Good afternoon and welcome to Compass Diversified's fiscal 2026 second quarter conference call. Today's call is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one a second time. At this time, I would like to turn the call over to Ben Tapper, Vice President, Investor Relations. Ben, please go ahead.

Thank you, and welcome to Compass Diversified's second quarter 2026 conference call. Representing the company today are Elias Sabo, Chief Executive Officer, Zach Sawtelle, Chief Operating Officer, and Stephen Keller, Chief Financial Officer. Before we begin, I'd like to remind everyone that during the course of this call, Cody will make certain forward-looking statements, including discussions of forecasts and targets, future business and divestiture plans, future liquidity and leverage positions, plans to return capital to shareholders, future performance of Cody and its subsidiaries, and other forward-looking statements regarding Cody and its financial results. Words such as believes, expects, anticipates, plans, projects, should, and future or similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to many risks and 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 company's Form 10-K, as filed with the SEC on February 27, 2026, as well as in other SEC filings and press releases. Except as required by law, COTI undertakes no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events, or otherwise. During today's call, we will refer to certain non-GAAP financial measures. Definitions of these measures, reconciliations to the most directly comparable GAAP measures, and additional information regarding their use are included in today's earnings release, which is available in the investor relations section of the company's website at www.compassdiversified.com. Please note that references to EBITDA in our prepared remarks refer to adjusted EBITDA. unless otherwise indicated, year-over-year comparisons of net sales and subsidiary adjusted EBITDA exclude Lugano from the prior year period and exclude the divested Sterno Food Service business from both the current and prior year periods. Our full year 2026 outlook is presented on a different basis and includes the adjusted EBITDA generated by the Sterno Food Service business prior to its sale. Cody has not reconciled its full year of 2026 subsidiary adjusted EBITDA outlook to the most directly comparable gap measure because Cody does not provide guidance for income or loss from continuing operations and management cannot predict with sufficient certainty all of the inputs necessary to provide such a reconciliation without unreasonable effort. Additional information regarding this limitation is included in today's earnings release. Throughout this call, we will refer to Compass to are spied as Cody or the company. At this time, I would like to turn the call over to Elias Sabo. Elias?

Thank you, Ben, and good afternoon, everyone. In the second quarter, our subsidiaries delivered double-digit adjusted EBITDA growth and strong cash flow. Based on our first half performance and current expectations for the remainder of the year, we are maintaining our fiscal 2026 total subsidiary adjusted EBITDA outlook. Zach and Stephen will provide detail on our operating performance and outlook shortly. Beyond subsidiary performance, we took concrete actions to strengthen our balance sheet and improve alignment with shareholders. In May, we completed the previously announced sale of Cerno's food service business at an attractive valuation, applying more than $280 million of the proceeds to debt reduction. We also amended our management services agreement. The amendment followed a board-led review that considered investor perspectives and market practices. It lowers fees and ties more of the manager's compensation to shareholder returns and operating performance. Let me provide some additional details. Effective January 1, 2027, the amended agreement reduces the base management fee from 2% to 1.25% of average adjusted net assets on the first $3 billion in assets and caps the 2027 base fee at $30 million. It also establishes two additional awards, each equal to 12.5 basis points of average adjusted net assets. One is designed to increase the manager's ownership of Cody shares, and the other is tied directly to shareholder returns and Operating Performance. Even assuming full payout of both awards, we expect the amended agreement to reduce 2027 fees by approximately $20 million compared with the prior management fee formula. While the Sterno sale and MSA changes are important milestones, our work is not done. Our shares continue to trade at what we believe is a meaningful discount to intrinsic value and we remain focused on closing that gap. Before I hand the call over to Zach, I want to briefly address the leadership transition we announced in June. I will retire as Chief Executive Officer at the end of this year and Zach will succeed me. Cody has been the focus of my career and I am proud of what we have accomplished. The challenges following Lugano made the past year one of the most difficult periods in our history. I wanted to remain in place through the most acute phase of that work and help put Cody in a position to move forward. With the progress we have made and Zach ready to lead, I believe this is the right time for the transition. I have worked with Zach for 17 years. He understands our businesses, our people, and our model, and I have complete confidence in him. Over the remainder of the year, Zach and I will continue working closely to ensure a smooth transition. With that, I'll turn the call over to Zach.

Thanks, Elias. I appreciate your confidence, and I look forward to working closely with you through the transition. Our near-term priorities are straightforward. Drive profitable growth across our subsidiaries, pursue divestitures where we can realize attractive value, further reduce debt, and as our balance sheet strengthens, efficiently return capital to the shareholders to close the valuation gap in our current share price. We are moving with urgency and discipline to realize value for our shareholders. Turning to the quarter, our strong operating performance was broad-based. Every one of our branded consumer businesses grew adjusted EBITDA. BOA grew adjusted EBITDA 27% on growth across all primary segments with expanding gross margins. The honeypot grew adjusted EBITDA 32% on expanded period care distribution across grocery, drug, and mass, where it is significantly outpacing the broader category. Primaloft returned to growth with adjusted EBITDA of 28%, supported by strong demand from our Asian brand partners. 5.11 grew adjusted EBITDA by 14% on expanded margins of more than 200 basis points through more disciplined promotional activity and Tariff Refunds. We estimate that some of the second quarter strength at Boa and Primaloft reflected the timing of customer orders. We have considered that timing in our expectations for the remainder of the year. With an industrial, Arnold delivered a standout performance with adjusted EBITDA up nearly 50%. Backlog remains strong, supported by demand for rare earth magnets sourced outside China and continued progress at our Thailand facility. Rimports, our home fragrance business, benefited from tariff refunds while absorbing separation costs related to the Sterno Food Services divestiture. As discussed last quarter, lower expected volume from a large customer will weigh on results in the second half. All tour is where we have work to do. Adjusted EBITDA declined roughly 50% in the quarter. Tariff-related disruption weighed on white goods, while softer vaccine demand affected the cold chain business. Higher input costs and competition added further pressure. Those are real market factors, but they are not the only issue. Our commercial execution has not been good enough, and we are urgently working to correct this issue. The team is focusing its commercial efforts on the end markets where Altor is strongest and taking costs out to match current demand. This will take several quarters. Taken together, the quarter reinforced our confidence in our businesses and the teams running them. With that, I'll turn the call over to Stephen to review our financial results, balance sheet, and outlook.

Thanks, Zach. As Ben noted in the introduction, the year-over-year comparisons are complicated by the inclusion of Lugano in the prior year period and the sale of Sterno's food service business during the quarter. I will begin with our reported gap results and then discuss our results on a more comparable basis. For the second quarter, Gap net sales were $424 million compared with $479 million in the prior year period. Income from continuing operations was $82 million compared with a loss of $81 million last year. Basic earnings per share were $0.86 compared with a loss of $0.88 in the prior year period. The current quarter results included a $182 million gain on the sale of Sterno's food service business and a $58 million reduction in the fair value of our receivable from Lugano. Turning to the operating results of our continuing subsidiaries, which exclude Lugano and the vested food service business, net sales were approximately $411 million, roughly flat with the prior year. Branding consumer net sales increased 7.2%, while industrial net sales declined 11.5%. On the same basis, subsidiary adjusted EBITDA was approximately $92 million, an increase of 12.6%. Branded consumer adjusted EBITDA increased 24.2%, while the adjusted EBITDA for industrial declined 12.8%. It is important to note that these results benefited from IEPA tariff refunds received across several of our businesses during the quarter. As Zach described in detail, strong performance across our branded consumer businesses and at Arnold more than offset the challenges at Altor. On a reported basis, including Sturnow's food service business, which generated approximately $2 million in adjusted EBITDA through the May 1 sale date, subsidiary adjusted EBITDA was approximately $94 million. Corporate expenses were approximately $29 million. resulting in total adjusted EBITDA of approximately $66 million. Corporate management fees excluding fees paid by our subsidiaries were $12.3 million for the quarter as reflected in our income statement. Actual cash payments related to second quarter fees were $6.2 million, roughly half that amount. We continue to expect corporate cash management fees paid to the manager to be between $25 and $30 million for the full year reflecting the manager's repayment of the remaining management fees overpaid in connection with the Lugano restatement. Public company costs were approximately $16 million in the quarter. This includes more than $12 million of Lugano-related and other one-time costs. We do not add these costs back in calculated and adjusted EBITDA. They are included in corporate expenses and reduce total adjusted EBITDA. These costs remain elevated due primarily to ongoing professional fees associated with Lugano and the related litigation, investigation, and bankruptcy proceedings. To date, D&O insurance recoveries have offset only a small portion of the related cash outlays. Year to date, we have received around $2 million of D&O insurance reimbursements. We have submitted additional claims and expect significant further recoveries though the timing and amount are not fully within our control. I am accountable for both and am focused on recovering more and spending less. Cash generation improved substantially. We generated approximately $30 million of operating cash in the second quarter, bringing year-to-date operating cash flow to more than $50 million. compared with an operating cash outflow of approximately $65 million in the first half of 2025. Capital expenditures were $6 million in the quarter and $11 million year to date, roughly half the prior year level. We ended the quarter with $87 million of cash and near full availability on a revolver. Total debt was approximately $1.6 billion, down nearly $300 million from year end. primarily reflecting the application of the external sale proceeds to our term loan. Our covenant leverage ratio was 4.8 times down from 5.3 times at the end of the first quarter. Our senior secured net leverage was 0.66 times. Subsequent to the quarter end, we amended our senior credit facility to extend all of our term loan and $54 million of our revolving commitments to January 12, 2028. We have right-sized the revolver to reflect our expected liquidity needs, strong cash generation, and continued focus on reducing debt. We believe the amended facility provides the financial flexibility we need. Reducing leverage remains a top financial priority. We made real progress during the first half, but there is more work to do. Before turning to our outlook, I want to provide a brief update on Lugano. During the quarter, we announced a settlement with the Unsecured Creditors Committee intended to facilitate the orderly liquidation of Lugano's assets, preserve value in the state, and accelerate a portion of our recovery. Under the settlement, we currently expect to receive nearly $20 million in recovery by early fall, which we intend to apply to debt reduction. We expect additional recoveries over time, although the timing and amount remains uncertain. We will continue to update investors as appropriate. Turning to our outlook, we are maintaining our fiscal 2026 total subsidiary adjusted EBITDA outlook of $320 million to $365 million. One note on the outlook, it includes the roughly $9 million of adjusted EBITDA generated by the food service business before the sale because that is how we report the full year. The quarterly year-over-year comparisons I gave you a moment ago exclude it. We now expect branded consumer adjusted EBITDA of $235 million to $270 million. For industrial, we expect $85 million to $95 million. This reflects a stronger outlook for our branded consumer business and a softer outlook for industrial. For modeling purposes, we continue to assume capital expenditures of $30 million to $40 million for the full year. Our outlook incorporates the order timing at BOA and Primaloft that Zach discussed, as well as the current operating environment at Altor. It does not assume any additional acquisitions or divestitures or significant changes in the current trade environment. With that, I'll turn the call back to Zach.

Thanks, Stephen. I want to close by emphasizing two things. First, we have great businesses led by strong management teams. We will continue to support our teams with the resources and flexibility they need to perform. We are focused on ensuring that our businesses deliver long-term shareholder value. Second, our priorities are unchanged. Drive profitable growth across our subsidiaries. Pursue divestitures where we can realize attractive value and reduce debt. As our balance sheet strengthens, we intend to efficiently return capital to shareholders. We believe that our continued execution against these priorities will narrow the gap between our share price and the underlying value of our business. Thank you for your time. Elias, Stephen, and I will now take your questions. Operator, please open the line.

Thank you, and we'll now begin the question and answer session. If you've dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, press star 1 a second time. If you're called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your questions. Again, it is star 1 to join the queue. And our first question comes from the line of Chris Kennedy with William Blair. Your line is open.

Yeah, good afternoon. Thanks for taking the question. Zach, you've had a large role at Compass over the years. Can you just provide some perspective as to what you think the consumer and the industrial subsidiaries can grow over the long term?

Sure, absolutely. Thank you for the question. I think we have a carefully curated portfolio of very high quality consumer and industrial businesses that are well positioned in their respective markets. And as we've outlined in prior earnings calls, I think across the spectrum, the consumer businesses vary from high single digit to double digit profitability growth opportunities. And I think on the industrial side of the business, the opportunity remains in the mid single digit to high single digit growth opportunities in the future.

Got it. Thank you for that. And then any update on free cash flow guidance for this year? Clearly, it's improving. Just are we at a sustainable level going forward? Thanks for taking the questions. I'm going to let Steve answer that question.

I think no significant changes here. I mean, again, obviously, short of any divestiture that we may do during the second half of the year, which would substantially change it. But I think we're still on track for the way that we have described it, still kind of in that $50 million range, given where we're at. And that's after all payments.

Thank you. I'll jump back in the queue.

And our next question comes from the line of Lance Vitanza with TD Cowan. Your line is open.

Thanks, guys. A couple, if I can. The first is on the corporate cost structure. I think that's an area that appears increasingly important to the equity story. And as investors look toward 2027, should we be thinking about total corporate expense, including management fees and public company costs as being closer to 50 million dollars than the levels we've seen historically and and are there additional opportunities over the longer term beyond the MSA amendment that might further reduce corporate overhead over time?

Yeah I think that's the way to think about it I think a little bit higher than 50 million is probably the right way you know there is a you know on the base fees next year there is a from the management fee there is a 30 million dollar cap um We're targeting this year to have about, excluding the one-time fees on public company costs, we're talking about $25 million this year. But I would expect those to come down next year as we kind of deal with some of the auditor changes, et cetera. So I think somewhere for corporate costs, somewhere around $20 million is probably the right number to think about it. And then for management fees, thinking that $30 to $35 million is probably the right way to think about it.

Okay, that's helpful. And then on Altor, you mentioned in the prepared remarks that the work to improve performance remains fairly comprehensive and it sounds like it's going to take several quarters to execute. EBITDA down obviously quite a bit in the second quarter. As we think about the next few quarters, what milestones can we be watching for to gauge whether the turnaround is progressing as expected and how should we think about the cadence of improvement from here? both toward stabilizing results and then ultimately returning the platform to growth. Is it going to be sort of like the proverbial straight line towards flat and then growth, or do we have a few more really tough quarters to come and then a big hockey stick up higher in two or three quarters time? How would you sort of describe that?

Hi, Lance. This is Zach. Thank you for the question. Our assumption is gradual improvement over the next four to five quarters. Q2 was a very challenging quarter. Some external factors, some internal factors of note with high oil prices, our primary raw material has inflated and that is squeezing margins and we do not anticipate that to abate for several quarters. So I would anticipate the recovery to stretch modestly over a handful of future quarters.

So if I could just get one, thank you for that, Zach. And if I could just get one more in before I jump back in the queue. You've talked a lot, including today, about the substantial discount to intrinsic value. We agree. And you've made progress over the past year with the Sterno transaction, balance sheets in much better shape, etc., As you think about closing the discount from here, do you believe additional asset sales remain the primary catalyst or can continued operating performance and deleveraging begin to narrow the gap even absent another transaction?

Great question. We are still highly committed to an additional divestiture in order to accelerate the deleveraging process. and that hasn't changed and we're continuing to evaluate multiple opportunities to pursue what would be an attractive divestiture in realization for our shareholders. We still think that is an important part of the next steps in order to close that gap between our intrinsic value and where the share price is currently trading.

Thanks very much.

and our next question comes from the line of Larry Solow with CJS Securities. Your line is open.

Great. Zach, I just want to welcome you. I know you've been with the company for a while, but welcome to your new role or your pending new role. Well, I guess you're the CEO, so that is a new role. You're welcome. I guess just to follow up on that question, I think we all agree probably that the fastest way to close that gap in underlying value The value we see in the market today is through an asset sale. Your thoughts, kind of big picture, thinking outside the box, any other levers besides an asset sale at a good price, which I think is an obvious way to hopefully improve the value there, but any other thoughts? Clearly, you're going to run by this. The playbook's probably going to be run pretty much the same. I don't expect you to come in there and, you know, upend everything. But just, you know, any thoughts on how, you know, other ways to sort of narrow that gap over time?

Certainly. There are alternative methods, but I do believe that the most prudent way, given where our share price is currently trading, would be to monetize an asset, whether that is a full monetization or a partial monetization. and we're evaluating you know everything across the spectrum with the north star being what is the best way to create value in the share price for a shareholder.

Okay um okay and just more operational question uh it sounds like just you know general broad brush um The consumer, more specifically the consumer as it relates to your businesses. Sounds like the businesses are still marching along, doing pretty well. There was maybe a little bit of some pull forward this quarter, but general broad brush. Have you seen any change since the beginning of the year up to today across your branded businesses?

Generally speaking, we are seeing a strong consumer through our businesses in the data that we see. And I would generally characterize Q2 performance in the consumer side of our subsidiaries at or slightly above expectations. So we are not seeing a weakness in the consumer and probably performing, again, modestly better than expectations set in January of this year.

Just lastly, tariff refunds total. Can you give us just an idea? I think you mentioned Rimports and 511 benefited from them. Can you kind of give us a thought on what it was in the quarter? And I assume there's a number you have kind of baked into guidance, or is that just for what it was in the quarter?

Yeah, that's correct. I would characterize IEPA tariff rebates in Q2 as relatively modest, mid-single-digit millions. and I would characterize expected tariff refunds for the business modestly more than that in the back half of the year.

Okay. And that's already in the guidance or not? That's correct. It is included in the guidance. Got it. Okay. Thanks.

And as a reminder, it is star one if you would like to ask a question. And our next question comes from the line of Timothy D'Agostino with Be Riley Securities. Your line is open.

Yeah, hi. Thank you for taking the questions today. Just on leverage and then obviously deleveraging going forward, I'm looking at the 10Q and for the covenants, it seems you're within your range for all three on those covenant ratios. So I guess thinking to the end of 26 and into 27, Is there a certain leverage ratio you're targeting getting to? And then could you maybe just provide some color commentary on your focus for deleveraging through the end of 26 and maybe how we should think about it for 27?

Sure. Look, again, our number one, we've always said that we would like to be operating around three or three and a half times. So you think that's the right level? And so to get there, we clearly need to do a divestiture, which is what Zach's been talking about as one of the key focus areas. Outside of that, the things that we're doing is, one, driving the businesses forward and also trying to maximize our recoveries from Lugano and some other areas. We think, you know, excluding divestiture, which, you know, is lumpy and happens, you know, it happens when it happens, you know, we think we can get down to kind of close to around four and a half times by the end of the year on an organic basis. And then we would, like I said, we would like to add additional inorganic, whether it's asset sales, business sales, et cetera. And so that is those getting that leverage down is a key focus and driving cash flow. Ultimately, given our businesses, though, we do have really strong free cash flow generating businesses, and that's going to be a key point for organically leveraging this year and into next year.

Okay, great. And then if we just think about, you know, maybe potential other ways of capital or just returning capital shareholders in terms of maybe a dividend or share repurchases, should we really not start to think about that until you get within, you know, that leverage target you're focusing on? Or could we see that, you know, even if you do get to a four times leverage, let's say? Thanks.

I think you'd see us under four times. I think you would see us start thinking through how to return capital efficiently to shareholders. Obviously, we'd have to work with the board to do that. But I think under four, we would see ourselves in a position to probably return capital. And again, with a focus on closing the gap to intrinsic value.

Okay, great. Thank you so much for taking the questions.

And as a reminder, it is star one if you would like to ask a question. And our next question comes from the line of Robert Dodd with Raymond James. Your line is open.

Hi, guys. Hello, everybody. And yeah, welcome, Zach, to Public Company Conference Course 101. On the kind of, on Logano, right, and you gave us, right, you've got a $20 million recovery coming by the fourth. and maybe more ultimately. Can you give us, and I'm not asking for a precise, I mean, are there potential recoveries beyond that? I mean, is it another zero to 20 or is it a zero to 100? I mean, can you give us any kind of idea about the scale there? Because obviously any recovery from Milagano straight to debt is free, air quotes around free, deleveraging. So any qualitative idea you can give us about the relative scale?

It's a It's a similar amount of money from tax. That $20 million that we're talking about would primarily come from the Gordon Brothers guarantee that was submitted to the inventory. The additional recoveries that we have line of sight to would be tax refunds. Those are just hard to predict when. It's not entirely clear. It's hard to predict when the IRS will refund the money, but you would expect another $20 million or so coming in from that over over the next couple of years or so. And then there are other things. There are lots of other recoveries that we would expect the liquidating trust of the final estate to go after. They're very hard to predict, and they have both the amount and the timing. And so I think we would expect some additional recovery. It's just hard to quantify, and so we wouldn't want to We're operating as if those would be zero, and then if they're more, to your point, we'll use that to pay down debt immediately or return capital shareholder.

Got it, got it. Thank you. On to another operating target. BOA and Primaloft, obviously a good quarter this quarter, and it's the seasonality, right? I mean, you know, customers stocking up, so to speak, before the manufacturing season for the back half of the year, however exactly you want to term that. How... Confident are you that this is normal seasonality, which you had built into the guidance already, versus is there a risk that this is inventory overstock, again, that the customers are worried about other tariffs or whatever, and so they're overstocking? And is there a risk that this has a kind of a negative effect in 27? Or is it just it's normal and it's just, you know, skew growth, et cetera, et cetera?

Thanks for the great question. So I would not characterize it as normal seasonality per se. As we noted in the prepared remarks, we do think that the Iran conflict did cause some B2B partners likely to modestly accelerate some orders into Q2. However, I do want to emphasize we believe that to be modest and that is reflected in our projections for the back half of the year. And we remain confident in the business's performance for the back half of the year. So we think that they did perform modestly above expectations as a result of some pull forward. But despite that tailwind, the businesses are really well positioned for a strong back half of the year.

Got it, got it, thank you. And then just on 511, you mentioned more moderate promotional activity, which obviously contributed to margin expansion. I mean, some kind of question, is there, how moderate and is there any risk to impairing End-user relationships who like their coupons, etc. I mean, thoughts on trimming back sometimes on promotional activity might annoy an end customer. And what's your view is there?

Sure. We think moderating the promotional activity is the right decision to create long-term value in the business to ensure that we're getting the right customer that's paying full price for a great quality product. And so it is striking the right balance of ensuring that we are not disappointing our customer in a tough market environment, but also ensuring that we're realizing the appropriate value for the great products that 5.11 is delivering. I would also call out that the professional business, which is the heritage of the business, the DVD portion of the business, is performing incredibly strongly. and is seeing a robust demand both in North America and across Europe, in particular somewhat driven by the increase in conflicts both in Europe and the Middle East.

Got it. Thank you.

And with no additional questions, I would now like to turn the conference back over to Zach Sawtelle for closing remarks.

Great. Well, thank you everyone for your time and we look forward to discussing Q3 with you in the future.

Ladies and gentlemen, this concludes today's call and we thank you for your participation. You may now disconnect.