Compass Diversified Holdings Q1 FY2024 earnings call

Management Statement and Operational Highlights

• Business Performance: Strong Q1 results with branded consumer vertical leading. Lugano's international expansion with new London salon. BOA and PrimaLoft recovering from inventory headwinds. Acquisition of The Honey Pot Company integrated well with shelf space gains. Divestiture of Crosman aligned with strategic focus on innovative companies.
• ESG Initiative: Inaugural sustainability report released, outlining ESG framework and actions to drive social and environmental benefits.
• M&A Outlook: Optimism in M&A market with improved quality of businesses and competitors struggling with leverage buyout financing, creating opportunities for Compass Diversified.

Segment Performance

• Branded Consumer Vertical: In Q1 2024, pro forma revenue grew 11% and pro forma adjusted EBITDA grew 22%. Lugano had 61% revenue growth and 83% adjusted EBITDA growth, with a new London salon opened. BOA saw 13% revenue growth and 15% adjusted EBITDA growth, recovering from inventory headwinds. The Honey Pot Company, acquired in Q1, has gained shelf space and point-of-sale growth though adjusted EBITDA was pressured. 5.11 was flat in revenue but slightly up in adjusted EBITDA.
• Industrial Vertical: 3 industrial businesses had slight declines in revenues and adjusted EBITDA in Q1. Arnold had revenue growth but higher SG&A costs. Altor had revenue decline but robust new product pipeline. Sterno saw slight adjusted EBITDA growth with foodservice offsetting scented wax division.

Guidance

• Raised full year adjusted earnings guidance range by $3 million to $148 million to $163 million. Full year adjusted EBITDA expected $390 million to $430 million.
• Subsidiary adjusted EBITDA guidance: branded consumer vertical $355 million to $385 million, industrial vertical $125 million to $135 million.
• Leverage ratio improved due to strong operating performance and proceeds from Crosman sale used to pay down debt, with plans to further delever through divestitures or ATMs.

Risks

• Elevated inflation, delayed rate cuts, and heightened geopolitical risks negatively affecting industrial vertical.
• Macroeconomic uncertainties impacting consumer spending patterns, especially for lower-income consumers, which could affect sales in certain segments.

Question and Answer

• Q: Larry Solow on leverage and M&A outlook A: Elias Sabo discussed comfort with higher leverage to fund acquisitions, plans for divestitures, and strong deleveraging trend due to strong operating performance and proceeds from Crosman sale.
• Q: Mark Feldman on Velocity initiatives and PrimaLoft bookings A: Patrick Maciariello mentioned focus on technology and new product development at Velocity, and PrimaLoft bookings indicating growth in Q2 as supply chain improves.
• Q: Derek Sommers on industrial segment revenue and margins A: Patrick Maciariello said revenue decline in industrial segment was mix of price and quantity, and margins held up due to management teams driving efficiency at subsidiaries like Altor and Sterno.
• Q: Matt Koranda on Crosman divestiture and Honey Pot growth A: Elias Sabo explained splitting Velocity Outdoor for better value creation by separating air gun business (Crosman) and retaining archery/hunting apparel with new technology. Patrick Maciariello discussed Honey Pot's shelf space gains in drug/grocery channels and new product pipeline.
• Q: Robert Dodd on PrimaLoft and BOA drivers A: Patrick Maciariello noted PrimaLoft's bookings from new SKUs and client relationships, and Elias Sabo highlighted BOA's historical growth potential despite inventory headwinds.
• Q: Matthew Howlett on Lugano growth and Honey Pot runway A: Elias Sabo and Patrick Maciariello discussed Lugano's growth drivers including salon maturation, geographic expansion, and product investment. Patrick Maciariello detailed Honey Pot's shelf space gains in big-box, drug, and grocery channels with new product pipeline in 2025-2026