Compass Diversified Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Organizational Changes: Pat Maciariello retired from Compass Group Management after 20 years, and Zach Sawtelle stepped into the role of COO. James Bottiglieri retired from the CODI Board.
• SEC Compliance: Back in compliance with SEC filings, credit facility, and bond indentures, returning to normal operating cadence.
• Year-to-Date Results: Subsidiaries excluding Lugano had mid-single-digit growth in adjusted EBITDA. Consolidated net sales and subsidiary adjusted EBITDA discussed with details on consumer and industrial verticals.
• Commitment to Stakeholders: Focus on execution, reducing leverage, and positioning to return capital to shareholders, recognizing current valuation discount to intrinsic value of underlying businesses.

Segment Performance

• Consumer Vertical: Year-to-date, sales in consumer vertical grew low single digits. BOA saw a slight decline due to exiting a children's business in China but core business grew double digits; Honey Pot is the fastest-growing feminine care brand, driving double-digit EBITDA growth; 5.11 had mid-single-digit sales growth, adapting to the tariff environment.
• Industrial Vertical: Industrial vertical had mid-single-digit sales growth, supported by Altor's acquisition of Lifoam. Arnold faced headwinds from rare earth supply chain disruptions but has a growing backlog; Sterno delivered double-digit EBITDA growth, driven by its core food service offering.

Guidance

• Tightened subsidiary adjusted EBITDA range excluding Lugano to between $335 million and $355 million for 2025.
• Expect to organically deleverage in 2026 through solid growth in subsidiary adjusted EBITDA. Outlook for 2026 to be provided in the fourth quarter call, assuming no incremental material impact from changes in tariff environment or other macro/geopolitical developments.

Risks

• Geopolitical and Tariff Risks: Uncertainty in geopolitical landscape and tariff environment affecting business operations.
• Rare Earth Supply Chain Disruptions: Impacted Arnold's performance in the short term due to geopolitical uncertainty and disruptions in the rare earth supply chain.
• Macroeconomic Uncertainty: Consumer spending headwinds due to inflation and economic slowdown potentially affecting the business.

Question and Answer

Q: Congratulations on getting the restatement done. My question would be with respect to the Honey Pot...

A: Sure. And thank you, Lance. First feels good to be back up to date with all of our filings and the company getting back to a more normal operating level. With respect to the Honey Pot, this is really an extraordinary brand...

Q: Great. Welcome back, I guess, to the current financial world. Also just want to extend my best wishes to both Pat and Jim...

A: Yes. Thank you, Larry. Thank you for the warm wishes for Pat and Jim. They have both been really valuable participants here in building Compass and have become friends with us all, and we wish them the best in their future endeavors...

Q: Congrats on being current in everything, really big accomplishment. I guess my first question kind of goes back to asset sales...

A: Yes. Tim, thank you for the question. This is Elias. In selling an asset, I mean, I think there are a number of avenues...

Q: Best wishes to Pat, you'll be missed. I guess what I wanted to make sure I understood, it sounds like we're motivated to sell an asset at some point this year...

A: So first of all, it's not a -- there's an incentive to get below 4.5. If we're not below 4.5, there's a payment. We won't be out of covenant. The covenant is actually higher. So we will be in covenant -- we are now and we will continue to be all next year...

Q: Congrats on Pat's retirement. Just wanted to follow up on the last comment you made about Arnold...

A: Yes. I would say, obviously, clearly, Cris, we were wrong with Arnold in 2025. And so let's assume that we kind of get back to a normal baseline, which '24 would serve as a normal baseline year...

Q: And I understand you're not going to give commentary in 2026. But can you just remind us of kind of what the free cash flow conversion is of the business or how we should think about that?

A: Yes. Thanks. It's a great question. I think it's really important to think about because 2 things have really changed since last year, which is one is Lugano no longer in the portfolio, which is a significant user of working capital. Our underlying businesses now generate a substantial more amount of cash...