Q3 2019 Earnings Call
Good afternoon, and welcome to Compass diversified holdings third quarter 2019 conference call.
Today's call is being recorded.
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If you want to ask a question at the end up the prepared remarks. Please press the star keep the number one on your Touchtone phone.
At this time only to turn the conference over to match Percolates of the RGB cruise.
Interest.
Good afternoon, and welcome to confidence diversified holdings third quarter 2019 conference call today's call is being recorded.
Oh, my SAP in place on mute.
If you would like to ask a question at the end of the prepared remarks. Please press star <unk>. The number one on your Touchtone phone.
At this time I like to turn the conference over to Mac Berkowitz of the I TB group for introduction and the reading of the Safe Harbor statement. Please go ahead sorry.
Thank you and welcome to Compass diversified Holdings third quarter 2019 conference call, representing the company today, our Elias Sabo Coty, CEO , Ryan Faulkingham, CODI, CFO and Patmax Redline COO of Compass Group management before we begin I would like to point out that the Q3 press release, including the financial tables and non-GAAP .
Financial measure reconciliations are available at the Investor Relations section on the company's website <unk>.
You W. dot compass equity dotcom.
The company also filed its Form 10-Q with the FCC today after the market close which includes reconciliations of non-GAAP financial measures discussed on this call. Please note that references to EBITDA in the following discussions refer to adjusted EBITDA as reconciled to net income in the Companys financial filings. The company does not provide a reconciliation of the right.
Ratio of its estimated cash flow available for distribution reinvestment to its distribution. This is because certain significant information is not available without unreasonable effort, including but not limited to the company's future earnings current taxes capital expenditures and the distribution to be paid as approve quarterly by the company's board of directors through.
This call, we will refer to compass diversified holdings as Cody or the company no allow me to read the following safe Harbor statement.
During this conference call, we may make certain forward looking statements, including statements with regard to the future performance of Coty and its subsidiaries words, such as believes expects projects and future or similar expressions are intended.
Identify forward looking statements.
Forward looking statements are subject to the inherent uncertainties in predicting future results and conditions certain factors could cause actual results to differ on a material basis from those projected and these forward looking statements.
Some of these factors are enumerated in the rest factor discussion and Form 10-Q asphalt and Securities Exchange Commission for the quarter ended September 30, 29 team as well as other FCC filing.
In particular, the domestic and global economic environment has a significant impact on our subsidiary companies, except as required by law CODI undertakes no obligation to publicly update or revise any forward looking statements whether as a result of new information future events or otherwise throughout this presentation references to revenue and EBITDA for velocity, including Raven phone fabric.
Theaters and sterno, including imports are pro forma as if these businesses were acquired on January one 2018. Please note that in 2018 Coty acquired phone fabricators on February 15 imports on February 26, and Raven on September four and their pre acquisition results described herein are not intended to be indicative of there.
Respective results in the future under our ownership and management or as a measure of our past performance at this time I would like to turn the call over to life Sable.
Good afternoon. Thank.
Thank you all for your time and welcome to our third quarter earnings Conference call.
I'm pleased to report strong third quarter results in which our consolidated subsidiary EBITDA returned to growth.
Beating our expectations.
This was led by strong performance in our branded consumer segment with EBITDA growth of approximately 15% over the third quarter of 2018.
Notably our branded consumer segment is ahead of expectations and we expect this segment to continue to outperform for the remainder of 2019.
Within our branded consumer segment 511 continues to perform significantly ahead of our expectations with revenue and EBITDA growing approximately 18% and 60% respectively versus the third quarter of 2018.
The strong performance is driven by the rapid growth in the can companies consumer lifestyle segment.
Tapping into the growing demand from 511 enthusiastic highly engaged and well identified core consumer.
Elevens impressive growth follows our restructuring of the business in 2018, and we believe is a direct result of actions taken at the time, along with continued investments in people systems and logistics.
Our branded consumer segment also benefited from improved performance by our Liberty safe subsidiary.
As mentioned on the previous earnings call Liberty is benefiting from a new relationship with a large domestic farm and fleet retailer.
Our management team at Liberty Safe led by Steve All read is doing an exceptional job driving significant market share gains and realizing the benefits of operational leverage.
During the third quarter, we embarked on a restructuring of velocity outdoor and recorded a 33.4 million dollar noncash goodwill impairment charge.
The hunting and outdoor channel continues to be under significant pressure leading to reduce financial performance.
Despite the challenges in the marketplace. It's archery segment continues to perform well led by Raven crossbows, which brought significant innovation to the crossbow market through its extensive IP portfolio.
To lead the turnaround the velocity outdoor we have added Tom again, as executive Chairman and interim leader.
Tom brings a wealth of experience in growing branded consumer businesses, and we're delighted to have them, leading our effort to velocity.
In the third quarter, we realized approximately $700000 of restructuring costs and as a reminder, we do not add these costs back to our EBITDA for cat.
Our niche industrial businesses continued to perform in line with expectations. However, EBITDA declined by 4.7% for the quarter from a year ago period, reflecting a weakening global manufacturing environment.
Relocation of a facility at advanced circuits, and a timing shift in a large promotional order at Sterno, Pat will talk about these developments in his section.
Based on the strength of our branded consumer segment during the third quarter of 2019 consolidated subsidiary revenue and EBITDA increased by 3.4% and 3% respectively on a pro forma basis from the third quarter of 2018, we expect the strong earnings momentum in the third quarter two content.
New into the fourth quarter, and we expect pro forma 2019 full year EBITDA to exceed the year ago period.
For the three months ended September Thirtyth, 2019, CODI generated cash flow available for distribution and reinvestment, which we referred to as CAD of $30.2 million representing growth of over 14% compared to the three month period ending September Thirtyth 2018.
The third quarter of 2019 represents our first full quarter without cash flow from Manitoba harvest and cleaner.
For the nine month period, ending September Thirtyth, 2019, CODI generated cash up 74.0 million representing growth of approximately 5% over the comparable period of 2018.
Our year to date Cat is significantly ahead of our expectations. However, we have benefited from lower cash taxes and maintenance capital expenditures in the year to date period, and we expect higher maintenance capital expenditures in the fourth quarter than originally anticipated.
Based on our expectations for solid growth in fourth quarter, EBITDA and higher maintenance capital expenditures and assuming $1.44 per share annual distribution, we expect an annual CAD payout ratio of 85% to 90% and improvement from the 85% to 95% payout ratio.
Joe referred to on our last earnings call.
Turning to our balance sheet in the third quarter of 2019, we received the second installment payment from the sale of our Manitoba harvest subsidiary to till Ray.
As part of the second installment payment we received additional shares of till Ray, which we sold during the quarter and have no shares remaining.
The sale of the till ratio has resulted in a 4.9 million dollar loss from disposition, principally as a result of Tilbury shares declining in value during the calculation period.
Investors are both Manitoba harvest and cleaner have resulted in CODI, having the strongest balance sheet in our history.
Fighting a significant availability to pursue accretive at platform and add on acquisitions.
We are proud that we have been able to both significantly improved coty balance sheet well at the same time retaining sufficient earnings power to cover our distribution.
Realizing both balance sheet and income statement improvement simultaneously is a tremendous accomplishment and I would like to thank my team for guiding the company to this achievement.
For the third quarter of 2019, we paid a cash distribution of 36 cents per common share representing a current yield of 7.1%.
This brings cumulative distributions paid coty is 2000, and I and six IPO to $18.60 per share were 124% of the IPO price.
We also paid cash distributions today of approximately 45 cents per share on our seven in the quarter series, a preferred shares and approximately 49 cents per share on our seven Inseminate series B preferred shares both distribution to cover the period from and including July Thirtyth 2019.
I mean.
Up to but excluding October Thirtyth 2019.
I will now turn over the call to path to highlight our subsidiary performance.
Thanks, Elias I'll begin with our niche industrial businesses on a pro forma basis year to date 2019 revenue and EBITDA declined by 1.3% and 2.2% respectively. These results were roughly in line with our expectations advanced circuits financial performance was below our expectations in the third quarter, primarily as a result of a longer.
Unexpected shutdown of its Phoenix location associated with a plan moving production to a new custom built facility.
While fully operational at the beginning of October production in this facility, which represents approximately 20% of advanced circuits revenue was halted for almost the entire month of September .
The new facility expands AC ice capabilities and provides both greater capacity and increased efficiencies our advanced circuits team behind the leadership of John you COO worked tirelessly to minimize disruption during this transition and we're optimistic optimistic this investment will generate strong results.
Foam fabricators performed inline with our expectations for the third quarter bone fabricators is amongst our are shorter cycle businesses and weakness in the domestic manufacturing economy is causing modest revenue headwinds sterno performed slightly below our expectations for the third quarter, primarily due to a shift in holiday promotional holiday from.
Notional program at a large retail customer and 2018 shipments for this program straddle the end of the third quarter in the beginning of the fourth quarter and 2019, none of the related shipments were made in the third quarter 2019, but instead will be included in the fourth quarter 2019 revenue.
Arnold Magnetics met our expectations in the quarter and continue to both grow its backlog in aerospace and defense and initiate new development projects with prospective customers. We anticipate the realignment of focus towards these growing end markets will accelerate arnold's growth in 2020 and beyond.
Now turning to our branded consumer businesses on a pro forma basis year to date 2019 revenue and EBITDA increased by 1.4 present, and 1.5% respectively meeting our expectations herbal babies results were down slightly compared to 2018 inline with our expectations our core ergobaby branded products performed well in the quarter. However.
Our tool of branded products performed below expectations during the quarter Ergobaby launched its new embraced carrier and we're pleased with the initial results.
Liberty States revenue and EBITDA for the third quarter of 2019 exceeded our expectations as a company rolled out product to a new large form and fleet customer, we expect Liberty strong third quarter performance to continue into the fourth quarter.
Velocities results for the third quarter of 2019 were below our expectations the hunting and outdoor retail landscape continues to be under pressure. Despite the challenges in the marketplace. It's archery business exceeded our expectations as Elias mentioned during the quarter, we embarked on a restructuring of velocity installing Tom again, as executive Chairman and interim leader given the difficult.
Market environment, we expect velocities financial performance to be subdued through 2020.
As with other restructurings, we have executed in the past. However, we're confident that this process will lead to value creation for all stakeholders. Finally, our 511 subsidiary once again exceeded our expectations as we continued to make progress against our strategic roadmap and the third quarter of 2019 511 grew net sales by approximately 18%.
EBITDA by 60% a slight acceleration from the second quarter's growth in revenue and EBITDA of approximately 10% and 43% respectively.
We have opened nine new retail stores in 2019, and as a group. The 2019 stores are performing even better than a solid 2018 class. We had 54 retail stores open as of September Thirtyth 2019, and expect approximately 60 retail stores by year end.
In addition, 511 continued to benefit from investments made in ecommerce and we look to continue to accelerate its growth in that channel product innovation remains at the forefront of 511 and in the quarter. The recently introduced icon Pant and Norris sneakers.
Made their way to the company's top seller list. We continue to be pleased with the performance of 511 and maintain our view that this business will be our fastest growing subsidiary over the long term and has transformational potential to the entire coty business.
With that I'll now turn the call over to Ryan to at his comments on our financial results.
Thank you Pat before I discuss our consolidated financial results for the third quarter I want to highlight the great strides we have made during the first nine months of 2019, strengthening our balance sheet enhancing our liquidity and positioning the business with strong cash flow generation, which we believe will allow us to cover our distribution.
We'll basis moving forward.
As mentioned on our last call we executed two highly successful divestitures during 2019 generating gains in excess of 300 million.
Bringing our total gains realized since our IPO to over 1 billion.
During the first nine months of 2019, we repaid the remaining balance on our revolving credit facility and pay down our term loan by one on 193.8 million.
We have almost full availability on our 600 million dollar revolver at September 32009.
Our cash balance at September Thirtyth, 2019 was approximately 286 million.
Taking into account all cash held at Coty on our balance sheet. Our consolidated leverage ratio was 1.9 times at September Thirtyth 2019.
As a reminder, under the terms of our credit agreement, we have the ability to upsize the available capital on our revolver by 250 million.
From the 600 million that it is today to 850 million when we find strong acquisition opportunities in the future.
Finally, the remaining eight businesses are producing cash flow that we believe will allow us to exceed our distribution for the remainder of 2019 and on an annualized basis.
On our last earnings call, we estimated our payout ratio would be between 85% and 95% for the full year 2019.
As a result of the outperformance in the third quarter and the expected strong performance in the fourth quarter, we believe our payout ratio will improve and be between 85% and 90% for the full year 2019.
Moving to our consolidated financial results for the quarter ended September Thirtyth 2019, I will limit my comments largely to the overall results for our company since the individual subsidy or results are detailed in our Form 10-Q that was filed with the FCC earlier today.
On a consolidated basis revenue for the quarter ended September Thirtyth, 2019 was 388.3 million up 7.8% compared to 360.3 million for the prior year period.
This year over year increase reflects strong revenue growth at a branded consumer subsidiaries, notably 511 in Liberty offset by declines in our niche industrial subsidiaries as previously discussed.
Consolidated net loss for the quarter ended September Thirtyth 2019 was 26.5 million.
Which included the $33.4 million noncash impairment charge at velocity and the $4.9 million loss on the sale of till Rev shares.
As Elias mentioned, we sold all of our till ratios.
Solid net income for the prior year quarter was 5.8 million.
CAD for the quarter ended September Thirtyth, 2019 was 30.2 million up 14.3% from 26.4 million in the prior year period.
The increase in CAD during the quarter was primarily the result of 511 tactically improved operating performance lower maintenance capital expenditures over existing businesses offset by the loss of cash flow from our two divestitures in the first half of 2019.
A highlight of our quarterly performance was our ability to generate an increase in consolidated cash flow from our existing businesses as compared to the prior year notwithstanding the loss of cash flow from Manitoba harvest and clean Earth.
Turning now to capital expenditures.
During the third quarter of 2019, we incurred $3.3 million of maintenance capital expenditures compared to $7.6 million in the prior year period.
The decrease in maintenance Capex was primarily related to the sale of clean Earth as well as lower spend at Sterno and advanced circuits as Elias mentioned previously the maintenance Capex in the third quarter of 2019 was lower than we had expected due to a shift of certain capex projects into the fourth quarter and therefore, we anticipate our fourth quarter Maintena.
It's capex will be slightly higher than we had originally anticipated.
For the fourth quarter of 2019, we expect to incur maintenance capex of between 5 million and $10 million.
During the third quarter of 2019, we continued to invest growth capital spending 4.3 million, primarily at our 511 business. We expect our growth capex spend in the fourth quarter of 2019 to be between 5 million in $10 million, primarily related to his new facility move and to support five elevens long term growth objectives.
With that I'll now turn the call back over to Elias.
Thank you Ryan.
We are proud of our accomplishments thus far in 2019 executing two highly profitable divestitures of clean Earth, and Manitoba harvest generating over 300 million and gains for our shareholders in 2019, and increasing total gains to over 1 billion since our IPO.
At the same time, we returned to consolidated growth in the third quarter with our cat increasing double digits from a year ago period.
Based on the strength of our year to date results. We expect an improved annual CAD payout ratio and for full year 2019 subsidiary pro forma EBITDA to exceed 2018.
Our efforts in 2019 of resulted in CODI, having its strongest balance sheet in its history with unprecedented liquidity to pursue acquisitions I would like to close by briefly discussing M&A activity and our forward growth strategy.
Middle market M&A activity remains at historically high levels.
That capital remains robust with favorable terms and strategic in private equity acquirers continue to seek opportunities to deploy available capital as a result valuation multiples remain robust our acquisition efforts will continue to focus on accretive add on opportunities and selective platform acquisition.
Niche market leaders at valuations, where we can expect to exceed our weighted average cost of capital.
Going forward, we will maintain an intense focus on executing our proven and disciplined acquisition strategy improving the operating performance of our companies.
Opportunistically divesting when appropriate distributing sizable distributions and creating long term shareholder value.
With that operator, please open up the lines for key M&A.
Thank you at this time. Your first question comes from the line of Dave King with Roth Capital Partners.
Hi, guys that is actually Andrew stepping on for Dave Thanks for taking my questions.
So I guess just first on 511.
Could you maybe talk about how much growth is driven by the DTC versus wholesale channels.
And then within DTC can you discuss online versus in store performance.
Yes, so the most of the growth of the business is coming from the consumer side the wholesale side is.
A very stable, but low growth segment of the business. So.
You can assume the vast majority of the growth we've posted not only in 2019, but in the third quarter is coming from the consumer side, we don't break out the growth between our retail and e-commerce , but are.
But what I would say is our retail comps are positive.
They were strong in the third quarter and our ecommerce growth is kind of odd growing very rapidly as the entire business in brand become more mainstream.
Great. That's really helpful. And then then also on 511 could you just mainly talk about some of the some of the drivers for margin improvement in the quarter and now what do you guys see as the long term EBITDA margins for the business. What do you think this could shake out.
Sure I mean on margin improvements obviously was in the gross.
Gross profit line was the main driver there on as we do continue to invest in SGN a.
I did the main drivers is sourcing product more effectively and fewer discounts without being without getting into too much detail those are the.
The drivers as regard to long term margins I'll, let Elias comment and this is Pat but I'd just say higher.
We do think that there's going be a.
Continued to increase margins I don't believe we put a specific number on it yes part of the margin improvement also as a mix shift the consumer side of the business has better gross margins and thats leveraging through to better EBITDA margins and dropping through so as that mix shift continues we would expect it.
Continue to see margin.
Being margin accretive long term I think this is a business that we think is a mid to high teens type EBITDA margin business now that long term in the near term, we view significant investments that we'd like to invest in this business to continue to drive the type of growth that we have so there's.
Marketing and sales.
Initiatives that we have that we think can temper may temporarily not have margins increased on a linear path.
Like you would potentially expect to get to those levels that I said earlier, because you're investing a little bit more heavily upfront in some of those we're making some technology investment that further enable kind of the Omnichannel company that the company as per our omni channel strategy. The company is pursuing so those.
Rents will.
Temporarily.
Keep the margins from growing at the level that we think they'll ultimately achieve but this is a business that has significant margin upside as we kind of leverage the system.
That's great color. Thank you for that and then just switching gears a little bit on a on liberty in velocity, where do you think the gun and ammo cycle is.
And are you seeing any signs of optimism out there as we approach 2020.
Yeah, I would say so.
Really it's sort of different between the two although they're both selling to similar and customer I think liberty is done on remarkable job at being able to take market share and probably is masking some of the underlying weakness and just the hunting and outdoor space generally.
It's tough to say, where we are I mean, I think were well below mid cycle and if you looked over time.
Kind of we had a huge run off and then the bottom fell out.
Post 2016, and we've been continuing to try to search for a bottom I'd say there are large national retailers that are changing their view on distribution of certain products.
And so that's going to impact just foot traffic overall and a lot of the changes in challenges that we are embracing at velocity. For example is how we connect to our customer given distribution, which is being altered.
Really kind of as we speak so I would say, it's our view that were closer to the bottom I don't know that we have completely reached bottom and we're not yet seeing.
2020 election cycle result, in any type of temporary uptick or even permanent uptick in.
The activity underlying activity.
Great. That's helpful. Thanks, and then just lastly from me and then I'll step back.
What are your thoughts on divestitures through asset sales or IPO is currently and what are your thoughts on some of the deal multiples that are currently out there.
Yeah, I would say as we've done on our last call. We expect you know the net sort of more neutral right now now that doesn't mean in terms of asset acquisition versus divestiture.
It doesn't mean that we may not put an asset on our books or sell one from a timing basis, but just generally we expect to be more in a neutral phase not net divestitures at this point I would say that all that said.
All of the portfolio is available for sale at the right price right. I mean, that's kind of the nature of what we do and so multiples are elevated in today's environment and we're constantly as we field.
Interest in any one of our companys evaluating whether it's better to hold for our shareholders or whether it's better to divest.
In terms of what we're seeing in multiples I would say for good high quality companies, it's a double digit EBITDA multiple environment that we're operating in right now.
Say you know thats for.
General GDP or GDP, plus like growth businesses, but that have true barriers and are competitively well positioned we see kind of 10 12 times as the multiple environment, that's kind of prevailing out there.
Yeah, I would say its helps validate if anything on the multiple environment I think.
It's not flowing down.
And what the headline numbers look similar to a year ago or two years ago on sort of multiples in the middle market, but what we're seeing and we've seen.
Studies on actually as well is sort of some of the add backs people are looking for to get credit for increasing so the like for like multiple if you will continue to increase.
That's helpful. Thank you that's taking my questions. Thank you.
Thank you.
Your next question comes from the line of Larry Solow CJS Securities.
Hi, Good afternoon, it's actually lead you go to for Larry.
Good afternoon.
Just starting with be Sterno piece can you talk a little bit about or try to quantify the shift you saw from Q3 Q4, and then maybe just touch on the medium term drivers of that business organically and incorporate imports into the discussion.
Sure.
So first on the shift I mean, it was in the.
Hi single digit millions.
As what I would say.
Without getting you don't know side program, one year versus another but it was in the sort of high single digit.
Millions and we look to be able to get a good a good chunk of that back in the fourth quarter as we discussed I would say it sterno, there's some short term headwinds in our our home business, having to do with some of the decorative lighting concepts that we provide a slight headwind.
Small segment of our business to have to do with wet season, and the lower amounts of planting and and home improvement work that have been done and kind of how that flows through the big box customers. So we might see a little of that that's also the lower margin on portion of our business, we might see a little of that.
In in Q4.
Kind of making up for the summit or kind of as a headwind to some of that revenue that we're shifting into Q4, if you will.
I'm sorry, your let your other question was on just the long term drivers of growth or how do we think about growth of the business is that correct yes.
Yeah I don't think this is our the this is not 511, you have to kind of separate the business.
Really into a couple of parks I think the the sterno products side, which is the day ethylene glycol and the gel fuels is sort of.
PGP plus business, that's incredibly incredibly well run and efficiently run I think on the sort of import side. If you look into the wax. The WEX cubes, we continue to come up with innovative products, there and I would hope that we can grow that business.
A little bit faster than the core and then similarly on the home business, which is.
Candles decorative lighting I see that is kind of more GDP GDP, plus so I'd say kind of two thirds of the business or in that sort of GDP range in the hopes is that the rim ports on business the wax.
Warmers.
Thanks oils et cetera can can help accelerate the combined business.
Little little factored that into the hopefully mid single digits low to mid single digits.
Great and then.
As it relates to your acquisition pipeline, whether its tuck ins or new platforms are there any verticals that we should be thinking about that are particularly attractive to you at this point.
No we don't do as much of a top down analysis thinking are we looking for our investments in our niche industrials or in our consumer.
A little bit more is kind of what we're out seeking and what we see is available for sale. So there's not a concerted effort in one or the other that being said.
You've seen some of the pressure that we've experienced this year and our industrial segment.
Really is following what we're seeing on a global basis and all the headline numbers are coming down I think we're performing really well frankly, especially considering the disruption and earnings from the advanced circuits move in the timing shift that Pat just set at sterno, especially concerning those two things we feel really good about how we're doing.
Versus the overall environment that we're operating in but I would say that for industrial businesses today, especially for new platforms.
Calculation multiples are really high and if we think that the environment is.
Potentially reduced and I guess, a lot will depend on what happens with kind of the trade war and some other global.
Kind of headline risks that are out there, let's say right now, though it feels like prices remain elevated without having a good supportive environment underneath it.
To be able to invest again so.
There's a slightly higher bar on industrials today that could turn around if the manufacturing environment starts to look a little bit more promising.
But we're looking aggressively both in the industrials and consumer space I would say are most of our efforts continue to be on add ons. As we think we have eight really strong companies most of which we'd like to deploy significant capital to grow to be much larger than they are today.
That's very helpful. Thanks, very much I'll hop back in Q.
Thank you.
Your next question comes from the line of Kyle Joseph with Jefferies.
Hey afternoon, guys and thanks for taking my questions.
Ill.
Allies.
Spoken a lot about the deal environment and and combine that with the fact that your balance sheet.
Isn't the best position today.
Can you remind us of your your capital allocation priorities given given the deal environments. How you guys pay down some of the term debt in July but notice that your cash balance is still very high compared to where it has been historically so he can you.
Refresh us on your capital allocation priorities, given the strength you balance sheet.
Sure I'll, let me just first start out by saying, what we view as most important into our business is payment of the distributions on our common and preferred stock and we paid it for 13 straight years more than that now.
Coming public and as you know pile even through the financial crisis, we never had to cut so were extraordinarily proud of that and believe it's something that.
Investors have have come to really expect us to that.
Is very much in our minds, when we think about capital allocation just broadly I would say in general where we stand today is it's not lost on us that were 11 years into an economic cycle and that it's the longest in the history of the U.S. anything typically don't go on forever and there are some.
Evaded.
And pricing on the other hand remains extraordinarily high so we've tried to be discipline, which I think we've done a really good job over the years being.
And position ourselves defensively right now and so that does mean, we have more cash we have more availability than we have had at historical periods, but I think is important and in order to have that because at some point and I can't tell you whether thats three months or three years.
Others, but at some point, there likely will be a good buying opportunity and a lot. Many times. It's a result of credit market the end up freezing and having more availability and those times is in the long term. The best thing that we can do to create shareholder value.
So.
For right now.
Our capital we are keeping more cash it is there for acquisitions now we are aggressively chasing add ons and I think you know we will find some opportunities to put money to work through our companies, where we can get better purchase price multiples and where we can create some.
Strategic value.
I think just in general our philosophy, where we sit right now in the cycle is to maintain higher amounts of liquidity than normal and hence a more defensive posture.
That makes perfect sense. Thank you.
And just given it was another rate cut today can you remind us how how coty and I guess, we almost have to think about it on a company by company based is that how coty does in kind of a low rate environment given the forward curve right now.
Yes sure.
Kyle So you know the floating rate today.
From our capital.
Stack standpoint.
We have a floater floating rate on the revolver of course, you've got nothing outstanding there the term loan b floats, so that in effect will benefit us a little bit on the term loan b.
Offsetting that though is a swap on a portion of that outstanding term loan B that would go the other way so kind of net a little bit of a benefit on the term loan b.
Of course, our bonds, which are fixed but yet I think the lower rates of course help.
Where those trade today, I think they're close to 106 or 107, so those are trading well.
But I think of course to the the lower rates make our.
Preferred in our common more attractive I think we're seeing that in the marketplaces are as our share price rises from our subsidiary standpoint, so that debt.
With them some of that is fix some of that float so to the extent.
Theres lower interest rates, there is technically slightly lower less interest to us however recall that.
We own all their debt and they want to pay off as their debt as quickly as possible. So any interest savings effectively comes up via principal payments, so that that really won't be impacted much. So I'd say looking across our capital stack net net not as significant impact.
Got it thanks, very much answering my questions and congratulations on good quarter.
Thank you Kyle.
Again, if you would like to ask a question. Please press Star then a number one on your telephone keypad I can start one.
A question.
And your next question comes from the line of Robert Dodd with Raymond James.
Hi, guys looking at the velocity, obviously, I mean, you talked a little bit about.
The restructuring and new.
Management, essentially that but can you give us some color on.
What's what are the expectations, because if I look at.
Revenue.
This quarter.
I mean first half revenue was up 1% Thats with 11 this year without having that last year. So.
With without last year, so its negative organic growth, but this quarter. This quarter 46 million up a bunch so far as I know, that's an all time high EBITDA as well.
So has this been something valuation. This change so can you give us kind of on what the real expectations are slim you for this business that.
This necessitated note.
The charge and the.
The new approach.
Yes, so Robert the on an organic basis the businesses.
Down pretty substantially in the first half of the year.
2019 compared to 2018.
That is when you have the pro forma of fact of adding in the Raven acquisition, which we did in 2000 late 2018, so I'll kind of like for like organic basis. The business ran down pretty significantly in the first half of the year and I'd say a lot of that is due to.
To market conditions.
I think the products still are good products, our archery business is doing extremely well the third quarter was a significant improvement and part of this is due also to some headwinds that we talked a lot about with respect to Ajay razzi contract that GAAP filled in 2018, but wasnt even.
Opened for 2019, and Raven was because it's a relatively new technology. The market had a bunch of stocking orders in 2018. So there were also some market factors that caused the comparables in 2018 to be.
Difficult for 2019, all that being said.
When we looked at the business and its positioning and sort of kind of how we felt it was operating we thought that one the channels of distribution were changing really dramatically.
And that we needed to come up with a different approach to be able to connect to our customers and to adapt to the changing world and.
We brought Tom again in as CEO , Tom as run a number of consumer product businesses and add some really great ideas about and has executed this in the past about how to effectively reach customers in a kind of changing distribution format and so as much as anything we felt that.
We needed sort of a new directional change to cope with where the retail environment and where the distribution.
It is moving too.
And we're really fortunate to get a guy that we've known for a number of years.
Became available is very seasoned and bringing him and I think like we've done in other businesses will mark a change in trajectory now all that being said as you know when we go through and we restructure of business. It typically takes a little bit of time before the new programs are able.
All to get traction and you start seeing growth. So I would say you know we have maybe a little bit higher expectations of what we said, but I would say for everybody right now we think that financial performance, it's probably near the bottom right now.
There, maybe a little bit of downside not a lot probably from this level, but I think over the course of the next year, we're going to be doing some new things there'll be some costs that we need to incur in order to.
Rethink our distribution and connectivity to our customers that will drive long term value. So I don't think this is not a V shaped recovery.
By any means but I think it's one where you know we would hope to kind of bottom out around the levels that we're at now and then as we progress forward.
Some of these new initiatives take hold we think the company can resume back to growth probably 2021 and beyond.
And then on Paramount is is really just a function of the.
The accounting.
Let's make us.
Put together what they think the.
Cash flows are it's really representative a lot of the historical performance and because the company performed below our expectations. It goes through kind of a step one step to impairment analysis, and then model produced kind of the results that you see the $30 million impairment.
I understood on that I mean kind of the way you told there with which you know connect customers.
And distribution focus it's it's a somewhat similar to.
The the choices of words and things you using it I would say three years ago for 511 right in terms of you'd have more online more direct to consumer more opening the stores. So it is the goal here to take velocity fill them you know the distributor relationship for two more.
That to consumer product marketing I mean, it works for 511, but is that the kind of thing you're thinking why now.
Yes, so Robert I would say, we've we really need to be doing that with all of our company and one of the thing that's happening we all hear about know the Amazon is growing dramatically and the whole online world is growing so dumb math dramatically historical distribution to be set up to go.
Through solely through big box mass merchants, it's just changing dramatically and so all of our company need to think about connectivity to customers, creating communities, where customers can interact with our products and the lifestyle that.
Our products afford to them and very much and the way that we talked about this with 511 511, a little bit different because it's got such a broad line and it has the ability to open retail box is probably not.
Same if you thought about velocity ergo baby or a liberty. They don't have maybe the same breadth of opportunity that 511 has there all of our companies are moving in a manner to create more connectivity to their customers to be able to.
Provide them with product.
Distribution isn't available locally to them and so everybody needs to go through that change and I'd say, that's what we are embarking on with velocity. The channel that velocity went through has been very much disrupted but it had been a really stayed in stoic channel for many many years and so we need.
I get that process, rolling and thinking about distribution and consumer touch points different than how they had done that and that's why we're we're frankly notwithstanding the fact that the financial performance has been weak this year and we had to go through restructuring.
We believe this is a lot of the value that we we add right I mean, we're active managers here to these companies and when we bring in someone asked the skill level of a Tom again. This is when we think the inflection point for value starting to increase starts again, so we're pretty excited about what.
This will portend for the future for velocity.
Got it I really appreciate that color and you dropped said name in the as well that I was going to ask about next obviously OCO baby that same kind of issues disrupted the distribution with babies R us et cetera et cetera.
So is there anything you know they've been through some new.
Product development cycles.
Several years and the management as has had some tweaks throughout that process as well anything.
That can be done incrementally of over and above what you do it right now because obviously I mean, we're looking probably it down revenue yet again this year that be three years since we've seen any revenue CLO.
Yes, that's the channel difficulties of that but is there anything that can be done in the man that they may be approaching velocity that the can kick start that that is that business and maybe get it to a break through to back to revenue growth.
Yes, So first I would say, it's kind of two different there's two different business segments there.
That I'd want to point to and we touched on it a little bit in the and the transcript, but to be Tula business, which we acquired.
A pretty modest multiple of EBITDA when we acquired it has faced significant headwinds.
And is driving a lot of that if not all of that decline.
The Ergobaby business is solid and actually I think it had a little bit revenue growth this quarter and it is kind of more solid on a on a better trajectory. We do think tool is stabilizing and they have some great new products and some great new marketing initiatives.
The Ergobaby business is really an international business too, which helps it where the majority of its revenue is generated outside of the U.S. in those markets are all doing.
Fine the things you talked about and babies R us.
And kind of a general headwind to juvenile in the U.S. birds birth rates are down we need to continue to come up with new product to excite the consumers I think we did that with the embrace I think we did that with our metro stroller.
And some of these products will will catch fire like the our hope is in our belief is like the threesixty didn't like we've had products do it in the past so really it ergobaby.
The company is connected to its customer I think.
I think the company.
Is able to has been able to really generate strong relationships with mothers.
But I think there it's more about innovation product design et cetera.
Okay I appreciate it thank you.
Thank you Robert.
Your next question comes from the line of Brian Hogan with William Blair.
Yes, good afternoon.
Good afternoon, Brian .
My question is actually kind of 11.
Nice.
Our growth this year and.
So the store has been performing.
Expectations I.
I guess when my questions is how many stores ultimately do you think you can handle them closer to get there.
And then what have you done the change your site selection. This given the strong performance in 2019.
Yes, I'll I'll start with kind of what we think the potential is.
Our potential we think Brian is probably 250 to 300 stores right now.
But that fluid to be honest with you and as stores either perform a little bit better. It goes into a model that is quite dynamic and.
That could increase to four or 500, depending on performance, maybe some marketing initiatives locally and just as the brand becomes more aware the market opportunity.
We will grow but as we stand today with the brand where it stands today, which still is relatively in its infancy from a consumer lifestyle brand. We think that is sort of a 250 to 300 potential store against kind of 60, which will have at the end of the year.
I'll, let Pat touch on your second part of your question I think we met hide.
Was very senior.
Executive at ARIA I ran west Marine I think he's added another sort of.
Layer of statistics onto sort of some of the stores, we're looking at and where the right sites are helping did a good job before I think thats, even improve I think broadly we're probably based on those statistics it doesn't need to be in a 5 million person Metro complex if the stat speak.
To to the strength of a market right you know in El Paso or is there a smaller city.
Ben probably more open to and I think those things have had that have driven results.
Right well make them the store growth I mean do things you can do 20 a year.
Yeah, I would say.
20 seems like a good target for right now.
And a little bit as the company continues to grow we can add more resources and so I think it may accelerate over the next couple of years, Brian but for right. Now you now I think 20 to 25 is probably a reasonable target in 2019, it's going to be a low.
Lower store opening but part of that was because with the new management team that we brought in as Pat said, we also brought in some expertise in retail location and identifying what are the proper.
Market conditions that we should be using to.
Figure out where our next store is going to go and Pat mentioned this and you know on the script, but our 2019 class is performing much stronger than our 2018 or 17 classes were and those were both pretty good classes. So the reach the new mine.
Model is working really well we felt it was important to slow down growth in our retail footprint temporarily which is why we had very little activity in the first six months of the year until we got our model built out in new exactly kind of what the right locations, we're going to be and now I think we're back on.
On pace in terms of the rollout of our retail at kind of a couple of months.
Sure and then last question is still in those 511.
My estimates.
Until returns.
Slide 11 pretty low relatively speaking due to its peers.
And obviously you have uniforms I get that.
Is there opportunity to improve that drove significant amount of.
Yes.
Yes.
As we move to more of a DTC customer the law enforcement customers.
Require us to carry.
A full array.
And a full assortment in.
Every imaginable size right as your your fit fitting out of police force Ernie SMS Force.
As we move to a more consumer I'd say two things first.
We've made some hires and.
Promoted some people who are very capable undertaking a harder look at inventory everyday and that's starting to pay off.
Second I would say as we move to more consumer.
We should be able to get better terms as well as these does sort of balance of the business the consumer business. The wholesale the DTC turns faster than the law enforcement side.
Sure. Thank you please.
Thank you.
At this time, we have no further questions I would now like to turn the call back to Mr. Green lights table.
I would like to thank everyone again for joining us on todays call and for your continued interest in Cody.
We look forward to sharing our progress with you in the future.
Thank you.
Thank you for joining complaints diversified holdings third quarter conference call have a wonderful day and you may now disconnect.
Okay.
Alright.