Compass Diversified Holdings (CODI) Q2 2023 Earnings Call Transcript

Good afternoon, and welcome to Compass Diversified's Second Quarter 2023 Conference call. Representing the company today are Elias Sabo, CODI's CEO; Ryan Faulkingham, CODI's CFO; and Pat Maciariello, COO of Compass Group Management. Before we begin, I would 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 and 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 call, we may make certain forward-looking statements, including statements with regard to the future performance of CODI 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 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 all may have a significant impact on CODI and our subsidiary companies. Except as required by law, CODI 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, but 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. We discussed how this strategy has driven resiliency in our performance. This quarter is no different. We face 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 continue 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, an 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. 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 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, 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 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 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 CODI. With that, I will now turn the call over to Pat.

Thanks, Elias. Throughout this presentation, when we discuss pro forma results, it will be as if we own PrimaLoft from January 1, 2022. As Elias mentioned, in the quarter we continue to face headwinds in several areas due to correcting inventory levels in the supply chain. Yet, in select spots, these headwinds appear to be starting to ease. Our Velocity subsidiary continues to see pressure in both of its major end markets due to a combination of reduced sell-through and tight inventory controls put in place by hunting and fishing-focused retailers. As we have discussed repeatedly, Velocity benefited greatly from demand pull-forward during the pandemic, as outdoor activity levels increased dramatically. As anticipated, the company is now paying the cost for this and demand has declined significantly below what we see as historically trend line levels. The impact of this bullwhip effect is having an outsized and, we believe, short-term impact on our consolidated financials. Despite these significant headwinds, strengths in our other subsidiaries led to only modest declines in consolidated pro forma revenue and EBITDA. In fact, when we exclude Velocity's performance, CODI as a whole shows growth in the quarter, both in terms of revenue and adjusted EBITDA. Now, on to our subsidiary results. I'll begin with our niche industrial businesses. For the year-to-date period ending June 2023, revenues declined by approximately 4% and adjusted EBITDA increased by 12.3% compared to the same period a year ago. Similar to the first quarter, each of our niche industrial businesses expanded margins in the second quarter, and aggregate adjusted EBITDA margins expanded by over 250 basis points versus prior year. Arnold showed solid growth in revenue and EBITDA, and once again, had strong bookings in the quarter. The company continues to gain traction securing new projects across markets, many of which were driven by increased demand for electrification in the economy. Margins expanded due to positive mix as sales continued to skew towards more technologically advanced products. End market demand remained solid across segments in Arnold, and we expect aerospace and defense to be a talent in the near term, as spending in the commercial aerospace sector has not yet returned to pre-pandemic levels. Outdoor's revenue declined slightly in the year-to-date June period as more cyclical end-market space headwinds and the company passed on raw material savings. Although there was a slight decline in revenue, adjusted EBITDA increased by over 21% in the six-month period compared to the prior year, due predominantly to a series of broad efficiency measures put in place by the new team. We remain encouraged by the progress made at Outdoor. At Sterno, revenue declined by approximately 7% in the year-to-date period compared to a year ago, driven by lumpiness in the company's scented wax business. Despite this decline, the company was able to operate efficiently and benefit from greater stability and shipping costs, driving slight growth in EBITDA on a year-to-date basis. Turning to our consumer businesses, for the year-to-date June 2023 period, revenues increased marginally, and adjusted EBITDA declined by 7.5% compared to the prior year. BOA continued to show a decline in adjusted EBITDA versus record first half of 2022. The company again added new partner platforms in the quarter that we expect should drive growth in 2024 and beyond. BOA's selling continues to be significantly below end market demand. We believe year-over-year comparisons will improve on a percentage basis in the third quarter of this year, and the 2023 adjusted EBITDA performance will track closely to full year 2021 levels. The launch of Alpine Boots incorporating our technology continues to track above our expectations, and we expect them to have a meaningful presence on the slopes in this upcoming ski season. We are also proud of the continued widespread adoption of BOA-enabled products by cyclists. In this year's recently completed Tour De France, approximately 75% of competitors, including overall winner, Jonas Vingegaard, competed in shoes incorporating BOA fit technology. Marucci once again had an exceptional quarter and for the year-to-date period, revenue and adjusted EBITDA grew by approximately 20% and over 57%, respectively compared to the year-ago prior period. Sales growth was strong across most channels. Our latest acquisition of composite bat maker, Baum Bat, performed well in the quarter, and we are pleased with the integration to date. The company has made significant progress in several of its adjacent categories, and we are particularly excited by strides made in the large fielding glove market as well as Marucci's growth geographically, primarily in Japan. Lugano once again had a strong quarter. For the year-to-date June period, revenues and adjusted EBITDA grew by 45% and 41.5%, respectively compared to the prior year. The company saw strong growth in multiple salons including Newport, Aspen and Houston, and experienced strong sales in the second quarter in its newly opened Washington, D.C. salon. Looking ahead, our Greenwich, Connecticut salon is scheduled to open by the end of August, and we've made progress in the quarter on construction of our second flagship salon in Palm Beach. In addition, we are pleased to announce that we recently executed a lease for a salon in London, which when opened in mid- to late 2024 will mark Lugano's first international salon. We believe Lugano's bespoke approach to ultra-high-end jewelry will be successful internationally, just as it has domestically. PrimaLoft continued to show modest declines in both revenue and adjusted EBITDA in the year-to-date period as customers continued to hold on target inventory levels. As Elias mentioned, we believe we are seeing somewhat of a bottoming in our end customers' inventory cycles and bookings have shown improvement since the end of the first quarter. We continue to have project wins at PrimaLoft in the second quarter and believe that 2024 will be a strong year for the company. 5.11 had a solid second quarter, and for the year-to-date June 2023 period, revenue and adjusted EBITDA grew by close to 12% and 7.1%, respectively as revenue increased in all segments of the business. Despite continued revenue growth in the second quarter, adjusted EBITDA fell slightly as gross profit margins marginally as the company looked to reduce seasonal inventory in the quarter. Velocity continued to struggle in the second quarter. While point-of-sale activity remains sluggish in the company's airgun segment, we are seeing slightly more positive signs with regards to end customers in the archery segment. The retailers have been slow to add to depleted inventory levels. While we believe the company will have meaningfully positive adjusted EBITDA in the second half of 2023, we continue to focus both on cost controls and demand stimulation as we navigate this difficult period. As a whole, given the headwinds, we are pleased with our performance in the second quarter as it comes in above our expectations. Though we believe that some of the broader headwinds facing our companies are starting to improve, our management teams remain vigilant in controlling costs. We believe we will grow in 2023 and anticipate a strong 2024. I will now turn the call over to Ryan for his comments on our financial results.

Thank you, Pat. Moving to our consolidated financial results for the quarter ended June 30, 2023, I will limit my comments largely to the overall results for CODI since the individual subsidiary results are detailed in our Form 10-Q that was filed with the SEC earlier today. On a consolidated basis, revenue for the quarter ended June 30, 2023, was $524.2 million, up 2% compared to $515.6 million for the prior year period. This year-over-year increase primarily reflects our acquisition of PrimaLoft during the third quarter of last year. Consolidated net income for the second quarter was $17.1 million compared to net income of $31 million in the prior year. The decrease was primarily due to an increase in interest expense as a result of financing the PrimaLoft acquisition and rising interest rates. Adjusted EBITDA in the second quarter was $90.1 million, up 3% compared to $87.4 million in the second quarter of 2022. The increase was due to the benefit of the PrimaLoft acquisition. Adjusted earnings for the second quarter was above our expectations at $35.6 million, down from $39.3 million in the prior year quarter. The decline was primarily a result of higher interest expense. Now on to our financial outlook. For the full year 2023, we continue to expect consolidated subsidiary adjusted EBITDA to range between $400 million and $460 million. For the full year 2023, we continue to expect adjusted earnings to range between $110 million and $135 million. This is the same guidance we had provided last conference call. Turning to our balance sheet. As of June 30, 2023, we had approximately $67.4 million in cash, approximately $506 million available on our revolver and our leverage was 4.08x, just under 4.1 million. We have substantial liquidity, and as previously communicated, we have the ability to upsize our revolver capacity by an additional $250 million. With our liquidity and capital, we stand ready and able to provide our subsidiaries with the financial support they need, invest in subsidiary growth opportunities and act on compelling acquisition opportunities as they present themselves. Turning now to cash flow provided by operations. During the second quarter of 2023, we received $21.7 million of cash flow from operations, primarily a result of strong operating performance. This is up $23.5 million from the prior year's comparable period. We used $33.7 million in working capital during the second quarter of 2023, a substantial decrease from $63.5 million used in the prior year when we needed to support many of our businesses' inventory levels as a result of supply chain disruptions. For the year-to-date period, cash flow provided by operations increased $72.6 million compared to the prior year. We expect to continue to monetize working capital across the business with the exception of Lugano as we continue to fund its growth objectives. Also of note during the quarter, the manager waived 50% of the management fee owed by the company in respect of PrimaLoft, and we used approximately $20 million to fund Marucci's add-on acquisition of Baum Bat. Finally, turning to capital expenditures. During the second quarter of 2023, we incurred $15.5 million of capital expenditures at our existing subsidiaries compared to $14 million in the prior year period. The increase was primarily a result of the timing of retail build-outs at Lugano and 5.11 to support their continued growth. For the full year of 2023, we continue to anticipate total capital expenditures of between $60 million and $70 million. We continue to see strong returns on invested capital at several of our growth subsidiaries and believe they will have short payback periods. Capital expenditures in 2023 will primarily be at Lugano for new retail salons and at 5.11 as we continue to increase its retail store count from its 121 stores as of June 30. With that, I will now turn the call back over to Elias.

Thank you, Ryan. I would like to close by briefly providing an update on the M&A market and our strategic initiatives. In terms of M&A, deal activity has remained suppressed below historic levels for some time now. However, we started to see some increased activity in the second quarter that we expect to gain momentum over the balance of the year. On the ESG front, we continue to advance our key initiatives and execute our strategy. Our approach to ESG is directly tied to our business model, and ESG is becoming increasingly important to potential employees seeking new opportunities. For these reasons, it is critical that we consistently and clearly communicate our ESG philosophy and practices both internally and externally. To reflect the work in progress that has occurred across the organization over the past 12 months, we have updated the sustainability page on our website. We have spent significant time working with our subsidiaries to understand how our overarching ESG framework will be implemented and our companies to facilitate value creation and our web page as a source to tell this story. We aim to generate measurable benefits that align with our values and create strong financial returns for our stakeholders. We believe that the environmental, social and governance factors that we use to build our framework over time will allow us to deploy capital in a different way than many in the marketplace reflecting risk more appropriately. The volatility that we face today only underlines the importance of businesses like ours stepping up with purpose. We are committed to driving positive change and leading the industry to become the model of choice. An example worth discussing comes from one of our niche industrial subsidiaries, The Sterno Group. In June of 2023, Sterno's Texarkana manufacturing facility achieved the True Silver certification for zero waste. True, which stands for Total Resource Use and Efficiency, is administered by Green Business Certification, which is a leadership standard for facilities to measure zero waste performance. Currently, Sterno's Texarkana facility is the only manufacturer that is True-certified in the state of Texas, and we are proud of Sterno's recognition and their pursuit of zero waste. In conclusion, we're proud of our second quarter results which highlight the true benefits of our diversification strategy. While several of our consumer businesses continued to be impacted by persistent inventory destocking headwinds, our niche industrial businesses continued to perform well. The overall strength of our subsidiaries gives us confidence in our belief that we're well-positioned to not only grow this year but have a snapback year in 2024 once these headwinds fully dissipate. Before we open the phones for Q&A, it's with heavy hearts that we acknowledge the passing of our friend, former Board chair and mentor to so many of us at Compass, Sean Day. Over the last 25 years, Sean played an integral role in the formation of our strategy. His business acumen, professionalism, integrity and kindness will be greatly missed throughout our company. So on behalf of the entire CODI team and our Board of Directors, we express our deepest condolences to the entire Day family. With that, operator, please open the lines for Q&A.

Your first question comes from the line of Larry Solow from CJS Securities. Please ask your question.

Thanks so much and good afternoon, good evening, everyone. I have a couple of general questions before I get to a specific one. It seems like the quarter was a bit better than expected, with EBITDA being roughly flat or close to it. Last quarter, you had indicated a mid-to-high single-digit decline expected. As I consider this, is the reason you're not increasing the guidance simply that operations are improving, but inventory reductions are a bit heavier and will likely continue into Q3? Is that a fair way to put it?

Yes, Larry, I think you're spot on. We did better in the second quarter than we had forecasted on our first quarter earnings call, but we didn't raise our guidance. The reason behind that is, as you've identified, the inventory headwinds are a little more persistent than we thought, and they're going to bleed forward a little bit longer. As I said, we're starting to see some shoots by stabilization of new orders at PrimaLoft. We haven't seen that in some of our other consumer-facing businesses. So I think as a result of that, we're just being a little bit more prudent. Although there are some positive signs in the portfolio as well. So I would really caution or position this more as us being incredibly conservative right now because the business is performing better than we have anticipated.

That's a reasonable explanation and provides good insights. I have a question regarding Sterno. Was there a specific reason for the management change? Additionally, regarding Sterno's performance, I understand EBITDA is around $40 million to $45 million. If I recall correctly, the business pre-COVID performed similarly. I know you acquired imports, which might not be performing as well as it did during its peak in COVID. With Walmart as a significant customer, it seems you might be losing some shelf space. Can you clarify the reasons behind the management change and provide an overview of how imports are performing today compared to the candy business?

Hi, Larry. As is often the case, people retire. Craig Carnes, a long-term colleague of ours at the firm, has decided to retire, and we believe we have found an excellent replacement in Jeff, which we are excited about. Regarding the breakout, I will say your numbers are somewhat incorrect; while you are conceptually on the right track, they are a bit off. The candy business or the chafing fuel business never exceeded 30; it was always below that, even at its peak years. I'll let you interpret that as you wish, but you are correct in your observations.

No, I was saying the can heat and someone like Sterno Home, those combined before you bought imports, I would say.

We faced some pressures, but it was never quite as high as I would say. The wax business, it's a lumpy business. And it's a business that has some great quarters and some weaker periods. We bought it at a very attractive price for the company, and we continue to see it performing for the shareholders, and we continue to see it performing.

Larry, just to add one other point. As you've noted regarding a major customer in that sector, inflation has significantly affected consumer spending, particularly among those with the least disposable income. These products are generally aimed at that demographic. As inflation decreases and real wages begin to rise, we anticipate that the scented wax portion of our business will start to improve and will no longer be a negative factor for earnings at that company. The impact of inflation on that customer base has been a considerable challenge for the company.

Fair enough. To conclude on a more positive note, we have received numerous questions about Lugano over the past few months, particularly regarding its Founder Moti Ferder and the potential for business growth. How much infrastructure has been developed to support him? Given the rapid growth last year and a further increase of 45% year-to-date this year, although we don't have a crystal ball, what sets this business apart from other high-end dealers? What could this business evolve into in five years?

Yes. So Larry, I think it's a good question. Obviously, when you see a company that has this kind of rapid growth, the natural question is how long can it sustain this kind of growth, and is it experiencing something that is making it more temporary? Like the pandemic had obviously positive impacts on a company like Velocity that is now experiencing a payback. I think that's a natural question to wonder if that's happening to Lugano. Actually, quite to the contrary, I think the market that Lugano is going after and the approach that they have created, which is very unique and distinct in the industry, is one that is generally underserved. I know that may sound a little bit strange, but this kind of customer subset is one that hasn't been targeted at the same level by a lot of the major players in the industry. It is much more of a one-off unique kind of jewelry that has been created compared to a lot of competitors that want to offer something that can be much more mass and have the same piece sold throughout multiple outlets. So the model is completely different. Given the community-type aspect that our founder has built the business around with his customers, there is significantly greater room to run, in our opinion. Much of the limitations on the growth of this business was really predicated on investment, how much capital was available to put new salons in place, how much capital was available for inventory to create these pieces. Working with Moti to drive this business forward, we were able to solve a lot of those capital issues. What you've seen is an acceleration in the company's growth because of that. We don't view this as temporary, and we don't see the growth opportunity as being limited right now. In fact, some of the programs that we're putting in place and the additional tie-ins that we have around our customer segment are only accelerating and strengthening the community effect and product purchases ultimately, and the profitability of this business. Moti, who is the founder that we partnered with, is one of the most visionary CEOs that I've ever had the pleasure of working with, and he's created a unique business model that has a lot of runway for growth. Its limitation will be how much capital we want to put in to facilitate that growth. Our view has been with return on invested capital rates as high as they are here, we will continue to fund all of this and these opportunities until we see some sort of slowdown in growth. We're just not experiencing that. So I think that's a long-winded answer, I know, to a short question, but think there's legs to this and that it can grow to multiple sizes of what it is today because it's such a unique mousetrap and so differentiated from everybody else in the industry.

The next question is from Matt Koranda from ROTH Capital Partners. Please ask your question.

It's Mike on for Matt. Maybe just on the Industrial segment. Really encouraging to see the sizable margin expansion in the industrial businesses. Last quarter, we mentioned an expectation for bookings to continue to slow, and it looks like it might have. So maybe just an update on how bookings in the industrial segment have trended since the last call. And then specifically on Altor, just how sustainable are these margins? Should we be pulling forward a north of 20% EBITDA margin going forward? Or should margins come in a bit as the booking environment slows?

So first one is on bookings. I'd say, in general, in our industrial sector, those longer-lead businesses that we have actually saw an increase in bookings. Bookings were higher than revenue, with a book-to-bill rate of over 1. So solid there. I think your second question was on Altor and if we should see expanding margins. We think we'll continue to see efficiency gains there. We believe we will look to add on acquisitions that we can then also add more efficiency gains to. This management team is very good. Terry and his team have done it before, and we've been impressed by them. We think at a minimum, this margin level is sustainable, absent sort of price increases. Remember, we pass on the raw material price increases to our customers with a lag, so even though we'll be making the same dollar contribution on a per-pound basis, the margins may go down if EPS and other raw material prices increase.

Got it. Makes a lot of sense. I guess moving to Marucci is one of the stronger businesses in the quarter, both top and bottom line relative to our expectations. So maybe just a little bit more color on what drove the outperformance? Are we still seeing strong sell-through? And then further, what type of margins are baked into the guide for the back half of the year? Should we expect something similar to last year in the mid-20% range?

I would expect margins similar to the first half of this year. As it relates to what drove the revenue growth, we continue to have strong sell-through on Cat X. We also continue to expand into new categories, like fielding gloves, which is a significant category getting a lot of traction. If you looked at many of the hitters in the home run derby, they were using either a Victus bat or Marucci bat, so there's just a great brand that continues to gain traction.

Got it. Makes sense. Last one for me. Along similar lines on Marucci, maybe just touch on the BAM acquisition, quarterly performance, any trends you're seeing in DC and just overall commentary on the integration process and plans for the future for Bob.

Sure. We think we can grow BAM. They were capacity constrained. I'm not going to touch on the specific financial performance. Ryan has indicated we borrowed about $20 million as far as the use of proceeds for that. So you can get your head around sort of the purchase price. But we will be adding capacity for BAM in 2024. I don't know if that will be the biggest driver of growth for the company, but it will be another driver of growth. Our DTC, both at Marucci and at BAM remain strong.

Your next question is from Mark Falkman from William Blair. Please ask your question.

This is Mark on for Chris Kennedy. Just wanted to ask on Velocity. I know you had mentioned it, but could you talk about any of the initiatives that are in place to turn that business back to growth on the revenue line and then also improve margins there?

Yes, Mark. With Velocity, we should all expect that while we experienced significant growth in participation, revenue, and earnings during the pandemic, we are currently facing a payback period. As people stayed home, hunting became a popular activity, leading to a surge in demand, especially for high-ticket archery items. However, these are not items that customers purchase regularly, resulting in a drastic rise in demand during the pandemic when supply was limited. Although we had an exceptional year in 2021, we’ve cautioned that this level of earnings is not sustainable. We are currently experiencing a downturn in demand, with excess inventory and low retail foot traffic. Unlike our other businesses, the market for these products is not expanding. Despite this, I don't believe the situation will worsen, and we can expect some improvement due to inventory depletion next year, but this year we have limited options for stimulating demand. We are launching great new products, but since many customers may not buy again for several years, it's challenging to drive immediate interest. We need to manage expectations for 2023, as our team is effectively cutting costs and improving efficiency. However, declining revenue leads to negative operating leverage affecting results. I predict a tough year for Velocity in 2023 but anticipate better performance in 2024. The previous peak of over $50 million in EBITDA wasn’t sustainable, and the first half of this year has generated significantly less than that. We're likely to find a more balanced level of demand moving forward. The revenue decline has necessitated more cost-cutting measures than we might have otherwise taken. Improving the efficiency of the business will enhance margins as revenue recovers. Despite our wishes for a different market scenario, I expect the second half of the year to be better than the first, though we shouldn't expect to see the same level of performance. A rebound to stronger performance might not happen until next year.

Great. Helpful there. And then I guess on PrimaLoft, I know when you guys acquired it, and since then, you've talked about some of the additional markets and revenue opportunities there like ThermoPlu or the licensing opportunity of increasing the consumer-facing image of PrimaLoft. Can you talk about any of those initiatives there beyond just synthetic down?

Yes. One of the major initiatives we're focusing on is our new Pure initiative, which is produced using reduced emissions. We are making significant efforts to navigate the supply chain in order to provide our end customers with a trustworthy product made with minimal emissions, and this is generating considerable interest from many of our end customers at the moment.

The next question is from Derek Sommers from Jefferies. Please ask your question. Yes. One of the large initiatives we're pushing is our new Pure initiative, which is produced using reduced emissions. We're working very hard to maneuver through the supply chain to give our end customers a product they can trust, created using as few emissions as possible, and that is generating significant interest from many of our end customers right now as an example.

Hi. Good afternoon, everyone. I was just wondering if you could share any commentary on how international performance has been at the portfolio of companies. We started to see a little bit of volatility coming out of macroeconomic data and some policy decisions there and just wanted to hear your input.

Yes, sure. I can't say there's been any huge trends. Obviously, China is coming back slower than anticipated, and everybody is looking for stimulus there. We've seen that in our distributor customers. We have observed that in places where we have sales to China and have seen that at stores in Asia. I'd say Europe is muted, and North America is pretty strong in general.

Your last question is from Matthew Howlett from B. Riley. Please ask your question.

Just on the guidance, did I hear you right that 3Q adjusted EBITDA would be a dollar amount equal to the second quarter?

Yes, roughly in line with the dollar amount we just posted.

So I look at it basically with the midpoint of your $430 million to $460 million guidance, excluding the corporate G&A, you're talking about 111 for the third quarter and then something like 115, 116 in the fourth quarter. Is that how we should think about the gross EBITDA?

I think that's a good way to think about it.

Yes.

Okay. Great. Last thing I was intrigued by the comments in there about '24. I know you don't provide guidance for '24, so I'm not trying to ask you, but you sort of touched on how it could be really snapped back. I think historically, you said 10% growth for your portfolio of companies; could we possibly be thinking about something much better than that in '24 in a snapback scenario?

Yes. What we're trying to highlight is that if you consider what's happening right now, and as Pat mentioned, we keep discussing inventory destocking. The end market sales for nearly all of our companies in the consumer space, especially those working through the wholesale channel, are subdued, or in some cases, end market sales are outperforming our own sales. A notable exception is Marucci, where inventory levels weren't as high, giving them a better opportunity to align sell-in with sell-through. If a company sells $20 million or $30 million more than it sells in, the absence of inventory destocking could significantly enhance revenue growth without relying solely on our initiatives. That said, companies like BOA have excelled in expanding new platforms, and we know their products are trending and growing faster than the industry average, which should support strong growth even without any discrepancies between sell-in and sell-through. We view the inventory headwind as a rubber band being stretched further as inventories decrease. When it rebounds, it would not be unreasonable to anticipate that 2024 might see growth surpassing our long-term core growth expectations, although I'm not providing specific guidance for that year.

The way you explained it makes it very clear now the challenges that the destocking is causing; that normalization is going to give you a boost as it returns to normal growth rates. That makes a lot of sense. I usually get asked about health care. I know you provided an update on M&A. Is there anything new to report on that front? Are you still looking at deals? Just an update would be helpful.

Kurt is active. I think we're in a really weird market backdrop. This has been one of the slowest M&A markets that I've seen in 25 years in middle market M&A. It matches or has a longer duration than the pandemic and the financial crisis in terms of how long it's lasting in terms of muted M&A activity. It's hard in any industry to think there's going to be a lot of activity happening. Sellers are hesitant for price discovery. All we can do is track those, know they're out there, and know they will be coming. We have a robust funnel of potential opportunities that fit within the core critical outsourced services space with the right economic moat around the businesses, but there's no catalyst to bring them to market. We're tracking these companies and as sellers feel more confident, we'll see a return to the market. I'm more encouraged by the breadth and number of opportunities we currently have on our target list. I believe we're in the right vertical and expect some initial green shoots to emerge. We saw the IPO market open up recently, giving people more confidence, which may stimulate the M&A markets. Overall, I think we are positioned really well to be active buyers in the healthcare space.

There are no further questions at this time. I would now like to turn the conference back to Mr. Elias. Sir?

Thank you, operator. As always, I'd like to thank everyone again for joining us on today's call and for your continued interest in CODI. Thank you for your continued support.

Thank you. This concludes the Compass Diversified conference call. Thank you, and have a great day.