Compass Diversified Q2 Earnings Call Highlights

• Compass Diversified's $292M Sale Ignites Stock

Compass Diversified (NYSE:CODI) reported second-quarter results marked by double-digit growth in subsidiary adjusted EBITDA, improved operating cash flow and lower debt following the sale of Sterno’s food service business, while maintaining its full-year 2026 outlook.

GAAP net sales for the second quarter were $424 million, compared with $479 million a year earlier. Income from continuing operations was $82 million, versus a loss of $81 million in the prior-year period, while basic earnings per share were $0.86, compared with a loss of $0.88. The quarter included a $182 million gain from the sale of Sterno’s food service business and a $58 million reduction in the fair value of a receivable from Lugano.

• Compass Diversified In Buy Range After Clearing Handle Buy Point

On a comparable basis excluding Lugano and Sterno’s divested food service business, net sales were approximately $411 million, roughly flat from a year earlier. Subsidiary adjusted EBITDA rose 12.6% to approximately $92 million. Branded consumer adjusted EBITDA increased 24.2%, while industrial adjusted EBITDA declined 12.8%.

Consumer businesses drive EBITDA growth

Chief Operating Officer Zach Sawtelle said every branded consumer business increased adjusted EBITDA during the quarter. BOA’s adjusted EBITDA rose 27%, supported by growth across its primary segments and expanding gross margins. The Honey Pot Co. increased adjusted EBITDA 32% as it expanded period-care distribution across grocery, drug and mass retail channels.

PrimaLoft returned to growth, with adjusted EBITDA up 28% due to demand from Asian brand partners. Sawtelle said some of the quarterly strength at BOA and PrimaLoft reflected the timing of customer orders, which the company incorporated into its expectations for the rest of the year.

At 5.11, adjusted EBITDA increased 14%, aided by margin expansion of more than 200 basis points. The company cited more disciplined promotional activity and tariff refunds. During the question-and-answer session, Sawtelle said the company believes moderation in promotions supports long-term value by attracting customers willing to pay full price for products. He also said 5.11’s professional, business-to-business segment was performing strongly in North America and Europe.

Sawtelle characterized consumer performance as at or slightly above the company’s expectations entering the year. He said Compass Diversified was not seeing consumer weakness across its branded businesses.

Industrial results mixed as Altor faces pressure

Within the industrial portfolio, Arnold Magnetic Technologies posted adjusted EBITDA growth of nearly 50%. The company said Arnold’s backlog remained strong, supported by demand for rare-earth magnets sourced outside China and progress at its Thailand facility.

Rimports benefited from tariff refunds during the quarter but also absorbed separation costs tied to the Sterno food service divestiture. The company reiterated that lower expected volume from a large customer is expected to weigh on Rimports’ second-half results.

Altor remained the principal operating challenge. Its adjusted EBITDA declined by roughly 50% in the quarter as tariff-related disruption pressured its white-goods business and weaker vaccine demand affected its cold-chain operations. Higher input costs and competition also weighed on results.

Sawtelle said commercial execution at Altor “has not been good enough” and that the company is focusing on end markets where the business is strongest while reducing costs to match demand. He said Compass Diversified expects a gradual improvement over the next four to five quarters, rather than an immediate recovery, citing elevated oil prices for a key raw material as a continuing margin headwind.

Debt reduction, management fee changes and Lugano recoveries

Chief Executive Officer Elias Sabo said the company used more than $280 million in proceeds from the May sale of Sterno’s food service business to reduce debt. Total debt ended the quarter at approximately $1.6 billion, down nearly $300 million from year-end. The company’s covenant leverage ratio improved to 4.8 times from 5.3 times at the end of the first quarter.

Compass Diversified ended the quarter with $87 million in cash and near-full availability under its revolving credit facility. Subsequent to quarter-end, the company amended its senior credit facility, extending its term loan and $54 million of revolving commitments to Jan. 12, 2028.

Operating cash flow was approximately $30 million during the second quarter, bringing first-half operating cash flow to more than $50 million, compared with an approximately $65 million cash outflow in the first half of 2025. Capital expenditures were $6 million in the quarter and $11 million year to date.

The company also amended its management services agreement, effective Jan. 1, 2027. The amendment lowers the base management fee to 1.25% of average adjusted net assets on the first $3 billion in assets, from 2%, and caps the 2027 base fee at $30 million. It adds two potential awards, each equal to 12.5 basis points of average adjusted net assets, linked to manager ownership of Compass shares and shareholder returns and operating performance.

Sabo said that even with full payout of the additional awards, the revised agreement is expected to reduce 2027 fees by approximately $20 million compared with the prior formula. CFO Stephen Keller said investors should think of recurring corporate costs at around $20 million next year and management fees in a range of $30 million to $35 million, excluding one-time items.

Regarding Lugano, Keller said the company expects to receive nearly $20 million by early fall under a settlement with the unsecured creditors committee, with proceeds intended for debt reduction. He also said the company expects roughly another $20 million in potential tax refunds over the next couple of years, though timing remains uncertain. Additional recoveries are possible but were not quantified.

Outlook maintained; additional divestiture remains a priority

Compass Diversified maintained its fiscal 2026 total subsidiary adjusted EBITDA outlook of $320 million to $365 million. The outlook includes approximately $9 million of adjusted EBITDA generated by Sterno’s food service business before its sale.

• Branded Consumer adjusted EBITDA outlook: $235 million to $270 million.
• Industrial adjusted EBITDA outlook: $85 million to $95 million.
• Full-year capital expenditure outlook: $30 million to $40 million.

The forecast assumes no additional acquisitions or divestitures and no significant changes in the current trade environment. The company said its full-year guidance includes expected tariff refunds, which Sawtelle described as modest mid-single-digit millions in the second quarter and modestly higher in the second half.

Management said deleveraging remains a top priority. Keller said the company aims to operate at leverage of roughly three to 3.5 times over time and expects it could reach close to 4.5 times by year-end on an organic basis, excluding a divestiture. He said the company could begin considering capital returns to shareholders if leverage falls below four times.

Sawtelle, who will succeed Sabo as chief executive officer at the end of 2026, said the company remains committed to pursuing another divestiture, including potential full or partial monetizations, to accelerate debt reduction and help narrow what management considers a gap between the company’s share price and its intrinsic value.

About Compass Diversified (NYSE:CODI)

Compass Diversified Holdings (NYSE:CODI) is a publicly traded private equity company headquartered in Bethesda, Maryland. The firm specializes in acquiring and managing middle-market businesses across a variety of industries, with a focus on driving operational performance and sustainable growth. As an externally managed entity, Compass Diversified leverages a disciplined investment approach to build a portfolio of market-leading companies that benefit from strategic oversight, capital support and shared best practices.

Compass Diversified's investment activities span five core sectors: branded consumer, consumer services, differentiated industrial products, value-added distribution and business services.

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