this inventory cycle, Primaloft has provided the first positive signal and leaves us optimistic that some of our other consumer businesses will soon return to positive bookings growth. Given the persistence in inventory destocking and the lag between bookings growth and revenue growth, We expect third quarter adjusted EBITDA to be roughly similar on an absolute dollar basis to this year's second quarter. We continue to project adjusted EBITDA growth for the full year 2023 as compared to full year 2022. In addition, we are anticipating a strong rebound in growth in the fourth quarter. Before turning this all over to Pat, I'd like to summarize our performance and outlook. We are pleased with our second quarter results as they came in above our expectations. Despite the inventory destocking headwinds, the overall strength of our subsidiaries not only gives us confidence that we will grow adjusted EBITDA this year, but leads us to believe that our growth will accelerate in 2024. We believe we are well positioned to capitalize on the opportunities created once these headwinds dissipate, And we remain committed to our strategy, which we expect will deliver another year of growth at Cody. With that, I will now turn the call over to Pat.