Q2 2020 Compass Diversified Holdings Earnings Call
Good afternoon, and welcome to capacity Richard <unk> second quarter 2020 Conference call. Today's call is being recorded all lines have been placed on even if he would like to other question at the end of their prepared remarks. Please press the star <unk>. The number one on your Touchtone phone I've, just fine I would like to turn the conference.
Over Mr., Matt Berkowitz, I'd be curious what introductions and the reading of the Safe Harbor statement. Please go ahead Sir.
Thank you and welcome to Compass diversified second quarter 2020 conference call.
During the company today, our lives saved vocally CEO, Ryan Faulkingham, Koby, CFO and Patmax Redline COO Mr. management.
Before we begin I'd like to point out that the Q2 2020 press release, including the financial tables, and non-GAAP financial measure reconciliations are available at Investor Relations section on the company's website at Www Dot compass diversified dot com.
But he 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 and the Companys financial filings throughout this call we will refer to compass diversified.
As Cody or the company now allow me to read the following the Safe Harbor statement.
During this conference call, we may make certain forward looking statements, including statements with regard to the future performance as Cody and its subsidiaries words, such as believes expects projects and future or similar expressions are intended to identify forward looking statements. These forward looking statements are subject to the inherent uncertainties in predicting future results in conditions.
Certain factors could cause actual results to differ on a material bases from those projected in these forward looking statements and some of these factors are numerous and the risk factor discussion and form 10-Q as filed with Securities and Exchange Commission for the quarter ended June 30, 2020, as well as in other SEC filings in particular, the domestic and global economic.
Like environment. That's currently impacted by the killed the 19 pandemic 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 at this time I'd like to turn the call over to a lot stable.
Good afternoon. Thank you all for your time and welcome to our second quarter earnings Conference call.
Before discussing our result, I would like to take a brief moment to acknowledge the continued impact of the cobot 19 pandemic.
The last few months have been challenging in many ways for so many people and we hope that you in your families are well and managing through this period of change.
As we said on our last call the safety and well being of our employees remains our top priority, we're continuing to follow national state and local guidelines and implement industrywide best practices to protect our employees. We recognize that our teammates are one of our most valuable asset.
We are committed to making sure they feel comfortable and supported during this time.
Despite the challenges we experienced during the last few months.
I'm pleased to report that our second quarter result, substantially exceeded our expectations.
Excluding the Rucci consolidated subsidiary adjusted EBITDA for the second quarter was $54 million compared to 55.2 million in the second quarter of 2019.
These results were significantly better than the guidance range of 28 million to $38 million provided during our first quarter earnings call.
While the impact of the response to the pandemic has been widespread and continues to pose challenges for each of our subsidiary companies. We have been impressed with the ongoing effort of our management team to position our company for long term success.
Together, we reduce spending and monetize working capital throughout the quarter to maximize cash flow.
Our strong result in continued distribution payment demonstrate the benefits of owning a family of diversified on correlated subsidiary companies the extent of which has never been so put out.
Well some of our subsidiaries have been acutely impacted by the pandemic with end market demand in certain segments nearly disappearing others have experienced record levels of demand on a seasonally adjusted basis.
During the second quarter, we strategically access to capital markets and raised approximately 200, and then $90 million of additional capital.
Coming into the quarter, our balance sheet was already strong and this capital raise gives us meaningful financial flexibility to execute on growth opportunities that we believe will be a button it coming out of the pandemic.
Our unique approach to investing disciplined allocation of capital and active management of our subsidiary businesses resulted in upgrades from both Moodys and S&P in connection with our capital rate.
Our actions over the past two years have underscored the effectiveness of our permanent capital structure and advantage of our model. We spent much of 2018 out of the acquisition market and were a net divesture of approximately $1 billion in assets in 2019.
In 2020, we're turning to a more aggressive acquisition strategy and plan to use our strong balance sheet position to accelerate our growth and deliver outsized shareholder returns.
Right, we remain focused on continuing to selectively partner with management team that can benefit from our deep sector knowledge operational expertise and permanent capital base as they manage through the near term uncertainty and positioning themselves for years to come.
One example of our strategy in action came at the end of the quarter, when we announced the add on acquisition of Polyfoam to our foam fabricators platform.
This acquisition is highly complimentary to phone fabricators geographic footprint and increases its cold chain revenues, which are benefiting from long term secular growth.
Additionally, we have supported 511 as the company became opportunistic signing leases again to further expand its retail footprint capitalizing on favorable lease pricing and continued consumer demand.
Now turning to our financial result.
Consolidated subsidiary pro forma revenue for Coty for the second quarter, including Maruti declined by four and a half present the $334 million.
And consolidated pro forma adjusted EBITDA declined by 8% to $52 million.
Our results were favorably impacted by a surge in demand for outdoor related products, along with cost management across our subsidiaries of our nine subsidiaries three showed growth over prior year and virtually all of our company has exceeded our expectation.
We generated 13, and a half million dollars of cash flow available for distribution and reinvestment, which we referred to was CAD during the second quarter of 2020 exceeding our expectation.
Notably our cash taxes were significantly higher than expected due to our velocity subsidiary.
We expect a majority of these cash taxes to reverse in the second half of 2020, Ryan will discuss our financial results in greater detail shortly.
On April 20, if we closed on our acquisition of Maruti sports, a leading designer and manufacturer manufacturer of premium baseball and softball equipment and apparel.
Despite the shutdown of professional baseball and most most youth sports Maruishi performed better than expected in Q2.
Although 2020 will be a challenging year from rucci, we're pleased to own this business and believe it is poised for accelerated growth in the long term.
Turning to guidance.
While we continue to see uncertainty in the second half of the year stemming from the pandemic, we have enough visibility across our subsidiaries to provide insight into our full year consolidated EBITDA expectations and our payout ratio.
The pandemic continues to change every day and while continued shutdowns of certain area. The economy could negatively impact our results more than we currently anticipate we felt it was important to provide our shareholders and capital partners with some visibility into our expected performance.
Please note that our guidance includes merging as if it was acquired on January Onest 2020.
For full year 2020, we anticipate pro forma adjusted consolidated subsidiary EBITDA of between 210 million and 240 million.
And we anticipate a CAD payout ratio for the year of 140% to 120%.
At the midpoint of our guidance range, we expect to pay out approximately $20 million more in distributions than we earned and earn in CAD for the full year of 2020.
Although we strive to always earned more than we pay out we recognized this year is an anomaly and are well positioned to make the payment despite lowered earnings for the year.
In fact, as you know we Opportunistically sold two companies in 2019 and generated approximately 240 million in that game.
We expect to pay out less than 10% of these net gains we generated in last year's divestitures to maintain our distribution levels in 2020, which is a priority for us.
Before I turn it over to path to provide additional detail on our subsidiary companies performance in the second quarter I want to update you on two of our internal initiative started early in the 2020 year.
First we have continued to push forward with our goal of being a leader in terms of SG, taking numerous steps this quarter to advance this important initiative and integrate DSG considerations further into our investment process from the point of due diligence and through the ongoing management of our subsidiaries.
Second I encourage you all to checkout, our newly designed website, which launched this week and has more information on our progress in these areas and now over to Pat Thanks life.
Before I begin on our subsidiary results for the quarter as a whole exceeded our expectations I wanted to touch generally on the effects of the pandemic throughout our companys.
Broadly speaking our niche industrial businesses sales and earnings were impacted more negatively and our branded consumer businesses as work stoppages or disruptions impacted several of the end markets our industrial businesses serve.
Among them aerospace appliances and hospitality.
However, our branded consumer businesses, Ben benefited significantly from increased consumer demand and outdoor categories and as a result experienced strong sales and earnings growth.
Now onto our subsidiary results for the quarter I'll begin with our niche industrial businesses for the second quarter of 2020 revenues declined by 12.4% and EBITDA decreased by 19.1% over the comparable quarter in 2019 for the year to date period revenues declined by 9.7% EBITDA decreased by 14 point.
8% over the comparable period in 2019.
Advanced circuits continued its steady performance with EBITDA in the quarter growing slightly over prior year the growth Capex investment, we made last year and a new facility in Chandler, Arizona continues to pay dividends as this manufacturing facility is producing strong growth over prior year.
Fabricators, EBITDA was down 20% and the second quarter on a 23% revenue decrease from fabricators margins benefited from lower input costs and other cost containment initiatives during the quarter. Many from fabricators customers were were forced to temporarily suspend production due to the cobot 19 pandemic, resulting in decreased demand.
Revenue strengthened during the quarter, however, and thus far in July revenues are trending close to year ago levels.
Arnold Magnetics EBITDA declined by 18% in the second quarter from the year ago period, we believe the longer term prospects for Arnold remains strong as their product offering is central to companies continued efforts to become more energy efficient. However, some of the company's end markets, namely aerospace in oil and gas our challenges due to the effect of the pandemic and are unlikely to.
Rebound in the near term as a result, we expect Arnold to have a challenging 2020.
The sterno groups EBITDA was down 29% in Q2 2010, a 2020 from the year ago period, Sterno perform much better than our revised expectations early in the second quarter as the company's consumer business experienced record demand on a seasonal basis for its line of wax and essential oil products. The core catering line shaping fuel and related.
Products, however experienced the near complete halt in demand. We expect this segment to remain depressed for some time as large gathering continue to be discouraged given the ongoing pandemic. Despite the reduction reduction in catered new and catering related sales, we want to acknowledge the extraordinary effort from management, including the painful reductions in personnel as well as the shoe.
Shifting strategy to develop and produce a line of high quality hand, sanitizer products in a short period of time Sterno has been a trusted brand in the food service industry for more than 100 years and with the increase in hand sanitizer demand in this channel. We believe the company is well positioned to take market share.
Now turning to our branded consumer businesses. Our results for Maruti are presented as if we owned it from January one 2019 for the second quarter of 2020 pro forma revenues and adjusted EBITDA.
Increased by 2.5% and 7.5% respectively over the comparable period and 29 team for the year to date period pro forma revenues and adjusted EBITDA increased by 3.5% and 8.8% respectfully over the comparable period and 29.
Ergo babies EBITDA was down 4% in Q2 2020 from the year ago period, Gerber Baby benefited from international distributor demand that was ordered prior to the pandemic in fulfilled in the second quarter globally end market demand was weak during the pandemic and as a result, our distributor partners have excess inventory that needs to be reduced resulting in expect.
Did we can demand in the third quarter and potentially in the fourth quarter. Despite the lowered expectation for the balance of the year. We are seeing end market demand recover swiftly and our domestic ergobaby brand produced roughly flat revenues in the second quarter relative to the year ago period, Liberty Safe EBITDA was up 80% in the second quarter from the year.
Ago period, Liberty continued to benefit from securing distribution with a large form and fleet customer in the third quarter of last year.
In the upcoming third quarter Liberty will be comping against this initial loading. Despite this difficult comparison end market demand remains robust and most of Liberty production capacity is booked through the end of the third quarter. Additionally end market demand online and that retailers remained strong for liberty's product driven by the current elevated levels of uncertainty.
Routines revenue in the second quarter declined by 60% in EBITDA declined from approximately 1 million in 2019 to negative 2004 in 2020. Please note that our second quarter results. Only include approximately 800000 of loss. Despite the negative comparison. These results were ahead of our expectations as we expected end market demand from rupees products.
Dropped precipitously as professional baseball unused sports were temporarily halted and many sporting goods retailers were close proportions of the quarter professional baseball resumed play in the United States in a modified 60 game season last week and youth sports are starting in parts of the country Marucci had seen increased demand and its direct channels. However high inventory.
Level than its wholesale accounts need to decline before revenues revert to more normalized levels. Despite the ongoing challenges we remain optimistic about MMORPG future.
Velocity outdoors EBITDA was up 104% in Q2 2020 from the year ago period. This performance was much better than expected as demand for all products increased dramatically driven by a broad trend towards increased outdoor activities. While the rapid surgeon end market demand has placed significant stress on the supply chain and internal production capacity.
Management and the company's employees have performed admirably and rising to the challenge currently retail channels are low on inventory and we're working diligently to increase production in order to the both meat end market demand and keep our wholesale partners in stock with adding adequate inventory levels.
Finally, five elevens EBITDA was down 3% in Q2 2020 from a year ago period. However, on a year to date period basis, five elevens EBITDA has increased by 9% 511 close its retail stores to the general public in April and upon reopening has been working under modified hours. Additionally, the professional side of the business experienced reduce.
As orders in the second quarter as first responders, we're focused on securing products most necessary for fighting the pandemic.
Orders on the professional side started to recover in June and bookings have been accelerating thus far in July despite the weakness on the professional side. The consumer portion of the business continued to perform significantly ahead of expectations. During the second quarter. Our same store sales, which includes our ecommerce business grew by approximately 10.5% on acceleration.
And from 7.5% same store sales growth in the first quarter of 2020, we believe many macro trends are positively impacting the 511 consumer brand and that the company has even stronger opportunities moving forward.
Positively impacting the 511 brand include increased participation and outdoor activities worldwide, a shift from dresser tired of casual whereas companies offer more flexible work schedules and more formal in person meetings are limited and an increase preparedness mindset consistent with five elevens positioning and its mission statement to always be ready.
We continue to believe 511 will be transformational to the entirety of compass with that I will now turn the call over to Ryan to add his comments on our financial results.
Thank you Pat.
Before I discuss our consolidated financial results for the second quarter of 2020.
I want to highlight our second quarter distributions that were recently paid to shareholders.
On July 23rd 2020, we paid shareholders of cash distribution of 36 cents per common share representing a current yield of approximately 8.9%, including this distribution. We have paid approximately $19 and 68 per share in cumulative distributions since Codis 2006, IPO. This reflects 131 person.
Many of the IPO price.
Further tomorrow, we will pay cash distributions of approximately 45 cents per share on our seven in a quarter series a preferred shares and approximately 49 cents per share on or seven and seven eight series B and series C preferred shares.
All three preferred distributions cover the period from and including April Thirtyth 2020 up to be but excluding July thirtyth 2020.
Moving to our consolidated financial results for the quarter ended June Thirtyth 2020 I.
I will limit my comments largely to the overall results for a company since the individual subsidiary 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 June Thirtyth, 2020 was 333.6 million down less than 1% compared to 336.1 million for the prior year period. This year over year decrease reflects the challenging economic conditions as a result of the cobot 19 pandemic strong sales growth at our branded consumer.
Subsidiaries velocity outdoor and Liberty was offset by declines and other of our business as previously discussed.
Consolidated net loss for the quarter ended June Thirtyth 2020 was 7.4 million.
Consolidated net income for the prior year second quarter was 218.2 million and included a $206.5 million gain recorded in connection with the sale of cleaner.
CAD for the quarter ended June Thirtyth, 2020 was 13.5 million down from 26.2 million in the prior year period.
Our prior year CAD included our results from cleaner up until June Thirtyth 2019, the data sale.
Our CAD during the quarter was above our expectations with EBITDA only down slightly from prior year substantially above our expectations and our subsidiary management teams, reducing capex spend in light of economic conditions, we would have generated significantly more cat in the quarter. However, our cash taxes were negatively impacted by more.
And $6 million that velocity outdoor.
As we've mentioned many times in the past our cash taxes are extremely difficult to predict quarter to quarter. However on an annual basis. It is much easier.
We anticipate a large majority of the impact of lots of the outdoors cash taxes to reverse in the second half of 2020, and therefore benefit our second half cat performance I'll provide more GAAP guidance on cash taxes shortly.
The other factors impacting our CAD during the quarter as compared to the prior year was lower interest expense lower management fees as a result of our waiver of 50% of the management fee in Q2.
And higher preferred share distributions as a result of our series C issuance in November 2019.
As Elias mentioned earlier, our balance sheet as strong as of June Thirtyth 2020, we had over 200 million in cash and approximately 600 million available on our revolver. Our leverage is below two times, we stand ready and able to provide our subsidiaries the financial support they need make distributions to our preferred and common shares.
Holders.
As well as move on compelling investment opportunities in this dislocated market as they present themselves.
Turning now to capital expenditures.
During the second quarter of 2020, we incurred 3.3 million of maintenance capex of our existing businesses compared to 4.4 million in the prior year period.
The decrease in maintenance Capex was related to a reduced capex spend across the majority of our businesses.
During the second quarter of 2020, we continued to invest growth capital spending $3.1 million in the quarter, primarily related to five elevens long term growth objectives growth capex in the prior year quarter was 6 million.
Turning to our expectations for 2020.
As a reminder, our quarterly operating cash flow results can vary materially based on factors such as the timing of shipments of large orders or the timing of certain investments made before or after quarter end.
Elias provided adjusted EBITDA guidance, and our payout ratio expectations for the full year of 20 to 20 I'd like to now provide guidance on capex and cash taxes.
For maintenance Capex, we had previously estimated capex spend of between 20 million in 25 million for the full year of 2020.
Our current estimate for maintenance Capex for the full year of 2020, including Maruishi is between 17 million and $20 million.
For growth Capex, we had previously estimated spend of between 10 million and $15 million for the full year of 2020. However, our revised expectation for growth Capex is between $13 million in 15 million primarily at 511.
For 2020 cash taxes, our previous expectations, where to spend between 6% and 8% of our subsidiaries told total EBITDA and cash taxes.
We now expect cash taxes will decline to between 6% to 7% of our subsidiaries total EBITDA.
Keep in mind this percentage should be applied to full year 2020, total EBITDA and not quarterly as we experienced in Q2 with velocity outdoor our cash taxes as a percentage of EBITDA can vary significantly quarter to quarter.
With that ill now turn the call back over to us.
Thank you Ryan.
I would like to close by briefly discussing M&A activity and our go forward growth strategy.
As I mentioned earlier, we took steps in 2019 to prepare for the unexpected and those decisions have positioned us well to weather the storm and emerged stronger on the other side.
We have the balance sheet strength to support our companies as they operate in the these highly unusual times our companies our leaders in their respective industries and are poised to gain additional market share in the month in years to come.
Our balance sheet strength has allowed us to pursue growth initiatives unavailable to others as the debt markets close to all but the highest quality issuers. We believe the best opportunities to generate long term shareholder value occurred during market dislocations like we are currently experiencing and we're constantly evaluating the best way.
Ways to enhance our portfolio, while prioritizing the financial health of our subsidiaries, we entered the year with significant balance sheet strength and further solidified it with the capital raise in May.
With our enhance balance sheet position and the resiliency of our subsidiary companies, we feel increasingly prepared to capitalize on new opportunities, while taking a patient and disciplined disciplined approach to executing our growth priority.
Our strategy is strategy is differentiated cody for more than two decades and remains consistent as we navigate the uncertainty ahead and position our subsidiary companies for long term success.
We are intensely focused on executing our proven and disciplined acquisition strategy improving the operating performance of our company.
Opportunistically divesting enhancing our commitment to SG initiatives across our portfolio distributing sizable distributions and creating long term shareholder value.
With that operator, please open up the lines for QNX.
That is noted.
Hi, good to ask a question you will need to press star one on your telephone.
Question, Chris Nippon I have.
Please standby, while we composite Guinea roster.
Our first question comes from the line of Larry Solow CJS Securities. Your line is now open.
Great. Thank you all good afternoon guys.
Good afternoon Electric Taylor.
Just a couple of subsidiaries and then maybe again, we're generally question just on.
Velocity outdoor obviously benefiting from the demand for outdoor.
Products.
They know they started sort of coal would sort of came out. These guys are you guys are sort of doing the undergoing restructuring there.
Does that come into play it all can you just sort of speak.
Velocity sort of.
Mid mid term outlook and.
You expect sort of this demand these kind of performance numbers to continue in the back half of the year.
I realize it's a that easy to again.
Yeah. So I think on the managed Larry This is Pat I think on the management side.
Tom again, Kelly Grindle, and the team beneath them have really done an exceptional job.
Managing through this and we couldn't be happier as it relates to demand I mean, I can't speak to October and November I could tell you. We don't see any slowing down in July and probably August and we'll see from that if you remember Q3 is a big a big quarter for them you seasonally anyway as it relates to hunting and outdoor activities. So.
So thats how's that for forgotten that I could talk over the next few months I can't tell you what December going to look no no no.
So as saying at the end of my question that I realize.
It's not easy I guess I get it now that's all I was curious then on sterno.
Obviously, much better than feared certainly down year over year, but.
So your business basically being temporarily wiped out or close to zero.
Can you speak sanitary imports and the actual year over year growth at that business I got to imagine it's pretty material.
It's material there is not it's material, but we've also seen you know.
Hand, sanitizer sales some of the outdoor more camping fire starter sales help through the retail channels.
So I don't think weeks, we talk it is that material growth.
But I don't think we speak directly to.
Subsidiaries or pieces of businesses, but the other part of it is kind of a transition to hand, sanitizer and some demand for those other non shaping fuel related product external sales.
It's pretty expandable to be able to shift into that start making the hand sanitizer just on qualitative basis did it so it sounds like it actually quantitatively own moved the needle somewhat and help performance.
Yes, and I think you know Larry I think the team really needs to be commended here for this.
It is easy to bring up a new line I think everybody's aware probably a lot of people are aware, there's something like 75.
Companies that had have had hand sanitizer recalled lately by the FDA.
A lot of Omar imports or their companies that tried to get quickly into the market. There is actually quite a bit that you have to go through from a regulatory standpoint to be able to do this and.
This is a process that requires special on manufacturing conditions like explosive explosion proof rooms, sterno have that all available to them and the management team really move that light speed to be able to do this and what excites us.
About this product.
One is we think it's now a new category that is here to stay in the hospitality industry by and large right or it wasn't there because most restaurants encourage their employees to wash their hands rather than do you hand, sanitizer, but now guests are using hand sanitizer. So it's a big change. So this is a new market thats kind of all.
Up and opened for grab and star knows quality has always been number one with sterno and we have 100 year track record of establishing quality product distribution capabilities and so there's a lot of companies to come in with product that may not be up to spec our product.
Is and it passes kind of all the requirement.
And so the team has done a great job and we think this is a nice adjacent market that is probably here to stay at some level.
And we'll be complimentary to the shaping line when that business comes back.
Right no. Good yes, absolutely, okay shifting gears quickly and 511.
I remind us roughly normalize what percentage of the business. That's on the professional side what is that roughly what was it a 19.
You know it was professional was a little greater than 50% of the business and I'm going to talk about professional being both domestic and international.
With sort of 55% of the business in 2019, given the differential in growth rates, we anticipated that 2020 that would reverse in fact that have Tom, especially as the consumer business you see some of these trends Pat mentioned the growth in same store sales, which clearly includes E commerce, but if you compare that.
Two you know a lot of household brand names that are out there that sell apparel and footwear. Some of these guys are down 30, 40% in this company same store sales growth accelerated from kind of 7% to 10% and not from Q1 to Q2. So it really is the I think strong Testament to this.
Brand and its emergent and how much it speaks to its consumer.
But just in terms of percentages the consumer business is now running larger than the professional business. So if it was 50 545 last year at sort of flip flopping this year.
Right.
And then on the it sounds like you guys are going on I know you looked like store openings were kind of on a little over pause, but it sounds like you've found some new location in a little bit of capex going into I assume.
Restart maybe a slower ramp.
Your turn on the store openings any color to that yes, we're opportunistically opening up stores.
We have authorized some and we won't have the same number of new stores in 2020 likely that we had in 2019.
Theres opportunities out there as landlords or are feeling the effect of this market too.
Even if.
That's what we're doing.
Right. Okay, you guys said transformational to the entire company.
Sort of the obviously, it's your biggest or your second biggest holding today are right there with startup.
Such as the growth outlook is that presents all monetization of the asset.
Would it what sort of the mean by that or any thoughts on.
Yes, so Larry we think this is a company that will more likely than not will follow the Fox path. If it continues with the growth that it's been on and would be an IPO candidate for US I think when you consider companies that are more on trend and have really.
The long term first off we talked about the same store sales comps, which.
And any type of business like this is going to be really meaningful to value a company.
But if you just think of some of the drivers that are kind of in past Numerated. A few of them that are really aiding in that growth.
You think about how early the company is in its rollout of stores E commerce, continuing to grow along with that and as we continue to enable more consumer services. We think we're just really early in the consumer you know.
Component of the company's growth.
And as a result of that we think that multiples are generally pretty.
Pretty high for companies that demonstrate these type of characteristics very low cyclicality in the depth of the pandemic really high growth rates driven by.
A lot of white space in kind of just new opportunities to put down.
Retail stores, but then strong same store sales growth in.
When you combine a bunch of those factors. We think this is not just.
Fast growing company for us, but it's also a really high valuation multiple based on that and I think when you look at it you know where some of its competitors or just people broadly in the consumer lifestyle business that are on trend our trading with these type of growth profiles are trading on a multi.
Level basis, you could easily see how.
It could help re rate the share price of Coty.
If it was to be a stand alone public company trading anywhere near where some of these other kind of consumer lifestyle brands are trading.
Right got it again I appreciate the color. Thanks, a lot leasing and congrats again on the corner.
Thank you Larry I appreciate the support.
Your next question comes from the line of Matt Koranda from Roth Capital. Your line is now open.
Hey, guys. Thanks for taking the questions.
Just wanted to start on slide 11 could you guys comment maybe on just the or break out the growth in in store sales versus online.
It's great to see the comp up in Q2 overall, but how much did that kind of skewed toward quite a bit of become growth.
Yes, so Matt we don't break it out in that level typically I would say, we don't breakout what our same store sales growth is we just wanted to do this because it's such a highly unusual time and because companies I think there was a lot of concern about having a multi channel retail.
Well or even though this is really an omnichannel company.
And as a product company. It does have a retail component and I know there was a lot of concern out there. So we gave more granularity into.
End of the growth rates than we typically what all that being said I'll try to Directionally give you some idea.
Our E Commerce business was growing really rapidly sorta circuit double what it was over prior year, our retail business was down slightly and you would anticipate that being the case, because we close to the general public for one of the three month and then when we reach.
Opened we went to extremely limited.
Kind of ours so.
It was obviously it skews towards E Commerce, I think when we talk about Capex and I know this isn't part of your question, but just.
To get out there.
A lot of the growth Capex, we're putting in right now is really in enabling much more seamless consumer experiences between our E commerce, and our retail and as those lines get Blurrier frankly, it gets a lot harder to be able to tell where you're generating revenue is it coming because of the store for.
For example, if you order online and have it shipped from store do you give the store the credit for online if you order online and pick up from store you noted the store get a credit.
Where to returns come back do they go against kind of online because its multi channel or does it go against the store. So this is going to continue to get Blurrier and Blurrier and I think Thats why the convention has always been to look at same store sales and as ecommerce being one box.
But kind of Directionally. The E commerce was growing at a really rapid rate and we would expect that to continue to you know when I think the brands that are more.
E Commerce native like 511, and they had the ecommerce side far in advance of having a consumer retail side.
Those brands are we are holding up far far better than brands that are mostly retail reliant with small ecommerce percentages.
Very helpful color. Thanks, Les and then just a follow up on 511.
I guess my expectation would be that higher next numbers generally should translate or correlate and some rough way to your future consumer sales expectations.
Could you help us kind of calibrate our expectations around that because obviously, it's been a bit big acceleration and data points there.
Help us understand sort of how that does translate to the consumer sales side of 511 on a go forward basis.
Yeah, I would say your nics numbers, you are talking about background checks and the surgeon background check I'd say.
We see more of a correlation with that at Liberty then I think we've seen at 511, I mean, I can't speak to the correlation is not causation right and when you bygone hopefully we're getting a safe to it's not quite that directed 511 as what we see two I'd I'd I'd caution you for making that direct comparison.
Okay fair enough.
And then just shifting gears one phone and then and then one more follow up just kind of overall, but.
On thumb, the Polyfoam add on to help us kind of understand the positioning there it looks interesting kind of with exposure to cold chain storage.
But maybe thoughts on does that change sort of the revenue growth outlook profile for foam at all or the margin profile in the way that we should be modeling that going forward.
Not materially I mean, we're hoping to increase the margins on on Polyfoam as we move forward.
Theres Theres some synergies in any acquisition it is more cold chain.
Related are concentrated than than the rest of our business. So if you have a different view on the growth in the cold chain.
Slightly it could but it wasn't a huge I mean, you've seen the financial disclosures wasn't a huge acquisition. So I wouldn't think it would change necessarily to.
The profile Thats significantly.
Okay got it.
And then just on the M&A environment overall, guys. It sounds like obviously.
Taking my takeaway from your prepared remarks or that you're going to be more aggressive in terms of your posture on M&A.
With that.
But anything you guys can provide in terms of details like bias toward add ons versus platform.
Any quantification of the pipeline that you can help outlets and just overall, maybe Elias what are you seeing on on the multiples Ron has anything kind of shaken loose since the pandemic or is there a lot of money still kind of chasing fewer acquisitions that are available.
Yes, so it's a great question, Matt and your observation is correct, we have moved from being.
Pretty much risk off in a net divestiture to now being risk on and that investor and we think that when you have this kind of volatility.
Thats caused by the pandemic. These are sort of the market dislocations when a dislocation like does happen. It's the most opportune time to put money to work and really benefit our shareholders over the longer term.
That the generally what fuels, the M&A market, especially with competing private equity firms as access to credit markets.
And the credit markets.
Really weak right now I would say if you're a large public company borrower and the federal reserve as we know kind of dabbled into some investment grade bonds and that obviously push money.
Out of AI, Jie and into lower class bond capital access has been much stronger, but if you're trying to do a middle market one off acquisition.
The market for credit there I don't want to say, it's completely disappeared, but severely reduced and so as a result of that our private equity appears that is disadvantage today relative to us where if you went back a year ago. They were massively advantage because credit stand.
Towards whereas looses they've been in the 20 plus years I've been doing this and it was just fueling kind of a massive run up in prices. So that's sort of why we look at now is a great opportunity to be aggressive in M&A and frankly, it's why we took a lot of balance sheet capital coming into the year.
Sure and rose more capital because we want to take advantage of these conditions and we don't know how long. These conditions are going to remain typically you know the public markets capital markets heal the private markets will heal with some type of lag. So there's probably a window that exists.
Were you know this volatility is going to create an opportunity and then prices likely are going to rise pretty significantly now all that being said in the second quarter.
With a lot of the government programs that got put in place there wasn't a in the impetus for companies to be going out and seeking to do a transaction and so if you had a good company that had liquidity earnings were holding up.
Bringing your business out in the midst of the pandemic and testing the waters. When you know who knows what the price discovery would look like didn't really make a lot of set so good companies pulled out of the market and companies who could be really stressed financially are getting access to government assistance.
That was keeping them from coming is quickly to the market now what we're starting to see is the beginning stages of that really change. We're hearing from a lot of the investment banking folks that we work with in the M&A market that Theres a lot of pitches that are starting to happen. So that kind of puts a three to four month kind of lag.
As to when we would expect to see significantly more activity coming.
But for right now you know the markets were relatively muted now that you know for US you asked whether we have a bias towards add ons or platforms. We clearly are seeking to grow the number of platforms that we have no I think we've said on numerous occasions, we have the human capital and the Oregon is.
In addition to be able to move to 12 to 15 platforms, we think that greater diversification with in the portfolio is is beneficial it lowers the volatility of the portfolio.
Thank you know as we strive to continue to get ratings upgrades and.
Having lower volatility in earnings.
Is clearly an important component to that.
But in on top of that in a market, where you're not seeing a lot of new big opportunities come to market.
For us to be able to go out and approach add on acquisitions, where we may have already had contact from before to continue to follow up on that is probably more actionable and kind of the really near term but.
But we're looking at both I would just say that platforms are probably likely going to be a little bit kind of longer in the year, a little bit farther off in the year in terms of pricing.
It's really hard to say right now because theres no price discovery, because M&A has been so.
Really shut off in the second quarter I will give you my hypothesis, which is I think pricing may appear high when you look at cobot depressed earnings and so I think on a multiple basis, what you see transact is going to be significantly.
Lower than.
What the intrinsic value of the company would have been and significantly lower than a couple of years past, but it may look high on a multiple depending on how much earnings are temporarily down and so I think there will be good values to be had in the next kind of 12 to 24 months I think.
Beyond that when the credit markets come back I would just tell you private equity capital has not contracted during this time and back is probably expanding slightly during this time.
Mostly to the big established from private equity capital is still growing and so that suggests that as credit markets come back.
Year or two years three years from now asset prices are likely to river right back to kind of levels that they were pre pandemic.
Super helpful. Appreciate all the the color last and I'll jump back you guys. Thanks.
Thank you.
Your next question comes from the line of Kyle Joseph from Jefferies. Your line is now.
Hey, good afternoon, guys mismatch questions have been addressed.
Just just one more on mariucci obviously.
Challenging time for the business, but stepping back and if he can even think about this in the stage spend like kind of ex Kobe can you give us your your expectations for part of the overall size that that business and given the addressable market and if you can kind of step back and do that pre Kelvin.
Yes, Sir Kyle this is.
This is Dave so I would say.
Clearly some some headwinds.
This year and I think at least short into the medium term there'll be a little hang over just in terms of some inventory in the in the channel and and maybe use tournaments being down.
Little bit but to your question I.
I think we feel even better about kind of the medium term here in in particular do the impact of of the current environment on some of our competitors. So we feel like there is some nice opportunity too.
Take take some market share expand the product offering.
International opportunities.
But.
Hang over from this year.
In terms of maybe competitor discounting and inventory in the channel is likely to two to last a little little while but.
So hard to predict kind of timing, but we would expect this company to resume its its growth profile.
When when those when that situation remedies.
Sure. Thanks, and then one follow up for me just you touch that E commerce trends it at 511, but.
Looking at the other consumer companies.
Which companies has seen the biggest offset are the most benefit from from shift to E commerce trends.
Yes, Kyle so I would say.
All of our companies on the consumer side have benefited from their ecommerce side of their business has benefited in one of the things that I think when we've chatted before we've talked to you about kind of getting our company's aligned and in terms of their distribution channels.
Making sure that ecommerce was becoming a larger component and really even more so than that becoming less reliant on a physical footprint and so you know for an ergo baby and one of their other brand thats in there too how do you create communities, where if you're seeing the product walking.
Came through a buybuy baby, that's great, but you know if thats going to be more limited in the go forward. How do you still get that sense of community that you need to have in order to pull and get product sales through that and we've really been emphasizing that with all of our company when we talked about the restructuring.
And that needed to happen out velocity.
Part of it was bringing in a management team that understood that we needed to have you know we needed to build communities, we need to be less reliant on the physical footprint that we were going through historically because those channels were just changing and so we've been working with our companies for.
These years, now and being able to get ready for that and whether thats using social platforms to build communities or you too which is part of I guess social platforms, but you know all the different aspects of being able to.
Better connect to your can your customer and do that electronically and then have distribution capabilities that go along with that has been something that we've been working really aggressively on with our company. So I think it's one of the reasons you saw that our consumer businesses have performed as well as they have performed.
Right I mean as a class our consumer businesses grew revenues in grew EBITDA year over year in the second quarter and that would enable because they are they have done all of these basic foundational things prior to so velocity is working really aggressively there I'll give you. An example of a company.
That you would say well how does this lend itself to electronic distribution, but one of the reasons Liberty safe is doing so well is a couple of years ago, we really kicked off in initiative and our management team there, Steve all read and Justin Buck have done just such an extraordinary job of being able to drive online sale.
Sales and our online sales work, a little differently, where we actually partner with the dealers that we're working with to fulfill the orders, but we generate something like a third of the orders for our dealer network comes through our website and for US it's great. Because we now are controlling that customer so.
There are many benefits that come along with it but we're talking about something that could weigh upwards of a ton and you say will that doesn't really lend itself to be E. Commerce, you're right. It does it but you can still take steps to de emphasized strictly the in store experience and bring it more into an online.
Experience and be able to work in that manner and so we've been doing it across the board with our company.
All of our company experience really strong growth in E commerce demand.
And I think it why the consumer demand and revenue was as strong as it was.
Got it very helpful. Thanks, very much Spansion my question and congratulations on good quarter.
Thank you Kyle.
Your next question comes from the line of Robert Dodd Raymond James Your line is now open.
Hi, guys and congrats.
Yes.
The impressive quarter.
Yes.
So some follow ups on.
So most of the and Liberty kind of the the out we've seen and obviously.
On the tax items consumers.
Certainly well hang on a hobby outdoor et cetera, so that that in hindsight.
Sizing that it did so well.
Since we last couple of months ago.
But.
How confident.
The demand just continuing to see now.
It is really end market demand.
Inventory.
I mean in your prepared remarks, you mentioned the couple of times.
Inventory channels.
In the wholesale.
Because of the strength of demand, but so how confident.
You said you get about July August.
Andy.
Any information any data you've got that shows that stability flowing through to end use of purchases business just.
Restocking.
Yes, Robert So right now what we're seeing is of the inventory levels of our partners or the lowest we've seen in years and in fact take a velocity for example, the biggest challenge and you're right. If you think about it it's probably not surprising that some of the outdoor brands and kind of how.
Be things like this when you're limited in what you can do out quicker was going to grow.
So we're all pleasantly surprised by that but I would say we think this is probably a little bit more durable and terms all the demand right now I would say we are very confident that not only is this not just end market demand that is represented in the sales but ourselves.
Don't even that represent the full end market demand because our inventory levels that are you know our distributor partners are so low right now.
So we think theres a considerable period of just rebuilding inventory back up to the right levels and frankly, what we're seeing even in July right. Now is that demand at the store level end demand remains really robust and kind of elevate.
Good at levels significantly greater than where it was a year or two or three years ago. So we feel very confident that this is the end market. This is all end market demand plus some.
Now whether this will a year from now we will still be talking about you know if theres a vaccine and there's better therapeutics and things are back to normal then you know will address it then but I would say for.
The immediate future I would that business looks to have these both of those businesses look to have demand that is.
There to fulfill and more of the challenges on the supply chain and the manufacturing capacity that we have both at our velocity and live and Liberty subsidiaries.
Got it got everybody appreciate that.
Yes.
How fast.
Lease that manufacturing capacity is that in the plan because obviously it doesn't look like.
Capex increase sounds like it was mostly 511.
Then putting another line loss for example, the men plans.
Yes, it takes a little bit longer I mean part of it is.
We have complex supply chains, especially at velocity and our supplier partners are fully maxed out as well and so it's not is easy to ramp up supply when you're talking about demand growth that has been this material. It takes a little while to ramp it up.
So I would say you know in the near term sort of 2020, it's going to be difficult to ramp supply out now and Liberty. You know this is pretty big pieces of equipment and you're building safe you know, there's just constraints in terms of the.
And then getting new equipment and.
And I will tell you, we're being a little bit cautious.
In that we recognize that the pandemic has created many dislocations that are out there look people aren't traveling right now they're not doing other leisure activities. So you know there there's more disposable dollars that can be used in other areas there.
Doing more outdoor thing I would say, what we are being guarded again is investing too much in supply growth to the extent that you know some of the demand increase is not long term sustainable so we'd like to you know if we would rather be more methodical with the way that we plan out.
The supply growth the amount of investment that is really required.
And so we will bring on more supply were working aggressively to fill all of the demand and make sure that we can be good partners to all of our distributors.
But at the same time, we want to be responsible and not overbuild you know for given the current condition and you know as we all have to just appreciate the uncertainty today is greater than it's been.
Kind of probably at any point and compass as history right over the last 20 plus years.
So we just need to be a little bit more cautious with the way that we planned supply growth.
John I appreciate that.
Slide 11.
Okay.
Increasing.
Capacity on the source lease signings has given.
Just a function and the opportunity to opportunity to be opportunistic.
Is this.
Operating and opportunities that maybe you should change.
Which locations UK.
You mean.
Yes, well would have been a more expensive location before but now lease pricing is more reasonable given the environment can you give us any color is anything changing about the selections of those and why you signing new leases and way you signing new leases now.
Yes, right now we're still looking at the places that have been that the locations that have been proven to work for us right. So.
Freeway signage, we know the co tenants that worked well for us.
Up like that we're not yet opening up 511, South Coast Plaza for example, and nor do I see that as.
Near term in our.
And our future. So I'd say, we're able to find these locations easier now and kind of those idea locations. The same ones that kind of fit our profile easier now.
And are able to drive better lease economics, but we're not yet sort of expanding the aperture too.
That other kind of.
Higher Affluents mall.
Hi, Ken on the acquisition.
A follow up.
A question.
You talked about.
Let me see an additional platform acquisition.
Patient to the portfolio.
At the same time, a new platform acquisition in this environment given the level of uncertainty.
Adds more risk.
So to the portfolio versus given.
Yes, no about that business versus an AD. So.
How would you.
Instead, obviously thats a platforms maybe further out.
But is that simply because the market and the due diligence for those takes time.
Weeks.
But more visibility stability.
So they should about how this time them pan out before adding a platform.
To the portfolio add ons, just make more sense given more these known about those industries end markets at this point.
Yes, Thats, a it's a great observation Robert I mean, clearly add ons are less risk because we have the management team already in place at the platform, we own and we have systems in place and we can generally plug those and.
We know better about the industry, we and thinking about new platforms I would say right now the reason I would say I mentioned, it maybe a little longer do.
Our transact on a new platform is because the M&A market for new platforms has really dwindled and we see fewer opportunities right now just because of the dynamics I talked about earlier with kind of government stimulus and you know the banks have taken a much more.
You know kind, a let's just wait and see approach, giving forbearance to companies and not really forcing action that would generally create a lot of kind of potentially good company bad balance sheet situation, where it forces the business to recapitalize with a new owner.
Such as company. So that's really the reason that I see it taking longer to do a new platform than an add on now to your question about risk profile.
Clearly I get your point and at 100%. The case I think if we were to consummate a new platform. It would have to be a really high quality company that we understood really well what the growth drivers were what its downside risk was the dynamics of the business.
And we would have to get comfortable because as you stated you know there's a greater level of uncertainty today than there was kind of a year or two ago. When we add economic conditions that were supportive now you've got kind of.
The pandemic you've got the economy, that's more reliant on government assistance and so there's clearly more risk factors and so it does raise the bar in terms of what we would need to see for a new platform, but there are some really there in for example, I will just say we've seen some really high quality.
The companys pre pandemic.
That if they were to come back into the market, we would be really excited because the quality of the company was such and the stability of their earnings were such that we would transact I'll point timber rucci because merge it truly is a pandemic led opportunity that we were able to close.
Those on it was pre pandemic, but remember the pandemic was sort of reaching throughout China and Asia at that point and was just starting to come into the us and as other buyers were being scared off from the property I'd. Just tell you. This is an asset that we looked at and said are we comfortable.
With what the earnings will look like in 2020, and frankly, we thought at one point it would be zero and so we're much more bullish about it now and we think it will be significantly greater than zero. So that is a good positive, but when we looked at the dynamics of this business and how strong. It was I mean, you know this.
This isn't a business and you don't see opportunities like this that come along all the time and so for us to be able to take advantage of a company of this quality with the type of growth profile and Trust me when we get out of 2020, we're all going to like the growth profile of Murray energy and it's going to help diversify the growth.
The overall business it will be additive to growth and it will diversify.
From 511 being sort of the strongest pillar of growth. So that we have more if we saw companies like Maruti, we would want to ask on those because that's part of the opportunistic advantage that we have with our permanent capital model to be able to bring to bear so.
We're out looking for these kind of eight type companies like them or rucci and I think in those type of businesses. We think there the first to rebound we're already seeing marucci rebound and we believe it's much faster than where its competitors are and that's why Dave said, we think that this is actually net positive for marine.
Good because our competitors are being weekend and we're coming out faster. So we're gaining more market share at their expense. If we can find other platform opportunities like that that's the stuff that we're looking for right now and we would transact against.
Got it.
Please shed congratulations on a quarter again, thanks, Thank you Robert.
I'm showing no further questions at this time I would like to turn the conference back to Mr. NYSE, though.
Great I would like to thank everyone again for joining us on todays call and for your continued continued interest in Cody, we look forward to sharing our progress with you in the future that concludes our call operator.
Ladies and gentlemen that concludes today's conference call. Thank you for participating you may now disconnect.
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