Compass Diversified Holdings Q1 FY2026 Earnings Call

Good afternoon, and welcome to Compass Diversified's fiscal 2026 first quarter conference call. Today's call is being recorded. At this time, I would like to turn the call over to Ben Tapper, Vice President, Investor Relations. Ben, please go ahead.

Thank you, and welcome to Compass Diversified's First Quarter 2026 Conference Call. Representing the company today are Elias Sabo, CODI's Chief Executive Officer; and Stephen Keller, CODI's Chief Financial Officer. Before we begin, I'd like to remind everyone that during the course of this call, CODI will make certain forward-looking statements, including discussions of forecasts and targets, future business plans, future performance of CODI and its subsidiaries, and other forward-looking statements regarding CODI and its financial results. 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 many risks and 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 company's Form 10-K as filed with the SEC on February 27, 2026, as well as in other SEC filings and press releases. Except as required by law, CODI undertakes no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events or otherwise. During the call, we will refer to certain non-GAAP financial measures. The Q1 2026 press release, including the financial tables and non-GAAP financial measure reconciliations for adjusted EBITDA, subsidiary adjusted EBITDA, pro forma net sales and financial results excluding Lugano, are available at the Investor Relations section on the company's website at www.compassdiversified.com. 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 CODI's press release and SEC filings. The company does not provide a reconciliation of its full year expected 2026 subsidiary 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. At this time, I would like to turn the call over to Elias Sabo. Elias?

Thank you, Ben, and good afternoon to everyone. We started 2026 committed to a clear plan, and we are delivering against it. Specifically, we sold Sterno's food service business at an attractive valuation despite a muted M&A environment. We completed a sale leaseback at Altor and applied the proceeds directly to debt reduction. We delivered solid subsidiary adjusted EBITDA growth, highlighted by double-digit growth in our Consumer businesses despite uncertainty in the global economy. And collectively, our subsidiaries generated strong operating cash flow in the quarter, a hallmark of the CODI model. Incorporating our current view of the operating environment and reflecting the sale of Sterno's food service business, we are updating our full year guidance. Before Stephen walks through the financials and our updated guidance, I would like to provide additional color on both our strategic focus and operational performance. Let me start with the sale of Sterno's food service business. Throughout this process, we've been asked whether the broader environment, including geopolitical uncertainty in the Middle East, tighter private credit markets and other macro factors, would limit our ability to monetize our businesses at attractive values. From the outset, our answer was straightforward. First, there is almost always a market for high-quality businesses. And second, we have an experienced team with a track record of maximizing value across market cycles. We believe the outcome here speaks for itself. We view this as an initial step towards the goals we've established, not the final stop. Our leverage ratio remains above our target range and our shares continue to trade at what we believe is a discount to intrinsic value. Our work is not done. We will continue to pursue deleveraging and value creation, both organically and inorganically, with the same urgency and discipline we have demonstrated so far. And once leverage is within our target range, we will accelerate work to address the gap to intrinsic value, including through the efficient return of capital to shareholders. Alongside our deleveraging efforts, we have initiated a review of our management services agreement. We are actively evaluating our MSA for opportunities to further align incentives and drive incremental shareholder value. The process is underway and we expect to provide further updates in the coming months. Turning to operational performance. Against the backdrop of continued macro uncertainty, our subsidiaries collectively outperformed in the first quarter. Let me walk through a few highlights. Our Consumer businesses led the way, with double-digit adjusted EBITDA growth driven by strength across these businesses. The Honey Pot continued its exceptional momentum in the first quarter, with revenue growth of nearly 25% and EBITDA growth of over 40% compared to the prior period. We continue to see the brand gain share across the feminine care category, reflecting the strength of the product portfolio, expanded distribution and growing consumer adoption as the brand continues to extend beyond its origin into the broader period care category. The Honey Pot is now firmly established as a leading better-for-you brand in the feminine care, and we believe it has significant runway for continued growth. BOA delivered another strong quarter, with revenue growth of 6.5% and EBITDA growth of 11% compared to the prior-year period. We believe the performance of the BOA Fit System is unmatched. And that technical edge continues to drive category-leading adoption across snow sports, cycling, workwear and more. The company's focus on differentiated solutions and operational efficiency supports their category-leading margins. And with continued innovation and expansion into new performance applications, we see meaningful opportunity for growth ahead. 5.11 Tactical delivered solid margin performance and strong cash flow in the quarter, despite some modest top line pressure. The business continues to generate durable cash flow from its core professional customer base, and we are encouraged by the steps the team is taking to expand 5.11's appeal to the broader adventure-oriented consumer. This includes a recent grand opening of its next-generation retail format in Seattle, which significantly outperformed the chain average on opening weekend. Early customer response has been strong and we are seeing encouraging traction. While this is an early signal, it reinforces our belief that 5.11 has meaningful runway to broaden the brand's reach over time. And finally, within our Consumer businesses, a new leadership team is getting up to speed at PrimaLoft. It's only month three, but we are pleased with management's progress, laying the groundwork to accelerate future growth while remaining a highly profitable, low working capital business. Much more to come in future quarters. Turning to our Industrial businesses. Arnold delivered a standout quarter with adjusted EBITDA nearly doubling year-over-year, despite ongoing geopolitical dynamics around rare earth supply including continued export restrictions out of China. While these dynamics create near-term headwinds, they also reinforce the long-term tailwinds for the business. Demand for geopolitically secure rare earth magnet supply continues to build as customers increasingly prioritize reliable non-China sources. Arnold's Thailand facility is ramping up, adding capacity and supply chain redundancy. We believe this uniquely positions Arnold to serve aerospace, defense and industrial customers who prioritize supply chain security and performance reliability. Altor remains a work in progress. The business faced a challenging first quarter, reflecting competitive pressure in the cold chain market and continued consumer headwinds in the appliance market. The team is focused on execution, optimizing the combined platform following the Lifoam acquisition and driving commercial progress. And we remain confident in Altor's long-term positioning even as near-term results continue to reflect current market conditions. Finally, let me turn to Rimports, which is the business we retained following the sale of the Sterno food service business. Rimports is a home fragrance platform, supplying scented wax, wax warmers and essential oils under a range of in-house and private-label brands to many of the nation's largest retailers. We want to be clear about what to expect. The balance of 2026 will be a transition period. Rimports will absorb some stranded costs from the separation of the food service business during the year, and we are working through an updated commercial relationship with a large customer. Both of these factors will weigh on near-term results, but are expected to improve in 2027. We have confidence in the leadership team and believe the long-term opportunity remains attractive as the team focuses on the go-forward business. Before I hand the call over to Stephen, I want to underscore that the actions this quarter are part of a disciplined, sequenced plan. Our path is clear: deleverage, drive continued operational performance, further align management incentives, and over time, close the gap between our share price and intrinsic value. That is the priority we are executing against. With that, I'll turn the call over to Stephen to walk through the financial results.

Thanks, Elias. As a reminder, our prior-year GAAP results include Lugano, which has since been deconsolidated following its bankruptcy filing last November. With that context, I will discuss our GAAP results first, followed by our non-GAAP results that exclude Lugano, to better facilitate year-over-year comparisons. For the first quarter, GAAP net revenues were $427 million, down 5.9% year-over-year due to the inclusion of Lugano in the prior period. GAAP net loss from continuing operations was $30.8 million, an improvement of approximately $19 million year-over-year, primarily reflecting the absence of Lugano's losses in the current period. I will now provide our first quarter non-GAAP results, which excludes Lugano from the prior year. Net sales were in line with prior year as strong double-digit growth at the Honey Pot and Arnold were offset by ongoing challenges at Altor due largely to unfavorable macro trends. Across our businesses, our Consumer net sales increased 2.3%, while Industrial net sales declined 3.3% compared to the prior-year period. Subsidiary adjusted EBITDA was $83.9 million, an increase of 6.3%, with Consumer up 11.6% and Industrial down 4.5% compared to the prior year period. While Arnold nearly doubled year-over-year, Industrial growth was offset by the top line headwinds at Altor. Corporate management fees, excluding those paid by subsidiaries, were $14.4 million for the quarter as reflected on the income statement. Actual cash payments for Q1 fees will be significantly less at around $7.5 million. As previously discussed, corporate cash management fees paid to the manager are expected to be between $25 million and $30 million for the full year as our manager pays back the overpaid management fees related to Lugano restatement. Public company costs were $13 million in the quarter, which includes more than $7 million of one-time costs associated with Lugano, including the cost of ongoing litigation and investigation and corporate governance changes. While these one-time costs were significantly higher than initially anticipated, we did not include any offsets that may be realized through insurance or other proceeds as we move through 2026. It is important to note that in April, we received our first insurance reimbursement, and we expect to recover additional expenses over the balance of 2026. More importantly, we remain focused on managing and reducing our public company costs, consistent with our efforts to delever and drive long-term value creation. Cash generation was a highlight of the quarter. We generated $23.9 million in operating cash flow, a meaningful improvement versus the prior year. Our capital expenditures of $5.1 million were less than half of the prior-year period, reflecting disciplined capital allocation and a capital-efficient profile of our subsidiary businesses. Together, Q1's operational cash generation demonstrates the strength of our businesses and keeps us on track towards delivering significant free cash flow in 2026. We ended the quarter with $65 million in cash and cash equivalents and nearly full availability on our $100 million revolver. Our leverage ratio for debt covenant purposes at quarter-end was approximately 5.3x, a strong improvement in the quarter. As we announced earlier this week, the sale of Sterno's food service business has now closed, and we have repaid more than $280 million of senior secured term loan debt. This reduces our total leverage to approximately 5x and brings our senior secured net leverage to below 1x. Importantly, this allows us to avoid the milestone fees under our senior credit facility that would otherwise have applied beyond June 30. Reducing leverage has been and remains our top financial priority. Our actions thus far this year put us in a meaningfully stronger position. There is more work to do, and we remain disciplined and focused on the priorities we have laid out to our shareholders. Turning briefly to Lugano. The Chapter 11 process is advancing as expected, as are our efforts to minimize our liability and maximize our ultimate recovery. We expect to have greater clarity on timing by the end of the second quarter, and we'll update investors as appropriate. Before turning to our outlook, I'd like to briefly note that while the evolving tariff environment has created significant market uncertainty, we are currently experiencing a tailwind across multiple businesses. Separately, we also expect to receive one-time tariff-related refunds during 2026, though the specific timing and magnitude are difficult to forecast at this time. We will provide more clarity as the year progresses. I'll now provide an update on our 2026 outlook. For the full year, we expect subsidiary adjusted EBITDA of between $320 million to $365 million. This range, adjusted for the impact of the sale of Sterno's food service business, is at or above the expectation we set at the start of the year and reflects the continued strength of our diversified collection of businesses. For our Consumer businesses, this equates to adjusted EBITDA between $225 million to $260 million. And for our Industrial businesses, we expect adjusted EBITDA of between $95 million and $105 million, which includes some stranded costs associated with the sale of our Sterno business. We expect these costs will decline in 2027. For modeling purposes, we continue to assume CapEx of between $30 million to $40 million for 2026 and we expect corporate cash management fees of between $25 million and $30 million. As has been our practice, our outlook does not include the impact of any potential acquisitions or divestitures, except as noted regarding the sale of the Sterno food service business. It also does not include any significant impact positive or negative to the evolving trade environment. With that, I'll hand it back to Elias for closing remarks.

Thanks, Stephen. Let me be clear about where we stand. The first quarter of 2026 was a quarter of execution, solid subsidiary performance, a meaningful divestiture at an attractive valuation and measurable progress on the priorities we laid out. But a single quarter does not make a turnaround and we've by no means reached the finish line. We will continue to pursue our stated objective to create long-term shareholder value and close the gap to intrinsic value. That means in the near term pursuing strategic divestitures at attractive valuations and returning capital to shareholders where appropriate. Trust is earned through consistent execution, and that is what shareholders should expect from us every quarter going forward. The sale of Sterno's food service business is an important signal of what is possible. We transacted at an attractive value, on an accelerated time line, in an otherwise softer M&A environment. That outcome reflects both the quality of the business and the capability of our team to run disciplined processes and maximize value for shareholders. Beyond the proof point, it is an important first step. We believe in the CODI model. We take a permanent capital approach to acquire great businesses, partner with strong management teams and actively manage growing category leaders over the long term. That model has generated value for shareholders for nearly two decades. We are confident in the model and committed to demonstrating its value through execution. Thank you as always for your support. Stephen and I will now take your questions. Operator, please open the lines.

Your first question is from Larry Solow of CJS Securities.

Great. I guess, can you just clarify the guidance? So net, you're down $25 million, and obviously, you're up $5 million in Branded. So that's separate from the sale, the divestiture of Sterno. But then obviously, Sterno's a — it sounds like there's some moving parts, right, for Sterno, maybe more than we would have thought the impact on the sale. You said some kind of stranded or lagging costs there. But then maybe there's still another adjustment. Are you reducing maybe Altor Solutions a little lower too, or anything else in there?

Larry, no, the main thing is actually just adjusting for the sale of Sterno, specifically related to the lost EBITDA, the stranded costs, and, as Elias mentioned in the prepared remarks, we do have a couple of negotiations with some large customers in that particular business that we think will be a bit of a headwind for the year. So yes.

So basically the RemainCo of Sterno, which is Rimports, will be somewhat lower this year than last year.

Yes. I want to be clear, we're not deconsolidating Sterno out of the business. The first quarter of Sterno will be included in our full year EBITDA. And then the next three quarters will just be Rimports.

Right. And is there like a short term issue where your corporate costs are too much because you carved out Sterno but you still have Rimports, or could you maybe bulk up infrastructure where it actually impacts you? Yes, go ahead.

As we mentioned in our original press release, we are retaining the Sterno management team with Rimports. That is something we need to work through. We think this is the right team to help accelerate Rimports growth, but we do have to make some adjustments to overall cost levels as we go forward.

Got you. And the stranded costs, I imagine you have pretty good visibility they will not repeat next year. Your customer negotiations with the one — I think I know one large customer — we don't know the outcome yet. But the stranded costs, obviously, you have pretty good confidence those won't repeat, right? Is that fair?

Yes. We have to address the stranded costs. The stranded costs are costs that existed last year that will continue to exist in the business, but we need to work them down over time as appropriate for what is now a smaller business.

Right. Okay. That's what I thought. So you need to downsize sort of the corporate structure there. That makes sense. And just curious, so a couple of quick ones. In general, Elias, maybe just on the Branded piece, it sounds like a lot of moving parts. But in general, just your Consumer businesses, the confidence you have, anything really changed over the last six months? Obviously, that encompasses the start of the Iran conflict, higher inflationary pressures, or a lot higher. So any visibility or any impact at any of your businesses because of this? Or are you contemplating that in your guidance? Any thoughts there?

Yes, Larry. I would say our Consumer businesses performed extremely well. The first quarter was above our expectations. Coming into the second quarter and as many of these companies work through backlog, I would say they're set up to perform better in the second quarter than expectations as well, and that's in the face of the conflict starting. Where it gets a little harder to dissect is whether customers are accelerating some orders because of the conflict and worries about longer-term inflation and global oil supply. That's to be determined. But right now, the Consumer business looks very strong and better than anticipated. Currently, and I know this sounds odd to say, it is unaffected by the global macro events that we see around us on a daily basis.

Okay. And BOA really had a nice quarter. Anything outstanding there? I know you sold the footwear business. You reported 11% EBITDA growth, but I imagine it was even better excluding that. Any extra color there?

No. BOA is a great business. We say over and over how strong this company is, its competitive positioning and strategic outlook. It has one of the best management teams I've worked with. Those are all the ingredients to propel the company forward consistently. It has a great IP position and is very well positioned. The business had huge growth during the supply chain shock and then some softness after that. Recently, we had a customer in Asia on our kids line where, for price-competitive reasons, we walked away. So there has been some noise. Right now, the business is in a much better spot based on inventory positioning, customer mix and durability, and the growth ahead of it. Where there were some extraneous choppy factors, the business now looks to be in smoother waters and should produce the kind of double-digit growth rates we saw in the first quarter on a continuing basis.

Great. Last question, Elias. You did announce that you completed a nice divestiture. I know you said you'd look and probably do more. Are you pretty confident you'll complete at least one more this calendar year?

That is our plan. The M&A markets are a bit choppy and weaker than where they've been in the past, but they ebb and flow. We own really great-quality assets. As I mentioned in my opening remarks, there's always a market for great companies. We do feel confident we'll be able to transact. Against that, there's still a conflict, $100 oil prices and uncertainty. Private credit markets have tightened, which is a headwind for transacting. That is our focus: getting leverage down is the top priority. We understand we need to get our leverage down to be in a position to allocate capital again. As we said in our opening remarks, we will look to close the intrinsic value discount once we get there. We remain confident we'll be able to execute, although I caution the M&A markets continue to remain choppy.

Our next question will come from Timothy D'Agostino from B. Riley Securities.

Regarding leverage, could you remind us again what your long-term goal is? Where do you want leverage to be? As well, given the sale of Sterno food services, how does that impact your timeline and path to that leverage target? And then lastly on that, given where the stock is today and, looking into the future getting to your leverage target, when would share buybacks become part of the equation for you all? At these levels, is it attractive? Understanding you still have more deleveraging to do.

Long term, we've always said we'd like to be around 3x to 3.5x levered. That would be our long-term goal in a normal situation. Our current focus is to get under 4x as a key milestone. Once we get under 4x and given where the stock is trading and its discount to intrinsic value, we would start thinking it could make sense to return capital to shareholders potentially through share buybacks. So long term 3x to 3.5x; the next milestone is getting below 4x, which would allow us to think about returning capital.

Okay. Great. And then with an additional sale of a full subsidiary, do you think you can get to that 4x by year-end? Or will it take a bit more work? Just understanding the impact of the next sale might have, in your opinion.

If you think about it organically, the rest of the year we expect leverage to step down to around 4.5x or a bit higher. Then inorganic activities, which would include recoveries from Lugano and a sale of a subsidiary, would further reduce leverage. It depends on the specific subsidiary and the multiple we receive. With another sale, organic work and Lugano recoveries, we anticipate being below 4x, but again it's dependent on the particulars.

Okay. Great. That's very helpful color. If I could sneak a final quick one in—on SG&A, it looked lower this quarter as a percentage of revenue. Anything to flag there on why SG&A was lower in the quarter?

If you mean corporate, corporate costs are higher as discussed in the prepared remarks. If you're looking at overall SG&A on the GAAP line collectively, there is nothing specific to call out—just normal prudent management within the teams. As we discussed at the last call, 5.11 has made strides using AI to reduce overhead costs. Prudent managers look to reduce SG&A, especially when there's macro uncertainty.

Our next question will come from Matt Koranda from ROTH Capital.

I have a fundamental one on segment and then a couple of housekeeping items. On Honey Pot, can you unpack what's driving the substantial growth there? And I guess north of 30% EBITDA margins in that segment, how sustainable do you view that level as? How should we think about a normalized level going forward?

What's driving the growth is market share gains in the category. When we acquired the company, it was primarily in the hygiene side—washes and wipes—which is a small portion of the overall addressable market. The bigger opportunity was to increase that percentage and extend the brand into adjacent categories. We've had success extending into the period care market, which is about 20 times bigger than the original market. The brand has shown elasticity to move into that market. We stand for better-for-you, which resonates with younger consumers, and our goal is to win that cohort. Growth in period care can continue to drive dramatic growth because we are relatively small in an enormous market with a differentiated proposition. Regarding margin, the company can generate higher margins in this category because better-for-you products command a premium. Additionally, there were tariff rulings that benefited margins—there were significant tariff costs incurred last year that have come down, aiding margin. If tariffs creep back, there could be some margin give-back, but if tariffs remain at current levels, those margins should be stable. There's nothing in pricing we see that would prevent maintaining these margins. Given mid-20s top-line growth, price does not seem to be suppressing demand. We believe we can hold these margins.

Okay. And on tariff recoveries, I want to confirm there were none within the first quarter that benefited margins. Also, as you get recoveries throughout the year, how will those flow through the financial statements so we know how to model them?

There was no one-time recovery of last year's tariffs in Q1. There were benefits from a lower tariff environment versus Q4 of last year. When we do receive one-time historical tariff refunds, those will be a positive in the P&L and we will call them out as one-time benefits so everyone can model them appropriately. Any margin right now is not related to onetime tariff benefits but to the current tariff environment.

Got it. One more question: you mentioned revisiting the MSA. Are you willing to share preliminary thoughts on potential changes, such as moving to an asset-based management fee or changes in allocation methods?

We are not in a position yet to discuss specifics. What we wanted to convey is that discussions are ongoing between the manager, the Compensation Committee and the Board. We anticipate MSA changes in the next few months, but it would be premature to discuss the specifics now.

Our next question is from Heli Sheth of Raymond James. Heli Sheth: You mentioned revisiting the MSA. Are you willing to share preliminary thoughts on potential changes, such as moving to an asset-based management fee or changes in allocation methods? Elias Sabo, Chief Executive Officer: We are not in a position yet to discuss specifics. What we wanted to convey is that discussions are ongoing between the manager, the Compensation Committee and the Board. We anticipate MSA changes in the next few months, but it would be premature to discuss the specifics now.

Congrats on the sale. Now that you've completed this and gotten your senior leverage down below 1x, is there any urgency with other sales processes, especially with a muted M&A market?

Yes. There is urgency because leverage at 5x is too high and our shares trading at current prices do not reflect intrinsic value. The urgency is getting leverage down and being in a position to allocate capital. Returning capital, including potential share buybacks, is part of that plan. We must balance urgency against current M&A conditions, which are somewhat muted. We transacted Sterno in a difficult market, so we believe we can transact again this year. The Sterno transaction has taken some pressure off to do something immediately if the market severely undervalues assets. We will transact to create shareholder value, and our central case remains continued deleveraging through divestitures.

Got it. On tariffs, you mentioned limited clarity on timing or magnitude of refunds. What does the process look like and is there an inflection point where you'll have a better idea of timing or magnitude?

A government website was set up recently to start the process, and each of our companies is going through it. We do not have clarity yet. We will provide updates as we have them and will call out any one-time benefits on future earnings reports. We expect the process to be somewhat choppy—some recoveries will be realized and some will be contested. Each company may differ.

At this time, I'm showing no further questions. I would like to turn it back to Elias Sabo for closing remarks.

Thank you, everyone, for your time today. We look forward to seeing you and talking to you on our next conference call.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.