Q4 2020 Compass Diversified Holdings Earnings Call
Okay.
Yeah.
Good afternoon, and welcome to accomplish diversified its fourth 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 and the number one on your Touchtone phone at this time I would like to turn the conference over to Matt Barkley.
Which I would think I G B group for introductions and the reading of the Safe Harbor statement. Please go ahead Sir.
Thank you and welcome to Compass diversified fourth quarter 2020 conference call, representing the company today, our lives day, Bocconi CEO, Ryan Buckingham <unk>, CFO and Pat Mozzarella D O all of Compass Group management.
Before we begin I would like to point out that the Q4, 'twenty 'twenty press release, including on 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 dot com.
Company also filed its form 10-K with the SEC 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 in the following discussions refer to adjusted EBITDA as reconciled to net income on the company's financial filings. The company does not provide a reconciliation of its full year expected 2021, adjusted EBITDA, our 'twenty 'twenty, one payout ratio because certain significant reconciling information is not available without unreasonable.
Throughout this call, we will refer to compass diversified as Tony 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 Coty and its subsidiaries words, such as believes expects plans projects and future or.
And similar expressions are intended to identify forward looking statements. These forward looking statements are subject to the inherent on inherent uncertainties in predicting future results and conditions.
Certain factors could cause actual results to differ on a material basis from those projected on these forward looking statements on some of these factors are numerous and the risk factor discussion in the form 10-K as filed with the SEC for the year ended December 31, 2020, as well as in other SEC filings in particular, the domestic and global economic environment.
<unk> is currently impacted by the COVID-19 pandemic.
As a significant impact on our subsidiary companies, except as required by law Cody undertakes no obligations to publicly update or revise any forward looking statements whether as a result of new information future events or otherwise at this time I would like to turn the call over to Elias Sabo.
Good afternoon.
Thank you all for your time and welcome to our fourth quarter earnings Conference call.
Before discussing our results I would like to take a brief moment to acknowledge the extraordinary efforts of our employees as we navigate it through the unprecedented challenges of COVID-19.
Despite working remotely for most of the past year, our employees executed at an extremely high level and delivered results foreign excess of our expectations.
During the year, we successfully completed two transformational acquisitions.
Debt and equity capital at attractive rates to solidify our balance sheet.
Appointed two Ceos at our subsidiary companies.
And produce financial results that not only exceeded our expectations, but also produced organic growth on a pro forma basis over 2019.
Most importantly, we were able to achieve these accomplishments without faltering on our unwavering commitment to our team prioritizing employee health and safety.
Despite the challenges brought on by the pandemic I am pleased to report that our fourth quarter results dramatically exceeded our expectations.
Including bolt in marucci as if we owned them from January one 2019.
Pro forma consolidated revenue grew by 11% and adjusted EBITDA grew by 9% over prior year's quarter.
For the full year ended December 31, 2020 pro forma consolidated revenue grew by two 5%.
And adjusted EBITDA grew by 2% over 2019.
With respect to our previous guidance range of 270 million to $280 million.
At our Investor day, we communicated that we expect it to be at the high end of the range. We are pleased to report that we significantly exceeded the high end of the range with consolidated pro forma adjusted subsidiary EBITDA of over $290 million.
These results are a testament to our strategy of acquiring industry, leading niche companies and.
Then actively managing them by working closely and supporting our subsidiary management teams to enhance value for our stakeholders.
Our subsidiary management teams moved swiftly upon the onset of COVID-19.
On a safe and healthy workplace for our associates, while taking the necessary actions to reduce discretionary costs.
As the impact of the pandemic started to become more apparent our management teams were nimble and reacting quickly to pivot and take advantage of opportunities in their respective markets.
As you know each coty subsidiary faced unique challenges with some experiencing large declines in end market demand, while others experienced rapid and on anticipated increases.
And environment. This volatile required skillful navigation by our teams and I'm extremely pleased to report that our subsidiary management teams and their employees delivered above and beyond.
Their tremendous efforts and continued focus during the 2020 during 2020 helped enable us to navigate the pandemic in a position of strength.
Although last year was difficult for everyone to endure the crisis highlighted the advantages of our permanent capital model as we execute our private equity like strategy.
Most private equity firms were largely sitting on the sidelines with limited access to capital.
We enjoyed open access to the capital markets as evidenced by our capital raise in May 2020.
With our balance sheet strong we were able to acquire two world class niche consumer businesses at attractive valuations very few others were able to make that same kind of impact on.
Our permanent capital business model is fundamentally advantaged against our peer set has we have the freedom to divest opportunistically like we did in 2019 with almost $1 billion in enterprise value in these divestitures.
And then aggressively deploy in times of market dislocation like we did in 2020 acquiring almost $700 million in new businesses.
As we've mentioned throughout the year, the acquisitions of <unk> and Boa have transformed our portfolio and raised our core growth rate substantially.
The performance of these businesses since our acquisition vividly demonstrates this growth leveraging marucci in the six months from July one 2020 to December 31, 2020, as compared to the same period last year has experienced approximately 20% revenue growth and 70%.
EBITDA growth.
Youth sports and various levels of restrictions around the country.
Similarly bullet experienced revenue growth of two 5% and EBITDA growth of 29% substantially above expectations for the fourth quarter and compared to the same period last year.
These two stellar companies possess all the attributes we look for in branded consumer acquisition candidates highly aspirational brands.
Premium product positioning and proven an extraordinarily talented leadership.
As I mentioned, our subsidiary management teams performed to their best this year and CEO, Kurt Ainsworth, Atmel, Rucci and Sean Neville at Boa, We're no different we have a strategy that has long proven that companies with characteristics like these will be positioned for accelerated growth for <unk>.
Years to come.
We enter 2021 with significant momentum at our back.
Our consumer businesses on a pro forma basis grew at a remarkable level of greater than 40% over the back half of 2020.
And early in 2021, we continue to see well above trend growth in this segment well.
Well, our industrial business has suffered in 2020 due to reduced end market demand. We believe our growth rate will turn back positive in this segment as soon as the second quarter with comparable quarters, becoming much easier.
For us to achieve this type of performance in a dislocated market highlights the substantial benefits of our diversification strategy and lowering our financial volatility.
Based on these trends for 2021, we expect to produce consolidated subsidiary adjusted EBITDA of between $305 million and $325 million representing growth of 5% to 12%.
And a payout ratio of between 80% and 70%.
Before turning the call over to Pat to review, our subsidiary result, I want to take a minute to discuss our strategy for 2021 and beyond.
We believe we have created a fundamentally better way to execute a private equity like strategy.
Core to that is our permanent capital structure, which allows us the freedom to acquire Opportunistically divest businesses without deference to timelines.
As management has proven over the past few years, we have the financial flexibility to act based on opportunities that arise relative to current market conditions and as you know our management is committed to staying in alignment with our stakeholders at all levels of our organization and its subsidiaries.
As evidenced by waiving millions of dollars in management fees over the past few years.
Oh, the utmost strategic importance is the relentless pursuit of a lower cost of capital over.
Over the past few years, we have made major strides in reducing our weighted average cost of capital by including preferred equity and unsecured bonds and our capital structure.
We believe there are numerous opportunities to continue to lower our cost of capital and further enhance our competitive advantage in the marketplace.
As Ryan will mention later in his section we will continue to evaluate the merits and risk of a potential change in our cap structure from a pass through entity to a C Corporation.
We're still too early on our evaluation process to provide insight. However, any decision will be predicated on our desire to achieve the lowest cost of capital possible for our shareholders. Because we believe that is what will deliver the greatest level of long term shareholder value.
With that I will now turn the call over to Paul.
Thanks Elias.
Before I begin on our subsidiary results I want to touch generally on the year.
Over the course of 2020 as well as during the fourth quarter, our branded consumer businesses benefited from an increased demand in outdoor categories and as a result experienced strong sales and earnings growth our niche industrial businesses exceeded our midyear expectations as a group those sales and earnings continue to face headwinds.
Driven by pandemic related travel slowdowns and uncertainty.
Now onto our subsidiary results I'll begin with our niche industrial businesses.
For the full year revenues declined by five 6% and EBITDA decreased by 18, 3% versus 2019.
For the fourth quarter of 2020 revenues increased by four 7% and EBITDA.
<unk> declined by 23, 8% versus the comparable period in 2019.
For the year revenue at advanced circuits declined by 3% and EBITDA by nine 1% versus 2019.
The fourth quarter was challenging for <unk> for advanced circuits as uncertainty surrounding defense budgets. Following the results of the presidential election caused a reduction in customer demand for circuit boards used in research and development projects we.
We have seen these trends stabilize somewhat beginning in the middle of January and the Companys bookings have shown considerable improvement in the period since then.
We anticipate Aci's result in 2021 will be in line with those in 2020.
Arnold Magnetics EBITDA declined to $9 3 million in 2020 as compared to $15 4 million in 2019 Arnold's performance for the year was with.
It was impacted partially by reduced activity in the aerospace and oil and gas related segments of the economy as well as severance and related charges associated with the decreased this decreased activity.
While revenue for the year declined by 17, 5% trade bookings were approximately flat as the company is benefiting from longer term defense related orders.
While headwinds in the aerospace market will continue in 2021, we do believe Arnold will show growth in revenue and EBITDA in the year as the effects of the pandemic begin to lift.
We recently rebranded foam fabricators is outdoor solutions to better reflect the company's diversified packaging platform.
Outdoor solutions grew EBITDA by six 8% in 2020. This is partially attributable to the performance in its core business and it's also attributable to benefits from the bolt on acquisition of Polyfoam Corporation Midway through the year, which has driven strong top line growth as demand for protective packaging and temperature management solution.
<unk> continued to increase we continue to see solid demand. It outsourced solutions in 2021 and are encouraged by the company's strong project pipeline.
The Sterno group's 2020, EBITDA declined by 27, 8% versus 2019 to $49 5 million demand for the company's core chasing fewer lines decreased significantly in the fourth quarter given the substantial reduction in holiday banquets and large gatherings. We expect this segment to slowly improve.
In mid to late 2021 as large portions of our population are vaccinated and business and leisure travel begin to show signs of recovery.
The company's consumer business continued to experience elevated demand for its line of wax and essential oil products. The product mix had a slightly negative impact on margins during the fourth quarter. We anticipate sterno has results in 2021 will be in line with 2020.
Now turning to our branded consumer businesses, which continue to benefit from ongoing consumer demand on outcome outdoor categories.
Our results are presented as if we owned Maruti and Boa from January one 2019 for the year revenue increased by nine 1% and EBITDA by 22, 1% versus 2019.
In 2020, our branded consumer businesses contributed over 60% of our pro forma consolidated subsidiary EBITDA and in the fourth quarter of 2020 EBITDA at these businesses increased by 42, 5%.
But it was full year 2020, EBITDA increased by 10, 3% on roughly flat revenue in the fourth quarter, but was EBITDA increased by 29% versus the comparable period in 2019 to $9 1 million exceeding our expectations.
<unk> experienced strong demand across several several of its categories and continues to innovate in partnership with its customers.
This quarter, we are excited by that we were excited by the publication of results stemming from the company's multi year research partnership with the University of Denver.
At least in this study showed meaningful improvements and agility and speed and those wearing shoes with the Tri panel or why rep full closures should performance improvements of between 3% to 9%. The study's findings were reported in multiple relevant publications. We remain impressed with the <unk> team on the company's technology applications and we are optimistic.
Mystic about the company's future.
Ergo Baby as 2020, EBITDA declined to $15 6 million versus $21 3 million in 2019 fourth quarter revenue and EBITDA were impacting impacted negatively as the company repurchased inventory of its Tula brand from an international distributor as the company refocus as that brand towards its historic direct to consumer routes.
International orders have returned to more normal pre pandemic levels for the first quarter of 2021, though further European or Asian, Lockdowns could have a negative impact.
<unk> launched its heirloom carrier in the fourth quarter and results exceeded our expectations. The heirloom is unique to the market from post consumer recycled polyester and demonstrates our commitment to sustainability Ergo has several additional product launches scheduled for the remainder of 2021, which we believe will have a meaningful impact on the company's performance.
And we will produce year over year revenue and EBITDA growth.
Liberty Safe EBITDA increased to 19 million in 2020 from $10 9 million in 2019 Liberty strong continued performance in the fourth quarter was driven by both dealer sales and sales for traditional big box customers and market demand as well as bookings remain robust in 2021 and much of the company's production capacity remained.
Spilled into the second quarter of this year.
<unk> finished 2020 with EBITDA of $13 8 million down just three 1% from 2019 revenue and EBITDA in the fourth quarter were up 12, 7% and 63, 8% respectively. As the company continues to benefit from the launch of its cat nine line of bats, strong sell throughs for its products and gains in shelf space.
At key accounts.
We believe that <unk> exceptional 2020 financial performance and a year that experienced reductions in stoppages of baseball seasons nation wide speaks to both the power of the brand and the quality of the company's leadership team and employees.
The first quarter of the year typically represents a seasonally larger portion of the company's revenue and EBITDA given channel partners are shipped goods in advance of spring baseball seasons. This year. We are confident that marucci is well positioned to in advance of the spring season, and we believe the company will benefit from what is expected to be a much more stable spring baseball season.
Velocity outdoor as EBITDA increased substantially in 2020 up 83, 2% from the year ago period philosophies performance was better than expected as investments made over the last several years came to fruition and continued consumer interest in outdoor activities drove demand for the company's products the challenges in part.
The company supply chain remain the velocity team continues to have definitely handled the heightened levels of demand and take market share current bookings in sell through at velocity remains strong for 2021, driven by growing participation rates and innovative new product introductions.
Finally, five eleven's full year EBITDA increased by 16, 5% in 2020 and by almost 20% in the fourth quarter versus Q4 19.
Despite reduced traffic in the Companys retail stores due to the pandemic five eleven's direct to consumer business as a whole significantly exceeded our expectations. In 2020. In addition, the company took significant steps in the fourth quarter to enhance its omni channel retail experience as it enabled ship from store capabilities and the vast majority of it 70 <unk>.
Three retail locations and shipped a significant portion of online orders from stores. During the holiday season, we continue to believe that the 511 brand resonates strongly with its customers and that the company is even greater opportunities ahead.
Before I turn the call over to Ryan I would once again, just like to recognize the extraordinary work of our subsidiary company management teams and all of our employees in 2020 last year created management challenges and obstacles that no. One could have envisioned 12 months ago throughout the year, our teams demonstrated skill leadership and Derby day.
Termination and we are proud to work with each of them I will now turn the call over to Ryan for his comments on our financial results.
Thank you Pat moving to our consolidated financial results for the quarter ended December 31 2020.
I will limit my comments largely to the overall results for our company since the individual subsidiary results are detailed on our form 10-K that was filed with the SEC earlier today.
On a consolidated basis revenue for the quarter ended December 31, 2020, with $474 8 million up 22, 7% compared to $387 million for the prior year period. This.
This year over year increase primarily reflects our acquisition of marucci and Boa during 2020 excluding.
Excluding these recent acquisitions, our revenue increased by more than 10% driven by strong sales growth at our branded consumer subsidiaries velocity outdoor 511, and liberty, which offset declines in sales at Arnold <unk> on ACI.
Consolidated net income for the quarter ended December 31, 2020 was $8 8 million compared to $5 4 million in the prior year.
CAD for the quarter ended December 31, 2020 was $36 million up 20% from $30 million in the prior year period, our CAD that we generated during the quarter was significantly above our expectations, primarily due to our strong fourth quarter EBITDA increase as compared to the prior year.
Other factors impacting our CAD in Q4 compared to the prior year include slightly lower capex spend and increase in cash taxes and higher preferred share distributions as a result of our series C issuance in November of 2019.
On a full year basis, our cash substantially exceeded our distribution.
Our payout ratio for fiscal year, 2020 was 82% and our CAD increased 6% over the prior year.
Turning to our balance sheet as of December 31, 2020, we had over $70 million in cash approximately $290 million available on our revolver and our leverage was three one times.
We have substantial liquidity and as previously communicated we have the ability to upsize, our revolver capacity by an additional $250 million.
We stand ready enable to provide our subsidiaries with the financial support they need invest in subsidiary growth opportunities as well as act on compelling investment opportunities as they present themselves.
Turning now to capital expenditures during the fourth quarter of 2020, we incurred $6 $7 million on maintenance capex of our existing businesses compared to $7 2 million in the prior year period.
During the fourth quarter of 2020, we continued to invest in growth capital spending $4 million in the quarter, primarily related to five eleven's long term growth objectives growth capex from the prior year quarter was $5 7 million.
Turning to our expectations for 2021.
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.
<unk> provided adjusted EBITDA guidance, and our payout ratio expectations for the full year of 2021, I'd like to now provide guidance on capex and cash taxes.
For maintenance Capex, our estimate of spend for the full year of 2021 is between 20 million and $25 million.
For growth Capex, our estimate of spend for the full year of 2021 is between $12 million and $16 million primarily at 511.
For cash taxes, we expect full year 2021 cash taxes to be approximately 9% of our subsidiaries total adjusted EBITDA.
As a reminder, our cash taxes as a percentage of EBITDA can vary significantly from quarter to quarter.
As Elias mentioned earlier, we are continuing to explore a change on our tax structure, including the possibility of electing to be taxed as a C Corporation, we are evaluating the cost and benefits of such a change as well as the implications of current and future tax law corporate law and potential impacts of such a change on our access to the capital markets distribute.
<unk> policy corporate debt ratings cost of capital amongst many other considerations, we will provide updates as appropriate as we move along on this process with that I will now turn the call back over to life.
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 prepare to prepare for the unexpected in 2020.
Those decisions and our unique permanent capital structure positioned us to not only weather the storm, but to also proactively execute on our growth strategy and a volatile year.
Heading into 2021, we continue to have the balance sheet strength to support our companies as they operate in these unpredictable conditions, we remain confident in our subsidiaries in the respective management teams as they have successfully pivoted their businesses as appropriate during the pandemic to maintain and even grow their market positions.
As we look to the future we are optimistic that our subsidiaries are well positioned to continue to gain additional market share and look forward to continuing to support the growth in the months and years to come.
As for Cody, we will continue to seek both platform and add on acquisitions as we believe that there are compelling opportunities for us to generate long term shareholder value given continued market dislocations in 2021.
In addition, we will continue to invest in and enhance our subsidiary company's competitive positioning which includes supporting them as they build and grow their digital transformation strategy.
Our differentiated strategy has set us apart from more than a decade.
And it remains consistent.
121, we remain intensely focused on executing our proven and disciplined acquisition strategy, improving our operating performance all of our companies Opportunistically divesting.
Enhancing our commitment to ESG initiatives across our portfolio and creating long term shareholder value.
With that operator, please open up the lines for questions and answers.
At this time I would like to remind you if you'd like to ask a question Star then the number one your first question.
Is from the line of Larry Solow with CJS Securities.
Great. Thanks, Good afternoon, guys and congratulations on a really good year.
Environment.
I guess first question just a couple on the on the subsidiaries themselves just on 511.
Good to see returning to growth on the quarter on the top line really impressive on the mall.
An improvement on the year I think it was up by 170 bps or so on revenue was relatively flat, maybe a couple percentage points, but.
Just trying to dive a little bit more into that is that driven more by me.
Mix more on online sales productivity gains or maybe a little bit.
Operating leverage on there what sort of driving that margin improvement.
Year over 15%.
Hey, Larry It's Elias and good afternoon, and thank you for your comments at the beginning.
With 511, and I would say what is broadly not being seen by the market as the.
Shift and the consumer and professional business as you know a few years back. This was predominantly a professional business today, it's migrated to be in North America more of a consumer business size wise the professional business have quite a few challenges globally.
You know there was a lot of the social unrest caused police and other law enforcement budgets.
To be reduced.
And so the pandemic has actually I think uniquely.
Cause the professional side to be down and that's masking the really extraordinary results on the consumer side. So as we've mix shifted more towards consumer clearly that has much higher gross margins and because we have such a direct presence most of our consumer is direct to consumer.
Margins are substantially better than they are at a wholesale business. So most of it I would say is due to mix shift I will say the company also did an extraordinary job of moving quickly to ratchet cost down.
The retail side of our consumer business experienced far lower traffic as a result of the pandemic. So the company did a great job of moving very quickly to retain profitability.
In the retail side and I would say just broadly because of the uncertainty the company did great at controlling spend now.
We'll say that there is.
A lot of opportunities for investment in this company. So as we look into 2021.
On the consumer business continues to grow really dramatically I would say, we would plan to bring back some of that expense not necessarily deleveraging.
The margins, but we would plan to bring back expenses at least in line with revenue growth.
There is some good opportunities to really enhance the company's growth rate over the long term.
And it does sound like you plan to maybe accelerate.
The slowdown of new store openings in 2020, although I think that did start to.
Pick up again on the back half, but with your commentary on the Capex, mostly going towards 511, I assume that's for new stores, yes.
Yes.
Remember with our new stores that has multi purpose one is clearly as a revenue.
Second is it really access of marketing in that trade region.
Third and most importantly, and Pat hit on this in his section. We now have more of a true omnichannel experience and we're able to ship from store, which we did a considerable amount of revenue from our E. Comm was actually shipped from our stores. So it opens up a lot of capacity. So it works so integrated Larry.
On a from an Omnichannel standpoint that we think it's important to continue with that.
Frankly with rents coming down the economic model is still very strong.
And so I would say our commitment to continuing to rollout the store network is as strong as it was pre pandemic.
Gotcha, Okay, and then just switching gears just on the on the.
The C structure conversation.
This often comes up and I know you guys are it's a continuous process and evaluation.
You got on some for compass.
Is there anything from a high level different this time around it does seem like perhaps maybe you are.
Not taking this more serious but maybe moving more towards a potential switch on structure.
Tax structures with tax laws changed at all perhaps under the Trump Trump administration didn't change other biden or something along those effects or anything that kind of maybe different this time around.
Yes, so I'm going to ask Ryan to give a little bit more on <unk>.
Detail, Larry, but I would just a kind of high level a couple of things one the Trump tax law was negative two partnerships.
And the tax law change there was just one.
<unk> of it and therefore, the differential between you know and this is still early in our analysis with a different from positive differential we had from being a pass through is really materially come down based on.
A provision on that tax law that has changed that's number one number two we would be looking at this really seriously anyway and as I said in my commentary. Our goal is to have the best cost of capital.
On the private equity peers that that is looking at the middle market.
On opportunities and we think that when we I always say to the guidance we're always looking at.
Where is the economic moat of a business and how can it continue be deepened we think one of the economic moats around our business is our weighted average cost of capital and it is materially lower now than what our peers are especially on a risk adjusted basis that look if youre going to have 90% leverage than your WAC is prop.
Lower but your chances of going out of business are pretty high and so when we've risk adjusted we think our WAC is really low we are continuing to look at all opportunities that we can lower our WAC and changing to a C Corp for tax purposes has the potential in our opinion to lower our cost of capital so its getting a really sick.
Areas of valuation now without Ryan maybe you can just touch a little bit more granularly, that's kind of how we're looking at this yes.
Yes sure.
Hi, Larry one other thing just on the on the taxes of course part of the consideration is.
<unk> administration, and what that does for taxes in the early preliminary analysis on that is there is it still.
Net neutral and that it's not that detrimental in terms of raising rates on corporate so I think thats kind of a positive sign but certainly it is early in the process. We believe we have the right partners assisting us in the analysis that we've talked about the tax impact on the what's the tax impact on shareholders, what's the tax impact on the corporate.
And that moves forward.
Whats the impact on our distribution policy, what's the timing of it.
And of course, what's the market impact of it and all of that with the line of sight on reducing cost of capital as sort of the Paramount strategic rationale so.
It's moving along it is a long process for sure and we want to make sure that were thorough in the analysis.
And just lastly, just on a quick follow up on that you mentioned a potential.
Change in the distribution policy can you maybe elaborate on that nominal.
Sure sure Larry I mean part of the analysis is trying to.
Consider what the tax impact across the system isn't today, our shareholders who are partners.
Pay the tax on our distribution. So our dollars 44 per year goes out to shareholder and a portion of that is the tax liability on.
The entity and if we were a C corp than the C Corp would now have the tax liability. So there has to be.
Some analysis around.
What makes sense in terms of our distribution policy and I think as Elias highlighted our core focus is on reducing our cost of capital. So we need to we need to think about what the distribution policy is going forward now that we assumed the tax liability and how that impacts our cost of capital. So that's kind of where we're at it's still early in that process.
But that is part of the analysis that we're working on.
Got it okay, great I appreciate that color. Thanks, Thanks again.
Sure. Thank you.
Your next question is from the line of Kyle Joseph with Jefferies.
Hey, Good afternoon, guys, let me Echo my congratulations on a very strong finish to a turbulent year.
I guess I'll start on from a high level perspective, just thinking about 2020 and even into 'twenty. One the proliferation of backs can you give us a sense for.
The potential impacts on your business, whether they're positive or negative.
Proliferation of Spacs.
Is it meeting we don't know how long this phenomenon on the last whether it's temporary or whatnot, but just kind of near term implications for the business.
Good afternoon to life.
I think the Spacs are generally not competitive for with us given what they are focused on now.
What we see is a lot of the high profile ones, but they're really geared much more towards early stage companies that want a public.
Mechanism by which they can go public so we're seeing the EV space the battery space for Evs.
The <unk>.
Space right like with Virgin Galactic and I think youre going to continue to see some of these companies that frankly, we would have no interest in.
Acquiring Val.
They are pre revenue in some cases, they're clearly free cash flow and so that doesn't really fit in our model generally lower middle market companies like work on acquiring are not ones that are.
Highly desired by the kind of spak.
Peter Group right now so we don't really see competition from stocks.
Firstly I would say, we don't really see spots is a great exit opportunity for a lot of our companies either because the dynamics of what they're looking for much earlier stage sort of much more disruptive type companies. So my view is it doesn't really have that large of an impact one way or another on us but your.
There is a broader point I think beyond spots, which is.
There is a lot of capital that continues to be in the market as we all know the federal reserve continues and central banks around the world continue to be very aggressive with monetary policy and that continues to push people to seek higher returns.
Out the risk curve ultimately, we sit at the end of the risk curve right and the private equity like space.
And so there is a lot of capital that's sitting there and you know there I would say the there are some opportunities that continue to be created because there are still dislocations in certain segments of the market.
Broadly, we see asset prices returning back in 2021 to where they were pre pandemic as you know the simple supply and demand of capital against assets, indicating that and you can still get access to relatively cheap debt capital in fact, maybe not relatively a historically.
Debt capital in many instances so the competitive dynamic not from stocks, but just from private equity.
Likely look more like it did pre pandemic right now.
Got it makes a lot of sense.
Then question for probably either Elias Ryan here.
Just on seasonality kind of a couple of years ago, we were accustomed to the first quarter being the lowest in terms of CAD, but obviously you had two portfolio sales in <unk>.
Portfolio acquisitions.
<unk>.
The portfolio has evolved and then 2020, you can obviously through any seasonality out the window, but just.
And then I think you guys alluded to Maruti, having are having kind of a strong first quarter. So just give us a sense for how the seasonality of the overall portfolio has evolved.
Yeah.
Ryan do you want to I'll kick it over to Ryan and let him talk about it but it's likely going to be less than what it's been historically largely because marucci does have their strongest earnings quarter in the first quarter, but Brian do you want to touch on that.
Sure Yes.
What <unk> said is spot on historically, our first quarter has been one of our lower cash flow generating quarters, and rucci, certainly offsets that given their business and the sell in ahead of the baseball season, So that'll help our first quarter overall.
And Boa traditionally doesn't have much seasonality there business can can be a little lumpy depending on when product.
Gets gets sold in so, but theres really hard it's hard to assess seasonality.
On that business right now and Youre right Covid, certainly skews things a lot this year.
Just just given as you say you can throw it out the window. So I think.
Thousand 21, maybe the back half may may normalize a little bit.
First half.
Could have some benefit to.
Overall results because of Covid ending.
It's.
Hard to read that now, but by and large as we go forward thinking 2022, the business will be less seasonal overall.
Okay.
One one last one from me apologies if I missed it in your cash.
Commentary that minus where leverage closed the year out.
And how that would trend through 'twenty, one ex incremental acquisitions in and give us a context of where that is in your overall target leverage on.
Yes sure. So it's just under three one times at the end of the year.
So that is in line with our financial policy.
And it's a comfortable place for us to be.
Good news is we as we exited 2020, we had a very high free cash flow year.
And we were able to organically delever as we exited the year on as we look at 2020 ones.
Expected performance again, assuming no acquisitions or divestitures, we will have organic delevering occur with that free cash flow generation. So it's it's certainly starting to harm I'd say given that we now have 10 businesses and we've got more core growth occurring in the portfolio. So.
We should definitely reap the benefit on a leverage standpoint, as we exit 2021.
Got it very helpful. Thanks for taking my questions and congrats again on a very good year.
Thank you Karl Thanks Karl.
Yes.
Your next question is from the line of Cris Kennedy with William Blair.
Hey, guys. Thanks for taking the questions and congrats on navigating a difficult time.
I just wanted to dig in a little bit more on the momentum and velocity is there a way to parse out kind of the internal initiatives versus kind of a macro tailwind towards outdoor thank you.
Pat.
Yes. Thanks.
I think the short answer is no.
But we see we do see we are seeing shelf space gains we're seeing.
A great reaction to our product introductions and.
And so we think we are taking market share. We believe strongly that we are outpacing the market, but other than that we can't pull it apart.
Quantitatively.
Understood and then just a broader question on the.
I think it by us at the Investor Day, you kind of talked about potentially looking into new verticals, whether it be healthcare fintech or something to that effect.
Can you just go a little bit more into that would be great. Thanks, a lot guys.
Yeah. So we continue.
It really gets back to sort of a strategic look of our business and as our cost of capital continues to come down and our competitive advantages continue to grow.
The business is poised for a good.
On a growth spurt here going forward.
We've been developing our human capital internally.
I think our team right now is operating at a level that frankly is better than we've had in any year and look it's evidenced by what we did last year right. A couple of acquisitions a couple of CEO transition that we completed.
Doing some capital raising.
Those are all really positive and the financial results. We delivered I think are a testament to the entire group at the manager who all performed at such an extraordinary level now that all being said, we look at a lot of the stars aligning for growth, but we don't have core expertise in some additional verticals and so our ability.
80 to enter into new verticals is really predicated on us finding the right human capital and bringing that onboard.
I mentioned at our Investor Day don't expect this to be something that is kind of a near term 2021 objective that we can execute against it may be if we found the right person my personal guess is it longer than that because we're going to want to build around some talent that we bring into the organization.
Innovation. So we continue to recruit and get really high caliber individuals that are coming into the firm and really all pleased I think together Chris in terms of.
We look at our kind of growth mandate going forward, but entering into new verticals without bringing in some talent that has that domain expertise, we think would be.
Too risky and so we're going to just be more patient wait until we find the right person, we will clearly announce that when we do to the marketplace and then from there. There's some length of time until we would be active in that space, but that's sort of the sequencing of it I would again reiterate I wouldn't consider that a near term.
<unk> objective, we would be fortunate if it is but I don't think it's kind of near term that we can execute against that.
Great. Thanks, a lot guys take care.
Your next question is from the line of Matt Koranda with Roth capital partner.
Stepping on for Matt.
Just wanted to talk on pack Baluchi and velocities EBIT margins a little more.
Those are pretty outstanding just wanted to see if you could talk more to what drove up I'm going to ask Pat to comment on both maruti and velocity for Ya.
Yes, I would say if you kind of look annually.
We definitely had some reduced costs I would look to be investing in both those businesses.
The opportunities in both those businesses are.
Plentiful Aldo.
Although being said I don't see EBITDA margins progressing significantly.
Either of them.
Got it Thats helpful.
Just to wrap up.
So with force.
<unk> solutions.
Know that you guys are distributed across like a dozen plus.
<unk>, just any concerns with the weather not because of weather and being able to get the raw materials.
Sure so.
Broadly speaking.
Several of our plants were down for brief periods.
They are now all back up and functioning.
At or close to full capacity.
As it relates to raw materials, we're looking kind of through the supply chain back to sort of core styrene prices there are some disruptions.
We believe we're in a good position versus our competitors, we believe any disruption will be.
Somewhat minor and as you know we have price pass through mechanisms with a lot of our customers as well. So we don't see any shortages there may be raw material increases because of the disruptions, which we think will be able to handle them.
Hey, Thanks, guys.
Thank you.
Your next question is from the line of I'm, sorry, if I Mispronounced your last name, Matt <unk> with Raymond James.
Hey, all afternoon, and thanks for taking my questions just wanted to follow up if I can.
Any color you can give on where valuations are sitting now versus kind of pre COVID-19 levels and then how are you thinking about positioning in 2021, whether thats net buyer net neutral or net seller on things.
Yes, I'm going to let Pat just touch on valuations because he seeing companies within the market on a daily basis, I would say with respect to our view on 2021.
Little hard to tell whether it will be a net divestiture or not kind.
Kind of Investor here I would say over the next couple of years, because we believe we're at the beginning parts of the cycle.
Being in that Investor is likely where we would like to be.
Although as you know along the way, we're always open to opportunistic divestitures and so whatever the market kind of gives US is what we look at taking advantage of it for our shareholders.
It's hard for US, we don't really don't comment on whether we're going to divest the business or were going to acquire a business but.
But I would say in general we're probably looking to.
Being net investors over the next couple of years past any commentary on what Youre seeing in.
On asset valuations, both from an absolute standpoint on a multiple basis.
Yeah, I mean, I'd say the.
We are back to pre pandemic levels.
If not above them.
Our challenge some businesses have been sort of there's been a change in consumer patterns that have permanently changed.
The way consumers operating work because of Covid and so you can kind of capitalize those earnings other times. There is things that you have to look forward to see whats. The 2021, 2022, EBITDA really going to be like before you put on multiples and that sort of the process that I would say the market is going through right now if that makes sense, but in a sort of.
Vacuum average multiples are backup sort of above pre pandemic levels and then then it gets into the minutia of business to business.
Great Thats it from me I appreciate the time.
Thank you.
I would now like to turn the call back over to Elias for closing remarks.
Great well. Thank you operator as always I'd like to thank everyone again for joining us on today's call and for your continued interest income.
We look forward to sharing our progress with you in the future.
That concludes our call. Thank you.
That does conclude today's conference. Thank you for participating you may now disconnect.
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