Compass Diversified (CODI) Q3 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call reveals significant net losses and operational challenges, particularly related to Lugano. Despite some positive performance from Honey Pot and future growth expectations, the lack of specific guidance, ongoing divestiture plans, and economic slowdown concerns contribute to a negative sentiment. Additionally, the market cap suggests a moderate reaction, resulting in a likely stock price movement in the negative range of -2% to -8%.
Key Financial Performance
Net Sales (Q3 2025) $472.6 million, up 3.5% year-over-year. The increase was driven by overall growth in the company's subsidiaries, excluding Lugano.
Consolidated Net Sales (Year-to-Date 2025) $1.4 billion, an increase of 8.6% over the prior year or 6.1% excluding the impact of Lugano. Growth was driven by strong performance in the consumer and industrial verticals.
Consumer Vertical Sales (Year-to-Date 2025) Up 3.1%, driven by strong growth at the Honey Pot and additional contributions from 5.11. BOA declined slightly due to exiting a lower-value business in China, but its core business grew double digits.
Industrial Vertical Sales (Year-to-Date 2025) Grew 10.5%, driven primarily by Altor's acquisition of Lifoam. Growth was partially offset by short-term headwinds at Arnold due to geopolitical uncertainty and rare earth supply chain disruptions.
Subsidiary Adjusted EBITDA (Year-to-Date 2025) $257 million, an increase of 5.8% over 2024. Growth was driven by double-digit growth at the Honey Pot and Sterno, as well as Altor's acquisition of Lifoam. Partially offset by challenges at Arnold.
GAAP Net Loss (Q3 2025) $87.2 million, which includes expenses related to the Lugano investigation and Lugano's operations.
Consolidated Net Loss (Year-to-Date 2025) $215 million, which includes a $155 million loss at Lugano.
Public Company Costs and Corporate Management Fees (Year-to-Date 2025) $99.5 million, including more than $37 million of one-time costs associated with the Lugano investigation and restatement.
Cash Used in Operating Activities (Year-to-Date 2025) $54 million, primarily due to costs associated with Lugano's operations and its disposition.
Capital Expenditures (Year-to-Date 2025) $34 million, in line with the prior year, to support sustained growth in subsidiaries.
Cash and Cash Equivalents (End of Q3 2025) $61.1 million, with less than $10 million used on the revolver.
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Operating Highlights
BOA Fit System: Continued significant penetration in multiple applications such as snow sports, cycling, workwear, and protective headwear. Exited lower-value children's market in China to focus on core business, which grew double digits.
The Honey Pot: One of the fastest-growing feminine care brands, driving share gains and category growth with innovative products. Achieved strong double-digit EBITDA growth.
5.11: Adapted to tariff environment with supply chain actions and targeted pricing while selectively investing to broaden brand reach.
Rare Earth Magnetics Market: Arnold is one of the few U.S. producers of samarium cobalt magnets, essential for aerospace and defense. Despite short-term headwinds from export restrictions, long-term demand for secure supply chains is rising.
Sterno: Achieved double-digit EBITDA growth by optimizing sourcing and production locations to navigate tariff challenges.
Altor: Supported industrial vertical growth with the acquisition of Lifoam in 2024.
Leverage Reduction: Focused on deleveraging through organic growth and potential strategic transactions, including opportunistic business sales.
Capital Allocation: Prioritized reducing leverage, investing in growth, and planning to return capital to shareholders efficiently.
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Risk or Challenges
Geopolitical Risks and Tariff Environment: The year 2025 was marked by geopolitical risks and a fluid tariff environment, creating uncertainty and volatility that impacted operations and financial performance.
Rare Earth Supply Chain Disruptions: Arnold faced short-term headwinds due to disruptions in the rare earth magnetics market, including intermittent export restrictions, which increased volatility and created challenges in supply chain security.
Lugano Investigation and Bankruptcy: The Lugano investigation and subsequent Chapter 11 bankruptcy proceedings resulted in significant financial losses, including a $155 million year-to-date loss, and incurred over $37 million in one-time costs.
Leverage and Debt Reduction: The company faces high leverage, with a year-end leverage ratio of 5.3x (excluding Lugano). There is a need to deleverage both organically and through potential strategic transactions to mitigate financial risks.
Tariff-Related Uncertainty: Broader tariff-related uncertainty created challenges for subsidiaries like 5.11 and Arnold, requiring supply chain adjustments and pricing strategies to protect performance.
Management Fee Overpayment: The overpayment of cash management fees due to Lugano's results has created financial complexities, though the company expects to recoup these fees by the end of 2026.
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Guidance & Outlook
Subsidiary Adjusted EBITDA Guidance for 2025: Expected subsidiary adjusted EBITDA range, excluding Lugano, is tightened to between $335 million and $355 million.
2026 Outlook: The company expects to organically deleverage in 2026 through solid growth in subsidiary adjusted EBITDA. No specific guidance for 2026 will be provided until the fourth quarter call.
Leverage Reduction Plan: The company plans to reduce leverage both organically and through value-accretive strategic transactions, including potential opportunistic sales of one or more businesses. The year-end leverage ratio, excluding Lugano, is expected to be around 5.3x. The credit agreement amendment provides flexibility to deleverage in an orderly way, with milestone fees incentivizing faster deleveraging starting June 30, 2026.
Capital Allocation Priorities: The company aims to reduce leverage, invest for growth and long-term value creation, and return capital to shareholders at the appropriate time.
2026 Assumptions: The outlook assumes no incremental material impact from changes in the tariff environment or other macro and geopolitical developments.
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Shareholder Return Plan
Commitment to shareholder returns: The company recognizes the need to drive shareholder returns and is taking steps to position itself to efficiently and prudently return capital to shareholders.
Valuation considerations: The company believes its current valuation represents a significant discount to the intrinsic value of its underlying businesses. If this disconnect persists, it will be factored into decisions regarding the return of capital.
Leverage reduction: The company prioritizes reducing leverage to mitigate risk and ensure long-term financial flexibility, which may influence the timing and scale of share repurchase programs.
Potential share repurchase: Management and the Board have not yet purchased shares following the completion of the restatement due to timing and process constraints. They expect the insider trading window to reopen after filing the 2025 Form 10-K and completing the annual audit.
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Key Q&A
Q:Can you comment on the performance of the Honey Pot brand relative to internal expectations and the drivers of any outperformance?
A:The Honey Pot brand has significantly outperformed expectations. The brand has successfully expanded into the menstrual category, a much larger market than its original hygiene-focused products. This expansion has led to increased shelf space and strong inventory turns. The company is also investing in marketing, which has contributed to its success. Growth is expected to continue into 2026.
Q:Are there any assets that are off the table for divestiture, or is everything available for sale?
A:All assets are available for sale at all times, depending on the value offered. However, the company will not sell premium assets at a discount. The firm is focused on divestment to reduce leverage and enable capital allocation, including stock buybacks.
Q:How do you view the economy today compared to earlier in the year, and what factors have influenced growth?
A:Growth has slowed from 8% in Q1 to 2-3% in Q2 and Q3. Factors include timing issues with demand, inflationary pressures, and tariffs. The industrial side of the business was impacted by China's export restrictions on rare earth minerals, but normalization is expected in 2026. Despite the slowdown, the company still anticipates growth.
Q:What is the outlook for growth and leverage reduction in 2026?
A:The company expects a growth year in 2026 with strong free cash flow. Deleveraging will occur through both portfolio growth and free cash flow generation. Guidance will be provided in the upcoming year-end call.
Q:What is the normalized management fee for the company, and how will it change in the future?
A:The normalized management fee is approximately $55 million, including fees paid by subsidiaries. Cash payments will be lower next year due to adjustments for overpaid management fees.
Q:What are the potential avenues for asset sales, and could an IPO be a possibility?
A:Asset sales could occur through IPOs, strategic buyers, or private equity. IPOs unlock value but do not provide quick liquidity. The company is exploring multiple assets for sale but will not sell at a discount.
Q:Has the oversight of portfolio companies changed, and what lessons were learned from the Lugano situation?
A:The company has outsourced its internal audit function for better scalability and industry-specific expertise. It will avoid deals with high-risk structures like Lugano's. The Lugano situation was unique, and the overall oversight model has been effective for 20 years.
Q:What is the status of Arnold's supply chain disruptions, and what is the outlook for the business?
A:China's export controls on rare earth minerals caused a $6-8 million EBITDA disruption. Export controls have loosened, and normalization is occurring. Customers are diversifying supply chains away from China, which positions Arnold for above-trend growth in the next few years.
Q:Are there any updates to the long-term organic revenue growth targets for subsidiaries?
A:Most subsidiaries are performing in line with expectations. Honey Pot is exceeding growth expectations, while 5.11 is slightly underperforming due to tariffs. Arnold's growth rate is expected to be materially higher due to supply chain shifts.
Q:What is the expected free cash flow conversion for 2026?
A:The company expects to generate $50-100 million in free cash flow in 2026 after all expenses, including interest, dividends, and CapEx. This marks a significant improvement from historical performance.
Q:Review of Unclear Management Responses
A:Management avoided providing specific guidance for 2026 during the call, stating that it would be shared in the upcoming year-end call. Additionally, while discussing asset sales, management did not specify which assets might be sold, citing the need to avoid giving leverage to potential buyers.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
Altor acquisition
CGM
CODI Chief
Compass Diversified
Compass Group
Honey Pot
Lifoam term
Officer
President Investor
Sabo
Sterno
acquisition Lifoam
agreement amendment
application
cadence
cash fee
chain disruption
chapter
child
compliance
credit agreement
date sale
disruption term
earth supply
export restriction
flexibility
handful
investigation
magnet
manager
reminder
restatement
result date
result plan
role
subsidiary digit
tariff environment
CODI Transcript
Compass Diversified (CODI) Q3 2025 Earnings Call Transcript
Unknown1-14
The earnings call reveals significant net losses and operational challenges, particularly related to Lugano. Despite some positive performance from Honey Pot and future growth expectations, the lack of specific guidance, ongoing divestiture plans, and economic slowdown concerns contribute to a negative sentiment. Additionally, the market cap suggests a moderate reaction, resulting in a likely stock price movement in the negative range of -2% to -8%.
Compass Diversified (CODI) Q4 2024 Earnings Call Transcript
Unknown2-27
The earnings call summary presents a mixed picture: strong financial metrics with a significant preferred equity raise and growth in Lugano, yet vague guidance and lack of clarity in management's responses during the Q&A. The market's reaction may be tempered by uncertainties in growth forecasts and unclear strategies, despite positive signals like deleveraging efforts and potential sales boosts from brand refreshes. Given the company's market cap and the mixed signals, a neutral stock price movement is likely in the short term.
Compass Diversified (CODI) Q3 2024 Earnings Call Transcript
Positive10-31
The earnings call highlighted strong financial performance with significant revenue and EBITDA growth, along with a new $100 million share repurchase program. Despite supply chain and labor challenges, the optimistic guidance and strategic focus on M&A, along with increased consumer vertical EBITDA guidance, present a positive outlook. The market cap suggests moderate sensitivity to these factors, leading to a predicted positive stock movement of 2% to 8%.
Compass Diversified (CODI) Q2 2024 Earnings Call Transcript
Positive8-1
CODI's earnings call shows strong financial performance with a 27% rise in adjusted EBITDA and increased guidance, offsetting the loss from Crosman's sale. The company's strategic focus on growth and successful acquisition of HoneyPot, along with strong performances in Lugano and BOA, bolster confidence. Despite some concerns in the industrial segment, the consumer segment's growth is robust. The Q&A reveals optimism about M&A opportunities and leverage management. Considering CODI's market cap, these factors suggest a positive stock price movement over the next two weeks.
CODI Report
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