Compass Diversified Holdings Stock

Good afternoon, and welcome to Compass Diversified's Fiscal 2026 Second Quarter Conference Call. Today's call is being recorded. [Operator Instructions] 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, CODI 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 CODI and its subsidiaries and other forward-looking statements regarding CODI 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 in some of these -- 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, CODI 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's Foodservice 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's Foodservice business prior to its sale.

CODI has not reconciled its full year 2026 subsidiary adjusted EBITDA outlook to the most directly comparable GAAP measure because CODI 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 Diversified as CODI 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 Sterno'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 considers 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 2 additional awards, each equal to 12.5 basis points of average adjusted net assets. One is designed to increase the manager's ownership of CODI 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's 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.

CODI 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 CODI 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 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 Honey Pot 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 up 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. Within 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's Food Services divestiture. As discussed last quarter, lower expected volume from a large customer will weigh on results in the second half. Altor 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 GAAP results and then discuss our results on a more comparable basis. For the second quarter, GAAP 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 Sternos' 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 divested foodservice business, net sales were approximately $411 million, roughly flat with the prior year. Branded 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's 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 Sterno'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 million 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 onetime costs. We do not add these costs back in calculating adjusted EBITDA. They are included in corporate expenses and reduced 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'm accountable for both and I'm 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 our revolver. Total debt was approximately $1.6 billion, down nearly $300 million from year-end, primarily reflecting the application of the Sterno's sale proceeds to our term loan. Our covenant leverage ratio was 4.8x, down from 5.3x at the end of the first quarter.

Our senior secured net leverage was 0.66x. 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 rightsized 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 2 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.

[Operator Instructions] And our first question comes from the line of Chris Kennedy with William Blair.

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. 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?

I'm going to let Stephen answer that question.

Yes. No, 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.

And our next question comes from the line of Lance Vitanza with TD Cowen.

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 than the levels we've seen historically? And are there additional opportunities over the longer term beyond the MSA amendment that might further reduce corporate overhead over time?

Yes. I think, the way to think about it, I think a little bit higher than $50 million is probably the right way. There is a -- on the base fees next year, there is a -- from the management fee, there is a $30 million cap. We're targeting this year to have about -- excluding the onetime 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 -- as we 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, think in that $30 million 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 towards 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 2 or 3 quarters' time? How would you sort of describe that?

Lance, this is Zach. Thank you for the question. Our assumption is a gradual improvement over the next 4 to 5 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 -- 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's transaction, balance sheet is in much better shape, et cetera. 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 are continuing to evaluate multiple opportunities to pursue what would be an attractive divestiture and 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.

And our next question comes from the line of Larry Solow with CJS Securities.

Zach, 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, COO is a new role, you're welcome. I guess just a follow-up on that question. I think we all agree probably the fastest way to close that gap in underlying value and value we see in the market today is through an asset sale.

Just your thoughts, kind of big picture, thinking outside the box, any other levers the size of an asset sale at a good price, which I think is an obvious way to hopefully improve the value there. But just any other thoughts? Clearly, you're going to run by this -- the playbook is probably going to be run pretty much the same. I don't expect you to come in there and upend everything. But just any thoughts on how -- 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 we're -- 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 everything across the spectrum with the North Star being what is the best way to create value in the share price for our shareholders.

Okay. Okay. And just more operational question. It sounds like just general broad brush, the consumer, more specifically the consumer as it relates to your businesses. It sounds like the businesses are still doing -- 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 relative to today across at least 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 weakness in the consumer and probably performing, again, modestly better than expectations set in January of this year.

Got it. And just lastly, tariff refunds total, can you give us just an idea? I think you mentioned Rimports and 5.11 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?

Yes, that's correct. I would characterize IEEPA 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 is that -- that's already in the guidance or not?

That's correct. It is included in the guidance.

[Operator Instructions] And our next question comes from the line of Timothy D'Agostino with B. Riley Securities.

Just on leverage and then obviously deleveraging going forward, I'm looking at the 10-Q and for the covenants -- it seems you within your range for all 3 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 or commentary on your focuses -- your focus for deleveraging through the end of '26 and maybe how we should think about it for '27?

Sure. Look, again, number one, we've always said that we would like to be operating around 3 to 3.5x. So I think that's the right level. And so to get there, we clearly need to do a divestiture, which is what Zach has been talking about is 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 excluding a divestiture, which is lumpy and happens -- it happens when it happens, we would -- we think we can get down to kind of close to around 4.5x 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 organic deleveraging this year and into next year.

Okay. Great. And then if we just think about maybe potential other ways of capital or just returning capital to shareholders in terms of maybe a dividend or share repurchases. Should we really not start to think about that until you get within that leverage target you're focusing on? Or could we see that even if you do get to a 4x leverage, let's say?

I think you'd see us under 4x, I think you would see us start thinking through how to return capital efficiently to shareholders. Obviously, we have to work with the Board to get to do that. But that -- I think under 4, we would see ourselves in a position to probably return capital and again, with a focus on getting -- closing the gap to intrinsic value.

[Operator Instructions] And our next question comes from the line of Robert Dodd with Raymond James.

Welcome Zach to public company conference calls one-on-one. On the kind of -- on Lugano, right, and you gave us right, you've got a $20 million recovery coming by the fall and maybe more ultimately. Can you give us -- and I'm not asking -- I mean, are there potential recoveries beyond that -- I mean, is there another 0 to $20 million? Or is it a 0 to $100 million? I mean, can you give us any kind of idea about the scale there? Because obviously, any recovery from Lugano straight to debt is 3, quotes around 3, deleveraging. So any qualitative idea you can give us about the relative scale?

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 related 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 the next couple of years or so.

And then there are other things -- there are lots of other recoveries that we would expect the liquidity trust or the final state to go after. They are very hard to predict, 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 that those would be 0. And then if there are more, we'll be -- to your point, we'll use that to pay down debt immediately or return capital to shareholders.

Got it. Got it. On an operating target, BOA and PrimaLoft, obviously, a good quarter this quarter, and that's the seasonality, right? I mean, customers stocking up, so to speak, before the manufacturing season for the back half of the year, however exactly you want to turn that. How confident are you that this is normal seasonality, which you have 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 SKU 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' 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. And then just on 5.11, 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, et cetera? I mean, thoughts on trimming back sometimes on promotional activity might annoy an end customer and what 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 B2B portion of the business is performing incredibly strong 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.

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. Take care.

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

Good afternoon, and welcome to Compass Diversified Fiscal 2026 First Quarter Conference Call. Today's call is being recorded. [Operator Instructions]

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 First Quarter 2026 Conference Call. Representing the company today are Elias Sabo, CODI's Chief Executive Officer; and Stephen Keller, CODI's Chief Financial Officer.

Before we begin, I'd like to remind everyone that during the course of this call, CODI will make certain forward-looking statements, including discussions of forecasts and targets, future business plans, future performance of CODI and its subsidiaries, and other forward-looking statements regarding CODI 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, CODI undertakes no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events or otherwise.

During the call, we will refer to certain non-GAAP financial measures. The Q1 2026 press release, including the financial tables and non-GAAP financial measure reconciliations, or adjusted EBITDA, subsidiary adjusted EBITDA, pro forma net sales and financial results excluding Lugano, are available at the Investor Relations section on the company's website at www.compassdiversified.com.

Please note that references to EBITDA in the following discussions refer to adjusted EBITDA as reconciled to net income or loss from continuing operations in CODI's press release and SEC filings. The company does not provide a reconciliation of its full year expected 2026 subsidiary adjusted EBITDA because certain significant reconciling information is not available without unreasonable efforts.

Throughout this call, we will refer to Compass Diversified as CODI or the company. At this time, I would like to turn the call over to Elias Sabo. Elias?

Thank you, Ben, and good afternoon to everyone. We started 2026 committed to a clear plan, and we are delivering against it. Specifically, we sold Sterno's food service business at an attractive valuation despite a muted M&A environment. We completed a sale leaseback at Altor and applied the proceeds directly to debt reduction. We delivered solid subsidiary adjusted EBITDA growth, highlighted by double-digit growth in our consumer businesses despite uncertainty in the global economy. And collectively, our subsidiaries generated strong operating cash flow in the quarter, a hallmark of the CODI model.

Incorporating our current view of the operating environment and reflecting the sale of Sterno's food service business, we are updating our full year guidance. Before Stephen walks through the financials and our updated guidance, I would like to provide additional color on both our strategic focus and operational performance. Let me start with the sale of Sterno's food service business.

Throughout this process, we've been asked whether the broader environment, including geopolitical uncertainty in the Middle East, tighter private credit markets and other macro factors, would limit our ability to monetize our businesses at attractive values. From the outset, our answer was straightforward. First, there is almost always the market for high-quality businesses. And second, we have an experienced team with a track record of maximizing value across market cycles. We believe the outcome here speaks for itself.

We view this as an initial step towards the goals we've established, not the final stuff. Our leverage ratio remains above our target range and our shares continue to trade at what we believe is a discount to intrinsic value. Our work is not done. We will continue to pursue deleveraging and value creation, both organically and inorganically, with the same urgency and discipline we have demonstrated so far. And once leverage is within our target range, we will accelerate work to address the gap to intrinsic value, including through the efficient return of capital to shareholders.

Alongside our deleveraging efforts, we have initiated a review of our management services agreement. We are actively evaluating our MSA for opportunities to further align incentives and drive incremental shareholder value. The process is underway and we expect to provide further updates in the coming months.

Turning to operational performance. Against the backdrop of continued macro uncertainty, our subsidiaries collectively outperformed in the first quarter. Let me walk through a few highlights.

Our consumer business has led the way, with double-digit adjusted EBITDA growth driven by strength across these businesses. The Honey Pot continued its exceptional momentum in the first quarter, with revenue growth of nearly 25% and EBITDA growth of over 40% compared to the prior period. We continue to see the brand gain share across the feminine care category, reflecting the strength of the product portfolio, expanded distribution and growing consumer adoption as the brand continues to extend beyond its origin into the broader period care category. The Honey Pot is now firmly established as a leading better-for-you brand in the feminine care, and we believe it has significant runway for continued growth.

BOA delivered another strong quarter, with revenue growth of 6.5% and EBITDA growth of 11% compared to the prior year period. We believe the performance of the BOA Fit System is unmatched. And that technical edge continues to drive category-leading adoption across snow sports, cycling, workwear and more. The company's focus on differentiated solutions and operational efficiency supports their category-leading margins. And with continued innovation and expansion into new performance applications, we see meaningful opportunity for growth add.

5.11 Tactical delivered solid margin performance and strong cash flow in the quarter despite some modest top line pressure. The business continues to generate durable cash flow from its core professional customer base, and we are encouraged by the steps the team is taking to expand 5.11's appeal to the broader adventure oriented consumer. This includes a recent brand opening of its next-generation retail format in Seattle, which significantly outperformed the chain average on opening weekend. Early customer response has been strong and we are seeing encouraging traction. While this is an early signal, it reinforces our belief that 5.11 has meaningful runway to broaden the brand's reach over time.

And finally, within our consumer businesses, a new leadership team is getting up to speed at PrimaLoft. It's only month 3, but we are pleased with management's progress, laying the groundwork to accelerate future growth while remaining a highly profitable, low working capital business, much more to come in future quarters.

Turning to our Industrial businesses. Arnold delivered a standout quarter with adjusted EBITDA nearly doubling year-over-year, despite ongoing geopolitical dynamics around rare earth supply, including continued export restrictions out of China. While these dynamics create near-term headwinds, they also reinforce the long-term tailwinds for the business.

Demand for geopolitically secure rare earth magnet supply continues to build as customers increasingly prioritize reliable non-China sources. Arnold's Thailand facility is ramping up, adding capacity and supply chain redundancy. We believe this uniquely positions Arnold to serve aerospace, defense and industrial customers who prioritize supply chain security and performance reliability.

Altor remains a work in progress. The business faced a challenging first quarter, reflecting competitive pressure in the cold chain market and continued consumer headwinds in the appliance market. The team is focused on execution, optimizing the combined platform following the Lifoam acquisition and driving commercial progress, and we remain confident in Altor's long-term positioning even as near-term results continue to reflect current market conditions.

Finally, let me turn to Rimports, which is the business we retained following the sale of the Sterno food service business. Rimports is a home fragrance platform, supplying scented wax, wax warmers and essential oils under a range of in-house and private-label brands to many of the nation's largest retailers.

We want to be clear about what to expect. The balance of 2026 will be a transition period. Rimports will absorb some stranded costs from the separation of the food service business during the year, and we are working through an updated commercial relationship with a large customer. Both of these factors will weigh on near-term results, but are expected to improve in 2027. We have confidence in the leadership team and believe the long-term opportunity remains attractive as the team focuses on the go-forward business.

Before I hand the call over to Stephen, I want to underscore that the actions [ this quarter ] are part of a disciplined, sequenced plan. Our path is clear, deleverage, drive continued operational performance, further align management incentives and, over time, close the gap between our share price and intrinsic value. That is the priority we are executing against.

With that, I'll turn the call over to Stephen to walk through the financial results.

Thanks, Elias. As a reminder, our prior year GAAP results include Lugano, which has since been deconsolidated following the bankruptcy filing last November. With that context, I will discuss our GAAP results first, followed by our non-GAAP results that exclude Lugano, to better facilitate year-over-year comparisons.

For the first quarter, GAAP net revenues were $427 million, down 5.9% year-over-year due to the inclusion of Lugano in the prior period. GAAP net loss from continuing operations was $30.8 million, an improvement of approximately $19 million year-over-year, primarily reflecting the absence of Lugano's losses in the current period.

I will now provide our first quarter non-GAAP results, which excludes Lugano from the prior year. Net sales were in line with prior year as strong double-digit growth at the Honey Pot and Arnold were offset by ongoing challenges at Altor due largely to unfavorable macro trends. Across our businesses, our Consumer net sales increased 2.3%, while Industrial net sales declined 3.3% compared to the prior year period.

Subsidiary adjusted EBITDA was $83.9 million, an increase of 6.3%, with Consumer up 11.6% and Industrial down 4.5% compared to the prior year period. While Arnold nearly doubled year-over-year, Industrial growth was offset by the top line headwinds at Altor.

Corporate management fees, excluding those paid by subsidiaries, were $14.4 million for the quarter as reflected on the income statement. Actual cash payments for Q1 fees will be significantly less at around $7.5 million. As previously discussed, corporate cash management fees paid to the manager are expected to be between $25 million and $30 million for the full year as our manager pays back the overpaid management fees related to Lugano restatement.

Public company costs were $13 million in the quarter, which includes more than $7 million of onetime costs associated with Lugano, including the cost of ongoing litigation and investigation and corporate governance changes. While these onetime costs were significantly higher than initially anticipated, we did not include any offsets that may be realized through insurance or other proceeds as we move through 2026. It is important to note that in April, we received our first insurance reimbursement, and we expect to recover additional expenses over the balance of 2026. More importantly, we remain focused on managing and reducing our public company costs, consistent with our efforts to delever and drive long-term value creation.

Cash generation was a highlight of the quarter. We generated $23.9 million in operating cash flow, a meaningful improvement versus the prior year. Our capital expenditures of $5.1 million were less than half of the prior year period, reflecting disciplined capital allocation and a capital-efficient profile of our subsidiary businesses. Together, Q1's operational cash generation demonstrates the strength of our businesses and keeps us on track towards delivering significant free cash flow in 2026.

We ended the quarter with $65 million in cash and cash equivalents and nearly full availability on our $100 million revolver. Our leverage ratio for debt covenant purposes at quarter-end was approximately 5.3x, a strong improvement in the quarter.

As we announced earlier this week, the sale of Sterno's food service business has now closed, and we have repaid more than $280 million of senior secured term loan debt. This reduces our total leverage to approximately 5x and brings our senior secured net leverage to the low 1x. Importantly, this allows us to avoid the milestone fees under our senior credit facility that would otherwise have applied beyond June 30.

Reducing leverage has been and remains our top financial priority. Our actions thus far this year put us in a meaningfully stronger position. There is more work to do, and we remain disciplined and focused on the priorities we have laid out to our shareholders.

Turning briefly to Lugano. The Chapter 11 process is advancing as expected, as are our efforts to minimize our liability and maximize our ultimate recovery. We expect to have greater clarity on timing by the end of the second quarter, and we'll update investors as appropriate.

Before turning to our outlook, I'd like to briefly note that while the evolving tariff environment has created significant market uncertainty, we are currently experiencing a tailwind across multiple businesses. Separately, we also expect to receive onetime tariff-related refunds during 2026, though the specific timing and magnitude are difficult to forecast at this time. We will provide more clarity as the year progresses.

I'll now provide an update on our 2026 outlook. For the full year, we expect subsidiary adjusted EBITDA of between $320 million to $365 million. This range, adjusted for the impact of the sale of Sterno's food service business, is at or above the expectations we set at the start of the year and reflects the continued strength of our diversified collection of businesses. For our Consumer businesses, this equates to adjusted EBITDA between $225 million to $260 million. And for our Industrial businesses, we expect adjusted EBITDA of between $95 million and $105 million, which includes some stranded costs associated with the sale of our Sterno business. We expect these costs will decline in 2027.

For modeling purposes, we continue to assume CapEx of between $30 million to $40 million for 2026, and we expect corporate cash management to be between $25 million and $30 million. As has been our practice, our outlook does not include the impact of any potential acquisitions or divestitures, except as noted regarding the sale of the Sterno food service business. It also does not include any significant impact positive or negative to the evolving trade environment.

With that, I'll hand it back to Elias for closing remarks.

Thanks, Stephen. Let me be clear about where we stand. The first quarter of 2026 was a quarter of execution, solid subsidiary performance, a meaningful divestiture at an attractive valuation and measurable progress on the priorities we laid out. But a single quarter does not make a turnaround, and we've, by no means, reached the finish line. We will continue to pursue our stated objective to create long-term shareholder value and close the gap to intrinsic value. That means in the near term pursuing strategic divestitures at attractive valuations and returning capital to shareholders where appropriate. Trust is earned through consistent execution, and that is what shareholders should expect from us every quarter going forward.

The sale of Sterno's food service business is an important signal of what is possible. We transacted at an attractive value on an accelerated time line in an otherwise softer M&A environment. That outcome reflects both the quality of the business and the capability of our team to run disciplined processes and maximize value for shareholders.

Beyond the proof point, it is an important first step. We believe in the CODI model. We take a permanent capital approach to acquire great businesses, partner with strong management teams and actively manage growing category leaders over the long term. That model has generated value for shareholders for nearly 2 decades. We are confident in the model and committed to demonstrating its value through execution.

Thank you as always for your support. Stephen and I will now take your questions. Operator, please open the lines.

[Operator Instructions] Your first question is from Larry Solow of CJS Securities.

Can you just clarify the guidance? So you net, you're down $25 million, and obviously, you're up $5 million in branded. So that's separate from the sales divestiture of Sterno. But then obviously, turnover -- sounds like there's some moving parts, right, for Sterno, maybe more than we would have thought the impact on the sale. You said some part of stranded or lagging cost there. But then maybe there's still another adjustment. Are you reducing maybe Altor solutions a little lower too, or anything else in there?

Larry, no, the main thing is actually is just adjusting for -- the Industrial is just adjusting for the sale of Sterno, specifically related to the lost EBITDA, the stranded cost and as well as what Elias mentioned in the prepared remarks, which is we do have a couple of negotiations with some long-term -- with some large customers in that particular business that we think will be a little bit of a headwind for the year. So it's -- yes.

So basically the RemainCo of Sterno, which is Rimports, will be somewhat lower this year than last year.

I want to be clear, we're not -- we won't be fully -- we're selling Sterno, we're not deconsolidating it out of business. So you will have the first quarter of Sterno is -- will be included in our full year EBITDA. And then the next 3 quarters will just be Rimports.

Right. And is there like -- is there short term, like your corporate costs are too much because you kind of carved out Sterno but you still have Rimports, or could you maybe bulk of infrastructure maybe where it actually impacts you?

As we mentioned I think in our original press release, we are retaining the management team in the Rimports business -- the Sterno management team is staying with Rimports. And so that is something that we need to work through. We think -- we actually really think this is the right team to help kind of help accelerate Rimports growth, but it is a little -- we have to make some adjustments to overall cost levels as we go forward.

Got you. And the stranded cost, I imagine those, you kind of have pretty good visibility, will be -- not repeat next year. The customer negotiations with the one -- I think I know one large customer, that we don't know the outcome yet. But the stranded cost, obviously, you have pretty good confidence those won't repeat, right, I guess. Is that fair?

Yes. I mean it's -- you have to -- we have to address the standard cost. It is -- the stranded costs are costs that existed last year that will continue to exist in the business, but we need to work them down over time as appropriate for our small -- what is now a smaller business.

Right. Okay. That's what I thought. So it was a little bit down, sort of the corporate structure there. That makes sense.

And just curious, so a couple of quickies. In general, Elias, maybe just on the branded piece, it sounds like a lot of moving parts. But in general, just your Consumer, the confidence you have, anything really changed over the last 6 months? Obviously, that encompasses the start of the Iran conflict or whatever you want to call it, higher -- more inflationary pressure is back or a lot higher. So any visibility or any -- have you seen any impact on any of your businesses because of this? Or are you contemplating that in your guidance? Any thoughts there?

Yes, Larry. We, I would say, have seen our Consumer business is performing extremely well. First quarter was above what our expectations were. And I would say coming into the second quarter and as a lot of these companies were on backlog, I would say they're set up to perform better in the second quarter than expectations as well. And that's clearly in the face of the Iran war starting.

Now I think where it gets a little bit harder to dissect is whether customers are accelerating some orders because of the war and worries about longer-term inflation and kind of oil going through -- kind of global oil supply. That's a little bit more to be determined. But I would say right now, what we can analyze, the business on the Consumer side looks very strong and better than anticipation. And currently, and I know this sounds odd to say, unaffected by the global macro events that we see kind of around us on a daily basis.

Okay. And BOA really had a nice quarter. Anything standing there? I know -- I think you had -- you sold the footwear business, I know. So maybe -- so you reported 11% EBITDA growth, but I imagine it was even better ex that. So any extra color there?

No. BOA is a great business. We say over and over how awesome this company is, its competitive positioning, strategic outlook. It has one of the best management teams, if not the best management team, that I've ever worked with. And so I think those are all the ingredients to propel the company forward on a consistent basis. As you know, Larry, it's got a great IP position.

So it's just -- it's so well positioned. And I think we went through a lot of kind of turbulence. Obviously, it had huge growth during the supply chain shock, and then we had some softness that came from that. And then more recently, we had a customer in Asia on our kids line that, from price competitive reasons, we walked away from. And so there's been a little bit of noise. And I think right now, the business is in a much better spot based on where the industry is in kind of its inventory positioning, and where we are in terms of the customer mix and durability and then all the growth that it has ahead of it.

So I would say where there's been some extraneous sort of kind of choppy things that have happened here, this business now, we think, is sort of in a smoother set of waters and should produce the kind of double-digit kind of growth rates that we saw in the first quarter on a continuing basis.

Great. Last question, Elias. You did announce that you completed a nice divestiture. I know you said you'd look and probably do more. Are you pretty confident you'll complete at least 1 more this calendar year?

I mean that is our plan. The M&A markets I referred to are a bit choppy. They're weaker than where they've been in the past. But they ebb and flow, as you know. We own really great-quality assets, Larry. And as I mentioned in my opening remarks, there's always the market to transact for a great company or great companies. And so we do feel confident we'll be able to transact.

Now against that, there's still a war going on and $100 oil prices and lots of uncertainty. Private credit markets have really tightened, I think we see that kind of in the public stock prices of a lot of these private credit providers. So that is clearly a headwind for being able to transact.

But it is what our focus -- it's where our focus is. We understand we need to get our leverage down, and that is kind of the #1, 2 and 3 goals right now to get back into a position where we can be allocating capital again. And as we said in our opening remarks, looking to close the intrinsic value discount once we get there. So we remain confident we'll be able to execute against that, although I want to caution the markets continue to remain -- the M&A markets continue to remain choppy.

Our next question will come from Timothy D'Agostino from B. Riley Securities.

Regarding leverage, could you remind us again what your long-term goal is? Where do you want leverage to be? As well, given the sale of Sterno food services, how does that impact kind of your time line and your path in order to getting to that leverage target?

And then lastly on that, given where the stock is today and, let's say, looking into the future, getting to your leverage target, when would -- would share buybacks become part of the equation for you all? And at these levels, it's attractive, understanding you still have more deleveraging to do.

Long term, we've always said we'd like to be around 3x to 3.5x leverage. That would be like our long-term goal if things were in a more normal situation. I would say our current focus is now to get under 4x levered, as a key milestone for us. Once we got under 4x, we would start to think, given where the stock is trading and discount to intrinsic value, we would start thinking it would make sense to look to return capital to shareholders potentially through a share buyback.

And so I think long term, 3x, 3.5x. But I think the next milestone for us is to get below 4x, which just allows us to be a little bit more -- a little bit more about return of capital.

Okay. Great. And then with, I guess, with an additional sale of a full subsidiary, do you think you can get to that 4x by year-end? Or do you think it's going to take a little bit more work? Just understanding the impact of the next sale might have in your opinion.

Yes. I think -- so the way I would think about, if you think about it organically, I think the rest of the year, you kind of get -- you kind of have another step down probably to around 4.5x somewhere, a little bit higher than that, but somewhere around there. And then you start talking about the kind of inorganic activities, which would include recovery from Lugano, which should be straight deleveraging. And then you would have a sale of a subsidiary. And that, obviously, it just depends on which subsidiary. There's obviously a little bit of a circular reference there where you get rid of EBITDA, but you get how much -- you get the multiple on it.

And so we think with the sale of another company and the organic work and the work from Lugano recoveries, I think we would anticipate being below 4x. But again, it is dependent on the specific subsidiary and the multiple that we go for.

Okay. Great. That's super helpful color. And if I could just sneak a final quick one in there. I may have missed it earlier, I apologize. On SG&A, lower this quarter and, on my model, a lower percentage of revenue. I guess, is there anything to flag there on why SG&A was lower in the quarter? Again, I might have missed it, so apologies if I did.

You mean collectively across the business or are you talking about corporate -- corporate costs are higher, right, as we talked about in the prepared remarks. In terms of the overall business, and if you're looking at collectively SG&A on the GAAP accounts line, I think it's nothing specific to call out. It's nothing, just normal prudent management within the teams.

As I think we talked about at the last call, 5.11 has made some significant strides in using AI to reduce overhead costs in all of our businesses, as prudent managers do, they look to reduce SG&A costs, especially at a time when there's a little bit more macro uncertainty.

Our next question will come from Matt Koranda from ROTH Capital.

I guess one fundamental one on segment and then maybe a couple of housekeeping things. But on Honey Pot, maybe can you just unpack a little bit more about what's driving the really substantial growth there. And I guess just north of 30% EBITDA margins in that segment, how sustainable do you view that level as? And how should we be thinking about sort of a normalized level going forward?

Yes, Matt, the -- what's driving the growth is market share gains in the category. If you recall, when we acquired the company, it was principally in the hygiene side, the washes and wipes side of the business. That is a very small percentage of the overall addressable market. Only about 5% of the potential population of candidates use washes and wipes as -- instead of regular soap.

And so the big opportunity with this company was, one, to increase that percentage, which we've been doing. But secondly, to extend the brand into other adjacent categories. We've had really good success extending into the period care market. That is a market that is kind of 20x bigger than the original market that we started out with, and our brand has shown the elasticity to be able to move into that.

Remember, we stand for better for you, which is something that resonates especially with the younger consumer. And our goal is to win that younger consumer as they're coming into the category. And so the strategy is working extremely well. I would say growth in period care can continue to drive really dramatic growth because we are relatively small in an enormous market right now with a differentiated proposition to the customer.

In terms of margin, the company is in a category where it can generate higher margins. I mean these are better-for-you products. The positioning and brand association is all around better for you. And as a result, consumers are willing to pay up for that. Now I will say the company also had some benefits and we've had Stephen mentioned from tariff rulings here. There were huge tariff costs that were incurred as part of Liberation Day last year. And now with the IEEPA ruling, some of those costs have significantly come down. That is aiding margin, without question.

I think if your view is those tariffs creep back in some other way, then there'll be some give-back of margin naturally. I think if your view is tariffs are going to be sort of where they are right now at this temporary level, then you should view those margins as being stable. But there's nothing from a pricing standpoint that we look at that says we aren't able to maintain these margins. And I think if you see the growth rate of mid-20s top line growth, it's indicative of a very healthy brand that price is not the reason that people are not buying. So we plan -- we believe we can hold up.

Okay. Appreciate that, Elias. And I guess maybe this is a broader question for all the segments. But on tariff recoveries, I just want to make sure there were none within the first quarter that benefited margins. So just clarify that for us. But also as you get recoveries throughout the year, how will those flow through the financial statements, just so we're clear on sort of how it shows up?

Yes. So there was no onetime like recovery of last year's tariffs in as. As Elias mentioned, we did have some benefits of not having -- having lower tariffs than we had maybe in Q4 of last year, if that makes sense. To the extent that we -- when we do get onetime historical refunds on tariffs, that would just be a -- it would just be a positive in the P&L, and we will be sure to call that out for everyone for modeling purposes.

But any margin that you see right now is not related to onetime tariff benefits. It's more related to current -- under the current tariff environment that we're in today.

Okay. Got it. And then maybe just one more, if I could. You mentioned kind of a revisiting or review of the MSA. Are you willing to share any preliminary thoughts on that front in terms of what some of the changes could be or the changes you're contemplating maybe based around either, I guess, the asset-based management fee or allocation interest and how they are calculated?

We are not in a position yet to start to discuss that. What we wanted to convey to the market is that there are discussions that are ongoing now between the manager and the Compensation Committee to the Board of Directors. And we anticipate MSA changes to come in the next couple few months, and we just were really conveying that. But it would be premature, Matt, at this point to start talking about the flavor of what those changes will look like.

[Operator Instructions] And at this time, we have -- our next question is from Heli Sheth of Raymond James.

Congrats on the sale. So now that you've completed this and kind of gotten your senior leverage down below 1, is there any urgency with other sales processes, especially with a muted M&A market?

Yes. I would say, Hell, there's urgency because leverage at 5x is too high. And there's urgency because our share is trading at these prices, in our opinion, don't reflect intrinsic value. And so the urgency really becomes getting our leverage down and getting back into a position where we have capital allocation availability.

And there was a direct question earlier, and we said it would include potential share buybacks as part of that capital allocation. And so I think that creates urgency.

Now it is a fair question, and we have to juxtapose kind of that urgency against the conditions that exist in the M&A markets. And they are somewhat muted. But we transacted in an equally difficult M&A market on Sterno. And I think there is the ability to do that with another asset here over the course of the year, and we're taking it with a sense of urgency.

I do want to be clear though, to the extent the markets would significantly undervalue an asset in an M&A market, by doing the Sterno deal, it's taken the pressure off to do something that would be a necessity. We will transact to the extent it can create additional shareholder value. But if the market conditions were so weak that it didn't create additional shareholder value, we have bought time to be able to kind of have other strategic alternatives we could consider.

But that would be not our central case. Our central case is the markets, although they're not extremely strong, they're also not extremely weak. They kind of are a bit muted. And we believe the appropriate thing is continued deleveraging through divestitures.

Got it. And then if I can squeeze another quick one in here. On the tariffs, I know you mentioned that there's not much clarity right now on the timing or the magnitude of tariff refund. What does the process look like for that? And any clarity on whether there would be an inflection point at which you would have a better idea of the magnitude or the timing?

Yes. I mean it was just a couple of weeks ago or whatever where the government set up the website to actually start the process. And so each of our companies is going through the process. We really just do not have parity. We will be sure to provide -- as soon as this happens, we will provide clarity. Again, we will call it -- on future earnings reports, when we have it, we will call it out as a onetime benefit. But at this point, we do not -- it's just really hard to predict. And we expect -- I think we'd expect that it will be a little bit choppy. We'll get some back, we'll probably have to fight some. Each company will be a little bit different.

Thank you. And at this time, I'm showing no further questions. I would like to turn it back to Elias Sabo for closing remarks.

Thank you, everyone, for your time today. We look forward to seeing you and talking to you on our next conference call.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Good afternoon, and welcome to Compass Diversified's Fiscal 2025 Fourth Quarter Conference Call. Today's call is being recorded. [Operator Instructions]

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 Fourth Quarter 2025 Conference Call. Representing the company today are Elias Sabo, CODI's Chief Executive Officer; and Stephen Keller, CODI's Chief Financial Officer.

Before we begin, I'd like to remind everyone that during the course of this call, CODI will make certain forward-looking statements, including discussions of forecasts and targets, future business plans, future performance of coding and subsidiaries and other forward-looking statements regarding CODI 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 Form 10-K as filed with the SEC as well as in other SEC filings and press releases.

Except as required by law, CODI undertakes no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events or otherwise. During the call, we will refer to certain non-GAAP financial measures. The Q4 and full year 2025 press release, including the financial tables and non-GAAP financial measure reconciliations for the adjusted EBITDA and subsidiary adjusted EBITDA are available at the Investor Relations section on the company's website at www.compassdiversified.com. Please note that references to EBITDA in the following discussions refer to adjusted EBITDA as reconciled to net income or loss from continuing operations in CODI's press release and SEC filings. The company does not provide a reconciliation of its full year expected 2026 subsidiary adjusted EBITDA because certain significant reconciling information is not available without unreasonable efforts. Throughout this call, we will refer to Compass Diversified as CODI or the company.

At this time, I would like to turn the call over to Elias Sabo. Elias?

Thank you, Ben, and good afternoon to everyone. 2025 was painful. It was humbling, but it also proved that CODI is resilient. Our subsidiaries are strong, our people deliver and the core of this model works. That's the foundation we're building from. We've discussed last year's events in detail on prior calls. And as we highlighted in our third quarter update, conditions are improving and operations are normalizing. Against that backdrop, today's call will center on the performance of the businesses we currently control and our outlook for 2026.

Excluding Lugano, 2025 saw us generate mid-single-digit revenue growth with operating leverage that further accelerated subsidiary adjusted EBITDA growth to high single digits. Each of our consumer businesses grew adjusted EBITDA despite a consumer environment that presented real headwinds throughout the year. On the industrial side, in 2025, we saw modest growth in adjusted EBITDA. Acquisition-driven performance at Altor was offset by short-term challenges at Arnold as they navigated sustained periods of near complete rare earth export restrictions out of China. Our outlook for 2026 is solid as we expect to generate subsidiary adjusted EBITDA growth in the mid-single digits. This reflects our belief that our diversified collection of businesses are positioned to grow across a variety of economic conditions.

In 2026, we are focused on executing against our strategic plan and working to regain market confidence. Our path forward is clear. Our first priority is reducing our leverage ratio. We're addressing this on 2 fronts: drive organic growth with strong cash conversion, and executing attractive divestitures where proceeds and timing support deleveraging and shareholder value creation. Medium term, we're focused on closing what we believe is a meaningful gap between our share price and our intrinsic value. That view will guide us as we deploy capital to the highest risk-adjusted returns. In the current environment, if the current environment and conditions continue, that could include share repurchases. Longer term, when capital markets allow, we're committed to reigniting the CODI model. That means combining selective acquisitions with strong operations to generate durable shareholder value.

Everything starts with subsidiary performance. While the macroeconomic environment remains uncertain, our subsidiary teams are focused on what they can control, and they are delivering. Let me walk you through a few examples. For anyone who watched the 2026 winter games, Athletes equipped with the BOA Fit System tallied more than 100 medals in Nordic skiing, snowboarding and freestyle skin. That's up from 10 podium winners just 4 years ago. And we're confident Bo's presence will be even greater 4 years from now. The Honeypot had a great year, establishing a leading position in better for ufeminine care. Our consumer metrics like Net Promoter Score, the Honeypot is outpacing both conventional and better-for-you competition with significant additional runway to grow in brand awareness.

The Honeypot strong product portfolio is driving increased consumer adoption and distribution across many key retailers. The team has successfully taken the brand beyond its origins and washes and whites into the much larger period care category with a significant opportunity to grow market share over time.

Finally, Arnold ended the year with a backlog more than 40% higher than the prior year-end and is well positioned to capitalize on favorable trends across aerospace and defense among other end markets. Companies are desperate to find reliable, geopolitically secure sources of rare earth magnets. And Arnold is exactly that. Quoting activity is at an all-time high. It's also important to note that China has recently reinstated export restrictions ahead of bilateral talks with the U.S. While this may create some near-term disruption, it only further demonstrates Arnold's long-term value as a reliable, geopolitically secure supplier. And Arnold continues to make progress ramping its Thailand facility with initial production already underway, bringing online valuable additional capacity and redundancy.

As we have discussed, although our business model is to acquire and grow, given our current leverage position, we believe divesting 1 or more of our subsidiary businesses at attractive valuations is the most efficient path to meaningfully deleveraging and restoring financial flexibility. We believe this positions us to drive long-term value creation and ultimately help close our discount to intrinsic value. There are 4 things I hope you take away from our remarks today. First, we have initiated multiple sale processes and are actively engaged with qualified counterparties and advisers to drive this forward.

Second, on timing, processes for mid-market businesses typically take about 6 months end to end. This does not necessarily mean 6 months from today. While no transaction is ever certain, we're already well into multiple processes. Third, our priority is to drive shareholder value by both deleveraging and maintaining a sharp operating focus across our businesses. And fourth, we are moving with urgency to maximize value and keep these processes moving, fast, focused and disciplined. These goals are not in conflict. It is our job to balance them. The bottom line is simple. We are moving decisively. We are running disciplined processes, optimizing for the right outcome and will provide updates to you when we have something definitive to report.

For the past 3 months or more, we have candidly shared our plans to reduce our leverage. However, the ultimate objective has always been to maximize long-term shareholder value. Our belief is that our shares are trading at a significant and elevated discount to intrinsic value, and we are committed to closing the gap. We believe deleveraging and when appropriate, returning capital to shareholders through share buybacks can help close the gap. However, if it does not, we will continue to evaluate additional value maximizing alternatives for our shareholders. Strengthening our balance sheet, improving performance and making the hard choices required to put CODI in the strongest position going forward. It won't happen overnight, but we are operating with urgency and discipline because that's what our situation demands. Our incentives are aligned with shareholders. Everything we do is guided by 1 objective, maximizing long-term shareholder value.

With that, I'll turn the call over to Stephen to walk through the financial results.

Thanks, Elias. Before I begin, I would like to remind everyone that our reported GAAP results include Lugano through November 16, 2020, and the date that Lagao entered Chapter 11 bankruptcy. With that context, I'll first provide an overview of GAAP results and then focus on non-GAAP results, excluding Lugano, as we believe this is a more accurate reflection of our business going forward.

For the fourth quarter, GAAP net revenue was $468.6 million, down 5.1% year-over-year -- this decrease was primarily due to the impact of Lugano and deconsolidation. GAAP net loss for the quarter was $7.8 million, including more than $25 million in onetime Donal investigation restatement costs. For the full year, net revenues were $1.9 billion, up 4.8%. GAAP net loss for the year was $293.7 million, which includes approximately $60 million in investigation and restatement-related expenses.

I'll now provide our full year non-GAAP results, excluding Lugano. Net sales were $1.8 billion, up 3.9%. Our branded consumer net sales increased 3.7% while Industrial net sales increased 4.1% as acquisition-related growth at Altor was offset by global trade disruption in Arnold. Excluding Udano, subsidiary adjusted EBITDA was $345.8 million an increase of 8.8%, with consumer up 13.8% and industrial up 1.1%. The slower growth in adjusted EBITDA in Industrial was primarily due to Arnold and the geopolitical headwinds Elias described previously.

Public company costs and corporate management fees for the year were $91.1 million, which reflects 2 nonrecurring items. The investment and restatement costs as well as a $36.2 million credit in the fourth quarter related to excess management fees previously paid to CGM in connection with Lugano. Going forward, we are maintaining a rigorous focus on public company costs and cash fees consistent with our focus on deleveraging and long-term value creation. In 2025, we invested $44.3 million in capital expenditures, which reflects a $12 million reduction from the prior year. We continue to invest in our current subsidiaries to support their growth with a reduction in CapEx driven primarily by the absence of Lugano-related investments. We ended the year with $68 million in cash and cash equivalents and approximately $96 million available on our revolver.

Our leverage at year-end was slightly higher than anticipated at approximately 5.47x. Reducing leverage remains our top financial priority and we believe the actions already underway position us to make meaningful progress as we move through 2026. In January, we announced a sale leaseback for some of our alter facilities freeing up more than $11 million in cash that we were able to immediately use to pay down senior debt.

Before turning to our outlook, I want to reiterate our commitment to strong governance and oversight. The challenges of 2025 and have only reinforced our commitment, and we have and will continue to take concrete steps to further enhance internal controls and transparency across the organization.

I'll now provide an update on our 2026 outlook. For the full year, we expect subsidiary adjusted EBITDA of $345 million to $395 million. This includes consumer adjusted EBITDA of between $220 million to $260 million industrial adjusted EBITDA of $125 million to $135 million. You'll notice this is a wider range than in prior years, which reflects the inherent uncertainty in the macro environment.

At the midpoint, we expect solid growth in adjusted EBITDA across both sectors. For modeling purposes, our 2026 outlook assumes CapEx of between $30 million to $40 million. Further, CODI expects to pay cash management fees of between $25 million to $30 million in 2026. As has been our practice, our outlook does not include the impact of any potential acquisitions or divestitures and it also does not include any significant impact, positive or negative to the evolving trade environment.

With that, I'll hand it back to Elias for closing remarks.

Thanks, Stephen. I want to be clear about where we stand. 2025 was the hardest year in CODI's history. It was disappointing and painful for all of our stakeholders. But it is important to recognize that our remaining subsidiaries delivered in an uncertain environment. They stayed focused, they execute it and they proved this model works. As we move into 2026, that is what we are building on. Our path is clear. Operational execution with strong cash conversion, leverage reduction organically and inorganically and value-maximizing capital allocation.

We believe we have a proven business model and well-positioned subsidiaries on which to apply it. We operate with a permanent capital mindset to acquire great businesses partner with management, invest to grow category leaders over the long term. For shareholders, that means diversified exposure to high-quality middle market companies supported by engaged ownership and strategic capabilities. With 2025 behind us, we are focused on delivering on the potential across our collection of subsidiaries. As always, we appreciate your support.

Stephen and I will now take your questions. Operator, please open the lines.

[Operator Instructions] Our first question comes from the line of Larry Solow with CJS Securities.

Great. I usually ask you a question on just operations and whatnot. But it feels like there's not much change. You cannot give a preliminary outlook for '26 on your last call, which was only a few weeks ago. So I'm going to just switch gears and just ask just on the sale processes that are ongoing. It sounds like maybe we're within 90 days of hearing something at least or somewhere around there, maybe less than 6 months. But just curious, a lot of your -- the processes themselves, do you have how would you characterize the interest? Is it different across your assets? Just kind of how you feel so far it's progressing.

Yes. Larry, and thank you for the question. Look, we don't give a lot of detail about any processes and we historically have not, as you know, -- it is -- these processes are inherently uncertain, just very nature. And so we try to be very, I would say, reserved in terms of what we talk about with any of these processes. We've been saying for a while that it is our intent to divest at least a subsidiary maybe more, and that deleveraging is the most important thing that we have on our agenda right now and we are very much focused on that.

I just want to make 1 point very clear. We were not restated until early January. And we were not it was not advisable for us to have information on our companies in the market prior to having our earnings restated. So as a result of that, 1 has to just understand that although we could do a lot of prework prior to getting our numbers restated the work really kind of initiated upon the restatement. So I think we're working, as we said in our script, as diligently as possible. We understand expediency is important, but we will not do so at the expense of deterioration in value in our assets. Now with respect to interest in companies that we are currently engaging, I would say, it's really strong. And we own great companies, and these companies are highly marketable. And when they come to market, there are multiple bidders. Typically, you get both a combination of financial and strategic buyers that look at these assets. And we are finding that to be the case with the assets that we currently are considering for divestiture.

Fair enough. I appreciate that. Just a couple on the outlook, and then I'll move on. Just it looks like most of the growth is on the branded side, consumer side and no industrial is usually a slower group of businesses. But I guess this year, Arnold, you mentioned there'll still be some geopolitical risk that we'll probably get some rebound from last year, but maybe not a flow recovery. Maybe you could talk a little bit more about the outlook there? And then just on Altar. I know the quarter was a little bit weak. And I know that the vaccine sales have been down a lot. But somewhat of a change on the government recommendations and all. So if you can maybe just walk us through just a little bit more on the industrial businesses.

Yes. I would say, Larry, we did incur encounter weakness. With respect to Arnold, it has been very difficult to manage. And I'm going to say, step back and say, broadly, it's very difficult to manage businesses today. With the tariff and geopolitical uncertainty that has come from all of this tariff chaos. And I think that's probably the only word that you can use. We have tariffs then tariffs are suspended by our go way by the Supreme Court and the new tariffs come back. It creates a lot of distortions and numbers when you're managing against that backdrop.

With respect to Arnold, in particular, the actions of China against these tariffs have been to create, in some cases, complete export controls, which is what we suffered most of 2025. Now at the end of the year, we started to see that relief. And now as we said in our script, we've seen that emerge back again where a majority of our export licenses have been canceled as China gets ready for bilateral discussions with the U.S. and clearly, this is a leverage point. And Arnold unfortunately gets kind of -- it's the football that gets thrown around back and forth. The good news about that is we are about to lap in a few months where export controls were put in place -- so the pain that has suffered from these export controls will principally be early in the year.

And then we lap that so that is no longer going to create a headwind. As Stephen and I both commented in our script in different sections, Arnold's quoting activity is at an all-time high. Their backlog is up 40% from where it was a year ago. And our time land facility, which is going to add capacity that we were currently producing in China is starting to produce, and we think that is going to materially enhance our supply capabilities and our supply chain.

So yes, there is a couple of months more potentially of noise that is coming out, and it will make maybe not look quite as strong in growth in '26 over '25 -- but as we emerge through the year, I think the kind of growth rate, Arnold is capable of demonstrating will start to become insight when we get into the back half of the year. And frankly, from the level of quoting activity and the level of orders that we're getting, to the extent we have supply, we feel that 2026 could be a very good year and could develop out really strong. I'll let Stephen comment on Alter.

Yes. So Altor is actually -- we're a little bit more cautious in our outlook for Alto. We still think it's long-term positioned very well for -- in the cold chain. Obviously, some of the current administration's kind of war on vaccines has not necessarily been supportive of that business in the fourth quarter. And so we're still working through that as we go into next year. So we're a little bit more cautious on Ulta for 2026. Because in addition to the cold chain and the vaccines, we also have the tariffs have caused a slowdown in kind of appliance and appliance purchases. So again, we think the business is well positioned for the long term until there's a little bit more stability in the economic outlook, specifically around tariffs and then also on vaccines. I think that's really -- we're going to have to get through that to really see significant growth, but we will see it stabilize in 2026.

And overall, I think the industrial business is collectively, when you expect Sterno and Altor to be relatively modest and then there is significant upside opportunity in Arnold. It could be a really good year. We do have to work through the trade situation.

Got you. And Stephen, as you have free cash flow assumption for this year changed at all? I know you kind of gave a preliminary number last quarter, but you still look...

Not at all. We're very -- we're still saying that between $5 million $100 million of free cash flow makes sense. And I would say, again, probably there's always a little bit of upside potential related to timing of recoveries related to Lugano or directly related to the on or related to D&O insurance claims, et cetera. So operating, no changes, potential upside from the lookdown situation.

Our next question comes from the line of Chris Kennedy with William Blair.

Just wanted to talk a little bit about the branded consumer business this year given the wider than normal range. Like what -- I don't know, Talk a little bit about that wider range? Is it mostly tariff-related or just the general economy? Just a little bit more color would be helpful.

Yes. Cris, I think it's -- honestly, it's both in the related. The tariff uncertainty is just creating, I guess, uncertainty would be the proper word. It is highly fluid right now, as you know. And because of that, we just are anticipating slightly greater volatility. If there is better clarity on where tariffs are in the state of the economy, then I think as we progress through the year, we'll be able to narrow that down quite a bit. But the real chaos that is kind of being created out of the tariffs in the last 1.5 weeks has been very chaotic with what has happened -- we just felt it was better to widen our range right now given that.

I will make 1 comment also, which is the tariffs have had a negative impact on consumer spending. We've seen that. We saw that in the retail sales data that came out flat during the holiday season. Obviously, units were down within that and pricing was up. So I think we're seeing the impact of tariffs and the tax that they create on consumption for consumer goods having an impact. And we want to be responsible as we guide for next year and have an understanding that these tariffs could have big upside if they get pulled off completely and 150 days from now, we go back to 0. It could have kind of issues that we've already been seeing, which is reduced consumer activity. We saw that in the fourth quarter. So that is supporting a wider range right now and we don't know things like are there going to be refunds for the tariffs that the Supreme Court struck down. There's just a lot of uncertainties that are out there. No refunds have been built into the guidance, by the way.

Got it. Understood. And then just we noticed that leadership change at Prima lost, if you could just kind of give a state of the union on that subsidiary would be great.

Yes. So we acquired Prime late a couple of years ago. It's been kind of flattish along from when we acquired it. There was a lot of inventory that had to work through the channel. The company is well positioned right now. We had an opportunity to bring in an incredibly strong leader who had previously worked at 1 of our other subsidiaries, ban a very, very senior capacity. At the same time, Boas CEO, Sean Neville, who's a Board member -- at Prime aloft, and Sean is a very skilled executive and 1 of the best executives actually that I've ever worked with. And so having his talent at prime aloft from a board level, is very helpful in that business. And the ability to bring in Eric La who is a true superstar we think, is creates an opportunity for Prime a loss to really accelerate its growth and market penetration.

And so there was nothing kind of wrong with Prime a loft or with the leadership, but we felt this was an opportunity to bring in somebody who we had worked with before, who we know is an extraordinary talent -- and when you get those kind of opportunities, we think it's value creating within our entire firm.

Our next question comes from the line of Timothy D'Agostino with Equity Research Analyst.

Yes. I guess a lot of subsidiaries have been touched on. I guess could you kind of just give a little bit of a pulse check over at 5.11. And you might have spoken to it a little bit earlier. But it seems that the business just kind of keeps performing. So it would be great to kind of just hear a little more color on what's going over there.

Yes. I mean 5.11, there's 2 pieces of the business. One is the professional side. That side of the business is a good, steady growth business. mostly driven by government and municipality spend in the U.S. and then internationally by government. That is a very good solid core of the business which is very consistent and kind of grows year in and year out. The other side is the consumer business, which has been a big emphasis of growth under CODI's ownership, which is now coming up on a decade -- and we started with very little in consumer. I think there are 4 stores when we acquired the company back in 2016, and now there is well over 100. And so that has been a huge focus for us.

I would say on the consumer side, 1 of the things that has occurred here, this consumer 4, 5.11 is very price sensitive. And inflation has been very kind of difficult for that kind of mid to middle upper consumer, which is where 5.11 generally fits. As we know, we had about of inflation in '22 and '23 and '24 that caused real wages to go down for that cohort of buyer. And although 5.11 performed well through that, push through prices, we really found that we had gotten to sort of the top of the price level that our customers could afford. Unfortunately, when tariffs came in, apparel has been 1 of the areas that has been hit the hardest.

And 5.11 experienced that as well. We found that elasticity of demand was quite high as we tried to push through pricing. Some of that we had to roll back and that is gross margin dilutive, clearly, to be able to do that. But generally, the apparel category is having a lot of difficulty as this inflation on consumers goods have caused consumers to have to make more choices today. And apparel has been 1 of the choices that just broadly, they have not made or they've made in reduced consumption.

Five is experiencing that. And so the professional side is doing well. The consumer side has some headwinds given the prices that have been happening. Now on the flip side, 5.11 has probably been the most advanced company in implementing AI initiatives and getting productivity -- and so we've been able to generate positive operating earnings growth in this company because we've offset some of that gross margin degradation through SG&A cuts enabled by AI productivity, and we would anticipate continuing to be able to do that to drive the business until we get to a better and more healthy consumer.

[Operator Instructions] Our next question comes from the line of Heli Shaft with Raymond James.

So as you take step towards deleveraging -- do you have any sort of leverage target that you're looking to achieve shorter term by the end of 2026 versus longer term? And what's the probability of achieving those leverage targets organically rather than from asset sales?

Yes, thanks for the question. Really appreciate it. So first of all, I want to clalong-term, we're targeting 3 to 3.5x. That's the right area that we would like to be at probably the way we kind of think of it through the end of 2026 is that we would be around 4 -- to get to 4x, you would probably need to have -- we would definitely need to have some sort of deleveraging event through a sale transaction. Outside of that organically, we should be down well around 4 -- we would be probably around 4.5% is probably where you would be without a transaction, always somewhat dependent on the timing of recoveries from Lugano -- but key things here is we got some nice -- the sale-leaseback allowed us to pay back $11 million of debt.

We're going to generate somewhere between $50 million and $100 million of free cash flow that we'll use to pay down debt. We will also have, as we said, the growth mid-single-digit growth in EBITDA, all those organically get you down. Then you have the recoveries from Lugano, and then you have deleveraging events. All that together, again, puts us around that 4x leverage.

Got it. And a quick follow-up. As you begin the sale processes, what sort of M&A market are you seeing and anything to flag there?

Yes. I'd say the M&A market is it's not hot by any means, but it's also not dead. There has been little activity in the M&A markets over the last couple of years, and there's a lot of capital that remains available to acquire good assets. But I would say it is a maybe luke warm kind of market. It really depends on the type of asset that you have. Good assets always find good opportunities to be sold. And they create enough interest from multiple bidding parties to keep the integrity in the process and the price at a reasonable value.

I would say what is supportive to asset valuations today are rates are coming down. And capital typically starts flowing as rates start coming down from lending parties and that is very supportive, whether it's to financial buyers or just generally to strategics or anybody else that's in the market. On the sort of flip side to that, some of the policy uncertainty that we're seeing with around tariffs, some of the geopolitical risks that are occurring are causing buyers to be more concerned with the economy and what the future of the economy looks like especially when you're outside of like AI and things that are growing that. And as you know, we're in consumer and industrial those are tied to economic activity. So I think it's a little bit of countervailing forces where there's some worry about economic weakness, but you're getting a little bit of strength in kind of reduced rates and more debt capacity, and it kind of creates a, I would call it, moderate conditions for the M&A markets.

And I'm currently showing no further questions at this time. I'd now like to turn the call back over to Elias Sabo for his remarks.

Thank you all for your time today, and we look forward to talking to you on our first quarter conference call.

This concludes today's conference. Thank you for your participation. You may now disconnect.

Good afternoon, and welcome to Compass Diversified's Fiscal 2025 Third Quarter Conference Call. Today's call is being recorded. [Operator Instructions] 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 Third Quarter 2025 Conference Call. Representing the company today are Elias Sabo, CODI's Chief Executive Officer; and Stephen Keller, CODI's Chief Financial Officer. We are also joined by Zach Sawtelle, Chief Operating Officer for Compass Group Management; and Pat Maciariello, who recently retired after 20 years with CGM.

Before we begin, I'd like to remind everyone that during the course of this call, CODI will make certain forward-looking statements, including discussions of forecasts and targets, future business plans, future performance of CODI and its subsidiaries and other forward-looking statements regarding CODI 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.

While these statements present our best current judgment about future results, performance and plans as of today, our actual results and operations are subject to many risks and uncertainties that could cause actual results and operations to differ materially from what we expect. Except as required by law, CODI undertakes no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events or otherwise. In addition to any risks that we highlight during this call, important factors that may affect our future results, performance and plans are described in our recent SEC filings and press release.

During the call, we will refer to certain non-GAAP financial measures. Please note that references to EBITDA in the following discussions refer to adjusted EBITDA as reconciled to net income or loss from continuing operations in CODI's press release and SEC filings. At this time, I would like to turn the call over to Elias Sabo. Elias?

Thank you, Ben, and good afternoon, everyone. With today's filing, we are now current with our SEC filings for 2025. We're also back in compliance with the reporting requirements under our credit facility and bond indentures, and we're returning to a more normal operating cadence. It's been a long road thus far, and I want to thank everyone for their patience throughout this process. We appreciate the support you've shown as we work through it.

Before I discuss our performance, I want to give you all a quick update on some organizational changes that have occurred at Compass Group Management, our external manager. After 20 years of dedicated service, Pat Maciariello retired at the end of 2025. Pat has been an integral member of CGM's senior leadership team, and it's been a pleasure to work alongside him over the years. Stepping into the role of COO for CGM is Zach Sawtelle. Zach has been with CGM since 2009, most recently as the leader of our East Coast office. He's been instrumental in many of CODI's most successful acquisitions in his tenure and currently chairs the Boards of BOA, PrimaLoft, Altor and Sterno.

I'm thrilled to have him take on this role, and I'm confident his leadership will support continued execution by all of our subsidiaries. Before we move on, I'll pass the call to Pat to say a few words. Pat, over to you.

Thanks, Elias. It's hard to put 20 years into a few words, but I'll try. Working with the CODI team has been one of the most meaningful chapters of my life, and I want to thank each and every employee, manager and partner at Compass. I'm also grateful to the employees at each of our current and past subsidiaries. Your professionalism and hard work were evident every day. I would also like to express my gratitude to the executive teams at each subsidiary business. I have learned and continue to learn from each of you as you have modeled drive, leadership and character. Working with you has been the highlight of my career, and I will be forever grateful for the opportunity. I look forward to watching all of your continued successes from [ the far ]. Thank you.

Thank you, Pat. On behalf of everyone at Compass, thank you for your leadership and partnership over the years. Best of luck in your next chapter. I'll now turn to our year-to-date results and share a few operating highlights from our subsidiaries. Then I'll close with the steps we're taking to drive long-term shareholder value.

From a macroeconomic perspective, 2025 was a year marked by uncertainty driven by geopolitical risks and a fluid tariff environment. Despite that volatility, our subsidiaries, excluding Lugano, delivered mid-single-digit growth in subsidiary adjusted EBITDA through the first 3 quarters of 2025. That's consistent with the expectations we laid out at the beginning of the year. And while Lugano remains included in our reported results for the period, our focus today is on our 8 other subsidiaries. Our solid performance reflects the disciplined execution of our subsidiary management teams as well as the attractive positions our businesses hold in their respective markets. Across CODI, we own and operate high-quality, well-managed middle-market businesses that can perform through a range of economic environments.

Now let me walk through what we're seeing in each vertical and share a few examples of how our teams are driving results. Year-to-date, sales in our consumer vertical grew low single digits. BOA continues to drive significant penetration in multiple applications, including snow sports, cycling, workwear and protective headwear. The precision and performance of the BOA Fit system is unmatched. The Honey Pot is now one of the fastest-growing feminine care brands, driving continued share gains and category growth. The team has successfully launched innovative products and is taking share from legacy brands in the feminine care category. We believe this reflects the long-term appeal of better-for-you products as well as the strength of our brand, supporting strong double-digit EBITDA growth.

5.11 moved quickly to adapt to the evolving tariff environment, using supply chain actions and targeted pricing to protect performance while continuing to invest selectively to broaden the brand's reach. Year-to-date, our industrial vertical delivered mid-single-digit sales growth, supported by Altor's 2024 acquisition of Lifoam. In 2025, the rare earth magnetics market saw meaningful disruption that we believe creates a compelling long-term opportunity for Arnold. Demand for a more geopolitically secure rare earth supply chain continues to rise, while intermittent export restrictions have increased volatility. These export restrictions created short-term headwinds in 2025, but we believe they also reinforce the long-term tailwinds for the business as reflected in Arnold's growing backlog.

Today, Arnold is one of only a handful of companies producing samarium cobalt magnets in the U.S. These magnets play an essential role in the most demanding aerospace and defense applications where supply chain security and performance reliability are critical. Finally, Sterno continues to deliver double-digit EBITDA growth, driven by strength in its core food service offering. The Sterno management team continues to drive efficiency, including optimizing sourcing and production locations to navigate the tariff environment. These are just a handful of the accomplishments across both verticals.

Before I hand it over to Stephen, I want to reiterate our commitment to all of our stakeholders. Now that we have completed the Lugano investigation and restated our financials, we are focused on execution and on delivering consistent long-term shareholder value. While our priority remains reducing leverage to mitigate risk and ensure long-term financial flexibility, we recognize the need to drive shareholder returns, and we are taking steps to position ourselves to be able to efficiently and prudently return capital to shareholders. We believe that our current valuation represents a significant discount to the intrinsic value of our underlying businesses. If this disconnect persists, we will factor that in as we consider the greatest risk-adjusted return opportunities, including the efficient return of capital.

The bottom line is that we are committed to a better outcome for all of our stakeholders. With that, I'll now turn it over to Stephen.

Thanks, Elias. As a reminder, our reported results still include Lugano Holdings, unless otherwise stated. Lugano will be included in our consolidated results through November 16, 2025, the date that entered Chapter 11 bankruptcy proceedings and will be deconsolidated thereafter. For the third quarter, net sales were $472.6 million, up 3.5% year-over-year. GAAP net loss for the quarter was $87.2 million, which includes expenses related to the Lugano investigation as well as Lugano's operations.

Now given the timing of this call and because this is the first time we publicly discussed our 2025 results, I'll focus my commentary on year-to-date performance. This captures the first 3 quarters in full and helps normalize for inter-quarter shifts as customers prepare for and then reacted to changes in the tariff landscape. Year-to-date, consolidated net sales were $1.4 billion, an increase of 8.6% over the prior year or 6.1%, excluding the impact of Lugano. In our consumer vertical, sales were up 3.1%, driven by very strong growth at the Honey Pot with additional contribution from 5.11.

Year-to-date, BOA declined slightly as the team exited a lower value, less performance-oriented business in the children's market in China. This planned exit supports BOA's long-term strategy. Excluding the children's business in China, BOA's core business grew double digits. Year-to-date, sales in our industrial vertical grew 10.5%, driven primarily by Altor's acquisition of Lifoam. Growth was partially offset by near-term headwinds at Arnold due to the geopolitical uncertainty and disruptions in the rare earth supply chain. As discussed, while that disruption creates short-term challenges, we believe it also reinforces the long-term strategic relevance and growth opportunities of that business.

Excluding Lugano, year-to-date subsidiary adjusted EBITDA was $257 million, an increase of 5.8% over 2024. The growth in subsidiary adjusted EBITDA was primarily driven by double-digit growth at the Honey Pot and Sterno as well as Altor's acquisition of Lifoam. This growth was partially offset by short-term challenges at Arnold as it deals with the rare earth supply chain disruptions and broader tariff-related uncertainty. Our consolidated net loss year-to-date was $215 million, which includes $155 million loss at Lugano.

Public company costs and corporate management fees were $99.5 million year-to-date. Included in that amount is more than $37 million of onetime costs associated with the Lugano investigation and restatement. CODI and our Board continue to work with the manager to fully recoup overpaid cash management fees from prior periods affected by Lugano's results as originally reported. The overpayment of which will be partially offset by a voluntary cash management fee reduction made by the manager during 2025.

In the fourth quarter, we expect to reconcile these items through a significant true-up related to the restatement. We expect this to result in a onetime noncash benefit in CODI's P&L and the recognition of a current asset that will be used to offset future cash management fees. CODI expects to fully recoup the overpaid cash management fees by the end of 2026.

Turning to our cash flow. Year-to-date, we used $54 million of cash in operating activities, primarily due to costs associated with Lugano's operations and its disposition. Year-to-date, we've invested $34 million in capital expenditures in line with the prior year as we continue to protect and invest in our 8 subsidiaries to support sustained growth. We ended the third quarter with $61.1 million in cash and cash equivalents and less than $10 million used on our revolver. As a reminder, due to the credit agreement amendment we signed in late 2025, we have restored access to the full $100 million capacity on our revolver.

As Elias discussed, reducing leverage is our priority, and we are focused on deleveraging both organically and through value-accretive strategic transactions, including the potential opportunistic sale of one or more businesses. The credit agreement amendment we signed in December gives us the time and flexibility to deleverage in an orderly way. Under the amended agreement, our leverage covenant is relaxed through 2027 with milestone fees paid to the lender beginning June 30, 2026, if our leverage ratio is not below 4.5x, which serves as an incentive for faster deleveraging. That structure allows us to deleverage organically while remaining in compliance. It also preserves the flexibility to accelerate deleveraging through a value-accretive sale of one or more business. As a reminder, our year-end leverage ratio, excluding the deconsolidated Lugano results, is expected to be around 5.3x.

Finally, we expect to continue to fund the growth of our subsidiaries alongside our debt reduction and to maintain appropriate liquidity as we execute against our plans.

Turning to our outlook for 2025. Consistent with previously communicated guidance, we are tightening our expected subsidiary adjusted EBITDA range, excluding Lugano, to between $335 million and $355 million. We'll provide an outlook for 2026 when we hold our fourth quarter call. However, we do expect to organically deleverage in 2026 through solid growth in our subsidiary adjusted EBITDA. As has been our practice, our outlook does not include the impact of any potential acquisitions or divestitures and assumes no incremental material impact from changes in the tariff environment or other macro and geopolitical developments.

Finally, we know many investors have inquired why members of management and the Board have not yet purchased shares following the completion of the restatement. The main reason is timing and process. Given the cadence of our SEC filings this year, we expect our insider trading window to remain closed until after we file our 2025 Form 10-K and complete the annual audit. When the window does reopen, any purchases would be subject to our normal reclearance and compliance procedures. With that, I'll hand it back to Elias for closing remarks.

Thanks, Stephen. Before I wrap up, I want to share one additional thank you from our Board and everyone at CODI. James Bottiglieri retired from the CODI Board at the end of last year. For over 20 years, Jim was a key member of both the management team and eventually our Board. Jim was instrumental in our initial public offering and has been a valued Board member, providing deep institutional knowledge, financial expertise and wise counsel to the Board and management. We truly appreciate everything he contributed to CODI.

Now as I conclude today's prepared remarks and we look ahead, I want to reiterate our commitment to generating sustained long-term shareholder value. This objective is reflected in our capital allocation priorities to reduce leverage, invest for growth and long-term value creation and at the appropriate time, return capital to shareholders. With 2025 in the rearview mirror, we're ready to get back to what has historically defined CODI. We believe we have a battle-tested business model, strong enough to withstand the unprecedented events of this past year. We offer a permanent capital approach that allows us to acquire, manage and grow attractive businesses that are leaders in their space. We provide shareholders access to high-quality middle market businesses backed by engaged ownership, strategic resources and a long-term approach, while empowering strong management teams to run and grow our subsidiary businesses.

We know 2025 was challenging, and trust is earned through consistent execution. That's our focus as we enter 2026. With that, Stephen and I will now take your questions. Operator, please open the lines.

[Operator Instructions] And our first question comes from Lance Vitanza with TD Cowen.

Congratulations on getting the restatement done. My question would be with respect to the Honey Pot. My recent channel checks seem to suggest both more shelf space and also faster inventory turns than at least I had expected. And I'm wondering if you could comment on how the performance has been shaping up relative to your internal expectations. And to the extent there's been outperformance on that basis, what do you think the drivers of that have been?

Sure. And thank you, Lance. First feels good to be back up to date with all of our filings and the company getting back to a more normal operating level. With respect to the Honey Pot, this is really an extraordinary brand. I think we told you when we bought this business that this was a company that was founded by an extraordinary woman and that she was really changing kind of the entire industry and using better-for-you products. And it was mostly a business that was in the kind of more of the hygiene side, and it was not in the broader part of the feminine hygiene market. It was in more of the washes and wipes. And so that's a very small market.

One of the things that the company has been able to do, and it was always part of the plan was to extend the brand into other categories. And in this case, the company has been able to get into the menstrual category, which is a massive market compared to the market they were entered into before. And we've had very successful execution. Our product really does stand for something in our brand and with our customers, it's extendable into other adjacent categories. And so what we've seen is more shelf space being dedicated to us in this new category, and our turns are doing really extraordinarily well. So relative to expectations, I can tell you the company is significantly outperforming expectations given kind of the additional shelf space that we continue to talk to our retailers about as the next year gets set, we expect that growth to continue. And we're investing in the brand. You just see a lot more marketing. It was always our strategy. And so everything is coming together, and it is really producing wonderful results. And I think '26 is shaping up to be a great year.

That's really helpful. I appreciate it. If I could just squeeze in one last question. On the divestiture front, and I know you've talked about this previously, but could you just sort of remind me like are there any assets that are off the table there that you would just simply not consider selling at any price? Or should we just consider this you're going to look to maximize shareholder value. And if that's subsidiary, XYZ, it's subsidiary XYZ?

Yes. I would say everything -- our model has always been everything is for sale at all times. It all comes down to the value that you're willing to pay. And to the extent that's attractive to us, we would always be a seller under those circumstances. Nothing has changed with respect to that, Lance. So absolutely, all of our businesses remain available for sale because that's the basic kind of business model that we have. Now I would tell you that some of our companies that are growing really fast and have great dominant market positions. And I think we all know kind of some of those businesses that we have. Look, the valuation expectations are going to be really high. And if they fail to materialize, we are in a position where although we would like to divest the business, we don't have to and what we won't do is take a big discount on a premium asset.

And so I would just say, yes, everything remains available for sale. That's always been the case. We do have a firm-wide desire to be in divestment mode in order to shrink our balance sheet to get back to normal leverage and then have capital allocation available to us again. Stephen mentioned, part of that is clearly looks at buying back stock as a capital allocation opportunity. And at these prices, we would think that's pretty attractive. So divestment is what we would like to achieve, but it is not without kind of respect to valuation, and we'll be very disciplined in executing that.

Our next question comes from Larry Solow with CJS Securities.

Great. Welcome back, I guess, to the current financial world. Also just want to extend my best wishes to both Pat and Jim, great working and personal relationships with both of them. So I wish you guys both best of luck. I guess first question lies is just kind of just broad brush. I know you called out good color on all your holdings, quite frankly. But growth seems like it slowed a little bit. I think you grew kind of 8% first quarter and 2% or 3% this quarter. It looks like it's probably more just timing in some of your bigger holdings like BOA. I think maybe timing there and also the Chinese exit. So -- but just from a broad brush, how do you see the economy like today versus -- I know you had a lot of other things on your mind, but maybe at the start of the year and just...

Yes. Thank you, Larry. Thank you for the warm wishes for Pat and Jim. They have both been really valuable participants here in building Compass and have become friends with us all, and we wish them the best in their future endeavors. With respect to the economy and kind of how we see things or saw things unfold, yes, we did have a really strong Q1 and things moderated in Q2 and Q3. We saw a little bit of a pull forward of some demand that we think otherwise would have materialized on a more normalized pattern with the kind of Liberation Day announcement and there was a period of time where you could still bring some goods in, and I think everybody kind of rushed to do that.

So there's a bit of distortion, I would say, quarter-to-quarter because of that. But look, if we're going to normalize for that, there still is a bit of a slowdown that occurred after Liberation Day. And as you'd anticipate, there's -- look, a lot of inflation. There was some inflation that came through still, and it was very disruptive for a lot of companies. And I think consumers just got to the point where they weren't willing to take any additional inflationary pressures. So that's been a very difficult environment in which to operate. I would say 5.11 has probably had the biggest impact from that because we produce in Southeast Asian countries, not China. We were, I think, quick enough to get out of China when the President was in his first term and there was a lot of rumblings.

But in adjacent markets where you produce a lot of apparel, there's still 20% tariffs and you have a customer set that is very reticent to take any incremental price increases, that's a tricky spot that companies, I think, across a lot of different industries are finding themselves in. So it may not impact directly a BOA or PrimaLoft. But if our customers are feeling those same headwinds, then that impacts us. And so I would say broadly, Larry, these tariffs have kind of slowed down at least the consumer side of the business. The industrial side of the business clearly had a very unique kind of impact from the export restrictions that China put on rare earth minerals.

As a result of that, there's -- as you see in Arnold's results, millions of dollars of EBITDA reduction that occurred. I think that is a little bit more kind of one-off, and we expect that to revert back to normal in 2026. And so that had some impact on kind of the weaker results in the back half of the year. But I would just say broadly, things slowed a little bit, but still feel like they're growing.

Yes. And I know, listen, you're not giving guidance for next year yet, but you have spoken about sort of getting your leverage down organically into the mid-4s. So that would imply some growth. And it does feel like you're -- even if consumer slows a little more, you'll -- Altor sounds like it's going to -- I know it's basically flat this year, maybe organically, but it seems like that's not really -- a lot of that's noneconomically related with the cold storage. And as you mentioned, Arnold should bounce back a little bit, right, next year, hopefully. So it feels like your outlook, you're kind of holding into that outlook, continue to at least grow somewhat next year without getting ahead of our skis.

Yes. We're going to give an outlook for next year here, I guess, sooner rather than later because we're going to have our year-end call more quickly than normal. But I would say, Larry, we have very strong expectations that we will have a growth year next year. and our free cash flow is going to be very strong. And heretofore, we have not produced actual free cash flow because it's been invested in growth in working capital and other assets.

In 2026, when you talk about deleveraging path, there's 2 forms that it comes in. One is we expect growth of the portfolio. And number two, we expect to grow and have actual free cash flow that repays indebtedness and has a lower gross amount of debt at the end of the year. So when you -- so that is going to be something, and we're not giving guidance today, but I would tell you, when we do give it in 5, 6 weeks or whatever the timing is, it's going to include that kind of like foundational tenets.

Awesome. That sounds great. If I could just one more housekeeping question. Stephen, just -- can you give us a sense of sort of like a normalized management fee today. I guess it sounds like there'll be some noncash accounting true-up in Q4 that will kind of roll through the P&L next year. But -- so maybe as we enter '27, obviously, your company may look a whole lot different. But based on what the current holdings and net asset value is, like can you give us an idea what that normalized number would -- and then...

Yes. I think it's -- so look, obviously, we need to do a little bit of work to true up all the kind of overpaid management fees. And as you mentioned, there will be some adjustments in Q4. But from a management fee cost perspective, noncash, I would say, for next year, I think it's probably -- you can probably assume it's in the -- it's around $55 million, including what's paid directly by the subsidiaries. That's probably a good number based on our current portfolio of businesses and excluding any impact from Lugano -- excluding any fees, obviously, Lugano will be deconsolidated and those assets won't be under management.

From a cash perspective, next year, it will be substantially less as basically CODI will have lower cash payments to CGM to make up for the overpaid management fees that have been paid historically. So cash will be a lot less. But from an accounting perspective, you can assume around $55 million.

Our next question comes from Timothy D'Agostino with B. Riley Securities.

Congrats on being current in everything, really big accomplishment. I guess my first question kind of goes back to asset sales. It would be great to get some color on who might be interested or how you might go about a sale, not necessarily what you're selling. The reason why I ask is I think back to Fox Factory, and I wonder if there's any potential of like maybe like bringing a company public and that being a way of sale -- way to sell an asset. So I guess my question is, what are the different avenues you can explore when going to sell one of these assets?

Yes. Tim, thank you for the question. This is Elias. In selling an asset, I mean, I think there are a number of avenues. Fox was an example of an IPO. If you remember not too long ago, we filed actually right before the market kind of took a turn for the worst in 2022, an IPO for 5.11. And we withdrew that just because of market conditions, but that's a company that is kind of a size that potentially could explore that kind of pathway. And in fact, other companies are at that size or getting to that size as well.

So IPO becomes an absolute route for which we can monetize the position. I think that route has the benefit of unlocking value and demonstrating that to the market, but it does not have the benefit of quick deleveraging because inevitably, we become a large holder of those shares, and we have to, over a series of years, make orderly sales to be able to monetize that. So although I think that is a great way for us to monetize assets, and we have that in our portfolio of things we would do, I would say it comes at the cost of not having quick liquidity.

For faster liquidity, I'd say the routes are through investment banks typically that we engage and they go out and talk with kind of strategic buyers, private equity buyers. Tim, understand because we're in the market all the time and we're engaging in the market, we're getting inbounds and we are talking with bankers constantly about strategics or other PE firms that may have interest in our assets and then conversely assets that we may have interest in. Now '25, we weren't doing really the latter, looking for assets clearly. But there's always kind of that chatter that is going on.

So I think just in the normal operations, we have a pretty good understanding of where strategics are right now by our different companies and their acquisition cycles. who's expressed interest, who has not, where PE firms are in that process. And what we try to do is get a sense of what is the demand for an asset like this, typically using investment banking partners to help us do that. And the ones that we feel we can get the greatest amount of interest and demand for are assets that we're kind of bringing out to market.

Now I will say, and we've said this before, we have a couple of assets, a few that we are looking at this. We don't -- we're not saying we're going to sell multiple assets this year, but we do want to execute against a sale, and we don't want to give leverage to any potential buyer. And so in that process, we'll look at a few different businesses that we feel there's sufficient demand in the marketplace to warrant a good value and then we'll determine which one that we will want to divest based on how the market materializes.

Okay. Great. That's super helpful color. And then if I can just ask another. Going forward in '26, the way you oversee the portfolio companies, has your oversight changed or how you go about it? If you could just provide any color there.

Yes. So I think what we talked about on the restatement call is that from an internal audit perspective and a compliance perspective, we have made some changes. We did decide to outsource our internal audit function with the idea that using a third party would allow us to do 2 things. One, it allows us to easily scale up and down the size of the team based on the assets that we have and the companies that we're running. And then the second thing is also when you use an outsourced team, when you get businesses that are -- have unique characteristics, it's easy for you to get industry-specific experience and quickly flex it up and down.

And so we think the changes in internal audit and compliance moving to an outsourced model will be a better model. That's the primary change that we are making in terms of the oversight. There's also some other internal processes that we'll be looking at. But we do want to recognize, the situation with Lugano was very, very terrible. It was unprecedented. It was also very unique and very unique to that situation. So as we talked about on the other call, we have -- we'll probably change a little bit of some of our criteria where we would not necessarily want to have a someone who is a founder, still CEO, still owns 40% and a key man, that's probably a risk that we, in retrospect, would like to structure differently if we had another deal.

So we will make some changes like that. But overall, we have to remember that the situation in Lugano was very, very isolated to Lugano. And so generally speaking, the model that we have had and the oversight we've had of these companies have worked very, very well for 20 years. And this is a very unique situation driven by a very unique individual.

Our next question comes from Matt Koranda with ROTH Capital.

Best wishes to Pat, you'll be missed. I guess what I wanted to make sure I understood, it sounds like we're motivated to sell an asset at some point this year, but we don't feel a whole lot of pressure given you have multiple good assets that you could potentially sell. The 4.5 leverage covenant that you have by midyear, is that something you could actually attain organically even just given the cash unlock from working capital that you could get this year?

So first of all, it's not a -- there's an incentive to get below 4.5. If we're not below 4.5, there's a payment. We won't be out of covenant. The covenant is actually higher. So we will be in covenant -- we are now and we will continue to be all next year. There is a -- look, with some recovery from Lugano, assuming that we have, there would be a path to getting below 4.5% organically, but it would be tighter than we would like, which is one of the reasons why we're trying to operate in a sense that we will be able to organically delever and therefore, that allows us to -- any asset sales to accelerate it and gives us more comfort.

So we'll go down both paths. We're not going to sell -- we do not want to sell a business at a discount that will destroy shareholder value. So we're focused on being able to get below if we -- if a sale at the right valuation doesn't materialize. We do, however, expect to sell a business.

Okay. All right. That's fair. That helps. And then I just wanted to hear a little bit more about Arnold and supply chain disruption, how long that sort of should be playing out or if it's already essentially solved in your mind and that just is going to take a little time to percolate through the business. Just an update there.

Sure. So as we all know, the trade liberation day and the tariffs on China caused a lot of global issues and retaliation by China in certain areas. Matt, the area where China has the most leverage is over rare earths, currently, something like 90% of all Neo magnets are produced in China, and I think something like 70% of all samarium cobalt, which is what we produce is produced in China. So they're just a massive player. They obviously have a lot of the raw material that's there. And these are absolutely integral as we think about the AI economy, alternate energy kind of production to serve the AI economy partly. And then robotics and electric cars, all of these things require rare earth magnets.

And so the future growth of economies is dependent on this. Clearly, China flexed their muscle and put export controls that we were not able to comply with. No company would have been able to comply with them. And as a result, that shut down pretty much all the business that we had that we could export out of China. That's kind of a $6 million to $8 million EBITDA disruption that we got hit with there. Now what's happened is China has loosened export controls and we're seeing products start to flow back out of China. But the longer term, so we expect normalization, and that's already happening in the fourth quarter. And we have a backlog that we need to obviously catch up. So that provides a good tailwind going into 2026.

Now the global landscape has really shifted because these are -- we work mostly with aerospace and defense customers. That's where samarium cobalt, magnets kind of really shine. And so that part of the market is very sensitive to just-in-time inventory ordering, and we deal with customers that are very -- the economy is dependent on them. Our national security is dependent on these customers. And so the stakes are very high. Clearly, our customers were rattled when we were not able to deliver product on schedule because of these export restrictions. And it wasn't just us, it was everybody they were buying from in China.

And so what we've seen, and this is where we believe there's a lot of bullishness around Arnold, and we think the upside trajectory for this company over the next few years is well above trend. There is a desire for a lot of our global customers to source their material in a more stable geography. And they're looking for U.S. or European or other Southeastern Asian country like Indonesia has got a Neo mine that's coming on. There is a big effort to diversify the supply base out of Mainland China, which is where it exists today. As we said in our prerecorded script, there's only a handful of us that can do that.

And so we sit in a pretty good position to be able to secure a lot of additional business and drive our business growth much faster than it otherwise would be. And that's why notwithstanding the short-term pain we suffered in 2025, I think in terms of underlying enterprise value of the Arnold business, this was a massive positive to that, and we expect it to manifest in future growth rate of earnings.

[Operator Instructions] And I'm not showing any further questions. I would now like to turn the call back over to Elias Sabo for any closing remarks. We do have one question...

Thank you all for...

Our next question comes from Cris Kennedy with William Blair.

Congrats on Pat's retirement. Just wanted to follow up on the last comment you made about Arnold. I mean it was almost a year ago when you had the Investor Day and you kind of gave long-term organic revenue growth targets for each of the subsidiaries. Any updated thoughts on that framework that you provided previously?

Yes. I would say, obviously, clearly, Cris, we were wrong with Arnold in 2025. And so let's assume that we kind of get back to a normal baseline, which '24 would serve as a normal baseline year. I think we would expect those growth rates temporarily because I don't know if this is a long-term shift. That actually looks into use of robotics and other things that may have longer-term demand generation that is outside of what we are seeing today. In the short term, though, let's say, 3 to 5 years, we would expect a materially higher growth rate from Arnold given the supply chain disruptions that we talked about and the resourcing of production.

Okay. And how about the other subsidiaries now that you have more working capital to allocate potentially that Lugano has gone?

Yes. No, we'll obviously talk more about that on our Q4 call and about our 2026 guidance. But I would say largely, our companies outside of Lugano are performing with the exception of Arnold that we mentioned are performing in line with expectation. Where we've noted we find things that are doing a little bit better is the Honey Pot. And I would say 5.11 is struggling a little bit because of tariffs. But largely, BOA, PrimaLoft, the other businesses, Sterno, they're performing in line with where our expectations are. And I'm not sure if you just went 1 year hence from last year's Investor Day, there'd be a lot of change. It probably would be more maybe 5.11's growth rate is a tad lower and Honey Pot is a tad higher.

Got it. Okay. And then I understand you're not going to give commentary in 2026. But can you just remind us of kind of what the free cash flow conversion is of the business or how we should think about that?

Yes. Thanks. It's a great question. I think it's really important to think about because 2 things have really changed since last year, which is one is Lugano no longer in the portfolio, which is a significant user of working capital. Our underlying businesses now generate a substantial more amount of cash. That, coupled with the elimination of the common dividend suggests that we will, from a free cash flow perspective, be creating pretty significant free cash flow. We actually expect -- depending on working capital usage and the timing, we'd expect that in 2026, that we should generate between $50 million to $100 million of free cash flow after everything, after interest, after dividend, after preferred dividends and CapEx, et cetera.

So that is a marked change from, I would say, where we have been historically. And so that is something that we're -- that's one of the reasons why we're very confident in the fact that we will be able to organically delever on top of looking at these more strategic, more rapid delevering activities.

I would now like to turn the call back over to Elias Sabo for any closing remarks.

Thank you, everyone, for joining our call today. We understand this has been a very difficult last almost year for all of us. We are really excited to be caught up, and we look forward to speaking with you all again in another couple of months and previewing our 2026 expectations. Thank you, and have a great day.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.

Thank you for standing by, and welcome to Compass Diversified's conference call. [Operator Instructions]. Today's call is being recorded. [Operator Instructions]. I would now like to hand the call over to Ben Tapper, VP, Investor Relations. Please go ahead.

Thank you, and welcome to Compass Diversified's conference call to discuss the restatement of our financial statements for the fiscal years 2022 through 2024. Representing the company today are Elias Sabo, CODI's Chief Executive Officer; and Stephen Keller, CODI's Chief Financial Officer. We are also joined by Pat Maciariello of Compass Group Management, LLC.

Today's call is focused on the restatement of our financial statements, our Audit Committee's internal investigation of Lugano, the actions we are taking in response and an update on our 8 other businesses, which have continued to perform during 2025.

Before we begin, I'd like to remind everyone that during the course of this call, CODI will make certain forward-looking statements, including discussions of forecasts and targets, future business plans, future performance of CODI and its subsidiaries and other forward-looking statements regarding CODI 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. While these statements represent our best current judgment about future results, performance and plans as of today, our current results and operations are subject to many risks and uncertainties that could cause actual results and operations to differ materially from what we expect.

Except as required by law, CODI undertakes no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events or otherwise. In addition to any risks that we highlight during this call, important factors that may affect our future results, performance and plans are described in our most recent SEC reports and press release.

During the call, we will refer to certain non-GAAP financial measures. Please note that references to EBITDA in the following discussions refer to adjusted EBITDA as reconciled to net income or loss from continuing operations in CODI's financial filings.

At this time, I would like to turn the call over to Elias.

Thank you, Ben, and good afternoon to everyone. Today, we will walk you through the fraud that occurred at Lugano and how it led us to the decision to restate our 2022, 2023 and 2024 financial results. We will also summarize the key findings of our Audit Committee's independent investigation and the remediation efforts we've already made and are continuing to make to people, processes and structure in response to the Lugano situation.

Finally, we will put this in the context of CODI's broader business and the performance we see across our other 8 subsidiaries. I want to begin by saying that this has been, without question, the most challenging period in CODI's history. We recognize the impact this situation has had on our shareholders, creditors, employees, and partners.

CODI has always taken pride in being a disciplined, transparent steward of shareholder capital, and that standard continues to guide every decision we make. There are 4 key messages I want you to take away from today's call. The fraud at Lugano was pervasive, complex and isolated to that business. In retrospect, Lugano was a unique unCODI-like acquisition in terms of structure, industry and capital intensity. Based on what we've learned, we are refining our acquisition criteria and governance expectations. We are making changes designed to further enhance our people, processes and structure, building on our long track record of accountability and transparency. Four, CODI's diversified business model has been battle-tested. Our remaining subsidiaries continue to collectively perform and support our focus on deleveraging, regaining market confidence and maximizing shareholder returns going forward.

For anyone who hasn't followed our situation closely, in early May, we announced that our Audit Committee had initiated an investigation into the financing, accounting and inventory practices of Lugano. In that same release, we announced that Lugano's founder and former CEO had resigned and stepped off the Lugano Board without severance. It is our understanding that shortly after the investigation was initiated, he and his family fled the U.S. and permanently relocated to Israel. The Audit Committee's investigation has now concluded and the findings are deeply troubling.

What the Audit Committee discovered was deliberate and systemic fraud. The former Lugano CEO engaged in a scheme to significantly overstate Lugano's sales and profits, misrepresent the existence and value of Lugano's inventory and keep potential financial liabilities off Lugano's books and records. His efforts to hide his fraud were extensive. He created fake sales transactions to inflate Lugano's reported revenues, claimed inventory that either didn't exist or didn't belong to Lugano and entered into numerous unreported financing arrangements with third parties that he kept off Lugano's balance sheet.

These arrangements directly violated multiple CODI policies as well as the terms of CODI's intercompany credit agreement with Lugano. In support of his fraud, he relied on a complex network of undisclosed counterparties and financing arrangements, and prepared faults documents and records to support these transactions and evade detection by CODI's management and auditors. Importantly, the Audit Committee's investigation found no evidence that this fraud extended beyond Lugano to CODI or to any of CODI's other subsidiaries.

Further, the Audit Committee's investigation makes clear that the former Lugano CEO's actions were not mistakes or errors in judgment. This was intentional fraud carried out through a deliberate scheme to bypass controls that were put in place to prevent this type of misconduct. This fraud persisted for multiple reporting periods and increased in magnitude.

Before I move on, I want to take a minute to explain why this situation has been so personally and professionally challenging. When we decided to acquire Lugano 4 years ago, we did so on the basis we do for every acquisition on its financial merits. But I was especially excited about this opportunity because it appeared to closely align with CODI's core values. Lugano presented itself as a company that made community service a fundamental part of its business model. Its customer-only club, for example, required significant philanthropic commitments before a client could even be invited.

The former CEO, among other owners, was an Ellis Island Medal of Honor recipient, an award given to individuals who have distinguished themselves through service to humanity. To later discover that these initiatives were only a facade for fraud, greed and personal gain has been deeply disappointing. At CODI, our values are not a marketing exercise. They guide us because we believe it is the right way to do business and because we believe they differentiate us in a way that ultimately benefits our shareholders. What we uncovered at Lugano is fundamentally inconsistent with our philosophy.

With that background, I'll now hand the call over to Stephen to explain how the events at Lugano impacted our financial statements for the periods we restated.

Thanks, Elias. Early in the investigation, the Audit Committee confirmed that the fraud and financial misconduct were isolated to Lugano. Our other 8 subsidiaries were not involved and there has been no change in our other subsidiaries previously reported financials. Our corporate structure and business strategy were purposefully designed to ensure the operating challenges at one subsidiary do not directly impact our other businesses.

We believe our ability to continue to drive growth collectively across all our other subsidiaries amidst this backdrop of fraud is a testament to the resiliency of the CODI business model and to the strength of our operating teams. The fraud committed by the former Lugano's CEO impacted CODI's financial statements in multiple ways, all of which will be detailed in our as-filed financial statements, which we anticipate filing very shortly.

At a high level, the restatement significantly reduced our reported inventory. Consolidated inventory for 2024 was reduced by greater than $375 million or nearly 40%. All of this is related to Lugano. It also brought into our balance sheet additional short-term debt related to previously undisclosed financing arrangements at Lugano. And further, Lugano's revenue declined by more than 85% from previously recorded levels following the removal of the fraudulent revenue.

All of these adjustments will be reflected in our financial statements. And again, they are all driven by changes in Lugano's financials. Ultimately, the Lugano business was significantly smaller than initially reported. As a result, its cost structure was misaligned with its true scale and it generated significant losses. Inventory levels were materially below what we had previously understood. Lugano at the direction of the independent Board of Directors filed for Chapter 11 protection on November 16, 2025 and commenced a Section 363 sale process.

Lugano expects recovery from the sale of existing inventory, refunded taxes as well as potential insurance claims, civil recoveries and other sales of assets. Lugano's recoveries, net of expenses, will be distributed to Lugano's creditors. CODI is Lugano's senior secured creditor, but all recovery is subject to court approval. Regardless of what we ultimately recover from Lugano bankruptcy, the cost of the Lugano fraud will by a wide margin represent the most significant loss CODI has experienced since its inception.

I do not want in any way to minimize that fact. With that acknowledgment, I do want to describe several structural offsets to the Lugano loss that will lessen the impact of CODI's shareholders over time. These offsets include a tax shield on future capital gains, roughly equivalent to the loss we realized at Lugano, a recoupment of overpayment of management fees paid by CODI to the manager during the impacted periods, all of which we expect to be completed by the end of 2026, a reduction in profit allocation payments due to loss we realized at Lugano.

In connection with the Chapter 11 process, Lugano will be deconsolidated from CODI's consolidated financial statements effective as of the bankruptcy filing date. The bankruptcy isolates Lugano's financial and legal obligations to the bankruptcy of [ state ]. While painful, Lugano's Chapter 11 process provides a defined and orderly progression to bring the Lugano matter towards resolution.

I want to now turn -- I want to turn now to the steps we are taking as a result of what the Audit Committee's investigation uncovered at Lugano. While our ownership model and governance framework have supported a long and successful track record across our subsidiaries, this situation has reinforced that we must always look for ways to improve. At the conclusion of the investigation, we conducted a thorough assessment and are implementing enhancements to our processes, structures and controls.

These actions build on rather than replace the framework that has served our shareholders well over many years and are designed to further strengthen our risk management and enhance our oversight. Lugano was a departure from a capital-light cash flow-positive professionally managed businesses that have driven our success for over 2 decades. Uniquely, we partnered with a founder who retained significant ownership, continued to serve as CEO and was instrumental in most aspects of the business.

While we took steps to address this after the acquisition, he exploited the ownership structure and concentrated key man risk to circumvent our controls. Based on these learnings, we are refining our acquisition criteria and governance expectations, so overreliance on a founder CEO, coupled with a typical industry-specific practices will be avoided in future acquisition decisions.

Further, we are focused on strengthening our compliance, risk management and internal audit functions. We have made the decision to move to an outsourced model and expect to add an additional risk and compliance oversight role, reporting directly to our Audit Committee. We believe an outsourced model will allow us to more easily scale our internal audit resources to the size and complexity of our business at any given time. Further, it will allow us to add specialized resources with relevant industry experience to meet the changing needs of our subsidiaries.

Finally, an outsourced model will also allow us to better leverage and adopt industry best practices as they evolve. Outside of risk and compliance, we are also working to introduce refinements to our acquisition process including the standardization of guidelines for deal structuring and post-close management, supplemental due diligence requirements and stronger credit committee oversight approval and monitoring of all intercompany loans to our subsidiaries.

Finally, we are working on modifications to our management services agreement to create even greater alignment between our external manager and CODI's shareholders and to ensure that management fees overpaid over the course of our Lugano ownership are fully offset by the end of 2026. These actions are intended to augment and reinforce the processes we have in place so we can operate more effectively and continue our emphasis on ethics and compliance and deliver strong results for shareholders over time.

I will now hand it back to Elias to provide an update on the rest of our subsidiaries.

Thanks, Stephen. Despite a choppy macro environment, collectively, our other 8 subsidiaries continue to perform. These businesses are category leaders that operate in attractive markets, cater to enthusiastic customers, and we believe are well positioned to deliver strong and durable financial results.

In addition to filing the restated financials, we intend to file our first, second and third quarter 2025 financials over the coming weeks. So I can't share as much detail about 2025 performance as I'd like at this time. However, in the aggregate, excluding Lugano, we have been driving growth in both sales and EBITDA. We're encouraged by the progress we are seeing across our diverse brands. For example, BOA is driving share gains across multiple footwear categories based on real and measurable performance improvement. The Honey Pot is now the fastest dollar growth, Better-for-You Feminine Care Brand in the market.

Meanwhile, anyone who has followed the recent rare earth discourse knows Arnold Magnetics can play an important role in providing companies with domestically produced rare earth magnet solutions. And Altor, we believe, sits in a prime position to capture long-term growth in the attractive cold chain market. We believe we have exceptional subsidiaries across both our consumer and industrial verticals that isn't to disregard the inherent uncertainty in the global economy today. While no businesses are immune to broader economic headwinds, we believe our subsidiary businesses are navigating them as effectively, if not better than most.

I'll now pass it back to Stephen once more to quickly discuss our path to reduce leverage and our financial outlook for the remainder of the year.

Thanks, Elias. Before I walk you through our deleveraging plans, I want to clarify where we sit today. Our leverage ratio is significantly above our leverage covenants and also above where we'd like to operate from a long-term risk perspective. We are in active discussions with our senior lenders regarding the amendment to our credit agreement that will provide additional flexibility around our current leverage profile.

Based on the progress of those discussions, we currently expect to finalize and announce amendment in the coming weeks. I'd also like to take a moment to walk through our leverage in more detail as there are several structural and operational factors that work in our favor. Excluding Lugano, we would expect our leverage ratio to drop from above 6x now to approximately about 5.6x. When you then factor in the expected growth in our full year 2025 subsidiary adjusted EBITDA, we expect to end 2025 with a leverage ratio of around 5.2 to 5.3x.

This is still clearly outside our current covenant at 5x. However, it is significantly lower than one might anticipate given our current situation. To quickly get back into compliance and to move closer to our long-term target level between 3 to 3.5x, we have a dual-pronged approach. First, we are focused on ensuring that our subsidiaries continue to perform and drive solid growth in EBITDA and cash flow. We believe that based on the strength of our underlying businesses, we can organically return to compliance in 2026. Second, although our business model is to acquire, manage and grow our subsidiaries, we believe that it's prudent to explore the divestiture of one or more of our subsidiaries in the near term to accelerate our deleveraging. To that end, we are actively working with our investment banking partners to look for ways to maximize value for shareholders, and we will be disciplined in our execution. Management is committed to reducing leverage, and we continue to drive sales and EBITDA growth at the subsidiary level.

Finally, I'd like to briefly address our outlook for the remainder of the year. At the start of the year, we guided to subsidiary adjusted EBITDA of $570 million to $610 million, including Lugano. We now expect full year subsidiary adjusted EBITDA of $330 million to $360 million, excluding Lugano.

On a like-for-like basis, this represents mid-single-digit plus growth in subsidiary adjusted EBITDA excluding Lugano, and it is consistent with our original guidance. We expect to publish our quarterly results in the coming weeks, and we'll provide more detail on that. Because we haven't yet filed our 2025 Qs, I'll also provide a brief note on our current liquidity position.

As of September 30, our most recent quarter close, we had $65 million of consolidated cash on hand $6 million drawn and just under $4 million of letters of credit outstanding on our $60 million revolver. We expect our subsidiaries to continue to generate meaningful cash flow as we move throughout the year.

I'll now pass it back to Elias for some closing remarks.

As we move forward, we are operating with a renewed sense of purpose, determination and focus. We recognize the gravity of Lugano fraud and the impact it had on our shareholders and other stakeholders. We are committed to rebuilding your trust and we'll do that through the transparency, accountability and discipline that have defined CODI since inception. We provide permanent and patient capital focused on driving long-term value creation at each of our subsidiaries.

We acquired controlling interest in high-quality, high-growth mid-market companies. Our long-term focus has enabled us to acquire and manage innovative and disruptive businesses that deliver outsized growth. We believe that this approach generates superior returns and our track record supports that. We also pride ourselves on appointing and working closely with high-quality management teams to deliver on the potential of each of our subsidiaries.

As we've described today, we are taking meaningful steps to strengthen our processes, structures and controls and to sharpen our acquisition criteria and governance so that a situation like Lugano is not repeated. Meanwhile, our remaining 8 businesses continue to perform, and we believe CODI's business model has been tested and proven resilient.

We are committed to demonstrating once again how successful this strategy has been and can continue to be, notwithstanding our experience with Lugano. We are focused on reducing leverage, regaining market confidence and maximizing long-term returns for our shareholders. I would also like to take this opportunity to thank our subsidiary leadership teams and employees who have continued to execute at a high level and remain focused on serving customers throughout this entire process.

Finally, I want to recognize the broader CODI team for their hard work and professionalism. Nothing about this experience has been easy, and we greatly appreciate their dedication and perseverance. As always, thank you for your continued support.

With that, Stephen and I will now take your questions. Operator, please open the line.

[Operator Instructions] Our first question comes from the line of Chris Kennedy of William Blair.

Thanks for the update. We understand you're focused on reducing leverage. But can you just talk about the philosophy of returning capital to common shareholders going forward?

Yes, Chris, I would say our first priority is to reduce leverage because I think that is good for everybody in the capital structure. And clearly, being out of compliance is with our senior debt, it makes it kind of requirement #1. We also have kind of in working with our bondholders. When we issued this, we kind of had notionally always established and with the rating agencies that we would have a 3.5x kind of ceiling on leverage for our normal operations. And so just to be clear, we feel that is the most important thing to do is to divest assets and harvest free cash flow from our businesses to get down below that leverage level.

Once we get there, I think we'll have to assess, to be honest, what our capital allocation strategy is. We do believe in return of capital. As you know, it has been a historic pillar to what we have done. The form in which that would take and how that would exist is really going to be based on the facts and circumstances at the time. So it's hard for me to say right now where we're sitting, what return of capital policies will take effect after our leverage gets back down to an appropriate point. But it is something that has been a pillar of what we have done, and we will address that as kind of we get our -- as we bring our leverage down to a more reasonable point.

Understood. And then just broadly, I know we'll get the financials over the next couple of weeks. But across the 8 businesses, are there any standouts in terms of performance relative to expectations, either good or bad?

Yes. I would say there's a couple. I'm just going to hit on the outliers because most of the things are, frankly, within sort of a small band of what our expectations are. Probably the two largest outliers, one positive, one negative. The negative I'll say, is Arnold Magnetics. With Arnold the kind of political, I guess, football or the trade wars that have been created with China have caused significant problems with export control licenses on any type of rare earth material or finished product from a rare earth material.

Arnold does have a big presence in China. Most of the product that we produce there is exported, and a lot of it is used in the aerospace and defense industries. Because of the way that China set up their export controls, it was just impossible for the company to comply -- for us to be able to comply with what their requirements were. So virtually all of that product got delayed in shipping for, I don't know, call it, 5, 6 months over the course of the negotiations between the U.S. and China and that's going to have a negative impact this year on what their operating results.

I think the good news is we are seeing as a result of that significant orders coming in and demand being placed. And frankly, the RFQs that are coming out from some of our customers looking to redomicile their supply outside of China is quite significant. So although negative in the short term, I would say we think is net bullish over the kind of immediate to long -- kind of intermediate to long term, even starting in next year.

On the positive side, the Honey Pot has really performed far better than expectations. It is now the fastest growth in terms of dollar value in the feminine care market. In the United States, it's continuing to take shelf space. We moved very successfully from the hygiene category and now have extended the brand into the menstrual category. It really opens up a huge part of the market. And I think, more importantly, also demonstrates the expandability of this brand into adjacent categories within feminine care. And so that company's growth rate, both top line and EBITDA, is significantly exceeding what our expectations were. I'd say everything else, Chris, is kind of within a 5% band of where our expectations probably are.

Our next question comes from the line of Larry Solow of CJS Securities, Inc.

Welcome back. Just first question, just following up on Chris' question on '25. I realize you're somewhat compromised. But could you just give us any high-level view on free cash flow? I know, obviously, Lugano was kind of the drainer there, so hoping that free cash flow is at least commensurate with your EBITDA growth.

Yes. So I'd say two things. One, we obviously -- as you said, we -- Lugano was always a working capital hog. The other businesses actually generate very significant free cash flow. And so the other businesses collectively together are generating very substantial free cash flow. The only caveat I would have to say, though, is that obviously, there's a meaningful amount of investigation and restatement related costs that outside of subsidiaries that we are having to use some cash for that. But the businesses themselves are doing very -- are generating significant free cash flow.

Okay. And if I could just squeeze in 2. Just will we get the restated financials tonight? Is that coming out very shortly imminently? And then can you just discuss the Lugano, just the Chapter 11 proceedings, kind of the length of it? I realize it's in the court hands, so some of it had your control, but kind of the next steps we should look for on that side of it.

Sure. So yes, you can expect us to file the financials shortly, probably not today, but it will be -- but shortly. On the Lugano bankruptcy, where the process is, is actually today is -- I think today is the last day for people to object to the original filings. It then moves into a process like the 363 process, assuming there's no objection, they would move forward. There'd be -- I think the bids are available on the -- would have to be submitted by the 11th -- maybe 11th to 12th. And then the -- we do know that we -- after the 363 filing that we signed 15 -- the credit committee signed 15 NDAs with interested parties who want to participate in the auction. So there does seem to be some interest there. So basically, we'll kind of see where we stand.

I think the one thing that's important, though, is there's -- unless someone buys as a going concern, think of it as an orderly liquidation of the existing inventory. That will be a defined period. There will also be a recovery of the taxes, that will take a little bit longer. There is a significant amount of taxes that was overpaid, around $70 million. That would expect to go back to Lugano state. That's obviously not fully in management controls. You have to file amended tax returns, et cetera. And so we expect that to take -- a lot of it to come back relatively soon and then some could take up to 3 years. But the intention is to continue to just make sure that, that credit committee and the Chief Restructuring Officer is focused on maximizing recovery and that's what they're doing, obviously overseen by the bankruptcy court, not by us.

Our next question comes from the line of Timothy D'Agostino of B. Riley Securities.

Kind of following up the last question regarding legal proceedings and any overhang with Lugano bankruptcy. For '25 results when they come out, should we expect obviously heightened legal fees and expenses? And can you just provide any color around that?

Yes. So you'll see a substantially elevated amount of kind of corporate overhead costs driven by the restatement and the investigation. So probably -- again, probably around -- I think you can expect about $50 million to $60 million of additional costs that will be accrued for.

Okay. Great. And then just if I can ask a second one here. I don't believe you provided any updates at Velocity and like their '25 performance. I was wondering if you could just touch on that very quickly.

I mean, Velocity is -- after the sale of Crosman, Velocity is a very small part of our portfolio. They're performing relative -- they resized their business on a like-for-like basis. They are doing okay. They're doing, I mean, pretty well, but it's a very small part of the portfolio at this point.

Our next question comes from the line of Matt Koranda of ROTH Capital.

I wanted maybe just first, Stephen, if you could just give a quick rundown of what the balance sheet look like as of September 30. I know you just quickly gave, I think, revolver metrics, but just full debt on the balance sheet as of 9/30. And then just clarify for us, I think I'm clear on this, but I want to make it totally clear. There are no obligations to Lugano creditors that are going to be retained on the balance sheet. Those would all be wiped and essentially with Lugano and the Chapter 11 proceeding.

Correct. So that's a little bit of a tricky thing. So the -- once it's deconsolidated as of November 16, 2025, then there will all be -- all those things will be wiped. It will be elevated at the end of the quarter -- Q3 just because they'll still have -- we'll still have those short-term kind of off-balance sheet debt that will now be on balance sheet. So that's where -- the right way to think of it is I think -- again, I think the first 3 quarters of this year, which will still consolidate Lugano in our first 3 quarters. They will be -- again, I think you just think of -- they will just be a little bit messy because of that. Once we deconsolidate, then there'll be a much more cleaner state. But again, our total net debt should be -- kind of excluding Lugano piece will be about $1.9 billion, a little bit under $1.9 billion.

Okay. All right. That's helpful. And then just wanted to hear a little bit more about how we're thinking about asset sales. I guess, I wanted to hear your philosophy, Elias, on how we think about knocking down net debt because obviously, you've got some really good core assets that are unaffected by this that either maybe you want to retain because they're really healthy for the long run, but maybe also would be good opportunistic divestitures that would immediately help you on the leverage front. So I just wanted to hear a little bit more about how you're thinking about divestitures?

Sure. So I would say, Matt, in general, and this has always been the case, at the right price, all of our businesses are for sale. And that is always going to be the case, and it always has been the case. And so we've always said that all, I guess, now 8 of our companies are open and available for sale. In terms of how we approach and would target the market and which companies, we, as you know, do not say what companies we are bringing to market or thinking about engaging in potential divestiture transactions with. However, I would say our philosophy here is there are a few assets that we think are kind of timely to be able to divest right now where the market backdrop is accommodated and where the valuation could be interesting to CODI's stakeholders and provide with meaningful deleverage.

And so we are with multiple of our assets in different stages of conversations about a potential kind of process. Some could be all the way to appointing an investment banker. Some could be a little bit earlier than that. But our goal would be to have a few companies that we are approaching market and what we believe is that it's not to say we're going to sell a few companies, Matt, but it's very difficult if I said, hey, we're going to take one company out, and we're going to hang all of our hopes that, that one company sells, okay, we could guarantee a sale, but we may not like the price.

And so we're going to put a couple of companies kind of out in market, put out feelers, see where kind of valuation is, and then we'll hone in on an asset or two that will allow us to achieve kind of meaningful deleveraging. We are keeping in mind having kind of assets that we want as a core that could kind of over time serve as a good base to rebuild from. Those assets would need to fetch a far higher price, obviously, for us to be able to divest. But in general, I would say there's a couple of -- we're looking at this situation as unique and we may need to forgo some future opportunity on a great asset if we can get a great price today because it assists in the deleveraging efforts, which we think is sort of from a strategy standpoint, the #1 top priority and it trumps sort of the longer-term strategy of what we hold over time just because of the need to get our leverage down and the need to restore confidence back in the market.

Okay. Very fair. If I could just sneak one more in. I guess the question about incremental restatement costs has already been asked. But what I wanted to get a sense for is what happens with corporate expense if we ex out Lugano? And once we're through with some of the restatement costs, I would assume that should be substantially lower over time. Any sort of bracketing you're willing to do there for us?

Yes. So for sure, obviously, the restatement costs are onetime and they're not part of the ongoing things. I think you can think of on the management fees, I think you've heard us talk and I have heard Elias talk before that we think that -- so first, in 2026, those will be down substantially, primarily because we overpaid in previous periods, and we'll be earning those costs back. So cash costs will be much lower.

In terms of corporate over -- the public company costs and corporate and other costs, I would say they'll be kind of a little bit more on par. There would -- and then -- yes, it's a little bit of a smaller business. We made some decisions to add some resources in internal audit and risk and clients just kind of to make given the kind of situation that we're in. So those costs will be on par, but for a slightly small business. So we've increased them a little bit because of the additional support that we're going to be providing. Reduction is going to come from management fees.

Our next question comes from the line of Robert Dodd of Raymond James.

And sort of related to that question. On the incremental investments, I mean, you mentioned you're going to an outsourced model, adding more staff, separating the fact that the corporate overhead might be flattish versus where it was before. But can you give us an idea of like how much incremental cost are you thinking into the business on a go-forward basis in terms of additional compliance, risk management, et cetera. So I mean how -- if it's flat, how much is the mix? Just how much more money you're spending on monitoring, et cetera, between internal new hires, et cetera, plus you mentioned going to obviously an outsourced model for parts of it.

Yes. So again, for the -- so actually, all of the risk management, including this new resource that we've identified will all be outsourced. We made a decision to outsource that risk and compliance and risk management as an internal audit. Again, what I would say is, the best way to say is the cost -- the total cost should be very -- the total cost for a public company should be only slightly higher, but again, it's on a slightly smaller business without Lugano. So we've increased cost from that -- on a relative basis, but not absolute.

Okay. Fair enough. And then if I can, on -- if we move past Lugano, like the next kind of big business for this one was BOA. And I think you made some comments about it at the beginning that I think it was doing pretty well, and you've obviously given some updates on some of the other businesses. But how are design wins, et cetera, going for BOA/tariffs having any impact? Because obviously, that's probably now your most significantly valuable business.

Yes, Robert, for sure, it is our most valuable business, I would say. And just based on its multiple in its size. And it continues to perform extremely well. In terms of customer wins, we continue to get more placement. Our Alpine strategy is going really well and now moving kind of into the uppers and lowers on having both systems. We just are broadly getting a lot more wins. In terms of -- so from that standpoint, I would say it's business as usual. They continue to plug along, getting kind of similar type of double-digit SKU growth that we kind of work year-over-year. So the company is doing well on SKU count, I should say.

In terms of the tariffs, you remember, like this and PrimaLoft are both ingredient brands. And so the tariffs actually don't impact either of those companies. However, they will impact the products that those companies products go on. So if we go on a piece of footwear that is made in China and then sold in the U.S., and it's got a 40% tariff, obviously, our brand partner has to figure out how they're dealing with that and whether they're pushing through that cost.

So it's clearly from a standpoint of unit volume, you clearly have seen some headwind in all consumer products. And I would say it's fair to say that both BOA and PrimaLoft are experienced. Their customers are experiencing those same headwinds due to tariff costs, but those are not directly impacting. The tariff costs do not impact BOA or PrimaLoft at any level other than kind of that indirect through our customers' kind of unit volume that's happening.

I will mention one thing about BOA, and that is we have -- there's -- we do, do some business in Asia with all of the trade wars that are going on or the tariffs and then kind of retaliation that's happening. We do find in one of our Asian markets, some revenue that has fallen off, but the rest of the business is growing and making up for it. And it was expected as we were going through this. And so it's not -- it's performing right in line with what we would have expected. But I would say if there's a negative to what's happening in trade, it's kind of the political climate is spilling over into the international business opportunity. BOA saw it a little bit. But really, all of our businesses are finding international business harder to -- it's harder today than they would have, call it, a year ago before tariffs and retaliatory measures have been put in place.

[Operator Instructions] Our next question comes from the line of Ryan Shelley of Bank of America.

My question was surrounding litigation following everything that happened with Lugano. So both ways, can you just give us an overview of litigation you're pursuing against both the founder as well as participants in the fraud. And then if there just -- if there's any litigation currently outstanding against CODI itself?

Yes. So a couple of things here. You have to little bit separate Lugano from CODI in this particular case because again, Lugano is now in the control of the bankruptcy court. A lot of the claims that will be pursued will be pursued by Lugano with -- and to the extent there's recovery, we would expect to get that as kind of senior secured. But Lugano is pursuing a lot of different avenues specifically civil recoveries against the former CEO. There are some lawsuits that have been announced, and I'm sure they're going to -- there'll be additional things that they're working through. That will be -- that's an important part -- to the extent that if there's anyone else, any other third parties who are involved in the schemes, I think you would expect the Chief Restructuring Officer to pursue all avenues to recover.

In terms of -- so Lugano will be very -- Lugano, the bankruptcy and a Chief Restructuring Officer, we believe, will be very aggressive to pursue all avenues. From our perspective, there will be -- we will also look at any opportunities for recovery from -- at the CODI level. But again, those will be more related to our investment than anything that happened as part of the investment as opposed to Lugano going after the people involved in Lugano business. There obviously have been -- in terms of other lawsuits, there have been a number of lawsuits that have been filed both shareholder lawsuits as well as CODI being named in lawsuits related to Lugano things.

Most of those at the bankruptcy had stayed most of those lawsuits, and we would expect the lawsuit that were named that are really lawsuits against Lugano, we would expect those to be dismissed from our perspective. But there are a number of lawsuits that have been filed, and we'll obviously defend ourselves vigorously.

Got it. Got it. So it sounds like most of the lawsuits would be related to activity at Lugano, not at CODI level?

Yes, I mean, look, there will be lots of people who name CODI in lawsuits related to Lugano. Our expectation is that those should be -- that we're not the right -- that those should be just focused on Lugano.

I would now like to turn the conference back to Ben Tapper for closing remarks. Sir?

This is Elias. Thank you all for your time today, and we look forward to talking with you in the next couple of weeks as we file our financials and get caught up through Q3, and we plan on having a call to discuss our year-to-date financials after we file our Q3 financials. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.