pass Diversified LLC(CODI) - 2025 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - For Q3 2025, net sales were $472.6 million, an increase of 3.5% year-over-year [20] - Year-to-date consolidated net sales reached $1.4 billion, an increase of 8.6% over the prior year, or 6.1% excluding the impact of Lugano [21] - Year-to-date subsidiary-adjusted EBITDA was $257 million, an increase of 5.8% over 2024 [23] - The consolidated net loss year-to-date was $215 million, which includes a $155 million loss at Lugano [24] Business Line Data and Key Metrics Changes - In the consumer vertical, sales were up 3.1%, driven by strong growth at The Honeypot, while BOA experienced a slight decline due to exiting a lower-value business in China [22] - The industrial vertical saw sales growth of 10.5%, primarily driven by Altor's acquisition of Lifoam [22] - The Honeypot achieved strong double-digit EBITDA growth, while Sterno also delivered double-digit EBITDA growth [24] Market Data and Key Metrics Changes - The rare earth magnetics market faced disruptions due to geopolitical factors, creating long-term opportunities for Arnold [16] - Demand for a more secure rare earth supply chain is increasing, with Arnold positioned to benefit from this trend [16][102] Company Strategy and Development Direction - The company is focused on reducing leverage to mitigate risk and ensure long-term financial flexibility while also aiming to return capital to shareholders [19] - The management emphasized a commitment to generating sustained long-term shareholder value through capital allocation priorities [34] - The company is open to divesting any business if it maximizes shareholder value, maintaining a disciplined approach to valuation [44][46] Management's Comments on Operating Environment and Future Outlook - The management noted that 2025 was marked by uncertainty due to geopolitical risks and a fluid tariff environment, impacting performance [11] - Despite challenges, the company expects to achieve organic growth and free cash flow in 2026, with a focus on deleveraging [62] - Management expressed confidence in the long-term growth potential of Arnold, particularly in light of supply chain shifts [102] Other Important Information - The company has restored compliance with SEC filings and credit facility requirements, returning to a normal operating cadence [6] - The management team has undergone changes, with Zach Sawtelle stepping in as COO following Pat Maciariello's retirement [8] Q&A Session Summary Question: Performance of The Honeypot - The Honeypot has significantly outperformed expectations, gaining more shelf space and achieving faster inventory turns due to successful brand extension into new categories [38][41] Question: Asset Divestiture Strategy - The company maintains that all assets are for sale if the valuation is attractive, with a focus on maximizing shareholder value [43][44] Question: Economic Outlook - The management acknowledged a slowdown in growth but expects to return to a growth trajectory in 2026, driven by strong free cash flow and portfolio growth [62] Question: Management Fees and Financial Outlook - The normalized management fee is expected to be around $55 million for the next year, with a significant reduction in cash payments due to overpaid management fees [67][70] Question: Supply Chain Disruption at Arnold - The supply chain disruptions are expected to normalize, with a backlog providing a tailwind for growth in 2026 [100][102]