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CD

Compass Diversified Holdings (CODI)·Q2 2024 Earnings Summary

Executive Summary

  • Q2 2024 net sales rose 11% year over year to $542.6M, with Branded Consumer strength more than offsetting Industrial softness; Adjusted EBITDA increased 27% to $105.4M while GAAP net loss of $13.7M reflected a $24.6M loss on the divestiture of Crosman .
  • Management maintained full-year guidance but shifted mix: Branded Consumer Subsidiary Adjusted EBITDA raised by $10M to $365–$395M; Industrial lowered by $10M to $115–$125M; consolidated Adjusted EBITDA held at $390–$430M and Adjusted Earnings at $148–$163M .
  • Consumer tailwinds: BOA revenue +42% and EBITDA nearly +60%, PrimaLoft revenue +14% and EBITDA +11%, and Lugano continued “extraordinary” growth; Industrial faced weaker demand at Altor and planned footprint changes at Arnold with $10–$15M one-time capex .
  • Leverage improved to 3.2x with ~$544M revolver availability and $68.4M cash; Q2 cash from operations was a use of $35M, largely from Lugano inventory to support growth; quarterly $0.25 distribution maintained .

What Went Well and What Went Wrong

What Went Well

  • “Another strong quarter… driven by continued strength in our consumer businesses,” with destocking headwinds subsided and BOA, PrimaLoft, and Lugano performing exceptionally well; management is “bullish about the second half of 2024 and beyond” .
  • BOA revenue +42.1% and adjusted EBITDA nearly +60% YoY; PrimaLoft revenue +14.1% and EBITDA +11.1% as inventory headwinds abated; Lugano’s London salon “vastly exceeded expectations” in its first months .
  • Adjusted Earnings rose 36% to $39.8M and Adjusted EBITDA rose 27% to $105.4M, exceeding internal expectations, driven by consumer brands and Honey Pot contribution .

What Went Wrong

  • Industrial vertical decline (revenues and adjusted EBITDA) due to reduced customer demand and distribution partner churn at Altor; management expects muted Industrial performance for the remainder of 2024 .
  • Honey Pot slightly below expectations from SKU losses at a large retailer and traffic softness at certain big-box partners; near-term pressure despite long-term double-digit growth view .
  • GAAP net loss of $13.7M versus prior-year net income $17.1M, driven by $24.6M loss on Crosman sale and $7.3M tax expense at Velocity (valuation allowance); mix-shift toward consumer improves intrinsic value but increases concentration risk (Lugano) .

Financial Results

MetricQ2 2023Q1 2024Q2 2024
Net Sales ($USD Millions)$486.9 $524.3 $542.6
GAAP Basic EPS ($USD)$0.35 $(0.85) $(0.45)
Operating Income ($USD Millions)$42.1 $38.6 $61.3
Adjusted EBITDA ($USD Millions)$82.9 $94.8 $105.4
Gross Profit Margin %44.5% (216.6/486.9) 46.1% (241.8/524.3) 47.8% (259.1/542.6)
Adjusted EBITDA Margin %17.0% (82.9/486.9) 18.1% (94.8/524.3) 19.4% (105.4/542.6)

Segment revenue and profitability:

SegmentQ2 2023Q2 2024
Branded Consumer Pro Forma Net Sales ($USD Millions)$336.3 $373.5
Niche Industrial Pro Forma Net Sales ($USD Millions)$175.6 $169.1
Branded Consumer Adjusted EBITDA ($USD Millions)$68.5 $96.6
Niche Industrial Adjusted EBITDA ($USD Millions)$33.8 $29.7
Corporate Expense (Adjusted EBITDA, $USD Millions)$(19.3) $(21.0)
Total Adjusted EBITDA ($USD Millions)$82.9 $105.4

Key KPIs and balance sheet/cash flow:

KPIQ1 2024Q2 2024
Cash and Cash Equivalents ($USD Millions)$64.7 $68.4
Revolver Availability ($USD Millions)$551.6 ~$543.6
Total Leverage Ratio (x)3.84x 3.2x
Capex ($USD Millions)$7.7 $11.2
Cash from Operations ($USD Millions)$(13.2) $(35.2)

Notes:

  • CODI no longer adds back management fees in Adjusted EBITDA; Q2 management fees were $18.9M .
  • Q2 net loss reflects $24.6M loss on Crosman sale and $7.3M tax expense at Velocity (valuation allowance) .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Subsidiary Adjusted EBITDA ($USD Millions)FY 2024$480–$520 $480–$520 Maintained
Branded Consumer Subsidiary Adjusted EBITDA ($USD Millions)FY 2024$355–$385 $365–$395 Raised $10M
Industrial Subsidiary Adjusted EBITDA ($USD Millions)FY 2024$125–$135 $115–$125 Lowered $10M
Adjusted EBITDA ($USD Millions)FY 2024$390–$430 $390–$430 Maintained
Adjusted Earnings ($USD Millions)FY 2024$148–$163 $148–$163 Maintained
Capex ($USD Millions)FY 2024$50–$60 $55–$65 Raised
Common Distribution ($/share)Q2 2024$0.25 $0.25 Maintained

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4 2023)Previous Mentions (Q1 2024)Current Period (Q2 2024)Trend
Inventory destocking (consumer)Headwinds started to subside; expected tailwind in 2024 BOA better-than-expected; PrimaLoft bookings up; consumer inventories more balanced Headwinds subsided; BOA +42% revenue, PrimaLoft +14% revenue; strong H2 setup Improving tailwind
Industrial macro softnessStrong 2023 growth; cautious on 2024 normalization Industrial revenues −10% and EBITDA −3% in Q1; conservatively guided Weaker demand at Altor; muted performance through year; Arnold footprint changes Deteriorating near term
Lugano expansion53% revenue and ~65% EBITDA growth in 2023; London salon planned London opened; strong maturation of flagship salons London “vastly exceeded expectations”; continued extraordinary growth Accelerating
M&A market and disciplineMore deal activity; cost of capital advantage; Honey Pot acquired Feb-24 Optimism; comfortable taking leverage up temporarily Increased deal volume but quality lagging; focus on innovative, moated assets Selective/cautious
Honey Pot performanceN/A (closed Feb-24)Flat revenue; slight EBITDA decline; strong shelf gains Slightly below expectations due to SKU loss and traffic; long-term double-digit growth view Near-term soft; LT positive
Leverage and liquidity3.11x at year-end; expected increase post Honey Pot then decline 3.84x; expected decline; ~$552M revolver 3.2x; ~$544M revolver; expected decline absent large M&A Improving
Regulatory/operationalPFAS transition at 5.11; DTC challenges ESG report released; PFAS complexities persist Arnold relocation with one-time expenses and $10–$15M capex Execution-focused

Management Commentary

  • Elias Sabo, CEO: “While the current business environment has had a negative impact on our industrial businesses, our branded consumer vertical performed extremely well… Combined, Lugano, BOA and PrimaLoft represent approximately half of our EBITDA… we are feeling bullish about the second half of 2024 and beyond” .
  • Patrick Maciariello, COO: “On a combined basis, pro forma revenue and adjusted EBITDA grew by 6% and 18%, respectively… Lugano remained the largest driver… BOA grew revenue by 42.1% and adjusted EBITDA by almost 60%… PrimaLoft grew revenue and EBITDA by 14.1% and 11.1%” .
  • Ryan Faulkingham, CFO: “Adjusted EBITDA in the second quarter was $105.4 million, up 27%… leverage ratio was 3.2x… substantial liquidity … expect leverage to continue to decline absent significant acquisitions” .
  • Mix shift: “We are increasing the subsidiary adjusted EBITDA range for our branded consumer vertical by $10 million… reducing the… industrial vertical by $10 million” .

Q&A Highlights

  • BOA and PrimaLoft drivers: Growth was broad-based across BOA verticals including workwear; PrimaLoft bookings and destocking recovery supported growth .
  • Honey Pot headwinds: Larger retailers account for “close to half” of revenue; well-publicized traffic reductions drove near-term softness .
  • Lugano concentration and funding: High ROIC justifies capital allocation; management considering creative financing/diversification options longer term to manage concentration risk .
  • Capex and operations: FY24 capex raised to $55–$65M with spending primarily at Lugano (new salons) and Arnold (manufacturing footprint change) .
  • Leverage posture: Comfortable temporarily taking leverage up 0.5–0.75 turns for the right asset given strong consumer growth engines (Lugano, BOA, PrimaLoft) .

Estimates Context

  • Consensus EPS and revenue estimates from S&P Global were unavailable at the time of this analysis due to a rate limit error. As a result, we cannot provide a definitive vs. estimates comparison for Q2 2024. We will update this section once SPGI access is restored.

Key Takeaways for Investors

  • Branded Consumer momentum is the core narrative: BOA acceleration, PrimaLoft recovery, and Lugano’s international success underpin consolidated margin expansion and outlook resilience .
  • Guidance mix-shift toward Consumer (raised) and away from Industrial (lowered) is strategically positive for CODI’s long-term value creation despite near-term Industrial headwinds—expect continued narrative focus on consumer growth engines .
  • Cash conversion outside Lugano remains healthy; leverage trending down with ample revolver capacity provides optionality for selective M&A and internal growth capex .
  • Watch concentration risk and capital intensity at Lugano; management is evaluating creative financing/diversification options if Lugano’s share of EBITDA continues to rise .
  • Near-term Industrial outlook muted (Altor), with Arnold executing footprint changes (one-time expenses/capex); monitor execution and 2025 rebound setup .
  • Dividend maintained ($0.25) and preferred distributions continue; supports income profile while growth investments proceed .
  • Trading lens: Expect stock narrative sensitivity to consumer outperformance and any incremental mix-shift or M&A—surprises likely from sustained destocking tailwinds and Lugano growth; risks include Industrial softness and Honey Pot retailer traffic normalization timelines .