Good afternoon, and welcome to the Compass Diversified Holdings' First Quarter 2020 Conference Call. Today's call is being recorded. [Operator Instructions]At this time, I would like to turn the conference over to Matt Berkowitz of the IGB Group for introductions and the reading of the safe harbor statement. Please go ahead, sir.

Thank you, and welcome to Compass Diversified Holdings First Quarter 2020 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 would like to point out that the Q1 2020 press release, including the financial tables and non-GAAP financial measure reconciliations are available at the Investor Relations section on the company's website at www.compassequity.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. 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.Throughout this call, we will refer to Compass Diversified Holdings 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, words such as believes, expects, 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-K as filed with the Securities and Exchange Commission for the year ended March 31, 2020 as well as in other SEC filings.In particular, the domestic and global economic environment is 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 first quarter earnings conference call. Before discussing our results, I'd like to take a moment to acknowledge the current unprecedented environment. The impact of the Covid-19 pandemic has been widespread around the world and we are only just beginning to understand the near-term effect on our business. Today, I will describe what we are seeing at this time; the additional steps we've taken to position the company for long-term success. And further alignment in addition to providing as much detail as I can about what we are expecting for the second quarter.First and most importantly, the safety and well-being of our employees remains our top priority. We have implemented rigorous procedures of both at the manager level and at our subsidiary companies to protect our employees such as working remotely when possible, strict social distancing measures, when it's not, increasing cleansing protocols, temperature checking and other best practices as suggested by the CDC. We will continue to take all steps necessary to protect our employees help and ensure that they feel safe and supported.Turning to the impact of Covid-19 on business. With over 90% of the US population under some form of shelter and place orders beginning in mid-March and continuing through most of April, US economic outlook suddenly dropped and dramatically dropped last month. European and Asian markets are under similar orders which have significantly impacted the global economy. As a result, our subsidiaries experienced a drop in demand for certain products beginning in mid-March and accelerating in April as the full effect of the shelter in place orders took hold. At CODI, we have always managed our business for the long term and the unexpected. While the current situation may have been stand beyond our wildest…

Thanks Elias. I'll begin with our niche industrial businesses. For the first quarter of 2020, revenues declined by 7% and EBITDA decreased by 10.5% over the comparable quarter in 2019. Advanced Circuits was down % in Q1, 2020 from the year ago period. Advanced Circuits EBITDA declines improved sequentially in each month during the first quarter with March roughly meeting 2019 performance. Thus far in April, Advanced Circuits is performing roughly in line with last year's.Foam Fabricators EBITDA was down 3% in Q1, 2020 from the year ago period. Foam Fabricators is benefiting from lower input cost and other cost containment initiatives. In addition, Foam Fabricators have seen increased demand for insulated coolers which are using food delivery and pharmaceutical shipments among others. Thus far in April Foam Fabricators are seeing significantly reduced demand as a result of a reduction in revenue from its appliance customers, however, cost containment measures and lower input costs are expected to somewhat mitigate the effect on earnings.Arnold Magnetics EBITDA was up 7% in Q1, 2020 from the year ago period. Arnold benefited from increased bookings in the back half of 2019 that were scheduled to ship in 2020. We expect these 2019 bookings to continue to benefit Arnold in the second quarter, however, its book-to-bill ratio started to decline in February and has fallen below 1 at the end of March. The Sterno Group's EBITDA was down 19% in Q1, 2020 from the year ago period. Sterno was performing ahead of expectations in January and February, however, as Elias mentioned demand first its core catering products fell dramatically at the end of the first quarter. We expect the catering and related products business to experience extremely weak demand in the second quarter and weak performance for at least the remainder of the year. As…

Thank you, Pat. Before I discuss our consolidated financial results for the first quarter of 2020, I want to highlight our first quarter distributions that were recently paid to shareholders. Last week on April 23rd, we paid shareholders a cash distribution of $0.36 per common share representing a current yield of approximately 7.2%. Including this distribution, we have paid approximately $19.32 per share in cumulative distributions since CODI's 2006 IPO. This reflects 129% of the IPO price. In addition, today we paid cash distributions of approximately $0.45 per share on our 7.25 Series A preferred shares and approximately $0.49 per share on our 7.78 Series B and Series C preferred shares, all three preferred distributions covered the period from and including January 30th, 2020 up to but excluding April 30th, 2020.Moving to our consolidated financial results for the quarter ended March 31st, 2020. I will limit my comments largely to the overall results for our company 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 March 31st, 2020 was $333.4 million, down 1.6% compared to $338.9 million for the prior year period. This year-over-year decrease reflects the challenging economic conditions as a result of the Covid-19 pandemic. Strong sales growth at our branded consumer subsidiaries, 5.11 and Liberty was offset by declines in other businesses previously discussed.Consolidated net income for the quarter ended March 31st, 2020 was $4.9 million. Consolidated net income for the prior year's first quarter was $110.2 million and included a $121.7 million gain recorded in connection with the sale of Manitoba Harvest. CAD for the quarter ended March 31st, 2020 was $17.7 million essentially flat from the prior year period. Our CAD during the quarter was above…

Thank you, Ryan. I would like to close by briefly discussing M&A activity and our forward growth strategy. As I mentioned earlier, we took steps in 2019 to prepare for the unexpected. Those decisions have positioned us well to make it through this crisis and emerge as a stronger company on the other side. We continue to believe our hands-on and disciplined approach has and will continue to set us apart and ensure our portfolio is well situated to weather the storm. We are taking deliberate near-term actions to further align interest with shareholders, which will better position us to deliver meaningful value in the years to come. As we have done through other challenging moments in time, we are confident that we have the right strategy and excellent team in place and a strong group of subsidiaries to only preserve but also find stronger footing on the other side.As difficult as we expect the second quarter to be, we believe that the companies that successfully managed through this turmoil will be stronger and more valuable moving forward. We have the balance sheet strength to support our companies as they operate in these highly unusual times. Our companies, our market share leaders in their respective niches and are poised to gain additional market share. Our balance sheet strength has allowed us to pursue growth initiatives unavailable to others as the debt markets closed to all but the highest-quality assures. We believe the best opportunity to generate long-term shareholder value occurs by acquiring premium assets during market dislocations like we are currently experiencing. While we will always prioritize the financial health of the company over strategic acquisition and this time will be no different, we are constantly evaluating the best ways to enhance our portfolio. We enter the year with significant balance sheet strength and will seek to capitalize on select opportunities, while maintaining a balanced approach to risk taking.Our strategy remains the same going forward. We are intensely focused on executing our proven and disciplined acquisition strategy, improving the operating performance of our companies, opportunistically divesting, enhancing our commitment to ESG initiatives across our portfolio, distributing sizable distributions and creating long-term shareholder value.With that operator, please open up the lines for Q&A.

[Operator Instructions]Our first question coming from the line of Kyle Joseph with Jefferies. Your line is now open.

Hey, good afternoon, guys. Start by saying we appreciate the guidance starting up tomorrow one company in this environment let alone nine. So much appreciated there. I wanted to start off on 5.11, if we could. Can you give us a sense for the breakdown of sales between stores and online and then just based on the geographic dispersion of stores give us the best sense for the outlook of store reopening?

Sure. Good afternoon, Kyle. This is Elias. First, I would say between our ecom and retail and as we said in our script the ecom and retail business when you've combined the two is running up sort of high single digits over last year which to be honest with you we think is just an incredible achievement considering the condition. Our retail stores are running down a little more than 50% right now month to date in April. It's a little too early to tell on reopening, how those will trend, so we don't have anything on geographic dispersion yet to share with you. We are, as reopening happen we are looking at states we're reopening is occurring more quickly. So take Georgia or Texas and we are looking at how the stores build and I think that will help inform us in states that reopen more slowly like California. So we're accumulating that data right now, too early to tell. Our ecom business is running well over a 100% up year-over-year and so what really encourages us as we've seen 5.11's result is as our retail has closed to the consumer that consumer has moved over by and large to our ecom sites and kind of year-over-year demand for the product in what arguably is the most unusual time in our life time is actually up. So I think it bodes really well for how strong this brand is and how strong this brand will emerge.

That's really helpful. Thanks and full disclosure here, I haven't read every single word of the Cares Acts but did you have any some series that would have been eligible for PPP?

Yes. I'll ask Pat to answer that.

Yes. I mean holistically with the government initiatives we have not, you could -- there are some affiliation rules that make us or we felt it wasn't the right thing to do to apply for the PPP. The only real sort of recovery act that we participated in and it was ever so slightly was the family's first Coronavirus Relief Act which is you know if you meant to be employee in a company of less than 500 people which is in all our companies which is just some of our company has to take a couple weeks off because they have a family member who's sick or something like that. We get an offset for that salary in tax credit, so payroll taxes.I haven't really seen the numbers on where we've used that if we have used that it's been very, very sparingly. And that sort of the only Recovery Act sort of statements that we have taken or will take in.

Kyle, let me just add one point to that, I think, the PPP plan and we're seeing some backlash to public companies that have access to capital that are taking it. I think that was designed more for smaller, private held companies that don't have access to capital. Our liquidity is awesome to be honest with you and we feel that the earnings power of our company is on a comparative basis holding up extremely well. And so we wouldn't feel morally that it's correct for us to apply for these programs that are designed for companies that need it and need it just to keep people on their payroll. And so we have adequate capital. We have adequate resources to be able to make it through. Our companies are positioned really well in performing to be honest with you much better than our expectations, if you had asked us four or five weeks ago. And so we don't feel that it would have been morally right to accept those payments even if we were eligible.

That's a great answer and I think everyone can get behind it. Next, I'll ask Ryan a question on the balance sheet, given rate movements in the quarter, can you give a sense for your cost of funds. Obviously given you're fixed versus floating liabilities and just remind us if you have any LIBOR floors and any of those facilities and then address potential refi opportunities with lower rates versus wider spreads.

Sure. Good afternoon. So as you recall because of the substantial sales we had in 2019, we entered the year with really no floating rate, our revolver was zero; our term loans were paid off and the only debt we had outstanding was our bond at $400 million which is a fixed rate instrument. So now that we've closed on Marucci last week, we have or took $200 million down on the revolver for that acquisition that today is a LIBOR plus a spread instrument. Our spread today on that LIBOR is 175 and there is no LIBOR floor in that agreement today. So we think our floating rate today is very variable, interest rates are quite low. So we don't see a reason to refi today. Is that helpful?

Yes. Got it. That's great. And then the last part, I was trying to write down everything you get said on the call but I missed some of your commentary on the pipeline in terms of potential acquisitions given market disruptions here. But can you just walk us through how did the pipeline look in mid-March when volatility started in early April? When volatility really peaked and then subsequent to the equity market recovery, outlook for deal flow has really transition over the last call at 60 days.

Sure. So, Kyle, first it was, and just wants to emphasize that we view Marucci acquisition as being a direct result of the market dislocation. This is a really highly coveted asset and I think as you guys see this business and its performance over the years and sort of how it was trending, this is a business that came to us by virtue of the fact that Covid had a major impact on financial markets broadly and M&A was shutting down and it gave us a huge leg up. So I only say that because it really is illustrative of how we can use our balance sheet strength right now and our permanent capital model has a massive advantage when others mainly PE are sort of frozen out of the market unless they want to equities the whole thing because availability of debt to finance standalone acquisition today is mere zero. So with that said in mid-March, I would say the pipeline is pretty robust. We saw -- and in our pipeline I would say over the course of 2019 and coming into this year were really robust. What we kept saying was pricing is just outside of kind of the range at which we would be willing to transact.Starting in mid-March, I would say there's been a complete freeze in all M&A related activity and that's gone on for the last 45 days. There are some companies that we have reached out to us that we had been talking to where it is pretty much desperate time. They may be working in highly impacted industries and they're just trying to figure out how to get to the other side. I think they're still right now a relatively large when M&A markets reopen, a relatively large bit out spread.…

Our next question coming from the line of Lawrence Solow with CJS Securities. Your line is open.

Great. Good afternoon, guys. Good to hear your voices and I hope you and your families too are relatively healthy and [Indiscernible] time, speaking with sort of the acquisition theme, can you give that just a little more color obviously just close on Marucci and I think this is your first public call since you acquired, announced the acquisition. Maybe discussed the strategy or sort of what you guys hope to help [frankly cable] to sort of the companies obviously been growing pretty rapidly last year, so maybe what do you think sort of comp brings to the table, what sort of the post corona outlook, if you will.

Yes. So, Larry, let me start and then I'll ask Pat indeed to chip in as those guys are the ones that can it did all the heavy lifting here. I would say with respect to Marucci, it is our belief that these kind of assets don't come along that often. And we've seen it over our time over history, I would say that this company looks most like Fox Factory in terms of the people that are at the top of the sport are using it in winning with the product, same sort of dynamic exist with Marucci and that creates a halo in this aspirational pull that moves down into the broader part of the market for youth sports or for Fox for example with a weekend warrior and so for us this has the similar attributes and again these kind of companies don't come along all that often, which is why we have so much enthusiasm notwithstanding the fact that youth sports and baseball is on temporary pause right now in 2020. So I'll start with that but then I'll ask Pat indeed to pitch in on sort of what we see is as growth opportunities and how we see them being able to help them. Pat?

Yes and I mean I would just say it's a company that has a tremendous brand that we've been following for years. That isn't under penetrated internationally as well. I'd say there have been some great strong solid friends in baseball participation over the last several years prior obviously to Covid. And lastly, I said that the company, we are thrilled with a management team right now. We think the entire management team is very strong. We think they are strong leaders and we think there's a lot of markets here that can be gained both internationally and through new products that they're have introduced or will introduce. Dave, what else would you add?

I think you hit on it on most of, it starts with kind of the authentic enthusiast brand, Joe great management and we see electives some good white space to attack over time things take time but in product extensions in other baseball categories in softball in international direct the team. So a lot of white space to attack over time starting with the authentic enthusiast brand.

Right. Okay. So no CAD 9 this year though I guess. That's a joke. Just switching gears, so on Sterno just could you clarify that there's 60% of the business itself is consumer basically that's the Campbell Rim portside. And then the remaining 40 is Sterno heat and the home is that right or my -- [Indiscernible]

That’s roughly correct.

Okay so the Campbell side is doing okay, the other the heat side obviously is going really not many consumer zero and then yes, okay.

So the broadly we can tell you the consumer division everything outside of food service right? The foodservice division obviously is the one we talk to that's highly impacted. In totality the rest of the business is salad with some areas of strength and in some areas of weakness but in totality that's sort of the breakdown we give you.

Okay and just on the cost-cutting side and just we could just do it with a sort of broad-brush I again I'm sure it's different agencies, subsidiaries in terms of where you can -- you guys obviously run pretty lean operations as is so these kind of thing is more like workflow slowing and our last shift, obviously you don't want, you want to keep yourself well oiled up for the long term. So, I imagine most of the stuff you can roll back when you have to.

Yes. I would say, Larry, what we try to do and it's got to be a case-by-case example so some of our portfolio is growing and growing pretty rapidly right like Liberty Safe, Velocity, those businesses are doing really well. And we've got like advanced surface and for right now 5.11 has been, have been growing, so we have a lot of the portfolio that is growing. And the parts of it that are growing in Q2 we’re very careful not to take costs out unnecessarily because that would impact the growth opportunity.In the parts of the business that are flat or not growing, I would say it really runs the gamut it can be anything from furloughing employees and layoffs, which frankly are the hardest for us to do emotionally but necessary is cutting things that you would expect like travel expenses and conferences. Those are easy because nobody's doing them, there's marketing expenses that are getting pulled back, clearly CapEx is being brought down to essential level.So I would say what we have instructed all of our companies and we really move very quickly in March as we saw this unfolding is real cut quickly. If there's growth initiatives right now we just have to be very careful and skeptical that with a GDP that's likely to be down. I think the consensus forecast is like 35% or 36% in Q2. We all need to be really careful coming in to how the second quarter is going to look.And therefore let's take decisive actions now while understand number one, we don't want to cut into muscle because we want to be able to have these businesses all not only perform through these times, but be able to service our customers well and frankly take market share on the backside. And I think unfortunately there's going to be a lot of companies that are exiting the market via bankruptcies and closing down.And the players that remain are all going to emerge stronger and their market share will redistribute. I mean that's what happens typically in downturns and this is the biggest downturn of our life. So we’ve reminded our companies that we need to be able to spool back up and to put all of our employees back and put all of our spending programs back as the economy comes back and as some of that market share as we think we’ll naturally inroad to us.We need to be in a position to take it and I would say, we have tried to maintain at the point of attack spending across our portfolio, so where we have had the least cost have come in sales, marketing and R&D, new product development because we think those are the things that will allow us to be aggressive market share grabbers here but everything outside of that we're in big cost containment mode.And it's sort of the same playbook we ran in 2009 when we were during the financial crisis.

Next question coming from the line of Robert Todd with Raymond James. Your line is now open.

Hi. Guys. I hope everybody's doing well. Just a follow-up as well and then some others, and to follow-up to Larry's question on the cost-cutting, can you give us any rough scale say we're FTEs were say need. We ended the year I mean obviously there's seasonality in it and where headcount in general is today? I mean I'm not looking for a company by company counts, but can you give us a kind of a little bit of context of just how significant that cost-cutting step has been?

Yes. Robert, that's probably a little bit more granular than what we would like to get into. I would say we expect, if you want to know kind of in dollar terms we expect millions per month in cost containment initiative to be rolling through. So like a 5.11 is going to have some pretty significant cost cuts that they've implemented as has Sterno and so it's millions and millions of dollars per month, but we're really not prepared to say kind of on FPE. Some of it is furloughed employees versus laid off, so it's a little too early I think to start to disclose some of that.

Fair enough. Just looking at it, I mean, a couple of businesses as you said I mean 5.11 in some elements is doing quite well, Liberty doing quite well in some areas. I mean as orders as I think to ask this I mean how's the supply chain to those because obviously I mean 5.11 does a lot of manufacturing overseas and the supply chain disruptions over there. So for the products that are selling well what's your inventory situations supply chain situation?? I mean how many -- how long can it go -- this disruption go on and your inventory situation remain okay in the product areas across those businesses that are selling well in this environment.

So I don't want to say there are no issues, but there's -- but our management team is working through them at each company very well. It's geography by geography. China goes downtown China comes back up. The anonymous date up Bangladesh went down but now is started. I mean it's geography by geography broadly I would say it's not our biggest concern right now. Our management team is nimble. They've sourced in multiple geographies throughout the company by company. So as of yet it's not -- there's other issues that were worth that we went through that we're far more worried about than that right now, Robert.

Right. Fair enough. On the liquidity situation, obviously, yes, you call it $60 million in cash $400 million available on the revolver, you have 2.5x leverage on kind of trailing EBITDA obviously EBITDA is going to fall and more lower trailing. I mean how much you -- but at the same time maybe the opportunity set is improving. You've talked about -- you having the pipeline and maybe being share being available to pick up some of that could be organic. Some of that could obviously be an acquisitive. How -- where in this environment would you be willing to take leverage and how much of that liquidity would you be willing to utilize on acquisition front versus a reserved, obviously, in case portfolio companies need additional support.

Sure. So I'll just start Robert high-level and then I'll ask Ryan to also chip in. As you said our leverage is I think a little over two times right now Ryan correct me if I'm wrong. It will increase we've obviously guided to kind of down 30% to 50% in the second quarter and I would say frankly April's tracking a little better than expected and so we plan, I would say we feel really good about that range and hopefully even improving beyond that but and undoubtedly leverage is going to come up because the denominator and that calculations coming down. So we still think when we stress test our companies that our leverage is below sort of the high end of the target band that we've talked about publicly. And so that provides some availability to be out there. In terms of liquidity, we look at it right now as we have $400 million available on our revolver, but we have a $250 million upsize option should we go out and choose to exercise that. And our senior leverage is kind of one time so I would hope our lending partners are excited about providing to a low-risk credit like us and frankly, we view sort of the debt capital markets as being pretty wide open.I think our, as of yesterday I think we were trading 103 on our bond and so bond, the bond market is pretty strong. So I think for us we have access to the capital market that would allow us to increase the amount of availability, but obviously we need to work within our leveraged covenant. I think as we get three, six months from now and we have a better understanding of earnings trajectory broadly not just with us but broadly in the economy then we could be a little bit more acquisitive and be willing to bring our leverage up to the kind of the high part of our desired range and potentially even a little bit above that temporarily.But it would be temporary because we believe we are deleveraging pretty quickly. Ryan, what would you add to that? You obviously work in with our capital markets providers all the time.

Yes. Sure. So a lot of, everything you've said, Elias, I've agreed with just to add some clarity to the numbers. We are a little over two times today as I mentioned in the prepared remarks pro forma for Marucci and Robert as a reminder, we have total debt covenant capacity of five times. So we have a -- what we think we're extremely comfortable with our covenant position even with the expected declines in EBITDA and even if we stress test those okay. In terms of where we are prioritizing our liquidity today, we've touched on a couple of these but I will reiterate because I think it's important. One, first and foremost, it's to support our companies through this unprecedented time.We want to ensure that they emerge even stronger. We talked about in their niche markets, if they're a market share leader if they come out of this, they should have greater market share and we want to make sure our companies have the financial support to get there. Number two is we will use our liquidity and prioritize our capital allocation which includes our distributions on our preferred and common, okay. Third, only after the first and the second have been satisfied will we in, as Elias said three to six months from now would be able to think about finding and investing opportunistically.And in terms of capital it's, I think in our minds finding some add-ons to existing companies is a great potential use of capital in this near to intermediate term in that three to six month period for us today thinking about a substantially large platform deal in the next three to six months is very low likelihood just given the uncertainty in the markets, uncertainty in cash flow streams, valuations et cetera. So I think that's really how we're thinking about it, hopefully it gives you a decent framework about our liquidity and how we prioritize that capital.

Absolutely. I really appreciate that color and then yes understood. Elias, I got to ask a follow-up since you mentioned it April is tracking slightly better than expected. So can you give any more that you can say about that? Is that particular area? Is that the good business is doing even better or is there -- are there some surprises in there that something you thought might be a bit weaker is actually doing better. Any color on that one since you opened the door a little bit.

Sure. No. I appreciate that I mean we've been looking at this and we thought i'll step back and say, I think all of us in business have viewed the orders to stay at home as just being so outside of the realm of what we could ever imagine that you probably all have some dark thoughts that go through our minds with respect to how that's going to impact our companies. And how do you operate and how is human behavior going to happen and so I think as we started to see this rollout it was a scary time, Robert, to be honest. And I think as every week is gone by we've seen our company doing broadly better and, I don't, I would say not across the board but the majority of our company are doing substantially better than what we would have thought a few weeks to go short cycle business, shut down of the economy that's going to be impacted quite severely and to see it holding up as well as it is, frankly is really encouraging. So it is not all eight companies, now nine with Marucci but we have some really good bright spot within the portfolio and pretty much everybody is sort of holding their own and so we are encouraged by it. Pat, do you have any follow up --

I'd just add our management team broadly have been very nimble and shown a great deal of skill at the subsidiary level. We always had high expectations of them and know that we are fortunate to work with great people but they performed very well and are continue to perform very well broadly in this environment.End of Q&A

And I am not showing any further questions at this time. I'd now like to turn the conference call back over to Mr. Elias Sabo for closing remarks.

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. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.