Compass Diversified (CODI) Q2 2020 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Compass Diversified Second Quarter 2020 Conference Call. Today's call is being recorded. All lines have been placed on mute. [Operator Instructions]. At this time, I would like to turn the conference over to Mr. 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 Q2 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.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. 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 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 June 30, 2020 as well as in other SEC filings. In particular, the domestic and global economic environment has 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 discussing our results, I would like to take a brief moment to acknowledge the continued impact of the COVID-19 pandemic. The last few months have been challenging in many ways for so many people. And we hope that you and your families are well and managing through this period of change. As we said on our last call, the safety and well-being of our employees remains our top priority. We are continuing to follow national, state and local guideline and implement industry-wide practices to protect our employees. We recognized that our teammate are one of our most valuable asset and we are committed to making sure they feel comfortable and supportive during this time. Despite the challenges we experienced during the last few months, I am pleased to report that our second quarter results substantially exceeded our expectations. Excluding Marucci, consolidated subsidiary adjusted EBITDA for the second quarter was $54 million, compared to $55.2 million in the second quarter of 2019. These results were significantly better than the guidance range of $28 million to $38 million provided during our first quarter earnings call. While the impact of the response to the pandemic has been widespread and continues to pose challenges for each of our subsidiary company. We've been impressed with the ongoing effort of our management team to position our company for long-term success. Together we reduce spending and monetize working capital throughout the quarter to maximize cash flow. Our strong results and continued distribution payments demonstrate the benefits of owning a family of diversified, uncorrelated subsidiary companies, the extent of which has never been so pronounced. While some of our subsidiaries have been acutely impacted by the pandemic, with market demand in certain segments nearly disappearing, others have experienced record levels of demand on a seasonally adjusted basis. During the second quarter, we strategically access the capital markets and raised approximately $290 million of additional capital. Coming into the quarter, our balance sheet was already strong, and this capital raise gives us meaningful financial flexibility to execute on growth opportunities that we believe will be abundant coming out of the pandemic. Our unique approach to investing, disciplined allocation of capital, and active management of our subsidiary businesses resulted in upgrades from both Moody's and S&P in connection with our capital raise. Our actions over the past two years have underscored the effectiveness of our permanent capital structure and advantage of our model. We spent much of 2018 out of the acquisition market, and we're a net divestiture of approximately $1 billion in assets in 2019. In 2020, we are turning to a more aggressive acquisition strategy and plan to use our strong balance sheet position to accelerate our growth and deliver outsized shareholder returns. We remain focused on continuing to selectively partner with management teams that can benefit from our deep sector knowledge, operational expertise, and permanent capital base as they manage through the near term uncertainty and position themselves for years to come. One example of our strategy and action came at the end of the quarter, when we announced the add-on acquisition of Polyfoam to our foam fabricators platform. This acquisition is highly complimentary to foam fabricators geographic footprint, and increases its pull chain revenues, which are benefiting from long term secular growth. Additionally, we have supported 5.11 as the company became opportunistic, signing leases again to further expand its retail footprint, capitalizing on favorable lease pricing and continued consumer demand. Now turning to our financial results. Consolidated subsidiary pro forma revenue for CODI for the second quarter, including Marucci, declined by 4.5% t to $334 million and consolidated pro forma adjusted EBITDA declined by 8% to $52 million. Our results were favorably impacted by a surge in demand for outdoor related products, along with cost management across our subsidiaries. Of our nine subsidiaries, three showed growth over prior year and virtually all of our companies exceeded our expectations. We generated $13.5 million of cash flow available for distribution and reinvestment, which we refer to as CAD during the second quarter of 2020, exceeding our expectations. Notably, our cash taxes were significantly higher than expected due to our velocity subsidiary. We expect the majority of these cash taxes to reverse in the second half of 2020. Ryan will discuss our financial results in greater detail shortly. On April 20, we closed on our acquisition of Marucci sports, a leading designer and manufacturer of premium baseball and softball equipment and apparel. Despite the shutdown of professional baseball in most youth sports, Marucci performed better than expected in Q2. Although 2020 will be a challenging year for Marucci, we are pleased to own this business and believe its poised for accelerated growth in the long term. Turning to guidance. While we continue to see uncertainty in the second half of the year stemming from the pandemic, we have enough visibility across our subsidiaries to provide insight into our full year consolidated EBITDA expectations, and our payout ratio. The pandemic continues to change every day. And while continued shutdowns of certain areas of the economy could negatively impact our results more than we currently anticipate, we felt it was important to provide our shareholders and capital partners with some visibility into our expected performance. Please note that our guidance includes Marucci as if it was acquired on January 1, 2020. For full year 2020, we anticipate pro forma adjusted consolidated subsidiary EBITDA of between $210 million and $240 million. And we anticipate a CAD payout ratio for the year of 140% to 120%. At the midpoint of our guidance range, we expect to pay out approximately $20 million more in distributions than we earn in CAD for the full year of 2020. Although, we strive to always earn more than we payout, we recognize this year is an anomaly and are well positioned to make the payments despite lowered earnings for the year. In fact, as you know, we opportunistically sold two companies in 2019 and generated approximately $240 million in net gain. We expect to payout less than 10% of these net gains we generated in last year's divestitures to maintain our distribution levels in 2020, which is a priority for us. Before I turn it over to Pat to provide additional detail on our subsidiary company's performance in the second quarter, I want to update you on two of our internal initiatives started early in the 2020 year. First, we have continued to push forward with our goal of being a leader in terms of ESG, taking numerous steps this quarter to advance this important initiative, and integrate ESG considerations further into our investment process, from the point of due diligence, and through the ongoing management of our subsidiaries. Second, I encourage you all to check out our newly designed website, which launched this week, and has more information on our progress in these areas. And now over the Pat.

Thanks, Elias. Before I begin on our subsidiary results for the quarter, we guys as a whole exceeded our expectations. I want to touch generally on the effects of the pandemic throughout our companies. Broadly speaking, our niche industrial businesses sales and earnings were impacted more negatively than our branded consumer businesses as work stoppages or disruptions impacted several of the end markets our industrial businesses serve, among them aerospace, appliances and hospitality. However, our branded consumer business has been benefited significantly from increased consumer demand and outdoor categories, and as a result experienced strong sales and earnings growth. Now on to our subsidiary results for the quarter. I'll begin with our niche industrial businesses. For the second quarter of 2020. Revenues declined by 12.4% and EBITDA decreased by 19.1% over the comparable quarter in 2019. For the year to date period, revenues declined by 9.7% and EBITDA decreased by 14.8% over the comparable period in 2019. Advanced circuits continued at steady performance with EBITDA in the quarter growing slightly over prior year. The growth CapEx investment we made last year in a new facility in [Indiscernible] continues to pay dividends as this manufacturing facility is producing strong growth over prior year. Foam Fabricators EBITDA was down 20% in the second quarter and a 23% revenue decrease. Foam Fabricators margins benefited from lower input costs and other cost containment initiatives. During the quarter, many Foam Fabricators customers were forced to temporarily suspend production due to the COVID-19 pandemic, resulting in decreased demand. Revenue strengthened during the quarter however, and thus far in July, revenues are trending close to a year ago levels. Arnold Magnetic EBITDA declined by 18% in the second quarter from the year ago period. We believe the longer term prospects for Arnold remain strong as their product offering is central to company's continued efforts to become more energy efficient. However, some of the company's end markets namely aerospace and oil and gas are challenged due to the effects of the pandemic and unlikely to rebound in the near term. As a result, we expect Arnold to have a challenging 2020. The Sterno Group's EBITDA was down 29% in Q2, 2020 from the year ago period Sterno performed much better than our revised expectations early in the second quarter, as the company's consumer business experienced record demand on a seasonal basis for its line of wax and essential oil products. The core catering line of shaping fuel and related products, however, experienced a near complete halt and demand. We expect this segment to remain depressed for some time, as large gatherings continue to be discouraged given the ongoing pandemic. Despite the reduction in catering related sales, we want to acknowledge the extraordinary effort from management including the painful reductions in personnel, as well as the shift in strategy to develop and produce a line of high quality hand sanitizer products in a short period of time. Sterno has been a trusted brand in the foodservice industry for more than 100 years. And with the increase in hand sanitizer demand in this channel, we believe the company is well-positioned to take market share. Now turning to our branded consumer businesses. Our results for Marucci are presented as if we owned it from January 1, 2019. For the second quarter of 2020, pro forma revenues and adjusted EBITDA increased by 2.5% and 7.5% respectively over the comparable period in 2019. For the year to-date period, pro forma revenues and adjusted EBITDA increased by 3.5% and 8.8% respectively over the comparable period in 2019. Ergobagy's EBITDA was down 4% in Q2, 2020 from the year ago period. Ergobaby benefited from international distributor demand that was ordered prior to the pandemic and fulfilled in the second quarter. Globally end market demand was weak during the pandemic. And as a result, our distributor partners have excess inventory that needs to be reduced, resulting in expected weakened demand in the third quarter and potentially in the fourth quarter. Despite the lower expectation for the balance of the year, we are seeing end market demand recover swiftly and our domestic Ergobaby brand produce roughly flat revenues in the second quarter relative to the year ago period. Liberty Safe EBITDA was up 80% in the second quarter from the year ago period, Liberty continue to benefit from securing distribution with large farm and fleet customer in the third quarter of last year. In the upcoming third quarter, Liberty will be coping gainst this initial load in. Despite this difficult comparison, end market demand remains robust, and most of Liberty's production capacity is booked through the end of the third quarter. Additionally, end market demand online and that retailers remains strong for Liberty's product driven by the current elevated levels of uncertainty. Marucci's revenue in the second quarter declined by 60% and EBITDA declined from approximately $1 million in 2019 to negative 2004, and 2020. Please note that our second quarter results only include approximately 800,000 of loss. Despite the negative comparisons, these results were ahead of our expectations. As we expected end market demand from Marucci products dropped precipitously, as professional baseball and youth sports were temporarily halted and many sporting goods retailers were closed for portions of the quarter. Professional Baseball resume play in the United States and a modified 60 games season last week and youth sports are starting in parts of the country. Marucci has seen increased demand and its direct channels. However high inventory levels and its wholesale accounts need to decline before revenues revert to more normalized levels, despite the ongoing challenges, we remain optimistic about Marucci future. Velocity outdoors EBITDA was up 104% in Q2, 2020, from the year ago period. This performance was much better than expected, as demand for all products increased dramatically driven by a broad trend towards increased outdoor activities. While the rapid surge in end market demand has placed significant stress on the supply chain and internal production capacity management and the company's employees have performed admirably and rising to the challenge. Currently, retail channels are low on inventory and we are working diligently to increase production in order to both meet end market demand and keep our wholesale partners in stock with adequate inventory levels. Finally, 5.11's EBITDA was down 3% in Q2 2020 from the year ago period. However, on a year to-date period -- basis, 5.11's EBITDA has increased by 9%. 5.11 close its retail stores to the general public in April and upon reopening has been working under modified hours. Additionally, the professional side of the business experience reduced orders in the second quarter as first responders were focused on securing products most necessary for fighting the pandemic. Orders on the professional side started recovering June and bookings have been accelerating this for in July. Despite the weakness on the professional side, the consumer portion of the business continues to perform significantly ahead of expectations. During the second quarter our same store sales, which includes our e-commerce business, grew by approximately 10.5% on acceleration from 7.5% same store sales growth in the first quarter of 2020. We believe many macro trends are positively impacting the 5.11 consumer brand, and that the company has even stronger opportunities moving forward. Trends positively impacting the 5.11 brand include, increased participation and outdoor activities worldwide, a shift from dress attire to casual wears companies offer more flexible work schedules, and more formal in person meetings are limited and an increased preparedness mindset consistent with 5.11's positioning and its mission statement to always be ready. We continue to believe 5.11 will be transformational to the entirety of Compass. With that I will now turn the call over to Ryan to add his comments and our financial results.

Thank you, Pat. Before I discuss our consolidated financial results for the second quarter of 2020, I want to highlight our second quarter distributions that were recently paid to shareholders. On July 23, 2020, we paid shareholders a cash distribution of $0.36 per common share, representing a current yield of approximately 8.9%. Including this distribution we have paid approximately $19.68 per share in cumulative distribution since CODI's 2006 IPO. This reflects 131% of the IPO price. Further, tomorrow, we will pay 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 cover the period from and including April 30, 2020, up to, but excluding July 30 2020. Moving to our consolidated financial results for the quarter ended June 30, 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 June 30, 2020 was $333.6 million, down less than 1% compared to $336.1 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, velocity outdoor and liberty was offset by declines and other of our businesses previously discussed. Consolidated net loss for the quarter ended June 30 2020 was $7.4 million. consolidated net income for the prior year second quarter was $218.2 million and included a $206.5 million gain recorded in connection with the sale of Clean Earth. CAD for the quarter ended June 30, 2020 was $13.5 million, down from $26.2 million in the prior year period. Our prior year CAD included our results from Clean Earth up until June 30, 2019 the date of sale. Our CAD during the quarter was above our expectations. With EBITDA only down slightly from prior year substantially above our expectations and our subsidiary management teams reducing CapEx spend in light of economic conditions, we would have generated significantly more CAD in the quarter, however, our cash taxes were negatively impacted by more than $6 million at velocity outdoor. As we've mentioned many times in the past, our cash taxes are extremely difficult to predict quarter-to-quarter. However, on an annual basis, it is much easier. We anticipate a large majority of the impact of Velocity Outdoors cash taxes to reverse in the second half of 2020 and therefore benefit our second half CAD performance. I'll provide more guidance on cash taxes shortly. The other factors impacting our CAD during the quarter as compared to the prior year was lower interest expense, lower management fees as a result of our waiver of 50% the management fee in Q2, and higher preferred share distributions as a result of our Series C issuance in November 2019. As Elias mentioned earlier, our balance sheet is strong. As of June 30, 2020, we had over $200 million in cash and approximately $600 million available on our revolver. Our leverage is below two times. We stand ready unable to provide our subsidiaries the financial support they need, make distributions to our preferred and common shareholders, as well as move on compelling investment opportunities in this dislocated market as they present themselves. Turning now to capital expenditures. During the second quarter of 2020, we incurred $3.3 million of maintenance CapEx of our existing businesses, compared to $4.4 million in the prior year period. The decrease in maintenance CapEx was related to our reduce CapEx spend across a majority of our businesses. During the second quarter of 2020, we continued to invest growth capital, spending $3.1 million in the quarter, primarily related to 5.11's long term growth objectives. Growth CapEx in the prior year quarter was $6 million. Turning to our expectations for 2020. As a reminder, our quarterly operating and cash flow results can vary materially based on factors such as the timing of shipments of large orders, or the timing of certain investments made before or after quarter end. Elias provided adjusted EBITDA guidance and our payout ratio expectations for the full year of 2020. I'd like to now provide guidance on CapEx and cash taxes. For maintenance CapEx, we have previously estimated CapEx spend of between $20 million and $25 million for the full year of 2020. Our current estimate for maintenance CapEx for the full year of 2020, including Marucci is between $17 million and $20 million. For growth CapEx we had previously estimated spend between $10 million and $15 million for the full year of 2020. However, our revised expectation for growth CapEx is between $13 million and $15 million, primarily at 5.11. For 2020 cash taxes, our previous expectations were to spend between 6% and 8% of our subsidiaries total EBITDA on cash taxes. We now expect cash taxes will decline to between 6% to 7% of our subsidiaries total EBITDA. Keep in mind, this percentage should be applied to full year 2020 total EBITDA and not quarterly. As we experienced in Q2 with Velocity Outdoor, our cash taxes as a percentage of EBITDA can vary significantly quarter to quarter. With that, I'll 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. As I mentioned earlier, we took steps in 2019 to prepare for the unexpected, and those decisions have positioned us well to weather the storm and emerge stronger on the other side. We have the balance sheet strength to support our companies as they operate in these highly unusual times. Our companies are leaders in their respective industries, and are poised to gain additional market share in the months and years to come. 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 issuers. We believe the best opportunities to generate long term shareholder value occur during market dislocations like we are currently experiencing, and we are constantly evaluating the best ways to enhance our portfolio, while prioritizing the financial health of our subsidiaries. We entered the year with significant balance sheet strength and further solidified it with the capital raised in May. With our enhanced balance sheet position and the resiliency of our subsidiary companies, we feel increasingly prepared to capitalize on new opportunities while taking a patient and disciplined approach to executing our growth priority. Our strategy has differentiated CODI for more than two decades, and remains consistent as we navigate the uncertainty ahead and position our subsidiary companies for long term success. We are intensely focused on executing our proven and disciplined acquisition strategy, improving the operating performance our company, 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.

That is noted. [Operator Instructions] Our first question comes from the line of Larry Solow from CJS Securities. Your line is now open.

Great. Thank you. Good afternoon guys.

Good afternoon, Larry.

Just a couple of subsidiaries and then maybe one more general question. Just on Velocity Outdoor, obviously, benefiting from the demand for outdoor products. They started sort of as COVID sort of came out these guys -- you guys are sort of undergoing restructuring there. Has that come into play, though, can you just sort of speak to velocity sort of mid term outlook? And do you expect sort of this demand and these kind of performance numbers to continue in the back half of the year? I realized that its not that easy to -- yes go ahead?

Yes. So I think on the manage, Larry, this is Pat. I think on the management side, Tom McGann, Kelly Grindle and the team beneath them have really done an exceptional job, managing through this, and we couldn't be happier. As it relates to demand, I mean, I can't speak to October and November. I can tell you we don't see any slowing down in July and probably August. And we'll see from that. If you remember, Q3 is a big quarter for them, seasonally anyway, as it relates to hunting and outdoor activities. So that's -- how's that were forgotten. I can talk about the next few months. I can't tell you what December is going to look like.

No. That's what I was saying again, my question that I really it's not easy. I get it. I get it. Now that's all. So then on Sterno, obviously much better than feared. Certainly down year-over-year, but with PCB business basically being temporarily wiped out or close to zero. Can you speak sort of reports [ph] and the actual year-over-year growth at that business? I got to imagine it's pretty material?

It's material. There's no doubt its material, but we've also seen hand sanitizer sales, some of the outdoor more camping fire starter sales help through the retail channels. So I don't think we talk -- it is a material growth. But I don't think we speak directly to subsidiaries or pieces of businesses. But the other part of it is kind of a transition to hand sanitizer and some demand for those other non shaping fuel related product external sales

Right. And it's pretty commendable to be able to shift into that, start making the hand sanitizer just on a qualitative basis. Did it sounds like it actually quantitatively moved the needle somewhat and helped performance?

Yes. And I think -- Larry, I think the team really needs to be commended here for this. It isn't easy to bring up a new line. I think everybody's aware or probably a lot of people are aware. There's something like 75 companies that have had hand sanitizer recall lately by the FDA. Lot of them are imports or their companies that tried to get quickly into the market. There's actually quite a bit that you have to go through from a regulatory standpoint to be able to do this. And this is a process that requires special manufacturing conditions like explosion proof room. Sterno have that all available to them and the management team really moved at light speed to be able to do this. And what excites us about this product category. One is, we think it's now a new category that's here to stay in the hospitality industry, by and large before it wasn't there, because most restaurants encourage their employees to wash their hands rather than to use hand sanitizer. But now guests are using hand sanitizer. So it's a big change. So this is a new market that's kind of up and open for grabs. And Sterno's quality has always been number one with Sterno. And we have 100-year track record of establishing quality product, distribution capabilities. And so, lot of companies have come in with products that may not be up to spec. Our product is and it passes kind of all the requirement. And so the team has done a great job and we think this is a nice adjacent market that is probably here to stay at some level and will be complimentary to the shaping line when that business comes back.

Right. Good. Yes, absolutely. Okay. Shifting gears probably on 5.11. Can you just remind this roughly normalized? What's the percentage of business that's on the professional side? What is that roughly? What was it in 2019?

Professional was a little greater than 50% of the business. And I'm going to talk about professional being both domestic and international with sort of 55% of the business in 2019. Given the differential in growth rates, we anticipated that 2020 that would reverse In fact, it has, especially as the consumer business, you see some of these trends. Pat mentioned the growth in same store sales, which clearly includes e-commerce. But if you compare that to a lot of household brand names that are out there that sell apparel and footwear, some of these guys are doing 30%, 40% in this company, the same store sales growth accelerated from kind of 7% to 10% from Q1 to Q2. So really is, I think strong testament to this brand and its emergence and how much it speaks to its consumer. But you know, just in terms of percentages, the consumer business is now running larger than the professional business. So, if it was 55, 45 last year, it's sort of flip flopping this year.

Right. Very impressive. And then, it sounds like you guys have -- I know you look like stopping or kind of on a little bit of a pause. But it sounds like you found some new locations and a little bit of CapEx going into -- I assume a restart maybe a slower ramp and near term on the store openings, any color to that?

Yes. We're opportunistically opening up stores. We've authorized some. We won't have the same number of new stores in 2020 likely that we had in 2019. But there's opportunities out there as landlords are feeling the effect of this market to, even if -- so that's what we're doing.

Right. Okay. And then you guys said, transformational to the entire company. That just sort of the -- obviously it's your biggest or your second biggest holding today are right there with start off. That's just the growth outlook. Is that potential monetization of the asset? What's sort of do you mean by that? Or any thoughts on that?

Yes. So Larry, we think this is a company that more likely they not will follow the Fox path, if it continues with the growth that it's been on and would be an IPO candidate for us. I think when you consider companies that are more on trend and have really long term -- first off, we talked about the same store sales comps, which in any type of business like this is going to be really meaningful the value of company. But if you just think of some of some of the drivers that are kind of in path, a numerated a few of them that are really aiding in that growth. You think about how early the company is in its rollout of stores, e-commerce continuing to grow along with that. And as we continue to enable more consumer services, we think we're just really early in this consumer component of the company's growth. And as a result of that, we think that multiples are generally pretty high for companies that demonstrate these type of characteristics. Very low cyclicality in the depths of the pandemic, really high growth rates driven by a lot of white space and kind of just new opportunities to put down retail stores, but then strong same store sales growth. And when you combine bunch of those factors, we think this is not just a fast growing company for us, but it's also a really high valuation multiple. Based on that and I think when you look at it where some of its competitors, or just people broadly in the consumer lifestyle business that are on trend are trading with these type of growth profiles are trading on a multiple basis, you could easily see how it could help re-rate the share price of CODI, if it was to be a standalone public company trading anywhere near where some of these other kind of consumer lifestyle brands are trading.

Right. Got it. Again, appreciate the color. Thanks a lot. And congrats again on a good quarter.

Thank you, Larry. Appreciate the support.

Your next question comes from the line of Matt Koranda from ROTH Capital. Your line is now open.

Hey guys. Thanks for taking the questions. Just wanted to start on 5.11. Can you guys comment maybe on just the breakout the growth in store sales versus online? It's great to see the comp up in Q2 overall. But how much did that kind of skew toward a quite a bit of e-comm growth?

Yes. So Matt, we don't break it out in that level. Typically I would say, we don't break out what our same store sales growth is. We just wanted to do this, because it's such a highly unusual time. And because companies, I think there was a lot of concern about having a multi channel retailer. Even though this is really an omnichannel company and it's a products company. It does have a retail component. And I know there was a lot of concern out there. So we gave more granularity into kind of the growth rates than we typically would. All that being said, I'll try to directionally give you some idea. Our e-commerce business was growing really rapidly, sort of circles double what it was over prior year. Our retail business was down slightly, and you would anticipate that being the case, because we close to the general public for one of the three months. And then, when we reopen, we went to extremely limited kind of hours. So, it was obviously, it skews towards e-commerce. I think when we talk about CapEx and I know this isn't part of your question, but just to get out there, a lot of the growth CapEx we're putting in right now is really enabling much more seamless consumer experiences between our e-commerce and our retail, and as those lines get blurrier, frankly, it gets a lot harder to be able to tell where you're generating revenue. Is it coming because of the store. For example, if you order online and have it ship from store, you get the store, the credit or online. If you order online and pick up from store, does the store get a credit. Where do returns come back? Do they go against kind of online because it's small by channel? Or does it go against the store. So this is going to continue to get blurrier and blurrier. And I think that's why the convention has always been to look at same store sales as e-commerce being one box. But kind of directionally the e-commerce was growing at a really rapid rate. And we would expect that to continue to. And I think the brands that are more e-commerce native, like 5.11. And they have the e-commerce side foreign advance of having a consumer retail side, those brands are holding up far, far better than brands that are mostly retail reliant with small e-commerce percentages.

Very helpful color. Thanks a lot. And just a follow up on 5.11. I mean, I guess my expectation would be that higher net numbers generally should translate or correlate at some rough way to your future consumer sales expectations. So could you help us kind of calibrate our expectations around that? Because, obviously, we seen a big acceleration and data points there. Help us understand sort of how that does translate to the consumer sales side of 5.11 on a go forward basis?

Yes. I would say, your net numbers, you're talking about background checks and a certain background check. I'd say we see more of a correlation with that at Liberty than I think we've seen at 5.11. I mean, I can't speak to correlation is not causation, right. And when you buy a gun, hopefully you're getting a safe to. It's not quite that directed 5.11 is what we see. So I caution you from making that direct comparison.

Okay. Fair enough. That's fair. And then just shifting gears, one on Foam and then one more follow up just kind of overall. But on Foam, the Polyfoam add on help us kind of understand the positioning there. It looks interesting, kind of with exposure to cold chain storage. But maybe thoughts on does that change sort of the revenue growth outlook profile for Foam at all, or the margin profile in the way that we should be modeling that going forward?

Not materially. I mean, we're hoping to increase the margins on Polyfoam as we move forward. There's some synergies in any acquisition. It is more cold chain related or concentrated than the rest of our business. So if you have a different view on the growth in the cold chain, slightly it could. But it wasn't a huge, I mean, you've seen the financial disclosures wasn't a huge acquisition, so I wouldn't think it would change necessarily the profile that significantly.

Okay. Got it. And then just on the M&A environment overall, guys, it sounds like obviously, taking my takeaway from your prepared remarks is that you're going to be more aggressive in terms of your posture on M&A. I think he said exactly that. But anything you guys can provide in terms of details, like bias toward add-ons versus platform? Any quantification of the pipeline that you can help out with? And just overall, maybe allies, what are you seeing on the multiples front? Has anything kind of shaken loose since the pandemic or is there a lot of money still kind of chasing fewer acquisitions that are available?

Yes. So it's a great question, Matt. And your observation is correct. We have moved from being pretty much risk off in a net divestiture to now being risk on and then new investor. We think that when you have this kind of volatility that's caused by the pandemic, these are sort of the market dislocation. When a dislocation like this happen, it's the most opportune time to put money to work and really benefit our shareholder over the longer term. Generally what fuels the M&A market, especially with competing private equity firms is access to credit markets. And the credit markets are really weak right now. I would say, if you're a large public company borrower and the Federal Reserve as we know kind of dabbled into some investment grade bonds and that obviously pushed money out of IG and into lower class bonds, capital access has been much stronger. But if you're trying to do a middle market, one-off acquisition, the market for credit there, I don't want to say it's completely disappeared, but it's severely reduced. And so as a result of that, our private equity peers that is disadvantaged today, relative to us, where if you went back a year ago, they were massively advantage because credit standards were as loose as they've been in the 20 plus years I've been doing this. And it was just fueling kind of a massive run up in prices. So that's sort of why we look at now is a great opportunity to be aggressive in M&A. And frankly, it's why we took a lot of balance sheet capital coming into the year and rose more capital, because we want to take advantage of these conditions. And we don't know how long these conditions are going to remain. Typically, the public markets, capital markets heal, the private markets will heal with some type of lag. So there's probably a window that exists where this volatility is going to create an opportunity and then prices likely are going to rise pretty significantly. Now, all that being said, in the second quarter with a lot of the government programs that got put in place, there wasn't a impetus for companies to be going out and seeking to do a transaction. And so if you had a good company that has liquidity, earnings were holding up, bringing your business out in the midst of the pandemic and testing the waters, who knows what the price discovery would look like, didn't really make a lot of sense. So good companies pulled out of the market. And companies who could really stressed financially are getting access to government assistance that was keeping them from coming as quickly to the market. Now, what we're starting to see is the beginning stages of that really change. We're hearing from a lot of the investment banking folks that we work within the M&A market, that there's a lot of pitches that are starting to happen. So that kind of puts a three to four month kind of lag as to when we would expect to see, significantly more activity coming. But for right now, the markets were relatively muted. Now, that for us, you asked whether we have a bias towards add-ons or platforms? We clearly are seeking to grow the number of platforms that we have. I think we've said on numerous occasions, we have the human capital and the organization to be able to move to 12 to 15 platforms. We think that greater diversification within the portfolio is beneficial, it lowers the volatility of the portfolio. I think as we strive to continue to get ratings upgrades and having lower volatility in earnings is clearly an component to that. But in on top of that, in a market where you're not seeing a lot of new big opportunities come to market, for us to be able to go out and approach add-on acquisitions where we may have already had contact from before, to continue to follow up on that is probably more actionable and kind of the really near term. But we're looking at both. I would just say that platforms are probably likely going to be a little bit kind of longer in the year, a little bit farther off in the year. In terms of pricing, it's really hard to say right now, because there's no price discovery, because M&A has been really shut off in the second quarter. I will give you my hypothesis, which is, I think pricing may appear high when you look at COVID depressed earnings. And so I think on a multiple basis, what you see transact is going to be significantly lower than what the intrinsic value of the company would have been and significantly lower than a couple of years past. But it may look high on a multiple depending on how much earnings are temporarily down. And so, I think there will be good values to be had in the next year kind of 12 to 24 months. I think beyond that when the credit markets come back, I would just tell you, private equity capital has not contracted during this time. In fact, it's probably expanding slightly during this time, mostly to the big established firm, but private equity capital is still growing. And so that suggests that as credit markets come back a year, two years, three years from now, asset prices are likely to revert right back to kind of levels that they were pre pandemic.

Super helpful. Appreciate all the color. Congrats and I'll jump back. Thanks.

Thank you, Matt.

Your next question comes from the line of Kyle Joseph from Jefferies. Your line is now open.

Hey, good afternoon guys. Most of my questions have been addressed. Just one more on Marucci obviously a challenging time for the business, but stepping back and if you can even think about this in this day and age, but like kind of ex COVID, can you give us your expectations for the overall size of that business? And given the addressable market and if you can kind of step back and do that pre COVID?

Yes. So Kyle, this is this is Dave. So, I would say, clearly some headwinds this year, and I think, at least, short into the medium term there'll be a little hangover just in terms of some inventory and in the channel and maybe huge tournaments [ph] being down a little bit. But to your question, I think we feel even better about kind of the medium term here in particular due to the impact of the current environment on some of our competitors. So, we feel like there's some nice opportunity to take some market share, expand product offering, international opportunities. But the hangover from this year in terms of maybe competitor discounting and inventory in the channel is likely to last a little while. But -- so hard to predict kind of timing. But we would expect this company to resume its growth profile when those -- when that situation remedies.

Sure. Thanks. And then one follow up for me. Just you talked about e-commerce trends at 5.11. But looking at the other consumer companies, which companies have seen the biggest offset or the most benefit from shift to e-commerce trends?

Yes, Kyle. So I would say, all of our companies on the consumer side have benefited from their ecommerce side of their business has benefited. And one of the things that I think when we've chatted before we've talked to you about kind of getting our companies aligned, and in terms of their distribution channels, making sure that e-commerce was becoming a larger component, and really even more so than that becoming less reliant on a physical footprint. And so, for an Ergobaby, and one of their other brands that's in their tool [ph], how do you create communities where, if you're seeing the products walking through a bye-bye baby, that's great. But if that's going to be more limited in the go forward, how do you still get that sense of community that you need to have in order to pull and get product sales through that? And we've really been emphasizing that with all of our companies. When we talked about the restructuring that needed to happen at velocity, part of it was bringing in a management team that understood that we needed to have, we needed to build communities, we need to be less reliant on the physical footprint that we were going through historically, because those channels were just changing. And so, we've been working with our companies for years now and being able to get ready for that. And whether that's using social platforms to build communities or YouTube, which is part of, I guess, social platforms. But all the different aspects of being able to better connect to your customer and do that electronically, and then have distribution capabilities that go along with that has been something that we've been working really aggressively on with our company. So I think it's one of the reasons you saw that our consumer businesses have performed as well as they have performed, right? I mean, as a class or consumer businesses grew revenues and grew EBITDA year-over-year in the second quarter. And that was enabled because they are -- they have done all of these basic foundational things prior to. So, Velocity is working really aggressively there. I'll give you an example of a company that you would say, well, how does this lend itself to electronic distribution? But one of the reasons Liberty Safe is doing so well is a couple of years ago, we really kicked off an initiative and our management team there, Steve Allred and Justin Buck have done just such an extraordinary job of being able to drive online sales. And our online sales work a little differently, where we actually partner with the dealers that we're working with to fulfill the orders. But we generate something like a third of the orders for our dealer network comes through our website. And for us, it's great, because we now are controlling that customer. So there are many, many benefits that come along with it. But we're talking about something that could weigh upwards of a ton. And you say, well, that doesn't really lend itself to the e-commerce. You're right, it doesn't. But you can still take steps to de emphasize strictly the in-store experience and bring it more into an online experience and be able to work in that manner. And so, we've been doing it across the board with our companies, and all of our companies experienced really strong growth in e-commerce demand. And I think why the consumer demand and revenue was as strong as it was.

Got it. Very helpful. Thanks very much for answering my questions, and congratulations on good quarter.

Thank you, Kyle.

Your last question comes from the line of Robert Dodd from Raymond James. Your line is now open.

Hi, guys, and Congrats. A really impressive quarter in a bizarre environment. Some follow-ups really. On Velocity and Liberty kind of the Outdoor we've seen and obviously in all the data in terms of consumers. Really, we're having a lot of hobby [ph] Outdoor et cetera. So, that surprising, that it did so well since where we were couple of months ago. But how confident are you that the demand you're continuing to see now is really end market demand versus inventory rebuild. I mean, in your prepared remarks you mentioned the couple of times the inventory channels of the distributors and wholesales were pretty thin because of the strength of demand. But how confident are you? Obviously, you said, you feel really good about in July, August. Any information, any data you've got that shows that's really flowing through to end user purchases versus just restocking?

Yes, Robert. So right now what we're seeing is of the inventory levels of our partners are the lowest we've seen in years. And in fact take a Velocity for example, the biggest challenge and you're right, if you think about it, its probably not surprising that some of the outdoor brands and kind of hobby things like this when you're limited and what you can do out here was going to grow. So we are all pleasantly surprised by that. But I would say, we think this is probably a little bit more durable in terms of the demand. Right now, I would say, we are very confident that only is this not just end market demand that's represent in the sales, but our sales don't even represent the full end market demand, because our inventory levels that are distributor partners are so low right now. And so, we think there is a considerable period of just rebuilding inventory backup to the right level. And frankly, what we're seeing even in July right now is that demand at the store level and demand remains really robust and kind of elevated at levels significantly greater than where it was a year or two or three year ago. So we feel very confident that this is end market -- this is all end market demand plus. Now, whether this will a year from now? We'll still be talking about if there is a vaccine and there's better therapeutic and things are back to normal then we'll address this end. But I would say, for the immediate future, this business looks to have -- these both of those businesses look to have demand that is there to fulfill and more of the challenges on the supply chain and the manufacturing capacity that we have both to add our Velocity and Liberty subsidiaries.

Got it. Very appreciate that. I mean, the follow-up to those, how fast could you increase that manufacturing capacity? Is that in the plan? Because obviously, it doesn't look the growth CapEx increase, sounds like its mostly 5.11 rather than putting in other line and velocity for example. So are there any plan from them as well?

Yes. It takes a little bit longer. I mean, part of it is, we have complex supply chain specially at Velocity. And our supplier partners are fully max out as well. And so, its not as easy to ramp up supply. When you're talking about demand growth that is been this material, it takes a little while to ramp it up. So I would say, in the near term sort of 2020, its going to be difficult to ramp supply up. Now on Liberty, this is pretty big pieces of equipment and you're building safe. There is just constrains in terms of the physical location, getting new equipment. And I will tell you, we're being a little bit cautious. And we recognize that the pandemic has created many dislocations that are out there. Look, people aren't traveling right now. They are not doing other leisure activities. So there is more disposable dollars that can be used in other areas. They are doing more outdoor things. I would say, what we are being guarded against is investing too much in supply growth to the extend that some of the demand increase is not long term sustainable. So we'd like to -- if we would rather be more methodical with the way that we plan out the supply growth, the amount of investment that is really required. And so, we will bring on more supply. We're working aggressively to fill all of the demand and make sure that we can be good partners to all of our distributors. But at the same time, we want to be responsible and not overbuild for given the current condition. And as we all have to just appreciate, the uncertainty today is greater than it's been kind of probably at any point and composite history right over the last 20 plus years. And so, we just need to be a little bit more cautious with the way that we plan supply growth.

Got it. I appreciate that. I'm going to ask you on 5.11, you talked about obviously increasing growth capacity on the stores lease signings has given this disruption and the opportunity to be opportunistic. I mean, is this creating an opportunity for maybe to change. Which locations you pick? I mean, are you aiming for -- what would have been a more expensive location before but now lease pricing is more reasonable given the environment. Can you give us any color? Is anything changing about that the selections of those and why you're signing the new leases, and where you're signing the new leases now?

Yes. Right now, we're still looking at the places that have been -- the locations that have been proven to work for us, right? So through a signage, we know the co-tenants that work well for us, stuff like that. We're not yet opening up 5.11 South Coast Plaza, for example. And nor do I see that as near term in our future. So I'd say we're able to find these locations easier now and kind of those ideal locations, the same ones that kind of fit our profile easier now, and are able to drive better lease economics. But we're not yet sort of expanding the aperture to that other kind of higher affluence mall.

Got it. And then one more if I can. On the acquisition front, I mean, most of these are follow-up, so two questions. I mean, you talked about, obviously, an additional platform acquisition adds diversification to the portfolio. At the same time, a new platform acquisition in this environment given the level of uncertainty I think adds more risk to the portfolio versus given that there's less known about that business versus an add-on. So, I mean, how would you -- I mean you said, obviously that the platforms may be further out. But is that simply because the market and the due diligence for those takes time or you want to wait for more visibility, stability, information about how this pandemic is going to pan out before adding a platform? And do the portfolio add-ons just make more sense given more of this known about those industries and end markets at this point?

Yes. And that's a -- its a great observation, Robert. I mean, clearly add-ons are less risk, because we have the management team already in place. That's a platform we own. And we have systems in place we can generally plug those in. We know better about the industry. We and thinking about new platforms, I would say right now, the reason I would say, I mentioned, it may be a little longer to transact on a new platform is because the M&A market for new platforms has really dwindled. And we see fewer opportunities right now, just because of the dynamics that I talked about earlier with kind of government stimulus. And the banks have taken a much more kind of let's just wait and see approach, giving forbearance to companies and not really forcing action, that would generally create a lot of kind of potentially good company, bad balance sheet situation, where it forces the business to recapitalize with a new owner, such as Compass. So that's really the reason that I see it taking longer to do a new platform than an add-on. Now to your question about risk profile. Clearly I get your point, and that's 100% the case. I think, if we were to consummate a new platform, it would have to be a really high quality company that we understood, really well what the growth drivers were. What its downside risks was. The dynamics of the business. And we would have to get comfortable, because as you stated, there's a greater level of uncertainty today than there was kind of a year or two ago when we had economic conditions that were supportive. Now you've got kind of the pandemic. You've got the economy that's more reliant on government assistance. And so there's clearly more risk factors. And so it does raise the bar in terms of what we would need to see for a new platform. But there are some really -- and for example, I would just say, we had seen some really high quality companies, free pandemics, that if they were to come back into the market, we would be really excited because the quality of the company was such and the stability of their earnings were such that we would transact. I'll point to Marucci. Because Marucci truly is pandemic lead opportunity that we were able to close on. It was pre pandemic. But remember, the pandemic was sort of raging throughout China and Asia at that point and was just starting to come into the U.S. And as other buyers were being scared off from the property, I just tell you, this is an asset that we looked at and said, are we comfortable with what the earnings will look like in 2020. And frankly, we thought at one point, it would be zero. And so we're much more bullish about it now. And we think it will be significantly greater than zero. So that is a, you know, a good positive. But when we looked at the dynamics of this business and how strong it was, I mean, this is an a business, and you don't see opportunities like this that come along all the time. And so for us to be able to take advantage of a company of this quality with the type of growth profile. And trust me when we get out of 2020, we're all going to like the growth profile of Marucci. And it's going to help diversify the growth of the overall business. It will be additive to growth, and it will diversify away from 5.11 being sort of the strongest pillar of growth, so that we have more. If we saw companies like Marucci, we would want to act on those. Because that's part of the opportunistic advantage that we have with our permanent capital model to be able to bring the bear. So, we're out looking for these kind of A type companies like a Marucci. And I think in those type of businesses, we think they're the first to rebound. We're already seeing Marucci rebound, and we believe it's much faster than where its competitors are. And that's like Dave said, we think that this is actually net positive for Marucci, because our competitors are being weakened and we're coming out faster, so we're gaining more market share at their expense. If we can find other platform opportunities like that, that's the stuff that we're looking for right now and we will transact again.

Got it. I appreciate it. Congratulations on an impressive quarter again. Thanks.

Thank you, Robert.

I am showing no further questions. I'd like to turn the conference back to Mr. Elias Sabo.

I would like to thank everyone again for joining us on today's call, and for your continued interest in Cody. We look forward to sharing our progress with you in the future. That concludes our call, operator.

Ladies and gentlemen, that concludes today's conference call. Thank you for participating. You may now disconnect.