Compass Diversified (NYSE:CODI) Q4 2025 Earnings Call Transcript

Compass Diversified (NYSE:CODI) Q4 2025 Earnings Call Transcript January 14, 2026

Compass Diversified misses on earnings expectations. Reported EPS is $-0.97811 EPS, expectations were $0.7.

Operator: Good afternoon, and welcome to Compass Diversified’s Fiscal 2025 Third Quarter Conference Call. Today’s call is being recorded. All participants are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session. To ask a question, please press 11 on your telephone, and wait for your name to be announced. To withdraw your question, please press 11 again. 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.

Ben Tapper: 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 Sautel, Chief Operating Officer for Compass Group Management, and Pat Maciariello, who recently retired after twenty years with CGM. Before we begin, I’d like to remind everyone that during the course of this call, Compass Diversified 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 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?

Elias Sabo: 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’ve worked 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 twenty 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 Sautel. 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.

Pat Maciariello: Thanks, Elias. It’s hard to put twenty 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. 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 are 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 afar. Thank you.

Elias Sabo: 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 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 eight other subsidiaries.

Our solid performance reflects the disciplined execution of our subsidiary management team, 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. While we’ll continue to drive significant penetration in multiple applications, including snow sports, cycling, workwear, and protective headwear. The precision and performance of the BOAFit system are 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 action 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 LifePhone. 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 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 US. 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.

Stephen Keller: 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 it 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 three quarters in full and helps normalize for interquarter shifts as customers prepared 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, 10.5% driven primarily by Altor’s acquisition of LifePhone. 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 LifePhone. 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 the $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 one-time 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 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 one-time 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 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 eight 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 4.5 times, 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 businesses. As a reminder, our year-end leverage ratio, excluding the deconsolidated Lugano results, is expected to be around 5.3 times. 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 in 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 restatements. 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-Ks and complete the annual audit.

When the window does reopen, any purchases would be subject to our normal preclearance and compliance procedures. With that, I’ll hand it back to Elias for closing remarks.

Elias Sabo: 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 twenty 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: Thank you. As a reminder, to ask a question, please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. One moment for questions.

Q&A Session

Operator: And our first question comes from Lance Vitanza with TD Cowen. You may proceed.

Lance Vitanza: Thanks, guys, for taking the question, and 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?

Elias Sabo: Sure. And thank you, Lance. It, you know, first feels good to be back up to date with all of our filings and the company getting back to a more normal operating result level. With respect to the Honey Pot, you know, this is really an extraordinary brand. You know, 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. It was mostly a business that was in 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 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 mass market compared to the market they were entered into before. And we’ve had very successful execution. Our product really does stand for something, and 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 expectation, 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. So everything’s coming together, and it is really producing wonderful results. And I think 2026 is shaping up to be a great year.

Lance Vitanza: Thanks. 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, you know, off the table there that you would just simply not consider selling at any price, or should we just consider this, you know, you’re gonna look to maximize shareholder value. And if that’s, you know, subsidiary x y z, it’s subsidiary x y z.

Elias Sabo: Yeah. I would say everything, you know, 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, you know, 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, you know, available for sale because that’s the basic, you know, 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, you know, we all know kind of some of those businesses that we have. Look. The valuation expectations are gonna be really high.

If they fail to materialize, we are in a position where, you know, although we would like to divest the business, we don’t have to. And what we won’t do is take a, you know, big discount on a premium asset. And so I would just say, you know, yes. Everything remains available for sale. That’s always been the case. We do have a, you know, 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, you know, part of that is clearly looking at, you know, 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, you know, kind of respect to valuation, and we’ll be, you know, very disciplined in executing that.

Lance Vitanza: Thanks so much.

Stephen Keller: Thank you, Lance.

Operator: Thank you. Our next question comes from Larry Solow with CJS Securities. You may proceed.

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

Elias Sabo: Yeah. Thank you, Larry. Thank you for the warm wishes for Pat and Jim. They’ve 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, you know, or saw things unfold, 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, you know, kind of Liberation Day announcement. And there was, you know, a period of time where you could still bring some goods in, 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. We’re gonna normalize for that, there still is a bit of a slowdown that occurred after Liberation Day. And as you’d anticipate, you know, there’s, look, a lot of inflation. There was some inflation that came through. Still, and, you know, it was very disruptive for a lot of companies. And I think consumers, you know, 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, you know, the biggest impacts from that because, you know, we produce in Southeast Asian countries, not China. We were, you know, 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, you know, in adjacent markets where you produce a lot of apparel, there’s still 20% tariffs. And you have a customer set that is, you know, very reticent to take any incremental price increases, that’s a, you know, tricky spot that companies, you know, I think, are across a lot of different industries are finding themselves in. So, you know, it may not impact directly a BOA or a Primaloft, but if our customers are feeling those same headwinds, then that impacts us. And so I’d say broadly, Larry, these tariffs have, you know, kind of slowed down at least the consumer side of the business. The industrial side of the business clearly had, you know, a very unique kind of impact from the export restrictions that China put on rare earth minerals.

As a result of that, there’s, you know, as you see in Arnold’s results, millions of dollars of EBITDA reduction that occurred. I think that is a little bit more, you know, kind of a one-off, and we expect that to revert back to normal in 2026. Yep. 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.

Larry Solow: Yeah. 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 with into the mid-fours, so that would imply some growth. And it does feel like even if consumer slows a little more, Altor sounds like it’s gonna, you know, I know it’s basically flat this year, maybe organically, but it seems like that’s not really a lot of that’s non-economically 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 is you’re kind of holding into that outlook, you know, continue to at least grow somewhat next year without getting ahead of our skis.

Elias Sabo: Yeah. We’re gonna give an outlook for next year here, I guess, sooner rather than later because we’re gonna 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 that our free cash flow is going to be very strong. And, you know, heretofore, have not produced actual free cash flow because it’s been invested in, you know, growth in working capital and other assets. In 2026, you know, when you talk about deleveraging path, there’s two forms that it comes in. One is we expect growth of the portfolio. And number two, we expect to gain 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, you know, 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, you know, five, six weeks or whatever the timing is, you know, it’s going to include that kind of, like, foundational tenets.

Larry Solow: Awesome. That sounds great. If I could just one more housekeeping question. Stephen, just on 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’ll kind of roll through at 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, you know, what that normalized number would be? And then…

Stephen Keller: Yeah. So 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, like, as you mentioned, there will be some adjustments in Q4 from a management fee cost perspective, noncash. I would say for next year, I think it’s probably around you can probably assume within the 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. Okay. And then so excluding any fees, obviously, Lugano, we can consolidate, and those assets won’t be under management. Right. From a cash perspective, next year, it’ll 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 would be a lot less, from an accounting perspective, you’ll see more of $55 million.

Larry Solow: Yep. Okay. Oh, that’s fair. Great. I appreciate it. Thank you, guys.

Stephen Keller: Thank you, Larry.

Operator: Thank you. Our next question comes from Timothy D’Agostino with B. Riley Securities. You may proceed.

Timothy D’Agostino: Yeah. Thanks for taking the question. 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, you know, who might be interested or how you might go about a sale. Not necessarily what you’re selling. The reason why I ask is, you know, 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. So I guess my question is, what are the different avenues you can explore when going to sell one of these assets?

Elias Sabo: Yeah. Tim, thank you for the question. This is Elias. You know, 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 worse in 2022 on an IPO for 5.11. And we withdrew that just because of market conditions. But that’s a company that is, you know, kind of of a size that potentially could explore that kind of pathway. And in fact, you know, other companies are, you know, at that size or getting to that size as well. So IPO becomes an absolute route for which we can, you know, 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. You know, for faster liquidity, you know, I’d say the routes are, you know, through investment banks, typically that we engage, and they go out and talk with, you know, kind of strategic buyers, private equity buyers. You know, 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 2025, we weren’t doing really the latter looking for, you know, assets clearly. But, you know, 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, 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, you know, kind of bringing out to market. Now I will say we’ve said this before, you know, we have a couple assets.

A few that we are looking at this. You know, we don’t we’re not saying we’re gonna 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, you know, determine which one that we will want to divest based on how the market materializes.

Timothy D’Agostino: 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.

Stephen Keller: Yeah. So I mean, 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 two 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 the second thing is also when you use an outsourced team, when you get businesses that 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, very unique, that situation. So as we talked about on the other call, we will probably change a little bit of some of our criteria. We would not necessarily want to have 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 of 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 have worked very, very well for twenty years.

And this is a very unique situation driven by a very unique individual.

Timothy D’Agostino: Great. Thank you so much for your time, and congrats again.

Stephen Keller: Thank you, Tim.

Operator: Thank you. Our next question comes from Matt Koranda with Roth Capital. You may proceed.

Matt Koranda: Best wishes to Pat. You’ll be missed. I guess, 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?

Stephen Keller: So first of all, it’s not a the there’s an incentive to get below four or five. If we’re not below four or five, there’s a payment. We won’t be out of covenant. The covenant is actually higher. So we will be we will be in covenant the we are now and will continue to be all next year. There is a look. With some recovery from Lugano, you know, assuming that we have there would be a path to getting below four and a half 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 know, any asset sales to accelerate it and gives us more comfort. So we’ll go down both paths. We’re not gonna sell we do not want to sell a business at a discount.

That we don’t that will destroy shareholder value. So we’re focused on being able to get below if you know, if a sale at the right valuation doesn’t materialize. We do, however, expect to sell a business.

Matt Koranda: Okay. Alright. That’s fair. That helps. And then 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 gonna take a little time to percolate through the business. An update there.

Elias Sabo: 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. You know, Matt, the area where China has the most leverage is over rare earths currently. Something like 90% of all Neo Neomagnets are produced in China, and I think something like 70% of all samarium cobalt is what we produce, is produced in China. So they’re just a 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, you know, alternate energy, you kind of production, to serve the AI partly, and then robotics and electric cars, all of these things require rare earth magnets. And so, you know, 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. You know, it’s kind of a, you know, $6 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, you know, 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, you know, customers that are, you know, very the economy is dependent on them. Our national security is dependent. You know, 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 US or European or, you know, other Southeastern Asian countries. Like, Indonesia has got a neomine that’s coming on. There’s 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.

Matt Koranda: Okay. Super helpful. Leave it there. Thanks, guys.

Elias Sabo: Thank you.

Operator: Thank you. Please press 11 on your telephone. One moment for questions. 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, all for I’m sorry. One moment, please. Our next question comes from Chris Kennedy with William Blair. You may proceed.

Chris Kennedy: Great. Thanks for fitting me in and 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?

Elias Sabo: Yeah. I would say obviously, clearly, Chris, we’re wrong with Arnold in 2025. And so let’s assume that we kind of get back to a normal base. Which ’24 would serve as a normal baseline year. I think we would expect those growth rates temporarily I don’t know if this is a long-term shift. That actually looks into, you know, 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 three to five 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.

Chris Kennedy: Okay. And how about the other subsidiaries now that you have more working capital to allocate potentially? That Lugano’s gone.

Elias Sabo: Yeah. No. It’s, you know, we’ll obviously talk more about that on our, you know, Q4 call and about our 2026 guidance. But I would say, you know, 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, you know, they’re performing in line with where our expectations are, and I’m not sure if you just went one 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’s is a tad higher.

Chris Kennedy: Got it. Okay. And then, understanding you’re not gonna give commentary in 2026, but can you just remind us of kind of what free cash flow conversion is of the business or how we should think about that? Thank you.

Stephen Keller: That’s a thanks. It’s a great it’s a great question. I think it’s really important to think about because two things have really changed since, you know, 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 a 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, expect that in 2026, that we should generate between $50 to $100 million of free cash flow. After, you know, after everything, after interest, after dividend, after preferred dividends and all and capital CapEx, etcetera.

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.

Chris Kennedy: Great. Thanks for taking the questions.

Elias Sabo: Thank you, Chris.

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

Elias Sabo: Thank you, everyone, for joining our call today. We understand this has been a very difficult, you know, 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.

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