Q2 2021 Compass Diversified Holdings Earnings Call

So a lot of inventory and into our cost of goods sold.

These extraordinary conditions are creating a backdrop where subsidiary like many others are raising prices in order to combat rising inflationary pressures.

Emerging from the pandemic has created a fluid environment that makes forecasting future.

For results more difficult than in past periods.

Amongst the difficulties or uncertainty over demand pattern changes.

Fly shortages labor tightness and inflationary pressures.

That said in light of our extraordinary first half results and our expectations for the balance of the year, we now expect to produce full.

Year 2021, consolidated subsidiary adjusted EBITDA of between $350 million and $370 million.

Which includes Liberty.

Representing growth of 20% to 27% from prior year.

And a payout ratio.

<unk> of between 65% and 55%.

Based on her historic distribution rate of 36 cents.

Per share each quarter.

If we exclude liberty's adjusted EBITDA from our 2021 full year estimate as the sale of is anticipated to close in on.

August we would expect to produce between $325 million and 345 billion of consolidated subsidiary of adjusted EBITDA.

I would also like to note that our guidance incorporates 1 time expenses and write offs.

Sterno of up to $5 million in.

Council of 2021 as the company exit of low margin product lines.

As a reminder, we do not add back of extraordinary costs in our results.

Excluding this charge and with the economic recovery underway. We believe the company will continue to show positive comparisons in the back.

Back half of the year.

Before turning the call over to Pat to review our subsidiary results I would like to take a minute to discuss our ongoing ESG efforts.

Tony is deeply committed to maintaining responsible investment practices that position our businesses and our firm for long term success and.

Positively impacts of the world around them.

I am proud to report that during the second quarter, we became a sponsoring member of U S debt.

The forum for sustainable and responsible and back to.

U S. <unk> is the leading voice and advancing sustainable and impact investing across the.

Out of that client.

We believe joining the U S.

<unk> is our commitment and we look forward to being an active participant in the for us.

Also during the second quarter of 2021, we added 2 independent board members to Boeing's Board of directors, while last year, we added 2 independent board members to merge.

<unk> Board solidifying our commitment to good corporate governance, both of the Coty and the subsidiary level with that I will now turn the call over the past.

Thanks Elias.

Before I begin on our subsidiary results I wanted to talk generally about the quarter.

We believe on branded consumer.

Paul has remained very well positioned to benefit from the changing consumer landscape.

Each of these businesses exceeded our expectations in the quarter as.

As the group our niche industrial businesses also performed above expectations with.

With that said I also want to reinforce that Elias said about.

How about today's dynamic environment, all kind of our subsidiary.

The areas experienced significant increases in cost in the quarter and many of them face supply chain disruptions or management teams showed tremendous skill and adjusting on a real time basis to the fluid conditions and they once again affirmed the strong confidence we have in them.

Now on to our subsidiary results I'll begin with our niche industrial businesses.

For the second quarter of 2021 revenue increased by 24, 1% and EBITDA increased by 18, 4% versus the second quarter of 2020.

On a year to date basis revenues increased by 13, 6% and EBITDA increased by 10% versus 2020.

For the year to date peer.

Revenue at advanced circuits was approximately flat and EBITDA declined by 3.4% as compared to the first 6 months of 2020.

Once again in this quarter bookings outpaced billing and ACI is built up considerable backlog due to part shortages, mostly at the assembly business.

Arnold Magnetics revenue increased by.

Period, 8% and EBITDA increased by 47, 2% to $9.8 million in the first 6 months of the year. The increase was driven by several factors, including increased sales for aerospace and defense related customers associated with large orders received in 2020 higher gross profit margins associated with positive mix and the acquisition.

<unk>, which was completed on March 1st of this year.

Arnold met our expectations for the quarter. Despite order volume in the Companys Aerospace segment, not yet returned to pre pandemic levels.

As the market as this market segment normalizes in the remainder of 2021, we expect the Arnold's performance will material outpaced materially outpace.

Of ramp of weaker back half of 2020.

Outdoor solutions grew revenue by 48, 6% and EBITDA grew by 12% in the year to date June 22021 period as compared to the same period in 2020.

As we forecasted last quarter margins were under pressure in the second quarter due to.

2 significant increases in the company's core raw material.

In addition margins continue to be impacted by the acquisition of Polyfoam in Q3, 2020, which carry lower margins, we expect margins to improve for outdoor for the remainder of the year and the as.

As the company is able to contractually pass through a substantial portion.

Based on material price increases we also expect performance improvement measures of Polyfoam for progress following the pandemic related delays.

The sterno group's year to date revenue and EBITDA increased by 3.9% and 5.8% respectively versus year to date 2020.

Demand for the company's core chasing fewer lines.

<unk> continued to increase sequentially of travel and events slowly returned to normal.

The improving significantly the company has not yet seeing foodservice demand of pre pandemic levels demand for sterno is consumer products remain solid and the company continues to see strong demand for its line of <unk>.

Lack of an essential.

I'm just products as Elias mentioned in Q3, and Q4, we will have restructuring expenses totaling $4 to $5 million of sterno as the company exits of lower margin product lines. Excluding these expenses. We believe sterno will continue to show positive comparisons in the back half of the year absent new pandemic related mandates being put in place.

The loyalty now turning to our branded consumer businesses, which as of the group experienced another exceptional quarter on.

Our results are presented as if we owned the <unk> from January 1.2020 for.

For the quarter each of our 6 branded consumer businesses exceeded our expectations and experienced significant growth as the group year to.

<unk> revenues increased by 38, 7% and EBITDA increased by 93% versus the year to day period in 2020.

Both of US year to date revenue increased by 57, 8% versus the comparable period in 2020, EBITDA more than doubled to $32.2 million versus the comparable period in 2020 exceeding our.

Our expectations, but we'll.

<unk> experienced strong demand across most of its categories led by cycling workwear and snowboard customers. In addition, the Companys partners partners and trail running launched several new innovative products during the quarter, which were met with the excitement in the market.

We continue to believe that some portion of Boe of exceptional growth.

To date of <unk> from brand partners ordering ahead of supply chain constraints of shows associated with slowdowns in global shipping.

We believe the company will perform well and continue to grow in the back half of 2021, but we do not expect the same level of explosive growth that we have experienced year to date.

Both growth so far under our ownership has been exceptional.

While the company is not immune from supply chain challenges and delays, particularly given their growth management is definitely working through these issues.

We are working well with the team of thought at all levels and are pleased to have developed a strong trust and solid relationships. We are excited about the company's future and are proud to be partners of the team.

First of all babies year to date 2021, EBITDA increased to $11.1 million versus $8.9 million of net year to date period of 2020 on increase of 24, 1% the.

The company has experienced strong demand for its omni breed carrier, which we started shipping in the first quarter of this year as well as strong sales generally on line.

We feel like the company has achieved an inflection point in performance and remain optimistic about herbal babies prospects in the back half of 2021.

That said Ergo baby is 1 of our most global businesses and as such continued lockdowns in a number of countries could impacted growth in the remainder of the year.

Liberty safe the year to date revenue.

They're not increased by 31 for 66, 5%, respectively compared with the prior year to date period as Elias mentioned, we have entered into a definitive agreement to divest of Liberty safe, which we expect to close on August and I would just like to take this moment to personally thank the employees and management team of the company for over a decade of partnership.

And EBITDA rucci had another strong quarter that exceeded expectations.

Important to note. However that comparison benefited from a severely impacted second quarter of 2020 on team sports were almost completely halted due to the pandemic.

Revenue in the year to day period grew by 120% and EBITDA increased dramatically to $17.7.

Versus $3.2 million in the prior year to day period.

<unk> did have certain operational inefficiencies this quarter and we expect margins to improve from second quarter levels in the back half of the year.

The third quarter represents a tough comparable for the company at Q3.2020 represented an opening up of team sports.

And the company launched the highly successful cat 9 line of that.

That being said, we believe the company and its brand are on solid footing and we will have a strong back half of 2021.

Of note I would like to mention that this last weekend represented of the return of the <unk> World series, and which of 120 Premier Youth baseball teams traveled to.

Louisiana to compete on Plainfield throughout the state.

We are excited that this events return following the pandemic.

By all accounts it was a tremendous occasion the signal a strong return for use baseball following of cancels.

The last day outdoors EBITDA increased significantly in the first half of 2021 of $136.7.

The $24.8 million.

Velocity performance surpassed our elevated expectations as consumer interest in outdoor activities continues to be strong and drove demand for their products.

Bookings in the quarter were higher than they were in the second quarter of 2020.

Despite the company, having a very strong quarter of year ago and backlog.

7 for close to record levels.

While we are not certain to what degree of the pandemic permanently shifted consumer behavior towards the outdoor activities. We do believe that velocity captured significant market share in both of the 2 main segments over the last 18 months. The challenges continue and part of the company supply chain and they are not immune to commodity price increases we bill.

The velocity will have a solid back half of 2021.

Finally, 5 elevens year to date EBITDA increased by 41, 7% versus year to day 2020, and revenue grew by 14, 4% over the same period.

As a reminder, due to the process we have initiated at 511 I won't be delving further into the specific.

FX of 511 performance 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 June 32021, I will limit my comments largely to the overall results for Cody since the individual subsidiary results.

<unk> are detailed in our form 10-Q that was filed with the SEC earlier today.

On a consolidated basis revenue for the quarter ended June 32021 was $487.4 million up 46, 1% compared to $333.6 million for the prior year period.

This year over year.

It's.

Primarily reflects our acquisition of BOE of during 2020 net.

In addition, we had strong sales growth at of branded consumer subsidiaries and our niche industrial businesses on the combined basis.

Consolidated net loss for the quarter ended June 32021 was $11.3 million compared to $7.4 million.

In the prior year the.

The increase in net loss was due to a $33.3 million loss on debt extinguishment recorded during the second quarter of 2021 as the result of our bond refinancing cash.

Flow available for distribution and reinvestment or CAD for the quarter ended June 32021 was for.

The increase $6 million almost 3.5 times the prior year period of $13.5 million or CAD that we generated during the quarter was significantly above our expectations almost doubled our distribution and was the highest quarterly CAD we've ever generated the.

The increase was primarily due to the outstanding performance at our most recent the recent acquisition.

<unk> for Ritchie and Bella as well as continued strong performance at virtually all of our consumer and industrial businesses.

Other factors impacting our cat on the second quarter compared to the prior year include slightly higher capex spend and increase in cash taxes higher management fees as a result of our waiver and the second quarter of last.

Last year and higher interest expense.

Turning to our balance sheet as of June 32021, we had over $100 million in cash approximately $600 million available on our revolver and our leverage was approximately 2.6 times.

We have substantial liquidity and as previously communicated we have the ability to upsize.

1 of our 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 and act on compelling investment opportunities as they present themselves.

Turning now to capital expenditures during the second quarter of 2021, we incurred.

Our reported $1 million of maintenance capex of our existing businesses compared to $3.3 million in the prior year period. The increase was primarily a result of the need for increased maintenance spend at many of our subsidiaries to keep up with elevated demand levels.

During the second quarter of 2021, we continued to invest in growth capital spending.

$64.1 million in the quarter, primarily related to 5 eleven's long term growth objectives growth capex from the prior year quarter was $3.1 million.

Turning now to an update on our tax reclassification process as we've mentioned on prior calls and Elias referenced earlier, we are pursuing a potential change on our tax classification.

On June 23, 2021, we issued a definitive proxy statement requesting shareholder approval to amend our governing documents to allow the trust to check the box to elect to be treated as a corporation for U S. Federal income tax purposes.

The shareholder meeting will be held on August <unk> 2021.

The.

Spending star approve we anticipate that our board of directors will cause the trust to elect to be treated as a corporation for U S. Federal income tax purposes effective late in the third quarter of 2021 or early in the fourth quarter of 2021.

We will provide an update on the results of the shareholder meeting as soon as reasonably.

The amendment of article.

Following the conclusion of the August 3rd meeting.

Please refer to the definitive proxy statement filed with the SEC on June 23, 2021 for additional information related to the potential tax reclassifications.

With that I will now turn the call back over to the lives.

Thank you Ryan.

The blue for I would like to close by briefly discussing M&A activity and our go forward growth strategy.

In 2020, we took advantage of market conditions and acquired 2 outstanding platform company with exceptional growth prospects.

And early in 2021, we consummated an add on for our hurdle from Citi.

As we stand today market conditions have changed rapidly.

Asset prices have appreciated materially driven by an increase in M&A activity stemming from an abundance of equity capital coupled with strong availability of debt capital.

Despite the frothy market <unk> remains well positioned to succeed our true.

Capital structure allows us to be flexible and take advantage of market conditions.

In addition, the dramatic reduction on our cost of capital over the past few years allows us to be selectively aggressive on acquisition opportunities that we deem have potential to enhance shareholder returns.

Going forward.

The minute continue to invest in and enhance our subsidiary company's competitive positioning.

Each include supporting them as they build and grow their digital transformation strategy.

Our differentiated strategy has set us apart for more than a decade and it remains consistent in.

In 2021, we will continue to be intensely.

We will focus on executing our proven and disciplined acquisition strategy.

Improving the operating performance of our companies.

Enhancing our commitment to ESG initiatives across our portfolio and creating long term shareholder value with that operator. Please open the lines for Q&A.

If you would like to ask a question. Please press star followed by 1 on your touch campaign now if you change your mind is followed by <unk>.

All of SaaS question comes from Larry Solow from CJS Securities. Your line of please go ahead.

Great. Good afternoon, guys. Thanks for taking the questions a lot of Pops.

Perhaps just the general question kind of a leading the kind of given the lead on year on year on.

On closing commentary just in terms of the the.

Pending reclassification of Mcclatchy classification.

Yes.

What do you see as sort of the advantages or.

2.2 of that switch beyond sort of the the obvious.

The increase the target Investor base.

Lowering the cost of capital so does that perhaps make you more aggressive.

In the future.

<unk> growth strategy, maybe try to make is probably the bigger with the.

The access to lower cost of.

You can try to discuss that for a high level of any potential changes there and any potential changes on the capital structure on even thought.

For that would be great.

Sure and thanks, Larry for the question and nice to talk to you. This afternoon.

So when we embarked on.

On this process and started reviewing the entire tax reclassification you know obviously the first thing that we had to you know the look.

Look through was Holistically is there going to be a bigger tax burden as a result of the theyre not Fortunately based on sort of tax law changes from 2017, we found that the tax.

Burden was you know the same holistically, rather we were a C corp taxpayer for a pass through so you know the principal benefit of being able to do this as you've identified is it really opens up the aperture of the number of investors that can access our company E.

E T asked are largely.

<unk> is unable to given the pass through characteristic of the K 1 day.

Unreleased bid the taxable income that we create you know theres a lot of retirement accounts and frankly more and more institutional potential owners are choosing not to invest and pass through type.

The entity so you know.

Without having a negative from a tax standpoint, but getting the benefit of having additional shareholders.

As we've talked to investors about the during the proxy.

It's sort of a no brainer, it's all benefit without kind of any cost associated with it I.

True.

Secondary and tertiary benefits Larry that works for them right. Now I think you know we would like to move you know eventually towards the concept of an adjusted EPS and away from probably CAD there'll be an overlap period, so that we get comparability because we want this to be.

I think the really transparent, but I think that helped with a few things.

Owning public company like we did with 5 years ago as you remember 1 of the challenges with cat is because we weren't getting the cash flow from a public company. It really put a lot of pressure on the sell that asset and redeploy it into something that got.

On a cash flow going forward as we migrate more of.

Adjusted EPS, which is I think also more easily understood and digested by the eventual community. So that's the rate that same price.

Now to your question about kind of of our growth initiatives and we've been very transparent in saying we think.

Complete company operate better as a bigger entity, we think that in the net.

Kind of 7 to 10 years, this should be $1 billion, EBITDA company and being able to get there and we're not going to get there only through organic growth and through use of that capital.

Clearly, we don't have that kind of leverage.

The the nor would we want to take that kind of risk that we will need access the equity capital and we think this helps to provide significantly greater depth to the equity capital markets that we otherwise wouldn't have had and of partnership structure.

And kind of.

The great answer.

Switching gears real fast and actually of <unk>.

Question on on the can I ask you about labor availability and supply chain issue, but if you can touch on that.

Pretty extensively.

Kind of in the sort of your guidance.

<unk>.

It appears like you're certainly you raise your outlook for the year of it looks like the most of the raise I know you don't guide for the quarter.

The ability of it looks like most of the raises for the beat in the quarter.

The difference from your expectations and without getting into specifics of that sort of.

Am I on the right ballpark there on the kind of holding the line in the back half of the year, just because of these uncertainties with labor and.

My chain issues in the.

Who knows.

Those with actual demand the trajectory of demand as Covid, it's still kind of in a waxing and waning of is that a fair assessment.

Yeah, Larry I think that's spot on I would say.

We're.

Frankly, pleasantly surprised by the strength of our second quarter results.

And there's just a lot of uncertainty.

But.

<unk> heard from other companies, none of us have ever gone through a pandemic and the reopening of the economy and what that portends for our businesses as you know very much uncertain.

As you know, we strive to set reasonable guidance that we can be.

And so you know we tend to be somewhat conservative when we look at kind of where our guidance is we wanted to and I think we said in our scripted comments.

<unk> is not the issue now there are certain companies like sterno for Arnold in the Aerospace Division, where you know frankly, we would.

More of demand and we have the capacity to supply more demand, but broadly across the portfolio, we have demand that remain that the.

Of what we can supply and so.

What we are seeing are some of the inflationary elements come through we talked about and we said in our script.

Like other companies, we're passing on price.

But it's too early right now for us to understand with any clarity what the elasticity of demand is whether some of those price increases that are met to protect margin are going to her future demand and so when we're in these inflection points that we feel like right now.

I mean, if you went back over time I would say over the last you know pretty much 15 years that we've been of public company for the vast majority of that we sat in the disinflationary environment and so we're at an inflection now where we're seeing inflation come in we're seeing a lot of supply constraints come in this is something on.

It will to the past 15 year operating environment, we're in and so we're choosing to be way more conservative in the outlook that we have and sort of hold where our guidance is just because we don't know how that is on the play out now that being said I'll continue to read it.

Where are we.

The U N through the month of July for 1 third through the quarter.

Demand is holding up remarkably well in fact, probably in excess of.

What our expectations are.

Thus far in July and if that continues I think we feel pretty good about the remainder of the year.

Great Great just last.

We've seen.

They usually throw on the subsidiary of question I was going to be on the front of 11. After you put that great number, but we've kind of been stifled. There. So just just on the on sterno.

Just to clarify did you say that was a $5 million hit to EBITDA at the sales I think you said EBITDA and the products from Sterno home.

And then of course.

Last question on the there is a piece of our Canadian operations that were restructuring.

What kind of total I think the accounting rules you can't be a 1 time charge anymore, but if there will be a sort of extraordinary expense in the back half of the year.

The EBITDA of $45 million.

Got it okay. Great appreciate the okay guys. Thanks again.

The February.

Thanks, Larry.

Our next question comes from Matt Koranda from Roth Capital. Your line is open. Please go ahead.

Hey, guys. Good afternoon. Thanks.

I don't want to get too far down the road here, but if we think about sort of.

The situation post tax reclassification I just wanted to get your preliminary thoughts on sort of how should we be thinking about tax expense post checking the box of if and when we get to that point and then also you mentioned <unk>.

The the ability to present more of an adjusted EPS figure.

On a go forward basis, so I just wanted to give.

And maybe talk a little bit about how you envision sort of presenting that what are some of the elements that will go into it how does it kind of compare the CAD.

Okay.

I'll touch on the tax question with respect to the second question I think we're we're still developing on that and I think internally.

We're.

We're working through that but the plan is to provide more color on the next earnings call.

And then potentially come out with comparable periods and provide some depth so that people can see trends and things.

But that will be a little bit TBD for now.

But with respect to your question on income tax.

Tax expense.

Just to take a step back to the structure you know all of our companies down below.

Our C Corp, Theyre all taxpayers.

So the only income that is coming up to.

Cody is primarily interest income.

We're their lender and they're paying.

Net of interest as a lender.

That is offset though with interest expense at Coty and that if you look at the subsidiaries. We have in the interest income and interest expense, we have thats going to be going forward at least initially.

To be in a negative position. Okay. So we will have more interest expense at Kodiak.

Well then we have interest income okay, and then the other income streams would be dividend income if we have some sort of recapitalization of the subsidiary.

For capital gain tax if we were to sell the business for a gain so in a year that we don't have a recap of the sizeable capital gain we're going.

<unk> got an NOL position. Okay. So it's really we'll be building of benefit in a given year that can then be applied on a future.

You know period should we have taxable income okay. So I think it's always hard to know when we will have a sale of a recap but.

But I think.

Moving to be annoying standpoint, you Shouldnt think about us having.

Actual.

Cash tax expense at the Coty level going out the door until we have 1 of those 2 income events.

That makes sense.

Yes totally very helpful.

And then maybe 1 for Elias on M&A I know at.

On the sort of talked a little bit about your views.

And maybe my interpretation of what you sounded a little bit more cautious on the deployment of cash for acquisitions, just kind of given the environment. We're in.

Multiple of expanding and whatnot.

So am I hearing that right and then are you seeing any pockets that are still interesting, maybe just a little bit more color.

Color on where those interesting opportunities may lie if there are on a per deployment.

Yes, Matt So you know the M&A market came back with vigor and I would say it was probably the shortest period, where you could deploy at attractive prices in.

In a recession I've experienced.

I think it was.

Just a function of if you think of all of the capital that sloshing around in the market. You know I think we all are aware of there is the fact that had been raised at a kind of a massive level.

And they have timelines they need to deploy capital private equity is flush with capital.

<unk>.

And that availability has come back and come back more aggressive than it was at the end of the of the Baxter Eichel. So all of that is just creating an enormous amount of demand for the asset now we are seeing a lot more assets come to market right I mean, it kind of the natural working.

Of the marketplace. If you of demand for something eventually prices go up and supply comes in but we are just seeing elevated kind of pricing based on these dynamics.

We expect that to continue so as we did with the Liberty the divestiture.

Always.

Looking for ways to take advantage for our shareholders. Even if it means we may have a short term under optimization of our balance sheet.

If you look at it over a longer period of time.

<unk> being able to capitalize on market condition.

As always you know.

End of what we strive.

Always do and right now asset pricing is high so.

What it boils down to is are we looking to deploy capital you heard in the comments of Larry.

Growth goals are to get to $1 billion of EBITDA, we guided $3.50 to $3.70 for this year.

And that includes Liberty safe, which is going to be running out so to get from here to there we're going to have to deploy and we're going to have the Bayou companies I would say we continue to focus on add on opportunities. There is some good opportunities for some of the more subscale companies that are there where we have a platform where we can create some cost saving opportunity.

<unk> through consolidation of some revenue synergies and then on top of that we're always open for the new platform and I think importantly, where we stand today versus years ago.

And we've continued to beat on the over and over and over again, we have the best cost of capital.

We believe of any of our peers in the middle market private equity and is the result of that we can reach and we can get in and be the winning buyer on the really premium assets I think for us it's about finding those really great opportunities and being able to run hard against.

And now having the cost of capital that allows those to be accretive right away versus before trying to reach for some of the more premium assets would have created a dilutive near term outlook and that was something that would be difficult for us to absorb so we feel we're just fundamentally position.

So much better, but just to be more so think of in your and your answer yes. It is a market that favors divestitures now more so than it favors deployment of capital, but our business and our teams are to go out and find great opportunities to get capital deployed so I don't want to make it sound like.

So we won't be seeing new assets that we're acquiring both on platform and add on we absolutely will be it's just our teams are working harder to be able to find those opportunities.

Thanks, Alan Thanks for all of the detail.

Maybe just from keeping on the theme of asking the second question.

Pat.

You mentioned.

That was.

It was on a pretty strong run rate since you guys bought it.

And that we shouldnt necessarily count on that that growth rates of kind of sustain through the back half of this year. So I just wanted to get a little bit more granularity on that.

On what drove the.

A stronger than expected growth rate at the.

In the first half and then what sort of 1 of the some of the headwinds you are contending with on the back half of the year for us.

Sure I mean as I mentioned, we're at.

Yeah.

We've had of explosive first half right I mean, I think we grew by 100%.

Sort of doubled.

For us the forecast that in the second half I don't think it would be appropriate nor honestly, we had a stronger back half of last year. Then we had this year I do think will grow in the second half of the year.

We will have nice growth, we see continued demand we have some worry that you know there's the whole restocking aspect of covers were bared in certain of our categories.

Some of our OEM partners are doing that we have some worried that they were you know.

Sure.

There was some ordering ahead because some of our partners. We are worried about the supply chain disruptions, but all of the things that we still see strong demand, we do see supply chain issues, just like we do in every other business, but our management.

For the team is working definitely through that we believe we're taking market share.

And it's just sort of catching on and it's a really global right. So.

A lot of it maybe may not be as visible to us here in North America, but we're.

We're very confident in the back half, but we just don't think we're gonna quite quick.

Growth rates that we saw in the first half as they were.

Pretty dependent.

Fair enough. Thank you for that.

Ill jump back in queue. Thanks, guys.

Okay.

Our next question comes.

From call of Joseph of Jefferies. Your line is open. Please go ahead.

Hey afternoon, guys. Congrats on a really good quarter and thanks for taking my questions.

Ryan I think you said it but I missed it you know where is the leverage currently and then kind of can you give us a sense of where you expect that to be.

1 of the Liberty fail.

Yes sure.

Karl Thanks for the question and I appreciate the the nice comments it was a great quarter.

So we ended the leverage at the end of March just below 3 times kind of 2.9 level.

We've come down to 2.6 for I believe is the exact.

The number and that's all through organic deleveraging I mean that was just truly through.

The cash coming to our balance sheet through working capital optimization, but also extraordinary EBITDA performance, so really good organic deleveraging.

The Liberty proceeds.

Once we receive them as you might've seen on that relief portion of that will be earmarked to our anticipated special distributions when we check the box, but the delta of that will sit on the balance sheet of cash. So we do not have any pre payable debt right now we have nothing outstanding on the revolver and just just for.

At the.

Winning bond.

So it will sit as cash on our balance sheet as we seek to deploy it but that will bring our leverage down another sort of tense I'd call. It so ex.

Spectation has to be sort of.

Closer to 2 and a half I'd say by the end of the third quarter.

Yeah.

Great. Thanks, and then just a follow up for me as.

The outstanding of modeling out of the companies for 'twenty 2.

Any company that you'd highlight as being you know.

Insulated from whether it be supply chain disruption or inflationary pressures and an end.

The company would you expect the kind of.

The more exposed if you will.

I think we see supply chain pressures everywhere right I mean, those that are.

On.

So I guess, it's broad and it's just a matter of degrees right.

But again most of our companies are positioned in a way to where they can add a good chunk of that group.

And they are working hard to do that.

And just a matter of the Greek.

They're all basically.

The entire economy.

Got it yeah totally fair, it's kind of like asking the pick your favorite child so on.

Uh huh.

And thanks for answering my questions.

Thank you Kal.

Think of.

Our next question comes from Chris Kennedy of William Blair. Your line is I assume the please go ahead.

Hey, guys. Thanks for taking the question in a lot of exciting things happening.

Elias can you just talk a little bit about going forward I remember at your Investor Day, you talked about potentially.

Chile looking into new verticals beyond the niche.

Industrial and consumer side, any progress or update on that.

Yes, Chris Thanks for the question.

<unk> to be of priority area for us.

I think we believe that health care is probably.

You know of vertical that we would like to pursue whether it's kind of the next vertical or not a little bit of the fluid because it's around finding the right individual with the right experience and the right domain knowledge and then building out around that.

If the stars all.

Wind of that with somebody who had experience in the healthcare space that is what we're seeking but it's a little bit of of longer fuse to be on it because we have to find the right individual that.

The person and make sure that kind of the fit from an investment philosophy from.

From a cultural standpoint is right. So it's something we are working hard on and we would hope you know over the course of.

By the end of 'twenty 2 that we have you know somebody landed on that.

Can start that effort for us.

But that's something that we continue to focus on in the meantime, we continue.

To add.

On the HR side, we're in that we're adding on our investment team.

Almost on a kind of annual basis, we're adding a couple of the few people.

We continue to staff up because we are building for what we see in the future as a firm that can be substantially.

If you ever than we are today, and adding of vertical becomes sort of part and parcel to the.

Fantastic and then just I guess the follow up as you.

Go towards the 1 billion of EBITDA does your targets kind of your target size increase of lots and just kind of talk.

The large how that changed.

Changes going forward, especially with the lower cost of capital. Thanks, a lot guys.

Sure and I think that's the great observation credit I mean, you know our goal is to own companies that have going forward have the ability to reach at least $50 million of EBITDA that sort of internally, where we kind of.

Strive to get to some companies theyre going to be able to do it through organic growth some company theyre going to need consolidation opportunities to do it and frankly, some companies arent going to be equipped to be able to get there and I would say you know look at the most recent divestiture that we made of Liberty safe is totally and.

In connection with that strategic vision that we want our company to be bigger I mean, the Liberty is a great business. It's run by Great people, we've had a wonderful relationship with D var Red Justin marketing guys that we've worked with literally for over a decade.

It is the company that has delivered over.

Delivered on the expectation that we had but the reality of it.

We weren't going to be able to get it to a materially larger size and that's 1 of the strategic rationale that we put in place in our business here is that we want of companies that can get to that 5100 or even $150 million EBITDA.

Size over time, and managing a larger pool of companies.

The larger size of the company is not necessarily just a greater number of companies. So that's sort of where we're focused on I would say as we think about new platform opportunities. They generally are going to be larger.

Or they are going to have better growth prospects of the smaller organic like a marucci for example, which has outstanding growth prospects or they have really good consolidation opportunity.

There's a lot of strategic benefit as you get larger companies in the portfolio.

As you know some of the.

Public company things that we do with respect to stock and compliance that is the little easier to absorb as the public company and we don't just give lip service to the ESG efforts that we're putting in place. These are things that we're gonna be forcing down on our subsidiary companies were doing that at the holding company right now.

And it really expanded at work so as we start to put more and more things in play that are.

More public company in nature, and what kind of smaller private company. It helps if we have larger company than the stable.

Great. Thanks, a lot guys.

Thank you.

Our next question comes from Derek Hewett of Bank of America. Your line is open. Please go ahead.

The good evening, everyone and congrats on the record quarter.

Now of 511 and Liberty they represent about 25% to 30% of.

Either revenue.

Revenue or EBITDA, so given the comment earlier that the business really needs to the scale, how do you balance.

Opportunities the but.

But potentially harvest subsidiary of that at attractive valuations versus.

Maybe generating more predictable growth in.

In some sort of adjusted.

Earnings calculation.

Which could also impact evaluation of assuming that the C Corp conversion goes forward.

Yeah on baked there it gives us the lights for the nice comments it was a record quarter in.

We're really proud of our team that does.

Ciliary spread of being able to execute at the high level and give.

Against the backdrop of so much uncertainty, but it is of great question I mean, our business model is you know frankly different than most companies out there because a portion of what we do is opportunistically buy back and I think that's really what makes the.

The different and create more opportunities for shareholder value creation.

But some time when you are in divestment of Windows in the market gives you the opportunity.

And so we have the kind of read the tea leaves and take what opportunity market is giving us and.

<unk> heard of that Theyre going to the times, when we will be under earning our balance sheet potential you saw it in 2019, when we divested Manitoba harvest cleaner and we did it at record multiples.

There was the period, where we were going to have lower EBITDA.

<unk> basis outright dollar value.

We're going to have lower.

<unk>, earning.

As you remember.

We waived management fees, because it's always been our view that if we're going on under earn for the potential of time the managers should also under earn its potential.

No.

Aligned with our shareholders that have done that in the past.

But there are times when.

When the best decision that you can make outside of the optic the while youre going to have maybe aggregate lower adjusted EPS or aggregate lower EBITDA is to have estimate on your.

Taking advantage of the market conditions, and I think that we've always run the business with kind of more intermediate and longer.

And not net.

The short term view and we said, let the opportunity that the market is getting fixed.

What is the strategy right that is so yeah, it's possible with the Liberty divestment and.

Other strategic alternatives that we're looking at right now that we could have.

Smaller portfolio and a smaller balance sheet kind of.

Later on this year or into next year.

For a period of time until we can redeploy that but I would.

Back to look at how much earnings leverage comes from making the right decision right. When we divested these.

The assets in 2019 for getting obviously now of pandemic hit, but we were looking squarely down.

Lower earnings and lower aggregate EBITDA in 2020, but then we cook proceeds from selling it really great multiples and redeploy that into 2 great growth business.

No.

And now 2021, our earnings have exploded higher and I think if you went back and looked at 2019 compared to where we guided right now we're talking about 2020 being like 50 for 2021 being like 50% up in cat over where we were in 2019 and so if you take a.

The assembly longer kind of on.

The point.

And what we think we're kind of path to do than taking advantage of market opportunity, even if kind of shrink the balance sheet.

A near term capacity always worked out and build I think greater value.

Evidence.

The kind of results that we're putting up this year.

Okay. Thank you and then in terms of your longer term.

Could EBITDA goal is that possible with the air.

How many verticals do you think you would need to be able to kind of kind of meet that that longer term.

Slight.

Yes, I mean to be honest, we think we probably could do it with the verticals that.

I think that it becomes more probable if we can add another vertical.

Over time, I think we would like to.

We have 1 or 2 more I think there is a limit of how much we would like it given that.

We've had 2 verticals now for a decade or so once we started the vertical is our business I don't think we're looking to kind of stamp of these out like.

On an accelerated pace, but I think if we could do 1 more it makes getting to $1 billion of EBITDA more probable and very achievable.

<unk> that being said I want to let everyone know, we still believe with the verticals were in there is a broad enough set of target.

We are positioned extremely well both on capital availability cost of capital and human capital to be able to.

The goal, even if we don't add another vertical.

Okay.

Okay. Thank you very much.

Thank you Derek.

Our next question comes from Matt Tjaden of Raymond James Your line of Nathan. Please go ahead.

After.

Everybody and appreciate you taking my questions first 1 for me continuing on on the tax reclassification kind of on on a longer term perspective, how does how does checking the box change how you think about acquisition candidates whether that be in terms of of deal pricing or for target structure any any thoughts there would be of interest.

Yeah, Matt so the checking of the box won't have any impact on the way that we look at acquisition in terms of how we structure of the acquisition.

As Ryan is the kind of it we are a little bit different flavor of income net flows up to the holding company.

And so I think you know on the acquisition side. It really is going to have no impact whatsoever. We're really you know could have impact is on the divestment side, where the company then we'll have an incremental Pat but frankly that was the incremental pack that our shareholders, we're going to be able to ask the PE.

And the.

Any per structure. So if I think about it from a holistic standpoint, there is no incremental pack and there is no kind of view towards a change of strategy and our acquisition or divestment.

If I circle back the Larry the initial question on benefit of the potential tax structure.

Sure, we do view, having our equity being more accessible by a much broader group of investors.

Who frankly have shown interest in the past, but for the fact that.

Investing in our partnership with something that was very difficult for a lot of people we think <unk>.

Additional demand on the shares naturally should inure to all of our shareholders benefit through higher share prices and then for the company with a lower cost of equity capital. So I guess that could sort of shape of little bit of our acquisition decision, making but I would say in terms of kind of how we.

We run the business, we don't look at the structure changes impacting that at all.

Okay Fair enough I guess, just another quick 1 for me on on Sterno, So I know last quarter, we talked about.

Venues opening again, having having some sort of benefit the sterno with cases back on the rise and the Delta.

Is there any risk of of a near term kind of softening at sterno.

Yes.

It's quite the answer I'd say, we haven't gotten quite back even before if you think about June I think it was probably our best month since before the.

Before.

<unk> as far as bookings goes on the sort of foodservice side.

And again those levels were still.

Materially off of sort of pre pandemic levels.

But it's the foodservice side, it's a real time indicator and add sort of events.

Shrink.

And the number of venues that are open terrain.

The 10 day will have an impact on the foodservice ex that being said.

Our consumer side, and some of our Oh waxes and our essential oils.

A little bit of a natural hedge for that and that when people spend more time at home. They tend to spend you know purchase more of those it doesn't quite make up for the.

The whole impact that you.

If we were.

I'll go back into lockdown or something like that again.

But it is a little bit of a hedge of that makes sense.

That's it for me appreciate the time and congrats on a good quarter.

And thanks for that.

Got it.

For a nice on the questions on the kind of same line.

So I'll hand, the call back over to your line of shopping.

Thank you operator.

As always I'd like to thank everyone again for joining us on today's call and for your continued interest in Cody.

We look forward to sharing our progress with you in the future.

That ends our remarks, thank you operator.

This concludes today's call. Thank you for joining you may now disconnect your lines.

[music].

Yeah.

[music].

Okay.

Okay.

Okay.

Uh huh.

[music] profit.

Okay.

[music].

The group.

Yeah.

Yeah.

The.

Right.

The.

[music].