Compass Diversified's Q3 2025 Earnings Call: Shifting Guidance on Branded Growth, 5.11 Tactical, Leverage, and Honey Pot Performance

Date of Call: Jan 14, 2026

Financials Results

• Revenue: $1.4B year-to-date, an increase of 8.6% YOY (6.1% excluding Lugano)

Guidance:

• Tightening 2025 subsidiary adjusted EBITDA range (excluding Lugano) to $335M-$355M.
• Expect to organically delever in 2026 with solid growth in subsidiary adjusted EBITDA.
• Free cash flow expected to be between $50M-$100M in 2026.
• Outlook does not include impact of potential acquisitions/divestitures or changes in tariff environment.

Business Commentary:

Financial Performance and Compliance:

• Compass Diversified reported net sales of $472.6 million for Q3, up 3.5% year-over-year, and year-to-date consolidated net sales were $1.4 billion, an increase of 8.6% over the prior year.
• The company completed its SEC filings and restated financials, returning to compliance with reporting requirements after a period of challenges.

Segment Performance and Growth:

• Year-to-date sales in the consumer vertical grew low single digits, with the Honey Pot brand achieving strong double-digit EBITDA growth, while BOA experienced a slight decline due to exiting a lower-value business in China.
• The industrial vertical delivered mid-single-digit sales growth, driven by Altor's acquisition of Lifoam, despite short-term challenges at Arnold due to rare earth supply chain disruptions.

Operational and Strategic Adjustments:

• The company is focused on reducing leverage, aiming for a mid-4x leverage ratio organically, and exploring value-accretive strategic transactions, including potential business sales.
• organizational changes included the retirement of Pat Maciariello and the appointment of Zach Sawtelle as COO to support continued execution by subsidiaries.

Supply Chain and Macroeconomic Challenges:

• 5.11 faced challenges adapting to tariff environments, impacting its performance, while Arnold experienced short-term headwinds due to geopolitical disruptions in the rare earth supply chain.
• Despite these challenges, the company anticipates long-term opportunities, particularly in the rare earth magnetics market, driven by geopolitical and supply chain dynamics.

Sentiment Analysis:

Overall Tone: Positive

• Management expresses commitment to execution and long-term value, citing 'solid performance,' 'strong double-digit EBITDA growth' at some subsidiaries, and confidence in deleveraging organically. They state 'we believe we have a battle-tested business model' and 'we are ready to get back to what has historically defined CODI.'

Q&A:

• Question from Lance Vitanza (TD Cowen): Could you comment on Honey Pot's performance relative to internal expectations and drivers of outperformance?
  Response: Honey Pot is significantly outperforming expectations due to successful expansion into the menstrual care category, gaining shelf space and achieving fast inventory turns, supported by strong brand marketing.

• Question from Lance Vitanza (TD Cowen): Are there any assets off the table for sale?
  Response: All businesses are for sale at all times, but management will be disciplined on valuation and not take discounts on premium assets; the priority is to shrink the balance sheet and return capital.

• Question from Lawrence Solow (CJS Securities): How do you see the economy today versus the start of the year?
  Response: Growth slowed after Q1 due to tariff-related demand pull-forward and consumer reluctance to accept inflation, impacting apparel businesses like 5.11, though industrial side faced unique rare earth supply chain headwinds.

• Question from Timothy D'Agostino (B. Riley Securities): What are the different avenues for selling assets?
  Response: Avenues include IPOs (e.g., 5.11), strategic or PE buyer sales via investment banks, or other means; IPOs unlock value but provide slower liquidity, while sales to buyers offer faster cash.

• Question from Matt Koranda (ROTH Capital Partners): Could you attain the 4.5x leverage covenant organically?
  Response: There is a path to get below 4.5x leverage organically, but it would be tight; the company plans to pursue asset sales to accelerate deleveraging without destroying shareholder value.

• Question from Cristopher Kennedy (William Blair): Any updated thoughts on long-term organic revenue growth targets for subsidiaries?
  Response: Arnold's growth is expected to be materially higher in the short term (3-5 years) due to supply chain disruptions and resourcing; other subsidiaries like Honey Pot are performing slightly better, while 5.11 is struggling with tariffs.

Contradiction Point 1

Growth Outlook for the Branded Segment

Guidance for branded segment growth appears inconsistent between quarters.

How has the economy changed compared to the start of the year, and what factors are causing the growth slowdown? - Lawrence Solow (CJS Securities, Inc.)

2025Q3: The company expects organic growth and strong free cash flow in 2026. - [Elias Sabo](CEO)

What's driving growth in the branded segment for 2025, and is Lugano still the primary driver? - Lawrence Solow (CJS Securities)

2024Q4: the 2025 guidance is based on a more modest forecast. - [Elias Sabo](CEO)

Contradiction Point 2

Financial Outlook for 5.11 Tactical

The characterization of 5.11's 2025 performance outlook shifts from positive to pressured.

Have there been any updates to the long-term organic revenue growth goals for subsidiaries? - Cristopher Kennedy (William Blair & Company L.L.C.)

2025Q3: 5.11 slightly pressured by tariffs. - [Elias Sabo](CEO)

Regarding 5.11, excluding the PFAS-related charge, what is the current business status and the 2025 outlook? - Lawrence Solow (CJS Securities)

2024Q4: 5.11 is performing well. Key initiatives for 2025 include... - [Patrick Maciariello](COO)

Contradiction Point 3

Leverage Appetite and Divestment Strategy

Contradiction on willingness to take on debt for acquisitions versus strict leverage control.

Are there any assets you would not consider selling at any price? - Lance Vitanza (TD Cowen)

2025Q3: The company is in divestment mode to shrink its balance sheet and reduce leverage... - [Elias Sabo](CEO)

Regarding M&A market comments, what is your leverage appetite at current levels, and are there plans to further improve leverage through divestitures? - Lawrence Solow (CJS Securities)

2024Q1: The company is comfortable increasing leverage temporarily to fund acquisitions... - [Elias Sabo](CEO)

Contradiction Point 4

Outlook for The Honey Pot's Performance

Contradiction on the growth trajectory and drivers for The Honey Pot.

How has the Honey Pot's performance compared to internal expectations, and what are the drivers of any outperformance? - Lance Vitanza (TD Cowen)

2025Q3: The Honey Pot is significantly outperforming expectations. - [Elias Sabo](CEO)

What are The Honey Pot Company's growth drivers and shelf space gains? - Matt Koranda (ROTH MKM)

2024Q1: Gains are occurring with major box retailers... and the company is excited about the product pipeline for 2025-2026. - [Patrick Maciariello](COO)

Contradiction Point 5

Leverage Targets and Deleveraging Strategy

Conflicting signals on willingness to exceed 4.5x leverage and reliance on asset sales.

Can you attain the 4.5x leverage covenant by mid-2026 organically this year? - Matt Koranda (ROTH Capital Partners, LLC)

2025Q3: There is an incentive to get below 4.5x; if not, a payment is triggered.... A path to organic deleveraging exists, but it would be 'tighter than we would like,' which is why pursuing an asset sale is also a priority... - [Stephen Keller](CFO)

Given current leverage around 4x, can the company acquire larger assets? Would the company consider exceeding 5x leverage or selling smaller subsidiaries? - Lawrence Solow (CJS Securities)

2023Q4: The company could consider deals that push leverage into the 4x range (like The Honey Pot) but would not go to 5x. Leverage is expected to decline back into the 3.5x target range post-acquisition due to strong cash flow and growth. - [Elias Sabo](CEO)