Compass Diversified Holdings

Good afternoon and welcome to Compass Diversified Third 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 star, then the number one on your touchstone phone. At this time, I would like to turn the conference over to Cody Sla 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 2023 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 would like to point out that the Q3 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 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 expectations related to the sale of Marucci and the future performance of CODI and its subsidiaries, the impact and expected timing of acquisitions and divestitures, including the divestiture of Marucci and future operational plans such as ESG initiatives. Words such as believes, expects, anticipates, plans, projects, should, and future or similar expressions are intended for 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 COTI 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. Before I discuss our third quarter results, I would like to cover the press release we issued this afternoon announcing the agreement to divest Marucci Sports to Fox Factory Holding Company at an enterprise value of $572 million. Cody expects to realize a pre-tax gain on the sale of between $225 million to $245 million, and we expect the net proceeds will be used to pay down outstanding debt and for general corporate purposes. We are extremely proud of the growth Marucci has experienced under our ownership, and we feel fortunate to have been able to partner with their outstanding team. We acquired the business in April 2020 based on our confidence in both Marucci's brand and management. Keep in mind, this was at a time when few transactions were being completed due to the pandemic, but our flexible capital structure and our commitment to seizing strong opportunities even in times of economic uncertainty, allowed us to execute at a time when others weren't. Since then, the Marucci team has acted decisively, strengthening their brand and growing their core business. They have gained share in new markets like fielding gloves and softball. We have also expanded the Marucci product portfolio by acquiring Lizard Skins and Bound Bath. We are honored to have partnered in this success. Thank you to Kurt and the entire Marucci team for their contributions over the last several years. We wish them nothing but continued success. Now on to our third quarter. We are pleased to report remarkably strong third quarter results, which once again exceeded our expectations and have us raising our full year outlook. Our consistently strong results reflect not only the diversification of our subsidiaries, but our ability to find excellent businesses that produce category-leading growth. To underscore this point, since 2019, we have grown consolidated subsidiary adjusted EBITDA for four straight years, despite volatile economic cycles and a once-in-a-generation pandemic. I am pleased to tell you, given our increased subsidiary adjusted EBITDA guidance that Ryan will highlight shortly, we fully expect 2023 to be a fifth straight year of growth. During the third quarter, pro forma consolidated revenue declined by 1%, while pro forma adjusted EBITDA grew 11%. EBITDA margins expanded by approximately 250 basis points to a record 21.9% in the quarter. The decline in revenue was due to our industrial businesses. While they benefited from lower commodity input costs, driving the 19% EBITDA growth, we passed some of those lower input costs on to our customers and experienced a mixed shift to higher margin categories, resulting in an 8% decline in revenues. When you look at year-to-date EBITDA performance, our industrial businesses have performed exceptionally well, posting 14% growth. We expect this segment to produce strong growth in the fourth quarter and into 2024. Our branded consumer businesses exceeded our expectations by growing in the third quarter. Pro forma revenues increased by 2% and EBITDA increased by almost 9%. This represents the first quarter of positive EBITDA growth this year. As we have stated many times before, inventory-related destocking headwinds have significantly lowered our consumer growth rate in 2023. Even though these headwinds still existed in the third quarter, we were able to produce solid growth. While we expect inventory destocking to continue in the fourth quarter, comparisons to prior year are expected to ease, and we expect growth rates will further accelerate. Given the broader difficult macroeconomic backdrop, We are certainly pleased with our subsidiary's resilience and performance to date, and we remain confident in an even stronger 2024. With that, I will now turn the call over to Pat.