Compass Diversified Holdings (CODI) 2025 Q4 法說會逐字稿

Good afternoon and welcome to Compass Diversified Fiscal 2025 fourth quarter conference call. Today's call is being recorded.

(Operator Instructions)

I would like to turn the call over to Ben Tapper, Vice President of Investor relations. Ben, please go ahead.

Thank you and welcome to Compass Diversified's 4th quarter 2025 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 statement, 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 Form 10k as filed with the SEC 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 Q4 and full year 2025 press release, including the financial tables and non-GAAP financial measure reconciliations for the adjusted EBITA and subsidiary adjusted EPITA, 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 discussion 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.

Thank you, Ben, and good afternoon to everyone.

2025 was painful. It was humbling. But it also proved that CODI is resilient. Our subsidiaries are strong, our people deliver, and the core of this model works. That is the foundation we are building from.

We’ve discussed last year’s events in detail on prior calls, and as we highlighted in our third‑quarter update, conditions are improving and operations are normalizing. Against that backdrop, today’s call will center on the performance of the businesses we currently control and our outlook for 2026.

Excluding Lugano, 2025 saw us generate mid‑single‑digit revenue growth, with operating leverage that accelerated subsidiary adjusted EBITDA growth into the high single digits. Each of our consumer businesses grew adjusted EBITDA despite a consumer environment with real headwinds throughout the year.

On the industrial side, in 2025 we saw modest growth in adjusted EBITDA. Acquisition‑driven performance at Altor was offset by short‑term challenges at Arnold as they navigated sustained periods of near‑complete rare‑earth export restrictions out of China.

Our outlook for 2026 is solid, as we expect to generate subsidiary adjusted EBITDA growth in the mid‑single digits. This reflects our belief that our diversified collection of businesses is positioned to grow across a range of economic conditions.

In 2026, we are focused on executing against our strategic plan and working to regain market confidence. Our path forward is clear.

Our first priority is reducing our leverage ratio. We are addressing this on two fronts driving organic growth with strong cash conversion and executing attractive divestitures where proceeds and timing support deleveraging and long‑term shareholder value creation.

Medium term, we’re focused on closing what we believe is a meaningful gap between our share price and our intrinsic value. That view will guide us as we deploy capital to the highest risk‑adjusted returns. If current conditions continue, that could include share repurchases.

Longer term, when capital markets allow, we remain committed to reigniting the CODI model combining selective acquisitions with strong operations to generate durable shareholder value.

Everything starts with subsidiary performance. While the macroeconomic environment remains uncertain, our teams are focused on what they can control, and they are delivering. Let me walk through a few examples.

For anyone who watched the 2026 Winter Games, athletes equipped with the BOA Fit System tallied more than 100 medals in Nordic skiing, snowboarding, and freestyle skiing up from ten podium winners just four years ago. We are confident BOA’s presence will be even greater four years from now.

Hustle & Hush had a great year, establishing a leading position in better‑for‑your feminine care. Based on consumer metrics like Net Promoter Score, Hustle & Hush is outpacing both conventional and better‑for‑you competitors, with meaningful runway to grow brand awareness. The brand has successfully expanded beyond washes and wipes into the larger period‑care category, creating a significant opportunity to grow market share over time.

Finally, Arnold ended the year with a backlog more than 40% higher than the prior year‑end and is well positioned to capitalize on favorable aerospace and defense trends. Companies are increasingly desperate for reliable, geopolitically secure sources of rare‑earth magnets, and Arnold is exactly that. Quoting activity is at an all‑time high.

It is also important to note that China recently reinstated export restrictions ahead of bilateral talks with the U.S. While this may create some near‑term disruption, it further reinforces Arnold’s long‑term value as a reliable, secure supplier. Arnold also continues to make progress ramping its Thailand facility, with initial production underway, adding valuable capacity and redundancy.

As discussed, while our model is historically to acquire and grow, given our current leverage position, we believe divesting one or more subsidiaries at attractive valuations is the most efficient path to meaningfully deleveraging and restoring financial flexibility. We believe this positions us to drive long‑term value creation and ultimately help close our discount to intrinsic value.

There are four things I hope you take away today

First, we have initiated multiple sale processes and are actively engaged with qualified counterparties and advisors.

Second, on timing, processes for mid‑market businesses typically take about six months end to end. This does not necessarily mean six months from today; we are already well into multiple processes.

Third, our priority is to drive shareholder value by both deleveraging and maintaining a sharp operating focus across our businesses.

Fourth, we are moving with urgency to maximize value and keep these processes fast, focused, and disciplined. These goals are not at odds. It is our job to balance them.

The bottom line is simple we are moving decisively. We are running disciplined processes, optimizing for the right outcome, and we will provide updates when we have something definitive to report.

For the past several months, we have been candid about our plans to reduce leverage. But the ultimate objective has always been to maximize long‑term shareholder value. We believe our shares trade at a significant and elevated discount to intrinsic value, and we are committed to closing that gap.

We believe deleveraging and when appropriate, returning capital to shareholders through share buybacks can help close the gap. However, if it does not, we will continue evaluating additional value‑maximizing alternatives for shareholders.

Strengthening our balance sheet, improving performance, and making the hard decisions required to position CODI for long‑term success remain our focus. It will not happen overnight, but we are operating with urgency and discipline because our situation demands it.

Our incentives are aligned with shareholders. Everything we do is guided by one objective maximizing long‑term shareholder value. With that, I’ll turn the call over to Stephen to walk through the financial results.

Thanks, Elias.

Before I begin, I would like to remind everyone that our reported GAAP results include Lugano through November 16, 2025, the date that Lugano entered Chapter 11 bankruptcy. With that context, I’ll first provide an overview of GAAP results and then focus on non‑GAAP results excluding Lugano, as we believe this is a more accurate reflection of our business going forward.

For the fourth quarter, GAAP net revenue was $468.6 million, down 5.1% year-over-year, primarily due to the impact of Lugano and its deconsolidation. GAAP net loss for the quarter was $78.8 million, including more than $25 million in one‑time Lugano investigation and restatement costs.

For the full year, net revenues were $1.9 billion, up 4.8%. GAAP net loss for the year was $293.7 million, which includes approximately $60 million in investigation‑ and restatement‑related expenses.

Turning to our full‑year non‑GAAP results excluding Lugano, net sales were $1.8 billion, up 3.9%. Branded consumer net sales increased 3.7%, while industrial net sales increased 4.1%, as acquisition‑related growth at Altor was offset by global trade disruption at Arnold.

Excluding Lugano, subsidiary adjusted EBITDA was $345.8 million, an increase of 8.8%, with consumer up 13.8% and industrial up 1.1%. The slower growth in adjusted EBITDA within industrial was primarily due to Arnold and the geopolitical headwinds Elias described earlier.

Public company costs and corporate management fees for the year were $91.1 million, which reflects two non‑recurring items the investigation and restatement costs, as well as a $36.2 million credit in the fourth quarter related to excess management fees previously paid to CGM in connection with Lugano. Going forward, we are maintaining a rigorous focus on public company costs and cash fees, consistent with our focus on deleveraging and long‑term value creation.

In 2025, we invested $44.3 million in capital expenditures, reflecting a $12 million reduction from the prior year. We continue to invest in our current subsidiaries to support their growth, with the reduction in CapEx driven primarily by the absence of Lugano‑related investments.

We ended the year with $68 million in cash and cash equivalents and approximately $96 million available on our revolver. Our leverage for debt‑covenant purposes at year‑end was slightly higher than anticipated at approximately 5.47 times. Reducing leverage remains our top financial priority, and we believe the actions underway position us to make meaningful progress through 2026.

In January, we announced a sale‑leaseback for some of our Altor facilities, freeing up more than $11 million in cash that we immediately used to pay down senior debt.

Before turning to our outlook, I want to reiterate our commitment to strong governance and oversight. The challenges of 2025 have reinforced that commitment, and we will continue taking concrete steps to enhance internal controls and transparency across the organization.

Now for our 2026 outlook. For the full year, we expect subsidiary adjusted EBITDA of $345 million to $395 million. This includes consumer adjusted EBITDA of $220 million to $260 million and industrial adjusted EBITDA of $125 million to $135 million. You’ll notice this is a wider range than in prior years, reflecting the inherent uncertainty in the macro environment. At the midpoint, we expect solid growth in adjusted EBITDA across both sectors.

For modeling purposes, our 2026 outlook assumes CapEx of $30 million to $40 million. CODI expects to pay cash management fees of $25 million to $30 million in 2026. As has been our practice, our outlook does not include the impact of any potential acquisitions or divestitures, and it does not include any significant positive or negative impact from the evolving trade environment.

With that, I’ll hand it back to Elias for his closing remarks.

I want to be clear about where we stand. 2025 was the hardest year in CODI’s history. It was disappointing and painful for all of our stakeholders. But it is important to recognize that our remaining subsidiaries delivered in an uncertain environment. They stayed focused, they executed, and they proved that this model works. As we move into 2026, that is what we are building on.

Our path is clear operational execution with strong cash conversion; leverage reduction, both organically and inorganically; and value‑maximizing capital allocation. We believe we have a proven business model and well‑positioned subsidiaries on which to apply it.

We operate with a permanent‑capital mindset acquiring great businesses, partnering with management teams, and investing to grow category leaders over the long term. For shareholders, that means diversified exposure to high‑quality middle‑market companies supported by engaged ownership and strategic capabilities.

With 2025 behind us, we are focused on delivering on the potential across our collection of subsidiaries. As always, we appreciate your support. Steven and I will now take your questions. Operator, please open the lines.

Thank you.

(Operator Instructions)

Larry Solow, CJS Securities.

Great, thanks. Good afternoon, everybody. Elias, I usually ask you about operations, but it feels like there’s not much change, and you already provided a preliminary outlook for 2026 on your last call a few weeks ago. So, I’ll switch gears and ask about the sale processes that are ongoing.

It sounds like we may be within 90 days of hearing something or somewhere around that timing, possibly less than six months. I’m curious how would you characterize the level of interest in the processes? Is the interest different across the assets? And overall, how do you feel things are progressing so far?

Yeah, good afternoon, Larry, and thank you for the question.

We don’t give a lot of detail about any processes, and historically we have not, because these processes are inherently uncertain by their very nature. For that reason, we try to be very reserved in terms of what we discuss publicly. We’ve been saying for a while that it is our intent to divest at least one subsidiary possibly more and that deleveraging is the most important priority on our agenda right now. We remain very focused on that.

I want to make one point very clear we were not restated until early January, and it was not advisable for us to have information on our companies in the market prior to having our earnings restated. As a result, while we could do a lot of pre‑work before the restatement, the true work really initiated once the restatement was completed.

We are working, as we said in our prepared remarks, as diligently as possible. We understand that expediency is important, but we will not pursue speed at the expense of deterioration in the value of our assets.

With respect to interest in the companies we are currently engaging on, I would characterize that interest as very strong. We own great companies, and these businesses are highly marketable. When they come to market, there are typically multiple bidders both financial and strategic buyers and we are seeing that play out with the assets we are currently considering for divestiture.

Fair enough, I appreciate that. Just a couple on the outlook and then I’ll move on. It looks like most of the growth is on the branded, consumer side. I know industrial is usually a slower group of businesses, and it sounds like this year Arnold will still have some geopolitical risks, so we’ll probably see some rebound from last year, but maybe not a full recovery.

Could you talk a little more about the outlook there? And then, on Altor the quarter was a little bit weak, and vaccine sales have been down significantly with some of the recent changes in government recommendations. Could you walk us through the outlook for the industrial businesses in a bit more detail? Thanks.

Yeah, I would say, Larry, that we did encounter weakness with respect to Arnold. It has been very difficult to manage. And stepping back more broadly, it is very difficult to manage businesses today with the tariff and geopolitical uncertainty created by what I can only describe as tariff chaos. We have tariffs, then tariffs are suspended or invalidated, and then new tariffs come back. It creates a lot of distortion in the numbers when you’re managing against that backdrop.

With respect to Arnold in particular, China’s actions in response to these tariffs have, at times, resulted in complete export controls which is what we suffered through for most of 2025. Toward the end of the year, we began to see some relief, but as we noted in our prepared remarks, those controls have re‑emerged, with a majority of our export licenses now cancelled as China prepares for bilateral discussions with the U.S. Clearly, this is a leverage point for them, and unfortunately, Arnold becomes the football that gets tossed around.

The good news is that we are about to lap, in a few months, the period when the export controls first went into place. So, the bulk of the pain from these controls will be early in the year, and once we lap that period, it will no longer be a headwind.

As Steven and both said in our prepared remarks, Arnold’s quoting activity is at an all‑time high, and their backlog is up 40% from where it was a year ago. In addition, our Thailand facility which will provide capacity previously produced in China is ramping production, and we believe this will materially enhance our supply capabilities and supply‑chain resiliency.

So yes, there may be a couple more months of noise that could make Arnold’s growth in 2026 look somewhat muted relative to its potential. But as we move through the year, we expect the true growth rate Arnold is capable of delivering to come into view, particularly in the back half of the year. And based on the level of quoting activity and order flow, assuming supply is available, we feel that 2026 could ultimately be a very strong year.

I’ll let Steven comment on Altor.

Yeah, so for Altor, we are a little more cautious in our outlook. We still believe it is well positioned long term in the cold‑chain space. However, some of the current administration’s recent actions and shifting guidance around vaccines have not been supportive of that business, which impacted results in the fourth quarter. We are still working through that as we head into next year.

Because of that, we are more cautious on Altor for 2026. In addition to the cold‑chain and vaccine dynamics, tariffs have caused a slowdown in appliance purchases, which also affects the business. We continue to believe the long‑term positioning is strong, but until there is more stability in the economic outlook specifically regarding tariffs and vaccines we need to work through those factors before seeing more meaningful growth. We do expect stabilization in 2026.

Overall, across the industrial businesses, we expect Sterno and Altor to be relatively modest contributors. But there is significant upside potential at Arnold. If we work through the trade situation, 2026 could be a very good year.

Got it. And Steven, has your free cash flow assumption for this year changed at all? I know you kind of gave a preliminary number last quarter.

At all. We're very, we're still saying that between $1500 million of free cash flow makes sense, and I would say again, probably, there's always a little bit of upside potential related to timing of recoveries related to Lugano. Or directly related to Lugano or related to, DNO insurance, refund, claims, etc. So operating, no changes, potential upside from the Lugano situation.

Great, thanks for all the call, guys. I appreciate it.

Thank you, Larry.

Chris Kennedy, William Blair. Your line is now open.

Yeah, good afternoon. Thanks for taking the question. Just wanted to talk a little bit about the branded consumer business this year given the wider than normal range, like what, I don't know.

Talk a little bit about that wider range. Is it mostly tariff related or just the general economy? Just a little bit more colours would be helpful.

Yeah, Chris, I think it’s both and they’re related. The tariff uncertainty is creating, frankly, real uncertainty. It is highly fluid right now, and because of that, we are anticipating slightly greater volatility. If we get better clarity on where tariffs ultimately land and on the state of the economy, then as we progress through the year, we’ll be able to narrow the range quite a bit.

But given the chaos created by the tariff environment and the last week and a half has been extremely chaotic with what’s occurred we felt it was more responsible to widen our range at this time.

I’ll make one additional comment tariffs have had a negative impact on consumer spending. We saw that reflected in the retail sales data during the holiday season, which came in flat. Units were down, pricing was up, and that tells you the tax‑like effect tariffs are having on consumption of consumer goods.

So, as we guide for next year, we want to be responsible and recognize that these tariffs could produce big upside if they are removed and 150 days from now, we could be back to zero. Or they could continue to produce the kind of consumer softness we’ve already been seeing. We saw that in the fourth quarter, and it supports giving a wider range right now.

And to be clear, we don’t know yet whether there will be refunds for the tariffs that the Supreme Court struck down. There are many uncertainties. No refunds have been built into the guidance.

Got it. Understood. Thanks for that. And then just we noticed that leadership change at PrimaLoft. If you could just kind of give a State of the Union on that subsidiary would be great.

We acquired PrimaLoft a couple of years ago, and its performance has been relatively flat since acquisition. There was a significant amount of inventory that needed to work through the channel, but the company is well positioned today.

We had an opportunity to bring in an incredibly strong leader who had previously worked at one of our other subsidiaries, BOA, in a very senior capacity. At the same time, BOA’s CEO, Sean Neville, is a board member at PrimaLoft. Sean is a very skilled executive one of the best I’ve ever worked with and having his involvement at the board level has been very helpful for that business.

The ability to bring in Eric Weiss, who we believe is a true superstar, creates an opportunity for PrimaLoft to accelerate its growth and market penetration. There was nothing wrong with PrimaLoft or its prior leadership; rather, we felt this was an opportunity to bring in someone we have worked with before and know to be an extraordinary talent. When we get opportunities like that, we believe they are value‑creating across our entire firm.

Great, thanks for taking the questions.

Timothy D'Agostino, Equity Research Analyst.

Yeah, hi. Thank you, and good afternoon. A lot of subsidiaries have already been discussed, but could you give a bit of a pulse check on 5.11? You may have touched on it earlier, but the business seems to keep performing well, and it would be great to hear a little more colour on what’s going on there. Thank you.

Yeah, I mean, 5.11 has two pieces to the business.

One is the professional side. That side is a steady, reliable growth business, mostly driven by government and municipality spend in the U.S., and internationally by government demand. It is a very solid core of the business consistent, dependable, and growing year after year.

The other side is the consumer business, which has been a major focus for growth under CODI’s ownership, now approaching a decade. When we acquired the company in 2016, there were only four stores; today, there are well over 100. That has been a significant area of emphasis for us.

On the consumer side, the challenge has been price sensitivity. The 5.11 consumer is quite price‑sensitive, and inflation has been difficult for that middle to upper‑middle consumer segment. We saw real wages fall for that cohort during the inflationary period in 2022, 2023, and into 2024. While 5.11 performed well and pushed through pricing, we reached the top of what customers could reasonably absorb.

Then tariffs came in. Apparel has been hit particularly hard, and 5.11 experienced that as well. We found elasticity of demand to be high as we pushed through additional price increases. Some pricing had to be rolled back, which is clearly gross‑margin dilutive. Broadly, the apparel category has been under pressure as inflation in consumer goods has forced people to make different spending choices, with apparel being one of the areas where they have pulled back. 5.11 is seeing that.

So the professional side continues to perform well, while the consumer side is facing headwinds due to pricing and inflation.

On the positive side, 5.11 has been one of the most advanced companies in our portfolio in implementing AI initiatives to drive productivity. We’ve been able to generate positive operating‑earnings growth by offsetting some of the gross‑margin pressure through SG&A reductions enabled by AI‑driven efficiencies. We expect to continue doing that to support the business until the consumer environment becomes healthier.

So much for taking the question.

(Operator Instructions)

Healy Sheth, Raymond James.

Good afternoon. Thanks for the question. So, as you take steps towards deleveraging, do you have any sort of leverage target that you're looking to achieve shorter term by the end of 2026 versus longer-term? And what's the probability of achieving those leverage targets organically rather than some asset sales?

Yeah, thanks for the question I really appreciate it. First of all, I want to be clear long term, we are targeting 3 times to 3.5 times leverage. That is the right range for us. Looking out through the end of 2026, we expect to be around 4 times.

To get to 4 times, we will definitely need some form of deleveraging event through a sale transaction. Organically, without any transaction, we would likely be around 4.5 times. That is also somewhat dependent on the timing of recoveries from Lugano.

The key points are these the sale‑leaseback allowed us to pay down $11 million of debt; we expect to generate between $50 million and $100 million of free cash flow, which we will use to further reduce debt; and we will have mid‑single‑digit growth in EBITDA. All of those factors, organically, bring leverage down. Then add recoveries from Lugano, plus any deleveraging event, and together, that gets us to roughly 4 times leverage.

Got it. Thanks for the clarity. And a quick follow-up, as you begin the sale processes, what sort of M&A market are you seeing and anything to flag there?

I’d say the M&A market is not hot by any means, but it’s also not dead. There has been limited activity in the M&A markets over the last couple of years, and there is still a lot of capital available to acquire good assets. I would characterize the market as lukewarm. It really depends on the type of asset you have.

Good assets always find good opportunities to be sold, and they attract enough interest from multiple bidding parties to maintain process integrity and achieve reasonable valuations. What is supportive of asset values today is that rates are coming down. As rates decline, capital typically starts flowing lenders become more active, and that creates support for both financial buyers and strategics.

On the flip side, some of the policy uncertainty we’re seeing particularly around tariffs along with geopolitical risks, is causing buyers to be more concerned about the economy and what the future economic environment may look like.

Outside of areas like AI, which continue to grow rapidly, the consumer and industrial sectors are tied to broader economic activity. So, there are countervailing forces some concern about economic softness, but also some strength from lower rates and increased debt capacity. Taken together, I’d call it a moderately constructive environment for the M&A markets.

Got it. Thanks.

Thank you. And I'm currently showing no further questions at this time. I now like to turn the call back over to Elias Sabo for closing remarks.

Thank you all for your time today, and we look forward to talking to you on our first quarter conference call.

This concludes today's conference. Thank you for your participation. You may now disconnect.