Compass Diversified Holdings (CODI) 2021 Q2 法說會逐字稿

Thank you, and welcome to Compass Diversified Second Quarter 2021 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'd like to point out that the Q2 2021 press release, including the financial tables, non-GAAP financial measure reconciliations are available at the Investor Relations section on the company's website at www.compassdiversified.com.

The company also filed its Form 10-Q with the SEC today after the market closed, which includes reconciliations of non-GAAP financial measures discussed on this call and is available at the Investor Relations section of our website.

Please note that references to EBITDA in the following discussions refer to adjusted EBITDA as reconciled to net income in the company's financial filings.

The company does not provide a reconciliation of the full year expected 2021 adjusted EBITDA or 2021 payout ratio 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 conference call, we may make certain forward-looking statements, including statements with regard to the future performance of CODI and its subsidiaries and statements related to the expected divestiture of Liberty and CODI's future tax structure.

Words such as believes, expects, plans, projects 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-Q as filed with the SEC for the quarter ended June 30, 2021, as well as in other SEC filings.

In particular, the domestic and global economic environment as currently impacted by the COVID-19 pandemic has a significant impact on 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.

Thank you all for your time, and welcome to our second quarter earnings conference call.

Before we get started, I'd like to take this opportunity to thank all of our employees for their extraordinary efforts, which continue to impress me as we navigate further through this unprecedented time.

We exited 2020 with strong momentum, and that has carried over in 2021.

Before we turn to the financial performance for the quarter, we want to provide an update on our busy start to 2021 and the significant progress we have made against our strategic alternatives.

During the second quarter, we took significant steps towards our potential tax reclassification.

We have set a date for a special shareholders meeting, which will be held on August 3, and we will announce the results of our special proxy vote as soon as practical following that meeting.

If we receive approval from our shareholders, we expect our Board will seek to affect the tax reclassification as soon as practicable.

We are excited about this potential change, which we believe would present an opportunity to expand CODI's shareholder base and make our company more widely accessible.

We believe this would position us to further build on our 15-plus years of success as a public company and provide greater value for all shareholders over time.

Subsequent to the second quarter, we announced the execution of a definitive agreement to divest Liberty Safe, which we expect to close in August of 2021.

I want to extend a special thanks to the management team and employees of Liberty Safe for 11 years of successful partnership with us.

During this time, we established both a strong personal and professional relationship while delivering a solid return on invested capital that exceeded our initial underwriting expectations.

I wish the Liberty team success with their new partners as they embark upon the next stage of their journey.

Earlier this year, we also completed a debt refinancing that significantly lowered our interest costs, further reduced our weighted average cost of capital and strengthened our capital structure.

This is a key example of how our team is always looking for more efficient ways to tap into the capital markets.

As a result of our actions in March, we believe today, we are better positioned to continue to leverage our permanent capital structure to our advantage as we look to be opportunistic in the market.

And finally, before I turn to financial performance, I want to mention that we have initiated a process to preliminarily explore strategic alternatives for 5.11, including a potential initial public offering.

We trust you will understand that in light of this, we will not be able to take any questions on 5.11 today.

Now turning to our financial performance.

I am pleased to report that our second quarter results continued the trend of outperformance that we saw in the first quarter, including BOA and Marucci as if we own them from January 1, 2020.

Pro forma consolidated revenue grew approximately 36% and adjusted EBITDA grew approximately 63% over prior year's quarter.

Our second quarter results were exceptional and reflect the incredible work of each of our subsidiary company's management team.

Though we continue to experience certain challenges and uncertainties stemming from the pandemic such as changes in demand patterns, supply disruption, shortages in labor and inflationary pressures at levels not previously experienced, our subsidiaries teams continue to expertly manage their operations to deliver record results.

Our branded consumer businesses continued to grow at an accelerated rate with all 6 of our branded consumer businesses growing revenue and EBITDA at a double-digit rate, producing second quarter aggregate EBITDA growth of approximately 100% over the prior year.

This growth was significantly above our expectations.

However, it is important to point out that our second quarter growth rate is distorted due to the base effect from last year when the economy went into shutdown.

Our consumer businesses started posting accelerated growth in the third quarter of 2020, which is carried through this quarter.

As a result, we expect the growth rate of our consumer businesses to normalize going forward as we have higher prior year comparables.

Following on the trends experienced in the first quarter, our industrial businesses posted second quarter revenue and EBITDA growth of 24% and 18%, respectively.

These results, which also exceeded our expectations, reflect a quicker return of demand for Sterno and Arnold, our businesses most impacted by the pandemic.

Notwithstanding the outperformance in the first half, I want to emphasize that the macro environment remains uncertain.

While demand across our subsidiaries remain strong, significant challenges exist, particularly on the supply side.

Inflationary pressures remain elevated and supply constraints are acute.

We were very pleased that our margins in the second quarter held up remarkably well despite these pressures and believe this is a testament to the strength of our subsidiary management team.

Going forward, we expect some margin headwinds in the third quarter as higher input costs start to flow out of inventory and into our cost of goods sold.

These extraordinary conditions are creating a backdrop where our subsidiaries, like many others, are raising prices in order to combat rising inflationary pressures.

Emerging from the pandemic has created a fluid environment that makes forecasting future results more difficult than in past periods.

Amongst the difficulties are uncertainty over demand pattern changes, supply shortages, labor tightness and inflationary pressures.

That said, in light of our extraordinary first half results and our expectations for the balance of the year, we now expect to produce full year 2021 consolidated subsidiary adjusted EBITDA of between $350 million and $370 million, which includes Liberty, representing growth of 20% to 27% from prior year, and a payout ratio of between 55% and 65% based on our historic distribution rate of $0.36 per share each quarter.

If we exclude Liberty's adjusted EBITDA from our 2021 full year estimate, as the sale is anticipated to close in August, we would expect to produce between $325 million and $345 million of consolidated subsidiary adjusted EBITDA.

I would also like to note that our guidance incorporates onetime expenses and write-off at Sterno of up to $5 million in the back half of 2021 as the company exits a low-margin product line.

As a reminder, we do not add back extraordinary costs in our results.

Excluding this charge and with the economic recovery underway, we believe the company will continue to show positive comparisons in the back half of the year.

Before turning the call over to Pat to review our subsidiary results, I would like to take a minute to discuss our ongoing ESG efforts.

CODI is deeply committed to maintaining responsible investment practices that position our businesses and our firm for long-term success and positively impact the world around.

I am proud to report that during the second quarter, we became a sponsoring member of US SIF, the forum for sustainable and responsible investments.

US SIF is the leading voice in advancing sustainable and impact investing across all asset classes.

We believe joining the US SIF strengthens our commitment and we look forward to being an active participant in the forum.

Also during the second quarter of 2021, we added 2 independent board members to BOA's Board of Directors.

While last year, we added 2 independent board members to Marucci's Board, solidifying our commitment to good corporate governance, both at the CODI and the subsidiary level.

With that, I will now turn the call over to Pat.

Thanks, Elias.

Before I begin on our subsidiary results, I want to talk generally about the quarter.

We believe our branded consumer businesses remain very well positioned to benefit from the changing consumer landscape.

Each of these businesses exceeded our expectations in the quarter.

As a group, our niche industrial businesses also performed above expectations.

With that said, I also want to reinforce what Elias said about today's dynamic environment.

All 10 of our subsidiaries experienced significant increases in costs in the quarter, and many of them faced supply chain disruptions.

Our management team showed tremendous skill in adjusting on a real-time basis to the fluid conditions, and they once again affirm the strong confidence we have in them.

Now on our subsidiary results.

I'll begin with our niche industrial businesses.

For the second quarter of 2021, revenue increased by 24.1% and EBITDA increased by 18.4% versus the second quarter of 2020.

On a year-to-date basis, revenues increased by 13.6% and EBITDA increased by 10% versus 2020.

For the year-to-date period, revenue at Advanced Circuits was approximately flat and EBITDA declined by 3.4% as compared to the first 6 months of 2020.

Once again in this quarter, bookings outpaced billings and ACI has built up considerable backlog due to parts shortages, mostly in its assembly business.

Arnold Magnetics revenue increased by 20.8% and EBITDA increased by 47.2% to $9.8 million in the first 6 months of the year.

The increase was driven by several factors, including increased sales to aerospace and defense-related customers associated with large orders received in 2020, higher gross profit margins associated with positive mix and the acquisition of Ramco, which was completed on March 1 of this year.

Arnold met our expectations for the quarter despite order volume in the company's Aerospace segment not yet returning to prepandemic levels.

As this market segment normalizes in the remainder of 2021, we expect that Arnold's performance will materially outpace a weaker back half of 2020.

Outdoor solutions grew revenue by 48.6% and EBITDA grew by 12% in the year-to-date June 2021 period as compared to the period of 2020.

As we forecasted last quarter, margins were under pressure in the second quarter due to significant increases in the company's core raw material.

In addition, margins continue to be impacted by the acquisition of Polyfoam in Q3 2020, which carries lower margins.

We expect margins to improve for outdoor for the remainder of the year as the company is able to contractually pass through a substantial portion of its raw material price increases.

We also expect performance improvement measures at Polyfoam to progress, following pandemic-related delays.

The Sterno Group's year-to-date revenue and EBITDA increased by 3.9% and 5.8%, respectively, versus year-to-date 2020.

Demand for the company's core chafing fuel lines continue to increase sequentially as travel and events slowly return to normal.

Though improving significantly, the company has not yet seen food service demand at prepandemic levels.

Demand for Sterno's consumer products remains solid, and the company continues to see strong demand for its line of wax and essential oil products.

As Elias mentioned, in Q3 and Q4, we will have restructuring expenses totaling $4 million to $5 million of Sterno as the company exits a lower margin product line.

Excluding these expenses, we believe Sterno will continue to show positive comparisons in the back half of the year, absent new pandemic-related mandates being put in place.

Now turning to our branded consumer businesses, which as the group experienced another exceptional quarter.

Our results are presented as if we own Marucci and BOA from January 1, 2020.

For the quarter, each of our 6 branded consumer businesses exceeded our expectations and experienced significant growth.

As a group, year-to-date revenues increased by 38.7% and EBITDA increased by 19.3% versus the year-to-date period in 2020.

BOA's year-to-date revenue increased by 57.8% versus the comparable period in 2020.

EBITDA more than doubled to $32.2 million versus the capital period in 2020, exceeding our expectations.

BOA continue to experience strong demand across most of its categories, led by cycling, workwear and snowboard customers.

In addition, the company's partners in trail running launched several new innovative products during the quarter, which were met with excitement in the market.

We continue to believe that some portion of BOA's exceptional growth stems from brand partners ordering ahead due to supply chain constraints associated with slowdowns in global shipping.

We believe the company will perform well and continue to grow in the back half of 2021, but we do not expect the same level of explosive growth that we have experienced year-to-date.

BOA's growth so far under our ownership has been exceptional.

While the company is not immune from supply chain challenges and delays, particularly given their growth, management is definitely working through these issues.

We are working well with the team of BOA at all levels and are pleased to have developed a strong trust and solid relationships.

We are excited about the company's future and are proud to be partners with the team there.

Ergobaby's year-to-date 2021 EBITDA increased to $11.1 million versus $8.9 million in the year-to-date period of 2020, an increase of 24.1%.

The company has experienced strong demand for its Omni Breeze carrier which we started shipping in the first quarter of this year as well as strong sales generally online.

We feel like the company has achieved an inflection point in performance and remain optimistic about Ergobaby's prospects in the back half of 2021.

That said, Ergobaby is one of our most global businesses, and as such, continued lockdowns in a number of countries could impact its growth in the remainder of the year.

Liberty Safe's year-to-date revenue and EBITDA increased by 31.4% and 66.5%, respectively, compared with the prior year-to-date period.

As Elias mentioned, we have entered into a definitive agreement to divest Liberty Safe, which we expect to close in August.

And I would just like to take this moment to personally thank the employees and management team of the company for over a decade of partnership.

Marucci had another strong quarter that exceeded expectations.

It's important to note, however, that comparisons benefited from a severely impacted second quarter in 2020 when team sports were almost completely halted due to the pandemic.

Revenue in the year-to-date period grew by 120% and EBITDA increased dramatically to $17.7 million versus $3.2 million in the prior year-to-date period.

Marucci did have certain operational inefficiencies this quarter and we expect margins to improve from second quarter levels in the back half of the year.

The third quarter represents a tough comparable for the company as Q3 2020 represented an opening up of team sports and the company launched a highly successful CAT9 line of bats.

That being said, we believe the company and its brand are on solid footing, and will have a strong back half of 2021.

Of note, I would like to mention that this last weekend represented the return of the Marucci World Series and with 120 premier youth baseball teams travel to Louisiana to compete on playing field throughout the state.

We are excited that this event's return following the pandemic.

By all accounts, it was a tremendous occasion that signaled a strong return for youth baseball following a canceled season.

Velocity Outdoor's EBITDA increased significantly in the first half of 2021, up 136.7% to $24.8 million.

Velocity performance surpassed our elevated expectations as consumer interest in outdoor activities continues to be strong and drove demand for this product.

Bookings in the quarter were higher than they were in the second quarter of 2020 despite the company having a very strong quarter a year ago and backlog remained at close to record levels.

While we are not certain to what degree the pandemic permanently shifted consumer behavior towards outdoor activities, we do believe that Velocity captured significant market share in both of its main segments over the last 18 months.

The challenges continue in part of the company's supply chain, and they are not immune to commodity price increases, we believe Velocity will have a solid back half of 2021.

Finally, 5.11's year-to-date EBITDA increased by 41.7% versus year-to-date 2020 and revenue grew by 14.4% over the same period.

As a reminder, due to the process we have initiated at 5.11, I won't be delving further into the specifics of 5.11's performance.

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, 2021.

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, 2021, was $487.4 million, up 46.1% compared to $333.6 million for the prior year period.

This year-over-year increase primarily reflects our acquisition of BOA during 2020.

In addition, we had strong sales growth at our branded consumer subsidiaries and our niche industrial businesses on a combined basis.

Consolidated net loss for the quarter ended June 30, 2021, was $11.3 million compared to $7.4 million in the prior year.

The increase in net loss was due to a $33.3 million loss on debt extinguishment recorded during the second quarter of 2021 as a result of our bond refinancing.

Cash flow available for distribution and reinvestment, or CAD, for the quarter ended June 30, 2021, was $46.6 million, almost 3.5x the prior year period of $13.5 million.

Our CAD that we generated during the quarter was significantly above our expectations, almost doubled our distribution and was the highest quarterly CAD we've ever generated.

The increase was primarily due to the outstanding performance at our most recent acquisitions, Marucci and BOA as well as continued strong performance at virtually all of our consumer and industrial businesses.

Other factors impacting our CAD in the second quarter compared to the prior year includes slightly higher CapEx spend, an increase in cash taxes, higher management fees as a result of our waiver in the second quarter of last year and higher interest expense.

Turning to our balance sheet.

As of June 30, 2021, we had over $100 million in cash, approximately $600 million available on our revolver and our leverage was approximately 2.6x.

We have substantial liquidity.

And as previously communicated, we have the ability to upsize our revolver capacity by an additional $250 million.

We stand ready and able to provide our subsidiaries with the financial support they need, invest in subsidiary growth opportunities and act on compelling investment opportunities as they present themselves.

Turning now to capital expenditures.

During the second quarter of 2021, we incurred $6.1 million of maintenance CapEx of our existing businesses compared to $3.3 million in the prior year period.

The increase was primarily a result of the need for increased maintenance spend at many of our subsidiaries to keep up with elevated demand levels.

During the second quarter of 2021, we continue to invest in growth capital spending $4.1 million in the quarter primarily related to 5.11's long-term growth objectives.

Growth CapEx in the prior year quarter was $3.1 million.

Turning now to an update on our tax reclassification process.

As we've mentioned on prior calls and Elias referenced earlier, we are pursuing a potential change in our tax classification.

On June 23, 2021, we issued a definitive proxy statement requesting shareholder approval to amend our governing documents to allow the trust to check the box to elect to be treated as a corporation for U.S. federal income tax purposes.

The shareholder meeting will be held on August 3, 2021.

If the amendments are approved, we anticipate that our Board of Directors will cause the trust to elect to be treated as a corporation for U.S. federal income tax purposes effective late in the third quarter of 2021 or early in the fourth quarter of 2021.

We will provide an update on the results of the shareholder meeting as soon as reasonably practical following the conclusion of the August 3 meeting.

Please refer to the definitive proxy statement filed with the SEC on June 23, 2021, for additional information related to the potential past reclassifications.

With that, I will now turn the call back over to Elias.

Thank you, Ryan.

I would like to close by briefly discussing M&A activity and our go-forward growth strategy.

In 2020, we took advantage of market conditions and acquired 2 outstanding platform companies with exceptional growth prospects.

And early in 2021, we consummated an add-on for our Arnold subsidiary.

As we stand today, market conditions have changed rapidly.

Asset prices have appreciated materially, driven by an increase in M&A activity stemming from an abundance of equity capital, coupled with strong availability of debt capital.

Despite the frothy market, CODI remains well positioned to succeed.

Our permanent capital structure allows us to be flexible and take advantage of market conditions.

In addition, the dramatic reduction in our cost of capital over the past few years allows us to be selectively aggressive on acquisition opportunities that we deem have potential to enhance shareholder returns.

Going forward, we will continue to invest in and enhance our subsidiary company's competitive positioning, which includes supporting them as they build and grow their digital transformation strategy.

Our differentiated strategy has set us apart for more than a decade, and it remains consistent.

In 2021, we will continue to be intensely focused on executing our proven and disciplined acquisition strategy, improving the operating performance of our company, enhancing our commitment to ESG initiatives across our portfolio and creating long-term shareholder value.

With that, operator, please open the lines for Q&A.

(Operator Instructions) Our first question comes from Larry Solow of CJS Securities.

Elias, perhaps just a general question, kind of a lead in, you kind of did lead in on your closing comments there.

Just in terms of the pending reclassification, tax reclassification.

And what do you see as sort of the advantages through that switch beyond sort of the obvious increase the target investor base and lower the cost of capital?

So does that perhaps make you more aggressive in future growth strategy?

Or maybe try to make us all even bigger with access to lower cost of capital?

Then you can sort of just discuss that from a high level.

Any potential changes there?

Any potential changes on the capital structure?

Any thoughts to that would be great.

Sure.

And thanks, Larry, for the question and nice to talk to you this afternoon.

So when we embarked on this process and started reviewing the entire tax reclassification, obviously, the first thing that we had to look through was, holistically, is there going to be a bigger tax burden as a result of this or not.

Fortunately, based on some tax law changes in 2017, we found that the tax burden was the same holistically, whether we were a C corp cash payer or a pass-through.

So the principal benefit of being able to do this as you've identified is, it really opens up the aperture of the number of investors that can access our company.

ETFs are largely unable to given the pass-through characteristics to K1 unrelated to the taxable income that we create, there's a lot of retirement accounts.

And frankly, more and more institutional potential owners are choosing not to invest in pass-through type entities.

So without having a negative from a tax standpoint, but getting the benefit of having additional shareholders, as we've talked to investors about this during the proxy, it's sort of a no-brainer.

It's all benefit without kind of any costs associated with it.

I think there is some secondary and tertiary benefits, Larry, that we're on right now.

I think we would like to move eventually towards a concept of an adjusted EPS and away from probably CAD.

There'll be an overlap period so that we give comparability because we want this to be completely transparent, but I think that helped with a few things, owning public companies like we did with FOX years ago.

As you remember, one of the challenges with CAD is because we weren't getting the cash flow from a public company, it really put a lot of pressure on us to sell that asset and redeploy it into something that got us cash flow going forward as we migrate to a more adjusted EPS, which is, I think, also more easily understood and digested by the investor community noticeably at that same time.

Now to your question about kind of our growth initiatives, we've been very transparent in saying we think this company operates better as a bigger entity.

We think that in the next kind of 7 to 10 years this should be a $1 billion EBITDA company.

And being able to get there, we're not going to get there only through organic growth and through use of debt capital.

Clearly, we don't have that kind of leverageability nor would we want to take that kind of risk.

So we will need access to equity capital, and we think this helps to provide significantly greater depth to the equity capital markets that we otherwise wouldn't have had in a partnership structure.

Okay.

Great answer.

Switching gears real fast.

I had actually a question on I'll ask you about labor availability and supply chain issue, but you touched on that pretty extensively.

Just tying that into sort of your guidance, it appears like you certainly have raised your outlook for the year.

It looks like most of the raise, I know you don't guide for the quarter, but it looks like most of the raise was for the beat in the quarter or the difference from your expectations.

And without getting into specifics, is that sort of -- am I in the right ballpark there?

And you're kind of holding the line in the back half of the year just because of these uncertainties with labor and supply chain issues?

And who knows what actual demand, the trajectory of demand is COVID is still kind of waxing and waning, is that a fair assessment?

Yes, Larry, I think that's spot on.

I would say we were frankly, pleasantly surprised by the strength of our second quarter results.

And there's just a lot of uncertainty I've heard from other companies.

None of us have ever gone through a pandemic and a reopening of the economy and what that portends for our businesses is very much uncertain.

And as you know, we strive to that reasonable guidance that we can beat.

And so we tend to be somewhat conservative when we look at kind of where our guidance is.

We wanted to, and I think we said it in our scripted comments, demand is not the issue.

Now there are certain companies like Sterno or Arnold in their aerospace division, where, frankly, we would like more demand and we have the capacity to supply more demand.

But broadly across the portfolio, we have demand that remains in excess of what we can supply.

And so what we are seeing are some of the inflationary elements come through.

We've talked about and we said in our script, like other companies, we're passing on price.

But it's too early right now for us to understand with any clarity what the elasticity of demand is, whether some of those price increases that are met to protect margin are going to hurt future demand.

And so when we're in these inflection points that we feel like right now, I mean if you went back over time, I would say, over the last pretty much 15 years that we've been a public company for the vast majority of that, we sat in a disinflationary environment.

And so we're in an inflection now where we're seeing inflation come in.

We're seeing a lot of supply constraints come in.

This is something unusual to the past 15-year operating environment we are in.

And so we're choosing to be way more conservative in the outlook that we have and sort of hold where our guidance is just because we don't know how that is all going to play out.

Now that being said, I'll continue to reiterate where we stand through the month of July, so 1/3 through the quarter, demand is holding up remarkably well, in fact, probably in excess of what our expectations are thus far in July.

And if that continues, I think we feel pretty good about the remainder of the year.

Great.

Just last question.

I'd like to use it to on subsidiary part, it was going to be on 5.11 except that great number, but we've kind of been stifled there.

So just on Sterno, just to clarify, did you say that was a $5 million hit to EBITDA?

Or is it sales?

I think you said EBITDA.

And is that product from Sterno home?

Any other color on that?

There is a piece of our Canadian operations that we're restructuring.

And so kind of total is -- I think the accounting rules, it can't be a onetime charge anymore, but there will be a sort of extraordinary expense in the back half of the year, EBITDA of $4 million to $5 million.

Our next question comes from Matt Koranda of ROTH Capital.

I don't want to get too far down the road here, but if we think about sort of the situation post tax reclassification, just wanted to get your preliminary thoughts on sort of -- how should we be thinking about tax expense post checking the box, if and when we get to that point?

And then also, you mentioned probably the ability to present more of an adjusted EPS figure on a go-forward basis.

So I just wanted to give you the opportunity to maybe talk a little bit about how you envision sort of presenting that?

What are some of the elements that will go into it?

How is it going to compare to CAD?

Okay.

Matt, I'll touch on the tax question.

With respect to the second question, I think we're still developing that.

And I think internally, we're working through that.

But the plan is to provide more color on the next earnings call.

And then potentially come out with comparable periods and then provide some depth so that people can see trends and things.

But that will be a little bit TBD for now.

But with respect to your question on income tax expense, just to take a step back to the structure, all of our companies down below are C Corp.

They're all taxpayers.

So the only income that is coming up to CODI is primarily interest income because we're their lender and they're paying us interest as their lender.

And that is offset, though, with interest expense at CODI.

And that, if you look at the subsidiaries we have and the interest income and the expense we have, that's going to be going forward, at least initially, to be in a negative position, okay?

So we'll have more interest expense at CODI's level than we have interest income, okay?

And then the other income streams would be dividend income.

If we have some sort of recapitalization of a subsidiary or capital gain tax if we were to sell a business for a gain.

So in a year that we don't have a recap or a sizable capital gain, we're going to be in an NOL position, okay?

So that's really -- we'll be building a benefit in a given year that can then be applied on a future period should we have taxable income, okay?

So I think it's always hard to know when we'll have a sale or a recap.

But I think from a modeling standpoint, you shouldn't think about us having actual cash tax expense at the CODI level going out the door until we have 1 of those 2 income events.

Does that make sense?

Okay.

Yes, totally, very helpful.

And then maybe one for Elias.

Just on M&A.

I know at the end, you sort of talked a little bit about your views.

And maybe my interpretation is you sounded a little bit more cautious on deployment of cash for acquisitions, kind of given the environment we're in, multiples expanding and whatnot.

So am I hearing that right?

And then are you seeing any pockets that are still interesting?

Maybe just a little bit more color on where those interesting opportunities may lie if there are any for deployment?

Yes, Matt.

So the M&A market came back with vigor, and I would say it was probably the shortest period where you could deploy at attractive prices in a recession I've experienced.

And I think there's just a function of, if you think of all the capital that's sloshing around in the market, I think we all are aware there's the staff that have been raised at a kind of a massive level and they have time lines they need to deploy capital.

Private equity is flush with capital and debt availability has come back and come back more aggressive than it was at the end of the back cycle.

So all of that is just creating an enormous amount of demand for the assets.

Now we are seeing a lot more assets come to market, right?

I mean it's kind of the natural working of the marketplace.

If you have demand for something, eventually prices go up and supply comes in, but we are just seeing elevated kind of pricing based on these dynamics.

And we expect that to continue.

So as we did with the Liberty Safe divestiture, we're always looking for ways to take advantage for our shareholders.

Even if it means we may have a short-term underoptimization of our balance sheet.

If you look at it over a longer period of time, I think being able to capitalize on market conditions is always kind of what we strive to do.

And right now, asset pricing is high.

So what it boils down to is are we looking to deploy capital?

You heard in the comments to Larry, our growth goals are to get to $1 billion of EBITDA, we guided $350 million to $370 million for this year, and that includes Liberty sale, which is going to be right now.

So to get from here to there, we're going to have to deploy and we're going to have to buy new companies.

I would say we continue to focus on add-on opportunities.

There's some good opportunities for some of these more subscale companies that are there where we have a platform, where we can create some cost-saving opportunities through consolidation or some revenue synergies.

And then on top of that, we're always open for a new platform.

And I think importantly, where we stand today versus years ago, and we've continued to beat on this over and over and over again, we have the best cost of capital, we believe, of any of our peers in the middle market private equity.

And as a result of that, we can reach and we can get in and be the winning buyer on the really premium assets.

I think for us, it's about finding those really great opportunities and being able to run hard against those and now having a cost of capital that allows those to be accretive right away versus before trying to reach for some of the more premium assets would have created a dilutive near-term outlook, and that was something that would be difficult for us to absorb.

So we feel we're just fundamentally positioned so much better, but just to be more succinct in your answer, yes, it is a market that favors divestitures now more so than it favors deployment of capital, but our business and our teams are to go out and find great opportunities to get capital deployed.

So I don't want to make it sound like we won't be seeing new assets that we're acquiring both on platform and add-ons, we absolutely will be.

It's just our teams are working harder to be able to find those opportunities.

Makes a lot of sense.

Thanks for all the details.

Maybe just some keeping with the theme of asking a segment question.

Pat, you mentioned that BOA was on a pretty strong run rate since you guys bought it and that we shouldn't necessarily count on that growth rate to kind of sustain through the back half of this year.

So just wanted to get a little bit more granularity on that, what drove the stronger-than-expected growth rate in the first half?

And then what's sort of the -- what are some of the headwinds you're contending with in the back half of the year as well?

Sure.

I mean as I mentioned, we're -- we've had an explosive first half, right?

I mean I think we grew by 100% or sort of doubled.

For us to forecast that in the second half, I don't think would be appropriate, more honestly we had a stronger back half last year than we had this year.

I do think we'll grow in the second half of the year.

I think we'll have a nice growth.

We see continued demand.

We have some worry that there's a whole restocking aspect or covers were bared in certain of our categories that some of our OEM partners are doing that.

We have some worries that they were -- that there was ordering ahead because they -- some of our partners were worried about the supply chain disruptions.

But all that being said, we still see strong demand.

We do see supply chain issues just like we do in every other business, but our management team is working definitely through that.

We believe we're taking market share.

And we believe we have a great product and a great technology that the company has developed and it's just sort of catching on.

And it's a really global business, right?

So a lot of it may be -- may not be as visible to us here in North America.

But we're very confident in the back half, but we just don't think we're going to quite see those growth rates that we saw in the first half as they were pretty defensive.

Our next question comes from Kyle Joseph of Jefferies.

Congrats on a really good quarter.

I'll start.

Ryan, I think you said it but I missed it.

Where is leverage currently?

And then kind of can you give us a sense of where you expect that to be pro forma the Liberty sale?

Yes.

Sure.

Kyle, thanks for the question, and appreciate the nice comments.

It was a great quarter.

So we ended leverage at the end of March just below 3x, kind of 2.9 level.

We've come down to 2.64, I believe, is the exact number.

And that's all through organic deleveraging.

I mean that was just truly through cash coming to our balance sheet, through working capital optimization, but also extraordinary EBITDA performance, so really good organic and other things.

The Liberty proceeds once we receive them as you might have seen in that release, a portion of that will be earmarked to our anticipated special distribution when we check the box.

But the delta of that will sit on the balance sheet as cash.

So we do not have any prepayable debt right now, we've got nothing outstanding on the revolver and just the outstanding bonds.

So we'll sit as cash on our balance sheet as we seek to deploy it, but that will bring our leverage down another sort of 10, I'd call it.

So expectations to be sort of closer to 2.5, I'd say, by the end of the third quarter.

Great.

And then just a follow-up for me, as modeling out the companies for '22.

Any companies you'd highlight as being insulated from whether it be supply chain disruption or inflationary pressures?

And any companies do you expect to kind of be more exposed, if you will?

I mean I think we see supply chain pressures everywhere, right?

I mean those that are -- so I guess it's broad, and it's just a matter of degrees, right?

But again, most of our companies are positioned in a way to where they can ask a good chunk of that through, and they're working hard to do that.

So it's just a matter of degrees as they're all facing that's something in the entire economy.

Our next question comes from Chris Kennedy of William Blair.

Elias, can you just talk a little bit about, going forward.

I remember at your Investor Day, you talked about potentially looking into new verticals beyond the niche industrial and consumer side.

Any progress or update on that?

Yes, Chris, thanks for the question.

It continues to be a priority area for us.

I think we believe that health care is probably a vertical that we would like to pursue, whether it's kind of the next vertical or not.

A little bit of it is fluid because it's around finding the right individual with the right experience and the right domain knowledge and then building out around that.

I think if the stars all aligned that, that was somebody who had experience in the health care space, that is what we're seeking.

But it's a little bit of a longer fuse, to be honest, because we have to find the right individual, that person and make sure that kind of the fit from an investment philosophy, from a cultural standpoint is right.

So it's something we are working hard on.

We would hope, over the course of, by the end of '22 that we have somebody landed that can start that effort for us.

But that's something that we continue to focus on.

In the meantime, we continue to add on the HR side, we're adding on our investment team, almost on a kind of annual basis, we're adding a couple of few people.

We continue to staff up because we are building for what we see in the future as a firm that could be substantially larger than we are today and adding a vertical becomes sort of part and parcel to that.

Fantastic.

And then just, I guess, a follow-up.

As you go towards $1 billion of EBITDA, does your targets kind of -- your target size increase a lot?

And just kind of talk about how that changes going forward, especially with the lower cost of capital.

Sure.

And I think that's a great observation, Chris.

I mean, our goal is to own companies that have, going forward, have the ability to reach at least $50 million of EBITDA, that's sort of internally where we kind of strive to get to.

Some companies, they're going to be able to do it through organic growth.

Some companies, they're going to need consolidation opportunities to do it.

And frankly, some companies aren't going to be as quick to be able to get there.

And I would say, look at the most recent divestiture that we made of Liberty Safe is totally in connection with that strategic vision that we want companies to be bigger.

I mean Liberty is a great business.

It's run by great people.

We've had a wonderful relationship with Steve Allred, Justin Buck, I mean, guys that we've worked with literally for over a decade.

It is a company that has delivered -- overdelivered on the expectations that we had.

But the reality is we weren't going to be able to get it to a materially larger size, and that's one of the strategic rationales that we've put in place in our business here is that we want companies that can get to that $50 million, $100 million, even $150 million EBITDA size over time and managing a larger pool of company or a larger size of company, not necessarily just a greater number of companies.

So that's sort of where we're focused on.

I would say, as we think about new platform opportunities, they generally are going to be larger or they're going to have better growth prospects if they're smaller organic like a Marucci, for example, which has outstanding growth prospects or they have really good consolidation opportunity.

I think there's a lot of strategic benefits as you get larger companies in the portfolio.

As you know, some of the public company things that we do with respect to stock and compliance, that is a little easier to absorb as a public company.

And we don't just give lip service to the ESG efforts that we're putting in place.

These are things that we are going to be forcing down on our subsidiary company.

We're doing that at the holding company right now in a really expanded effort.

So as we start to put more and more things in place that are more public company in nature and less kind of smaller private company, it helps if we have larger companies in the stable.

Our next question comes from Derek Hewett of Bank of America.

Congrats on the record quarter.

Now 5.11 and Liberty, I mean, they represent about 25% to 30% of either revenue or EBITDA.

So given the comment earlier that the business really needs to scale, how do you balance opportunities to potentially harvest subsidiaries at attractive valuations versus maybe generating more predictable growth and some sort of adjusted earnings calculation, which could also impact valuation, assuming that the C Corp conversion goes forward?

Yes.

Thanks, Derek.

This is Elias for the nice comment.

It was a record quarter, and we're really proud of our team that the subsidiaries for being able to execute at a high level and against the backdrop of so much uncertainty.

But no, it's a great question.

I mean, our business model is frankly different than most companies out there because a portion of what we do is opportunistically divest.

And I think that's really what makes us different and create more opportunities for shareholder value creation.

But sometimes when you are in divestment windows and the market gives you the opportunity.

And so we have to kind of read the tea leaves and take what opportunity the market is giving us.

And as part of that, there are going to be times when we will be underearning our balance sheet potential.

You saw it in 2019 when we divested Manitoba Harvest Cleaner, and we did it at record multiples.

There was a period where we were going to have lower EBITDA on an aggregate basis, outright dollar value.

We were going to have lower earnings.

As you remember, we waived management fees because it's always been our view that if we're going to underearn for a potential of time, then the managers should also underearn its potential.

So we aligned with our shareholders and have done that in the past.

But there are times when the best decision that you can make outside of the optics of well, you're going to have maybe aggregate lower adjusted EPS or aggregate lower EBITDA is to have divestments and you're taking advantage of the market conditions.

And I think that we've always run the business with a kind of more intermediate and longer view and not necessarily the short term view.

And we said let the opportunity that the market is giving us dictate what the strategy right that is.

So yes, it's possible with the Liberty divestment and other strategic alternatives that we're looking at right now that we could have a smaller portfolio and a smaller balance sheet kind of later in this year or into next year for a period of time until we can redeploy that.

But I would point back to look at how much earnings leverage comes from making the right decision, right?

When we divested these assets in 2019 for giving, obviously, now a pandemic hit, but we were looking squarely down at lower earnings and lower aggregate EBITDA in 2020, but then we took proceeds from selling at really great multiples and redeployed that into 2 great growth businesses and now 2021, our earnings have exploded higher.

And I think if you went back and look at 2019, compared to where we've guided right now, we're talking about 2020 being like 50, for 2021 being like 50% up in CAD over where we were in 2019.

And so if you take a slightly longer kind of -- in what we do and we think were kind of asked to do than taking advantage of market opportunity even if it's going to shrink the balance sheet in a near-term capacity always works out and build, I think, greater value as evidence of the kind of results that we're putting up this year.

Okay.

And then in terms of your longer-term adjusted EBITDA goal, is that possible with how many verticals do you think you would need to be able to kind of meet that longer-term goal?

Yes.

I mean, to be honest, we think we probably could do it with the verticals that we have.

I think that it becomes more probable if we can add another vertical.

Over time, I think we would like to probably have 1 or 2 more.

I think there is a limit to how much we would like it and given that we've had 2 verticals now for, I don't know, a decade-or-so once we started to verticalize our business.

I don't think we're looking to kind of stamp these out like at an accelerated pace.

But I think if we could do one more, it makes getting to $1 billion of EBITDA more probable and very achievable.

That being said, I want to let everyone know, we still believe that the verticals we're in, there is a broad enough set of targets.

We are positioned extremely well, both on capital availability, cost of capital and human capital to be able to achieve that $1 billion goal even if we don't add another vertical.

Our next question comes from Matt Tjaden of Raymond James.

First one for me, continuing on the tax reclassification.

Kind of on a longer-term perspective, how does checking the box change how you think about acquisition candidates?

Whether that be in terms of deal pricing or target structure?

Any thoughts there would be of interest.

Yes, Matt.

So the checking of the box won't have any impact on the way that we look at acquisitions in terms of how we structure the acquisition.

As Ryan has said kind of if we have a little bit different flavor of income that flows up to the holding company.

And so I think on the acquisition side, it really is going to have no impact whatsoever where it really could have impacted on the divestment side where the company then will have an incremental tax, but frankly, that was the incremental tax that our shareholders were going to be able to ask to pay in the prior structure.

So if I think about it from a holistic standpoint, there's no incremental path, and there is no kind of view towards a change of strategy in our acquisition or divestment.

If I circle back to Larry's initial question on benefits of the potential tax structure, we do view having our equity being more accessible by a much broader group of investors who frankly have shown interest in the path.

But for the fact that investing in a partnership with something that was very difficult for a lot of people, we think additional demand on the shares naturally should move to all of our shareholders benefit through higher share prices and then to the company with a lower cost of equity capital.

So I guess that could sort of shape a little bit of our acquisition decision-making.

But I would say in terms of kind of how we run the business, we don't look at this structure change is impacting it at all.

Okay.

Fair enough.

I guess just another quick one for me on Sterno.

I know last quarter, we talked about venues opening again, having some sort of benefit to Sterno.

With cases back on the rise and the Delta variant, is there any risk of a near-term kind of softening at Sterno?

Yes is quite the answer.

I'd say we haven't gotten quite back even before.

If you think about June, I think, was probably our best month since before the pandemic as far as bookings goes on the sort of food service side.

And again, those levels were still materially off of sort of prepandemic levels.

But the food service side is a real-time indicator and as sort of events shrink and the number of venues that are open shrink, it will have an impact on the food service sector.

That being said, our consumer side and some of our waxes and our essential oils are a little bit of a natural hedge for that in that when people spend more time at home, they tend to spend -- purchase more of those.

It doesn't quite make up for the whole impact that you're talking about if we were to go back into a lockdown or something like that again.

But it is a little bit of a hedge, if that makes sense.

There are no further questions on the telephone lines, so I'll hand the call back over to Elias Sabo.

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.

We look forward to sharing our progress with you in the future.

That ends our remarks.

Thank you, operator.

This concludes today's call.

Thank you for joining.

You may now disconnect your lines.