Compass Diversified 2026 Q2 Earnings Call

Ben, please go ahead. Thank you, and welcome to Compass Diversified's second quarter 2026 conference call.

Representing the company today are Elias Sabo, Chief Executive Officer, Zach Sawtelle, Chief Operating Officer, and Stephen Keller, 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 and divestiture plans, future liquidity and leverage positions, plans to return capital to shareholders, 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.

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 today's call, we will refer to certain non-GAAP financial measures. Definitions of these measures, reconciliations to the most directly comparable GAAP measures, and additional information regarding their use are included in today's earnings release, which is available in the investor relations section of the company's website at www.compassdiversified.com.

Please note that references to EBITDA in our prepared remarks refer to adjusted EBITDA, unless otherwise indicated, year-over-year comparisons of net sales and subsidiary adjusted EBITDA exclude Lugano from the prior year period and exclude the divested Sterno food service business from both the current and prior year periods. Our full year 2026 outlook is presented on a different basis and includes the adjusted EBITDA generated by the Sterno food service business prior to its sale. CODI has not reconciled its full-year 2026 subsidiary adjusted EBITDA outlook to the most directly comparable GAAP measure because CODI does not provide guidance for income or loss from continuing operations and management cannot predict with sufficient certainty all of the inputs necessary to provide such a reconciliation without unreasonable effort. Additional information regarding this limitation is included in today's earnings release.

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, everyone.

In the second quarter, our subsidiaries delivered double-digit adjusted EBITDA growth and strong cash flow. Based on our first half performance and current expectations for the remainder of the year, we are maintaining our fiscal 2026 total subsidiary adjusted EBITDA outlook. Zach and Steven will provide detail on our operating performance and outlook shortly. Beyond subsidiary performance, we took concrete actions to strengthen our balance sheet and improve alignment with shareholders. In May, we completed the previously announced sale of Sterno's food service business at an attractive valuation, applying more than $280 million of the proceeds to debt reduction. We also amended our management services agreement. The amendment followed a board-led review that considered investor perspectives and market practices. It lowers fees and ties more of the manager's compensation to shareholder returns and operating performance. Let me provide some additional details.

Effective January 1, 2027, the amended agreement reduces the base management fee from 2% to 1.25% of average adjusted net assets on the first $3 billion in assets and caps the 2027 base fee at $30 million. It also establishes two additional awards, each equal to 12.5 basis points of average adjusted net assets. One is designed to increase the manager's ownership of CODI shares, and the other is tied directly to shareholder returns and operating performance. Even assuming full payout of both awards, we expect the amended agreement to reduce 2027 fees by approximately $20 million compared with the prior management fee formula. While the Sterno sale and MSA changes are important milestones, our work is not done. Our shares continue to trade at what we believe is a meaningful discount to intrinsic value, and we remain focused on closing that gap.

Before I hand the call over to Zach, I want to briefly address the leadership transition we announced in June. I will retire as Chief Executive Officer at the end of this year, and Zach will succeed me. CODI has been the focus of my career, and I am proud of what we have accomplished. The challenges following Lugano made the past year one of the most difficult periods in our history. I wanted to remain in place through the most acute phase of that work and help put CODI in a position to move forward. With the progress we have made and Zach ready to lead, I believe this is the right time for the transition. I have worked with Zach for 17 years.

He understands our businesses, our people, and our model, and I have complete confidence in him. Over the remainder of the year, Zach and I will continue working closely to ensure a smooth transition. With that, I'll turn the call over to Zach.

Thanks, Elias. I appreciate your confidence, and I look forward to working closely with you through the transition. Our near-term priorities are straightforward: Drive profitable growth across our subsidiaries, pursue divestitures where we can realize attractive value, further reduce debt, and as our balance sheet strengthens, efficiently return capital to shareholders to close a valuation gap in our current share price. We are moving with urgency and discipline to realize value for our shareholders. Turning to the quarter, our strong operating performance was broad-based. Every one of our branded consumer businesses grew adjusted EBITDA. BOA grew adjusted EBITDA 27% on growth across all primary segments with expanding gross margins. The Honey Pot Co. grew adjusted EBITDA 32% on expanded period care distribution across grocery, drug, and mass, where it is significantly outpacing the broader category.

PrimaLoft returned to growth with adjusted EBITDA up 28%, supported by strong demand from our Asian brand partners. 5.11 grew adjusted EBITDA by 14% on expanded margins of more than 200 basis points through more disciplined promotional activity and tariff refunds. We estimate that some of the second quarter strength at BOA and PrimaLoft reflected the timing of customer orders. We have considered that timing in our expectations for the remainder of the year. Within industrial, Arnold Magnetic Technologies delivered a standout performance with adjusted EBITDA up nearly 50%. Backlog remains strong, supported by demand for rare earth magnets sourced outside China and continued progress at our Thailand facility. Rimports, our home fragrance business, benefited from tariff refunds while absorbing separation costs related to the Sterno foodservice divestiture. As discussed last quarter, lower expected volume from a large customer will weigh on results in the second half.

Altor is where we have work to do. Adjusted EBITDA declined roughly 50% in the quarter. Tariff-related disruption weighed on white goods, while softer vaccine demand affected the cold chain business. Higher input costs and competition added further pressure. Those are real market factors, but they are not the only issue. Our commercial execution has not been good enough, and we are urgently working to correct this issue. The team is focusing its commercial efforts on the end markets where Altor is strongest and taking costs out to match current demand. This will take several quarters. Taken together, the quarter reinforced our confidence in our businesses and the teams running them. With that, I'll turn the call over to Stephen to review our financial results, balance sheet, and outlook.