Q3 2020 Compass Diversified Holdings Earnings Call
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Good afternoon, and welcome to Compass diversified <unk> third quarter 2020 conference call. Today's call is being recorded all lines have been placed on mute if he would like to ask a question at the end of the prepared remarks. Please press the star key did the number one on your Touchtone phone.
At this time I would like to turn the conference over to Matt Berkowitz with the IGBT group for introductions and the reading of the Safe Harbor statement. Please go ahead Sir.
Thank you and welcome to Compass diversified third quarter 2020 conference call.
Representing the company today are like say about CODI, CEO, Ryan Faulkingham, CODI, CFO, and Pat and that's relative to C.L. of Compass Group management.
Before I begin I would like to point out that the Q3 2020 press release, including the financial tables, and non-GAAP financial measure reconciliations are available at the Investor Relations section on the company's website at Www Dot compass diversified dotcom becomes.
The company also filed its form 10-Q with the FCC today. After the market closed which includes reconciliations of non-GAAP financial measures discussed on this call and is also available at the Investor Relations section of our website.
Please note that references to EBITDA on the following discussions refer to adjusted EBITDA is reconciled to net income and the company's financial filings.
The company does not provide a reconciliation of its full year expected 2020, adjusted EBITDA or 2020 payout ratio because certain significant reconciling information is not available without unreasonable efforts throughout.
Throughout this call we will refer to Congress diversified as CODI or the company now 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 CODI subsidiaries words, such as believes expects plans 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 and conditions certain.
Factors could cause actual results to differ on a material basis from those projected in these forward looking statements and some of these factors are enumerated in the risk factor discussion in the form 10-K as filed with you actually see it for the year ended December 31, 2019, and its further update in the forms 10-Q as filed with the FCC for the quarters ended March 31 2020.
On June 32020, and September 32020, as well as in other SEC filings in particular, the domestic and global economic environment. As currently impacted by the COVID-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.
This time I would like to turn the call over to Elias stable.
Good afternoon. Thank you all for your time and welcome to our third quarter earnings Conference call.
Before discussing our results I would like to take a brief moment to acknowledge the continued impact of the COVID-19 pandemic.
This year, it's been challenging in many ways for so many people and we hope that you and your families are well in managing through this period of change despite.
Despite the challenges brought on by the pandemic I'm pleased to report that our third quarter results substantially exceeded our expectation.
Including the routines result from January Onest 2019 pro forma consolidated subsidiary adjusted EBITDA of 76.9 million exceeded prior year by 10%.
This outperformance was driven by our branded consumer businesses, which produced pro forma consolidated revenue and adjusted EBITDA growth of 15% and 42% respectively over prior year.
Looking back on the past few months I am incredibly proud of our team and the work we have done to position our subsidiaries for long term success, while driving value for our shareholders, notably we closed on the acquisition of bullet technologies, our second platform acquisition of the year as we continue to transform our portfolio.
Oh, John joins our lineup of market, leading branded consumer businesses, including Marunouchi sports, which we acquired in April.
The ability to source finance and close these strategic acquisitions among amid the height of the pandemic is a clear testament to our differentiated permanent capital model as compared to the traditional private equity model employed by our peers through.
Throughout 2018, and 2019, while others in the industry, we're aggressively deploying capital our permanent capital approach allowed us to be patient.
Instead, we capitalized on favorable market conditions, and Opportunistically divested two of our subsidiaries and use the proceeds to repay debt and strengthen our balance sheet.
Now in 2020, the pandemic has created market dislocations and our team has pivoted to a more aggressive acquisition strategy well peers have struggled to access the credit markets.
Our strong results in the third quarter and year to date period reflects the significant advantages of our model of owning a diverse set of niche market leading companies that serve a variety of end markets.
The benefits of diversification have never been more pronounced and reducing the volatility in our financial results and the addition of Baldwin Marucci only served to further enhance that diversification and the breadth of end markets or.
In addition to our capital allocation accomplishments over the past couple of years I'm also proud of the significant strides we have made in enhancing our management talent and up across our subsidiary companies.
During the third quarter, we promoted Jason frame to CEO of Ergobaby Jade.
Jason is a talented and experienced executive who has worked with coty for many years first in his capacity as CFO of Camelbak and most recently as CFO of Ergobaby.
Additionally, we announced that credit cards would be assuming the role of CEO of the Sterno group following Don Hinshaw. His planned retirement at the end of the year I want to thank Don for all his contributions to sterno and Coty over the years, we look forward to continuing to work with him in his capacity as a director of Sterno.
We have the utmost respect for both Craig and Jason and are highly confident that both will succeed in their new roles.
Our push to digitize our subsidiary businesses has further enhanced our financial results.
Across all of our businesses, we have been building, our digital presence and where possible reducing our reliance on physical infrastructure. The pandemic has created a seismic shift towards digitally enabled businesses and our strong performance. In 2020 is the culmination of a significant investment of time and resources over the past few.
Years to digitally transform our subsidiaries.
We remain focused on further modernizing our subsidiaries enhancing their and enhancing their digital capabilities as we believe the increased consumer demand for on time online retail will last long after the pandemic has been contained.
While our results exceeded our expectations in the third quarter, our subsidiary companies continue to see the impact of the ongoing pandemic certain of our companies have experienced the sudden decline in revenue due to strain on their end market, while others have experienced a large increase in demand that has caused stress throughout their supply chain and.
Across most of our subsidiaries, we struggled to hire additional human count capital I.
I would like to thank each of our subsidiary management teams for their exceptional service leadership and dedication during these challenging times.
Now turning to our financial results.
Consolidated subsidiary pro forma revenue for the third quarter increased by 3.9% to 419 million.
In consolidated pro forma adjusted EBITDA increased by 10% to 77 million.
Of our nine subsidiaries.
Six showed growth over prior year and virtually all of our companies exceeded our expectations.
And although we did not close on both technologies until after the third quarter also produced results that were ahead of our expectations.
Management estimates that bolus produced revenue and EBITDA growth of 20% and 67% respectively. During the third quarter and on a year to date basis revenue was flat and EBITDA is up 5%.
We generated $43.5 million of cash flow available for distribution and reinvestment, which we refer to as CAD. During the third quarter of 2020 as compared to $30.2 million of CAD in the third quarter of 2019.
This growth of 44% far exceeded our expectations. However, as Ryan will detail in his section our third quarter CAD was boosted by a cash tax reversal from the second quarter EPS velocity outdoor.
Even without this cash tax reversal, our CAD significantly exceeded our expectations on.
On a year to date basis, our cat of 74.7 million exceeded prior year to date up $74 million and covered our distribution payments to common shareholders of $68.3 million.
Turning to guidance.
Our outlook for the coming months continues to change every day due to the ongoing pandemic, which means continued uncertainty and limited visibility while continued shutdowns of certain areas of 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 them.
His ability into our expected performance.
Please note that our guidance includes both Maruti and Boa as if they were acquired on January Onest 2020.
For full year 2020, we anticipate pro forma adjusted consolidated subsidiary EBITDA of between $270 million and $280 million.
For comparison purposes, excluding Bala, we expect full year 2020 pro forma adjusted consolidated subsidiary EBITDA of between $240 million and $250 million as.
As compared to previous guidance of between $210 million and $240 million, reflecting an increase of $20 million at the midpoint or an improvement of 8.8%.
We anticipate a CAD payout ratio for the year of 100% to 90% a substantial improvement over previous guidance of 140% to 120%.
Notably, we now expect to cover our annual distribution notwithstanding the economic headwinds that exists due to the pandemic.
As Ryan will detail later in his section we are forecasting an increased amount of capital expenditures in the fourth quarter as many of our businesses have reduced their capital expenditure spend throughout the year, but now with improved performance are seeking to invest capital in areas that will strengthen their competitive positioning.
With that I will now turn the call over to Pat.
Thanks, Elias before I begin in our subsidiary results for the quarter, which exceeded our expectations I want to touch generally on the continued effect of the pandemic throughout our subsidiary companies.
Similar to last quarter, our branded consumer businesses continue to benefit from increased demand and outdoor categories and as a result experienced strong sales and earnings growth our niche industrial businesses also exceeded our expectations as a group those sales and earnings continued to face headwinds predominantly due to work stoppages and slowdowns.
And the aerospace and hospitality industries.
Now onto our subsidiary results for the quarter.
I'll begin with our niche industrial businesses.
Third quarter of 2020 revenues declined by 8.1% and EBITDA decreased by 18.3% over the comparable quarter in 2019.
For the year to date period.
Revenues declined by 9.1% and EBITDA decreased by 16.1% over the comparable period in 2019.
Advanced circuits continued its steady performance with EBITDA on the quarter growing 2.3% over prior year the.
The growth Capex investment, we made last year in a new facility in Chandler, Arizona continue to provide benefits as growth in this advanced manufacturing facility offset some weakness in sales of smaller orders typically associated with engineering students and hobbyists driven partially by school closures.
Arnold Magnetics EBITDA declined in the quarter from $4.4 million last year to $1.3 million in the current quarter.
Arnold's performance was impacted partially by severance and related charges as the company works to adjust its workforce to appropriately respond to the decreases in demand and its aerospace and oil and gas end markets.
As we touched on last quarter, we believe the longer term prospects for Arnold remains strong. However, some of the company's end markets will likely face continued challenges due to the effects of the pandemic and are unlikely to rebound fully in the near term.
Foam fabricators grew by 15.1% in the third quarter. The company benefited from the add on acquisition of Polyfoam Corporation at the beginning of the quarter foam Fabricators also experienced improved performance in its core business and both earnings and EPS pounds processed.
The Sterno group's EBITDA in the third quarter was down 27% from the year ago period.
Sterno performed better than our expectations in the quarter as the company's consumer business continued to experience elevated demand for its line of wax and essentially oil products.
For catering sales of chasing fuel and related products remain challenged we expect this segment to remain depressed for some time as large gatherings continue to be discouraged.
Sterno continues to develop its full line of hand sanitizer products, while sales of these newly introduced items in the third quarter declined sequentially due to significant inventory of product and supply chain. We remain encouraged by the prospects of this new market for sterno.
Now turning to our branded consumer businesses, which continue to benefit from ongoing consumer demand in our outdoor categories.
Our results are presented as if we own mucci from January Onest 2019. However, they do not include the results of Boa, which was acquired following the end of the quarter for.
For the quarter of 2020 pro forma revenues and adjusted EBITDA for these businesses increased by 15.2% and 42.3% respectively over the comparable quarter and 2019 significantly exceeding our expectations.
For the year to date period pro forma revenues and adjusted EBITDA increased by 7.8, and 17.7% respectively over the comparable period in 2019.
Ergo babies EBITDA was down 17% in the quarter from the year ago period, several large Asian distributor partners reduced or third quarter and fourth quarter orders due to excess inventory on hand, following pandemic related shutdowns in the second quarter, which negatively impacted or babies results end market demand and the most impacted Asian geographies recur.
Suffered somewhat in the third quarter, but they largely remain below year ago levels reduce distributor orders will remain a headwind for the remainder of the year negatively impacting the company's fourth quarter performance. However, we were encouraged by several planned new product introductions launching in the fourth quarter and were optimistic about the company's outlook and.
2021.
Liberty Safe EBITDA was up an impressive 96% and a third quarter from the year ago period significantly above our expectations end market demand online and at retailers remain strong for liberty's products and much of the Companys production capacity remains filled into the first quarter of 2021.
The management team and employees at Liberty continued to perform admirably as they work through the dual challenges of COVID-19 and significant increases in demand.
Marucci is revenue in the third quarter increased by 31% and EBITDA increased 81% as compared to the prior year period significantly surpassing our expectations the increase in revenues and profitability.
It was driven by the launch of Murray Energys, New Cat nine line of bats, and the gradual return of baseball during the quarter.
We are pleased by this is set by the success of the launch and believe it affirms the strength of the marucci brand and the quality of their products as.
As you May know in professional baseball resumed in the United States and had a successful regular and post season Youth baseball has returned at various levels and portions of the United States participation levels are not nearing those of 2019 and may not in the short term.
Velocity outdoors EBITDA increased substantially in the third quarter up 77% from the year ago period velocities performance was better than expected and continued consumer interest in outdoor activities drove added demand for all of the company's products. Despite challenges placed on the supply chain and production capacity manage.
Moment and the company's employees continue to adeptly handle heightened levels of demand. Despite velocities efforts retail channels remain low on inventory and we are working diligently to keep our wholesale partners in stock with adequate inventory levels. Finally, five elevens EBITDA was up 24% in the third quarter from the year ago period and.
Has increased 15% on a year to date basis. The company benefited from increased margins as a greater portion of its revenue was driven by DTC channels while.
While traffic and performance and the company's retail stores continue to face the impact of Tobin 19, operating restrictions 511 E. Commerce business continues to exceed our expectations. We believe that numerous macro trends are impacting the 511 consumer brand positively and that the company has even greater opportunities ahead with that I will turn.
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 third quarter of 2020, I want to highlight our third quarter distributions that were recently paid to shareholders.
On October 22nd 2020, we paid shareholders a cash distribution of 36 cents per common share representing a current yield of approximately 8.4%.
You notable highlights of our most recent common distribution.
One this marks our 58th quarter in a row that we have paid a distribution.
Since our 2006 IPO date, we have paid more than $20 per share in cumulative distributions.
Additionally, on Friday of this week, we will pay cash distributions of approximately 45 cents per share on our 7.25% series a preferred shares and approximately 49 cents per share on our seven and seven 8% series B and series C preferred shares all.
All three preferred distributions cover the period from and including July Thirtyth 2020 up to but excluding October Thirtyth 2020.
Moving to our consolidated financial results for the quarter ended September Thirtyth 2020, I will limit my comments largely to the overall results for our 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 September Thirtyth, 2020 was $418.9 million up 7.9% compared to $388.3 million for the prior year period. This year over year increase primarily reflects strong sales growth at our branded consumer subsidiaries flat for the outdoor.
At Liberty offset.
Offset by Sterno, and Arnold businesses, most impacted by the COVID-19 pandemic.
Consolidated net income for the quarter ended September Thirtyth 2020 was $20.9 million consolidated net loss for the prior year's third quarter was $26.5 million and included an impairment charge at velocity outdoor of $33.4 million.
CAD for the quarter ended September Thirtyth, 2020 was $43.5 million up 44% from $30.2 million in the prior year period.
Our cash that we generated during the quarter was significantly above our expectations, primarily due to our strong third quarter EBITDA increase as compared to prior year as.
As Elias highlighted the negative cash tax impact we had in the second quarter velocity outdoor reversed in the third quarter. Thus, we had no cash taxes at the consolidated level further contributing to our strong cash performance as we've mentioned many times in the past our cash taxes are extremely difficult to predict quarter to quarter. However, we are able to.
Do so more easily on an annual basis.
The factors impacting our CAD in the third quarter compared to the prior year includes slightly higher capex spend and higher preferred share distributions as a result of our series C issuance in November 2019.
As of September Thirtyth 2020, we had over $175 million in cash approximately $600 million available on our revolver and our leverage was below two times.
As you are aware, we closed on the Boa acquisition on October 16th to fund. This transaction, we used cash on hand at 300 million dollar drew.
Draw on our revolver and an investment by Boa minority shareholders of $61.5 million.
Pro forma for the Boa funding our balance sheet remains strong with a leverage at approximately 3.2 times.
Our revolver availability is approximately $300 million today, providing substantial liquidity and as previously communicated we have the ability to upsize our revolver capacity by an additional $250 million we.
We stand ready and able to provide our subsidiaries the financial support they need make distributions to our preferred and common shareholders as well as move on compelling investment opportunities in this dislocated market as they present themselves.
Turning now to capital expenditures.
During the third quarter of 2020, we incurred $3.8 million of maintenance capex of our existing businesses compared to $3.3 million in the prior year period.
During the third quarter of 2020, we continued to invest growth capital.
Spending $4.1 million in the quarter, primarily related to 511 long term growth objectives growth capex in the prior year quarter was $4.3 million.
Turning to our expectations for 2020.
As a reminder, our quarterly operating and 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 2020, I'd like to now provide guidance on capital expenditures and cash taxes.
For maintenance Capex, our estimate of spend for the full year of 2020, including Rucci and Boa from the date of acquisition is between $15 million and $18 million.
As Elias mentioned, our fourth quarter Capex spend is forecasted to be higher than original expectations. Many of our businesses are experiencing improved performance and are therefore investing capital in areas that will strengthen their competitive positioning.
For growth Capex, our estimate of spend for the full year of 2020 is between 13 million and $15 million primarily at 511.
For 2020 cash taxes, we expect full year cash taxes to be between 7.5% to eight and 5% of our subsidiaries total adjusted EBITDA.
This cash taxes percentage range is slightly higher than previous guidance given the outperformance at certain of our subsidiaries keep in mind. This percentage should be applied to full year 2020, total adjusted EBITDA and not quarterly as we experienced in Q2 and Q3 with velocity outdoor our cash taxes as a percentage of EBITDA can vary significantly.
In the quarter to quarter.
With that I will now turn the call back over to Elias.
Thank you Ryan.
I'd like to close by briefly discussing M&A activity and our go forward growth strategy.
As I mentioned earlier, we took steps in 2019 purpose to prepare for the unexpected.
Those decisions and our unique permanent capital structure have positioned us to not only weather the storm, but also proactively execute on our growth strategy. We continue to have the balance sheet strength to support our companies that they operate in.
These highly unusual type.
Our subsidiaries are leaders in their respective industries and are poised to gain additional market share in the months and years to come.
We will continue to seek both platform and add on acquisitions as we believe there are compelling opportunities for us to generate long term shareholder value during market dislocations like we are currently experiencing in addition, we will continue to invest in in their hands and enhance our subsidiary companies.
Competitive positioning which includes supporting them as they build and grow their digital transformation strategies.
Our differentiated strategy has set CODI apart for more than a decade and it remains consistent as we navigate the uncertainty ahead and position our diverse group of 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 MSG initiatives across our portfolio and creating long term shareholder value.
With that operator, please open up the lines for today.
Thanks.
Your first question is from the line of Larry So low.
Okay.
Great Good afternoon guys.
Congrats on a very nice.
Quarter.
Just a broad brush question that maybe I realize that you guys are.
A lot different industries, but clearly exited Q2 with a lot of momentum.
And some pent up demand.
As you exited Q3, it seems like a lot of industries are coming back.
There are some exceptions obviously.
Hotel business.
Catering itself not coming back anytime soon but it seems like a lot of things are coming back or normalizing even with coal.
Still out there obviously.
As you compare do you feel like you know.
Yes.
How do you feel like it was in Q3 versus Q2 do you feel even better than you did about the same.
Any way to sort of answer that in a broad brush.
Yes, Larry it's Elias and thank you for the question and good afternoon.
I would say you're right in Q2, we exited feeling pretty confident.
Clearly the caveat to what im about to say is the pandemic create such incredible on certainty that it's really hard to give guidance in any one day you may feel to prevent that you do the next day you know.
I would say today, we woke up to the markets down whatever 900 points in France going into a shut down and.
Germany, I guess, having modified shut down so you know there's clearly impacts that are outside of our control that being said I would say we feel similar to how we felt at the end of Q2 I mean the businesses.
Largely are running really well the same trends that existed coming out of Q2, I really mean remaining impacting Q3 outdoor continues to be a category that is being benefited significantly our industrial businesses that cater to certain end markets like foodservice and.
Aerospace Sterno and Arnold in particular are finding the same struggles so I would say those trends remain intact now clearly from quarter to quarter. Larry there can be unique things that happened. For example, we have the cat nine launch at Marucci, that's going to be a net positive when you have a new launch of something that is a two.
Your planned launch at the two year cycle. So we don't expect that kind of result to happen in the fourth quarter, but when you're talking about large trends I would say the trends that were here before continue to exist I think we're getting a little bit better at managing some of our supply chain issue.
Issues, where demand is suddenly boosted.
But we did want to call out the continuation of the problem of hiring additional human tap capital talent.
That problem continues, especially.
Some of the.
Manufacturing job level.
So that does put some capacity constraints on us the same way that it did after the second quarter.
Great.
Appreciate that color just a couple on the segment level the holding level just at 511.
Obviously, you guys did a.
Sadly kept sales flat in the quarter and obviously the regular general apparel industry I'm sure is still down significantly.
EBITDA actually grew 25% and I'm sure part of that as a shift to the online press.
Presence, but just maybe you can discuss it and I realize it's somewhat small numbers of $1 million, it's 15% of.
Growth, but that's still pretty commendable to grow EBITDA at 25% on a flat sales level.
Color on that more color.
Yes.
This is this is Pat I mean I'd say.
You hit the nail on the head with the.
You hit the nail on the head as you talked about the increasing margins that was a big driver of the growth honestly are companies are doing a good job controlling costs.
Encoded and 511 and disciplined certain of those costs as it relates to travel and entertainment are limited and that has a a net benefit and it's kind of a combination of those things I'd say, Larry if that makes sense.
Absolutely and then just on the new store openings I know you mentioned or I mentioned that the growth capital most of that's going to evolve 11.
I don't know if you want to give specific numbers, but.
Sort of tip been ticking up you know since I know in Q2 sort of obviously stopped temporarily.
On more opportunities with sort of the real estate environment not doing so well.
No we have.
I'm actually looking for it on the exact number but I don't want to Miss quoted.
And I don't have it here, but we have and will be little bit north of 70 stores 73 stores is our sort of view towards at the end of 2009, and 2020 versus sort of 61 and 2019, So we're finding opportunistically.
Good deals, we slowed down our growth a little bit this year, obviously as we've kind of halted it for a few months there, but opportunistically were looking for good deals and continue to grow and we're getting a hockey we remain the ROI and our return on these investments continues to be very high yes, Larry I would also just mention that in the quarter and expected going forward.
Continues to be a lot of technology investment that is growth capex, we categorize as growth Capex.
On line business, we've said is kind of growing rapidly so.
Circa was doubling for a big part of the year. It kind of continues with that trend and so to support that you really do need to create more robust.
Online more robust technology capabilities, but I would say an even broader than that part of it is supporting online, but part of it is supporting omni channel the ability to ship from store I think we're now up to and this is a small number but we went from zero to three stores that were able to ship from and we expect to be some.
Were north of 10 by the end of the year. So we're making progress against some of those initiatives. It does take a little bit as high but you have to invest in technology in advance of being able to do that and that really relieve some of the distribution and supply constraint problems that you know you're going to have from the main facility. It creates a lot of efficiency in the city.
So these are good long term growth initiatives that we continue to put in EPS, even beyond long term, there kind of near term and intermediate term growth initiatives, but we are making a significant amount of technology spend at 511 in particular that as part of that growth Capex in Q3.
Great I appreciate it thanks again.
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Okay.
Your next question is from the line of Kyle Joseph.
Hey, good afternoon guys.
Relations on another good quarter and thanks for taking my questions.
Brian just from a modeling perspective, and I know it sounds like and.
CAD won't be impacted by the by the tax Immaculate He talked about in the quarter and it sounds like it was really essentially moving part of CAD from the second quarter to the third quarter, but can you kind of can you quantify the benefit in the third quarter. Just so we can kind of get a framework for what.
Run rate catalyst event.
Sure sure. So so rough I'll give you kind of rough numbers, but in the second quarter, our cash taxes.
You know were higher which negatively affects CAD by about six and a half million dollars.
That and then in the third quarter that reversed, but not the full amount and therefore, we had a benefit to CAD of roughly $5 million. So when you think about it on a year to date basis, the cash taxes at velocity are appropriate given its taxable income and on a full year basis. It will too it was the nuance of gap that.
Created that large swing because they velocity has massively outperformed their budget is that helpful.
Thats perfect exactly what I need.
And yes, it's a good segue to my next.
So on velocity outdoor.
I think in your prepared remarks, you talked about last year at this point you had taken that an impairment charge on the business.
And to your point, it's massively outperforming their budget. So what's what's really two we then the recovery. There is at Covanta is it some of the management changes you guys made.
I guess the outlook for the.
Sustainability of that of that recovery.
Yes, so I think Kyle the.
Clearly the management changes were essential to the performance improvement that we've had.
Yeah. The team that we brought in here is performing at an exceptional level and I don't want to dismiss the challenges that happen when demand ramps up as quickly as it has the amount of challenges that our team has not only at velocity, but at other of our subsidiaries five.
11 Liberty.
You know it really is a lot you are talking about stressing your supply chain and stressing your.
Human capital.
Lot of overtime hours trying to hire and bring onboard new people. So there are a lot of challenges that this management team has been really adept at managing through.
So I would first and foremost say without them in the seat I don't know we would have performed nearly this well now the backdrop is there.
There is just a large increase in the amount of outdoor activity that is happening and a lot of people that have come back into the sport and so we think that is more that.
Is that all sustainable I don't know, let me no. One has a crystal ball I would say, we think its more sustainable than not I think we also are comparing to a period where results were very depressed and so we had two of our retail partners merged together that created incredible disruption.
For us as a supplier to them over 2018 and mostly over 2019. So that was a big issue. So now with that largely behind US we would have expected to see some type of pick up that was pretty substantial I would say on top of that we had a real effort to start to build.
Direct to consumer practice, which has lacked under prior leadership and those efforts are really gaining traction with very strong margins.
And so this is sort of the perfect time for us to be able to launch in there. So it's a culmination of a lot of things that are driving the results I would say, yes, and demand is up but I think our business is performing beyond just end demand being up because of some of those whether it be more.
Market changes.
Kind of our customers no longer having the headwind of merging together things of that that may have been one time more distorting negatively in 2019. So we think this is more sustainable and.
Going forward into fourth quarter as Pat had mentioned inventory at our retail channel partners is very low right now in fact, if anything it could be causing us some lost sales because we just don't have adequate product on the shelves, but I think that also bodes well for our performance as we look into fourth quarter and into two.
2021, just bringing our inventory levels back up to kind of normal levels and capturing sales that we may be missing right now.
Got it that's very helpful. And then one last one from me really just China.
Trying to gauge your appetite for.
Future acquisitions, whether they be platform or add on.
And sorry, two parts to this question first in terms of your your balance sheet.
Pharma the Boa closing in your it sounds like leverage is around that 3.2 times.
Area and then also in consideration.
Competition, you know I think its contact.
Fantastic you guys were able to complete two platform acquisitions when markets were really disrupted between.
Margin today, but from everything we track and we follow in terms of sponsor activity. It seems like things are are normalizing. So I guess first in terms of your own balance sheet, but also in terms of what seems to be.
Normalizing sponsor market out there your appetite for further acquisitions from here.
Yeah, I'm going to let Ryan speak to our balance sheet, which we feel very comfortable with and still have capacity, but I'll, let him speak to that let me address your second question, which is the sponsor activity and what we're seeing we were really quick to move and have the balance sheet strength in capital market access.
As you guys know and were able to close on routing in Bala and I would say that was when the markets were most disrupted I think it depends Kyle where you're looking right now so there are certain segments of the EPS.
In a market that are coming back and are coming back with real strength and then there are certain areas of them that continue to say really depressed and so I think it depends on where you are in the economy and how impacted your results were whether or not you're able to attract capital I think it depends on how big you are how deferred.
Good. So there is a lot of qualitative factors that are out there right now, but you are holistic statement of private equity is starting to become more active and as a result of that you know is our competitive advantage somewhat dissipating I would say the answer to that is yes, and so we feel good we put 700 million roughly whatever six.
Third and 54 million of.
Capital to work so far this year, we've achieved what our goals are I think if we were able to find some add on acquisitions to the nine platforms. We have right now that would be good accretive value enhancing ways for us to deploy capital.
I would say what we are seeing trading in the market right now in terms of new platforms doesn't seem overly interesting to us.
So we don't have I would say a pipeline that is quite as robust as what it was earlier in the year with.
With this high quality of opportunities, but things can change pretty quickly and again I'll go back to what I said when Larry EPS is first question you know the.
Pandemic is creating hi, heightened uncertainty and so what we may have heard over the last two weeks when people felt a vaccine was close or therapeutics were closed or the economy was going to stay open globally and start to regain theme that could actually change really quickly like it did today when we heard some European economies are artist.
Turning to close down you know Chicago, just had all indoor dining close so we're in a really fluid market right now and that and that definitely impacts M&A right confidence a buyer's impact that dramatically. So I think you're you're right PE is picking up we forecast that.
Private equity in 2021 will continue to increase in EPS activity level.
And we'll have to adjust and find good opportunities to deploy capital against that backdrop, Ryan you want to speak a little to our balance sheet capacity.
Yes sure.
Thanks, Les so as I said in my remarks.
Well and as you highlighted were roughly 3.2 times leveraged.
The financial policy, we've communicated last year that three and a half.
Is a comfortable area to be we're obviously below that so.
So feel very good about our leverage our performance continues to improve so.
So I think about that denominator as continuing decline, which should only help our leverage levels.
And in terms of liquidity, we've got 300 million available on the revolver, we still have the ability to upside that by $250 million. So plenty of plenty of liquidity to move on transactions, whether they be platform or add on acquisitions. So so feel like we're in a great great position balance sheet wise.
Got it. Thank you very much for taking all my questions.
Thanks, Kyle thanks. Thanks.
Your next question is from the line of Matt Koranda.
Hi, guys. Thanks.
Just wanted to cover a few segment questions. So first on Murray energy just wanted some help with the drivers of strength there in the quarter.
I know you guys mentioned about launch, which obviously it was probably pretty helpful. But just was there any pent up demand or like a shift from twoq into Threeq you.
No there is probably quite a bit of seasonality in the business.
We probably shouldn't pull forwards are 20% EBITDA margins.
Into the off season, but just wanted to get a sense for the drivers of strength and then how we should sort of be modeling.
Sort of the revenue cadence and seasonality in that business going forward for Q next year.
Yes, I mean cobot is changing a lot of the seasonality right and I would say, we're not 100% sure on how the seasonality will.
Move on this I would say was there a little bit of shift from.
Q2 into Q3, maybe a little but really the cat nine launch exceeded our expectations the market reception to it was very positive.
And that was one of the drivers obviously, we're not going to repeat the launch of that size.
This quarter, but that was one of the drivers license on that Matt ill, just say one thing about marunouchi because they think it when we acquired this business. It was that the depth of the pandemic and prior to that.
This was a business that was growing north of 20% annually on the revenue line and we know that is massively faster than what the market was growing and then everything shutdown and youth sports and in baseball and Marunouchi wasn't fair to that and I think there was some real concerns in Q2, but what we.
Had looked at and what we saw there was an extraordinary brand that had a lot of authenticity from the number of major League baseball players that we're swinging thereabout and how that translated into use sport category and the adoption and I think what Q3 is proven more so to us.
And as you mentioned could there be a little bit of seasonal shift here or there, yes, but I would say against the backdrop of the fact that you sports has fully reopened right in California were not even getting travel baseball anymore, which is the category where the company goes into so this.
This is a company that is a disruptor in its industry. It is an awesome brand. It has an exceptional management team. It's disrupting the sales channels by which it was able to deliver its product and that manifested in an incredibly successful product launch you don't really the best in the company's history. Despite this backdrop in so.
So we'll things shift a little bit here and there yes. The pandemic is going to do that it's curt to create really really weird seasonality 2020, probably in 2021, but I think what we'd like to do the.
The message out of this is one of the things that we saw in this business prior to the pandemic in which gave us the confidence to close this when we were right in the depths of the pandemic in the entire economy was shut down really shine through in Q3, and we couldn't be more excited to own this brand and what we believe is its future potential.
Makes a lot of sense. Thanks for that and then just one follow up on merger as well and obviously you guys have a lot of.
Institutional knowledge there on building, an omni channel business and 511.
What learnings can you take from 511, then apply to Maruishi in terms of the Omnichannel.
And more of a DTC approach merge it.
I would say and I'll, let Dave comment Dave do you have any comments, but they're ahead of where 511 was when we purchased 511 as a percentage of sales online kind of as they as they go to market online they've actually done a good job and we're just working to add.
Not surprisingly, we're just we're going to support them and augment them, we will be making an investment in its not the scale of the 511 investment, but we will be making investment late this year and early next year and some additional infrastructure to help them with that and Dave do you have any other comments on that front end of the only other thing I'd add is a couple other aspects that are of UBS.
Direct to consumer in addition to our web site.
They they have up.
Nice business in the in a rapidly growing business in the team sales and they have a.
What they call locker room, which is direct to consumer too.
James and then also small part of the business, but I think you have some exciting opportunities what they call clubhouse, which is kind of a.
Combination batting cage, but also you know retail experience, which is mostly on on a franchise basis, but those are the other components of DTC that.
We're excited about and we think of nice growth opportunities.
Very helpful. And then just if we can shift gears over to Boa.
Wanted to kind of cover one I mean, I know hasn't been that long, but how is the onboarding process spend since the close.
And then you guys referenced a really strong third quarter AFFO, which obviously isn't included in these results here, but wanted to get a sense for drivers of the 20% revenue growth and the 67 I think percent EBITDA growth that you guys referenced that though I mean very strong pull through what's creating that.
That margin expansion, if you will.
And the pull through that they're getting.
Yeah, we don't want to I want to be clear, we expect this business to grow.
When we have a good view of the adjacent season.
Both close and the ones that are a little bit further away over the next several years and we are confident that the business will be a strong grower for us there's a lumpiness to the business, however quarter to quarter month to month that drives some of that and that kind of drove Q3 over.
Q3 last year, you might see that in Q1 going.
Hopefully it won't be the purpose of that but you will see that in Q4, Q just some lumpiness, but the long term trends the trends we see in bookings the trends we see in platforms that were on and in products that were on in the market continue to be very positive. So that's just some lumpiness, but again a good solid growth consistent with the multiple we paid for it is expected and.
Can use to be expect as far as the Onboarding you're right. It is.
Relatively new into the deal but these are these are great people and this is a great team.
And the their positioning is just as kind of we thought it was in diligence and we're all getting to know each other and so far so good.
Great and then just one more if I can sneak one really quickly guys sorry for so many questions but.
On 511, Im curious just heading into holiday and winter.
There's been a lot of I guess industry commentary out there, saying that outerwear and some of the winter sports products are doing well I know these guys aren't squarely in that category, but I was just curious to get your sense heading into Fourq you sort of.
If they see a lift from sort of.
Increasing outerwear trends and adoption there.
And what are the margin implications, there and that type of scenario.
I can point you to a specific product I know we have some shoes that are coming out that are that are that people and some boots that people are very excited about I can't point to a specific outerwear product off the top of my head I do think 511, we'll continue to perform well in Q4, and I guess I wouldn't.
Whatever margin you have in the model I wouldnt necessary shipped on because of a of a push to outerwear or anything like that.
Gotcha, Okay, guys. Thanks, a lot I'll jump back in queue.
Your next question is from the line of Robert Dodd.
With Raymond James.
Hi, guys congrats.
Congratulations.
On the quota of pretty good it's a bit of an understatement.
On on your guidance, if I can I mean, you've talked a lot about uncertainty.
The full year guidance Weve narrowed the range pretty considerably announced a $10 million range only one quarter left to go obviously the last quarter. This $30 million range with two quarters stuff to go so I mean.
Is there anything to be that in the in the ULE.
Confidence in your ability to predict how these businesses are going to do over the fourth quarter kind of Christmas holiday season, et cetera, or maybe maybe sound a bit with velocity and liberty the revenue might be lost to already I mean, you you fully booked for Q that you just trying to fill the supply chains backups.
Can you give us any color on the drivers for why that range now what that says about confidence.
About predictability.
Yes.
Yes, I think Robert the and this is Elias the.
We did bring down the range part of the range coming that the narrowness of the range is just we have only one versus two quarters right. So.
Medical leave that should narrow somewhat we even brought it in a little bit more than that I think your observation that in certain of our businesses. We have revenue mostly booked in the in the fourth quarter and maybe even beyond.
That helps to get a better indication of where we're going to be running so I think when we looked at everything we just felt more comfortable that we were able to bring it down.
Ranged down I don't know that it necessarily means that there's any less uncertainty out there because uncertainty.
Is unfortunately high given that governments are making decisions that we have no control over Rick.
Regarding the reopening, but I would say just in general the other thing is we've seen how our companies are able to perform within a environment that has significant restrictions imposed on it and we talked about digital transformation in our company's I think it has been lost over the years.
How much we've invested in both time and capital and enabling our companies to be able to conduct digital business you know.
It may sound Crazy, but a company like advanced circuit.
Yeah, obviously have physical presence to produce their products, but virtually everything they do on the front end is done in a online capacity right and you go to someone like Liberty and you say, how do you deliver a 2000 pounds safe online and the fastest part of their growth by and I'm not talking about.
Little numbers by like order of magnitude the fast as part of their growth is an online deliveries and how they've been able to manage through that.
Just because it's a tough challenge doesn't mean that our companies don't have to solve it and so I think as we've been able to get more comfort with the way that our companies are able to operate in this environment and with the belief that now we're through October pretty much and the operating environment isn't changing or has.
Yet changed we'll see in November and December I think we just have a little bit more confident.
What I would say the decisions that can be made around co bid, which are outside of our control continue to be an overhang and thats likely been factored in or not likely that has been factored into the low end of our range.
Got it I appreciate that color. Thank you and I know I'm kind of leverage do we too is is is not the high end of that even the comfort level as Ron said two in half, but let's put means youre, maybe one solid add on acquisition.
Ways from being at the mid point has done a lot of being kind of a target we had half.
What would you say you will come if the M&A market does continue open up if you see some opportunities on the add on side, how high would you be willing to go in the short term.
Sure So let's have Andy.
Then tied to that Walt would fuel how would you like.
Who pool, if you do go above the unhappy things.
Down obviously, the third has been one of the tools historically, you've also sold businesses and lastly, the ROI and you can see this much higher than the auto I'd like now in new industrials.
So what would some of those b on the block or would that be something else that you'd consider maybe even just pausing and kind of go either at all into the less Mitchell can you can you.
Lenny.
Those kind of.
Question.
For me about how you would.
The the potential that leverage could meaningfully and how you would address that.
If it would happen lots and it's a bad thing it's just a question.
Yes, and I think you know rubber we try to keep in mind, where we are in a cycle with respect to our leverage and what our target Leverages and I think when we mentioned three and a half as being target leverage that's a good number that I would call a good mid cycle number for us like we all feel we probably are closer to a trough.
Right now in earnings than we are at a peak given where kind of the cycle. How it's played out so I think that right now.
Naturally we would have a slightly higher propensity to take on more leverage and maybe go above mid point, we have been up to four times at one point in our history and we were later in a cycle now I would tell you that didn't feel overly comfortable and we move pretty quickly to de leverage.
But you know Ryan made a great point earlier, which is the denominator is growing and we expect 2021 to show you know some solid growth again, we can't predict what's going to happen with the pandemic, but assuming that we start to get more containment of the pandemic theres nothing that would suggest that our.
Earnings are growing and as we talked about in our presentation around the bullet transaction. The businesses. We acquired this year and Boa and Murray energy have been additive to our growth profile. So I think as we've been able to add more growth and as we have more confidence that leverage will be coming down organically with.
Growth in EBITDA, it gives us more confidence and potentially going above three and a half times now would we go into the fours I don't think so thats not a comfortable zone for us, but we were in the kind of mid high threes I think given the growth that we're seeing in EBITDA and the fact that we now.
Now are creating any.
What I think is miraculous is the fact that we're in a pandemic and we're going through something we've never experienced before and yet we've now guided to be covering our distribution. So we're not using capital to support what our distribution is and with growth next year clearly that should only further to enhance our.
Cash flow production and so those factors lead me to be a little bit more confident in being able to bring up kind of our leverage to facilitate.
A couple of add ons, and maybe a meaningful size one.
To the extent, we were to de leverage and look for more capital because we saw opportunities out there I think you know and it's hard for us to rank order. These but I think you hit on them I mean, it goes to.
Sale of businesses and even though we are right now where we are in the cycle.
The truth is everything is available for sale, it's all about a matter of price. So if we're able to yield a value that we like in our company, we will divest them and we've shown you know a willingness to do that in the past preferred has been a great source of non dilutive capital to us I would tell you definitively with a $17 stock.
Comment is that part of our annual EPS something went terrifically wrong in the economy and earnings were falling apart, which we don't foresee but we feel we are still pretty significantly undervalued right now given the results that weve put up and so I think our common stock would have to appreciate pretty dramatically for us.
Think of that as a tool to use.
So really as we think of levers to pull it would be much more either on a divestiture or on issuance of preferred Ryan anything to add.
I think you hit on hit on everything there Elias I think I think all those points are are spot on so I've got nothing else. Thank you.
[music].
Okay I appreciate it.
I really appreciate the color. Thank you.
And congratulations on the timberland.
Thank you. It is we're very proud of that.
Yes.
Your last question is still on a very acute with bank of America.
Good afternoon, everyone and I reiterate kind of congrats on a.
Good quarter.
Following up on Kyle's question earlier.
CAD lives I think 43, and a half million dollars and I believe there was a 5 million dollar benefit from the velocity cash reversal say, so quote unquote normalized is more of a kind of the 38 and a half CAD run rate.
That being said were there any other kind of one time items or other noise to consider.
As we look at third quarter CAD.
Just given I think even 38 and a half million is a record number kind of despite the challenging backdrop.
Nothing else meaningful Derek this is Ryan it's really driven primarily by just really strong EBITDA performance.
Okay.
All right. Thank you very much.
Thank you there.
I will now turn the call over to Elias Sabo for any closing remarks.
Thank you operator, I'd like to take a moment to inform our shareholders analysts and capital providers that are investors that our investor day will be held virtually on December 10th well.
Well, we will be highlighting our most recent acquisition Boa and we'll have remarks from its CEO Sean level.
We will have a public announcement shortly but wanted everyone to mark their calendars.
In the meantime, we hope everyone heads out and picked up a pair of shoes with the bullet fit system and experiences first hand, its performance enhancing technology.
As always I'd 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.
And with that the call is over thank you operator.
Thank you that does conclude today's conference. Thank you for participating you may now disconnect.